Closing the lending gap will help government and business thrive

Closing the lending gap will help government and business thrive
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With taxpayers at risk for $20 trillion in loans and insured obligations, worth more than the five largest American bank companies combined, the United States government is essentially the largest financial institution in the world. Lending is a risky business as we learned during the last financial crisis. Government activities in this regard are no less dangerous, and perhaps more so, given public policy complexities that extend well beyond profit. Given a bleak fiscal outlook, policymakers may want to consider ways to reduce taxpayer exposure by fortifying financial institutions and financial technology companies with an enormous infusion of loan performance data that only it can provide.

Through more than 100 programs largely initiated or expanded in response to the Great Depression, the Great Society of the 1960s, and the financial crisis of 2008, the government has provided over 100 million direct loans and guarantees for home ownership, higher education, business assistance, and a variety of other purposes. As the government has increasingly turned to credit programs to accomplish a diverse set of objectives, as its loan portfolio more than doubled since 2008, it is trying to keep pace with an increasingly sophisticated financial marketplace, which could actually help reduce the federal lending role.

Government forays into this realm are typically driven by a desire to extend the lending frontier, thereby achieving societal gains, by either closing the information gap about creditworthiness or providing an explicit subsidy to borrowers who likely would not be granted a loan even if a private lender had full information. The government can increase credit availability under either of those conditions because, unlike private lenders, it is able to offer loans without regard for profit.

Federal credit agencies often contend they are primarily seeking to close information gaps rather than simply extending subsidies. If that is the case, the increasing size of the loan portfolio of the government suggests little progress has been made. If successful in that quest, the government would be incentivizing the private sector to lend and capture profits arising from new information, particularly given modern technologies and platforms designed to capitalize on the data boom. But, unfortunately, the government rarely shares detailed data on borrower performance, so it is difficult for the private sector to glean lessons from the federal lending experience that could be used to help narrow or eliminate such gaps.

Notwithstanding recent open government efforts, the types of data needed to close credit gaps are much more detailed than anything contained on the web. If the government were to make its loan performance data publicly available, while safeguarding personally identifiable information, lenders and analysts would seek to exploit the data to find new opportunities to lend and perhaps even provide lender liquidity. Research organizations would use the data to help policymakers gain insights on program costs and benefits, ultimately informing how much taxpayers are spending to accomplish intended outcomes.

Sharing its mother lode of loan performance data would present some challenges. Pulling datasets together is not necessarily a straightforward task, but new technologies are making that task much more readily accomplished. Furthermore, if profits can be captured from mining such data, the private sector will do so. But regardless of how the data is structured, it would be of enormous value if open sourced.

Clearly, we are in the midst of a technological revolution driven by data that is impacting every corner of the financial services industry. Technology firms and traditional financial institutions are using customer data to explore new business lines and otherwise leverage data to meet consumer demand. Firms like Amazon and Alibaba are even using their extensive databases to evaluate credit risk and facilitate loans to vendors selling on their platforms. Making available the vast government data repositories for players in the innovation economy could carry enormous benefits for taxpayers and the private sector alike.

With decades of accumulated data comprising many millions of loan records chronicling the performance of a wide range of borrowers in the United States, the government is in a unique position to release its credit data to enable the invisible hand of modern financial technology to reach out to borrowers who otherwise might appear untouchable.

Douglas Criscitello is a senior lecturer and executive director of the MIT Golub Center for Finance and Policy at MIT Sloan School of Management.