Bank Competition and Supply of Credit
Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: Manuel Adelino, Duke University
Credit Supply Shocks, Consumer Borrowing and Bank Competitive Response: Evidence From Credit Card Markets
AbstractI study local shocks to consumer credit supply arising from the opening of bank-related retail stores. Bank-related store openings coincide with sharp increases in credit card placements in the neighborhood of the store, in the months surrounding the store opening, and with the bank that owns the store.
I exploit this relationship to instrument for new credit cards at the individual level, and find that obtaining a new credit card sharply increases total borrowing as well as default risk, particularly for risky and opaque borrowers.
In line with theories of default externality, I observe that existing lenders react to the increased consumer borrowing and associated riskiness by contracting their own supply. In particular, in the year following the issuance of a new credit card, banks without links to stores reduce credit card limits by 24-51%, offsetting most of the initial increase in total credit limits.
Shock Propagation and Banking Structure
AbstractWe conjecture that lenders' decisions to provide liquidity are affected by the extent to which they internalize negative spillovers. We show that lenders with a large share of loans outstanding in an industry provide liquidity to industries in distress when spillovers are expected to be strong, because fire sales are likely to ensue. Lenders with a large share of outstanding loans also provide liquidity to customers and suppliers of industries in distress, especially when the disruption of supply chains is expected to be costly. Our results suggest a novel channel explaining why credit concentration may favor financial stability.
- G2 - Financial Institutions and Services