Do Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending During the Great Recession

From Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, and Johannes Stroebel:

The effect of bank-mediated stimulus on household borrowing depends on whether banks pass through credit expansions to households with a high marginal propensity to borrow (MPB). We use panel data on 14.2 million U.S. credit card accounts and 812 credit limit regression disconti- nuities to estimate the MPB for households with different FICO credit scores. We find substantial heterogeneity, with a $1 increase in credit limits raising total unsecured borrowing after 12 months by 58 cents for consumers with the lowest FICO scores (≤660) while having no effect on total bor- rowing by consumers with the highest FICO scores (> 740). We use the same credit limit regression discontinuities to estimate banks’ marginal propensity to lend out of a decrease in their cost of funds. For the lowest FICO score households, higher credit limits quickly reduce marginal profits, limiting the pass-through of credit expansions to those households. We estimate that a 1 percentage point reduction in the cost of funds raises optimal credit limits by $135 for consumers with FICO scores below 660 versus $1,478 for consumers with FICO scores above 740. We conclude that banks have the least incentive to pass through credit expansions to households that want to borrow the most and discuss the implications for bank-mediated stimulus.

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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