Do Banks Pass Through Credit Expansions to Consumers Who Want to Borrow

By Sumit Agarwal, S. Chomsisengphet, N. Mahoney, Johannes Stroebel. 2015

177 citations recorded by the source corpus.

We propose a new approach to studying the pass-through of credit expansion policies that focuses on frictions, such as asymmetric information, that arise in the interaction between banks and borrowers. We decompose the effect of changes in banks’ cost of funds on aggregate borrowing into the product of banks’ marginal propensity to lend (MPL) to borrowers and those borrowers’ marginal propensity to borrow (MPB), aggregated over all borrowers in the economy. We apply our framework by estimating heterogeneous MPBs and MPLs in the U.S. credit card market. Using panel data on 8.5 million credit cards and 743 credit limit regression discontinuities, we find that the MPB is declining in credit score, falling from 59% for consumers with FICO scores below 660 to essentially zero for consumers with FICO scores above 740. We use a simple model of optimal credit limits to show that a bank’s MPL depends on a small number of "sufficient statistics" that capture forces such as asymmetric information, and that can be estimated using our credit limit discontinuities. For the lowest FICO score consumers, higher credit limits sharply reduce profits from lending, limiting banks’ optimal MPL to these consumers. The negative correlation between MPB and MPL reduces the impact of changes in banks’ cost of funds on aggregate household borrowing, and highlights the importance of frictions in bank-borrower interactions for understanding the pass-through of credit expansions.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/24bc471d186831c67b5bb175884ecf183b36349c

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Citations in the corpus

Whatever It Takes: The Real Effects of Unconventional Monetary Policy (2019, unknown): “see Agarwal et al. (2015), Rodnyansky and Darmouni (2016), Chakraborty et al.”
Regional Heterogeneity and Monetary Policy (2019, unknown): “Agarwal et al. (2015) use detailed data from the Home Affordable Refinancing Program 6There is also a growing literature specifically studying the effects of QE.”
Regression discontinuity design with many thresholds (2017, unknown): “Agarwal et al. (2017) and De Giorgi et al. (2017) look at multiple cutoffs on credit scores, used by banks to make credit decisions. Education economics also provides a variety of applications. Angrist and Lavy (1999) and Hoxby (2000) use class size rules to estimate the impact of class size on stud”
Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports (2020, background): “and Souleles (2002) or Agarwal et al. (2015) – for a number of reasons.”
Liquidity versus Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession (2020, methodology): “Furthermore, Agarwal et al. (2018) show that credit expansions during the recovery were more likely to benefit higher-FICO borrowers, precisely those least likely to respond by increasing borrowing. Third, home price expectations were depressed relative to the boom years. Home price future contracts”