This paper presents several new stylized facts on what people actually pay to use their checking and credit card accounts. The median household pays $500 per year and could avoid more than half these ...costs with minor changes in behavior. Translating these avoidable costs into consumption terms, most consumers could afford to borrow more than 1,000 additional dollars simply by allocating payment choices more efficiently. Penalty fees are economically important (representing about half of total fees, and the lion's share of checking account costs), and most penalty fees are easily avoidable by the paper's metrics. Interest and avoidable interest generally persist over time; in contrast, fee and avoidable fee costs are negatively correlated over time for many consumers. Tremendous heterogeneity is found on all margins of costs and cost persistence.
We relate trade credit to product characteristics and aspects of bank—firm relationships and document three main empirical regularities. First, the use of trade credit is associated with the nature ...of the transacted good. In particular, suppliers of differentiated products and services have larger accounts receivable than suppliers of standardized goods and firms buying more services receive cheaper trade credit for longer periods. Second, firms receiving trade credit secure financing from relatively uninformed banks. Third, a majority of the firms in our sample appear to receive trade credit at low cost. Additionally, firms that are more creditworthy and have some buyer market power receive larger early payment discounts.
We find that credit default swap (CDS) spreads contribute significantly to price discovery in financial markets when firm-specific credit information is prominent. Using 3,470 S&P rating notch and ...watch changes for US public and private entities from 2001–2013, we show that CDS prices contain unique firm credit risk information that is not captured by the prices of other related securities such as stocks and bonds of the same firm. Credit information unidirectionally flows from CDS to bonds, particularly for private entities whose stocks are not concurrently trading in markets. We further find that CDS returns significantly predict stock returns, particularly their idiosyncratic components.
This paper identifies and discusses possible liquidity and credit scoring puzzles. Regarding liquidity, it is found that most account holders with a major credit card issuer have substantial unused ...liquidity on there credit cards at the time they borrow on payday loans. Their annual pecuniary losses from payday borrowing, compared to using their credit cards, are large compared to previously identified liquid debt puzzles. Regarding credit scores, payday lenders could obtain useful information about default probabilities by examining the FICO scores of applicants in addition to Teletrack scores, and credit card issuers would benefit from having frequently updated information about whether their account holders are payday borrowers. The authors conjecture that small costs could at least begin to explain these phenomena. Credit bureaus charge lenders small fees for each score query, and those fees might exceed the value of the marginal creditworthiness information obtained. On the consumer side, Zinman, Borzekowski, and Kiser discuss models of account-specific characteristics that can incorporate the realist variety of pecuniary, nonpecuniary, and cognitive costs.
We study the adoption of automated credit scoring at a large auto finance company and the changes it enabled in lending practices. Credit scoring appears to have increased profits by roughly a ...thousand dollars per loan. We identify two distinct benefits of risk classification: the ability to screen high-risk borrowers and the ability to target more generous loans to lower-risk borrowers. We show that these had effects of similar magnitude. We also document that credit scoring compressed profitability across dealerships, and provide evidence consistent with the view that credit scoring may have substituted for varying qualities of local information.
We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing ...before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the
impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, there are no overall positive effects of central bank liquidity, but higher hoarding of liquidity.
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 parameters 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.
VAR analysis on a measure of bank lending standards collected by the Federal Reserve reveals that shocks to lending standards are significantly correlated with innovations in commercial loans at ...banks and in real output. Credit standards strongly dominate loan rates in explaining variation in business loans and output. Standards remain significant when we include various proxies for loan demand, suggesting that part of the standards fluctuations can be identified with changes in loan supply. Standards are also significant in structural equations of some categories of inventory investment, a GDP component closely associated with bank lending. The estimated impact of a moderate tightening of standards on inventory investment is of the same order of magnitude as the decline in inventory investment over the typical recession.
We use data from an online financial service to show that many consumers fail to stick to their self-set debt paydown plans. This behavior is best explained by present bias. Our empirical approach is ...informed by a parsimonious model showing that the sensitivity of spending to paycheck receipt reflects a present-biased agents short-run impatience, and that this sensitivity is reduced by available resources only for agents who are aware (sophisticated) of their future impatience. Classifying users accordingly, we find that (i) sophisticated users debt paydown decreases with short-run impatience, and that (ii) planned paydown is most predictive of actual paydown for sophisticated users.
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