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Personal Bankruptcy and Credit Market Competition

Astrid Andrea Dick

INSEAD; Federal Reserve Bank of New York

Andreas Lehnert

Board of Governors of the Federal Reserve

January 2007

FRB of New York Staff Report No. 272

The effect of credit market competition on borrower default is theoretically ambiguous, because the quantity of credit supplied may rise or fall following an increase in competition. We investigate empirically the relationship between credit market competition, lending to households, and personal bankruptcy rates in the United States. We exploit the exogenous variation in market contestability brought on by banking deregulation at the state level: after deregulation, banks faced the threat of entry into their state markets. We find that deregulation increased competition for borrowers, prompting banks to adopt more sophisticated credit rating technology. In turn, these developments led previously excluded households to enter the credit market. We document that, following deregulation, (1) overall lending increased, (2) loss rates on loans decreased, and (3) bankruptcy rates rose. Further, we find that lending and bankruptcy rates increased more in states with greater actual (rather than potential) entry, and that credit card productivity increased after the removal of entry restrictions. These findings suggest that entrants brought with them enhanced underwriting technology that allowed for credit extension to new borrowers.

Number of Pages in PDF File: 44

Keywords: consumer bankruptcy, banks, competition

JEL Classification: K3, G2, L1

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Date posted: January 20, 2007  

Suggested Citation

Dick, Astrid Andrea and Lehnert, Andreas, Personal Bankruptcy and Credit Market Competition (January 2007). FRB of New York Staff Report No. 272. Available at SSRN: http://ssrn.com/abstract=957778 or http://dx.doi.org/10.2139/ssrn.957778

Contact Information

Astrid Andrea Dick (Contact Author)
INSEAD ( email )
Boulevard de Constance
77305 Fontainebleau Cedex

Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
Andreas Lehnert
Board of Governors of the Federal Reserve ( email )
Washington, DC 20551
United States
202-452-3325 (Phone)
202-263-4852 (Fax)
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