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

96 Pages Posted: 21 Sep 2015

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Neale Mahoney

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: September 2015

Abstract

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.

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Mahoney, Neale and Stroebel, Johannes, Do Banks Pass Through Credit Expansions to Consumers Who Want to Borrow? (September 2015). NBER Working Paper No. w21567. Available at SSRN: https://ssrn.com/abstract=2663205

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
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HOME PAGE: http://www.ushakrisna.com

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

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Washington, DC 20219
United States
202-649-5533 (Phone)

Neale Mahoney

University of Chicago Booth School of Business ( email )

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Chicago, IL 60637
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773.702.9278 (Phone)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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