The Effects of Competition in Consumer Credit Markets

62 Pages Posted: 13 May 2018 Last revised: 24 Sep 2018

See all articles by Stefan Gissler

Stefan Gissler

Board of Governors of the Federal Reserve

Rodney Ramcharan

University of Southern California, Marshall School of Business

Edison Yu

Federal Reserve Bank of Philadelphia

Date Written: September 19, 2018

Abstract

Using changes in financial regulation that create exogenous entry in some consumer credit markets, we find that increased competition induces banks to become more specialized and efficient, while deposit rates increase and borrowing costs for riskier collateral decline. However, shadow banks change their credit policy when faced with more competition, and aggressively expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the form of intermediation can shape economic fluctuations. They also suggest that increased competition can lead to large changes in credit policy at institutions outside the traditional supervisory umbrella, possibly creating a less stable financial system.

Keywords: Credit Union, Banking Competition, Consumer Credit, Shadow Banks

JEL Classification: G21, G23, G28

Suggested Citation

Gissler, Stefan and Ramcharan, Rodney and Yu, Edison, The Effects of Competition in Consumer Credit Markets (September 19, 2018). Available at SSRN: https://ssrn.com/abstract=3170996 or http://dx.doi.org/10.2139/ssrn.3170996

Stefan Gissler

Board of Governors of the Federal Reserve ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Rodney Ramcharan

University of Southern California, Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.google.com/site/rodneyramcharan/

Edison Yu (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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