The Effects of Competition in Consumer Credit Markets
Review of Financial Studies, Forthcoming
57 Pages Posted: 13 May 2018 Last revised: 21 Jan 2020
Date Written: December 20, 2019
This paper finds that banks and non-banks respond differently to increased competition in consumer credit markets. Increased competition and the greater threat of failure induces banks to specialize more in relationship business lending, and surviving banks are more profitable. However, non-banks change their credit policy when faced with more competition and expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the effects of competition depend on the form of intermediation. They also suggest that increased competition can cause credit risk to migrate outside the traditional supervisory umbrella.
Keywords: Credit Union, Banking Competition, Consumer Credit, Shadow Banks
JEL Classification: G21, G23, G28
Suggested Citation: Suggested Citation