The Effects of Competition in Consumer Credit Markets

Review of Financial Studies, Forthcoming

57 Pages Posted: 13 May 2018 Last revised: 21 Jan 2020

See all articles by Stefan Gissler

Stefan Gissler

Board of Governors of the Federal Reserve System

Rodney Ramcharan

University of Southern California, Marshall School of Business

Edison Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: December 20, 2019

Abstract

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

Gissler, Stefan and Ramcharan, Rodney and Yu, Edison, The Effects of Competition in Consumer Credit Markets (December 20, 2019). Review of Financial Studies, Forthcoming. 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 System ( 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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