Price Regulation in Credit Markets: A Trade-Off between Consumer Protection and Credit Access

49 Pages Posted: 7 Dec 2018 Last revised: 23 Sep 2021

See all articles by José Ignacio Cuesta

José Ignacio Cuesta

Stanford University, Department of Economics

Alberto Sepulveda

Superintendencia de Bancos e Instituciones Financieras de Chile

Date Written: September 20, 2021

Abstract

Interest rate caps are widespread in consumer credit markets, yet there is limited evidence on its effects on market outcomes and welfare. Conceptually, the effects of interest rate caps are ambiguous and depend on a trade-off between consumer protection from banks’ market power and reductions in credit access. We exploit a policy in Chile that lowered interest rate caps by 20 percentage points to understand its impacts. Using comprehensive individual-level administrative data, we document that the policy decreased transacted interest rates by 9%, but also reduced the number of loans by 19%. To estimate the welfare effects of this policy, we develop and estimate a model of loan applications, pricing, and repayment of loans. Consumer surplus decreases by an equivalent of 3.5% of average income, with larger losses for risky borrowers. Survey evidence suggests these welfare effects may be driven by decreased consumption smoothing and increased financial distress. Interest rate caps provide greater consumer protection in more concentrated markets, but welfare effects are negative even under a monopoly. Risk-based regulation reduces the adverse effects of interest rate caps, but does not eliminate them.

Keywords: credit, loans, interest rate regulation, adverse selection, competition

JEL Classification: D43, G2, L13, L51

Suggested Citation

Cuesta, José Ignacio and Sepulveda, Alberto, Price Regulation in Credit Markets: A Trade-Off between Consumer Protection and Credit Access (September 20, 2021). Available at SSRN: https://ssrn.com/abstract=3282910 or http://dx.doi.org/10.2139/ssrn.3282910

José Ignacio Cuesta (Contact Author)

Stanford University, Department of Economics ( email )

579 Jane Stanford Way
Stanford, CA CA 94305
United States
94305-6015 (Fax)

Alberto Sepulveda

Superintendencia de Bancos e Instituciones Financieras de Chile ( email )

Moneda 1123
Santiago
Chile

HOME PAGE: http://www.sbif.cl

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