The Effects of Competition in Consumer Credit Markets

63 Pages Posted: 16 Nov 2018 Last revised: 29 Apr 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 G. Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: 2018-10-23

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 policies, consumer credit

Suggested Citation

Gissler, Stefan and Ramcharan, Rodney and Yu, Edison G., The Effects of Competition in Consumer Credit Markets (2018-10-23). FRB of Philadelphia Working Paper No. 18-24, Available at SSRN: https://ssrn.com/abstract=3284329 or http://dx.doi.org/https://doi.org/10.21799/frbp.wp.2018.24

Stefan Gissler (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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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 G. Yu

Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106-1574
United States

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