Shocked by Bank Funding Shocks: Evidence from 500 Million Consumer Credit Cards

67 Pages Posted: 15 Jan 2020 Last revised: 14 May 2020

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Rohan Ganduri

Emory University

Nikhil Paradkar

Georgia Institute of Technology - Scheller College of Business

Linghang Zeng

Babson College - Finance Division

Date Written: July 31, 2018

Abstract

Using comprehensive credit card--borrower--bank matched data of approximately 500 million credit cards in the U.S., we analyze how a sharp unexpected decline in banks' short-term wholesale funding in 2008 affected their consumers. We decompose credit supply and demand effects using the sudden dry-up of short-term wholesale funding (which accounted for 17.8% of bank funding pre-2008) and account-level data on credit card limits and balances. For the same consumer, credit card issuers experiencing a 10% greater decline in wholesale funding reduced credit limits by 0.9% more relative to other issuers. Consumers' aggregate card balances decreased by 0.32% for a 1% reduction in aggregate limits induced by the wholesale funding liquidity shock. We document significant heterogeneity in the pass-through of the bank liquidity shocks with banks cutting credit limits by more for credit-constrained consumers (e.g., lower credit-score and higher credit utilization consumers). These consumers respond by cutting their consumption as they are less able to borrow from alternate sources. Moreover, this consumption decline is long-lasting for these credit-constrained consumers. Our results highlight that when banks face liquidity shocks, they are more likely to pass on these shocks to consumers who are least able to hedge against them. Consequently, our results show who bears the real costs of fragile bank funding structures.

Keywords: bank funding shock, consumer credit cards, consumption

JEL Classification: G21, G51

Suggested Citation

Chava, Sudheer and Ganduri, Rohan and Paradkar, Nikhil and Zeng, Linghang, Shocked by Bank Funding Shocks: Evidence from 500 Million Consumer Credit Cards (July 31, 2018). Available at SSRN: https://ssrn.com/abstract=3509356 or http://dx.doi.org/10.2139/ssrn.3509356

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Rohan Ganduri

Emory University ( email )

1300 Clifton Rd
Atlanta, GA 30322
United States

Nikhil Paradkar

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Linghang Zeng (Contact Author)

Babson College - Finance Division ( email )

Babson Park, MA 02457-0310
United States

HOME PAGE: http://sites.google.com/view/linghang-zeng

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