Credit Fire Sales: Captive Lending as Liquidity in Distress
66 Pages Posted: 18 Feb 2021 Last revised: 4 Mar 2022
Date Written: March 3, 2022
We study the impact of vertical integration of manufacturing and credit provision on the propagation of financial shocks in durable good markets. Using a new multicountry dataset on securitized car loans, we show that captive lending enables a liquidity constrained integrated manufacturer to increase the cash collected from car sales via a credit fire sale: reducing loan amounts in the intensive margin and relaxing lending standards in the extensive margin increases car sale down-payments, at the cost of future losses. A simple calibrated model shows that a stand-alone manufacturer would have to decrease car prices by up to 12% to generate the same liquidity
of a credit fire sale. We exploit quasi-exogenous variation in manufacturers' liquidity cost and need following the Volkswagen emissions scandal to identify the mechanism. We find that credit fire sales shift car purchases and indebtedness from high income, low risk consumers to low income, high risk ones. Thus, the direction, magnitude and heterogeneity of the lending channel of transmission of shocks through financial intermediaries is substantially altered when intermediation is internalized by manufacturers.
Keywords: captive finance, fire sales, car loans, vertical integration, liquidity, distress
JEL Classification: G20, G21, G23, G51
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