Credit Fire Sales: Captive Lending as Liquidity in Distress

65 Pages Posted: 18 Feb 2021 Last revised: 22 Apr 2021

See all articles by Matteo Benetton

Matteo Benetton

University of California, Berkeley - Haas School of Business

Sergio Mayordomo

Banco de España

Daniel Paravisini

London School of Economics & Political Science (LSE)

Date Written: April 21, 2021

Abstract

We study the role of captive finance in the car loan market when manufacturers' liquidity demand increases. Using a new multi-country 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-to-value in the intensive margin and relaxing lending standards in the extensive margin increases car sale down-payments, at the cost of future losses. We exploit quasi-exogenous variation in manufacturers' liquidity cost and need following the Volkswagen emissions scandal to identify the channel. A simple calibrated model shows that a standalone manufacturer would have to decrease car prices by 10% to generate the same liquidity of a credit fire sale.

Keywords: captive finance, fire sales, car loans, vertical integration, liquidity, distress

JEL Classification: G20, G21, G23, G51

Suggested Citation

Benetton, Matteo and Mayordomo, Sergio and Paravisini, Daniel, Credit Fire Sales: Captive Lending as Liquidity in Distress (April 21, 2021). Available at SSRN: https://ssrn.com/abstract=3780413 or http://dx.doi.org/10.2139/ssrn.3780413

Matteo Benetton (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Sergio Mayordomo

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Daniel Paravisini

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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