Credit Fire Sales: Captive Lending as Liquidity in Distress

66 Pages Posted: 18 Feb 2021 Last revised: 4 Mar 2022

See all articles by Matteo Benetton

Matteo Benetton

London School of Economics & Political Science (LSE) - London School of Economics; University of California, Berkeley - Haas School of Business

Sergio Mayordomo

Banco de España

Daniel Paravisini

London School of Economics & Political Science (LSE)

Date Written: March 3, 2022

Abstract

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 fi re 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

Suggested Citation

Benetton, Matteo and Benetton, Matteo and Mayordomo, Sergio and Paravisini, Daniel, Credit Fire Sales: Captive Lending as Liquidity in Distress (March 3, 2022). Available at SSRN: https://ssrn.com/abstract=3780413 or http://dx.doi.org/10.2139/ssrn.3780413

Matteo Benetton (Contact Author)

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

United Kingdom

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
147
Abstract Views
606
rank
272,063
PlumX Metrics