Personal Bankruptcy and Credit Market Competition

44 Pages Posted: 20 Jan 2007

See all articles by Astrid Andrea Dick

Astrid Andrea Dick

Federal Reserve Bank of New York

Andreas Lehnert

Board of Governors of the Federal Reserve System

Date Written: January 2007


The effect of credit market competition on borrower default is theoretically ambiguous, because the quantity of credit supplied may rise or fall following an increase in competition. We investigate empirically the relationship between credit market competition, lending to households, and personal bankruptcy rates in the United States. We exploit the exogenous variation in market contestability brought on by banking deregulation at the state level: after deregulation, banks faced the threat of entry into their state markets. We find that deregulation increased competition for borrowers, prompting banks to adopt more sophisticated credit rating technology. In turn, these developments led previously excluded households to enter the credit market. We document that, following deregulation, (1) overall lending increased, (2) loss rates on loans decreased, and (3) bankruptcy rates rose. Further, we find that lending and bankruptcy rates increased more in states with greater actual (rather than potential) entry, and that credit card productivity increased after the removal of entry restrictions. These findings suggest that entrants brought with them enhanced underwriting technology that allowed for credit extension to new borrowers.

Keywords: consumer bankruptcy, banks, competition

JEL Classification: K3, G2, L1

Suggested Citation

Dick, Astrid Andrea and Lehnert, Andreas, Personal Bankruptcy and Credit Market Competition (January 2007). FRB of New York Staff Report No. 272, Available at SSRN: or

Astrid Andrea Dick (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Andreas Lehnert

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3325 (Phone)
202-263-4852 (Fax)

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