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Competing for Loan Informal Seniority: Theory and Evidence

Author

Listed:
  • Theo C. Martins
  • Bernardo Ricca
  • Arthur Taburet

Abstract

Using data on the universe of retail loans in Brazil, we show that universal de[1]fault is rare: when borrowers are in distress, they often repay one of their credit cards. Using a novel identification strategy, we estimate the causal impact of getting a new credit card on default. We also document that borrowers prioritize repaying the cards with higher limits, originated by fintech companies, or by lenders that also sold them other financial products. Motivated by these facts, we introduce the concept of informal seniority and develop a model of non-exclusive lending in which lenders compete for repayment priority using contract terms. Competition for loan seniority creates a debt-dilution problem; as a result, bankruptcy laws mandating equal recovery rates across all unsecured loans can reduce welfare.

Suggested Citation

  • Theo C. Martins & Bernardo Ricca & Arthur Taburet, 2025. "Competing for Loan Informal Seniority: Theory and Evidence," Working Papers Series 632, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:632
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    References listed on IDEAS

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    1. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, June.
    2. Fulford, Scott L. & Schuh, Scott D., 2024. "Credit cards, credit utilization, and consumption," Journal of Monetary Economics, Elsevier, vol. 148(C).
    3. Fulford, Scott L., 2015. "How important is variability in consumer credit limits?," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 42-63.
    4. Manolis Galenianos & Alessandro Gavazza, 2022. "Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards," Journal of the European Economic Association, European Economic Association, vol. 20(5), pages 1897-1932.
    5. Sumit Agarwal & Souphala Chomsisengphet & Neale Mahoney & Johannes Stroebel, 2015. "Regulating Consumer Financial Products: Evidence from Credit Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(1), pages 111-164.
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