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Do Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending During the Great Recession

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  • Sumit Agarwal
  • Souphala Chomsisengphet
  • Neale Mahoney
  • Strö
  • Johannes bel

Abstract

We examine the ability of policymakers to stimulate household borrowing and spending during the Great Recession by reducing banks¡¯ cost of funds. Using panel data on 8.5 million U.S. credit card accounts and 743 credit limit regression discontinuities, we estimate the marginal propensity to borrow (MPB) for households with different FICO credit scores. We find substantial heterogeneity, with a $1 increase in credit limits raising total unsecured borrowing after 12 months by 59 cents for consumers with the lowest FICO scores (¡Ü 660) while having no effect on consumers with the highest FICO scores (> 740). We use the same credit limit regression discontinuities to estimate banks¡¯ marginal propensity to lend (MPL) out of a decrease in their cost of funds. For the lowest FICO score households, higher credit limits quickly reduce marginal profits, limiting the pass-through of credit expansions to those households. We estimate that a 1 percentage point reduction in the cost of funds raises optimal credit limits by $127 for consumers with FICO scores below 660 versus $2,203 for consumers with FICO scores above 740. We conclude that banks¡¯ MPL is lowest exactly for those households with the highest MPB, limiting the effectiveness of policies that aim to stimulate the economy by reducing banks¡¯ cost of funds.

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  • Sumit Agarwal & Souphala Chomsisengphet & Neale Mahoney & Strö & Johannes bel, 2015. "Do Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending During the Great Recession," CESifo Working Paper Series 5521, CESifo.
  • Handle: RePEc:ces:ceswps:_5521
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    Cited by:

    1. Marco Di Maggio & Amir Kermani & Christopher Palmer, 2016. "How Quantitative Easing Works: Evidence on the Refinancing Channel," NBER Working Papers 22638, National Bureau of Economic Research, Inc.
    2. Jason Allen & Kiana Basiri, 2016. "The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit," Staff Working Papers 16-26, Bank of Canada.
    3. Lawrence Santucci, 2016. "What Happened to the Revolving Credit Card Balances of 2009?," Consumer Finance Institute discussion papers 16-1, Federal Reserve Bank of Philadelphia.
    4. António Afonso & Joana Sousa‐Leite, 2020. "The transmission of unconventional monetary policy to bank credit supply: Evidence from the TLTRO," Manchester School, University of Manchester, vol. 88(S1), pages 151-171, September.
    5. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2020. "The Marginal Propensity to Consume over the Business Cycle," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 351-384, April.
    6. Nuno Paixao, 2018. "Housing Prices and Consumer Spending: The Bank Balance Sheet Channel," 2018 Meeting Papers 1017, Society for Economic Dynamics.
    7. Sumit Agarwal & Gene Amromin & Souphala Chomsisengphet & Tim Landvoigt & Tomasz Piskorski & Amit Seru & Vincent Yao, 2015. "Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program," NBER Working Papers 21512, National Bureau of Economic Research, Inc.
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    9. Choudhary, M. Ali & Jain, Anil, 2022. "Finance and inequality: The distributional impacts of bank credit rationing," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    10. Lancastre, Manuel, 2016. "Inequality and Real Interest Rates," MPRA Paper 85047, University Library of Munich, Germany.
    11. Sriya Anbil & Angela Vossmeyer, 2017. "Liquidity from Two Lending Facilities," Finance and Economics Discussion Series 2017-117, Board of Governors of the Federal Reserve System (U.S.).
    12. Deniz Aydin, 2022. "Consumption Response to Credit Expansions: Evidence from Experimental Assignment of 45,307 Credit Lines," American Economic Review, American Economic Association, vol. 112(1), pages 1-40, January.
    13. Lei Ding, 2017. "Borrower credit access and credit performance after loan modifications," Empirical Economics, Springer, vol. 52(3), pages 977-1005, May.

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