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Credit Growth and the Financial Crisis: A New Narrative

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  • Stefania Albanesi

    (The Ohio State University)

Abstract

A broadly accepted explanation for the 2007-09 financial crisis emphasizes the growth in lending to subprime households during the preceding boom. According to this view, the resulting rise in insolvencies and foreclosures caused the financial crisis, leading to a decline in housing values and a broad contraction in credit. This paper studies the evolution of household borrowing and delinquency between 1999 and 2013, using a large administrative panel of credit file data. Our findings suggest an alternative narrative that challenges the large role of subprime credit. We show that credit growth between 2001 and 2007 is concentrated in the middle and high quartiles of the credit score distribution. Borrowing by individuals with low credit score is virtually constant for all debt categories during the boom. We also find that the rise in defaults during the financial crisis is concentrated in the middle and upper quartiles of the credit score distribution, and the fraction of defaults to the lowest quartile of of the credit score distribution sizably drops during the crisis. We discuss the broader implications of these findings for the role of housing collateral in the propagation of the crisis.

Suggested Citation

  • Stefania Albanesi, 2016. "Credit Growth and the Financial Crisis: A New Narrative," 2016 Meeting Papers 575, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:575
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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