Essays on financial intermediation and household finance

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Paradkar, Nikhil Dilip
Chava, Sudheer
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This dissertation consists of three essays on the intersection of financial intermediation and household finance. In the first essay, using proprietary account-level data from a major credit bureau, I examine the impact of stress tests on bank risk-taking in the U.S. consumer credit card market. I decompose credit supply and demand effects by exploiting credit card--level data on limits and balances matched to both consumers and banks. For the same consumer, I examine the lending response of banks experiencing higher stress test--induced capital requirements (i.e., high-exposure banks) relative to less-exposed banks. I find that the earlier rounds of stress tests induced high-exposure banks to sharply reduce credit limits, especially for ex-ante risky borrowers. In contrast, in later rounds of stress tests, high-exposure banks increased limits for risky consumers. Consistent with higher bank risk-taking in later rounds, cards issued by highly exposed banks have a higher ex-post likelihood of default. Additionally, I document that more affected non-prime borrowers are more likely to default subsequently, and that this effect is markedly pronounced for the low-income and less-educated consumer segments. My findings suggest that stress test--induced increases in capital requirements can encourage higher bank risk-taking, with distributional consequences for consumer creditworthiness. In the second essay, using comprehensive credit bureau data, we study how obtaining marketplace lending (MPL) credit impacts consumers' future borrowing capacities and outcomes. We find that MPL borrowers' credit scores improve temporarily after loan origination relative to observably similar bank borrowers and borrowers with unmet credit demand, but MPL borrowers default at higher rates subsequently. We show that the initial improvement in capacities is somewhat mechanical, while the subsequent deterioration in outcomes indicates MPLs' screening is weaker relative to banks. MPL screening relative to banks is especially weaker when banks have relationship-based information and when MPL platforms provide less information to MPL investors. In the third essay, using comprehensive credit card--borrower--bank matched data of approximately 500 million credit cards in the U.S., we analyze how a sharp unexpected decline in banks' short-term wholesale funding in 2008 affected their consumers. We decompose credit supply and demand effects using the sudden dry-up of short-term wholesale funding (which accounted for 17.8% of bank funding pre-2008) and account-level data on credit card limits and balances. For the same consumer, credit card issuers experiencing a 10% greater decline in wholesale funding reduced credit limits by 0.9% more relative to other issuers. Consumers' aggregate card balances decreased by 0.32% for a 1% reduction in aggregate limits induced by the wholesale funding liquidity shock. We document significant heterogeneity in the pass-through of the bank liquidity shocks with banks cutting credit limits by more for credit-constrained consumers (e.g., lower credit-score and higher credit utilization consumers). These consumers respond by cutting their consumption as they are less able to borrow from alternate sources. Moreover, this consumption decline is long-lasting for these credit-constrained consumers. Our results highlight that when banks face liquidity shocks, they are more likely to pass on these shocks to consumers who are least able to hedge against them. Consequently, our results show who bears the real costs of fragile bank funding structures.
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