Consumer Default, Credit Reporting, and Borrowing Constraints

Why do negative credit events lead to long-term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three-year reduction in financing. Consumers respond to the shock by...

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Bibliographic Details
Published in:The Journal of finance (New York) 2017-10, Vol.72 (5), p.2331-2368
Main Authors: GARMAISE, MARK J., NATIVIDAD, GABRIEL
Format: Article
Language:English
Subjects:
Banking law
Bond markets
Borrowing
Chance
Consumer behavior
Consumer credit
Consumers
Credit ratings
Default
Loans
Money
Negative events
Regulation
Regulation of financial institutions
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Summary:Why do negative credit events lead to long-term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three-year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade itself accounts for 25% to 65% of their observed decline in borrowing at various horizons over the following several years.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12522