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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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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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description	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.
doi_str_mv	10.1111/jofi.12522
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source	International Bibliography of the Social Sciences (IBSS); Wiley; PAIS Index; JSTOR Journals and Primary Sources
subjects	Banking law Bond markets Borrowing Chance Consumer behavior Consumer credit Consumers Credit ratings Default Loans Money Negative events Regulation Regulation of financial institutions
title	Consumer Default, Credit Reporting, and Borrowing Constraints
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