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Personal bankruptcy and credit market competition

Author: Dick, Astrid A. ; Lehnert, AndreasINSEAD Area: Economics and Political ScienceIn: Journal of Finance, vol. 65, no. 2, April 2010 Language: EnglishDescription: p. 655-686.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: We document a link between U.S. credit supply and rising personal bankruptcy rates. We exploit the exogenous variation in market contestability brought on by banking deregulation — the relaxation of entry restrictions in the 1980s and 1990s — at the state level. We find deregulation explains at least 10% of the rise in bankruptcy rates. We also find that deregulation leads to increased lending, lower loss rates on loans, and higher lending productivity. Our findings indicate that increased competition prompted banks to adopt sophisticated credit rating technology, allowing for new credit extension to existing and previously excluded households. The paper also draws some interesting links with the recent financial crisis: contrary to the latter, the results of our paper suggest that the subprime credit card expansion (and default) of the 1980s and early 1990s was actually the result of increased competition and, importantly, improvements in credit scoring technology
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We document a link between U.S. credit supply and rising personal bankruptcy rates. We exploit the exogenous variation in market contestability brought on by banking deregulation — the relaxation of entry restrictions in the 1980s and 1990s — at the state level. We find deregulation explains at least 10% of the rise in bankruptcy rates. We also find that deregulation leads to increased lending, lower loss rates on loans, and higher lending productivity. Our findings indicate that increased competition prompted banks to adopt sophisticated credit rating technology, allowing for new credit extension to existing and previously excluded households. The paper also draws some interesting links with the recent financial crisis: contrary to the latter, the results of our paper suggest that the subprime credit card expansion (and default) of the 1980s and early 1990s was actually the result of increased competition and, importantly, improvements in credit scoring technology

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