Essays on banking and credit

Kejia Wu

doi:10.17918/00001746

In a broader sense, this thesis aims to contribute to understanding the credit market regarding the roles of consumers, institutions, and regulators. It is divided into three chapters. The first chapter (jointly with Dr. Kostantinos Serfes, Dr. Panos Avramidis, and Dr. George Pennacchi) analyzes how regulation that promotes greater access to bank credit, such as the Community Reinvestment Act (CRA), impacts the financing of small firms. It finds that when areas become CRA-eligible, the likelihood of bank lending to local small firms increases and firms reduce late trade credit payments, consistent with loans allowing small firms to pay trade credit more promptly and avoid late payment fees. The effect is more profound in low- and moderate-income areas where financial constraints are tighter due to low bank competition. The effect is also larger for small firms that operate in trade credit-dependent industries. The second chapter (jointly with Dr. Kostantinos Serfes and Dr. Panos Avramidis) addresses the question of whether the recent proliferation of technology in the lending process has an impact on business loan market competition. Using a theoretical model that assumes heterogeneity in lenders' screening ability and borrowers' investment horizon, we show that FinTech (traditional) lenders primarily supply unsecured (asset-backed) loans to borrowers with short-term (long-term) projects. The model builds on the interplay between screening ability and collateral requirements to characterize the competition between two ex-ante symmetric lenders. Lenders use screening technology and collateral requirements to mitigate competition and restrict the supply of credit through an endogenous segmentation of markets with different maturities. As information technology improves, the effect on credit supply and equilibrium interest rates is more nuanced and depends on the maturity of the market. The results offer a supply-side explanation for the growth of unsecured lending. The final chapter aims to understand how the credit terms of auto loan contracts affect new car transac- tions. Using a national sample of new car transactions in the United States, I estimate a random coefficient discrete choice model that explicitly incorporates credit terms such as interest rate and maturity to drive consumer preference for the combined car and car loan product in addition to traditional car characteristics. Including credit terms significantly increases estimated price elasticity, indicating that credit terms have a large effect on consumers' price sensitivity for the car. Moreover, buyers of the less premium car models are more likely to substitute across car models and maturity segments than across car models. Lastly, although U.S. auto dealerships have the discretion to mark up auto loans like cars, the result of the firm conduct test does not reject separate pricing or joint pricing of cars and car loans by auto sellers.

Essays on banking and credit

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Essays on banking and credit

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