First, we document that banks in the 90th percentile of the capital gap reduce their new supply of risky credit by 13 percent compared with those in the 10th percentile and cut their overall credit card risk exposure on an annual basis. Next, we show that these banks find alternative ways to remain competitive and attract customers by lowering interest rates and offering more rewards and promotions to select groups of borrowers. Finally, we show that consumers at banks with a gap increase their credit card spending and debt payoff and at the same time experience fewer delinquencies. We also show that our results are generalizable to other lending products such as mortgages and home equity. Overall, our results demonstrate a positive feedback loop among credit supply, credit usage, and credit performance due to the stress tests.View the Full Working Paper
Bank Stress Test Results and Their Impact on Consumer Credit Markets
WP 20-30 - Using Federal Reserve (Fed) confidential stress test data, we exploit the gap between the Fed and bank capital projections as an exogenous shock to banks and analyze how this shock is transmitted to consumer credit markets.