Credit Growth and the Financial Cri sis: A New Narrative (with S. Albanesi and G. DeGiorgi)
The abstract:
A broadly accepted explanation
for the 2007-09 financial crisis emphasizes the growth in lending to subpr
ime households during the preceding boom. According to this view, the resul
ting rise in insolvencies and foreclosures caused the financial crisis, lea
ding to a decline in housing values and a broad contraction in credit. This
paper studies the evolution of household borrowing and delinquency between
1999 and 2013, using a large administrative panel of credit file data. Our
findings suggest an alternative narrative that challenges the large role o
f subprime credit. We show that credit growth between 2001 and 2007 is conc
entrated in the middle and high quartiles of the credit score distribution.
Borrowing by individuals with low credit score is virtually constant for a
ll debt categories during the boom. We also find that the rise in defaults
during the financial crisis is concentrated in the middle and upper quartil
es of the credit score distribution, and the fraction of defaults to the lo
west quartile of of the credit score distribution sizably drops during the
crisis. We discuss the broader implications of these findings for the role
of housing collateral in the propagation of the crisis.