A1319
Title: Screening and monitoring in consumer credit: Evidence from credit unions
Authors: Olivia Wilkinson - University of Wisconsin-Madison (United States) [presenting]
Abstract: Banking consolidation and technological advancements have led to a decline in in-person banking relationships. Credit unions are financial institutions that continue to emphasize consumer relationships and community ties. Using an anonymous random panel of consumer credit reports from Equifax, a matched sample of credit union and non-credit union credit card borrowers is constructed to compare delinquency outcomes across lenders. Credit union borrowers exhibit lower delinquency rates on average, though there is heterogeneity across borrower quality. Two mechanisms are examined empirically and structurally: screening and monitoring. The screening channel is evaluated by testing whether credit limits contain differential predictive information of future delinquency across lenders. Credit limits issued by credit unions are more predictive of subsequent delinquency, consistent with stronger screening of borrower risk. Evidence for monitoring is more difficult to identify. Some evidence of slower transitions into delinquency appears with zip code-score-time fixed effects, but not with consumer-time fixed effects since the set of borrowers with both lenders is not representative of the full sample. A structural life-cycle model with hidden information and endogenous lender choice is estimated to quantify the relative importance of these two mechanisms and to evaluate welfare implications of changes to credit union market share.
