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201310 Pap

201310 Pap

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Published by: caitlynharvey on Feb 11, 2013
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Finance and Economics Discussion SeriesDivisions of Research & Statistics and Monetary AffairsFederal Reserve Board, Washington, D.C.From Wall Street to Main Street: The Impact of the FinancialCrisis on Consumer Credit SupplyRodney Ramcharan, Skander Van den Heuvel, and StephaneVerani
2013-10
NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminarymaterials circulated to stimulate discussion and critical comment. The analysis and conclusions set forthare those of the authors and do not indicate concurrence by other members of the research staff or theBoard of Governors. References in publications to the Finance and Economics Discussion Series (other thanacknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.
 
 From Wall Street to Main Street: The Impact of the FinancialCrisis on Consumer Credit Supply
Rodney Ramcharan Skander J. Van den Heuvel Stéphane Verani
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 December 5, 2012
Abstract
This paper studies how the collapse of the asset backed securities (ABS) market during thefinancial crisis of 2007-2009 affected the supply of credit to the broader economy using a newdataset that describes unique interbank relationships within the credit union industry. Thisindustry is important for consumer finance, and we find that ABS related losses at correspondentcredit unions are associated with a large contraction in the supply of consumer credit and ahoarding of cash among downstream credit unions. We also find that this contraction in creditsupply was concentrated among downstream credit unions that began the crisis with lowercapital asset ratios, and that it may have amplified the initial decline in house prices. Theseresults suggest that capital regulation might shape the ability of financial institutions to transmitsecurities price volatility onto the real economy.
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All authors are at the Federal Reserve Board.Rodney.Ramcharan@frb.gov.skander.j.vandenheuvel@frb.govand stephane.h.verani@frb.gov. The authors thank Maxim Massenkoff and Jeremy Oldfather for excellent researchassistance. The authors are also grateful to seminar participants at the Federal Reserve Bank of Boston, FederalReserve Board, IMF, NBER Monetary Economics Meeting, NBER Risks of Financial Institutions Meeting and theNCUA for comments. We also thank Jose Berrospide, Giovanni Favarra, Diana Hancock, Rustom Irani, StephenLeRoy, Anil Kashyap, Ralf Meisenzahl, Alberto Rossi, Wayne Passmore, Joe Peek, Amit Seru and Amir Sufi forhelpful comments. We are also indebted to John Worth and David Shetler for the data. The views expressed in thispaper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System.
 
 
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Introduction
Most narratives broadly agree that the proximate cause of the 2007-2009 financial crisiscentered around the collapse of the housing bubble in the United States. Mortgages and otherloans were securitized into asset backed securities (ABS), which were held on the balance sheetof banks and distributed widely throughout the financial system. Falling house prices and risingmortgage defaults then led to sharp declines in the price of mortgage and other types of ABS,igniting concerns about the liquidity and solvency of the banking sector (Brunnermeier (2009),Gorton (2009), Shleifer and Vishny (2011)).Less well understood however, is the mechanism through which the decline in ABSprices might have affected the supply of credit to consumers and small businesses in the broadereconomy. There is already powerful evidence that household leverage during the boom inconjunction with falling house prices during the bust may have depressed consumer demand,helping to engender the relatively slow recovery in output growth, employment and consumption(Mian and Sufi (2011)). But the ABS related balance sheet losses incurred by the financial sectormay have also led to a fundamental post crisis disruption in credit intermediation, contributing tothe slow economic recovery and weak house price growth.The goal of this paper then is to study how the financial crisis of 2007-2009 affected thesupply of credit to consumers.
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The traditional challenges to inference in any such analysiscenter around measurement and identification issues.
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In the case of the latter, economic theorydoes suggest that illiquidity in one corner of the banking sector, and large realized balance sheetlosses could engender a contraction in the aggregate supply of credit and economic activity(Allen and Gale (2000), Diamond and Rajan (2005), Shleifer and Vishny (2010)). However, thedecline in house prices and household net worth, as well as the general economic uncertaintyaccompanying the financial crisis could themselves reduce the demand for credit amongconsumers, leading to an observationally similar reduction in bank lending and economicactivity.
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Ivashina and Scharfstein (2010) examine the impact of the crisis on credit supply in the syndicated loan market;Cornett et. al. (2010) look more broadly at credit in the banking system, while Puri et.al (2011) focus on theinternational spillovers from the US crisis.
 
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Empirical research in this area has followed a diverse set of strategies to overcome these challenges. See forexample, Khawaja and Mian (2008), Paravisini (2008), and Peek and Rosengren (1997).
 

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