Three essays on financial intermediation and consumer credit markets

Han, Weitong

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https://hdl.handle.net/2142/124536 Copy

Description

Title

Three essays on financial intermediation and consumer credit markets

Author(s)

Han, Weitong

Issue Date

2024-04-23

Director of Research (if dissertation) or Advisor (if thesis)

Fonseca, Julia

Doctoral Committee Chair(s)

Pennacchi, George

Committee Member(s)

• Kahn, Charles
• Wu, Yufeng

Department of Study

Finance

Discipline

Finance

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Information spillover
• economies of scale
• credit card coverage
• mortgage supply
• market structure
• mortgage pricing
• portfolio lending
• market concentration
• service provision
• product differentiation
• online lending, payday loans, fintech

Abstract

My dissertation focuses on the intersection between financial intermediation, the consumer credit market, and market structure. The abstracts of the three chapters in the dissertation are as follows: In the first chapter, I examine how economies of scale in credit card lending affect mortgage lending via the spillover of information gathered from credit card operations. I find that a one standard deviation increase in the number of credit cards per capita increases mortgage origination by 10.2% and decreases interest rates by 16.6 basis points (bps). The increase in the supply of mortgage loans is unlikely to be driven by an inflow of retail deposits or a change in mortgage market power. Additionally, the reduction in interest rate is approximately three times as large for borrowers who have existing credit cards with their mortgage lenders than for those who do not. Collectively, my results are consistent with the hypothesis that information gathered from credit card operations reduces the uncertainty faced by lenders and thereby increases the supply of credit in the mortgage market. In the second chapter, I document a novel fact: banks that finance mortgages on their balance sheets (portfolio lenders) have strong pricing power in the local conforming mortgage markets, contrary to the prevalent perception that the conforming mortgage market is highly competitive and homogeneous. Using novel loan-level microdata provided by Experian, I show that these banks impose a premium of about 10 to 20 bps for mortgages with comparable ex-ante risk attributes. The relative pricing power of the portfolio lenders is stronger in counties where borrowers have a stronger preference for in-person service, in counties with higher levels of concentration, and when a county receives plausibly exogenous increases in mortgage demand. Overall, my findings suggest that portfolio lenders do compete on price in local markets and maintain market power by offering a higher provision of in-person service, thereby attracting borrowers with lower price sensitivity. The third chapter, a joint work with Jialan Wang and Filipe Correia, tests whether technology lowers the cost of credit in the expensive payday loan market, using data from a subprime credit bureau with nationwide coverage in the United States. Contrary to the notion that technology reduces consumer prices, we find that online loans are about 100% APR higher than storefront loans. This premium is not explained by observable loan or customer characteristics, including credit scores and traditional credit risk measures, and we do not find evidence of risk-based pricing on observables. Our evidence is consistent with asymmetric information and differences in fixed costs across the online and storefront markets.

Graduation Semester

2024-05

Type of Resource

Thesis

Copyright and License Information

Copyright 2024 Weitong Han

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