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Consumer Default, Credit Reporting, and Borrowing Constraints
Author(s) -
GARMAISE MARK J.,
NATIVIDAD GABRIEL
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12522
Subject(s) - downgrade , credit rating , business , currency , monetary economics , shock (circulatory) , credit crunch , credit default swap , financial system , finance , economics , credit risk , medicine , computer security , computer science
ABSTRACT Why do negative credit events lead to long‐term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three‐year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade itself accounts for 25% to 65% of their observed decline in borrowing at various horizons over the following several years.