Competing for Loan Informal Seniority: Theory and Evidence

Theo Martins, Bernardo Ricca and Arthur Taburet

No 632, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Using data on the universe of retail loans in Brazil, we show that universal de[1]fault is rare: when borrowers are in distress, they often repay one of their credit cards. Using a novel identification strategy, we estimate the causal impact of getting a new credit card on default. We also document that borrowers prioritize repaying the cards with higher limits, originated by fintech companies, or by lenders that also sold them other financial products. Motivated by these facts, we introduce the concept of informal seniority and develop a model of non-exclusive lending in which lenders compete for repayment priority using contract terms. Competition for loan seniority creates a debt-dilution problem; as a result, bankruptcy laws mandating equal recovery rates across all unsecured loans can reduce welfare.

Date: 2025-10
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