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Finance and Inequality: The Distributional Impacts of Bank Credit Rationing

Ali Choudhary () and Anil K. Jain

No 1211, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We analyze reductions in bank credit using a natural experiment where unprecedented flooding differentially affected banks that were more exposed to flooded regions in Pakistan. Using a unique dataset that covers the universe of consumer loans in Pakistan and this exogenous shock to bank funding, we find two key results. First, banks disproportionately reduce credit to new and less-educated borrowers, following an increase in their funding costs. Second, the credit reduction is not compensated by relatively more lending by less-affected banks. The empirical evidence suggests that adverse selection is the primary cause for banks disproportionately reducing credit to new borrowers.

Keywords: Credit markets; Capital; Liquidity; Financial stability; Inequality; Adverse selection; Relationships (search for similar items in EconPapers)
JEL-codes: G21 G28 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cfn
Date: 2017-08-31
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1211

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DOI: 10.17016/IFDP.2017.1211

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