The Effects of Competition in Consumer Credit Markets

This paper studies the effects of increased competition in the financial sector using changes in financial regulation that allowed some credit unions to compete directly with local banks. Greater competition leads to more highly levered banks, higher deposit rates, lower consumer borrowing costs, and an increase in lending at the extensive margin towards riskier borrowers, resulting in higher delinquency rates. Increased competition is also associated with the exit of less efficient and less well-capitalized banks. This evidence points to a hybrid view of the social consequences of competition in the financial system, as competition-induced efficiency improvements occur alongside riskier loan profiles for institutions. These effects also extend to non-depository institutions outside the traditional supervisory umbrella, and suggest that increased competition can create a less stable financial system.