Consumer participation in the credit market during the COVID-19 pandemic and beyond
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We find that credit demand is highest when
Key Points:
- We find that credit demand is highest when
the first lockdown ends and it drops when supportive monetary compensation schemes are implemented. - Credit is more likely to be
accepted under favourable borrowing conditions and after the approval of national recovery plans. - We also find
that demographic, economic factors, perceptions and expectations are associated with the demand for credit and
the credit grant. - First, it adds to a rapidly growing literature on household
borrowing behaviour during the COVID-19 pandemic; see, for example, Ho et al. - We provide evidence that credit applications and credit acceptances display a different pattern over
time. - Credit is more likely to be accepted under favourable borrowing conditions and after the
approval of national recovery plans. - In almost all countries
households are significantly less likely to apply and to get their credit approved than in Germany. - In line with literature, we show that
demographic and economic factors affect the probability for credit applications and credit approval. - In addition,
the paper shows that consumer perceptions and expectations matter when they decide to apply for credit. - Introduction
The participation of households in the credit market receives wide attention in the consumer finance literature
because consumer credit enters the monetary policy transmission mechanism through the so-called ?credit
channel?: changes in credit demand and supply have an effect on consumers' spending and investment, which in
turn affect economic growth. - We use microdata from the ECB?s Consumer Expectations Survey (hereinafter CES), a survey that
measures consumer expectations and behaviour in the euro area. - Its panel dimension allows for an assessment of
how consumer behaviour changes over time and how consumers respond to critical economic shocks. - This way we can gauge how credit applications and credit acceptances change under different, almost
opposite, borrowing conditions. - We also distinguish between the demand for long-term secured loans (mortgages) and for short-term
uncollateralized loans (consumer loans). - ECB Working Paper Series No 2922
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We use probit models to estimate the probability of the consumer to apply for credit and the credit being granted.
- The rate peaks in 2020Q3 which reflects the rebound in the demand for loans when the first lockdown ended.
- In almost all countries households are significantly less likely
to apply and to get their credit approved than in Germany. - However,
when it comes to credit acceptance, we observe that the two groups of households are more similar. - Finally, we find some heterogeneity with respect to the type of credit, particularly between secured and unsecured
debt. - The demand for
consumer credit is insignificant for liquid households and decreases significantly for constrained households in
the last two quarters of our timespan. - The first consists of a recently growing literature which
explores consumer behaviour in the credit market during the COVID-19 pandemic, mostly in the United States. - Sandler and Ricks (2020) show that consumers did not use credit card debt for financial liquidity in the early stage
of the COVID-19 pandemic. - (2020) report that credit card applications and new mortgage loans
declined during the first months of the pandemic in regions with more unemployment insurance claims. - Lu and
Van der Klaauw (2021) show that there was a sharp drop in consumer credit demand, especially for credit cards. - (2022) document that there was a substantial decrease in the usage of credit cards and home equity lines
of credit by Canadian consumers. - Our paper is also consonant with studies on the association between financial and demographic factors and
consumers? participation in the credit market as well as on the demand for specific types of credit. - January 2020 ? October 2020 - The two main events are the outbreak of the COVID-19 pandemic and the
consequential lockdowns in the euro area. - 4 If the
respondent has applied for more than one type of credit, she is asked to refer to the most recent credit application. - Between 2021Q3 and 2022Q3 the acceptance
rate stays above the average values, mirroring the easing of credit standards for consumer credit and other lending
to households during this period. - Second, we can investigate the presence of nonlinearities in how liquidity and the credit type interact in explaining credit applications.
- (2023) ? who show that in the United States the local pandemic severity had a strong
negative effect on credit card spending early in the pandemic, which diminished over time. - First, we select mortgages and consumer credit as the two mostly reported categories for secured and
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The full estimation results are reported in Table 3.
- The right-hand side panel of Figure 6 shows that the demand for consumer credit is insignificant for both liquid
and illiquid households. - It also shows that
subjective perceptions of credit access, financial concerns and expectations on interest rates matter for the demand
for credit. - In Bertola, G., Disney
R., and Grant, C. (eds) The Economics of Consumer Credit, Cambridge MA, MIT Press. - Horvath, A., Kay, B. and Wix, C. (2023) The COVID-19 shock and consumer credit: Evidence from credit card
data. - Magri, S. (2007) Italian households? debt: The participation to the debt market and the size of the loan.