The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets

Cortés, Kristle Romero; Glover, Andrew; Tasci, Murat

doi:10.26509/frb-wp-201625

Cited by 6 publications

(15 citation statements)

References 3 publications

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“…Lowest ability group that is able to repay R L conditional on the bank earning zero profits and given equilibrium lending standards. (2017) and Cortés, Glover, and Tasci (2018).…”

Section: Othermentioning

confidence: 98%

“…Di Maggio et al (2017) find an average Equifax Risk Score of 697 and a standard deviation of 109 using data from 2007-2013. Cortés, Glover, and Tasci (2018) find an average score of 693 with standard deviation of 107 using data from 2005-2014. I split the difference between the two and use a mean credit score of 695 and standard deviation of 108.…”

Section: Calibrationmentioning

confidence: 99%

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Lending Standards, Bank Risk-Taking, and Monetary Policy

2019

JAF

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This paper contributes to the burgeoning literature on the so-called "risk-taking channel" of monetary policy by constructing a partial equilibrium model of the commercial loan market, where conventional monetary policy influences bank lending standards and, by extension, the risk of bank default. In the model, borrower heterogeneity in terms of entrepreneurial abilities and project revenue results in optimal commercial bank lending standards. These standards take the form of a minimum ability requirement: only borrowers with abilities greater than or equal to the minimum threshold receive a loan; the rest are completely excluded from the loan market. After loans are made, a negative aggregate shock that lowers all borrowers' project revenue results in unexpected loan losses for the bank that may push it into default.In the baseline model, lending standards loosen and the probability of bank default rises when the central bank's policy rate falls, a result that suggests that asset quality and lending standards may play an important role in shaping the risk-taking channel of monetary policy. However, the relationship between bank default and the policy rate is sensitive to the extent of bank capitalization. While default risk and the policy rate are negatively correlated at relatively strongly capitalized banks, the risk of default at more weakly capitalized banks increases with the policy rate. Additionally, default risk at strongly capitalized banks is more responsive to changes in the policy rate than at weakly capitalized banks. This paper contributes to the literature on the risk-taking channel of monetary policy. First, the model enables analysis of the impact of monetary policy on risk-taking in a setting where both bank asset quality and leverage play a role in shaping the risk of bank default. Second, the model's results on the role of bank capitalization imply that the tradeoff between financial stability and monetary policy depends crucially on bank capital ratios. This suggests that recent changes to bank capital requirements embodied in new post-2008 financial crisis regulations may impact the nature and size of the risk-taking channel.

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“…Lowest ability group that is able to repay R L conditional on the bank earning zero profits and given equilibrium lending standards. (2017) and Cortés, Glover, and Tasci (2018).…”

Section: Othermentioning

confidence: 98%

Section: Calibrationmentioning

confidence: 99%

Lending Standards, Bank Risk-Taking, and Monetary Policy

2019

JAF

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“…Information on the states that enacted credit bans is from the National Conference of State Legislatures, and the dates that the bans went into effect were obtained from a combination of articles, press releases, and industry reports. The information in this table is identical to that in Cortés, Glover, & Tasci (2016). Table 3.1 that eventually enact a ban (ban states).…”

Section: Resultsmentioning

confidence: 99%

“…While those papers focus on individual-specific credit information, other papers like ours analyze recent credit reporting policies. Clifford and Shoag (2016) find positive effects and Cortés, Glover, and Tasci (2016) find negative effects on employment resulting from credit report bans, but they do not observe people with bad credit; rather, they consider locations (Census tracts and counties, respectively) where people with bad credit are concentrated, so their results may reflect outcomes for people with bad credit or for people who get pooled together with those with bad credit.…”

Section: Introductionmentioning

confidence: 99%

“…Studies on credit reporting bans that come closest to focusing on people with bad credit consider locations where people with bad credit are concentrated. Clifford & Shoag (2016) find an increase in jobs held by residents of Census tracts with the lowest credit scores, using the Longitudinal Employer-Household Dynamics (LEHD) data set, while in contrast Cortés, Glover, & Tasci (2016) Other recent research focuses on broader disadvantaged groups, for example youth and minorities as a whole, who have worse credit on average than other groups, and finds that restricting credit information may worsen employment outcomes. This implies, first, that members of the group with poor credit either do not benefit or are too small in number to affect outcomes for the whole group and, second, that those who resemble people with poor credit are directly harmed through statistical discrimination.…”

Section: Introductionmentioning

confidence: 99%

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Essays on Consumer Credit Markets and Debtor Protections

Pattison

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This thesis studies the costs, benefits, and welfare impact of laws that protect debtors when they default. The first chapter evaluates the welfare impact of one of the main debtor protections in the United States: asset exemptions. Asset exemptions shield debtors' assets from seizure by unsecured creditors, and so provide insurance that increases consumption when debtors default. This default insurance is financed by higher interest rates when debtors repay. I derive a sufficient statistic formula for the welfare impact of increasing exemptions, which captures the benefits to debtors who default either in or out of bankruptcy. I then estimate the key components of the formula. First, using the PSID, I estimate the change in consumption that occurs when debtors default, which determines debtors' willingness to pay for default insurance. The estimated 5.5% consumption drop upon default implies that debtors are willing to pay, at most, 16.5% over the actuarially fair rate for default insurance. Second, using credit union data and changes in state exemption levels, I show that higher exemptions increase interest rates and decrease recoveries on charged-off debt. The estimates imply that exemptions generate default insurance, but the higher interest rates are marked up 320% over what is actuarially fair. Ultimately, since the actual markup substantially exceeds what debtors are willing to pay, lower exemptions would increase welfare. The second chapter investigates whether borrowers file more bankruptcies when asset exemption are higher. A higher exemption makes bankruptcy more attractive, but also reduces the supply of credit, so the equilibrium effect on bankruptcy filings is uncertain. The reduced-form literature finds conflicting evidence, generally using cross-sectional variation in exemptions across states. I use panel variation in exemptions, combined with state-and county-level data on bankruptcies, and find that a median-sized exemption increase raises Chapter 7 bankruptcy rates by 3-7%. Event study regressions show that bankruptcy rates rise immediately after an exemption increase and remain high for at least six years, so it is i Bibliography 136 v Chapter 1 Consumption Smoothing and Debtor Protections 1 Stavins (2000) reports that 8.5% of households have filed for bankruptcy, and more recently, Dobbie et al. (2016) reports that 15% of individuals have filed for bankruptcy based on their calculations in the Federal Reserve Bank of New York's Consumer Credit Panel/Equifax Data. VISA reports that 55-60% of charge-offs occur without a bankruptcy filing (NBRC, 1997). 2 The $100 billion in interest rate payments, reported in Akerlof and Shiller (2015), is obtained by multiplying the total credit card debt in 2009 (886 billion) by the average interest rate on revolving credit (0.134).

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Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports

Dobbie¹,

Goldsmith-Pinkham²,

Mahoney³

et al. 2020

The Journal of Finance

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We study the financial and labor market impacts of bad credit reports. Using difference‐in‐differences variation from the staggered removal of bankruptcy flags, we show that bankruptcy flag removal leads to economically large increases in credit limits and borrowing. Using administrative tax records linked to personal bankruptcy records, we estimate economically small effects of flag removal on employment and earnings outcomes. We rationalize these contrasting results by showing that, conditional on basic observables, “hidden” bankruptcy flags are strongly correlated with adverse credit market outcomes but have no predictive power for measures of job performance.

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The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets

Cited by 6 publications

References 3 publications

Lending Standards, Bank Risk-Taking, and Monetary Policy

Lending Standards, Bank Risk-Taking, and Monetary Policy

Essays on Consumer Credit Markets and Debtor Protections

Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports

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