Exploring the expansion of credit on the demand and the supply side:
What are the Macroeconomic Implications of high Household Debt and Equity Ownership, and are Asset Based Credit (ABC) Institutions different from Banks?

Abstract

During the last two decades, the way credit is handled has profoundly changed on both the demand and supply sides, mostly due to the new role of collateral assets. On the demand side, household debt that is collateralized with real estate, cars, and other tangible assets has reached record levels. On the supply side, the use of collateralized credit has become widespread. Banks now use collateralized credit for a number of purposes such as risk management, issuing fees, etc..., and a new type of lender has entered into competition with banks through the use of assets instead of deposits for credit generation. These modifications, coupled with a stable financial environment and low interest rates, have led to the issuance of considerable amounts of collateralized credit. All these changes have macroeconomic implications, either creating new risk or magnifying existing financial systemic risk.

To study the increased demand for household credit, I develop a theoretical model of the macro dynamics of households, with financial stability moderated by asset prices. I show that household real estate debt has quantifiable drawbacks in terms of financial stability. To study the supply of credit, I examine the link between collateral assets and financial stability in two ways. First, I develop a theoretical model of the dynamics between financial stability and assets used as collateral for bank debt. I show that a simple link exists between the price dynamics of bank loan collateral assets and optimal leverage of the financial system. Second, I empirically investigate the characteristics of lenders that do not hold deposits, also called asset-based credit institutions, since they substitute deposit liquidity with short loans securitized by assets. I show that in liquidity generation, risk, and market discipline, asset-based credit institutions mostly behave like banks.