Do Banks Pass Through Credit Expansions to Consumers Who Want to Borrow?

Abstract

We examine the ability of policymakers to stimulate household spending during the Great Recession by reducing banks’ cost of funds. Using panel data on 8.5 million credit cards and 743 credit limit regression discontinuities, we find that the one-year marginal propensity to borrow (MPB) is declining in credit score, falling from 59% for consumers with FICO scores below 660 to essentially zero for consumers with FICO scores above 740. We use the same credit limit discontinuities, combined with a model of lending, to estimate banks’ marginal propensity to lend (MPL) out of a decrease in their cost of funds. For the lowest FICO score consumers, higher credit limits sharply reduce profits from lending, limiting banks’ incentives to pass through credit expansions to these consumers. We conclude that banks’ MPL is lowest for consumers with the highest MPB and discuss the implications for policies that aim to stimulate the economy through banks.