Credit Limit Research Articles

Unintended Consequences of the Credit Card Act

This paper asks first why consumers seek financing through credit cards. It then evaluates the impact on consumer welfare of the constraints on increasing interest rates present in the Credit Card Act. We model consumer financing in a setting where consumers do not commit to borrow from a given lender and where information asymmetry between a consumer and a lender arises over time. The existence of ex-post information asymmetry coupled with the lack of commitment leads to adverse selection of consumers which, in turn, prompts lenders to offer credit terms that are inefficient relative to a setting with perfect information. This inefficiency is alleviated if credit contracts have some of the features that we observe in credit cards, and we show that these features arise in the competitive equilibrium credit contract. Specifically, in a competitive equilibrium the issuer charges an up-front fee and commits to an interest rate before a loan is taken; the issuer retains an option to change the interest rate upon new information, and consumers have an option to repay the loan at any time. We also show that restrictions on increasing the interest rate, as in the Credit Card Act, are welfare decreasing. They lead to lower up-front fees, higher credit card interest rates for low credit-quality consumers, and lower credit limit for high credit-quality consumers. This paper contributes to the literature by providing a new model of credit cards, and offers predictions of relevance for policy makers.

Credit CARD Act of 2009: What did banks do?

The Credit CARD Act of 2009 was intended to prevent practices in the credit card industry that lawmakers viewed as deceptive and abusive. Among other changes, the Act restricted issuers’ account closure policies, eliminated certain fees, and made it more difficult for issuers to change terms on credit card plans. Critics of the Act argued that because of the long lag between approval and implementation of the law, issuing banks would be able to take preemptive actions that might disadvantage cardholders before the law could take effect. Using credit bureau data as well as individual data from a survey of U.S. consumers, we test whether banks closed consumers’ credit card accounts or otherwise restricted access to credit just before the enactment of the CARD Act. Because the period prior to the enactment of the CARD Act coincided with the financial crisis and recession, causality in this case is particularly difficult to establish. We find evidence that a higher fraction of credit card accounts were closed following the Federal Reserve Board’s adoption of its credit card rules, but not between May 2009, when the CARD Act was signed, and when most of its provisions became law in February 2010. However, we do find evidence that banks deteriorated terms of credit card plans at a higher rate during this period, especially lowered the credit limits. Among the survey respondents whose bank accounts were closed during that period, account holders were much more likely to close their own credit card accounts than to have them closed by their card issuers.

HOUSING MARKETS AND THE GLOBAL FINANCIAL CRISIS: THE COMPLEX DYNAMICS OF A CREDIT SHOCK

We analyze the multiple channels of influence that global financial crisis‐induced credit restrictions had on New Zealand's subnational housing markets. The dynamics caused by the credit shock are compared to those caused by a migration shock, a more common form of housing shock in New Zealand. We focus on the impacts on two outcome variables, house prices and housing supply, within a structural time series model of regional housing markets. Both shocks cause substantial and prolonged cyclical adjustments in each variable. Similar cyclical dynamics could complicate the conduct of macroprudential policies designed to affect bank credit allocation. (JEL E32, E44, R21)

Determinants of credit card debt: Differentiating between revolving credit debt and petty installment loan in China

ABSTRACTThis research explores the determinants of the probability of having credit debt, as well as the determinants of the severity of credit card debt. Credit card debt includes revolving credit debt and petty installment loan. The severity of credit card debt was measured by the duration of revolving credit debt and the amount of petty installment loans. Analysis of behavioral data from a Chinese commercial bank showed a significant difference between the determinants of the probability of having credit card debt and the determinants of the severity of credit card debt. Specifically, credit limit, gender, length of ownership of a credit card, and the total credit card expenditure were closely related to the likelihood of having revolving credit debt and to the duration of revolving credit debt. However, age, the square of age, credit ranking, and risk ranking were significantly correlated with the likelihood of having revolving credit debt rather than the duration of revolving credit debt. Credit card balance had a special influence on the duration of revolving credit debt. Compared with revolving credit debt, petty installment loan had few significantly related factors. Both age and the square of age could significantly predict both the likelihood of having petty installment loan and amount of petty installment loan. Credit ranking, risk ranking, and gender predicted the likelihood of having petty installment loan but did not correlate with the amount of petty installment loan. The frequency of petty installment use was closely related to the amount of petty installment loan. Copyright © 2014 John Wiley & Sons, Ltd.

Tenants’ campaigns for tenure neutrality and a general needs model of social housing: making universal claims

The policy of tenure neutrality championed by the International Union of Tenants as essential to a right to adequate housing advances a model of general needs or, in other words, universal social rented housing provision unrestricted by income limits or needs-based rationing. Support for this model has been severely undermined by recent European Commission rulings that have restricted access to social housing to those least capable of coping in a competitive market place. As general needs demand for affordable housing continues to swell, the challenge for adherents of tenure neutrality is to demonstrate that universal social housing can meet both the needs of the most vulnerable and the demands of those excluded from homeownership by price inflation and credit limits. This paper examines the promotion of universal social housing by tenants’ organisations and challenges the extent to which this model is intended ‘for all’. In a case study of the defence of municipal housing by English tenants’ movements, it identifies the exclusionary narratives that render the particular housing needs of advantaged social groups as universal. The paper concludes by reviewing strategies to resolve the tensions between the universal and the particular to reinvigorate support for tenure neutrality in arguments for widening access and supply of social housing.

Computational Methods for Risk-Averse Undiscounted Transient Markov Models

The total cost problem for discrete-time controlled transient Markov models is considered. The objective functional is a Markov dynamic risk measure of the total cost. Two solution methods, value and policy iteration, are proposed, and their convergence is analyzed. In the policy iteration method, we propose two algorithms for policy evaluation: the nonsmooth Newton method and convex programming, and we prove their convergence. The results are illustrated on a credit limit control problem.

The Roles of Bank and Trade Credits: Theoretical Analysis and Empirical Evidence

This study investigates the roles of bank and trade credits in a supply chain with a capital‐constrained retailer facing demand uncertainty. We evaluate the retailer's optimal order quantity and the creditors' optimal credit limits and interest rates in two scenarios. In the single‐credit scenario, we find the retailer prefers trade credit, if the trade credit market is more competitive than the bank credit market; otherwise, the retailer's preference of a specific credit type depends on the risk levels that the retailer would divert trade credit and bank credit to other risky investments. In the dual‐credit scenario, if the bank credit market is more competitive than the trade credit market, the retailer first borrows bank credit prior to trade credit, but then switches to borrowing trade credit prior to bank credit as the retailer's internal capital declines. In contrast, if the trade credit market is more competitive, the retailer borrows only trade credit. We further analytically prove that the two credits are complementary if the retailer's internal capital is substantially low but become substitutable as the internal capital grows, and then empirically validate this prediction based on a panel of 674 firms in China over the period 2001–2007.

Monetary Policy Implementation in the Context of International Integration during the Period 2011-2020

The research tries to systematize basic problems with implementation of monetary policy, provide an overall estimate of the implementation of this policy by the SBV over periods, test and measure monetary policy transmission to identify major regulatory instruments, and suggest measures to maximize effects of the transmission mechanism of the monetary policy from 2014 to 2020 when Vietnam gradually integrates into the world economy. The research combines the descriptive statistics and VAR model to analyze each specific target in the period from 1990 to present time. The results show that the SBV has changed to employment of indirect instruments from direct ones and reduced commands or directions as an administrative body. The monetary policy in the past, however, was not very effective, which showed itself in the fact that changes in money supply did not produce strong effects on such variables as inflation and gross output. Among instruments for the monetary policy, exchange rate and refinancing rate are considered important in curbing inflation, and required reserve has great effects on economic growth, while the research finds no evidence of effects of credit limit set by the SBV on macroeconomic variables.

INSEGURANÇA JURÍDICA DO DEVEDOR: PELA AMPLIAÇÃO DO DEBATE SOBRE SELEÇÃO ADVERSA E CUSTO DO CRÉDITO NO BRASIL

O artigo defende que a insegurança jurídica no crédito afeta também o devedor. O debate econômico brasileiro praticamente ignora problemas dos tomadores de crédito diante de procedimentos desleais e oportunistas dos credores. Para a teoria econômica dos contratos, o credor é a parte favorecida pela assimetria de informações sobre o mercado e sobre o contrato, e o agente da lei deve atuar de forma a corrigir esse desequilíbrio. A análise de 1.687 decisões do Superior Tribunal de Justiça, de 1998 a 2008, não revela viés anticredor nesse nível do Judiciário. O trabalho propõe a inclusão da insegurança jurídica do devedor no modelo de racionamento de crédito.

Credit card spending limit and personal finance: system dynamics approach

Credit cards have become one of the major ways for conducting cashless transactions. However, they have long term impact to the wellbeing of its owner, trough the debt generated by the credit card usage. Credit card issuers approve high credit limit to credit card owners, therefore influencing their credit burden. A system dynamics model has been used to model behavior of a credit card owner in different scenarios according to the size of a credit limit. Experiments with the model demonstrated that a higher credit limit approved on the credit card decreases budget available for spending in the long run. This is a contribution toward the evaluation of action for credit limit control based on their consequences. Key words: credit card, credit limit, system dynamics

Barriers of the development of web-based training in agricultural higher education system in Iran: A case study of Hamadan Bu Ali Sina University, Iran

Recently, higher education systems seek to use network-based and Internet-based information technologies in education, teaching and learning. E-learning in Iran higher education system has been started since 2003, however, its development has been very slow. The present study is a survey research. The participants of the study are faculty members, graduates and PhD students in Agriculture in Bu Ali Sina University. Total number of participants were analyzed (n?=?500). The accuracy of indicators and items in the questionnaire (face validity) has been confirmed by specialists. A questionnaire was used to collect data. Reliability was calculated by using Cronbach Alpha. In this study, Factor analysis is used to achieve the key factors. The results show that deficiency of executives, lack of learners' motivation, infrastructural barriers, restriction of credit, and software and hardware limitations are the main problems in the development of web-based training. At the end of the article, some recommendations are presented aiming to accelerate electronic training in Iran's higher education system.

Credit Constraints, Student Transfer and Optimal Tax Policy

This paper derives optimal labor taxation to finance student transfer if educational investments are subject to credit constraints. Credit constraints are endogenously determined under the incentive constraint that individuals cannot be better-off by defaulting. Student transfer alleviates credit constraints by reducing students' need to borrow, but taxing labor can reduce private credit limit by exaggerating moral hazard problems associated with credit constraints. Numerical examples show that labor taxation tightens credit limit, especially if education is important, labor is elastic and if a large share of earnings can be seized in case of default. Consequently, the optimal tax rates should be lower.

Carry trade y credit crunch en la economía española

This paper presents some factors which contribute and originate the current credit restrictions to companies and consumption during the crisis phase that have affected the Spanish economy is now experiencing. It analyzes key questions that lead to the current situation as policies applied by Central Banks before and during the crisis period, sectorial distribution of the credit, and performance of credit in commercial banks in their risk and liquidity policies. The quantitative data shows a clear link between two phenomena detected and integrated in the Spanish Financial System: the “carry trade” or the use of credit by the European Central Bank to buy great amounts of Public Debt caused the “credit crunch” with levels much lower than those existing in the other countries of OECD originated in base to the commercial banks behavior in their transmission role of the monetary policy.

Submission No. 3 to Senate Committee on Finance Comments on Option Y

The Senate Committee on Finance international tax reform staff discussion draft issued November 19, 2013 sets out two possible approaches (Option Y and Option Z) for international tax reform. This letter makes comments on Option Y. The subject matter of these comments include:1. Strengthening the Foreign Tax Credit Limitation So As To Prevent Job, Asset, Risk and Income Shifting2. Interplay of New Code §956 Low-Taxed Income and the Foreign Tax Credit3. Expenses (Other than Interest) Allocable to Exempt Income of a Controlled Foreign Corporation4. Foreign Tax Credit Limitation — Treatment of Foreign Withholding Taxes on Actual Distributions5. Amendment to Code §543 Definition of Foreign Personal Holding Company Income6. Amendment to Code §952(c)(1)(B)(iii) Definition of Qualified ActivityThis is Submission 3 of 7 Comment Letters Provided to the Committee.

Optimal Lending Contract with Uncertainty Shocks

I develop a dynamic agency model of financial contracting, where borrowing constraints appear as part of the optimal contract. The novelty of the paper relative to previous work is that volatility is stochastic and exogenous to the agent behavior. A line of credit appears in the optimal long term contract similar to (DeMarzo and Fishman, 2007). The novelty of the contract is that the credit limit varies over time, as a function of the state of volatility. Credit limit does not vary monotonically over firms. When uncertainty increases, credit limits are reduced for highly constraint firms, because the frictions become harder and the firms lose profitability. Instead, it is optimal to increase the credit limits for less indebted firms, they are still profitable and they need more flexibility to respond to the bigger shocks.

Foreign bank lending: Evidence from the global financial crisis

We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. A number of exercises testing alternative explanations for this result suggest that such more intense restriction also reflects the (functional) distance between a foreign bank's headquarter and the Italian credit market.

Submission No. 7 to Senate Committee on Finance -- Chairman's Staff Request for Comments on Certain Technical and Policy Issues Raised in the Staff Discussion Draft -- Responses

The Senate Committee on Finance international tax reform staff discussion draft issued November 19, 2013 sets out certain proposals for international tax reform. In a document also issued on November 19, 2013, titled “Chairman’s Staff Request for Comments on Certain Technical and Policy Issues Raised in the Staff Discussion Draft”, certain issues were listed and comments were requested. This letter responds to certain of those issues. Comments are provided for the following issues: Issues Applicable to Options Y and Z 1. Deduction for dividends received by domestic corporations from certain foreign corporations. 2. Application of dividends received deduction to certain sales and exchanges of stock. 3. Inclusion of United States related income in subpart F income. 4. Low-taxed income treated as subpart F income. 6. Reform of foreign tax credit limitation. Issues Applicable to Common Provisions within Discussion Draft 1. Treatment of previously deferred foreign income. This is Submission 7 of 7 Comment Letters Provided to the Committee.

Optimal tax and expenditure policy in the presence of emigration

Purpose – This paper aims to present a theoretical underpinning for the fact that empirical studies have found an inverted-U curve relationship between emigration and per capita income, based on credit restrictions. The implications for tax policy are also analyzed. Design/methodology/approach – Using an intertemporal general equilibrium model, the authors characterize how the presence of an “inverted U-curve” relationship between emigration and per capita income will influence the optimal tax and expenditure policy in a country where agents have the option to move abroad. Findings – Among the results it is shown that if age-dependent taxes are available, the presence of an inverted-U curve provides an incentive to tax young labor harder, but old labor less hard, than otherwise. Originality/value – This migration model fits the empirical facts of migration better than most of the migration models previously used in the optimal taxation literature.

Price and Income Elasticity of Australian Retail Finance: An Autoregressive Distributed Lag (ARDL) Approach

This paper models the price and income elasticity of retail finance in Australia using aggregate quarterly data and an autoregressive distributed lag (ARDL) approach. We particularly focus on the impact of the global financial crisis (GFC) from 2007 onwards on retail finance demand and analyse four submarkets (period analysed in brackets): owneroccupied housing loans (Sep 1985-June 2010), term loans (for motor vehicles, household goods and debt consolidation, etc.) (Dec 1988-Jun 2010), credit card loans (Mar 1990-Jun 2010), and margin loans (Sep 2000-Jun 2010). Other than the indicator lending rates and annual full-time earnings respectively used as proxies for the price and income effects, we specify a large number of other variables as demand factors, particularly reflecting the value of the asset for which retail finance demand is derived. These variously include the yield on indexed bonds as a proxy for inflation expectations, median housing prices, consumer sentiment indices as measures of consumer confidence, motor vehicle and retail trade sales, housing debt-to-housing assets as a measure of leverage, the proportion of protected margin lending, the available credit limit on credit cards, and the All Ordinaries Index. In the long run, we find significant price elasticities only for term loans and margin loans, and significant income elasticities of demand for housing loans, term loans and margin loans. We also find that the GFC only significantly affected the longrun demand for term loans and margin loans. In the short run, we find that the GFC has had a significant effect on the price elasticity of demand for term loans and margin loans. Expected inflation is also a key factor affecting retail finance demand. Overall, most of the submarkets in the analysis indicate that retail finance demand is certainly price inelastic but more income elastic than conventionally thought.

Structural Reforms in a Debt Overhang

We assess the effects of reforms in product and labor markets in a model economy featuring credit restrictions and pre-existing long-term debt. Both elements, which are core features of the current scenario faced by some euro area countries, combine to produce a slow and protracted deleveraging of the private sector and a persistent recession following a negative financial shock. In this environment, we show that product and labor market reforms may stimulate output and employment even in the short run, despite their deflationary effects. Furthermore, by favoring a faster recovery of investment and collateral values, product market reforms bring forward the end of deleveraging and the exit from recession.