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December 7, 2016


Credit Growth and the Financial Crisis: A New Narrative.


December 7, 2016


DIW Berlin im Quartier 110
Room 3.3.002A
Mohrenstraße 58
10117 Berlin


Stefania Albanesi, University of Pittsburgh

A broadly accepted view of the financial crisis contends that it was caused by an expansion in the supply of credit to high risk borrowers during the 2002-2006 credit boom. The expansion in subprime credit led to the spike in defaults and foreclosures that sparked the 2007-09 crisis. The resulting decline in housing values determined a broad contraction in credit and consumption, substantially contributing to the ensuing recession. 

We examine the evolution of household debt  and defaults between 1999 and 2013, using a large administrative panel of credit file data. Our findings suggest an alternative narrative that challenges the large role of subprime debt. We show that credit growth between 2001 and 2007 is concentrated in the prime segment, and borrowing by high risk individuals s virtually constant for all debt categories during the boom. The rise in defaults during the financial crisis is concentrated in the middle of the credit score distribution, and the share of defaults by subprime borrowers sizably drops during the crisis. We discuss the broader implications of these findings for policy responses and prevention of similar episodes in the future.