Piercing through Opacity: Relationships and Credit Card Lending to Consumers and Small Businesses during Normal Times and the COVID-19 Crisis

Piercing through Opacity: Relationships and Credit Card Lending to Consumers and Small Businesses during Normal Times and the COVID-19 Crisis

Allen N. Berger, Christa H.S. Bouwman, Lars Norden, Raluca A. Roman, Greg Udell, Teng Wang

Series number :

Serial Number: 
912/2023

Date posted :

April 26 2023

Last revised :

June 27 2023
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Keywords

  • Credit cards • 
  • household finance • 
  • consumers • 
  • small businesses • 
  • relationship lending • 
  • Banks • 
  • credit terms • 
  • cross-sectional smoothing • 
  • financial crises • 
  • COVID-19 • 
  • intertemporal smoothing

We build a bridge between relationship lending and transactions lending – investigating relationship effects on contract terms for credit cards, a relatively pure transactions lending technology. Using one million+ accounts, we find during normal times, consumers with relationships obtain better terms, but small businesses with relationships do not.

Both groups obtain improved terms during COVID-19, consistent with intertemporal smoothing – relationship borrowers obtain more favorable terms during crises, paid for by worse terms in normal times. Among other findings, CARES Act impediments to reporting consumer delinquencies to credit bureaus designed to protect customers reduced informational value of credit scores, penalizing safer consumers.

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Published in

Published in: 
Description: 
Journal of Political Economy (JPE), Forthcoming

Authors

Real name:
Raluca A. Roman
Real name:
Allen N. Berger
Real name:
Lars Norden
Professor of Finance
Real name:
Greg Udell
Indiana University Kelley School of Business
Real name:
Teng Wang