The Great Recession and Fringe Banking: Has the Economic Crisis Transformed Financial Behavior?
A variety of indicators suggest that households significantly altered their financial behavior in the wake of the Great Recession. Real personal consumption declined more during this recession than in the prior four recessions and has taken longer to recover. Total U.S. consumer debt, which has risen steadily over the past four decades, finally peaked at a little less than $2.6 trillion in April 2009, before declining slightly and remaining relatively stable since. The personal savings rate, which had reached a 50-year low of two-and-one-half percent at the onset of the recession, increased to five percent in the aftermath.
These statistics are indicators of economic activity largely within the traditional banking system. But between 10 and 20 percent of Americans do not use the services of traditional banks, and it is estimated that between 35 and 45 percent of low-income individuals are unbanked. These individuals carry out many of their financial transactions outside the traditional banking system. The Alternative Financial Services (AFS) industry, or “fringe” banking, consisting of check-cashing outlets, payday lenders, and other types of businesses, has grown more than 10 percent annually since the mid-1990s and is now estimated to be a $100+ billion business. AFS businesses tend to concentrate in areas with higher-than-average poverty rates, lower incomes, and larger proportions of minorities, immigrants, and single parents. Since the recession hit these groups hardest, it raises questions about whether households in these groups may have made greater use of fringe banking or shifted from traditional banks to fringe banks as the recession took hold.
The fringe banking industry however, has been greatly understudied because the data has been difficult to obtain. Professor Tal Gross of Columbia University and Drs. Sumit Agarwal and Bhashkar Mazumder of the Federal Reserve Bank of Chicago propose to undertake the intensive task of merging records from the traditional banking sector with a database of payday loans to get a better assessment of how the recession has changed the way in which families altered their financial behavior. They will be able to address questions such as whether the recession shifted Americans from credit cards to payday lending. Did a shift in the use of these different banking systems vary by socioeconomic status? Were geographic areas that experienced greater effects of the recession characterized by a disproportionate use of the fringe banking sector?
The investigators have unique access to several data sources which will allow them an extraordinary opportunity to explore these questions in detail. They currently possess a dataset with 13 million payday loan applications that nearly covers the universe of such loans. They propose to merge that data with credit bureau information obtained from Equifax, one of the three major national credit reporting agencies in the U.S. The Equifax data is a five percent random sample of Americans with credit files of approximately 35 million individuals. The data are for individuals with a credit history period of up to 10 years, from 1999-2011, and includes information on all credit products within the traditional banking sector, such as mortgage loans, home equity loans, car loans, and credit cards.