Have Differences in Credit Access Diminished in an Era of Financial Market Deregulation?

Abstract

Over the past few decades, financial markets became increasingly deregulated and household debt expanded, sometimes rapidly. It is thus possible that greater deregulation led to improved credit access and lower cost of credit for typically underserved groups, such as minorities and low-income families, relative to their counterparts. Credit access is measured here by loan denials, discouraged applications. The cost of credit is measured by debt payments relative to debt. Differences in credit access and the cost of credit should have diminished over time, particularly after 2000, after large-scale deregulation had taken place. Differences by demographic groups over time are tested using multivariate tests based on data from the Federal Reserve's Survey Consumer Finances from 1989 to 2004. While some minority groups found increasing credit access after 2000, credit became increasingly more expensive relative to whites due to a less advantageous composition of debt or higher interest rate differentials. Importantly, growing differences in debt composition and interest rates contradict the expectation of credit market equalization after deregulation.

Keywords:

• financial market deregulation
• household credit
• financial constraints
• cost of credit

Notes

1 Limitations on credit unions' scope and activities with respect to personal finance have decreased over time. For instance, in the 1980s, credit unions were permitted to offer first mortgages and in the late 1990s, credit unions have been allowed to offer membership to multiple groups (Leggett and Strand 2002; Tripp and Smith 1993). Following the greater scope of credit unions, they have experienced strong growth (Goddard et al. 2002; Kaushik and Lope 1994). Even non-members benefit since the competition with credit unions seems to have lowered the costs of financial services at banks that directly compete with credit unions (Emmons and Schmid 2000; Feinberg 2001; Feinberg and Rahman 2001).

2 1989 and 2001 are chosen as reference points since they are the closest data years to the last two business cycle peaks. Comparisons between 2004, 2001, and 1989 thus control for business cycle effects and can provide an indication of the impact of deregulation, which took place in the latter part of the 1990s.

3 To avoid double counting, only families who felt discouraged and were not denied credit are included here. See also Lyons (2003) for more details.

4 ARMs out of total mortgages serves as indicator for a family's desire to have lower monthly payments.

5 See Weller and Sabatini (2008) for details.

6 This analysis looks at changes in differences. There may still be substantially differences in fees in 2004, even if the gap between Hispanics and whites narrowed over time.