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Discussion of Household Borrowing High and Lending Low Under No-Arbitrage Jonathan Zinman

Discussion of Household Borrowing High and Lending Low Under No-Arbitrage Jonathan Zinman. Karyen Chu * Federal Deposit Insurance Corporation FDIC CFR Workshop 2006 * The opinions expressed in this presentation are mine alone and do not necessarily reflect the views of the FDIC.

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Discussion of Household Borrowing High and Lending Low Under No-Arbitrage Jonathan Zinman

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  1. Discussion ofHousehold Borrowing High and Lending Low Under No-ArbitrageJonathan Zinman Karyen Chu * Federal Deposit Insurance Corporation FDIC CFR Workshop 2006 * The opinions expressed in this presentation are mine alone and do not necessarily reflect the views of the FDIC

  2. What Is This Paper About? • Paper examines the observed behavior of some US households that pay high interest rates on credit card balances while maintaining lower-yielding balances in bank accounts • Borrow High Lend Low • Average US household with a credit card pays roughly $100 per year in finance charges to hold bank account balances instead of using them to pay down credit card debt

  3. What Are Some Contributions Of This Paper? • Focus on the cost of BHLL (LL = demand deposit balances) • Previous papers that have examined BHLL have focused on the size of the stock of liquid assets available • Bertaut and Haliassos (2002) • Gross and Souleles (2002) • Asks whether observed BHLL behavior is consistent with neoclassical models of consumer behavior

  4. What Data and Methods are Used? • Uses the 2004 Survey of Consumer Finances to calculate: • Focus on demand deposit balances in calculating the wedge • Checking and savings deposits • Adding money market and call accounts did not materially impact results

  5. What are the Paper’s Findings? • Most households incur very small monthly BHLL costs • Upper bound (all 2004 SCF HHs w/ CCs): mean = $15.38; median = $0; 75th percentile = $13.97; 90th percentile = $40.50 • Adjusted for recurring expenses (all 2004 SCF HHs w/ CCs): mean = $13.62; median = $0; 75th percentile = $10.20; 90th percentile = $36.13 • Adjusted for precautionary savings (all SCF HHs w/ CCs): mean = $6.19; median = $0; 75th percentile = $0; 90th percentile = $13.90

  6. What are the Paper’s Findings? (cont’d) • For households with no credit card debt, the cost of holding demand deposits rather than higher yielding assets is similar in magnitude to the BHLL cost: • Upper bound (CC borrowers): mean = $27.38; median = $11.14; 75th percentile = $30.42; 90th percentile = $68.15 • Upper bound (Non-borrowers): mean = $30.87; median = $9.00; 75th percentile = $26.38; 90th percentile = $68.75

  7. What are the Paper’s Findings? (cont’d) • Observed BHLL behavior is consistent with neoclassical models of consumer choice • Implicit value of liquidity • Finds no support for hypothesis that lower net worth households disproportionately incur substantial BHLL costs

  8. Some Questions, Thoughts and Comments • Table 3 (adjustments for implicit value of liquid assets) • Only shows results for the entire sample of 3,476 HHs with a credit card • Would be helpful to also report results separately for credit card borrowers • Upper bound (all 2004 SCF HHs w/ CCs) from table 1: mean = $15.38; median = $0; 75th percentile = $13.97; 90th percentile = $40.50 • Upper bound (2004 SCF HHs who are CC borrowers) from table 1: mean = $27.38; median = $11.14; 75th percentile = $30.42; 90th percentile = $68.15

  9. Some Questions, Thoughts and Comments (cont’d) • For households with no credit card debt, the cost of holding demand deposits rather than higher yielding assets is similar in magnitude to the BHLL cost • What are the estimated costs from other studies that have tried to quantify the opportunity cost of holding more liquid but lower-yielding assets? • Are their estimated costs comparable to the costs reported in table 1, column 4?

  10. Some Questions, Thoughts and Comments (cont’d) • Does the SCF give an accurate picture of a household’s average credit card balance or average demand deposit balance? • Balances are a snapshot of a point in time • Do credit card balances or demand deposit balances vary a lot from month to month for many consumers?

  11. Some Questions, Thoughts and Comments (cont’d) • Paper only looks at the costs of simultaneously holding demand deposits and carrying credit card balances • Argument of precautionary savings, high liquidity is highly persuasive for why consumers would choose to hold positive demand deposits even with positive credit card balances • What about other, less liquid, assets that could still be drawn upon to pay down a credit card balance

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