Credit Supply Shocks and Household Leverage: Evidence from the US Banking Deregulation

Sarah Brown, Daniel Gray and Alberto Montagnoli


We use a quasi-natural experiment framework provided by the staggered removals of interstate banking restrictions to identify the effect of increased availability of credit on household finances in the US. Analysing US household panel data, we explore the effects of state level banking deregulation on a range of aspects relating to household balance sheets including debt levels and leverage. Employing a range of panel data techniques to control for potential heterogeneity in the households’ financial situation, we show that deregulation increased both the propensity to hold debt and the amount of debt held. Our results also show an increased level of leverage following the credit supply shock. Furthermore, we find that the deregulation had a more pronounced effect on non-white headed households. Finally, we show how deregulation increased debt and leverage at the middle and the top of the debt and leverage distributions, and had a relatively large effect on non-white headed households at the top 20% of the debt distribution.