DP12280 | Sequential Banking: Direct and Externality Effects on Delinquency

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The ability to borrow sequentially from multiple lenders might generate sizable externalities in delinquencies. We provide evidence on the existence and “large” size of such effects. We first document that loan approval causes a persistent difference in the number of loans between initially approved and non-approved. We then show that while loan approval leads to no default for high credit score applicants, it causes a large 7pp increase in default on previously existing loans for lower score applicants. That is, a 1,000 MXN (60 USD) extra loan is associated with an increase in the probability of default of 1.5pp for the lower credit score group. This produces average losses close to 18% of total debt, an important externality on previous lenders. This shows that the financial inclusion of clients with lower credit scores is hard due to higher default, and that sequential banking may lead to high default equilibria.