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Title: The role of consumer leverage in financial crises
Author: Dimova, Dilyana
ISNI:       0000 0004 4234 1583
Awarding Body: University of Oxford
Current Institution: University of Oxford
Date of Award: 2015
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This thesis demonstrates that consumer leverage can contribute to financial crises such as the subprime mortgage crisis characterised by increased bankruptcy prospects and tightened credit access. A recession may follow even when the leveraged sector is not a production sector and can be triggered by seeming positive events such as a technological innovation and a relaxation of borrowing conditions. The first preliminary chapter updates the Bernanke, Gertler and Gilchrist (1999) approach with financial frictions in the production sector to a two-sector model with consumption and housing. It shows that credit frictions in the capital financing decisions of housing firms are not sufficient to capture the negative consumer experience with falling housing prices and relaxed credit access during the recession. The second chapter brings the model closer to the subprime mortgage crisis by shifting credit constraints to the consumer mortgage market. Increased supply of houses lowers asset prices and reduces the value of the real estate collateral used in the mortgage which in turn worsens the leverage of indebted consumers. A relaxation of borrowing conditions turns credit-constrained households into a potential source of disturbances themselves when market optimism allows them to raise their leverage with little downpayment. Both cases demonstrate that although households are not production agents, their worsening debt levels can trigger a lasting financial downturn. The third chapter develops a chained mortgage contracts model where both homeowner consumers and the financial institutions that securitize their mortgage loan are credit-constrained. Adding credit constraints to the financial sector that provides housing mortgages creates opportunities for risk sharing where banks shift some of the downturn onto indebted consumers in order to hasten their own recovery. This consequence is especially evident in the case of relaxed credit access for banks. Financial institutions repair their debt position relatively fast at the expense of consumers whose borrowing ability is squeezed for a long period despite the fact that they may not be the source of the disturbance. The result mirrors the recent subprime mortgage crisis characterised by a sharp but brief decline for banks and a protracted recovery for mortgaged households.
Supervisor: Vines, David Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: Economics ; Macro and international economics ; Financial economics ; Financial Frictions ; Financial Institutions Leverage ; Consumer Leverage ; Chained Loan Contracts ; Subprime Mortgage Crisis