# Presentation: 070465

## 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

## 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

## 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

## 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

## 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

## 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

## 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

## 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

## 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?

## 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?

## 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