Bank financial distress and consumption expenditure

Part 1. Examines the effect of banks financial distress on Canadian household consumption during the 2008/2009 financial crisis. The paper uses a unique identification strategy to show that distressed banks significantly reduced the supply of household non-mortgage credit. For high income/high wealth households this does not result in a reduction of consumption, because these households are able to compensate by drawing down liquid assets. Those households with low incomes or low liquid assets reduce consumption. On aggregate the credit supply effects can explain just over half of the dip in household consumption expenditures in Canada during the 2008/2009 financial crisis.

Part 2: Examines the effect of the real estate bust in the U.S. after the financial crisis on consumption expenditures. The literature has argued that consumption in 20010-20013 did not pick up in the recovery, because households were deleveraging, i.e. reducing their exposure to debt. This is a demand effect. In the paper we show that a supply effects was also at work. We take advantage of the fact that renters were not exposed to the adverse real estate wealth shock to identify supply effects.