Journal of Credit Risk

Bankcard performance during the Great Recession: a consumer-level analysis

Paul Calem, Julapa Jagtiani and Loretta Mester

  • This paper offers a “deep dive” examination of consumer default on credit card debt during the Great Recession.
  • We estimate a model that provides the best in-sample predictions of default for prime and below-prime customers, using all available relevant data from 2000-2008. The model fits the data very well in-sample but fails to accurately predict card defaults out-of-sample during the Great Recession period (2008-2013).
  • Default rates during the Great Recession are markedly under-predicted for prime consumers, but default rates are over-predicted for subprime borrowers.
  • This experience highlights the importance of identifying and managing model risk, particularly when venturing into “uncharted territory” as was the case in the credit boom prior to the Great Recession.

This paper investigates factors associated with high credit card loss rates during the period 2008–11 associated with the Great Recession. We examine default at the individual consumer (as opposed to the account) level. Using data available from consumer credit records for the period March 2000–March 2008, we develop and estimate segment-level logistic regression equations to predict default outcomes through 2013. The model fits the data very well in-sample but fails to accurately predict defaults out-of-sample for the Great Recession. On the one hand, default rates throughout the Great Recession are markedly underpredicted for prime consumers, especially those granted large credit limits during the credit expansion that characterized 2000–2008. On the other hand, default rates are overpredicted for subprime borrowers, indicating that lenders’ losses during the Great Recession would have been significantly larger if the repayment performance of subprime borrowers had aligned with extrapolation based on historical performance data.

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