Growing Up Without Finance

Abstract

Early-life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit outcomes. We identify the effect of local financial markets using Congressional legislation that led to unintended differences in financial market development across Native American reservations. Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have 10 point lower credit scores and 4 percentage point more delinquent accounts. These effects are long-lived and depreciate slowly after individuals move to more developed areas. Formative exposures to local banking improve consumer credit behavior by increasing financial literacy and financial trust.

Do Neighborhoods Affect the Credit Market Decisions of Low-Income Borrowers? Evidence from the Moving to Opportunity Experiment

“…While the negative direct impacts of (3) and (4) may still be present, the positive direct effects of (1) and (2) may be larger, since children have a longer period over which they can benefit from peer effects and proximity to credit institutions. Indeed, Brown et al (2019) find that exposure to financial institutions early in life can have long-run implications on household finance outcomes.…”

“…Increased wealth or income has the potential to provide additional liquidity to repay debts or qualify for additional credit. In a recent study, Brown et al (2019) find borrowers with subprime scores increase their credit utilization by 6.9 percentage points and reduce their debt-to-income ratio by 3.4 percentage points in response to a positive wealth shock. A number of studies also report positive correlations between income and credit scores (Beer et al, 2018), though credit bureaus do not use income as a direct input in their score calculations.…”

“…A better neighborhood has the potential to bring low income borrowers physically closer to traditional banks and put increased distance between borrowers and high-cost alternative or payday lenders. Exposure to financial institutions in childhood could also have life long impacts on the use of credit; for example, Brown et al (2019) find that local exposure to formal banking instutitions early in childhood leads to long-term improvements in consumer credit outcomes. At the same time, moving to a very low poverty neighborhood can potentially result in losing informal family or friend lending networks that are difficult to maintain from a distance.…”

Financial Access Under the Microscope

“…The evidence on the impact of microfinance presents an interesting contrast with studies of one-time randomized evaluations or aggregate data. While randomized control trials generally reveal "a consistent pattern of modestly positive, but not transformative effects" (Banerjee,5 The positive effects of increased bank branch density on financial inclusion and economic outcomes are also extensively documented in advanced economies (e.g., Gilje, Loutskina and Strahan, 2016;Brown, Cookson and Heimer, 2017;Nguyen, 2018). In particular, Celerier and Matray (2017) show that the U.S. interstate bank branching deregulation increased financial inclusion, leading to improved economic conditions for low-income households through asset accumulation and enhanced financial security.…”

Shrinking Networks: A Spatial Analysis of Bank Branch Closures

“…Limited physical bank access negatively affects specific populations, such as small businesses and those living in disadvantaged neighborhoods (Nguyen, 2014). Evidence suggests that consumers who had poor exposure to banks as children experience worse financial health than their peers later in life (Brown, Cookson, and Heimer, 2016). Examining the geographic distribution of branch closures is therefore necessary to understand the equality of physical bank access for different neighborhoods.…”