Thread by @prof_cookson, Let me tell you about another recent publication:"Growing up without finance" (with [...]

Let me tell you about another recent publication:

"Growing up without finance" (with Brown and Heimer)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2809164

It">https://papers.ssrn.com/sol3/pape... came out at the JFE in Dec 2019:
https://www.sciencedirect.com/science/article/abs/pii/S0304405X19301205

I">https://www.sciencedirect.com/science/a... wasn& #39;t on Twitter then, but I am now. I would have posted this thread back then. 1/n

Growing up without finance

Early life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit out…

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2809164

Pt 1: Financial inclusion is important. Notably, households without access to financial products (i.e., the unbanked) are held back for tons of reasons.

Pt 2: Early life experiences matter. A big literature shows exposures in early life affects later-in-life decisions. 2/n

Our paper connects these two literatures by showing that early-life exposures to local banking lead to long-term improvements to consumer financial risk (lower delinquencies, higher credit scores).

The effects last for more than a decade. 3/n

Strategy: we study a setting in which exposures to local banks happen for artificial, historical reasons: Native American reservations.

And, we merge Equifax (NYFRB-CCP) data to reservations, with and without local banks. 4/n

Variation in banking: In 1953, Congress passed a law that state courts could hear civil disputes on reservations (which are naturally sovereign).

The catch: the law didn& #39;t come into force everywhere because (randomly) some states had a clause that didn& #39;t allow this. 5/n

Local banks flourished under state courts because contracts with businesses were more credible.

This led to a large gap in local financial development, which we studied in a previous paper:
https://academic.oup.com/rfs/article-abstract/30/3/1019/2669944

For">https://academic.oup.com/rfs/artic... this paper, note we have 2 groups: banked and unbanked. 6/n

Law and Finance Matter: Lessons from Externally Imposed Courts

This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed diffe

https://academic.oup.com/rfs/article-abstract/30/3/1019/2669944

We merged these banked/unbanked geographies with credit histories from the Equifax credit panel for young borrowers.

Our questions: does formative exposure to banks matter for financial health later on? If so, why?

This timeline summarizes our empirical strategy. 7/n

Finding #1: Growing up without finance ==> less likely to have a credit report at all.

Without controls, there& #39;s about a 20pp difference, but this effect survives more sophisticated modeling (see paper). 8/n

Finding #2: Even for those who access credit eventually, growing up without finance (tribal courts) means later "entry" into formal credit markets.

Again, survives regressions with controls. 9/n

Finding #3: Growing up without finance ==> worse long-term financial health for those who stay in the "bank desert."

Here& #39;s a distribution of consumer riskscores (tribal = growing up without finance). Also worse delinquencies. 10/n

Finding #4: These effects are driven by folks who *grew up* during a time when state vs tribal had differences in local banks.

Older cohorts see no differences. 11/n

Finding #5: Using a novel movers identification (now also used in a cool paper by @nealemahoney & @Key_Z_E, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3547707),">https://papers.ssrn.com/sol3/pape... we show that the effect takes a long time to go away -- more than a decade. 12/n

Finding #5: Using a novel movers identification (now also used in a cool paper by @nealemahoney & @Key_Z_E, https://papers.ssrn.com/sol3/pape... we show that the effect takes a long time to go away -- more than a decade. 12/n

Findings #1-5 are great, but you might ask yourself. Why? What about formative exposures leads to these long-term effects?

A number of explanations could come to mind, and credit bureau data offer limited insight into this. Here, I refer you to our very smart referee... 13/n

For our JFE revision, we designed a survey to ask about all of these things, working with Qualtrics to recruit nearly 1000 Native Americans to participate.

Most channels didn& #39;t matter, but two items jumped out: bank-specific financial literacy and bank-specific trust. 14/n

Taking the big-5 fin literacy questions, 2 test knowledge of stocks, whereas 3 deal with interest/compounding.

You can learn interest rates at a bank, stock investing not so much.

Growing up w/o finance ==> worse fin literacy on bank-specific questions (not on stocks). 15/n

Continuing with the bank-specific theme, we also found that trust in bankers was affected for those who grew up without finance, but not generic trust. 16/n

There& #39;s more in the paper, including other tests of financial literacy & regressions with fixed effects.

For me, the biggest thing I took away from this paper is that surveys can be really useful, especially as a complement to other cool data sources. 17=end.

If you& #39;re interested, I also wrote up a lighter take on this paper about a month ago:

https://theconversation.com/growing-up-in-a-banking-desert-can-hurt-your-credit-for-the-rest-of-your-life-130938

This">https://theconversation.com/growing-u... summary focused on how our work relates to the unbanked problem.

Growing up in a banking desert can hurt your credit for the rest of your life

Banking deserts make it harder for children and young adults to become financially literate, which leads to worse credit and a lifetime of disadvantage.

https://theconversation.com/growing-up-in-a-banking-desert-can-hurt-your-credit-for-the-rest-of-your-life-130938

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