Credit Lines and Credit Utilization

While much is known about the characteristics of consumers or businesses that obtain credit lines, relatively little is known empirically about credit line utilization after origination. This study fills that gap by testing two interrelated hypotheses concerning borrower credit quality and credit line utilization. The empirical analysis confirms that borrowers with higher expectations of future credit quality deterioration originate credit lines to preserve financial flexibility. Furthermore, we estimate a competing risks model that confirms our predictions concerning changes in borrower credit line utilization in response to borrower credit quality shocks.