Credit Fire Sales : Captive Lending as Liquidity in Distress

We study the role of captive finance in the car loan market when manufacturers' liquidity demand increases. Using a new multi-country dataset on securitized car loans, we show that captive lending enables a liquidity constrained integrated manufacturer to increase the cash collected from car sales via a credit fire sale: reducing loan-to-value in the intensive margin and relaxing lending standards in the extensive margin increases car sale down-payments, at the cost of future losses. We exploit quasi-exogenous variation in manufacturers' liquidity cost and need following the Volkswagen emissions scandal to identify the channel. A simple calibrated model shows that a standalone manufacturer would have to decrease car prices by 10% to generate the same liquidity of a credit fire sale