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05 March 2019

CEPS: Price rules in consumer credit: should the EU act?

One of the key questions addressed by this study is to assess whether EU authorities should take action in order to further harmonise sub-prime lenders. To that end, the present study will assess the sub-prime market’s main characteristics, the different degrees of tightness in price rules across the EU, the main drivers behind the decision to tighten those rules and the main effects of new price rules on the sub-prime market.

Price rules are enacted to prevent some sub-prime lenders from wrongly exploiting the price-insensitivity of a significant share of sub-prime borrowers.

High diversity across countries can be observed in both the type of rules adopted (combining direct and indirect price caps) and their degree of tightness.

Rules seem to be tighter in an environment of high financial inclusion, intense public support in social matters, low risk of poverty, high household saving ratios and/or high maturity of consumption credit markets.

The few episodes of marked tightening have shown a significant decrease in both costs and volumes of loans, and it remains unclear whether large substitution effects have been triggered as a result.

EU harmonisation in price rules could be justified by the need for a better level-playing field; however, given the diversity in price rules, in the degree of tightness of these rules and in the structure of sub-prime markets, it could also trigger significant negative effects.

Overall, further research is greatly needed to appreciate better the size and mechanisms of sub-prime markets, and the implication of price rules.

Full publication

© CEPS - Centre for European Policy Studies

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