Dislocated Credit: Captive Lending as Liquidity Management.

A manufacturer who also provides loans to its customers can generate liquidity by adjusting credit terms and standards. For example, approving loans to risky borrowers it would have otherwise rejected, the manufacturer will boost revenue today at the cost of higher defaults in the future. Using a multi-country dataset on securitized car loans and quasi-exogenous variation from the Volkswagen emissions scandal, we show that manufacturers/lenders dislocate credit
in response to a liquidity shock. Using a calibrated model for quantification, we find that credit dislocations increase the cash collected up front per vehicle by 16% at a cost lower than available alternatives. Our results imply that the direction, magnitude, and heterogeneity of financial shock transmission to consumers is altered when financial intermediation is internalized by manufacturers.