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Banks’ Balance Sheets and Liquidation Values: Evidence from Real Estate Collateral

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  • Rodney Ramcharan

Abstract

This paper finds that declining bank equity or liquidity reduces liquidation values of bank-owned real estate and accelerates the pace of asset sales. Buyers of these assets earn significant returns for providing liquidity to banks, as prices tend to rebound sharply after sales by illiquid banks. Lower liquidation values also depress the prices of nearby real estate transactions. Policy interventions, such as equity injections and central bank asset purchases, increase liquidation values by providing institutions with the balance sheet capacity to slow asset sales. This evidence suggests that balance sheet adjustments at financial institutions can explain real asset price dynamics.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Rodney Ramcharan, 2020. "Banks’ Balance Sheets and Liquidation Values: Evidence from Real Estate Collateral," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 504-535.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:2:p:504-535.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz056
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    Cited by:

    1. Garbarino, Nicola & Guin, Benjamin & Lee, Jonathan, 2022. "The Effects of Subsidized Flood Insurance on Real Estate Markets," Bank of England working papers 995, Bank of England.
    2. Mark Mink & Rodney Ramcharan & Iman van Lelyveld, 2020. "How banks respond to distress: Shifting risks in Europe's banking union," Working Papers 669, DNB.
    3. Wang, Jiaxin & Huang, Xiang & Gu, Qiankun & Song, Zilong & Sun, Ruiyi, 2023. "How does fintech affect bank risk? A perspective based on financialized transfer of government implicit debt risk," Economic Modelling, Elsevier, vol. 128(C).

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