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Credit Booms and Lending Standards

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Author Info

  • Giovanni Dell'Ariccia
  • Luc Laeven
  • Deniz Igan

Abstract

This paper links the current sub-prime mortgage crisis to a decline in lending standards associated with the rapid expansion of this market. We show that lending standards declined more in areas that experienced larger credit booms and house price increases. We also find that the underlying market structure mattered, with entry of new, large lenders triggering declines in lending standards by incumbent banks. Finally, lending standards declined more in areas with higher mortgage securitization rates. The results are consistent with theoretical predictions from recent financial accelerator models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/106.

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Length: 37
Date of creation: 01 Apr 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/106

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Related research

Keywords: Moral hazard; Credit expansion; Housing; Industrial structure; Financial instruments; applications; mortgage; mortgage market; mortgage lenders; mortgages; mortgage lending; mortgage industry; residential mortgage; mortgage markets; mortgage-backed securities; mortgage credit; housing finance; risk profiles; underwriting; mortgage loans; risk taking; home mortgage; mortgage loan; home equity; risk profile; risk mortgages; risk management; foreclosure; mortgage default; subprime mortgage lending; current mortgage; collateralization; mortgage choice; banking crises; mortgage applications; credit risk; mortgage backed securities;

This paper has been announced in the following NEP Reports:

References

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  1. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
  2. Martin Ruckes, 2004. "Bank Competition and Credit Standards," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1073-1102.
  3. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
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  7. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  8. Dell''Ariccia, Giovanni & Marquez, Robert, 2005. "Lending Booms and Lending Standards," CEPR Discussion Papers 5095, C.E.P.R. Discussion Papers.
  9. G. B. Gorton & Ping He, 2008. "Bank Credit Cycles," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1181-1214.
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  15. repec:fip:fedgsq:y:2007:i:aug31 is not listed on IDEAS
  16. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 399-441, May.
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  20. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison," American Economic Review, American Economic Association, vol. 98(2), pages 339-44, May.
  21. Lown, Cara & Morgan, Donald P., 2004. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," SIFR Research Report Series 27, Institute for Financial Research.
  22. Yuliya Demyanyk & Otto Van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis.
  23. Ben S. Bernanke, 2007. "Housing, housing finance, and monetary policy," Speech 311, Board of Governors of the Federal Reserve System (U.S.).
  24. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  25. Charles W. Calomiris & Joseph R. Mason, 2003. "Consequences of Bank Distress During the Great Depression," American Economic Review, American Economic Association, vol. 93(3), pages 937-947, June.
  26. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  27. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, vol. 90(1), pages 30-45, March.
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