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Banks' Liability Structure and Mortgage Lending During the Financial Crisis

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  • Jihad Dagher
  • Kazim Kazimov
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    Abstract

    We examine the impact of banks’ exposure to market liquidity shocks through wholesale funding on their supply of credit during the financial crisis in the United States. We focus on mortgage lending to minimize the impact of confounding demand factors that could potentially be large when comparing banks’ overall lending across heterogeneous categories of credit. The disaggregated data on mortgage applications that we use allows us to study the time variations in banks’ decisions to grant mortgage loans, while controlling for bank, borrower, and regional characteristics. The wealth of data also allows us to carry out matching exercises that eliminate imbalances in observable applicant characteristics between wholesale and retail banks, as well as various other robustness tests. We find that banks that were more reliant on wholesale funding curtailed their credit significantly more than retail-funded banks during the crisis. The demand for mortgage credit, on the other hand, declined evenly across wholesale and retail banks. To understand the aggregate implications of our findings, we exploit the heterogeneity in mortgage funding across U.S. Metropolitan Statistical Areas (MSAs) and find that wholesale funding was a strong and significant predictor of a sharper decline in overall mortgage credit at the MSA level.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/155.

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    Length: 43
    Date of creation: 01 Jun 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/155

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    Related research

    Keywords: Liquidity; Bank credit; Banking sector; Credit demand; Credit risk; Global Financial Crisis 2008-2009; mortgage; statistics; mortgage credit; probability; mortgage lending; standard errors; probability model; housing supply; mortgages; heteroscedasticity; mortgage applications; samples; equations; mortgage lenders; mortgage loans; equation; mortgage application; housing finance; estimation method; linear regression; outliers; home mortgage; housing finance agency; standard deviation; standard error; mortgage market; conventional mortgages; regression analysis; mortgage credit risk; exogenous factor; mortgage loan; dummy variable; mortgage default; instrumental variables; descriptive statistics; econometrics; autocorrelation; instrumental variable; linear regressions; mortgage banker; correlations; independent variables; empirical exercise; skewness;

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    References

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    1. Huang, Rocco & Ratnovski, Lev, 2011. "The dark side of bank wholesale funding," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 248-263, April.
    2. Pierluigi Bologna, 2011. "Is there a role for funding in explaining recent US bank failures?," Questioni di Economia e Finanza (Occasional Papers) 103, Bank of Italy, Economic Research and International Relations Area.
    3. Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," Economics Working Papers ECO2010/30, European University Institute.
    4. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
    5. Heitor Almeida & Murillo Campello & Bruno Laranjeira & Scott Weisbenner, 2009. "Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis," NBER Working Papers 14990, National Bureau of Economic Research, Inc.
    6. Paul Goldsmith-Pinkham & Tanju Yorulmazer, 2010. "Liquidity, Bank Runs, and Bailouts: Spillover Effects During the Northern Rock Episode," Journal of Financial Services Research, Springer, vol. 37(2), pages 83-98, June.
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    Cited by:
    1. Kapan, Tümer & Minoiu, Camelia, 2013. "Balance sheet strength and bank lending during the global financial crisis," Discussion Papers 33/2013, Deutsche Bundesbank, Research Centre.
    2. Rita Babihuga & Marco Spaltro, 2014. "Bank Funding Costs for International Banks," IMF Working Papers 14/71, International Monetary Fund.

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