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Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble

Author

Listed:
  • Gazi Kara
  • Cindy M. Vojtech

Abstract

We empirically document that banks with greater exposure to high home price-to-income ratio regions in 2005 and 2006 have higher mortgage delinquency and charge-off rates and significantly higher probabilities of failure during the last financial crisis even after controlling for capital, liquidity, and other standard bank performance measures. While high price-to-income ratios present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building stronger capital buffers. Our results suggest that there is scope for improved measures of mortgage loan risk that could be considered for regulatory and risk management applications.

Suggested Citation

  • Gazi Kara & Cindy M. Vojtech, 2017. "Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble," Finance and Economics Discussion Series 2017-115, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2017-115
    DOI: 10.17016/FEDS.2017.115
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    File URL: https://www.federalreserve.gov/econres/feds/files/2017115pap.pdf
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    References listed on IDEAS

    as
    1. Antoniades, Adonis, 2015. "Commercial bank failures during the Great Recession: the real (estate) story," Working Paper Series 1779, European Central Bank.
    2. DeYoung, Robert, 2003. "The failure of new entrants in commercial banking markets: a split-population duration analysis," Review of Financial Economics, Elsevier, vol. 12(1), pages 7-33.
    3. Marco Terrones & Enrique G. Mendoza, 2008. "An Anatomy of Credit Booms; Evidence From Macro Aggregates and Micro Data," IMF Working Papers 08/226, International Monetary Fund.
    4. Robert J. Shiller, 2015. "Irrational Exuberance," Economics Books, Princeton University Press, edition 3, number 10421.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Bank failure; Credit risk; Mortgage risk; Residential real estate;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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