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Credit Booms and Lending Standards: Evidence From the Subprime Mortgage Market

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Listed:
  • Mr. Giovanni Dell'Ariccia
  • Mr. Luc Laeven
  • Ms. Deniz O 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.

Suggested Citation

  • Mr. Giovanni Dell'Ariccia & Mr. Luc Laeven & Ms. Deniz O Igan, 2008. "Credit Booms and Lending Standards: Evidence From the Subprime Mortgage Market," IMF Working Papers 2008/106, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/106
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    More about this item

    Keywords

    WP; denial rate; subprime market; lending standard; subprime mortgage lender; subprime mortgage market; credit boom; lending standards; mortgages; subprime loans; moral hazard; financial accelerators; market share; Loans; Housing prices; Personal income; Credit booms;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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