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"Banks' Liability Structure and Mortgage Lending During the Financial Crisis"

posted Dec 13, 2011, 12:18 PM by K K   [ updated Mar 15, 2013, 1:33 PM ]
With Dagher, J. -  IMF working paper 12/155 (2012). 

Presentations: International Monetary Fund (IMF-ICD), International Finance and Banking Society - best paper award.  American Finance Association (2013), European Finance Association (2012), and others. 

We examine the impact of banks' exposure to market liquidity risk through wholesale funding on their supply of credit during the financial crisis. We focus on mortgage lending to minimize the impact of confounding demand factors that could be potentially large when comparing overall lending by banks. The disaggregated data on mortgage applications we use allows us to study the time variations in banks’ decisions to grant mortgage loans, while controlling for bank, borrower, and regional characteristics. We find that banks that were more reliant on wholesale funding increased their rejection rates significantly more than other banks during the crisis. This result holds at the national level as well at the sub-national level in most of the largest Metropolitan Statistical Areas. To further control for applicant characteristics across banks we also reduce our 4 million data points to thousands of pairs of virtually indistinguishable applications and show that our main results are conserved. While the willingness to supply loans was affected by banks’ liability structure during the crisis, we find that the demand for mortgages decreased evenly along this dimension.  

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