Local Banks, Credit Supply, and House Prices

Abstract

I study the e?ects of an increase in the supply of local mortgage credit on local house prices and employment by exploiting a natural experiment from Switzerland. Losses in U.S. security holdings triggered a migration of dissatis?ed retail customers from a large, universal bank (UBS) to homogenous local mortgage lenders in mid-2008. Mortgage lenders close to UBS branches experience larger in?ows of deposits, unrelated to their investment opportunities. Using variation in the geographic distance between UBS branches and local mortgage lenders as an instrument for deposit growth, I ?nd that banks with an exogenous positive funding shock invest in strict accordance with their specialization (i.e. local mortgage lending). Consequently, house prices in neighborhoods around a?ected banks rise over 50% more than around una?ected banks. I also ?nd an increase in the number of employees at small ?rms, reliant on real estate collateral, in these neighborhoods. My results show that local mortgage oriented banks a?ect house prices through the supply of credit and that bank specialization thereby plays an important role in the allocation of capital across sectors.