Abstract
We investigate factors leading to bank failures during and after the Great Recession and banking crisis (2008–2015). The FHFA residential real estate house price index (HPI) for each of the 9 Census regions is used to interact with bank mortgage loans and bank financial statement variables. We find that these variables isolate different regional effects on the likelihood of a bank failing. Since we use changes from region to region, we find that regional location and HPI changes have an effect on banks’ commercial lending activity. Other more traditional and associated factors, like construction and land development lending or multifamily real estate lending, similarly explain bank failures during the main period of the banking crisis. By using this approach we better isolate the relationship between residential house prices and builders’ and land developers’ desire to borrow and the willingness of banks to concentrate portfolio lending in commercial real estate.
Highlights
Toxic residential mortgages, loans to borrowers with relatively poor credit, was thought to have led to banking troubles in 2008-2010
2009 had several root causes, and we show that regional residential annual house price index (HPI) changes interacting with bank
This paper finds that the regional HPI change effects on residential real estate lending are important explanations of bank financial health
Summary
Loans to borrowers with relatively poor credit, was thought to have led to banking troubles in 2008-2010. Real estate construction and development loans, commercial mortgages, and multi-family mortgages are consistently associated with a higher likelihood of bank failure. Residential single-family mortgages are either neutral or associated with a lower likelihood of bank failure. This study uses financial data from the individual banks’ Reports of Income and Condition (Call Reports) with additional explanatory variables reflecting residential house lending interacted with HPI relative changes by census regions (regional HPI change-house loan interactions). Along with financial characteristics of banks, these interaction terms that identify bank residential mortgage lending activity coupled with regional house price index annual changes to capture the effects of the residential house price movements on banks’ likelihoods of failure. Identifying the effects on bank failure of these more dynamic regional house price change interaction variables affect bank residential loan activity
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