The Cross-Market Spillover of Economic Shocks through Multi-Market Banks

Abstract

This paper investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007-2009. Some metro areas in the U.S. suffered much greater mortgage defaults than others. We use this regional variation to identify whether high mortgage delinquencies in some markets affected multi-market banks' mortgage lending in other markets. Our results show that multi-market banks reduced local mortgage lending in response to delinquencies in other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks' internal capital markets. This spillover effect was greatest in peripheral markets where multi-market banks do a small share of their lending. We find that securitized lending may have mitigated the decline in portfolio lending, but the effect on total lending is economically significant. The mechanism of the transmission appears to be through changes in bank capital and new information about the mortgage market.