Our website will undergo scheduled maintenance on the morning of Thursday, August 11, 2022. During this time, connection to our website and some of its features may be unavailable. Thank you for your patience and we apologize for any inconvenience.

Report

Local banks, credit supply, and house prices


Abstract: I study the effects of an increase in the supply of local mortgage credit on local house prices and employment by exploiting a natural experiment from Switzerland. In mid-2008, losses in U.S. security holdings triggered a migration of dissatisfied retail customers from a large, universal bank, UBS, to homogeneous local mortgage lenders. Mortgage lenders located close to UBS branches experienced larger inflows of deposits, regardless of their investment opportunities. Using variation in the geographic distance between UBS branches and local mortgage lenders as an instrument for deposit growth, I find that banks with an exogenous positive funding shock invest in strict accordance with their specialization (that is, local mortgage lending). Consequently, house price gains in neighborhoods around affected banks were more than 50 percent greater than those in neighborhoods around unaffected banks. I also find an increase in the number of employees at small firms, reliant on real estate collateral, in the former set of neighborhoods. My results show that local-mortgage-oriented banks affect house prices through the supply of credit and that bank specialization thereby plays an important role in the allocation of capital across sectors.

Keywords: credit supply; liquidity shocks; house prices; local banking; employment;

JEL Classification: G20; G21; R30;

Access Documents

File(s): File format is application/pdf https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr874.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2018-11-01

Number: 874

Pages: 71 pages