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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble
Gazi Kara
Cindy M. Vojtech
Abstract

We empirically document that banks with greater exposure to high home price-to-income ratio regions in 2005 and 2006 have higher mortgage delinquency and charge-off rates and significantly higher probabilities of failure during the last financial crisis even after controlling for capital, liquidity, and other standard bank performance measures. While high price-to-income ratios present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building stronger capital buffers. Our results suggest that there is scope for improved measures of mortgage loan risk that could be considered for regulatory and risk management applications.


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Gazi Kara & Cindy M. Vojtech, Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-115, 29 Nov 2017.
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Keywords: Bank failure ; Credit risk ; Mortgage risk ; Residential real estate
DOI: 10.17016/FEDS.2017.115
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