Bank failures, capital buffers, and exposure to the housing market bubble

We develop housing overvaluation measures that are separate from local economic conditions and show that banks with greater exposure to such overvalued markets have higher mortgage delinquency and charge‐off rates and significantly higher probabilities of failure during the 2007–2009 financial crisi...

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Bibliographic Details
Published in:Real estate economics 2024-11, Vol.52 (6), p.1470-1505
Main Authors: Kara, Gazi I., Vojtech, Cindy M.
Format: Article
Language:English
Subjects:
bank failure
Bank failures
Banks
Capital
credit risk
Default
Delinquency
Economic conditions
Economic crisis
house price‐to‐income ratio
Houses
Housing prices
mortgage risk
Mortgages
residential real estate
Risk management
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Summary:We develop housing overvaluation measures that are separate from local economic conditions and show that banks with greater exposure to such overvalued markets have higher mortgage delinquency and charge‐off rates and significantly higher probabilities of failure during the 2007–2009 financial crisis even after controlling for bank characteristics. While high house prices relative to fundamentals present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building capital. We also show that our overvaluation measures are important in explaining individual mortgage loan defaults and could be used to improve bank risk management.
ISSN:1080-8620
1540-6229
DOI:10.1111/1540-6229.12494