Lending to Keep the Lights On: Mortgages and Corporate Credit

Abstract

We show that banks’ local mortgage exposure affects credit supply to local firms: a one-standard-deviation increase in a bank’s local mortgage exposure translates into a 9.5% increase in propensity to participate in loans issued to a local firm. Conditional on syndicate participation, higher-mortgage-exposure banks contribute a larger share in the syndicate, are more likely to serve as lead arrangers and charge lower loan spreads. Exploiting uniform federal-level increases in the conforming loan limit (CLL) prior to 2008, we show that our baseline effect becomes significantly weaker when the CLL increases reduce banks’ on-balance-sheet exposure to local mortgages. The effect strengthens when local unemployment rises, when borrowers are major local employers, and when loans address liquidity needs, consistent with banks being more attentive to mortgage-related risks when local conditions deteriorate. Our findings highlight that concentrated lenders actively allocate corporate credit to protect their mortgage portfolios. This mortgage-exposure-driven lending is associated with lower subsequent local unemployment rates.

Keywords: Bank lending, syndicated loans, mortgage exposure, externalities

JEL Classification: D72, G21, G28