Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market

European Banking Center Discussion Paper No. 2009-14S

CentER Discussion Paper Series No. 2009-46S

44 Pages Posted: 4 Mar 2008 Last revised: 16 Jun 2009

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2009

Abstract

This paper links the current sub-prime mortgage crisis to a decline in lending standards associated with the rapid expansion of this market. We show that lending standards declined more in areas that experienced larger credit booms and house price increases. We also find that the underlying market structure mattered, with entry of new, large lenders triggering declines in lending standards. Finally, lending standards declined more in areas with higher mortgage securitization rates. The results are consistent with theoretical predictions from recent financial accelerator models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.

Keywords: credit boom, lending standards, mortgages, subprime loans, moral hazard, financial accelerators

JEL Classification: G21, E51

Suggested Citation

Dell'Ariccia, Giovanni and Igan, Deniz and Laeven, Luc A., Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market (January 1, 2009). CentER Discussion Paper Series No. 2009-46S. Available at SSRN: https://ssrn.com/abstract=1100138 or http://dx.doi.org/10.2139/ssrn.1100138

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Deniz Igan (Contact Author)

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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