Informational Advantages of Lending Locally

38 Pages Posted: 2 Dec 2011 Last revised: 13 Apr 2023

See all articles by Kristle Romero Cortés

Kristle Romero Cortés

UNSW Australia Business School, School of Banking and Finance

Date Written: February 1, 2015

Abstract

Banks decreased loan originations and retention in response to high home price appreciation during the run-up to the housing crisis when lending locally. This relationship holds even after addressing branch network endogeneity using historical branch networks and M&A activity as instrumental variables. For every 1 percent increase in home prices from 2002 to 2006, banks originated two fewer loans locally. Loans sold to Freddie Mac from banks with a local presence defaulted more, demonstrating superior knowledge on the part of the banks and exploring a new channel for adverse selection. Banks exited precisely the markets that experience price reversals.

Keywords: Mortgage Lending, House Price Growth, Loan Performance

JEL Classification: G21

Suggested Citation

Cortés, Kristle Romero, Informational Advantages of Lending Locally (February 1, 2015). Available at SSRN: https://ssrn.com/abstract=1967179 or http://dx.doi.org/10.2139/ssrn.1967179

Kristle Romero Cortés (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
316
Abstract Views
2,310
Rank
183,060
PlumX Metrics