The Transmission of Bank Liquidity Shocks: Evidence from House Prices
51 Pages Posted: 20 Oct 2012 Last revised: 28 Mar 2018
Date Written: April 17, 2017
This paper uses the 2007-2009 financial crisis as a negative liquidity shock on banks in the US and analyzes its transmission to the real economy. The ex-ante heterogeneity in the amount of long-term debt that matured during the crisis is used to measure the variation in banks' exposure to the liquidity shock. I find that banks transmitted the liquidity shock to the real economy by reducing their loan supply. The reduction was particularly strong for real estate loans. As a result, house prices declined in the MSAs where these banks have branches. Bank capital plays a significant role in the transmission: Under-capitalized banks transmitted the liquidity shock, whereas well-capitalized banks' lending did not show any decline.
Keywords: Financial crisis; Bank liquidity shocks; Bank capital; Credit supply shocks; House prices
JEL Classification: G21, G28, R31
Suggested Citation: Suggested Citation