The Impact of the Global Financial Crisis on Mortgage Pricing and Credit Supply
45 Pages Posted: 14 Feb 2013
Date Written: February 14, 2013
This paper studies the impact of the global financial crisis (GFC) on home mortgage pricing strategies and the credit supply of Australian financial institutions (FIs). It first employs the traditional error correction model to investigate the pass-through of monetary shocks by Australian FIs. Based on regimes determined by the data, it explores how the onset of the GFC alters lenders’ pricing decisions. Then, it uses an ordered probit model to identify the factors that determine cross-sectional variations in banks’ pricing behavior and the sources that prompt banks to change their pricing strategies throughout the GFC. Finally, it examines the relation of a bank’s home mortgage sales to its mortgage price, pricing strategy and funding support over different stages of the GFC.
We find first that big banks lead the price setting in home loan markets and these banks extended their dominant role during the GFC. Meanwhile, the sales of home loans by big banks expanded faster after the GFC. Second, a bank with a higher proportion of liquid assets has more conservative pricing policies, particularly during the GFC. Higher liquidity is associated with smaller loan supply and slower sales growth during and immediately after the GFC, and the effect is strongly significant. Third, the effects of mortgage price and pricing strategy on mortgage sales are more profound after the GFC. Fourth, banks with solid deposit funding are found to respond sluggishly to policy shocks. Household deposit-to-asset ratios also contribute positively to the home loan supply.
Keywords: Banking, Credit, Global Financial Crisis, Liquidity, Mortgage Pricing
JEL Classification: G21, G28, L11
Suggested Citation: Suggested Citation