Commercial Bank Failures During the Great Recession: The Real (Estate) Story

Abstract

The prevalence of the originate-to-distribute model for mortgage credit in the run-up to the Great Recession, resulted in commercial banks using their residual balance-sheet capacity to fund the credit expansion of the significantly more volatile segment of non-household real estate borrowers. A thorough review of bank risk exposures and competing hypotheses indicates that bank failures after the onset of the Great Recession owed more to pre-crisis exposure to non-household real estate credit than to exposure to household mortgages or to liquidity risk.

Keywords: bank failures, Great Recession, commercial real estate, MBS, wholesale funding

JEL Classification: G21, G28, R33