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Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble

36 Pages Posted: 5 Dec 2017  

Gazi Kara

Board of Governors of the Federal Reserve System

Cindy M. Vojtech

Board of Governors of the Federal Reserve System

Date Written: 2017-11-29

Abstract

We empirically document that banks with greater exposure to high home price-to-income ratio regions in 2005 and 2006 have higher mortgage delinquency and charge-off rates and significantly higher probabilities of failure during the last financial crisis even after controlling for capital, liquidity, and other standard bank performance measures. While high price-to-income ratios present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building stronger capital buffers. Our results suggest that there is scope for improved measures of mortgage loan risk that could be considered for regulatory and risk management applications.

Keywords: Bank failure, Credit risk, Mortgage risk, Residential real estate

JEL Classification: G01, G21, G28, R31

Suggested Citation

Kara, Gazi and Vojtech, Cindy M., Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble (2017-11-29). FEDS Working Paper No. 2017-115. Available at SSRN: https://ssrn.com/abstract=3081440 or http://dx.doi.org/10.17016/FEDS.2017.115

Gazi Kara (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Cindy Vojtech

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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