Local Banks, Credit Supply, and House Prices

70 Pages Posted: 23 Mar 2018 Last revised: 29 May 2018

See all articles by Kristian Blickle

Kristian Blickle

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: November 5, 2017

Abstract

I study the effects of an increase in the supply of local mortgage credit on local house prices and employment by exploiting a natural experiment from Switzerland. Losses in U.S. security holdings triggered a migration of dissatified retail customers from a large, universal bank (UBS) to homogenous local mortgage lenders in mid-2008. Mortgage lenders close to UBS branches experience larger inflows of deposits, unrelated to their investment opportunities. Using variation in the geographic distance between UBS branches and local mortgage lenders as an instrument for deposit growth, I find that banks with an exogenous positive funding shock invest in strict accordance with their specialization (i.e. local mortgage lending). Consequently, house prices in neighborhoods around affected banks rise over 50% more than around unaffected banks. I also find an increase in the number of employees at small firms, reliant on real estate collateral, in these neighborhoods. My results show that local mortgage oriented banks affect house prices through the supply of credit and that bank specialization thereby plays an important role in the allocation of capital across sectors.

Keywords: credit supply, liquidity shock, house prices, local banking, employment

JEL Classification: G20, G21, R30

Suggested Citation

Blickle, Kristian, Local Banks, Credit Supply, and House Prices (November 5, 2017). University of St.Gallen, School of Finance Research Paper No. 2018/11. Available at SSRN: https://ssrn.com/abstract=3146761 or http://dx.doi.org/10.2139/ssrn.3146761

Kristian Blickle (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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