Credit Expansion, Bank Liberalization, and Structural Change in Bank Asset Accounts

25 Pages Posted: 9 Jul 2020

See all articles by Keqing Liu

Keqing Liu

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Qingliang Fan

The Chinese University of Hong Kong

Date Written: May 4, 2020

Abstract

This paper studies the links among credit supply expansion, commercial bank asset account structures, and the housing boom preceding the 2007-2009 financial crisis. We propose a real business cycle model with a housing market and financial intermediaries (banks) subject to leverage constraints. In our model, banks channel funds to firms for production and provide collateralized loans to mortgage borrowers; thus, banks determine their asset account structures endogenously. We show that a credit supply expansion to banks can account for four key facts that characterize the housing boom: (1) an increase in real house prices; (2) an increase in the mortgage-to-GDP ratio; (3) a decrease in the real mortgage interest rate; and (4) an increase in the ratio of mortgages to firm loans in commercial bank asset accounts. In our model, a credit supply expansion to banks can also generate a boom-bust cycle through the collateral value channel via mortgage borrowers. Asset-side bank regulations that reduce excessive mortgage issuance during a credit boom can help to dampen the subsequent economic downturn.

Keywords: Credit expansion, Bank liberalization, Bank balance sheet, Business cycle

JEL Classification: E32, E60, G21, G51

Suggested Citation

Liu, Keqing and Fan, Qingliang, Credit Expansion, Bank Liberalization, and Structural Change in Bank Asset Accounts (May 4, 2020). Available at SSRN: https://ssrn.com/abstract=3627891 or http://dx.doi.org/10.2139/ssrn.3627891

Keqing Liu

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Qingliang Fan (Contact Author)

The Chinese University of Hong Kong ( email )

Hong Kong

HOME PAGE: http://michaelqfan.weebly.com

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