Housing Booms and Bank Growth

57 Pages Posted: 18 Feb 2021 Last revised: 1 Jun 2021

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Leming Lin

University of Pittsburgh - Katz Graduate School of Business

Luxi Wang

University of Pittsburgh - Katz Graduate School of Business

Date Written: May 15, 2021

Abstract

The rapid increase in U.S. house prices during the 2001--2006 period was accompanied by a historically rapid expansion of bank assets. We exploit cross-regional variation in local housing booms to study how housing demand shocks affected the growth of the banking sector. We estimate the effect of housing demand shocks that are orthogonal to local non-housing demand shocks and a range of observed local credit supply shocks. We employ several instrumental variables that plausibly identify variation in local housing demand that is exogenous to local banks. We find that the housing boom had a large effect on bank asset growth---the cross-regional elasticity of bank growth with respect to housing demand shocks is around 0.6. The regional elasticity estimate suggests that in aggregate, non-credit-supply-induced housing demand shocks can potentially account for more than a third of the growth of the banking sector during this period.

Keywords: Bank growth, housing demand, credit supply, Great Recession, house prices, mortgage demand

JEL Classification: E30, E44, E51, G21, R21, R31

Suggested Citation

Flannery, Mark Jeffrey and Lin, Leming and Wang, Luxi, Housing Booms and Bank Growth (May 15, 2021). Available at SSRN: https://ssrn.com/abstract=3749564 or http://dx.doi.org/10.2139/ssrn.3749564

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Leming Lin (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

346 Mervis Hall
University of Pittsburgh
Pittsburgh, PA 15260
United States

Luxi Wang

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

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