Spillover Effects of Banks’ Specialization in Corporate Lending on Mortgage Lending: The Industry Expertise Channel

Abstract

This paper documents an industry expertise channel through which a bank’s corporate lending can influence its mortgage lending. The industry expertise a bank gains through lending to firms in a specific industry strengthens its understanding of economic conditions in counties where the industry is a major sector. Thus, for households in those counties, banks can better evaluate their short-term and long-term financial conditions, and hence their mortgage affordability. Information gained from the industry expertise channel improves banks’ screening and monitoring efficiencies, leading to increased allocation of mortgage credits towards counties with same industry specializations. The effects are stronger when the information asymmetry between banks and mortgage borrowers is high or when local risk is high. Mortgages originated through such a channel are also less likely to default.

Keywords: Banks, Corporate Loan, Industry Expertise, Information Asymmetry, Mortgage

JEL Classification: G21, G30, D82