Exposure to Local Housing Markets and Bank Performance

75 Pages Posted: 15 Nov 2023

See all articles by Valentin Schubert

Valentin Schubert

Sveriges Riksbank; Stockholm School of Economics, Department of Finance

Martin Waibel

Stockholm School of Economics; Swedish House of Finance

Date Written: October 27, 2023

Abstract

We uncover a robust positive relationship between a bank’s share of retained mortgages and subsequent bank performance. This relation is time-varying and depends on the business cycle. During crises, when house prices decline and delinquencies increase, high-retained-share banks report higher profitability than other banks. The relation is reversed during expansion periods when house prices rise and delinquencies are typically low. We provide evidence that banks’ internalization of fire sale externalities acts as a main channel with important real effects: high-retained-share banks originate higher loan volumes at more favorable terms and indirectly affect the performance of banks active in the same region. Further evidence confirms that this channel is different from alternative explanations based on market power, relationship effects, diversification, or informational benefits.

Keywords: Fire sales, bank profitability, bank concentration, resilience

JEL Classification: G21, G32; L13, R31

Suggested Citation

Schubert, Valentin and Waibel, Martin, Exposure to Local Housing Markets and Bank Performance (October 27, 2023). Available at SSRN: https://ssrn.com/abstract=4614814 or http://dx.doi.org/10.2139/ssrn.4614814

Valentin Schubert (Contact Author)

Sveriges Riksbank ( email )

S-103 37 Stockholm
Sweden

HOME PAGE: http://www.valentinschubert.com

Stockholm School of Economics, Department of Finance ( email )

PO Box 6501
Stockholm, 11383
Sweden

HOME PAGE: http://www.valentinschubert.com

Martin Waibel

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

HOME PAGE: http://https://martinwaibel.com

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