Credit expansion, bank liberalization, and structural change in bank asset accounts

Keqing Liu and Qingliang (Michael) Fan

Journal of Economic Dynamics and Control, 2021, vol. 124, issue C

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 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:124:y:2021:i:c:s0165188921000014

DOI: 10.1016/j.jedc.2021.104066

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