Real estate prices and systemic banking crises

Yang Deng, Yan Zeng and Zhirui Li

Economic Modelling, 2019, vol. 80, issue C, 111-120

Abstract: The collapse of real estate prices has historically jeopardized banking stability and triggered systemic banking crises. This paper studies risk contagion in a banking system in real estate price shock by adopting complex network theory. Modelling the real estate-related asset as a common exposure of banks to the real estate market, we propose a model that incorporates two main risk contagion channels, i.e., the financial network and asset fire sales, and reveal how the real estate price shock is transmitted and propagated across banks. We demonstrate that banking stability is highly sensitive to the real estate price shock. Moreover, due to the particularly low liquidity of the real estate market, the asset fire-sales of real estate assets overwhelms the financial network, playing the dominant role in risk contagion. Our model can be adopted by regulators to conduct stress testing and to forge effective risk management strategies.

Keywords: Real estate price; Risk contagion; Financial network; Systemic risk; Banking crisis (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 L50 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:80:y:2019:i:c:p:111-120

DOI: 10.1016/j.econmod.2018.09.032

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