Real estate prices and bank stability

Michael Koetter and Tigran Poghosyan

Journal of Banking & Finance, 2010, vol. 34, issue 6, 1129-1138

Abstract: Real estate prices can deviate from their fundamental value due to rigid supply, heterogeneity in quality, and various market imperfections, which have two contrasting effects on bank stability. Higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults. In contrast, persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios, which increases bank distress probabilities. We test these hypotheses using unique data on real estate markets and banks in Germany. House price deviations contribute to bank instability, but nominal house price developments do not. This finding corroborates the importance of deviations from the fundamental value of real estate, rather than just price levels or changes alone, when assessing bank stability.

Keywords: Real; estate; prices; Bank; distress (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00307-0
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:6:p:1129-1138

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().