When good investments go bad: The contraction in community bank lending after the 2008 GSE takeover

Tara Rice and Jonathan Rose

Journal of Financial Intermediation, 2016, vol. 27, issue C, 68-88

Abstract: In September 2008, the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, were placed into conservatorship. The GSEs' equity prices dropped considerably in response, and, as a result, many banks that held sizable amounts of the preferred stock of the two GSEs recognized substantial losses. Fifteen failures and two mergers resulted. We treat these losses as plausibly exogenous, unanticipated, supply-side shocks to bank lending, as they are likely unrelated to demand-side factors that could affect lending, and because GSE investments were considered to be safe by banks, regulators, and rating agencies. As a result, this event allows us to examine the relationship between community bank condition and lending during the global financial crisis. We find that, following the shock, loan growth at exposed banks was about 2 percentage points lower than other banks.

Keywords: Banking; Financial crisis; Government sponsored enterprise; Credit contraction (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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Working Paper: When good investments go bad: the contraction in community bank lending after the 2008 GSE takeover (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:27:y:2016:i:c:p:68-88

DOI: 10.1016/j.jfi.2016.02.001

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