Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble

Gazi Kara (gazi.i.kara@frb.gov) and Cindy M. Vojtech
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Cindy M. Vojtech: https://www.federalreserve.gov/econres/cindy-m-vojtech.htm

No 2017-115, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We empirically document that banks with greater exposure to high home price-to-income ratio regions in 2005 and 2006 have higher mortgage delinquency and charge-off rates and significantly higher probabilities of failure during the last financial crisis even after controlling for capital, liquidity, and other standard bank performance measures. While high price-to-income ratios present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building stronger capital buffers. Our results suggest that there is scope for improved measures of mortgage loan risk that could be considered for regulatory and risk management applications.

Keywords: Bank failure; Credit risk; Mortgage risk; Residential real estate (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 R31 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017-11-29
New Economics Papers: this item is included in nep-ban, nep-cba, nep-rmg and nep-ure
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-115

DOI: 10.17016/FEDS.2017.115

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