Liquidity Risk and the Credit Crunch of 2007-2009: Evidence from Micro-Level Data on Mortgage Loan Applications

Adonis Antoniades

MPRA Paper from University Library of Munich, Germany

Abstract: I test the hypothesis that the banks' exposure to liquidity risk contributed to the contraction of mortgage credit during the financial crisis of 2007-2009. I use micro-level data on mortgage loan applications to control for variation in demand conditions and find that lenders who relied less on core-deposit funding or who had larger off-balance sheet exposure to credit lines, exhibited a sharper decline in their propensity to approve loan applications. These two sources of liquidity risk jointly accounted for a $41.5 billion-$61.9 billion contraction of mortgage credit during 2007-2009, or 5.2%-7.8% of total mortgage originations during this period.

Keywords: liquidity risk; bank lending channel; lines of credit; core deposits; real estate; mortgage lending (search for similar items in EconPapers)
JEL-codes: E51 G01 G11 G21 (search for similar items in EconPapers)
Date: 2013-07-01
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
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