Within-Bank Transmission of Real Estate Shocks

Wednesday October 19, 2016
  • Working Paper

We estimate the reaction of banks to capital losses induced by reductions in real estate prices. We consider banks as portfolios of assets in different locations and exploit regional variation in real estate in order to control for local demand shocks and bank-location specific factors. The results show that banks recognize substantial capital losses associated with real estate prices. They also adjust their lending and financing policies. They reduce lending across all types of loans, indicating contagion both across geographical locations and business lines. Large-affected banks issue more equity and all banks use their available liquidity to accommodate the shock. Finally, we find evidence of more affected banks rolling over and failing to liquidate problematic loans.