Banks' Liability Structure and Mortgage Lending During the Financial Crisis

IMF Working Papers, June 1, 2012

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Research question: impact of banks’ exposure to market liquidity shocks through wholesale funding on their supply of credit during the financial crisis in the United States.
Focus: mortgage lending to minimize confounding demand factors across heterogeneous credit categories.
Key empirical finding: banks that were more reliant on wholesale funding curtailed their credit significantly more than retail-funded banks during the crisis.
Demand-side observation: the demand for mortgage credit declined evenly across wholesale and retail banks.
Aggregate implication: wholesale funding was a strong and significant predictor of a sharper decline in overall mortgage credit at the Metropolitan Statistical Area (MSA) level.

Data: disaggregated data on mortgage applications enabling study of time variations in banks’ decisions to grant mortgage loans while controlling for bank, borrower, and regional characteristics.
Identification strategies and robustness:
- Matching exercises that eliminate imbalances in observable applicant characteristics between wholesale and retail banks.
- Various other robustness tests enabled by the wealth of data.
Outcome of methodological approach: allowed isolation of credit-supply effects associated with banks’ liability structure from demand-side movements in mortgage applications.

Exploitation of heterogeneity in mortgage funding across U.S. MSAs to assess aggregate implications.
Finding at MSA level: areas with greater reliance on wholesale-funded banks experienced sharper declines in overall mortgage credit.