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Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market

Author/Editor: Dell'Ariccia, Giovanni | Igan, Deniz | Laeven, Luc
Authorized for Distribution: April 1, 2008
Electronic Access: Free Full Text (PDF file size is 603KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper links the current sub-prime mortgage crisis to a decline in lending standards associated with the rapid expansion of this market. We show that lending standards declined more in areas that experienced larger credit booms and house price increases. We also find that the underlying market structure mattered, with entry of new, large lenders triggering declines in lending standards by incumbent banks. Finally, lending standards declined more in areas with higher mortgage securitization rates. The results are consistent with theoretical predictions from recent financial accelerator models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.
 
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Series: Working Paper No. 08/106
Subject(s): Credit expansion | Loans | Housing | Industrial structure | Financial instruments | Moral hazard
Author's keyword(s): credit boom | lending standards | mortgages | subprime loans | moral hazard | financial accelerators
 
English  
    Published:   April 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008106   Pages:   37
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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