The Cross‐Market Spillover of Economic Shocks through Multimarket Banks

Abstract

This study investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007–09. We show that multimarket banks reduced local portfolio lending in response to high overall mortgage delinquencies in their other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks’ internal capital markets. This spillover was greatest when the bank lacked a branch presence and when the market was highly peripheral to the bank in terms of its total mortgage lending. These effects were not fully offset by securitization or other portfolio lenders.

Housing Bust, Bank Lending & Employment: Evidence from Multimarket Banks

“…A 10% decline in house prices in a bank's markets is found to reduce small business lending by 25% when this non-local lending is included. The magnified effect is similar to Berrospide et al (2016), who find that exposed banks cut mortgage lending the most in areas in which they didn't have a branch.…”

“…I address this bias with geographically disaggregated lending data in the spirit of Huang and Stephens (2015); Bord et al (2014); Berrospide et al (2016). Namely, I estimate bankcounty lending as in equation 1, using the multimarket exposure of a bank to weak real estate markets to measure Shock b , and either county level real estate shocks or county fixed effects to control for η c .…”

“…8 Peek and Rosengren (2000); Chava and Purnanandam (2011);Cetorelli and Goldberg (2012) for example study spillovers through multinational banks, while Morgan et al (2004); Huang and Stephens (2015); Berrospide et al (2016); Bord et al (2014) focus on transmission within the United States.…”

“…11 Huang and Stephens (2015); Bord et al (2014); Berrospide et al (2016) use market fixed effects to control for demand, making the primary object of study changes in market shares instead of county level effects. Bord et al (2014), however, also show that counties unaffected by house price declines experience employment losses if locally operating banks locate in distressed markets.…”

“…Huang and Stephens (2015); Bord et al (2014); Berrospide et al (2016) use geographic variation in bank locations to show that banks exposed to housing and Robinson, 2014).…”