Housing Price Risks and Lending Behavior of Banks before and after the 2008 Financial Crisis

As high volatility in asset values can affect collateral values negatively and increase the likelihood of defaults by loan borrowers, facing high price risks in housing markets, banks need to lower risk exposures and reduce loans. Our analysis of US commercial banks shows that banks with higher housing price risks provided fewer loans secured by residential properties before the 2008 financial crisis. These results suggest that banks consider housing price risks when making loan decisions. However, banks with higher housing price risks that were significantly reliant on wholesale funding provided more residential loans, suggesting that they take more risks to improve their short-term performance which can compensate for cost of wholesale funding.