THE CORE ISSUE: THE IMPACT OF BANK LIABILITY STRUCTURE ON MORTGAGE LENDING IN THE EARLY 21ST CENTURY FINANCIAL CRISIS

Abstract

In the years leading up to the 2007 to 2009 Global Financial Crisis, the banking system increased reliance on wholesale funds to supplement core deposits as a source of funding. During the Crisis, institutions experienced liquidity problems due to the unavailability of wholesale funding. Because wholesale funding is typically uninsured and unstable relative to core deposits, banks that relied more on wholesale funding were more prone to bank runs. This paper examines the effect of banks’ reliance on wholesale funding on their supply of credit during the recent Financial Crisis in the United States. We focus on mortgage lending to reduce confounding demand factors involved when comparing banks’ overall lending across heterogeneous categories of credit. We merge the Reports of Condition and Income (“Call Reports”) data with Home Mortgage Disclosure Act (“HMDA”) data to obtain bank financials and mortgage data, respectively, for the 2006 to 2010 time period. In our sample of bank holding companies (BHCs), we exploit the variability in their liability structure and heterogeneity in mortgage funding across U.S. Metropolitan Statistical Areas (MSAs). We find that BHCs that depended more on wholesale funding, compared to those that relied more on core deposits, significantly decreased their lending during the crisis. Additionally, we find that larger BHCs with less equity capital, more illiquid assets, and less unused commitments decreased lending during the crisis. Last, the analyses of several trends over the years suggest a slight rebound in mortgage lending to pre-crisis lending behavior following the initial liquidity shock.