Residential House Prices, Commercial Real Estate Lending and Bank Failures

Abstract

We investigate factors leading to bank failures during and after the Great Recession and banking crisis (2008–2015). The FHFA residential real estate house price index (HPI) for each of the 9 Census regions is used to interact with bank mortgage loans and bank financial statement variables. We find that these variables isolate different regional effects on the likelihood of a bank failing. Since we use changes from region to region, we find that regional location and HPI changes have an effect on banks’ commercial lending activity. Other more traditional and associated factors, like construction and land development lending or multifamily real estate lending, similarly explain bank failures during the main period of the banking crisis. By using this approach we better isolate the relationship between residential house prices and builders’ and land developers’ desire to borrow and the willingness of banks to concentrate portfolio lending in commercial real estate.