The transmission of bank liquidity shocks: evidence from house prices

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15 Citations (Scopus)

Abstract

This article uses the 2007-09 financial crisis as a negative liquidity shock on banks in the USA and analyzes its transmission to the real economy. The ex ante heterogeneity in the amount of long-term debt that matured during the crisis is used to measure the variation in banks' exposure to the liquidity shock. I find that banks transmitted the liquidity shock to the real economy by reducing their loan supply. The reduction was particularly strong for real estate loans. As a result, house prices declined in the MSAs where these banks have branches. Bank capital plays a significant role in the transmission: under-capitalized banks transmitted the liquidity shock, whereas wellcapitalized banks' lending did not show any decline.

Original languageEnglish
Article numberrfy001
Pages (from-to)629-658
Number of pages30
JournalReview of Finance
Volume23
Issue number3
DOIs
Publication statusPublished - May 2019
Externally publishedYes

Keywords

  • Bank capital
  • Bank liquidity shocks
  • Credit supply shocks
  • Financial crisis
  • House prices

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