Credit expansion, bank liberalization, and structural change in bank asset accounts
Liu, Keqing; Fan, Qingliang
JOURNAL OF ECONOMIC DYNAMICS & CONTROL Year: 2021 Volume: 124.0
DOI: 10.1016/j.jedc.2021.104066
Abstract: This paper studies the links among credit supply expansion, commercial bank asset account structures, and the housing boom preceding the 2007–2009 financial crisis. We propose a real business cycle model with a housing market and financial intermediaries (banks) subject to leverage constraints. In our model, banks channel funds to firms for production and provide collateralized loans to mortgage borrowers; thus, banks determine their asset account structures endogenously. We show that a credit supply expansion to banks can account for four key facts that characterize the housing boom: (1) an increase in real house prices; (2) an increase in the mortgage-to-GDP ratio; (3) a decrease in the real mortgage interest rate; and (4) an increase in the ratio of mortgages to firm loans in commercial bank asset accounts. In our model, a credit supply expansion to banks can also generate a boom-bust cycle through the collateral value channel via mortgage borrowers. Asset-side bank regulations that reduce excessive mortgage issuance during a credit boom can help to dampen the subsequent economic downturn.
