Conferences - Seminars
Bank Risk-Taking and the Economy: Evidence from the Housing Boom and its Aftermath Real
By Antonio FALATO, Federal Reserve Bank
The short-termism of lenders amplifies boom-bust credit cycles, leading in turn to real costs for the aggregate economy. During the U.S. housing credit boom, publicly-traded banks increased mortgage lending activity and relaxed standards much more than privately-held banks, and more so if they were run by short-term oriented CEOs. In the ensuing bust, counties with greater exposure to short-term oriented public banks experienced more severe downturns across a variety of outcomes, including economically large drops in aggregate employment, durable consumption, and retail sales. The findings hold for text-based measures of short-term focus and are robust to using an identification strategy that instruments for county mortgage lending with shocks that areplausibly unrelated to local economic conditions. In all, we provide micro-founded evidence that the ownership structure and short-term focus of depository institutions matter for the real economy.
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