Within-Bank Spillovers of Real Estate Shocks

We study real estate shock transmission within banks across different geographical locations and business areas. We consider banks as portfolios of assets in different locations and exploit the heterogeneity in the regional variation of US real estate prices during the 2005–2010 period. This approach allows us to control for local demand shocks and bank location–specific factors. We begin by showing that banks first recognize substantial capital losses associated with real estate prices and adjust their lending and financing policies. Lending is then reduced across all types of loans, indicating contagion across both geographical locations and business lines. The effects influence banks of all sizes, although the total lending effect on the largest banks is one-third lower. Those banks that are more affected roll over and fail to liquidate problematic loans, in addition to reducing their operational costs and depleting their liquidity.