Delays in Banks’ Loan Loss Provisioning and Economic Downturns: Evidence from the U.S. Housing Market

I study whether banks’ loan loss provisioning contributes to economic downturns, by examining the U.S. housing market. Specifically, I examine the aggregate effects of banks’ delayed loan loss recognition (DLR) on house prices during the Great Recession and the channels through which these potential effects arose. I construct ZIP‐code‐level exposure to banks’ DLR before the crisis and compare high‐ and low‐exposure ZIP codes during the crisis to examine the aggregate effects of banks’ DLR on the housing market. I find that high‐exposure ZIP codes experienced larger decreases in mortgage supply, larger increases in distressed sales, and larger decreases in house prices during the crisis. In addition, I conduct individual bank‐level analyses and find that high‐DLR banks reduced their mortgage supply more than low‐DLR banks, and mortgages issued by high‐DLR banks were more likely to become distressed during the crisis. Taken together, these findings suggest that banks’ DLR was associated with nontrivial effects on the housing market during the Great Recession, and the effects of DLR on house prices were likely driven by both the credit‐crunch and distressed‐sales channels.