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Real estate prices and systemic banking crises

Author

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  • Deng, Yang
  • Zeng, Yan
  • Li, Zhirui

Abstract

The collapse of real estate prices has historically jeopardized banking stability and triggered systemic banking crises. This paper studies risk contagion in a banking system in real estate price shock by adopting complex network theory. Modelling the real estate-related asset as a common exposure of banks to the real estate market, we propose a model that incorporates two main risk contagion channels, i.e., the financial network and asset fire sales, and reveal how the real estate price shock is transmitted and propagated across banks. We demonstrate that banking stability is highly sensitive to the real estate price shock. Moreover, due to the particularly low liquidity of the real estate market, the asset fire-sales of real estate assets overwhelms the financial network, playing the dominant role in risk contagion. Our model can be adopted by regulators to conduct stress testing and to forge effective risk management strategies.

Suggested Citation

  • Deng, Yang & Zeng, Yan & Li, Zhirui, 2019. "Real estate prices and systemic banking crises," Economic Modelling, Elsevier, vol. 80(C), pages 111-120.
    • Handle: RePEc:eee:ecmode:v:80:y:2019:i:c:p:111-120
    DOI: 10.1016/j.econmod.2018.09.032
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    Citations

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    Cited by:

    1. Ayberk, İdil & Önder, Zeynep, 2022. "House prices and bank loan portfolios in an emerging market: The role of bank ownership," Economic Modelling, Elsevier, vol. 106(C).
    2. repec:agr:journl:v:4(621):y:2019:i:4(621):p:5-18 is not listed on IDEAS
    3. Jingbin Wang & Beibei Xia & Huiling Qiao, 2022. "Time‐varying impact of housing price fluctuations on banking financial risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 457-467, March.
    4. Kanno, Masayasu, 2022. "Exploring risks in syndicated loan networks: Evidence from real estate investment trusts," Economic Modelling, Elsevier, vol. 115(C).
    5. Chen, Ren-Raw & Zhang, Xiaohu, 2024. "From liquidity risk to systemic risk: A use of knowledge graph," Journal of Financial Stability, Elsevier, vol. 70(C).
    6. Iulian Nicolae VASILOIU, 2019. "Expanding the Eurozone. The stage of economic convergence for Bulgaria, Czech Republic, Croatia, Hungary, Poland and Romania," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(621), W), pages 5-18, Winter.
    7. Benjamin Kwakye & Chan Tze Haw, 2020. "Interplay of the Macroeconomy and Real Estate: Systematic Review of Literature," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 262-271.
    8. Xiaoyang Chen & Liguo Zhou & Lin Wang & Yuelong Zheng, 2023. "Risk spillover in China’s real estate industry chain: a DCC-EGARCH-ΔCoVaR model," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-16, December.
    9. Wang, Xiaoting & Hou, Siyuan & Shen, Jie, 2021. "Default clustering of the nonfinancial sector and systemic risk: Evidence from China," Economic Modelling, Elsevier, vol. 96(C), pages 196-208.
    10. Ao, Yibin & Zhang, Yuting & Wang, Yan & Chen, Yunfeng & Yang, Linchuan, 2020. "Influences of rural built environment on travel mode choice of rural residents: The case of rural Sichuan," Journal of Transport Geography, Elsevier, vol. 85(C).
    11. Han, Yang & Zhang, Haotian & Zhao, Yong, 2021. "Structural evolution of real estate industry in China: 2002-2017," Structural Change and Economic Dynamics, Elsevier, vol. 57(C), pages 45-56.

    More about this item

    Keywords

    Real estate price; Risk contagion; Financial network; Systemic risk; Banking crisis;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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