The impact of the global financial crisis on mortgage pricing and credit supply

This paper studies the pricing and sales of home mortgages in Australia, focusing on the global financial crisis (GFC). It shows that the crisis significantly changed banks’ pricing behavior and its impact varied across banks, depending on their asset sizes, deposit sources and liquidity profiles. Big banks led in price setting and responded promptly to both upward and downward adjustments of the cash target rate before and during the GFC. Albeit cutting their prices sluggishly after the GFC, they still enjoy greater market power and are expanding faster. Banks with solid deposit support became slower in responding to policy shocks during the GFC and sold more than their counterparts. Interestingly, banks in a better liquidity position tended to be more conservative in pricing during the GFC, i.e. reacting quickly when the cash rate moved up but slowly if it fell, but became more aggressive thereafter.