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Risky Mortgages and Bank Runs

Author

Listed:
  • Nurlan Turdaliev

    (Department of Economics, University of Windsor)

  • Yahong Zhang

    (Department of Economics, University of Windsor)

Abstract

The collapse of housing prices in the aftermath of the U.S. subprime mortgage crisis of 2008 not only worsened the balance sheet positions of the banking sector but also led to a “bank run” in some cases such as the collapse of Lehman Brothers in September 2008. We develop a theoretical model featuring household debt (mortgages) and banking sector frictions. We show that mortgage risks can potentially lead to a bank run equilibrium. Such an equilibrium exists since mortgage risks reduce the liquidation prices of bank assets. We further show that mortgage market regulations such as loan-to-value requirements reduce the likelihood of bank runs.

Suggested Citation

  • Nurlan Turdaliev & Yahong Zhang, 2020. "Risky Mortgages and Bank Runs," Working Papers 2007, University of Windsor, Department of Economics, revised Oct 2020.
    • Handle: RePEc:wis:wpaper:2007
    as

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    File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/2007.pdf
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    References listed on IDEAS

    as
    1. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    2. Gertler, M. & Kiyotaki, N. & Prestipino, A., 2016. "Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1345-1425, Elsevier.
    3. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    4. Mark Gertler & Nobuhiro Kiyotaki, 2015. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy," American Economic Review, American Economic Association, vol. 105(7), pages 2011-2043, July.
    5. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-164, April.
    6. Ferrante, Francesco, 2019. "Risky lending, bank leverage and unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 100-127.
    7. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    bank run; mortgage risk; loan-to-value ratio;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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