Residential House Prices Commercial Real Estate and Bank

“Residential House Prices, Commercial Real Estate and Bank Failures” by Gary S. Fissel, FDIC 1 Gerald A. Hanweck, George Mason University & Anthony B. Sanders, George Mason University January 4, 2019 N. B. The views in this paper are those of the authors and do not reflect the views of the FDIC. Please do not quote without permission from the authors. 1

Compare Great Recession & Thrift Banking Crises • Great Recession Banking Crisis Larger Banks are involved with bank failure more so than any other period. Bank Failure Comparison during Great Recession Crisis & Thrift Crisis 2

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What is done in this paper? Examination of the Great Recession Banking Crisis Focus of Paper: • We want to examine effects of the large house price movements over the Great Recession period to explain bank failures. 5

Explanatory Factors: • Identify important explanatory factors to explain the bank failures: • Typical causal factors include: • Bank capitalization, Ro. A & Non-performing Assets • Loans for RE Construction & Land Development • Not typical explanatory factors include: • Regional Residential RE House Price Changes • Direct & Indirect effects on bank failures 6

U. S. Commercial Real Estate Annual Price Changes Note: Prices are measured at end of quarter. Source: St. Louis Fed. , FRED 7

Balance Sheet Bank Construction & Land Development Loans 8

Source: Census Region HPI, FHFA 9

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Balance Sheet Bank Residential Real Estate Loan Concentrations Source: Call Reports, FFIEC 11

CONCLUSIONS Residential RE Price Changes – explain higher & lower likelihoods of bank failures over the Great Recession period and after. 1. Census Regional HPI changes certain ones are consistently significant over the 2008 -2015 failure period. 2. Commercial RE – consistently significant over 2008 -2011 period. • Larger Banks had higher likelihood of failure during the Great Recession. 1. 12

Literature Review of Bank Failures during the Great Recession • Mayes et al. (2009) • Gorton & Metrick (2012) Securitized Mortgage Assets • De. Young & Gorna (2013) • Cole & White (2012) Paper uses traditional Call Report variables to explain bank failures. We use this general framework of this paper. Ask a basic question: Didn’t the movements of the residential house prices have critical negative effects on banks’ health (i. e. , cause bank failures) other than “securitized banking”? • Sun et al. (2018) finds diverse effects of residential house prices on bank failures. 13

Estimation Framework • Binomial Logistic Regression {DV = Failure (1) & Survive (0)} • Bank Failures: Actual Failures, OBA & Technical Failures. • Technical Failures satisfy the following equation: Capitalt + Reservest – 0. 5(Non-Performing Assetst + Non-Accrual Assetst) < 0 Estimation Equation: 14

TABLE 1 – Variable Definitions 15

Table 4: Logistic Regression 2009 Failures Marginal Effects Estimation 16

Thank You for your attention to this paper. 17