Academic journal article The Journal of Real Estate Research

Do Mortgage Loans Respond Perversly to Monetary Policy?

Academic journal article The Journal of Real Estate Research

Do Mortgage Loans Respond Perversly to Monetary Policy?

Article excerpt

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We examine a well-known asymmetric effect of the transmission of monetary policy on bank lending related to loan securitization. Extensive empirical evidence shows that bank lending is more responsive to contractionary than to expansionary monetary policy (Gertler and Gilchrist, 1993; Bernanke and Gertler, 1995; Kashyap and Stein, 1995, 2000). This asymmetry is attributed to the bank lending channel of monetary policy transmission. The asymmetric effect of monetary policy on bank lending is more pronounced during recessions than during normal times as frictions generated by asymmetric information become more severe. Some researchers attribute this asymmetry in bank lending to moral hazard and agency problems that make banks more averse to issuing new loans or off-balance sheet commitments, especially during business cycle contractions (Stiglitz and Weiss, 1981; Holmstrom and Tirole, 1997; Diamond and Rajan, 2011; Caballero and Simsek, 2013). Others attribute the asymmetry to a drop in demand for bank loans during recessions (Bernanke and Blinder, 1992; Gertler and Gilchrist, 1993).

The bank lending channel works effectively when the Federal Reserve Bank affects the supply of bank loans through open market operations. For example, a tightening of monetary policy contracts bank reserves and consequently leads banks to cut their lending (Bernanke and Gertler, 1995). However, these negative shocks are not felt equally by different banks. Highly liquid banks are better able to mitigate such funding shocks than less liquid banks (Kashyap and Stein, 2000). Further, highly capitalized banks are less affected by monetary contraction than less capitalized banks (Kishan and Opiela, 2000). Moreover, small banks that are affiliated with a bank holding company (BHC) can more effectively insulate, through access to internal funds, their balance sheets from liquidity shocks than larger stand-alone banks (Peek and Rosengren, 1998; Campello, 2002).

Loutskina (2011) examines the importance of bank loan securitization in shielding bank lending from monetary shocks.1 She shows that securitization helps create a new source of liquidity that allows banks to transform illiquid loans into marketable securities. As such, securitization reduces the traditional dependence of banks on external sources of funds. She also finds that banks with more liquid loan portfolios (i.e., higher ratios of mortgages to total loans) experience a smaller drop in lending under conditions of monetary contraction than banks with less liquid loan portfolios. Loutskina's main conclusion is that the advent of securitization has not only altered the dynamics of bank liquidity management, but further weakened the bank lending channel. Securitizing banks are found to reduce their holdings of liquid securities while still able to increase their lending ability.

We contribute to the literature on securitization by examining the impact of bank loan securitization on the asymmetric response of bank lending to shifts in monetary policy. We argue that liquidity, created through loan securitization, changes the contractionary as well as the expansionary monetary policy effects on bank lending in such a way that reverses the conventional asymmetry of the bank lending channel during the period of study. We postulate that securitization-induced liquidity immunizes bank lending in response to a contractionary monetary policy and exacerbates lending in response to an expansionary policy. In effect, heavily securitized loans show a remarkable increase when monetary policy eases and decline only a little, if at all, when monetary policy tightens. Since this asymmetry occurs in the opposite direction of the conventional bank lending asymmetry, we refer to it as reverse asymmetry. We are the first to investigate the role of securitization in reversing the asymmetric response of bank lending to changes in monetary policy.

We investigate the asymmetric effects of monetary shocks on each type of bank loan for the U. …

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