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When good investments go bad: The contraction in community bank lending after the 2008 GSE takeover

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  • Rice, Tara
  • Rose, Jonathan
Abstract
In September 2008, the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, were placed into conservatorship. The GSEs' equity prices dropped considerably in response, and, as a result, many banks that held sizable amounts of the preferred stock of the two GSEs recognized substantial losses. Fifteen failures and two mergers resulted. We treat these losses as plausibly exogenous, unanticipated, supply-side shocks to bank lending, as they are likely unrelated to demand-side factors that could affect lending, and because GSE investments were considered to be safe by banks, regulators, and rating agencies. As a result, this event allows us to examine the relationship between community bank condition and lending during the global financial crisis. We find that, following the shock, loan growth at exposed banks was about 2 percentage points lower than other banks.

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  • Rice, Tara & Rose, Jonathan, 2016. "When good investments go bad: The contraction in community bank lending after the 2008 GSE takeover," Journal of Financial Intermediation, Elsevier, vol. 27(C), pages 68-88.
    • Handle: RePEc:eee:jfinin:v:27:y:2016:i:c:p:68-88
    DOI: 10.1016/j.jfi.2016.02.001
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    3. Halit Gonenc & Bert Scholtens, 2019. "Responsibility and Performance Relationship in the Banking Industry," Sustainability, MDPI, vol. 11(12), pages 1-49, June.
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    6. Michael S. Barr, 2022. "Why Bank Capital Matters: At the American Enterprise Institute, Washington, D.C. (virtual) December 1st 2022," Speech 95822, Board of Governors of the Federal Reserve System (U.S.).
    7. Spiegel, Mark M., 2022. "Monetary policy spillovers under COVID-19: Evidence from lending by U.S. foreign bank subsidiaries," Journal of International Money and Finance, Elsevier, vol. 122(C).
    8. Jagtiani, Julapa & Kotliar, Ian & Maingi, Raman Quinn, 2016. "Community bank mergers and their impact on small business lending," Journal of Financial Stability, Elsevier, vol. 27(C), pages 106-121.
    9. Sriya Anbil & Mark A. Carlson & Mary-Frances Styczynski, 2021. "The Effect of the PPPLF on PPP Lending by Commercial Banks," Finance and Economics Discussion Series 2021-030, Board of Governors of the Federal Reserve System (U.S.).
    10. Gregory McKee & Albert Kagan, 2018. "Community bank structure an x-efficiency approach," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 19-41, July.
    11. Craig Wesley Carpenter & F. Carson Mencken & Charles M. Tolbert & Michael Lotspeich, 2018. "Locally Owned Bank Commuting Zone Concentration and Employer Start-Ups in Metropolitan, Micropolitan and Non-Core Rural Commuting Zones from 1970-2010," Working Papers 18-34, Center for Economic Studies, U.S. Census Bureau.
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