Risky Mortgages and Bank Runs

Nurlan Turdaliev () and Yahong Zhang
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Nurlan Turdaliev: Department of Economics, University of Windsor

No 2007, Working Papers from University of Windsor, Department of Economics

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.

Keywords: bank run; mortgage risk; loan-to-value ratio (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 G21 G33 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2020-10, Revised 2020-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-dge, nep-mac, nep-rmg and nep-ure
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