December 23, 2013
HBTL-15: Empirical research on the causes of financial crises has grown in recent decades. Early work, such as that by Kaminsky and Reinhart, helped establish the link between asset prices and banking crises. While this initial research focused on equity prices, subsequent research expanded the analysis to include residential property prices. This subsequent research is briefly reviewed here. After establishing the link between residential property prices and banking crises, author Mark Calabria discusses the role of various credit policies, both for their impact on property prices and for the stability of the financial system in the face of declining property prices. The role of specific loan characteristics, such as loan-to-value (LTV), are discussed first, followed by the role of institutional leverage. Policy recommendations conclude.
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