| Name: | Description: | Size: | Format: | |
|---|---|---|---|---|
| 1.03 MB | Adobe PDF |
Advisor(s)
Abstract(s)
Understanding
the performance of banks
is of the u
tmost
importance due to the
impact the
sector
may have
on economic growth and
financial
stability.
Residential
mortgage loans constitute a large proportion of the portfolio of many banks and are one of
the key assets in the determination of performance.
Using
a
dynamic panel
model
, we
analyse the
impact
of
res
idential mortgage
loans
on bank profitability and risk
, based on
a
sample of 555 banks in the
European Union (
EU
-
15
)
, over
the period from 1995 to 2008.
We find that
banks with larger
weight
s
in
residential mortgage loans
display
lower
credit risk
in good
market conditions
. This result
may explain
why banks rush to lend on
property during b
ooms due to the positive effect
it has on credit risk
.
The results
also
show
that
credit risk and profitability
are lower
during the upturn in the
residential property
cy
cle.
Furthermore, t
he results reveal the existence of a non
-
linear relationship (
U
-
shaped
marginal effect),
as a
function of
bank’s risk, between profitability and
residential mortgage
exposure
. For those banks
that
have high
er
credit risk, a large
exposur
e
to
residential loans
is associated with
increased
risk
-
adjusted profitability,
through
a reduction in
risk. For
banks with
a moderate
to
low credit risk, the
impact
of higher
exposure
are also positive
on
risk
-
adjusted profitability.
Description
Keywords
Residential property prices Mortgage loans Bank performance Dynamic panel estimation