| Name: | Description: | Size: | Format: | |
|---|---|---|---|---|
| 925.61 KB | Adobe PDF |
Advisor(s)
Abstract(s)
Understanding the performance of banks is of the utmost relevance, because of the
impact of this sector on economic growth and financial stability. Of all the different assets
that make up a bank portfolio, the residential mortgage loans constitute one of its main.
Using the dynamic panel data method, we analyse the influence of residential mortgage
loans on bank profitability and risk, using a sample of 555 banks in the European Union
(EU-15), over the period from 1995 to 2008.
We find that banks with larger weights of residential mortgage loans show lower
credit risk in good times. This result explains why banks rush to lend on property during
booms due to the positive effects it has on credit risk. The results show further that credit
risk and profitability are lower during the upturn in the residential property price cycle. The
results also reveal the existence of a non-linear relationship (U-shaped marginal effect), as a
function of bank’s risk, between profitability and the residential mortgage loans exposure.
For those banks that have high credit risk, a large exposure of residential mortgage loans is
associated with higher risk-adjusted profitability, through lower risk. For banks with a
moderate/low credit risk, the effects of higher residential mortgage loan exposure on its
risk-adjusted profitability are also positive or marginally positive.
Description
Keywords
Residential property prices Bank performance Mortgage loans Dynamic panel estimation
Citation
Publisher
PFN 2012 (Portuguese Financial Network)