Bank Regulation, Construction Financing, and the Supply of New Housing
New research about the effects of post-2008 bank regulation confirms what I’ve argued since the financial crisis: increased bank regulation will often lead to more ills.
The study looked at the effect of
two major regulatory changes that took effect in 2013: the phased implementation of Basel III capital requirements and stress tests required under the Dodd–Frank Act. … [S]ince construction loans are relatively risky and require substantial capital under these rules, the policies may have encouraged the largest banks to reduce this type of lending.
The
evidence suggests that the reforms disrupted banking relationships rather than simply reducing lending across the board. Among builders that had relationships with both types of banks, relationships with stress-tested banks were 12.4 percentage points more likely to end after the reforms than relationships with other banks.
In addition,
[g]reater exposure to stress-tested banks was also associated with higher house prices. More-exposed counties experienced a 1.5 percent additional increase in house prices by 2017 relative to less-exposed counties in the same regional market.
While
these policies may have strengthened the banking system, they constrained lending in markets that depend on local relationships and specialized knowledge.
Cross-posted from Substack.
Source: https://www.cato.org/blog/bank-regulation-construction-financing-supply-new-housing
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