INTERDEPENDENCE OF PERFORMANCE BETWEEN BANKS AND REAL ESTATE MARKET (PRE, DURING AND POST CRISIS ANALYSIS) : EVIDENCE FROM U.S. MARKET

Abstract

Real estate market and its influence on the banking sector has been the topic since the occurrence of the Global Financial Crisis in 2008. Spike in real estate investments before crisis has expanded lending bank’s exposure to the real estate sector. Considerably less is known about how bank’s exposure to real estate in the form of collateralization has on the bank’s performances. This paper is concerned as to how the real estate market movements and bank’s exposure affect banks’ stock returns under volatile environment. Also, it seeks to uncover possible changes in relationship throughout the study period, from pre crisis to during crisis and finally after crisis. Empirical analysis of over a thousand bank holding companies was conducted and results suggested that under stable condition bank’s exposure is negatively related to its performance, and that the residential market only had significant positive relation with individual bank’s performance upon the occurrence of the crisis. Interestingly, during crisis where residential market takes a down turn, individual bank’s return improved. Possible explanations attributed to government interventions. Environmental shock is shown to have reminded the market of the potency of the real estate sector. The impact of real estate market and bank’s exposure had increasingly become more important in the determination of bank’s performance as influence from the general stock market and interest rate movements dwindled. Further sub sample regression showed that banks with high exposure experienced slower recovery vis a vis banks with low exposure despite greater upside benefits before crisis. Generally, banks were found to have performed poorer than the real estate market during crisis.