Our paper “ Holes in the Dike: The Global Savings Glut, U.S. House Prices and the Long Shadow of Banking Deregulation” (with Iryna Stewen) is now forthcoming in the Journal of the European Economic Association.

In the paper, we argue that capital inflows into the U.S. greatly contributed to the housing boom in the years prior to the financial crisis. States that liberalized their banking markets earlier saw bigger run-ups in house prices (and larger busts). The reason for this was the treacherous assumption, that geographically diversified banks should be allowed higher leverage (as would be implied by value-at-risk (VaR) models of bank risk management). States that liberalized their banking markets earlier had a stronger presence of geographically diversified banks by the time the savings glut started to hit the U.S. from the mid-1990s onwards. As we show, using bank-level data, the lending of geographically diversified banks was more sensitive to aggregate capital inflows and counties and states in which these banks had higher market shares saw a bigger expansion of mortgage credit and bigger house price increases.