Holes in the Dike: The Global Savings Glut, U.S. House Prices, and the Long Shadow of Banking Deregulation

The global savings glut (i.e. capital flows from China and other emerging economies into the U.S.) contributed significantly to the rise and fall of U.S. house prices prior to and during the great financial crisis. For identification, we exploit that interstate banking deregulation during the 1980s - a decade prior to the savings glut - cast a long shadow: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to aggregate U.S. capital inflows during 1997-2012. We use bank-level data to identify the mechanism behind this stylized fact: capital inflows relaxed the value-at-risk constraints of geographically diversified (‘integrated’) U.S. banks more than those of local banks. Hence, mortgage credit expanded more in states where integrated banks had a relatively bigger market share (due to early deregulation).