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Research Seminars & Workshops @ IRES

Presenter:Dr Zsuzsa Huszar

Assistant Professor, NUS Business School

Discussant:Professor Brent W. Ambrose

Smeal Professor of Real Estate
Director, Institute for Real Estate Studies
Professor of Insurance and Real Estate, Pennsylvania State University

The Role of Market and Regulatory Discipline in Mortgage Lender Failures:Bank versus Non-Bank Failures in Subprime Crisis


16 May 2011 (Mon)


2.30 pm - 4.00 pm


RMI Executive Seminar Room
21 Heng Mui Keng Terrace, Level 4


We provide a unique analysis of the failures of non-bank lenders in comparison with bank lenders to examine the role of market and regulatory discipline in the subprime mortgage crisis. We find that for non-bank lenders, the market discipline instead of promoting market stability rather impair it. First, lenders with high concentration of refinance and minority loans are more prone to fail despite that the information on these potentially aggressive lending practices has been public for years prior to the crisis. Second, competition increases risk taking and the probability of failures because lenders in competitive environment with finite number of qualified borrowers likely increase lending to less qualified borrowers to maximize revenues. More importantly, the similarities in bank and non-bank lenders' failures cast doubt on the importance of bank regulatory oversight, such as the capital reserve requirements and loan reserve ratios were generally inadequate. Since the higher loan reserves are associated with higher probability of failures, banks likely took on risky loans for higher profits while increased reserves which provided insufficient protection. Overall, we find that liquid asset ratios had the greatest economic impact in reducing the probability of failures suggesting that in addition to strengthening the existing regulatory requirements more emphasis should be put on alternative risk management tools such as liquid asset ratios.


non-bank failures, bank failures, mortgage market, subprime lenders, market discipline, banking regulation

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