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When Good Investments Go Bad: The Contraction in Comunity Bank Lending After the 2008 GSE Takeover
Tara Rice (au); Jonathan Rose (au)
In Sept. 2008, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were placed into conservatorship and dividend payments on common and preferred shares were suspended. As a result, share prices fell to nearly zero and many banks across the country lost the value of their investments in the preferred shares. The authors estimate that more than 600 depository institutions in the U.S. were exposed to at least $8 billion in investment losses from these securities. In addition, fifteen failures and two distressed mergers either directly or indirectly resulted from the takeover. Since these GSE investments were considered to be safe investments by banks, regulators, and rating agencies, the authors consider these losses to be exogenous shocks to bank capital, and use this event to examine the relationship between community bank condition and lending during this crisis. They find that in the quarter following the takeover of Fannie Mae and Freddie Mac, the measured Tier 1 capital ratio at exposed banks fell about 3% on average, and loan growth at exposed banks with median capitalization was about 2 percentage points lower compared to other banks in the following quarter. Consequently, the estimated aggregate lending drop among these banks would be roughly $4 billion. Figures and tables. This is a print on demand report.
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