Local Banks, Credit Supply, and House Prices

I study the effects of an increase in the supply of local mortgage credit on local house Prices and employment by exploiting a natural experiment from Switzerland. Losses in U.S. security holdings triggered a migration of dissatified retail customers from a large, universal bank (UBS) to homogenous local mortgage lenders in mid-2008. Mortgage lenders close to UBS branches experience larger inows of deposits, unrelated to their investment opportunities. Using variation in the geographic distance between UBS branches and local mortgage lenders as an instrument for deposit growth,I find that banks with an exogenous positive funding shock invest in strict accordance with their specialization (i.e. local mortgage lending). Consequently, house prices in neighborhoods around affected banks rise over 50% more than around unaffected banks. I also find an increase in the number of employees at small firms, reliant on real estate collateral, in these neighborhoods. My results show that local mortgage oriented banks affect house prices through the supply of credit and that bank specialization thereby plays an important role in the allocation of capital across sectors.