Plausibly Exogenous [1149] - GSE (03/26/2023)
LHS Variable
Lending
RHS Variable
Community bank conditions
Source of Exogenous Variation
In September 2008, the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, were placed into conservatorship. The GSEs' equity prices dropped considerably in response, and, as a result, many banks that held sizable amounts of the preferred stock of the two GSEs recognized substantial losses. Fifteen failures and two mergers resulted. These losses are treated as plausibly exogenous, unanticipated, supply-side shocks to bank lending, as they are likely unrelated to demand-side factors that could affect lending, and because GSE investments were considered to be safe by banks, regulators, and rating agencies.
- Rice and Rose (2016), “When good investments go bad: The contraction in community bank lending after the 2008 GSE takeover”