Import Competition and Bank Portfolio Rebalancing

This paper shows that the rise in import competition from China forced U.S. banks to rebalance their credit portfolios away from business loans and towards mortgage lending during the period from 1999 to 2006. We show that while aggregate mortgage lending declines in exposed counties, banks that are more exposed to the rise in import competition increase their mortgage origination significantly in non-exposed areas, and expand their geographical reach into new counties. Mortgages originated by such banks in new counties are more likely to be high-interest loans issued to low-FICO score, high-LTV (loan-to-value) borrowers that would have otherwise been credit rationed. Overall, our findings show that banks that are more exposed experience a rebalancing of their loan portfolio towards residential loans during the sample period. Our findings highlight the role of increased import competition from China for the rapid increase in size and riskiness of the U.S. mortgage market prior to the 2007-09 mortgage crisis