UBC Faculty Research and Publications

Does the lender matter? : lender type and home office location and real estate development lending Somerville, Tsur


Inter-regional expansion and merger and acquisition activity triggered by regulatory reforms are changing the structure of North America’s financial industry. Increases in concentration and the belief that large and small financial institutions specialize in distinct segments of the lending market has raised concerns among some that these industry changes will have real effects on the availability and access to credit for distinct classes of borrowers, especially smaller firms. This paper examines this issue by looking at differences across lenders in the financing of residential construction by lender type and home office, local vs. out-of-province, location. The analysis has two components. The first is a descriptive data analysis for evidence that smaller, local lenders provide capital to more marginal and infra-marginal borrowers. The second is a test of whether lenders active in multiple jurisdictions allocate loan capital for real estate efficiently. The paper uses data on over 1,300 senior and junior construction loans in the Vancouver, BC Canada metropolitan area to evaluate these issues. We find that local lenders do seem to behave differently, charging lower spreads and extending credit to more marginal or less well capitalized developers. However, contrary to the claims of many Vancouver developers, lenders in Central Canada did not limit credit to British Columbia when their home real estate markets turned down in the late 1980's and early 1990's. Rather the opposite, the lending volume and market share in the Vancouver market of lenders based outside of British Columbia rose when the relative condition of their home markets worsened.

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Attribution-NonCommercial-NoDerivs 2.5 Canada