Commercial Real Estate and Financial Stability: Evidence from the US Banking Sector

Global Financial Stability Notes, May 26, 2021

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Commercial Real Estate and Financial Stability: Evidence from the US Banking Sector

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Bibliographic details

• Authors: Salih Fendoglu
• Published: May 26, 2021
• Series: Global Financial Stability Notes
• DOI: https://doi.org/10.5089/9781513578286.065

Key findings on CRE price declines and bank performance

• Following a decline in commercial real estate (CRE) prices, banks with greater exposures to CRE loans perform worse than their counterparts.
• Observed bank-level consequences after CRE price declines:
  • Higher non-performing CRE loans.
  • Lower revenues.
  • Lower capital.
• Effects are particularly pronounced if the drop in CRE prices is persistent because of possible structural shifts in CRE demand (for example, an increased trend toward e-commerce and teleworking), even after the coronavirus disease (COVID-19) pandemic is over.
• The adverse impact of a decline in CRE prices is especially true for small and community banks, which tend to have the highest CRE loan exposures.
• Despite these vulnerabilities, the US banking sector has remained resilient during the pandemic crisis due to strong capital buffers and massive policy support.
• Policy implication: continued vigilance is warranted with regard to potential downside risks to CRE prices amidst ongoing structural shifts in the sector.

Analytical scope, data, and approach

• Geographic focus: US metropolitan statistical areas.
• Data used: detailed bank-level and CRE price data for US metropolitan statistical areas.
• Outcome measures emphasized: non-performing CRE loans, revenues, capital levels, and heterogeneity across bank types (notably small and community banks).

Policy relevance and risks

• Structural demand shifts (e.g., e-commerce, teleworking) can make CRE price declines persistent, amplifying adverse effects on banks with high CRE exposure.
• Supervisory and macroprudential attention should focus on banks with concentrated CRE exposures, particularly small and community banks.
• continued monitoring of CRE market developments recommended given potential for downside risks to financial stability.

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• Commercial Real Estate and Financial Stability: Evidence from the US Banking Sector; May 26, 2021
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