Chicago Fed: Commercial Real Estate Exposure Correlates To Reduced Lending

Banks that had high exposure to commercial real estate (CRE) prior to the financial crisis were more likely than other banks to slow their lending during the crisis, researchers from the Chicago Federal Reserve say.

Since mid-2008, net loans and leases at commercial banks have fallen nearly 3%, economists Sumit Agarwal, Hesna Genay and Robert McMenamin observe. ‘High CRE’ banks have reduced their lending to other segments of the economy, while banks with limited CRE exposure before the crisis have actually increased their non-CRE lending, the researchers find.

Although commercial property prices have declined by about 40% in the last three years, the researchers correlated reduced lending with bank characteristics other than the level of CRE concentrations. For example, high-CRE banks have lower Tier 1 capital ratios than do low-CRE banks. During the crisis, banks with higher Tier 1 capital ratios had faster loan growth.

‘Nonetheless, even after controlling for these factors, we find that banks with high-CRE concentrations prior to the crisis reduced their lending,’ the researchers conclude.

SOURCE: Chicago Federal Reserve


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