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Commercial property prices and bank performance

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  • E. Philip Davis

    (Brunel University)

  • Haibin Zhu

Abstract

We seek to assess the effect of commercial property price movements on the behaviour and performance of individual banks in a range of industrialised economies, extending the existing micro literature on bank performance. Our results suggest that commercial property prices tend to be positively associated with bank lending and profitability, and negatively associated with banks' net interest margin and bad loan ratios. Such an impact exists even when conventional independent variables determining bank performance are included as controls. Further extensions show that the magnitude of this impact is related to the size of the bank, the strength of bank capitalisation, the direction of commercial property price movements, and regional factors. The results have implications for risk managers, regulators and monetary policy makers. Notably, they underline the crucial relevance of commercial property prices as a macroprudential variable that warrants close scrutiny by the authorities.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 175.

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Length: 37 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:bis:biswps:175

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Related research

Keywords: commercial property prices; bank performance; panel estimation; financial accelerator;

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References

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Citations

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Cited by:
  1. Phong T. H. Ngo, 2006. "Endogenous Capital and Profitability in Banking," ANU Working Papers in Economics and Econometrics 2006-464, Australian National University, College of Business and Economics, School of Economics.
  2. Augustyniak, Hanna & Łaszek, Jacek & Olszewski, Krzysztof & Waszczuk, Joanna, 2012. "Cykle na rynku nieruchomości mieszkaniowych i komercyjnych, ryzyko dla inwestora oraz potrzeba adekwatnej i ostrożnej wyceny
    [Cycles on the housing and commercial real estate market, risks and th
    ," MPRA Paper 41070, University Library of Munich, Germany.
  3. K. Batu Tunay, 2010. "Banking Crises and Early Warning Systems: A Model Suggestion for Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 4(1), pages 9-46.
  4. Karim, Dilruba & Liadze, Iana & Barrell, Ray & Davis, E. Philip, 2013. "Off-balance sheet exposures and banking crises in OECD countries," Journal of Financial Stability, Elsevier, vol. 9(4), pages 673-681.
  5. E. Philip Davis & Haibin Zhu, 2004. "Bank lending and commercial property cycles: some cross-country evidence," BIS Working Papers 150, Bank for International Settlements.
  6. Krzysztof Olszewski, 2012. "The impact of commercial real estate on the financial sector, its tracking by central banks and some recommendations for the macro-financial stability policy of central banks," National Bank of Poland Working Papers 132, National Bank of Poland, Economic Institute.
  7. Beckmann, Rainer, 2007. "Profitability of Western European banking systems: panel evidence on structural and cyclical determinants," Discussion Paper Series 2: Banking and Financial Studies 2007,17, Deutsche Bundesbank, Research Centre.
  8. Koetter, Michael & Poghosyan, Tigran, 2010. "Real estate prices and bank stability," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1129-1138, June.
  9. António Miguel Martins & Ana Paula Serra, 2012. "Real Estate Market Risk in Bank Stock Returns: Evidence for 15 European Countries," CEF.UP Working Papers 1203, Universidade do Porto, Faculdade de Economia do Porto.
  10. Michal Hlavacek & Ondrej Novotny & Marek Rusnak, 2014. "Office Property in Central European Countries," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2013/2014, chapter 0, pages 148-155 Czech National Bank, Research Department.
  11. Davis, E. Philip & Karim, Dilruba, 2008. "Comparing early warning systems for banking crises," Journal of Financial Stability, Elsevier, vol. 4(2), pages 89-120, June.

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