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Exposure to Real Estate in Bank Portfolios

  • Deniz Igan

    ()

    (International Monetary Fund)

  • Marcelo Pinheiro

    ()

    (University of North Carolina - Charlotte)

We implement a three-step procedure to assess the extent of exposure to real estate in commercial banks. First, we investigate the determinants of delinquency on real estate loans. We find the changes in interest rates and income to be the major determinants of aggregate delinquency rate. In the second step, we adopt a stress testing approach to calculate the potential impact on banks’ position of any adverse changes in these determinants. These calculations suggest that a 1.3 percentage point increase in mortgage interest rate leads to a 20% decrease in a typical bank’s distance to default. Finally, we look at the cross-sectional differences to identify the most vulnerable banks. Banks with rapid loan growth along with high cost-income ratio appear to be the most likely to experience a deterioration in their soundness.

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File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol32n01/03.47_74.pdf
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Article provided by American Real Estate Society in its journal journal of Real Estate Research.

Volume (Year): 32 (2010)
Issue (Month): 1 ()
Pages: 47-74

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Handle: RePEc:jre:issued:v:32:n:1:2010:p:47-74
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Web: http://pages.jh.edu/jrer/about/get.htm Email:


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  1. Patrick K. Asea & S. Brock Blomberg, 1997. "Lending Cycles," NBER Working Papers 5951, National Bureau of Economic Research, Inc.
  2. Jose A. Lopez, 1999. "Using CAMELS ratings to monitor bank conditions," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun.
  3. Kerry D. Vandell & Walter Barnes & David Hartzell & Dennis Kraft & William Wendt, 1993. "Commercial Mortgage Defaults: Proportional Hazards Estimation Using Individual Loan Histories," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 451-480.
  4. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
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