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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.

Suggested Citation

  • Deniz Igan & Marcelo Pinheiro, 2010. "Exposure to Real Estate in Bank Portfolios," Journal of Real Estate Research, American Real Estate Society, vol. 32(1), pages 47-74.
  • Handle: RePEc:jre:issued:v:32:n:1:2010:p:47-74

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    References listed on IDEAS

    1. Asea, Patrick K. & Blomberg, Brock, 1998. "Lending cycles," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 89-128.
    2. 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.
    3. Jose A. Lopez, 1999. "Using CAMELS ratings to monitor bank conditions," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun.
    4. 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.
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    Cited by:

    1. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    2. Lucia Gibilaro & Gianluca Mattarocci, 2016. "Are Real Estate Banks More Affected by Real Estate Market Dynamics?," International Real Estate Review, Asian Real Estate Society, vol. 19(2), pages 151-170.
    3. Lassaâd Mbarek & Dorra Mezzez Hmaied, 2012. "Stock Market Assessment of Bank Risk: Evidence from the Maghreb Region," Working Papers 679, Economic Research Forum, revised 2012.
    4. Mbarek Lassaâd & Mezzez Hmaied Dorra, 2012. "Stock Market Assessment of Bank Risk: Evidence from the Maghreb Region," Review of Middle East Economics and Finance, De Gruyter, vol. 8(1), pages 1-26, August.
    5. William F. Bassett & Simon Gilchrist & Gretchen C. Weinbach & Egon Zakrajšek, 2011. "Improving Our Ability to Monitor Bank Lending," NBER Chapters,in: Risk Topography: Systemic Risk and Macro Modeling, pages 149-161 National Bureau of Economic Research, Inc.
    6. repec:ire:issued:v:20:n:03:2017:p:325-348 is not listed on IDEAS
    7. International Monetary Fund, 2015. "Namibia; Selected Issues," IMF Staff Country Reports 15/277, International Monetary Fund.
    8. António Miguel Martins & Ana Paula Serra & Francisco Vitorino Martins & Simon Stevenson, "undated". "Residential Property Loans and Bank Performance during Property Price Booms: Evidence from Europe," Real Estate & Planning Working Papers rep-wp2014-05, Henley Business School, Reading University.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services


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