Effectiveness of supervisory activities in mitigating banks’ commercial real estate risk

We assess the effectiveness of supervisory activities in mitigating credit risk stemming from banks’ commercial real estate portfolios. We analyse two activity types deployed by European banking supervisors: (a) on-site inspections, which assess in depth banks’ risk-taking and internal controls, but can only be selectively applied, and (b) off-site targeted reviews, which survey risk management practices across institutions, are less intrusive but are applied more widely. Using quarterly confidential supervisory data for large euro area banks between 2020 and 2024, we employ a Difference-in-Differences framework with an event-study design to capture the effects of these activities on the coverage ratio of banks’ commercial real estate portfolios. We find that on-site inspections are followed by persistent increases in coverage ratios, while targeted reviews are associated with immediate improvements which are significant but short-lived. The results highlight the complementary nature of the two activity types, which have different outreach possibilities and effects. JEL Classification: G21, G28, R30, C23