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No News is Bad News: Monitoring, Risk, and Stale Financial Performance in Commercial Real Estate

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Abstract

As financial intermediaries, banks have a key role in producing information and managing the risks on diverse loan portfolios. An important input into this process is ongoing collection of financial performance from borrowers. Using supervisory data on commercial real estate loans (CRE), this paper studies relationships between the content and timeliness of borrower-reported performance, internal bank risk ratings, and subsequent loan performance. Banks heavily rely on borrower reporting when setting risk ratings, despite the fact that borrowers with stale financials are more likely to default. Although banks can generally be slow to update their ratings as information becomes more stale on average, we find causal evidence that they do monitor more intensively in response to loan, location and portfolio risks.

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  • Samuel K. Hughes & Joseph B. Nichols, 2025. "No News is Bad News: Monitoring, Risk, and Stale Financial Performance in Commercial Real Estate," Finance and Economics Discussion Series 2025-032, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-32
    DOI: 10.17016/FEDS.2025.032
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    More about this item

    Keywords

    Bank monitoring; Risk management; Commercial real estate mortgages; Financial performance reporting;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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