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Exposure to Real Estate Losses; Evidence from the US Banks

  • Marcelo Pinheiro
  • Deniz Igan

We implement a three-step procedure to assess the extent of exposure to real estate in commercial banks. First, we demonstrate interest rates and income to be the major determinants of delinquency. Then, we adopt a stress testing approach to calculate the impact of any adverse changes in these determinants. This suggests that a 1.3 percentage point increase in mortgage interest rate leads to a 20 percent decrease in a typical bank's distance to default. Finally, we look at the cross-sectional differences and indentify the banks with rapid loan growth along with high cost-income ratio as the most vulnerable.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/79.

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Length: 33
Date of creation: 01 Apr 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/79
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  1. 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.
  2. Patrick Asea & S. Brook Blomberg, 1997. "Lending Cycles," UCLA Economics Working Papers 764, UCLA Department of Economics.
  3. Martin Ruckes, 2004. "Bank Competition and Credit Standards," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1073-1102.
  4. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
  5. Jose A. Lopez, 1999. "Using CAMELS ratings to monitor bank conditions," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun.
  6. 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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