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The role of commercial real estate investments in the banking crisis of 1985-92

  • Cole, Rebel A.
  • Fenn, George W.

This article examines the role of commercial real estate investments in the banking crisis of 1985-92, an unprecedented period during which more than 1,300 banks failed. Bank failures are fundamentally important because of the unique role played by financial institutions in the provision of business credit. We discover three striking features of banks failing during this period. First, commercial real estate was only a factor in the bank failures of 1988-92. Second, construction loans played a much larger role in bank failures than permanent loans, and the relationship is strongest with construction loans booked during 1983-1985. Third, other ex ante risk measures are systematically related to banking failure throughout the sample period. These results suggest that risk-seeking banks brought about their own demise and commercial real estate, especially construction lending, was one of the vehicles.

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File URL: http://mpra.ub.uni-muenchen.de/24692/1/MPRA_paper_24692.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24692.

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Date of creation: 02 Aug 1996
Date of revision: 01 Nov 2008
Handle: RePEc:pra:mprapa:24692
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  1. Rebel A. Cole & Jeffery W. Gunther, 1993. "Separating the likelihood and timing of bank failure," Financial Industry Studies Working Paper 93-2, Federal Reserve Bank of Dallas.
  2. Rebel A. Cole & Robert A. Eisenbeis, 1996. "The Role of Principal-Agent Conflicts in the 1980s Thrift Crisis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(2), pages 195-218.
  3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  4. Diana Hancock & James A. Wilcox, 1994. "Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 59-94.
  5. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  6. Richard E. Randall, 1993. "Lessons from New England bank failures," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 13-35.
  7. Donald D. Hester, 1992. "Financial institutions and the collapse of real estate markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 36, pages 114-150.
  8. Joe Peek & Eric S. Rosengren, 1994. "Bank Real Estate Lending and the New England Capital Crunch," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 33-58.
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