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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.

Suggested Citation

  • Cole, Rebel A. & Fenn, George W., 1996. "The role of commercial real estate investments in the banking crisis of 1985-92," MPRA Paper 24692, University Library of Munich, Germany, revised 01 Nov 2008.
  • Handle: RePEc:pra:mprapa:24692

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    References listed on IDEAS

    1. Cole, Rebel A. & Gunther, Jeffery W., 1995. "Separating the likelihood and timing of bank failure," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 1073-1089, September.
    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. 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.
    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. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    6. 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.
    7. Richard E. Randall, 1993. "Lessons from New England bank failures," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 13-35.
    8. Donald Hester, 1992. "Financial institutions and the collapse of real estate markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 36, pages 114-150.
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    Cited by:

    1. Kanagaretnam, Kiridaran & Zhang, Gaiyan & Zhang, Sanjian Bill, 2016. "CDS pricing and accounting disclosures: Evidence from U.S. bank holding corporations around the recent financial crisis," Journal of Financial Stability, Elsevier, vol. 22(C), pages 33-44.
    2. repec:eee:finana:v:54:y:2017:i:c:p:144-158 is not listed on IDEAS
    3. Adonis Antoniades, 2015. "Commercial bank failures during The Great Recession: the real (estate) story," BIS Working Papers 530, Bank for International Settlements.
    4. Min Hwang, 2014. "Financing real estate development: a case study of the US real estate market in the 2000s," Chapters,in: The Global Financial Crisis and Housing, chapter 7, pages 149-179 Edward Elgar Publishing.
    5. repec:eee:finsta:v:30:y:2017:i:c:p:209-228 is not listed on IDEAS

    More about this item


    bank; bank failure; commercial bank; commercial real estate; construction lending; real estate;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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