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COMMERCIAL REAL ESTATE LENDING CONCENTRATIONS: NEW EVIDENCE

Elisabeta Pana

Illinois Wesleyan University, USA

ABSTRACT

This study documents the management of risk used by small banks with commercial real estate lending concentrations prior to the 2007-2009 financial crisis. We show that banks with commercial real estate concentrations traded interest rate risk for credit risk. The trade-off is accompanied by a higher leverage and liquidity risk. Our findings support the argument advanced by policymakers and academic researchers that the increased scrutiny over banks’ lending standards and risk management practices is justified.

Keywords: Regulation, Commercial Banks, Lending, Bank Regulations

JEL classification: G18, G21, G28