Abstract
Much attention focuses on the role of real estate lending by banks as a precipitating factor in past financial crises, and especially with respect to the 2007-2008 crisis. Over the past five years, U.S. banks have increased their commercial real estate lending dramatically, raising concern among regulators about the potential for another financial crisis. In this paper, we analyze post-recessionary trends to determine whether the same dangerous pre-recessionary risk-taking trends are emerging. Regulators devote most of their attention to the banking sector with little regard to the role played by its various subgroups. This may explain why there is little research analyzing the specific role of community banks in sparking a financial crisis. In this study, we present a disaggregated analysis that focuses on the potential risks of increased commercial real estate lending from a comparative perspective, examining community banks vis-a-vis larger banking institutions, paying particular attention to the role of deliberate bank risk-taking as a causal factor in increased community bank commercial real estate CRE lending since the Great Recession.
Highlights
The respective ratios for non-community banks are just over 200% and 395%. 3.2 Effects of Geographical Region Given that the financial crisis was more severe in certain areas of the country, we examine the effect of geographical region on the Commercial Real Estate (CRE)/RBC ratio during the three periods of our study using each of the 12 Federal Reserve Districts as proxies
A study by the Richmond Federal Reserve Bank looked at banks with especially high concentrations of CRE loans, defined as having a CRE loan to RBC ratio (CRE/RBC) ratio of more than 400% (Fessenden & Muething, 2017)
Compared to the pre-recession period, we find that after the recession CRE lending community banks only increased their mean CRE/RBC ratios by an average of 12 percentage points from 144% to 166%
Summary
Banks which rely on large, volatile sources of funds such as negotiable certificates of deposit, and other liabilities with short-term maturities, are more likely to have unanticipated deposit outflows (Matz, 2007) It follows that banks whose strategies are to accept lower net liquidity ratios, either because they hold a smaller fraction of liquid assets or because they rely more heavily on volatile sources of funds are those which should be inclined to accept higher levels of risk. Another common risk estimation measure examines the ratio of core deposits to total deposits. To determine if variances are equal across the different geographic regions as well as across the different time-intervals, we use multiple testing procedures
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