Abstract
Real estate lending is a risky business. There is ample evidence from many countries for heavy bank losses or even failures caused by defaulted real estate loans. Particularly during real estate crises the losses tend to rise dramatically so that in some cases the banking system as a whole is endangered. It seems that lenders do not have the right instruments for managing all the risks inherent to real estate loans. On the other hand proper instruments cannot exist if the nature of real estate risks is not completely known. Therefore it is necessary to create new risk management instruments based on a sound analysis of real estate risks and of the demands on risk management.(This paper is an extract from my doctoral dissertation titled The Real Estate Market Risk of German Banks, written between 1994 and 1998. In 2004 I wrote an update with the title The Real Estate Market Risk of Banks - Revisited, see http://ssrn.com/abstract=947987). It seems that it is high time to write another update in the light of the events of the worldwide financial crisis that followed the US subprime crisis!)
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