Credit Risk in Commercial Real Estate Bank Loans

The Role of Idiosyncratic versus Macro-Economic Factors

Rob Nijskens, Dimitris Mokas

Research output: Working paperOther research output

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Abstract

The commercial real estate market is pro-cyclical. This feature, together with the relative size of the industry and the large capital inflows, has made this sector relevant for financial stability. Using a novel loan level data set covering the commercial real estate portfolios of Dutch banks we aim to uncover potential drivers of distress in commercial real estate loans. Furthermore, we estimate the relative importance of idiosyncratic and systematic factors and emphasize the importance of bank behavior for distinguishing between good and bad credit growth. We find that loans originated near the peak of the cycle are riskier, confirming the pro-cyclical nature of the market. As opposed to loans originated during busts, the risk of boom loans does not decrease when economic conditions improve. Idiosyncratic factors correlated with higher credit risk are loan-to-value ratios and interest rates, especially when coupled with variable rate contracts. Moreover, we find that collateral type plays a role, as loans for non-residential (office, retail, industrial) real estate with higher vacancy rates are riskier. These results have implications for both macroprudential and microprudential supervision, as they demonstrate the pro-cyclicality of the market and show that indicators like loan-to-value, interest rate structure and vacancy rates must be monitored more carefully in boom times.
Original languageEnglish
Place of PublicationAmsterdam
PublisherDe Nederlandsche Bank
Number of pages45
DOIs
Publication statusPublished - 29 Aug 2019

Publication series

NameDNB Working Papers
No.653

Fingerprint

Loans
Commercial real estate
Bank loans
Macroeconomic factors
Credit risk
Vacancy
Interest rates
Factors
Industry
Retail
Relative importance
Supervision
Capital inflows
Credit growth
Procyclicality
Financial stability
Real estate
Real estate market
Distress
Economic conditions

Keywords

  • macroprudential policy
  • risk monitoring
  • commercial real estate
  • procyclicality of credit
  • credit

Cite this

Nijskens, Rob ; Mokas, Dimitris. / Credit Risk in Commercial Real Estate Bank Loans : The Role of Idiosyncratic versus Macro-Economic Factors. Amsterdam : De Nederlandsche Bank, 2019. (DNB Working Papers; 653).
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Credit Risk in Commercial Real Estate Bank Loans : The Role of Idiosyncratic versus Macro-Economic Factors. / Nijskens, Rob; Mokas, Dimitris.

Amsterdam : De Nederlandsche Bank, 2019. (DNB Working Papers; No. 653).

Research output: Working paperOther research output

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