Banks' exposure to commercial real estate has been under scrutiny for more than a year, but researchers say the full extent of a possible crisis remains unclear.
According to Bloomberg, the credit facilities and loan terms that banks offer to real estate investment trusts give large financial institutions more exposure to commercial real estate than regulators realize.
That conclusion comes from a recent study led by Bilal Acharya, an economics professor at New York University, and Max Jaeger, an assistant professor at the Frankfurt School of Finance and Management. The researchers found that large banks' exposure to commercial real estate loans increases by 40% when accounting for indirect loans to REITs. Acharya said this type of exposure has not received as much scrutiny as loans on banks' balance sheets.
REITs tend to be relatively cash-strapped because they need to pay large dividends every year, so rising redemption demands could force them to draw on credit lines, which is exactly what Starwood REIT is currently finding itself in as its liquidity dries up.
“The collateral damage to large banks from large credit limit drawdowns means that the systemic risk from overall CRE exposure is probably much greater than if we looked at just direct exposures,” said Manasa Gopal, one of the study's co-authors.
One conclusion from the study is that regulators need to better consider lenders' exposure to real estate investment trusts when conducting stress tests.
It's unclear how big a threat this poses to larger financial institutions. Morgan Stanley has the highest percentage of credit available to REITs among the top five banks by market capitalization. But the Federal Reserve's Financial Stability Report released last month showed that bank credit to REITs has declined from a year ago.
The U.S. office market's distress, the most troubled sector of commercial real estate, hit $38 billion at the end of the first quarter, according to MSCI Real Assets.Big banks had $345 billion in indirect exposure to commercial real estate at the end of the fourth quarter of 2022, more than triple their total in the fourth quarter of 2013.
โ Holden Walter Warner
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