{"675027":{"#nid":"675027","#data":{"type":"news","title":"Research Finds Commercial Real Estate Risks Are Understated at Largest U.S. Banks ","body":[{"value":"\u003Cp\u003EAccording to a new academic study, regulators may be underestimating the risk\u0026nbsp;commercial real estate (CRE) poses for the largest U.S. banks when looking at only direct balance sheet exposures.\u0026nbsp;\u003C\/p\u003E\u003Cp\u003EThe researchers,\u0026nbsp;\u003Ca href=\u0022https:\/\/www.scheller.gatech.edu\/directory\/faculty\/gopal\/index.html\u0022\u003EManasa Gopal\u003C\/a\u003E, assistant professor of Finance at the Georgia Tech\u0026nbsp;Scheller College of Business; Viral V. Acharya, C.V. Starr Professor of Economics at New York University Stern School of Business;\u0026nbsp;Maximilian Jager, assistant professor of Finance at the Frankfort School of Finance \u0026amp; Management; and\u0026nbsp;Sascha Steffen, DWS Senior Chair in Finance at the Frankfurt School of Finance \u0026amp; Management published their findings in the article\u0026nbsp;\u0022\u003Ca href=\u0022https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=4847858\u0022\u003EShadow Always Touches the Feet: Implications of Bank Credit Lines to Non-Bank Financial Intermediaries\u003C\/a\u003E.\u0022\u003C\/p\u003E\u003Cp\u003EWhile CRE exposure concerns have traditionally focused on U.S. community banks, this new study reveals that large banks also face significant indirect risks through credit lines to REITs. These risks are often underestimated since they only appear fully on balance sheets once drawn. Factoring in REIT credit lines more than doubles CRE exposure at the nine largest U.S. banks, with similar increases among the top 50 banks.\u003C\/p\u003E\u003Cp\u003E\u0022In much of my prior work, I have been focusing on the growth of nonbanks and their role in the\u0026nbsp;economy,\u201d said Gopal. \u201cOne typically thinks of nonbanks, or shadow banks, as being separate from the traditional\u0026nbsp;banking system. However, these parts are closely linked. When exploring the linkages between banks and nonbanks, we started digging into bank lines of\u0026nbsp;credit to nonbanks. That\u0027s when we identified the large exposure of banks to REITs, and in turn, the\u0026nbsp;commercial real estate market.\u0022\u003C\/p\u003E\u003Cp\u003EInvestment companies, such as equity REITs and mREITs, have seen their credit lines grow by about 86% from 2012 to 2022, with around 50% of REIT financing coming from banks. Researchers used a stress-test framework to see how these REIT credit line commitments impact banks\u0027 capital adequacy. Their analysis, based on equity market valuations, revealed that the top 10 largest U.S. banks needed 75% more capital, increasing from $39 billion to $69 billion, when accounting for indirect REIT exposures. Additionally, banks with more REIT credit line commitments saw lower stock returns during crises without benefiting from higher returns in favorable conditions, as REITs are more sensitive to market stress than other borrowers.\u003C\/p\u003E\u003Cp\u003EFor example, Blackstone REIT (BREIT) faced large redemption requests in late 2022 due to rising interest rates and declining real estate prices, capping redemptions at 2% per month for 16 months. During this period, Blackstone increased its committed credits from $6.5 billion in Q2 2022 to $13 billion in Q3 and substantially increased the drawn credit from $1.1 billion to $6.3 billion in 2022, without banks changing credit pricing despite the higher risk. Unlike public funds, BREIT can limit redemptions, potentially worsening drawdown risks for public funds.\u0026nbsp;\u003C\/p\u003E\u003Cp\u003ESince REITs must distribute 90% of their income as\u0026nbsp;dividends, their ability to increase cash buffers is limited.\u0026nbsp;Thus, falling CRE valuations could lead to higher redemptions and REITs drawing down credit lines, creating a \u0022wrong-way risk\u0022 where banks\u0027 exposures rise as collateral value falls.\u0026nbsp;\u003C\/p\u003E\u003Cp\u003EGopal and her colleagues suggest regulators and the industry should focus on the evolving relationship between banks and non-banks and develop proper risk management strategies, noting that CRE valuations fell 21% after the Fed\u0027s monetary tightening in 2022.\u003C\/p\u003E\u003Cp\u003EFor more information on this research, see the following articles:\u003C\/p\u003E\u003Cp\u003E\u003Ca href=\u0022https:\/\/www.risk.net\/risk-management\/7959468\/us-large-bank-cre-risks-could-be-understated-say-researchers\u0022\u003EUS large bank CRE risks could be understated, say researchers\u003C\/a\u003E (Risk.net)\u003C\/p\u003E\u003Cp\u003E\u003Ca href=\u0022https:\/\/www.bloomberg.com\/news\/articles\/2024-05-30\/us-banks-have-a-commercial-property-blind-spot-risk-study-warns?srnd=markets-vp\u0022\u003EBig Banks\u2019 CRE Exposure Rises 40% When REIT Debt is Factored In\u003C\/a\u003E (Bloomberg)\u003C\/p\u003E","summary":"","format":"limited_html"}],"field_subtitle":"","field_summary":[{"value":"\u003Cp\u003EA new study by Manasa Gopal, an assistant professor of Finance, has found that large U.S. banks may underestimate their commercial real estate (CRE) risks and face substantial risks through credit lines to real estate investment trusts (REITs).\u0026nbsp;\u003C\/p\u003E","format":"limited_html"}],"field_summary_sentence":[{"value":"A new study by Manasa Gopal, an assistant professor of Finance, has found that large U.S. banks may underestimate their commercial real estate (CRE) risks and face substantial risks through credit lines to real estate investment trusts (REITs). "}],"uid":"28082","created_gmt":"2024-06-06 18:36:42","changed_gmt":"2024-06-06 18:40:59","author":"Lorrie Burroughs","boilerplate_text":"","field_publication":"","field_article_url":"","dateline":{"date":"2024-06-05T00:00:00-04:00","iso_date":"2024-06-05T00:00:00-04:00","tz":"America\/New_York"},"extras":[],"hg_media":{"674149":{"id":"674149","type":"image","title":"Gopal_Manasa_profile1.jpg","body":null,"created":"1717699034","gmt_created":"2024-06-06 18:37:14","changed":"1717699034","gmt_changed":"2024-06-06 18:37:14","alt":"Manasa Gopal, assistant professor of Finance","file":{"fid":"257626","name":"Gopal_Manasa_profile1.jpg","image_path":"\/sites\/default\/files\/2024\/06\/06\/Gopal_Manasa_profile1_0.jpg","image_full_path":"http:\/\/hg.gatech.edu\/\/sites\/default\/files\/2024\/06\/06\/Gopal_Manasa_profile1_0.jpg","mime":"image\/jpeg","size":54203,"path_740":"http:\/\/hg.gatech.edu\/sites\/default\/files\/styles\/740xx_scale\/public\/2024\/06\/06\/Gopal_Manasa_profile1_0.jpg?itok=nknTxuS1"}}},"media_ids":["674149"],"groups":[{"id":"1274","name":"Scheller College of Business"}],"categories":[{"id":"139","name":"Business"}],"keywords":[{"id":"35541","name":"Ernest Scheller Jr. College of Business"}],"core_research_areas":[],"news_room_topics":[],"event_categories":[],"invited_audience":[],"affiliations":[],"classification":[],"areas_of_expertise":[],"news_and_recent_appearances":[],"phone":[],"contact":[{"value":"\u003Cp\u003ELorrie Burroughs\u003C\/p\u003E","format":"limited_html"}],"email":[],"slides":[],"orientation":[],"userdata":""}}}