Exposure to Real Estate Losses

Exposure to Real Estate Losses

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We implement a three-step procedure to assess the extent of exposure to real estate in commercial banks. First, we demonstrate interest rates and income to be the major determinants of delinquency. Then, we adopt a stress testing approach to calculate the impact of any adverse changes in these determinants. This suggests that a 1.3 percentage point increase in mortgage interest rate leads to a 20 percent decrease in a typical bank''s distance to default. Finally, we look at the cross-sectional differences and indentify the banks with rapid loan growth along with high cost-income ratio as the most vulnerable.Evidence from the US Banks Marcelo Pinheiro, Deniz Igan ... It is, however, interesting to notice that the increase in exposure is actually driven by residential mortgage and home equity loans: the share of ... is cash flows from the real estate collateral but also because commercial real estate prices have historically shown more volatility (Figure 4).5 ... A similar pattern is visible in the middle panel when one looks at the untapped lines of credit for real estate as a measure of exposure.

Title:Exposure to Real Estate Losses
Author: Marcelo Pinheiro, Deniz Igan
Publisher:International Monetary Fund - 2009-04-01

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