Unveiling Hidden Risks
How Bank Credit Lines to REITs Amplify Systemic Threats in Commercial Real Estate
"We reveal the significant yet often overlooked risks posed by bank credit lines to non-bank financial intermediaries, particularly REITs investing in commercial real estate. By highlighting the higher utilization rates of these credit lines during economic stress and proposing new methodologies for stress tests, we underscore the need for regulators and policymakers to account for these indirect exposures. Our findings suggest that without this consideration, the systemic risks to large banks and the broader financial sector are substantially underestimated."
Prof. Sascha Steffen (DWS Senior Chair in Finance)
Term loans and credit lines for REITs add to systemic risk
Our study reveals that REITs utilize bank credit lines more extensively than non-financial corporates and other NBFIs, reflecting the performance of underlying real estate assets, especially during economic stress. This higher utilization during times such as post-COVID-19 and periods of rising interest rates results in significant drawdowns and equity corrections for large banks, indicating that ignoring this channel understates the true exposure of these banks to CRE risks. Consequently, this poses a substantial systemic risk to the financial sector. We propose a new methodology to incorporate this indirect exposure into bank capital stress tests.
Get in touch and let’s discuss
s.steffen@fs.de
+49 (69) 154008-794
Adickesallee 32-34
60322 Frankfurt, Germany