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Mr. Salih Fendoglu
This note analyzes the implications of changes in commercial real estate (CRE) prices for the stability of the US banking sector. Using detailed bank-level and CRE price data for US metropolitan statistical areas, the analysis shows that, following a decline in CRE prices, banks with greater exposures to CRE loans perform worse than their counterparts, experiencing higher non-performing CRE loans, lower revenues, and lower capital. These effects are particularly pronounced if the drop in CRE prices turns out to be persistent because of possible structural shifts in CRE demand—for example, because of an increased trend toward e-commerce and teleworking—even after the coronavirus disease (COVID-19) pandemic is over. The impact of a decline in CRE prices is especially true for small and community banks, which tend to have the highest CRE loan exposures. While the US banking sector has remained resilient during the pandemic crisis due to strong capital buffers and massive policy support, these findings suggest that continued vigilance is warranted with regard to potential downside risks to CRE prices amidst ongoing structural shifts in the sector.
Mr. Salih Fendoglu

underperform and the resulting provisioning expenses are higher for banks with a greater CRE exposure, they experience a stronger decline in pre-provision net revenues and regulatory capital ( Figure 4 , panel 2a). Figure 4. Commercial Real Estate Price Decline and Bank CRE Loans, Revenues and Capital Sources: Federal Financial Institutions Examination Council Call Reports; MSCI Real Estate; and author calculations. Notes: The panels show the effect of a change in commercial real estate (CRE) prices on banks’ cumulative CRE nonperforming loan rate, cumulative CRE

Mr. Salih Fendoglu

Title Page MONETARY AND CAPITAL MARKETS Global Financial Stability Notes Commercial Real Estate and Financial Stability: Evidence from the US Banking Sector No. 2021/01 Prepared by Salih Fendoglu May 2021 DISCLAIMER : The views expressed are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. This note analyzes the implications of changes in commercial real estate (CRE) prices for the stability of the US banking sector. Using detailed bank-level and CRE price data for US

Andrea Deghi, Mr. Fabio M Natalucci, and Mahvash S Qureshi
After dropping sharply in the early phases of the COVID-19 pandemic, commercial real estate prices are on the mend. However, the initial price decline, as well as the pace of recovery, vary widely across regions and different segments of the commercial real estate market. This note analyzes the factors that explain this divergence using city-level data from major advanced and emerging market economies. The findings show that pandemic-specific factors such as the stringency of containment measures and the spread of the virus are strongly associated with a decline in prices, while fiscal support and easy financial conditions maintained by central banks have helped to cushion the shock. A higher vaccination rate has aided the recovery of the sector, especially in the retail segment. Structural changes in private behavior such as the trend toward teleworking and e-commerce have also had an impact on commercial property prices in some segments. The outlook of the sector across regions thus remains closely tied to the trajectory of the pandemic and broader macroeconomic recovery, financial market conditions, and the pace of structural shifts in the demand for specific property types. In an environment of tightening financial conditions and a slowdown in economic activity, continued vigilance is warranted on the part of financial supervisors to minimize financial stability risks stemming from potential adverse shocks to the sector.
Andrea Deghi, Mr. Fabio M Natalucci, and Mahvash S Qureshi

cities in Canada and the United States have continued to experience steep declines. Performance of the office sector has also been uneven—prices picked up in one half of the cities in the sample (mostly Asian and European) but dropped in others (notably, in Canada, Hong Kong Special Administrative Region, South Africa, and the United States). 8 In what follows, the factors driving these divergent price trends are formally explored through econometric analysis. Explaining Changes in Commercial Real Estate Prices During the Pandemic The price of commercial

International Monetary Fund. Monetary and Capital Markets Department

regulatory capital are also lower ( Figure 3.8 , panel 2). Figure 3.8. United States: Impact of an Adverse Commercial Real Estate Price Shock on Bank Soundness Sources: FDIC Deposit Survey; Federal Financial Institutions Examination Council (FFIEC) Call Reports; MSCI Real Estate; and IMF staff calculations. Note: Panels 1 and 2 show the effect of a change in commercial real estate (CRE) prices on bank outcome variables: the CRE nonperforming loan rate (90+ days overdue), CRE net loan charge-off rate (each accumulated over the eight-quarter horizon), net revenues

Andrea Deghi, Mr. Junghwan Mok, and Tomohiro Tsuruga
The COVID-19 pandemic crisis has severely shocked the commercial real estate (CRE) sector, which could have important implications for macro-financial stability going forward because of the large size of the sector and its strong interconnectedness with the real economy. Using a novel methodology, this paper quantifies vulnerabilities in the CRE sector and analyzes policy tools available to mitigate related risks. The analysis shows that CRE prices were overvalued in several major advanced economies in 2020:Q1. It also shows that such price misalignments increase the likelihood of future price corrections and exacerbate downside risks to future GDP growth. While the path of recovery in the sector will depend inherently on the pace of overall economic recovery and the structural shifts induced by the pandemic, easy financial conditions may contribute to an increase in financial vulnerabilities and persistent price misalignment. Macroprudential policy can, however, be effective in curbing the financial stability risks posed by the CRE sector.
Andrea Deghi, Mr. Junghwan Mok, and Tomohiro Tsuruga

focusing on different horizons, the estimated effect of misalignment in the CaR model allows us to establish a “term structure” of CRE price risks, reflecting short-term and medium-term responses to a given factor. The estimation methodology follows previous studies focused on house prices (e.g., Deghi et al, 2020 ) and adopts a two-step procedure for panel quantile regressions based on Canay (2011) . 23 We provide a brief description of the general setup below. Define Δ h Y i,t+h as the average log change in commercial real estate prices, h periods ahead, for

International Monetary Fund
This report discusses the IMF/World Bank Financial Sector Assessment Program (FSAP) exercise for China undertaken during June–December 2010. The assessment concluded that reforms in China have progressed well in moving toward a more commercially oriented financial system. Despite success and rapid growth, China’s financial sector is confronting several near-term risks, structural challenges, and policy-induced distortions. A properly composed and timely implemented set of reforms would help address these challenges. A framework to resolve weak financial institutions on a timely basis is also needed.
International Monetary Fund

subsidiaries are Grade Three. 8 Earnings before interest and tax as a percentage of interest and principal expenses. 9 Number of SMEs in the industrial sector. 10 Percent change in commercial real estate and house price indices. 11 CBRC’s statistics based on credit data on institution (legal person). 25. The banking systems’ nonperforming loan (NPL) ratio has been on a downward trend, reaching 1.1 percent at end-2010 ( Figure 19 ). This decline was driven by the rapid expansion of credit, a decline in NPL levels, and a RMB 816 billion NPL