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Research Finds Commercial Real Estate Risks Are Understated at Largest U.S. Banks

A new study by Manasa Gopal, assistant professor of Finance, has found that large U.S. banks may underestimate their commercial real estate (CRE) risks and face vulnerability through credit lines to real estate investment trusts (REITs).
Manasa Gopal

Manasa Gopal, assistant professor of Finance

According to a new academic study, regulators may be underestimating the risk commercial real estate (CRE) poses for the largest U.S. banks when looking at only direct balance sheet exposures.

The researchers, Manasa Gopal, assistant professor of Finance at the Georgia Tech Scheller College of Business; Viral V. Acharya, C.V. Starr Professor of Economics at New York University Stern School of Business; Maximilian Jager, assistant professor of Finance at the Frankfort School of Finance & Management; and Sascha Steffen, DWS Senior Chair in Finance at the Frankfurt School of Finance & Management published their findings in the article "Shadow Always Touches the Feet: Implications of Bank Credit Lines to Non-Bank Financial Intermediaries."

While 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.

"In much of my prior work, I have been focusing on the growth of nonbanks and their role in the economy,” said Gopal. “One typically thinks of nonbanks, or shadow banks, as being separate from the traditional banking system. However, these parts are closely linked. When exploring the linkages between banks and nonbanks, we started digging into bank lines of credit to nonbanks. That's when we identified the large exposure of banks to REITs, and in turn, the commercial real estate market."

Investment 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' 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.

For 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.

Since REITs must distribute 90% of their income as dividends, their ability to increase cash buffers is limited. Thus, falling CRE valuations could lead to higher redemptions and REITs drawing down credit lines, creating a "wrong-way risk" where banks' exposures rise as collateral value falls.

Gopal 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's monetary tightening in 2022.

For more information on this research, see the following articles:

US large bank CRE risks could be understated, say researchers (

Big Banks’ CRE Exposure Rises 40% When REIT Debt is Factored In (Bloomberg)

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Manasa Gopal
Assistant Professor of Finance

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