Commercial property prices and bank performance

Abstract

We seek to assess the effect of changes in commercial property prices on bank behaviour and performance in a range of industrialised economies, extending the existing micro literature on bank performance. The results suggest that, consistent with macro-level studies, commercial property prices have a marked impact on the behaviour and performance of individual banks. The signs found are consistent with a view that commercial property provides important forms of collateral that are perceived by banks to reduce risk and encourage lending. Such an impact exists even when conventional independent variables determining bank performance are included. Moreover, there is evidence that the magnitude of this impact is related to the size of the bank, the direction of commercial property price movements, and regional factors. The results have implications for risk managers, regulators and monetary policy makers. Notably, they underline the crucial relevance of commercial property prices as a macroprudential variable that warrants close scrutiny by the authorities. They also highlight the need to develop indicators of individual bank exposure to the property market that could help to calibrate the potential impact of changes in prices in stress tests.