Data Management

Exposure To Real Estate Losses: Evidence From The US Banks

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Executive Summary

This paper implements a three-step procedure to assess the extent of exposure to real estate in commercial banks. Firstly, demonstrates interest rates and income to be the major determinants of delinquency, then adopts 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, looks at the cross-sectional differences and indentify the banks with rapid loan growth along with high cost-income ratio as the most vulnerable.

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