Are Real Estate Banks More Affected by Real Estate Market Dynamics? Evidence from the Main European Countries

Lucia Gibilaro and Gianluca Mattarocci

ERES from European Real Estate Society (ERES)

Abstract: Real estate market trend could affect the value of both the direct exposures in property loans and the real estate collaterals of loans, therefore banks' performance and/or risk could change significantly in the case of real estate market collapse or expansion (i.a. Wheaton, 1999). Indeed, during the recent financial crisis, the real estate was features by a strong decrease in loans with respect to the before crisis period (Ivashina and Sharfstein, 2010). Literature focuses the attention prevalently on the effect of a change in the property prices on the macro-variables and the monetary aggregates (Quigley, 1999). Only few studies look at the effect of the real estate market trend on the banks'lending policy and bank's performance (Davis and Zhu, 2004) taking into account bank's characteristics . In the analysis of the banking features, no evidence is provided on the relationship between real estate market trend and the bank's performance and risk . Moreover, the evidences provided by such studies do not control for the type the bank and the loan purpose.Considering a representative sample of European banks and using the BIS property index for the reference country of the bank, we study the relationship between the property market trend and the bank performance / risk exposure, considering also lagged relationships and testing for any relevant causality relationship.. Following the approach proposed by Eisenbeis and Kwast (1991), we identify real estate banks in our sample and we test for the existence of any significant difference respect to other banks. Moreover, we control the evidences for the pre and post financial crisis period. Results demonstrate that real estate banks do not perform always the worse (the better) during a real estate market downturn (upturn) and the reaction to the market trend is driven also by other features of the bank.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2013-01-01
New Economics Papers: this item is included in nep-ban, nep-eec and nep-ure
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