No News is Bad News: Monitoring, Risk, and Stale Financial Performance in Commercial Real Estate

Samuel K. Hughes and Joseph B. Nichols
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Samuel K. Hughes: https://www.federalreserve.gov/econres/samuel-k-hughes.htm
Joseph B. Nichols: https://www.federalreserve.gov/econres/joseph-b-nichols.htm

No 2025-032, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: As financial intermediaries, banks have a key role in producing information and managing the risks on diverse loan portfolios. An important input into this process is ongoing collection of financial performance from borrowers. Using supervisory data on commercial real estate loans (CRE), this paper studies relationships between the content and timeliness of borrower-reported performance, internal bank risk ratings, and subsequent loan performance. Banks heavily rely on borrower reporting when setting risk ratings, despite the fact that borrowers with stale financials are more likely to default. Although banks can generally be slow to update their ratings as information becomes more stale on average, we find causal evidence that they do monitor more intensively in response to loan, location and portfolio risks.

Keywords: Bank monitoring; Risk management; Commercial real estate mortgages; Financial performance reporting (search for similar items in EconPapers)
JEL-codes: G14 G21 G32 R33 (search for similar items in EconPapers)
Pages: 89 p.
Date: 2025-04-23
New Economics Papers: this item is included in nep-cfn
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-32

DOI: 10.17016/FEDS.2025.032

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