Extend-and-Pretend in the U.S. CRE Market

Matteo Crosignani and Saketh Prazad ()
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Saketh Prazad: https://www.hbs.edu/faculty/Pages/profile.aspx?facId=1543396

No 1130, Staff Reports from Federal Reserve Bank of New York

Abstract: We show that banks “extended-and-pretended” their impaired CRE mortgages in the post-pandemic period to avoid writing off their capital, leading to credit misallocation and a buildup of financial fragility. We detect this behavior using loan-level supervisory data on maturity extensions, bank assessment of credit risk, and realized defaults for loans to property owners and REITs. Extend-and-pretend crowds out new credit provision, leading to a 4.8–5.3 percent drop in CRE mortgage origination since 2022:Q1 and fuels the amount of CRE mortgages maturing in the near term. As of 2023:Q4, this “maturity wall” represents 27 percent of bank capital.

Keywords: commercial real estate; zombie lending; financial fragility; credit misallocation (search for similar items in EconPapers)
JEL-codes: E51 G21 R33 (search for similar items in EconPapers)
Pages: 51
Date: 2024-10-01
New Economics Papers: this item is included in nep-ban and nep-ure
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DOI: 10.59576/sr.1130

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