Loss Given Default, Loan Seasoning and Financial Fragility: Evidence from Commercial Real Estate Loans at Failed Banks

Emily Johnston Ross () and Lynn Shibut ()
Additional contact information
Emily Johnston Ross: FDIC
Lynn Shibut: FDIC

The Journal of Real Estate Finance and Economics, 2021, vol. 63, issue 4, No 5, 630-661

Abstract: Abstract Commercial real estate (CRE) loan losses are a recurring contributor to bank failures and financial instability, yet they are not well understood. We examine a unique and proprietary data set of CRE loan defaults at banks that failed and were resolved by the FDIC after the 2008 financial crisis. We build upon an existing literature relating stochastic collateral values to loss given default (LGD). Consistent with model predictions, we show that CRE loans defaulting sooner after origination are more sensitive to declining economic conditions and exhibit LGDs that are more severe. These results are robust to a number of factors, including the declining balance of the loan over time. Our findings point to an inherent fragility associated with high CRE loan growth, even without necessarily a deterioration in lending standards, due to the changing composition of CRE loan seasoning in the industry. This reflects an unexplored risk in the literature concerning rapid and cyclical expansions in CRE credit.

Keywords: Loss given default; Commercial real estate; Loan seasoning; Collateral; Credit cycles (search for similar items in EconPapers)
JEL-codes: G21 R33 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11146-020-09783-4 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jrefec:v:63:y:2021:i:4:d:10.1007_s11146-020-09783-4

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/11146/PS2

DOI: 10.1007/s11146-020-09783-4

Access Statistics for this article

The Journal of Real Estate Finance and Economics is currently edited by Steven R. Grenadier, James B. Kau and C.F. Sirmans

More articles in The Journal of Real Estate Finance and Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().