Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility

Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru

Journal of Political Economy Macroeconomics, 2025, vol. 3, issue 4, 525 - 573

Abstract: We analyze how credit and interest rate risk affect US bank solvency, focusing on 2022’s tightening and commercial real estate (CRE) loans representing 25% of average bank assets. Extending Jiang et al. (2024), we show that runs can emerge with liquid assets when banks face rate, credit, and uninsured leverage exposure. Falling property values leave 14% of CRE and 44% of office loans underwater, with broad refinancing risks, jeopardizing dozens to over 300 banks. Banks may conceal losses via “extend-and-pretend.” Higher rates now pose a greater threat than credit risk, potentially constraining monetary policy and underscoring the need to stress-test banks for rising rates.

Date: 2025
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