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

Matteo Crosignani and Saketh Prazad

No 19663, CEPR Discussion Papers from Centre for Economic Policy Research

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% 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% of bank capital.

JEL-codes: E51 G21 R33 (search for similar items in EconPapers)
Date: 2024-11
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