The role of commercial real estate investments in the banking crisis of 1985-92

Rebel Cole and George W. Fenn

MPRA Paper from University Library of Munich, Germany

Abstract: This article examines the role of commercial real estate investments in the banking crisis of 1985-92, an unprecedented period during which more than 1,300 banks failed. Bank failures are fundamentally important because of the unique role played by financial institutions in the provision of business credit. We discover three striking features of banks failing during this period. First, commercial real estate was only a factor in the bank failures of 1988-92. Second, construction loans played a much larger role in bank failures than permanent loans, and the relationship is strongest with construction loans booked during 1983-1985. Third, other ex ante risk measures are systematically related to banking failure throughout the sample period. These results suggest that risk-seeking banks brought about their own demise and commercial real estate, especially construction lending, was one of the vehicles.

Keywords: bank; bank failure; commercial bank; commercial real estate; construction lending; real estate (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 G32 G33 (search for similar items in EconPapers)
Date: 1996-08-02, Revised 2008-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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