Commercial property prices and bank performance

We seek to assess the effect of changes in commercial property prices on bank behaviourand performance in a range of industrialised economies, extending the existing micro literature onbank performance. The results suggest that, consistent with macro-level studies, commercial propertyprices have a marked impact on the behaviour and performance of individual banks. The signs foundare consistent with a view that commercial property provides important forms of collateral that areperceived by banks to reduce risk and encourage lending. Such an impact exists even whenconventional independent variables determining bank performance are included. Moreover, there isevidence that the magnitude of this impact is related to the size of the bank, the direction ofcommercial property price movements, and regional factors. The results have implications for riskmanagers, regulators and monetary policy makers. Notably, they underline the crucial relevance ofcommercial property prices as a macroprudential variable that warrants close scrutiny by theauthorities. They also highlight the need to develop indicators of individual bank exposure to theproperty market that could help to calibrate the potential impact of changes in prices in stress tests.