Bank asset structure,real-estate lending,and risk-taking |
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Institution: | 1. Department of Accounting and Finance, School of Business Administration, Oakland University, Rochester, MI 48309, USA;2. Department of Banking and Finance, Terry College of Business, The University of Georgia, Athens, GA 30602-6253, USA |
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Abstract: | The banking industry changed substantially in the 1990s as the number of banks declined rapidly, and as we document, commercial banks dramatically shifted their assets to real-estate loans. The portfolio restructuring seems to be followed mainly by capital-constrained banks as real-estate banks have lower risk-based-capital ratios relative to those of our benchmark group. Trading off credit risk for interest-rate risk is only one of the ways to arbitrage regulatory capital. We also show that real-estate banks keep higher ratios of fixed-rate loans to total assets and face higher probabilities of insolvency. The increasing proportion of banks specializing in real-estate lending, the incentives of regulatory discipline, and the weaknesses of risk-management strategies could stress the condition of the banking system during periods of large unexpected increases in interest-rates and are important issues for regulators and bank managers. |
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