The Role of Commercial Real Estate Investments in the Banking Crisis of 1985-92

26 Pages Posted: 2 Nov 2008

See all articles by George W. Fenn

George W. Fenn

Cambridge Finance Partners

Rebel A. Cole

Florida Atlantic University

Date Written: November 1, 2008

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

JEL Classification: G21, G28

Suggested Citation

Fenn, George W. and Cole, Rebel A., The Role of Commercial Real Estate Investments in the Banking Crisis of 1985-92 (November 1, 2008). Available at SSRN: https://ssrn.com/abstract=1293473 or http://dx.doi.org/10.2139/ssrn.1293473

George W. Fenn

Cambridge Finance Partners ( email )

Cambridge, MA 02139
United States
617-575-6613 (Phone)

HOME PAGE: http://www.cambridgefinance.com

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

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