U.S. Bank Fragility to Credit Risk in 2023: Monetary Tightening and Commercial Real Estate Distress

18 Pages Posted: 19 Apr 2023

See all articles by Erica Xuewei Jiang

Erica Xuewei Jiang

University of Southern California

Gregor Matvos

Northwestern University - Kellogg School of Management

Tomasz Piskorski

Columbia University - Columbia Business School, Finance

Amit Seru

Stanford University

Date Written: April 4, 2023

Abstract

Jiang et al. (2023) find that following recent monetary tightening the U.S. banking system’s market value of assets is $2.2 trillion lower than suggested by their book value, accounting for loan portfolios held to maturity. We illustrate that this decline in banks’ asset values has eroded their ability to withstand adverse credit events – focusing on commercial real estate (CRE) loans that account for about quarter of assets for an average bank ($2.7 trillion of bank assets in the aggregate). A 10% (20%) default rate on CRE loans – a range close to what one saw in the Great Recession on the lower end -- would result in about $80 ($160) billion of additional bank losses. While these losses are an order of magnitude smaller than the decline in bank asset values associated with a recent rise of interest rates, they do impact a non-trivial set of banks: an additional 280 (579) banks with aggregate assets of $700 billion ($1.2 trillion) would have their marked to market value of assets below the face value of all their non-equity liabilities. We again focus on uninsured leverage (i.e., Uninsured Debt/Assets) as the key to understanding whether these losses would lead to some banks in the U.S. becoming potentially insolvent--unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. Even if only half of uninsured depositors decide to withdraw, the losses due to CRE distress would result in additional 21 (58) smaller regional banks at a potential risk of impairment to insured depositors.

Keywords: Monetary Tightening, Uninsured Depositors, Runs, Commercial Real Estate

JEL Classification: G2, L5

Suggested Citation

Jiang, Erica Xuewei and Matvos, Gregor and Piskorski, Tomasz and Seru, Amit, U.S. Bank Fragility to Credit Risk in 2023: Monetary Tightening and Commercial Real Estate Distress (April 4, 2023). Available at SSRN: https://ssrn.com/abstract=4413799 or http://dx.doi.org/10.2139/ssrn.4413799

Erica Xuewei Jiang

University of Southern California ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Gregor Matvos

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Tomasz Piskorski

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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