Shadow Always Touches the Feet: Implications of Bank Credit Lines to Non-Bank Financial Intermediaries

62 Pages Posted: 30 May 2024

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Manasa Gopal

Georgia Institute of Technology - Scheller College of Business

Maximilian Jager

Frankfurt School of Finance and Management

Sascha Steffen

Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR)

Date Written: May 29, 2024

Abstract

Using real estate investment trusts (REITs) that invest in commercial real estate (CRE) as a leading example, we study the implications of bank credit lines to nonbank financial intermediaries (NBFIs). While small and mid-size banks hold an economically significant direct exposure in CRE term loans, a significant part of the CRE exposure of large banks is indirect via credit-line provision to REITs. Utilization of credit lines by REITs tends to be substantially higher on average than non-financial corporates and other NBFIs, and reflects the performance of underlying real estate, in normal times and especially during stress. In turn, large banks suffer drawdowns and equity corrections in stress times from extending credit lines to REITs. Ignoring this credit line channel understates the exposure of large banks to CRE risks. We propose a methodology to incorporate this exposure in bank capital stress tests.

Keywords: shadow banks, NBFIs, commercial real estate, CRE, real estate investment trust, REITs, systemic risk, bank capital, stress tests

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Gopal, Manasa and Jager, Maximilian and Steffen, Sascha, Shadow Always Touches the Feet: Implications of Bank Credit Lines to Non-Bank Financial Intermediaries (May 29, 2024). Available at SSRN: https://ssrn.com/abstract=4847858 or http://dx.doi.org/10.2139/ssrn.4847858

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Manasa Gopal (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://https://manasagopal.com/

Maximilian Jager

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Sascha Steffen

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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