Vulnerability of Banks and Thrifts to a Real Estate Crisis

FDIC Banking Review Series, Vol. 15, No. 4, 2003

19 Pages Posted: 23 Feb 2006

See all articles by Charles Collier

Charles Collier

FDIC, Division of Insurance and Research

Daniel Nuxoll

Government of the United States of America - Federal Deposit Insurance Corporation (FDIC)

Sean Forbush

FDIC, Division of Insurance and Research

Abstract

As part of its extensive off-site monitoring efforts, the Federal Deposit Insurance Corporation (FDIC) has evaluated banks' and thrifts' vulnerability to the stress of a real estate crisis similar to the crisis that occurred in New England in the early 1990s. Asking what would happen to banks and thrifts today if the real estate market were to experience a downturn similar to the one in New England a decade ago, we developed the history of the collapse of the New England real estate market into a stress test - the Real Estate Stress Test (REST) - that produces ratings comparable to the CAMELS ratings. The REST ratings indicate the severity of the exposure to real estate and therefore identify institutions that appear vulnerable to real estate problems. The ratings direct the attention of examiners to particular institutions and indicate that the FDIC should be especially concerned about the management of real estate lending at these institutions. Poor practices there could expose the FDIC to substantial losses.This article explains how the model was built with the use of New England data and was tested with the use of data from other historical real estate crises. The REST results for December 2002 are presented and analyzed, and recent trends - both nationally and for selected states - are discussed.

Suggested Citation

Collier, Charles and Nuxoll, Daniel and Forbush, Sean, Vulnerability of Banks and Thrifts to a Real Estate Crisis. FDIC Banking Review Series, Vol. 15, No. 4, 2003, Available at SSRN: https://ssrn.com/abstract=883635

Charles Collier

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States

Daniel Nuxoll (Contact Author)

Government of the United States of America - Federal Deposit Insurance Corporation (FDIC) ( email )

Washington, DC 20429
United States

Sean Forbush

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States

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