Finance and Economics Discussion Series (FEDS)
July 2014 (Revised July 2016)
Assessing Targeted Macroprudential Financial Regulation: The Case of the 2006 Commercial Real Estate Guidance for Banks
William F. Bassett and W. Blake Marsh
In the mid-2000s, federal bank regulatory agencies became alarmed by steadily increasing concentrations of commercial real estate (CRE) loans at many banks, particularly loans used to finance construction and land development (CLD). In January 2006, they issued guidance that required banks with specific high concentrations in those asset classes to tighten managerial controls. This paper shows that banks with concentrations in excess of the thresholds set in the guidance subsequently experienced slower growth in their CRE and CLD portfolios than can be explained by changes in the health of their balance sheets and economic conditions. Moreover, banks that were above the CRE thresholds also tended to have slower growth in C&I loans but faster growth in loans to households after the guidance was issued. The results highlight the potential for this type of macroprudential regulation to have a significant and broad influence on bank behavior.
Revised paper: Accessible materials (.zip)
Keywords: Credit channel, government regulation, bank lending, real estate
PDF: Full Paper