Figure 3 of the image shows the relationship between bank exposure to commercial real estate (CRE) and bank asset size. The plot shows that smaller banks have higher CRE exposure than larger banks. For example, banks with less than $100 billion in assets have an average CRE exposure of 60%, while banks with more than $100 billion in assets have an average CRE exposure of 17.5%.
The plot also shows that there is a lot of variation in CRE exposure within each bank size category. For example, some banks with less than $100 billion in assets have CRE exposure as low as 20%, while others have CRE exposure as high as 80%.
There are a number of reasons why smaller banks have higher CRE exposure than larger banks. One reason is that smaller banks are more likely to be community banks, and community banks tend to lend more to local businesses and individuals. Since CRE is a significant component of the local economy, community banks are more likely to have CRE loans in their portfolios.
Another reason why smaller banks have higher CRE exposure is that they are more likely to have underwriting standards that are less stringent than those of larger banks. This means that smaller banks may be more likely to lend to borrowers with weaker credit quality or to borrowers who are seeking to finance riskier CRE projects.
Finally, smaller banks may be more likely to have CRE exposure because they have less diversified loan portfolios than larger banks. This means that a smaller bank’s financial performance is more dependent on the performance of its CRE loan portfolio.
Overall, the plot shows that there is a strong relationship between bank exposure to CRE and bank asset size. Smaller banks have higher CRE exposure than larger banks. This is due to a number of factors, including the fact that smaller banks are more likely to be community banks, have less stringent underwriting standards, and have less diversified loan portfolios.
Source: Commercial Real Estate: Where Are the Financial Risks?
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