Banks have faced scrutiny from regulators, markets, and even their depositors, because of their exposure to commercial real estate lending. As transactions and valuations have fallen and many owners cannot refinance their properties, the status of CRE loans has been under increasing pressure. Many banks have pulled away from commercial real estate lending.

A new paper from researchers at the NYU Stern School of Business; Georgia Institute of Technology – Scheller College of Business; and Frankfurt School of Finance, CEPR now argues that banks face additional risk. Extensions of credit lines to nonbank financial intermediaries (NBFIs), with REITs being a prime example, provide the potential for extensive backchannel exposure. Additionally, they say that this less obvious relationship means larger banks face more risk from CRE than is generally assumed.

Interactions between CRE and banks have both the direct consequences previously mentioned and others that follow. "Considering the vast scale of the CRE market, valued at approximately $21 trillion in 20212, which is funded in part through bank loans, disruptions in the CRE sector can directly influence the availability of bank credit to households and businesses," the authors wrote.