Banks’ Venture into Real Estate: High Rollers, or Lemmings?

by Lynn E. Browne
September/October 1993

During the 1980s, commercial banks expanded their mortgage lending more rapidly than other financial institutions. This article examines the factors responsible for the variations in commercial banks’ real estate lending, in an attempt to determine whether banks pursued real estate loans in a high-risk, high-return strategy, or simply were caught up in the general enthusiasm for real estate lending.

The author’s regression analysis provides some support for the argument that banks looked to real estate loans to bolster their financial performance. She also finds that in New England, where banks were particularly aggressive in increasing their real estate lending and suffered a much higher failure rate than banks nationwide, pursuit of real estate loans was also pursuit of growth. And in New England, where most banks grew rapidly, those that grew fastest proved most vulnerable to failure.

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