The impact of real estate market in financial stability : commercial banks exposure

Abstract

This paper studies key factors and spillovers concerning the real estate market connection to the banking system, in four very different European countries. Nowadays, banks are strongly engaged in housing related activities, therefore changes in real estate value most probably have a non-trivial impact on bank´s profitability, either through direct investment or due to housing related loans. Using monthly data since 2000 until 2014 for four countries (France, Portugal, Sweden and United Kingdom) I found evidence that indeed the real estate is an important factor when one measures the costs and profits related to the banking system, it is also noticed that direct banking investment in this sector or massive engagement in mortgages related loans, are variables more important to control than the interest rate, for these European cases. My findings also suggest that the monetary policy in Europe should take into account this relationship between banking and the real estate market.