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Commercial real estate loans in Europe: does loan-to-value at origination predict default risk?

Author

Listed:
  • Federica Ciocchetta

    (Bank of Italy)

  • Raffaella Pico

    (Bank of Italy)

  • Ivan Quaglia

    (Bank of Italy)

Abstract

This paper analyses bank financing for commercial real estate (CRE), focusing on Italy and comparing it with a sample of other euro-area countries. The analysis is based on the European AnaCredit database. The study examines loan characteristics, their riskiness and the relationship between loan-to-value at origination (LTV-O) and default probability, providing insights into the potential effectiveness of LTV-O limits as a macroprudential tool. The analysis reveals notable differences across countries in CRE exposure levels, CRE lending practices and credit risk, with Italy having limited exposure, high reliance on commercial property as collateral and a significant use of additional guarantees for large LTV-O loans. The econometric results confirm a link between LTV-O and default probability in Italy and Spain, highlighting the importance of tailored macroprudential policies in enhancing financial stability.

Suggested Citation

  • Federica Ciocchetta & Raffaella Pico & Ivan Quaglia, 2025. "Commercial real estate loans in Europe: does loan-to-value at origination predict default risk?," Questioni di Economia e Finanza (Occasional Papers) 905, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_905_25
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2025-0905/QEF_905_25.pdf
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    References listed on IDEAS

    as
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    3. Berger, Allen N. & Espinosa-Vega, Marco A. & Frame, W. Scott & Miller, Nathan H., 2011. "Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 55-70, January.
    4. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    5. Kelly, Jane & Le Blanc, Julia & Lydon, Reamonn, 2018. "Pockets of risk in European Housing Markets: then and now," Research Technical Papers 12/RT/18, Central Bank of Ireland.
    6. Berger, Allen N. & Frame, W. Scott & Ioannidou, Vasso, 2016. "Reexamining the empirical relation between loan risk and collateral: The roles of collateral liquidity and types," Journal of Financial Intermediation, Elsevier, vol. 26(C), pages 28-46.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    bank lending; commercial real estate; default probability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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