CRE CREDIT RISK COULD be understated.Market participants and regulators may be understating the risk that commercial real estate (CRE) poses for the largest banks in the US, according to a paper by a team of academic researchers. “Most people, when thinking about commercial real estate, only consider the risks associated with loans on banks’ balance sheets,” says Viral Acharya, a professor at New York University’s Stern School of Business, and a co-author of the paper, Shadow always touches the feet: implications of bank credit lines to non-bank financial intermediaries. “But, in reality, banks and non-banks are always connected – you can’t fully grasp the size of the looming CRE crisis without considering non-banks drawing down their credit lines from banks. To date, concerns about CRE exposure have focused on US community banks, which hold a higher proportion of direct loans than the large banks with more than $100 billion in assets. However, the new study, released today (May 30), shows that large banks also have significant indirect exposure via credit lines to non-financial institutions – specifically real estate investment trusts (REITs). These credit lines only appear on banks’ balance sheets in full once they are drawn, and the associated credit risk is therefore easier to underestimate. Specifically, the study finds that CRE exposures at the nine largest US banks more than double when factoring in credit lines to REITs. Among the top 50 US banks, a further dozen or so banks show similar increases in exposure once the indirect risk is factored in.