The commercial real estate (CRE) market significantly influences financial stability, given its size, use as collateral, and cyclicality. This study explores macro-financial vulnerabilities arising from the CRE market, revealing that adverse developments in CRE capital values amplify systemic risk across financial sub-sectors, namely, banks, insurance companies and investment trusts, consistent with the collateral channel hypothesis. The CRE and financial markets relationship, however, displays nonlinearities. We introduce a UK CRE Misalignment index which integrates various market indicators to assess deviations from fundamental values in the CRE sector. We find that during market misalignments, the link between systemic risk and CRE growth weakens, suggesting that further property price increases in an overheated market could lead to a bubble and heightened systemic risk, in line with the deviation hypothesis. Finally, we employ a quantile regression model that captures another aspect of this non-linear relationship. We find that positive (negative) developments in the CRE market decrease (increase) the right tail of the historical systemic risk distribution, but CRE variation has a weak impact on the left tail and cannot effectively reduce systemic risk in periods of growth.

Abstract: This paper investigates the role of press freedom on systemic risk using an international sample of banks. We construct a novel and comprehensive measure of press freedom by integrating data from multiple widely recognized sources: the Reporters Without Borders Press Freedom country ranking, the Freedom of Expression Index, and the Freedom House Index. By combining these three distinct indices, our measure offers a more robust and multi-dimensional assessment of press freedom, capturing a broader spectrum of factors influencing media independence and freedom of expression across countries. Our empirical evidence suggests that press freedom is associated with lower systemic risk in the banking sector. We show that this relationship is mitigated during the upward phase of the economic cycle, and enhanced during banking crises. Our findings hold when addressing potential endogeneity problems and when accounting for additional macroeconomic and firm controls.

Abstract: We examine whether changes in issuer credit ratings by the three main providers are associated with changes in systemic risk. First, we find that rating downgrades result in an increase in bank systemic risk, whereas upgrades do not proportionally reduce systemic risk. Second, we document that the positive relationship between rating downgrades and systemic risk can be mitigated by accounting-based stability factors, such as profitability and capital, but also enhanced by sovereign rating downgrades. Finally, we show that sovereign rating downgrades have a greater effect on bound banks’ systemic risk compared to non-bound banks.

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Abstract: One in six properties in England is exposed to flood risk and around half of those affected properties can be characterised as high risk. In this paper we examine whether the probability of flooding is capitalised in England's property market prices. We use unique property-level data from Rightmove, UK's no.1 property website and the property-level FloodScore by Twinn, Royal HaskoningDHV. The latter is a metric of objective flood risk based on the likelihood of an individual property being flooded due to rainfall, overflowing rivers and tidal surges and is commonly used by UK lenders. By comparing the unconditional averages of our data, we find that properties at risk are sold at an 8.14% discount compared to non-exposed properties, and the price discount increases to 32.2% for properties with very high flood risk. By 2080 the flood events are expected to become more frequent and the average flood risk is projected to increase by 8%. Our empirical model suggests that one percentage point increase in properties' flood risk is associated with a decline of 0.07% to 0.11% in both sold and asking property prices. The impact is higher for properties of which flood risk is expected to increase or for regions that have recently experienced a flood event.

Abstract: Since 1966, the Severn crossing has been connecting England and Wales. In January 2018, its ownership returned to the UK Government, and this marked the start of a toll-free journey across the two countries and made commuting between the regions more affordable. In this paper, we examine the impact of the toll removal on the property market. We employ property-level data from the Land Registry and a difference-in-differences (DiD) empirical model for the periods 2016–2018 and 2019–2021 to capture the pre- and post-toll removal dynamics. The DiD estimation allows us to examine the causal relationship between policy changes and property prices. Our findings suggest that property prices in Newport and Monmouthshire (South East Wales) are positively affected by the policy, which results in a statistically significant increase of 5.8% more than those located in the South West England (Bristol and South Gloucestershire) region in the period 2019–2021. The impact can reach up to 13.1% for properties located in a 10 km radius of the bridge. The results indicate that the toll removal enables the ripple effect across the two markets by reducing commuting costs. This is the first paper that examines the Severn Crossing case study. Its contribution is significant since we provide empirical evidence on how reduced transportation costs increase property prices in the lowest income region and have the opposite effect on the area with higher incomes and economic activity levels.

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Abstract: This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response.

Abstract: This Note documents developments in the commercial real estate (CRE) market in Ireland since the onset of the COVID-19 shock as well as examining the factors determining the outlook. The CRE market is important to monitor from a financial stability perspective owing to its size and systemic interlinkages to both the real economy and the wider financial system. We show that the CRE market in Ireland has experienced a downward adjustment in valuations since the onset of the COVID-19 shock with the retail sector particularly affected. We highlight that components of the CRE market such as the retail and office sectors are particularly vulnerable to both near-term and structural implications of the COVID-19 shock such as the rise of online shopping and increased working from home practices. We combine a range of analytical approaches including forecast modelling techniques, the extension of the growth-at-risk framework to CRE and scenario analysis to assess the potential downside risks to the CRE market in Ireland.

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Abstract: This is the first paper to examine the role of the real estate sector and housing unaffordability in the determination of systemic risk. We measure the systemic risk of the UK by employing the Delta CoVaR method developed by Adrian and Brunnermeier (2016). and we explore both its cross-sectional and time series behaviour. Regarding the former, we show that when the real estate sector is under distress the tail risk of the entire financial system increases significantly. With respect to the latter, the findings of our dynamic model suggest that sustainable house prices positively contribute to the stability of the financial sector; whilst house price exuberance and rapid increases in housing unaffordability amplify systemic risk. Finally, we examine the conjecture that the banking sector comprises a transmission channel from the housing market to systemic risk. Our empirical results are in line with this argument and highlight the key role of housing unaffordability.

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