Bank Lending: Credit Risk and Market Dynamics

This lecture delves into the complexities of bank lending and credit risk, focusing on the current challenges posed by commercial real estate (CRE). It begins with an overview of credit risk in the news, highlighting recent concerns regarding the impact of rising interest rates and declining property values on banks globally. The instructor discusses the various types of commercial real estate, including residential, industrial, office, retail, and lodging, and the significant exposure banks have to CRE loans, particularly among smaller institutions. The lecture further explores the implications of credit rationing, where banks may refuse to extend credit even at higher rates due to adverse selection and moral hazard. The concept of relationship banking is introduced, emphasizing the importance of long-term interactions between banks and borrowers in mitigating risks. Finally, the lecture covers loan pricing, detailing the factors that influence interest rates, including institutional costs, expected losses, and the bank's financing costs, providing a comprehensive understanding of the dynamics at play in the lending market.