Claudio Giannotti

LIQUIDITY RISK EXPOSURE FOR SPECIALIZED AND UNSPECIALIZED REAL ESTATE BANKS: EVIDENCES FROM THE ITALIAN MARKET

Purpose – The purpose of this paper is to compare banks specialised on real estate lending with the overall market in order to the test if they are more or less exposed to liquidity risk.Design/methodology/approach – Following the approach proposed by the Basel Committee in order to evaluate the bank liquidity exposure, the paper compares the value of these measures between the real estate lending banks (REBs) and all other banks for the Italian market. A panel regression analysis is also performed in order to identify the main drivers of the liquidity risk measures for the two types of banks.Findings – The paper finds that no significant differences exist between REBs and the overall system if liquidity risk measures used by regulators in order to supervise the banking system are taken into account. Normally liquidity exposure by this type of bank is significantly affected by interbank market dynamics.Research limitations/implications – The paper considers only one market in order to test the fitness of ...Liquidity is the ability of a bank to collect money necessary for financing assets and meet obligations as they come due, without incurring unsustainable losses; the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk (Basel Committee on Banking Supervision, 2008). As banks specialized on real estate finance show an average high duration of the assets (Booth, 2002), liquidity risk is extremely relevant to ensure the stability of the financial intermediary. Under an asset and liabilities management approach (ALM), the paper is aimed to analyze the impact of the maturities structure on the liquidity position, discriminating between residential property specialized lenders and others. Yearly and half-yearly balance sheet data are collected from the ABI Banking Data database over the period 2000-2008. Data attain the individual balance sheet and all consolidated balance sheets are excluded from the analysis. In order to construct a sample that is representative of the Italian market, all banks available in each semester are selected independently from number of semesters for which the data are available The asset / liability structure analysis considers the banking book of each bank and computes, for each semester, measures of the liquidity risk exposure as: contractual maturity mismatch (Drago, 2003); concentration on funding (Matz and Neu, 2007); available unencumbered assets (Resti and Sironi, 2007). The sample is classified on the basis of the percentage of residential loan exposures on the total assets using a threshold the 40% per cent (Eisenbeis and Kwast, 1991). Total active banks are stratified in three groups according to the number of years in which they could be classified as specialized real estate banks (Blasko and Sinkey, 2006). A comparison of ALM measures for different subsamples is released in order to evaluate if the choice to specialize in the real estate sector affect the exposure at risk of the bank Results obtained will show that misalignment between asset and liability structure affects the liquidity position of the bank. The borroweris business sector and characteristics affect the bankis liquidity risk exposure. Banks that are structurally more exposed are those that are specialized in the real estate sectors. Empirical evidence provided demonstrates that the current debate on the need to define asset/liability maturity regulatory constraints could have relevant implication for the Italian banking sector, especially for the banks involved in the property market.

Liquidity risk exposure for specialised and unspecialised real estate banks: Evidence from the Italian market

Purpose – The purpose of this paper is to compare banks specialised on real estate lending with the overall market in order to the test if they are more or less exposed to liquidity risk.Design/methodology/approach – Following the approach proposed by the Basel Committee in order to evaluate the bank liquidity exposure, the paper compares the value of these measures between the real estate lending banks (REBs) and all other banks for the Italian market. A panel regression analysis is also performed in order to identify the main drivers of the liquidity risk measures for the two types of banks.Findings – The paper finds that no significant differences exist between REBs and the overall system if liquidity risk measures used by regulators in order to supervise the banking system are taken into account. Normally liquidity exposure by this type of bank is significantly affected by interbank market dynamics.Research limitations/implications – The paper considers only one market in order to test the fitness of ...Liquidity is the ability of a bank to collect money necessary for financing assets and meet obligations as they come due, without incurring unsustainable losses; the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk (Basel Committee on Banking Supervision, 2008). As banks specialized on real estate finance show an average high duration of the assets (Booth, 2002), liquidity risk is extremely relevant to ensure the stability of the financial intermediary. Under an asset and liabilities management approach (ALM), the paper is aimed to analyze the impact of the maturities structure on the liquidity position, discriminating between residential property specialized lenders and others. Yearly and half-yearly balance sheet data are collected from the ABI Banking Data database over the period 2000-2008. Data attain the individual balance sheet and all consolidated balance sheets are excluded from the analysis. In order to construct a sample that is representative of the Italian market, all banks available in each semester are selected independently from number of semesters for which the data are available The asset / liability structure analysis considers the banking book of each bank and computes, for each semester, measures of the liquidity risk exposure as: contractual maturity mismatch (Drago, 2003); concentration on funding (Matz and Neu, 2007); available unencumbered assets (Resti and Sironi, 2007). The sample is classified on the basis of the percentage of residential loan exposures on the total assets using a threshold the 40% per cent (Eisenbeis and Kwast, 1991). Total active banks are stratified in three groups according to the number of years in which they could be classified as specialized real estate banks (Blasko and Sinkey, 2006). A comparison of ALM measures for different subsamples is released in order to evaluate if the choice to specialize in the real estate sector affect the exposure at risk of the bank Results obtained will show that misalignment between asset and liability structure affects the liquidity position of the bank. The borroweris business sector and characteristics affect the bankis liquidity risk exposure. Banks that are structurally more exposed are those that are specialized in the real estate sectors. Empirical evidence provided demonstrates that the current debate on the need to define asset/liability maturity regulatory constraints could have relevant implication for the Italian banking sector, especially for the banks involved in the property market.

How to evaluate risk for Italian real estate funds

Purpose – The purpose of this paper is to define an approach useful to evaluate real estate funds on the specific characteristics of the Italian market and on the basis of international best practices.Design/methodology/approach – The first step is to identify specific factors and portfolio construction choices that could impact directly on the variability of inflows and outflows related to real estate fund. The analysis is realised constructing standard measures of financial and downside risk and identifying a panel model that allows to explain risk measure dynamics on the basis of some investments and portfolio characteristics. Results obtained are tested with an out of sample procedure in order to evaluate the type of misclassification risk related to each model. The second step is to evaluate the impact of debt policy on the risk assumed by a real estate funds. After an analysis of debt sustainability for each real estate unit on the basis of deadlines and amount of flows related to each investment, t...

The role of portfolio diversification in the hotel industry: Evidence from the Italian market

Purpose – The purpose of this paper is to study whether geographic and sector diversification allow for a significant reduction in the risk exposure of a portfolio of hotel investments in one of the major tourist markets, the Italian market.Design/methodology/approach – This paper evaluates the benefits related to a Markowitz diversification approach for the construction of a specialised portfolio in the hotel real estate market. The portfolio analysis considers the degree of efficiency of each portfolio, the type of diversification adopted by a more efficient portfolio, the persistence of results over time and the impact of diversification constraints.Findings – The results demonstrate that, while standard geographic and sector diversification allow for good results, the more efficient portfolios are more concentrated. The trade‐off is worse if some concentration constraints are established, but the portfolios identified are characterised by higher performance persistence.Research limitations/implication...

The relative importance of sector and regional factors in the hotel industry

Purpose - The purpose of the paper is to compare the role of the sector and geographical features in explaining the performance of a hotel structure. Design methodology/approach - The paper constructs a measure of net profit for available room (GOPPAR) for a representative sample of Italian hotels and uses a constrained linear regression model in order to identify the role of sectoral and geographical features. The analysis is released adopting a multiple cross sectional approach and considering not only the average role of sectoral and geographic characteristic, but also the time trend of relation inspected. Findings - Results obtained show that the overall national trend is not significant for explaining the performance of each hotel. Considering geographical and sectoral features, the first of these explain better the disalignment of the performance respect to the national average. Research limitations/implications - The paper proposes an analysis of the hotel industry using a standard geo-sectoral classification. More data about the characteristics of the firms considered in the sample could allow to define a more detailed model that consider also other hotel features that could impact on the demand and supply of the service. Practical implications - Results could be useful for the hotel chains and for institutional investors specialized in the hotel sector, in order to define a first guideline for the property selection process and diversification portfolio strategy. Originality/value - The paper represents the first work that analyse the role of regional and sectoral factors in explaining the performance of the hotel industry and supports the thesis proposed with and empirical evidence on world leading market (Italy).

THE ROLE OF RISK MEASURESí CHOICES IN RANKING REAL ESTATE FUNDS: EVIDENCE FROM THE ITALIAN MARKET

Real estate industry is a fast growing reality in all European Countries and during the last years also Italian market shows a significant increase in the number of real estate funds available not only for institutional investors. The increasing role of retail investors in the industry makes necessary to study simple return/risk measures that could be easily understood also by not financial skilled investors. Measures frequently used in the asset management industry are the Risk Adjusted Performance Measures scale independent. Studies available in literature evaluate the fitness of these measures in order to select best investment opportunities under the simplified assumption of the normality of results achieved. Looking at the Italian market, the paper studies the performance of Real Estate Funds traded in the Italian market for the time period 1999-2009 and verifies that the assumption of the normality of results is not coherent. Demonstrated the limits of this assumption, the paper compare ranking based on Sharpe ratio with those achieved using different RAP measure constructed using different risk measures. Results obtained demonstrate that rankings obtained are not strictly correlated and measures that do not assume the normality of returns identify rakings that are more stable over time.

Property market liquidity and real estate recovery procedures efficiency: Evidences from the Italian economic cycle

Purpose – The minimization of financial losses and costs stemming from the credit recovery process is strictly connected with the time necessary to complete the procedure: in real estate credits, it depends on the liquidity and the efficiency of the enforcement procedures. The purpose of this paper is to test the relevance of the economic cycle in Italy on the determinants of the recovery process both at national and regional level.Design/methodology/approach – The first step is to identify the determinants of the real estate loans recovery process duration by the means of the review of the existing literature. The second step develops an empirical analysis to appraise the relevance of the economic cycle on the liquidity of the real estate market and efficiency of real estate enforcement proceedings. The relevance of the economic cycle is verified through, first, a correlation analysis of the selected indexes with the national and regional gross domestic product (GDP) and, second, a regression analysis of...

Liquidity risk exposure for specialised and unspecialised real estate banks

Purpose – The purpose of this paper is to compare banks specialised on real estate lending with the overall market in order to the test if they are more or less exposed to liquidity risk.Design/methodology/approach – Following the approach proposed by the Basel Committee in order to evaluate the bank liquidity exposure, the paper compares the value of these measures between the real estate lending banks (REBs) and all other banks for the Italian market. A panel regression analysis is also performed in order to identify the main drivers of the liquidity risk measures for the two types of banks.Findings – The paper finds that no significant differences exist between REBs and the overall system if liquidity risk measures used by regulators in order to supervise the banking system are taken into account. Normally liquidity exposure by this type of bank is significantly affected by interbank market dynamics.Research limitations/implications – The paper considers only one market in order to test the fitness of ...Liquidity is the ability of a bank to collect money necessary for financing assets and meet obligations as they come due, without incurring unsustainable losses; the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk (Basel Committee on Banking Supervision, 2008). As banks specialized on real estate finance show an average high duration of the assets (Booth, 2002), liquidity risk is extremely relevant to ensure the stability of the financial intermediary. Under an asset and liabilities management approach (ALM), the paper is aimed to analyze the impact of the maturities structure on the liquidity position, discriminating between residential property specialized lenders and others. Yearly and half-yearly balance sheet data are collected from the ABI Banking Data database over the period 2000-2008. Data attain the individual balance sheet and all consolidated balance sheets are excluded from the analysis. In order to construct a sample that is representative of the Italian market, all banks available in each semester are selected independently from number of semesters for which the data are available The asset / liability structure analysis considers the banking book of each bank and computes, for each semester, measures of the liquidity risk exposure as: contractual maturity mismatch (Drago, 2003); concentration on funding (Matz and Neu, 2007); available unencumbered assets (Resti and Sironi, 2007). The sample is classified on the basis of the percentage of residential loan exposures on the total assets using a threshold the 40% per cent (Eisenbeis and Kwast, 1991). Total active banks are stratified in three groups according to the number of years in which they could be classified as specialized real estate banks (Blasko and Sinkey, 2006). A comparison of ALM measures for different subsamples is released in order to evaluate if the choice to specialize in the real estate sector affect the exposure at risk of the bank Results obtained will show that misalignment between asset and liability structure affects the liquidity position of the bank. The borroweris business sector and characteristics affect the bankis liquidity risk exposure. Banks that are structurally more exposed are those that are specialized in the real estate sectors. Empirical evidence provided demonstrates that the current debate on the need to define asset/liability maturity regulatory constraints could have relevant implication for the Italian banking sector, especially for the banks involved in the property market.

Banks’ Risk Culture in Residential Mortgage and Cross-Selling Policies: Evidence from the Euro Area

Cross selling is a standard approach adopted in the banking industry in order to maximize the expected revenues related to a banking relationship and residential real estate loans are one of the the main instruments used in order to look for new customers and establish a medium-long term relationship. This chapter compares trends in cross selling and real estate loans for a representative set of European banks and shows that the two variables are not perfectly correlated and some banking features (like size or real estate loan specialization) may affect the link between residential real estate loans and cross selling. Not specialized real estate banks are those that benefit the most from cross selling activities due to an higher increase of the ROA and a less significant increase of the Z-Score.

The effect of financial structure on net operating income: evidence from the European REITs market

The availability and use of credit have increased significantly over time due to economic growth and development, stronger institutional structures, increased financial innovation and integration, as well as firm-level considerations. Although many firms and households have delevered their balance sheets in response to the recent financial crisis, many governments and financial firms, and especially public real estate firms, continue to maintain significant levels of debt. This raised a lot of interest among academic on the determinants of public real estate firms’ capital structure choice. In fact, some recent research has provided evidence on the consistency of U.S. REIT capital structure choices against existing theories of optimal capital structure (e.g., Harrison et al., 2011). However, empirical evidence on the effect of financial structure on net operating income is still inconclusive, especially with respect to the European market. REITs and REIF are quite unique as their performance can be disentangled in two main components (current and capital gains component). However, what determines the dynamic of those two components and how it affects REITs/REIFs capital structure is still an open question. This paper aims to fill this gap. Precisely, we will first investigate the dynamic of profitability to analyze which component has been the most variable in the years before and after the crisis, which REITs/REIFs institutional features affect this dynamic (e.g. portfolio characteristics), and whether an increase of current income volatility leads capital gains volatility or vice versa. More importantly, we will test empirically the effect of financial leverage and debt composition on the two performance components.The results of this research will also have important implications for lenders of public real estate entities because we will shed light on the winning policy of banks (i.e. those who bet on the asset or income flows).