Understanding Banks' Resolution of Distressed Office Loans

Judy Yue, Joint Program in Financial Economics PhD Student

This project investigates why U.S. banks have delayed recognizing losses on distressed office loans following the post-2020 work-from-home shock. I propose and test a new channel for delayed distressed loan loss recognition: a fire-sale externality that spills over from weak to strong banks, freezing the market for distressed loan resolution. I argue that forbearance by undercapitalized banks generates the expectation of future correlated defaults, which depresses current secondary market prices and increases volatility for distressed CRE assets. Using loan-level CRE origination data from Corelogic deeds, I aim to document how loan extensions, restructurings, and defaults vary across lender capital strength and local exposure. The project aims to inform both bank-supervision policy and broader debates on financial stability in their concentrated risk exposure towards commercial real estate.

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