BANK REAL-ESTATE LENDING AND THE NEW-ENGLAND CAPITAL CRUNCH

The stock of real estate loans held by New England banks has declined dramatically. Given the limited potential for real estate investments, weak demand for real estate loans is to be expected. However, supply as well as demand factors may account for some of the decline in bank real estate loans. This paper documents that bank lending for real est ate may have been constrained by a capital crunch, whereby poorly capi talized banks shrank their assets, including real estate loans, to sat isfy capital requirements. Because the loss of bank capital is so wide spread in New England, bank-dependent borrowers may have difficulty ob taining real estate financing.