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Journal of Real Estate Finance and Economics, 10: 199-224 (1995) 0 1995 Kluwer Academic Publishers Bank Risk and Real Estate: An Asset Pricing Perspective JIANPING ME1 AND ANTHONY SAUNDERS Leonard N. Stern School of Business, New York University, 900 Tisch Hall, New York, NY 10003 Abstract While a number of papers have investigated the time-series behavior of expost bank stock returns and real estate returns, no study has comprehensively studied the relationship between ex ante risk premiums on both assets and the time-varying nature of such premiums in relationship to economic and real estate market conditions. In this study, we investigate how the changing nature of bank risk taking, especially in the real estate market, has affected the ex anre pricing of risk in the market for bank stocks. We tind that the time variation in bank risk premiums are partly determined by interest rate and real estate market conditions. We also discover that the real estate factor has been important for banks in the 1980s. Key Words: real estate factors, money center banks The 1980s have posed many loan management problems for large U.S. banks. In the early 1980s these banks faced growing problems in both their LDC and oil and gas loan port- folios. In the mid-1980s farming and agricultural loans were added to this list, and more recently, especially since 1987, commercial real estate has become a new problem loan area. By contrast, the 1970s are often viewed as a period of relative growth and prosperity for U.S. banking. This unfolding of asset-exposure problems for major U.S. banks raises an important em- pirical question: To what exten