Shadow Always Touches the Feet: Implications of Bank Credit Lines to Non-Bank Financial Intermediaries

We study the implications of banks extending credit lines to non-bank financial intermediaries (NBFIs), using real estate investment trusts (REITs) as an economically important example. While smaller banks hold significant direct exposures in CRE loans, the CRE exposure of large banks is also indirect via credit-line provision to REITs. REITs’ credit-line utilization is substantially more sensitive to market stress than for other publicly-traded NBFIs and corporates. In turn, large banks suffer drawdowns on credit lines to REITs and attendant equity corrections in stress times. Ignoring this NBFI credit-line channel understates the exposure of large banks to aggregate stress.