Staff Working Paper No. 1,119
By Thiemo Fetzer, Benjamin Guin, Felipe Netto and Farzad Saidi
This paper examines how insurance companies monitor and react to cash-flow shocks in commercial mortgage-backed securities (CMBS). Using detailed micro data around the onset of the Covid pandemic, we show that lease expiration predicts commercial real estate mortgage delinquency, particularly for offices due to lower demand. Insurers monitor these risks and sell more exposed CMBS – mirrored by a surge in small banks holding CMBS. This monitoring effort also affects insurers’ trading in other assets, indicating limited risk assessment capacity. Our findings reveal that institutional investors actively monitor underlying asset risk and can even gain informational advantages over some banks.
Insurers monitor shocks to collateral: micro evidence from mortgage-backed securities
