Long-run relationships among coal inventories at U.S. electric power plants, corporate bond rates and coal, natural gas, and electricity prices are estimated over the period July 1976 to October 2014. Tests for constancy of the long-run relationships show periods of instability which coincide with major regulatory events in the electric power sector. Deregulation of the natural gas and electricity markets are likely sources of instability for the period mid-1994 to mid-2001. Additionally, inventory behavior may have had a smoothing effect over instability caused by natural gas prices during the recent U.S. shale boom. Policy makers should be aware that altering the regulatory environment can result in considerable fluctuations in how firms' inventory decisions interact with input and output markets and opportunity costs in the long run.
The Covid-19 pandemic had an immediate and substantial impact on the commercial real estate (CRE) market-emptying workplaces, shopping centers, and hotels, thus affecting the cash flows of businesses occupying commercial space and in turn the ability of commercial space owners to meet their debt obligations.Delinquent CRE loans began to surface soon after the pandemic started and remain elevated in 2021. Broad loan delinquencies would represent a potential threat to bank capitalization and solvency, particularly for smaller banks that tend to have higher concentrations in CRE lending.Collateral and loan performance have varied significantly by property type during the pandemic. However, regulators do not collect information on CRE exposures by property type at smaller banks, which limits our insight into the systemic implications of CRE exposures at these firms.In this Chicago Fed Letter, we explore the shock to the CRE market brought about by Covid-19 and describe how it has affected bank portfolio-held CRE loans to date. Our insights are derived from large banks' data since small banks, which turn out to be the most exposed to CRE loans, have less granular reporting requirements. We also discuss the headwinds facing the sector, considerations for banks and regulators going forward, and potential regulatory blind spots due to reporting data granularity.The Covid-19 pandemic caused an immediate reduction in on-site business activity, reducing the cash flows of companies occupying commercial properties. As businesses shut down or downsized, vacant CRE space increased. The shock varied heavily across sectors as certain property types (e.g., hotel, retail, and office) experienced more dramatic stress than others (e.g., multifamily and industrial). Similar variation in market fundamentals was observed across geographies, with large, urban locales faring worse than smaller metros and suburban areas.The shock to the CRE market affected the ability of property owners to satisfy their debt obligations. Delinquent CRE loans began to surface soon after the Covid-19 pandemic started and remained at elevated levels as of 2021:Q1. The pandemic has also led to declines in collateral valuations, which can affect the dollar amount banks recover when foreclosing a delinquent loan.
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