Bank of England publishes working paper on insurers’ CMBS risk monitoring and the post-pandemic shift of office CRE exposure to small banks

The Bank of England published Staff Working Paper No. 1,119 analysing how insurance companies monitor and respond to cash-flow shocks in commercial mortgage-backed securities (CMBS) around the onset of the Covid-19 pandemic. Using micro-level evidence, the paper links lease expirations to higher commercial real estate (CRE) mortgage delinquency, particularly for offices, and finds that insurers respond by selling CMBS with greater exposure to those risks, with holdings rising among smaller banks. The research finds lease expiration is associated with about 1.3 percentage points higher delinquency in the baseline period and an additional 1.2 percentage-point increase post-pandemic. Insurance companies are shown to be major CMBS investors, holding about USD 200 billion of roughly USD 800 billion outstanding by end-2022 and close to one-fourth of newly issued private-label CMBS between 2017 and 2022; the median insurer’s private-label CMBS portfolio has around 26% office exposure. After Covid, insurers are over two percentage points more likely to sell office-exposed CMBS where leases expire within six years, acquire fewer office-exposed CMBS, and demand higher coupons on post-pandemic office-exposed issuance (around 15 basis points per one percentage-point increase in office exposure). The analysis also documents spillovers consistent with limited risk-assessment capacity, including reduced selling of other risky assets by insurers with larger office exposure, and evidence that risk is reallocated toward banks, with the number of small banks holding private-label CMBS nearly doubling between 2020 and 2023. The working paper is published as research in progress to elicit comments and does not represent Bank of England policy.