ESRB published a report that analyzes the financial stability risks and vulnerabilities related to the commercial real estate markets in EU. The report studies both common trends across EU countries as well as country-specific vulnerabilities and finally discusses the possible policy instruments available to address such vulnerabilities.
The report reveals that banking sector in some countries remains highly exposed to commercial real estate, but non-banks and foreign investors also seem to be playing an increasingly important role in commercial real estate markets. Some instruments and measures, which mainly target the banking sector, are available to macro-prudential authorities seeking to address commercial real estate-related vulnerabilities. EU legislation, through the Capital Requirements Directive (CRD IV), provides instruments that can address commercial real estate-related vulnerabilities in the banking sector using capital-based measures, which include increased risk-weights, loss given default (LGD), or own fund requirements. Moreover, the Alternative Investment Fund Managers Directive (AIFMD) includes instruments that can be used to address commercial real estate-related vulnerabilities in investment funds through leverage limits as well as liquidity management tools such as the suspension of redemptions. Depending on the availability of borrower-based measures in national legislation, measures such as loan-to-value (LTV) limits and debt service coverage ratio/interest coverage ratio (DSCR/ICR) floors can also be used to address commercial real estate-related vulnerabilities.
The report highlights that capital-based measures may also be implemented to increase the resilience of the financial sector and to influence cyclical developments in commercial real estate markets. The effective regulation of risk-weights for commercial real estate exposures in many countries would require adjustments under the internal ratings-based (IRB) approach. This is because risk-weights for most of the bank exposures are based on IRB models in many countries, although most countries have implemented measures to increase commercial real estate risk-weights using the standardized approach. However, EU legislation limits countries’ possibilities with regard to correcting or increasing risk-weights for IRB banks to address commercial real estate vulnerabilities. Finally, the report recommends that, given the rising importance of non-bank and cross-border financing in commercial real estate markets, it is important to investigate whether new instruments should be made available and, in addition, implemented beyond banking.
Related Link: Report (PDF)
Keywords: Europe, EU, Banking, Commercial Real Estate, CRD IV, IRB Approach, Standardized Approach, Macro-prudential Measures, ESRB
Previous ArticleHKMA Updates Enhanced Competency Framework on Cybersecurity
EIOPA submitted—to the European Parliament, the Council of the European Union, and EC—its 2020, fifth, and last annual report on long-term guarantee measures and measures on equity risk.
The BIS Innovation Hub Swiss Centre, SNB, and the financial infrastructure operator SIX announced the successful completion of a joint proof-of-concept (PoC) experiment as part of the Project Helvetia.
EBA published the final draft regulatory technical standards for calculation of own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework.
EIOPA published discussion paper on a methodology for the potential inclusion of climate change in the Solvency II (sometimes also written as SII) standard formula when calculating natural catastrophe underwriting risk.
EU published, in the Official Journal of the European Union, corrigenda to the Directive and the Regulation on the prudential requirements and supervision of investment firms.
MAS proposed amendments to certain regulations, notices, and guidelines arising from the Banking (Amendment) Act 2020.
PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.
RBNZ launched consultations on the scope of the Insurance Prudential Supervision Act (IPSA) 2010 and on the associated Insurance Solvency Standards.
SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.
EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.