The European Central Bank According to informed sources, signals to commercial banks that they will have to expect higher capital requirements if they do not have the risks from commercial real estate under control. Banking regulators are placing more emphasis on managing commercial real estate risks as part of their discussions with bank managers ahead of the annual determination of capital ratios for individual banks, say insiders with knowledge of the matter. Although the individual capital requirements are unlikely to apply until next year, the early warnings should enable banks to minimize losses from these loans, the insiders continued. The ECB declined to comment. The central bank’s banking supervisory authority has already made it publicly clear that eliminating risk management failures is its top priority.
US commercial real estate risk is spilling over into Europe
The key interest rates raised to combat inflation placed additional pressure on the commercial real estate market, which was already burdened by the trend towards home offices in the office sector and by the increasing popularity of online ordering in retail.
The ECB has been scrutinizing banks’ lending practices for several years and has repeatedly criticized the institutions for taking too many risks. In December she criticized banks for overvaluing their collateral. According to reports, pressure from the ECB has already led to banks making higher provisions for possible losses in the commercial real estate segment last year. Since actual credit losses have already occurred in individual cases, the supervisory attitude is evolving, it is said.
Insiders do not believe that the turbulence in the commercial real estate market will have a significant impact on banks’ capital ratios. They see the pressure on banks’ risk management as a way to keep the damage to a minimum. The ECB wants to ensure that banks are thorough and proactive when analyzing credit, particularly as interest rates change, said Elizabeth McCaul, a member of the ECB’s supervisory board, at a recent conference. Banks have been “slow” to rate real estate loans as riskier, McCaul said.