The European central bank (ECB) sounds the alarm: The fall in commercial real estate prices represents a significant risk for European banks and could lead to long-term burdens in the coming years. This warning from the ECB does not come out of nowhere, because similar problems have already led to turbulence in the USA.
In the United States there are mainly regional banks, who financed commercial real estate, felt the effects of the price decline. Recent interest rate hikes have brought some of these institutions to the brink of collapse. But the problem doesn't just affect the USA; The danger is also omnipresent in Europe.
According to Bloomberg, lending by European banks amounts to, that are secured by commercial real estate, on 1,2 Trillions of euros – a significant proportion of 8,3 Percent of the total loan portfolio. These figures come from data from the European Central Bank (ECB). Claudia Buch, Chairwoman of the ECB Supervisory Board, emphasized, that commercial real estate is particularly vulnerable and has an above-average proportion of non-performing loans.
The ECB has been following developments in the commercial real estate sector for a long time 2017 Exactly. It was determined, that some real estate companies have taken out loans, the repayment of which would become problematic in the event of rising interest rates. The pandemic has further increased pressure on the sector, as many jobs have been relocated to home offices, which led to a decline in sales in restaurants and shops. The subsequent rise in interest rates after the pandemic added to the pressure, because refinancing takes place under different conditions and variable-interest loans have to be revalued.
To deal with this risk, According to Bloomberg, measures are already being discussed in the ECB. It is expected, that banks will require higher collateral and take more risk provisions.
Another problem is the banks' lack of transparency regarding their loan portfolios. Since 2018 The ECB has the real estate portfolios of more than 40 Banks in Europe, Great Britain and the USA examined. It was discovered, that some institutions did not recognize the potential for significant losses and did not have sufficient information about their loans.
Jose Manuel Campa, Head of the EU banking supervisory authority EBA, warns banks about the long-term consequences of the fall in commercial real estate prices. However, he emphasizes, that the sector is not facing immediate systemic danger. Nevertheless, the example of the German Pfandbrief bank shows, how quickly a bank can come under pressure, particularly if it has significant exposure to the US commercial real estate sector.
Overall, the ECB's warning highlights the urgent need for European banks, prepare for the ongoing risks in the commercial real estate sector and take appropriate measures, to minimize possible stress.