CRE Risk: Recommendation of the European Systemic Risk Board of 1 December 2022 on vulnerabilities in the commercial real estate sector in the European Economic Area (ESRB/2022/9) 2023/C 39/01
The European Systemic Risk Board, ESRB, evaluates risks and vulnerabilities in the commercial real estate sector (CRE) and recommends measures that national competent authorities may take to monitor and mitigate those risks. This recommendation was published in the Official Journal (OJ).
In this recommendation, the ESRB identifies inflation, increasing interest rates, and falling real estate prices as the key risks currently prevailing in the CRE sector which could affect a large number of financial market participants ranging from real estate funds, to financial institutions, to ultimate retail investors.
To counteract these risks, the ESRB recommends a number of measures to be taken primarily by national competent authorities including the following – as largely quoted from our previous summary in EventID 19334:
1. Recommendation A: Supervisory authorities must closely monitor systemic risk that may arise from the current situation. This includes the monitoring of commercial real estate prices, the economic outlook particularly in the real estate segment and the construction sector, and the monitoring of investment activities in this area.
2. Recommendation B: Supervisory authorities must closely monitor the CRE loan practices of financial institutions and must ensure that institutions have adequate risk monitoring policies in place to guard against the current risks. Such policies shall include, among others, the regular assessment of the quality of CRE loans, the evaluation of the value of collateral (real estate), and the „adjustment of capital projections“ to reflect the current risks.
3. Recommendation C: Whenever needed and based on the assessments noted under (1) and (2), supervisory authorities may take micro- and macroprudential policy measures to increase the resilience of financial market participants such as the increase of capital buffer requirements of financial institutions or the imposition of leverage restrictions for investments funds heavily engaged in commercial real estate.
4. Recommendation D: The European Commission shall consider the implementation of Union-wide rules as regards measures that shall be taken in case any of the noted risks materialize and threaten the financial stability in the EU. Such rules would not only reduce the impact of the risks on the EU financial market, but would also ensure a level playing field among countries in the EU and thus prevent regulatory arbitrage by financial market participants.
