MNI BRIEF: CRE Loan Books A Risk To Financial Stability - ECB
Euro area bank's exposure to commercial real estate downturn could amplify other losses, leading to systemic crisis
Distressed commercial real estate (CRE) loan portfolios could “significantly amplify” the effects of adverse scenarios in other sectors, leading to "systemically relevant losses" for investment funds and insurers, a report published by the ECB Tuesday reported
Most euro area countries have taken macroprudential measures to address vulnerabilities in the residential real estate sector caused by recent rapid interest rate rises, with banks’ loan books also receiving some support from rising wages. However, policy action targeting CRE has been more limited, the report -- a pre-release from the upcoming Financial Stability Report, said.
“A comprehensive policy response for CRE markets would require multiple measures to be implemented to target all exposed actors and avoid leakages and would need to take particular care to avoid procyclicality,” the study concludes. “Regardless of whether targeted RRE or CRE measures are in place in each country, however, the internal processes of banks and non-banks should ensure that their provisioning practices and capital properly reflect the level of accumulated vulnerabilities.”