European Banks: Disclosure Challenges in Commercial Real Estate

The commentary analyses the challenges of Commercial Real Estate (CRE) disclosures in Europe.

Summary highlights from the commentary include:

• CRE remains a prominent sector in terms of asset size and implications for financial stability. Past experience shows that CRE can pose significant challenges for the banking sector due to its cyclicality.

• While the long-term implications of the pandemic for the CRE sector still remain uncertain, the conflict in Ukraine, inflationary pressure and a rapid and significant increase in the cost of funding could stress borrowers and consequently affect banks’ credit quality.

• Comparable data on CRE loans for European banks is available through the EBA’s Transparency Exercise. We took a look at two different FINREP reporting systems: NACE (F - Construction and L - Real Estate activities) as well as “Loans collateralised by commercial immovable properties”. We found out that, whilst both criteria overlap, there are some significant differences.

“Disclosure on CRE exposures remains generally limited in Europe, however we recognise that, in recent years, regulators and supervisors have enhanced the level of scrutiny, harmonisation and transparency.” said Borja Barragán, Senior Analyst from the DBRS Morningstar Global Financial Institutions team.