EBA warns of €1.4tn EU bank commercial real estate exposure; Fitch: climate debt freezes won’t hit MDB ratings
Banks in Germany, France and other EU countries have lent over €1.4tn to the commercial real estate sector, creating potential vulnerabilities, the European Banking Authority has warned.
In its latest risk report, the EBA said total EU bank exposure to commercial real estate has increased by 40 per cent to €1.4tn over the past decade, with smaller banks holding exposures that are now multiple times their equity being particularly at risk.
German and French banks reported the largest exposure, with €280bn tied to commercial real estate, while Dutch banks followed closely with €175bn.
EU banks have provisioned €31bn against potential real estate loan defaults and the risks should be “manageable”, the EBA said, adding that measures including Denmark’s capital buffer for property risks are one way to mitigate such risks.
The report also examined banks’ exposure to private credit and non-bank financial intermediaries such as investment funds. The EBA noted rapid growth in debt issued by banks to NBFIs, now accounting for more than a quarter of total bank-issued debt, which it said could pose risks to market stability amid a real estate downturn.
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As reported by Reuters, the World Bank and other major development banks introduced “climate resilient debt clauses” last year to allow low-income countries to defer repayments for up to two years in the event of severe climate disasters. Concerns arose that these clauses might impact the institutions’ triple-A ratings, which are crucial for securing low borrowing costs.
Fitch, however, stated that these clauses would have minimal impact on the banks’ overall balance sheets. “The introduction of deferral clauses would typically be rating neutral,” Fitch said, provided they do not significantly affect the institutions’ liquidity position.
Arnaud Louis, head of supranational ratings at Fitch, noted that defining its stance on CRDCs addressed a “gap” in its rating framework for multilateral lenders, especially as the clauses are expected to become more common amid rising climate concerns.
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European Central Bank policymaker Gabriel Makhlouf said on Tuesday he was comfortable with just one more interest rate cut this year, citing the need for more time to ensure the central bank’s 2 per cent inflation target is met.
Investors are expecting at least one, possibly two, additional cuts by December, following a drop in eurozone inflation from 10 per cent in late 2022 to 2.5 per cent last month.
“I am comfortable with expectations of another cut,” said Makhlouf, the central bank governor of Ireland and a member of the ECB governing council, in an interview with Reuters at the ECB’s Forum on Central Banking in Sintra, Portugal, adding that two cuts in the near term might be excessive, though not entirely off the table.
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UBS is experiencing a shift in how clients interact with their bankers, driven by artificial intelligence, according to Sabine Keller-Busse, head of the bank’s domestic business.
Speaking at the Point Zero Forum in Zurich, Switzerland, she compared the trend to patients visiting doctors with self-diagnosed ideas, noting that clients now use AI to develop proposals for the bank.
“With ChatGPT, there’s more data available,” Keller-Busse said. “We have to be aware that our clients are using it.”
UBS has been integrating AI into its services, last year launching a pilot for instant credit aimed at small and mid-sized companies. This service makes it possible to bypass traditional credit officers, speeding up the process for authorising standard credit products.
