The commercial real estate market, which has come under severe pressure, represents an increased risk for individual banks, but not a “systemic risk” at the European level. The fall in commercial real estate prices, as much as it may be a sensitive issue for German and Austrian banks and their supervisors, will not trigger “a new financial crisis”. This comforting view was represented by the Chairman of the EU Banking Supervision (EBA), the Spaniard Jose Manuel Campaon a working visit to Vienna.
Individual mega-bankruptcies in this area, most notably the implosion of René Benko’s Signa conglomerate, did not change this. According to Campa’s host, FMA board member Helmut Ettl, the Signa bankruptcy was to a certain extent anticipated by the domestic supervisory authority in close communication with the institutes and was therefore always manageable in terms of risk.
The reasons for the problems in commercial real estate
The main trigger for the problems in commercial real estate is the record-breakingly rapid rise in (key) interest rates in the last two years in the fight against record inflation.
Despite the now falling interest rates, banks still need to be cautious, say Campa and Ettl in unison. This is shown by the above-average rate of bad loans, which has risen to five percent. And generally the higher loan volume in this part of the overall loan market.
Ettl unsurprisingly defended financial market supervisory measures, such as the recently ordered higher equity buffer for commercial real estate loans, as “appropriate” against criticism from banking circles. In Europe, even those countries that have not taken such measures represent a very small minority, argues Ettl.
Fixed or variable
But every country in Europe is different and every large bank has to be viewed individually, says Campa. In his home country of Spain, most loans are granted on a variable basis. The banks’ profits therefore increased enormously during the phase of interest rate rises. In France, where the EBA is based and Campa lives, around 90 percent of the loans have fixed interest rates. The banks’ profits have hardly moved and are now tending to be lacking in view of major investment requirements, for example in digitalization.
Other issues for European banking supervisors include increasing cyber attacks or, for example, banks’ indirect exposure to China. Direct lending to China is low, but large European companies such as Volkswagen are heavily involved in China. The problems at VW could also affect banks in the EU in this detour, says Campa.