“It’s not all that bad” when it comes to loans

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.