Submissions on the Bank of England’s (BoE) discussion paper on UK credit data have been lodged this morning with CREFC Europe, the trade association for global commercial real estate finance markets, supporting a proposed statutory-backed database for UK commercial real estate (CRE) loans.
The British Property Federation, the Real Estate Finance Group (REFG), IPF as well as a number of expected individual company submissions and a joint submission co-authored by Paul Rivlin, co-founder of Palatium Investment Management, and Natalie Howard, a partner at Agfe, also submitted.
In May, in the BoE’s published a discussion paper – entitled, Should the availability of UK credit data be improved? – author Kieran Dent outlined that one of the impediments to improving the diversity and robustness of market-based financing in the UK might be the availability of credit information.
The scope of BoE’s discussion paper encompasses commercial credit information. Within this scope, the lack of a central repository of commercial real estate credit information in the UK was highlighted as a perceived “significant shortcoming”, referencing REFG’s A Vision for Real Estate Finance in the UK discussion paper, published in October 2013.
In the discussion paper’s executive summary, the BoE’s Dent continued: “Lenders need to access borrowers’ credit information as part of their assessment of the risks associated with lending. The sharing of credit data between lenders can reduce the problem of borrowers being better informed about their creditworthiness than lenders and support the ongoing monitoring of borrower risk-taking.”
The BoE added that comparable databases already exist within Europe, including shared central credit register (CCR), typically owned and operated by central banks or financial supervisors, as well as closed user groups operating credit reference agencies (CRAs).
At the heart of this discussion paper is whether or not a UK central repository of credit information should be mandatory, backed by statutory powers, or voluntarily.
In the executive summary of the BoE’s discussion paper, Dent alluded to “some degree of mandatory reporting may therefore be beneficial” in respect of an SME UK credit information central repository, but it is not clear whether the Bank applies this thinking in respect of a proposed CRE credit information central repository.
CREFC told CoStar News: “You need a mandatory regime firstly to achieve comprehensive coverage of the UK CRE debt universe, and secondly because the quality and reliability of voluntary data submissions will always be questionable, as we know from the De Montfort research.
“The market benefits of greater transparency and liquidity also depend on the standardised definitions and consistent reporting requirements that only a mandatory regime is likely to deliver.”
CREFC Europe, whose chief executive officer Peter Cosmetatos was a principal author of REFG’s Vision report, makes the case for a universal UK CRE loan-level database, stressing that such a central data repository is “a key step to improving its transparency and liquidity”.
CREFC sees the creation of a comprehensive UK CRE loan database as “a foundational element for promoting a healthier, more liquid and more stable CRE debt market that poses lower risks to financial stability”.
In its submission, CREFC states: “The CRE debt market has been diversifying rapidly since the crisis, with a range of different lenders (both banks and non-banks) subject to very different capital and broader regulatory regimes.
“We believe that a CRE loans database could help promote the development of a more coherent and informed regulatory framework, so differentiated regulatory treatment is either deliberate or avoided, with the consequences (either way) better understood, and undesirable consequences avoided.”
CREFC explained that the focus of a CRE loans database should be on collating robust, comparable, anonymised data to help elucidate the dynamics of the market and particular segments of it.
“Better publicly available and publicly scrutinised market data would support more cycle-aware lending practices and risk management at the institutional, as well as market, level,” CREFC wrote.
For clarity, CREFC is not purporting that a CRE loans database is intended to support credit checks against individual business borrowers, “but rather to provide robust, comparable, granular data that can be interrogated and analysed by market participants, investors, analysts, academics and regulators seeking to understand market composition, trends and cycles.”
The submission continued: “From the market perspective, better quality, transparent data should encourage greater standardisation and consistency in loan documentation, improving market liquidity and making CRE debt a more credible investment proposition, particularly for indirect and passive investors.
“From the regulatory perspective, access to timely, reliable, comparable data is a necessary (albeit not sufficient) condition for good micro- and macro-prudential regulation.
“If regulators have access to appropriate expertise (internally and externally), they will be far better positioned to manage the feedback loops between property and credit cycles effectively, enhancing the resilience of the financial system and the stability of capital flows.”
Rivlin and Howard’s co-authored submission makes a robust case against the compulsory registration of CRE loans backed by statutory powers, adding that there are “clear problems” which centre on costs, slowing down the process of executing loan origination as well as confidentiality concerns.
The submission stated: “We do not support the proposal to create a compulsory comprehensive database of UK loans. The proposal is a recipe for muddle and cost.
“The volume of information will be large and processing will be a major undertaking. The suggested benefits are unlikely to be achieved (and/or address issues that are not problems). The disbenefits are clear and substantial. Little or no relevant work has been done to support the assertions in the proposal (or to define the costs of implementation).
“We appreciate that the Bank is addressing a significant market failure and would support appropriate targeted measures but doubt that a comprehensive database would provide a valuable addition.”
Rivlin and Howard wrote that benefits of assembling a comprehensive database are not proven.
The submission continued: “The assertion that information should be collected so that academics and researchers can later think about what analysis can be made is not a good basis for effective research. Good research generally aims to test an identified causal relationship and demonstrate a correlation. No such proposals are put forward in the current papers.
“It is not clear to us that there are meaningful correlations to be identified in relation to CRE lending. Although CRE has been ‘research light’, various efforts have been made to link CRE price movements to other investment asset performance without success.
Insofar as there are ideas for testing new correlations, the appropriate way to assess them is to undertake controlled review with suitable sample data.
“The potential advantages that are listed for sharing CRE data need to be analysed further.”
In its submission, the BPF wrote that its members were supportive of an improved availability of CRE credit data which would provide regulators “with greater oversight of developments in the market in order to facilitate targeted and proportionate intervention”.
The BPF continued: “However, the BoE must be clear as to what it wants to achieve through better availability of credit data; supporting credit provision and maintaining regulatory oversight are two totally different objectives for which different approaches are needed.
“We envisage the creation of a database to maintain up to date information on CRE lending, although opinion among our members is currently divided as to how useful they would find it if it were publicly accessible.
“The benefits of data collection must outweigh the costs. The requirements for reporting to the database should be proportionate, standardised, consistent over time and if possible based on an existing framework. Only objectively measurable data should be included in a CRE loan database.”
The IPF, in its submission, wrote that it supports the recommendation of a CRE loan database in principle “as it may help to increase the understanding of loan risk through the CRE cycle and lower the barriers to new lenders, thereby creating diversity in the CRE finance market”.
The IPF continued: “We would urge that any introduction of any database be done in consultation with the CRE industry in order to maximise any ‘voluntary’ participation by lenders from the start and optimise the value of data collected over the short, medium and long-term.
“The costs of set up and running of the database need to be balanced against the likely benefits of a greater understanding of loan performance through the property cycle.
“We would, therefore, urge those involved in developing the database to have regard to the type and format of any data already collected by lenders for reporting purposes, e.g. as required by rating agencies, so as to avoid the need to provide data that is intrinsically the same but in a different form.”