The Bank of England (BoE) has confirmed its intention for deeper consultation with the commercial real estate (CRE) industry over the development of loan database for the sector while acknowledging that the benefits must outweigh the costs.
In its response to the discussion paper on UK credit data for both SME and CRE markets in May 2014, published today, the UK central bank stated that the processes will be separate.
For the UK commercial real estate market, the BOE confirmed that the majority of respondents– subject to costs – supported the recommendation of the Real Estate Finance Group (REFG) to establish a loan-level database for CRE loans.
“Most respondents agreed with the REFG assessment that the main information problem in the CRE market was that lenders and regulators need more data to understand the market and assess lending risks better,” wrote the BoE in its response.
However, the BoE recognised the considerable complexity in developing a loan database of commercial property loans but stopped short of indicating an intention for an all-embracing solution which also captures loans by debt funds.
The BoE’s outlined the following considerations:
- How to capture time series data on loan performance;
- Whether, and how, to capture lending by non-regulated institutions (such as debt funds);
- How much data should be made publicly available (for example, suitably anonymised data could allow market participants to better price risk and support market-based finance initiatives, such as securitisation);
- Whether a database should be delivered in house or by a third party;
- The appropriate technology for delivering a database.
“In considering the above issues, the Bank will engage closely with participants from the CRE industry, to ensure that the benefits of developing a CRE loan-level database outweigh the costs,” the BoE wrote.
“Previous CRE loan-level data collections by the Bank and the Prudential Regulation Authority have demonstrated the value of information at this granular level, but have also illustrated data shortcomings at banks that would need to be rectified for a database to be feasible.”
Initial industry response to the BoE’s commitment to engage with the sector on the viability of CRE loan database has been positively received, with the market encouraged by the central bank’s acknowledgement of the sector’s bespoke information problems.
CREFC Europe said: “We are pleased that the Bank of England sees the case for taking this idea forward, while recognising the need for close consultation with the industry to ensure pitfalls are avoided and that implementation is practical and cost-effective – as we believe it can be.”
Peter Cosmetatos, chief executive of CREFC Europe, added: “Better ‘big data’ transparency around the CRE debt market presents a tremendous opportunity for UK banks and other lenders, as well as for debt investors, borrowers and ultimately financial stability and the economy as a whole.
“We see this as a vital first step towards a more stable UK CRE debt market. We hope the Bank of England and the Prudential Regulation Authority will build on it by working with the industry to implement the rest of the Vision as well.
“For UK banks, a comprehensive national CRE loan database is the route to better models and capital rules that reflect economic risk better than ‘slotting’ does. Any investment in information management systems that might be required should also improve banks’ ability to use and manipulate their own data.
“Enhanced visibility and comparability of CRE loan information can only be a good thing for debt investors and, by extension, those seeking to distribute loans whether through securitisation, syndication or investment funds.
“For borrowers, a national CRE loan database should standardise the information requirements from different lenders, ultimately simplifying reporting requirements and reducing the administrative costs of borrowing.
“Finally, a comprehensive loan database will provide incredibly valuable insight for everyone interested in understanding the structure and composition of the market, capital flows and the cycle – including regulators, academics and analysts – even while allowing the underlying market to remain a private one.
“Having said all that, this remains a major project and there will be many opportunities to get it wrong. We are encouraged that the Bank is seeking to engage with industry to ensure mistakes are avoided. We plan to participate fully in that process, and encourage others to do so as well.”