The trade body for commercial real estate finance has submitted a response to the EC’s consultation on how the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV) impact the flow of credit from banks to the real economy.
The EC was particularly concerned as to how these rules affect lending to small businesses and long-term investment in infrastructure projects.
CREFC Europe agrees with the EC’s focus on bank lending to infrastructure and SMEs – two vital aspects of any healthy economy.
However, CREFC Europe is concerned that the EC has failed to take account of the importance of CRE to the wider economy in its review.
A functioning CRE market is vital to both SMEs and infrastructure development, the trade body says, pointing out that CRE is bound up with both the SME economy and the need for, and viability, financing and delivery of infrastructure.
CREFC warned the EC it was “senseless for policymakers to seek to promote SME and infrastructure finance while ignoring – or even penalising – CRE finance”.
In its submission to the EC, CREFC wrote: “A sustainable flow of credit to the CRE investment industry is (indirectly) essential for the wider economy.
“Unfortunately, negative associations between real estate risk and the global financial crisis appear to have steered policymakers and financial regulators into inappropriately ignoring or penalising CRE finance and/or particular forms of CRE exposure.”
CREFC wrote that the most obvious example is the way regulators have persistently sought to revive high quality or simple, transparent and standardised securitisation in ways that relegate securitised CRE debt to the opaque, high risk category.
“While that may seem justified from a narrow ABS perspective, it makes no sense when securitised CRE debt is seen in the economically and functionally meaningful context of the wider CRE debt market,” CREFC wrote.
“Securitised CRE debt, or CMBS, represents a very small part of that wider market, but it is also the most transparent and liquid part, and an element that has generally performed no worse (or better) than the CRE debt originated by banks before the crisis for their own balance sheets.
“Policymakers need to adopt a broader perspective and take account of the economic and functional context of securitisation in CRE debt markets.
“While the regulatory refusal (so far) to rehabilitate any part of the securitised CRE debt market discourages the distribution of CRE risk by banks into the bond market, other changes to banking regulation discourage the retention of CRE risk on balance sheet.”
The best example of this is the imposition of ‘slotting’ on all UK regulated IRBA banks. One of the indirect consequences of the slotting regime is greater risk distribution through the syndication market, rather than bond distribution through CMBS.
CREFC stated: “Policymakers need to consider whether it is appropriate for regulation to be encouraging such investors to gain CRE debt exposure through the loan market rather than through the more liquid, diverse and transparent securitisation market.”
The current regulatory environment does not reflect in its capital rules the real risks of different types of debt instrument (including CRE debt and CMBS), wrote CREFC, which gives rise to three problems:
- Misaligned capital rules actively work against the objective of promoting a sustainable, diverse supply of finance to the real economy;
- A regulatory system that wrongly calibrates the risks of investing in particular types of asset is unlikely to deliver the best outcome in terms of capital allocation either across different instruments (covered bonds v ABS v loans, for example) or across the economy; and
- The underlying risks (and benefits) of CRE and CRE debt cannot be made more visible or dealt with more efficiently in the interests of the economy and financial stability without a more holistic and functional approach to this sector.
CREFC concluded: “We would recommend that changes be made to the regulatory treatment of CRE (especially securitised CRE debt or CMBS) in order to allow it better to fulfil its potential in supporting the rest of the economy.
“The way CRE debt markets evolve in Europe is important for the economy, financial stability and the productive deployment of capital by, and for the benefit of, investors.”
Peter Cosmetatos, CEO, CREFC Europe, who wrote the submission added: “Regulators continue to ignore the very real benefits CRE brings to the wider economy.
“Unfortunately, the global financial crisis and real estate risk continue to be linked in their considerations, the hangover from which leads policymakers and financial regulators inappropriately ignoring or penalising CRE finance or particular forms of CRE exposure. Continuing to do this however has implications for infrastructure and SMEs.”