Industry group slams EBA’s proposed ‘shadow bank’ rules

European Banking Authority (EBA) guidelines have come under fire from the property industry, fearful they could limit bank lending into real estate funds.

Draft guidelines would classify alternative investment funds, including real estate funds, as shadow banks and subject them to lending limits, according to a joint statement from a group of European property associations, including The British Property Federation (BPF) and the Commercial Real Estate Finance Council (CREFC) Europe.

The EBA, set-up in the wake of the financial crisis to regulate Europe’s banking sector, last week completed its consultation on exposure limits to shadow banking entities after publishing a paper on the issue in March. It is attempting to insulate the mainstream banking sector from risks in the wider financial system, including shadow banks.

But the real estate associations, which also included the Investment Property Forum (IPF) and the German Property Federation (ZIA), argued that the EBA proposal would “shoehorn all alternative investment funds, regardless of their characteristics, into its shadow banking definition”.

The EBA used the Alternative Investment Fund Managers Directive (AIFMD) to define a shadow bank. Ion Fletcher, director of finance policy at the BPF said: “It is frustrating to see the EBA take such a broad-brush approach to who should be affected by the new guidelines.”

The Financial Stability Board, an influential body of regulators based in Switzerland that monitors the global financial system, had identified real estate equity funds as being “typically not part of the credit intermediation process”.

“A cornerstone of shadow banking regulation should be that it can only apply to entities that carry on bank-like activities. Real estate funds investing in buildings do nothing of the sort,” said Peter Cosmetatos, chief executive of CREFC Europe.

Real estate debt funds, meanwhile, although involved in the supply of credit, posed limited financial stability risks in Europe.

Cosmetatos said it was “disappointing that Europe’s banking regulator seems determined to ignore the vital role that commercial real estate debt funds are playing in helping credit flow to the real economy, dispersing risk in the financial system and helping the banks reduce their exposure to debt”.

“These funds are mostly closed-ended and use little or no leverage, providing credit to property businesses under the regulatory framework of the AIFMD. Even based on the EBA’s own reasoning, most CRE debt funds do not present shadow banking risks and they should not be branded as ‘shadow banks’.”

An EBA spokesperson said: “The EBA is mindful of the need to ensure that the of ‘shadow banking entity’ definition is appropriate and in line with the objectives of the guidelines, which are to address macro and micro prudential risks, and is workable in practice.”

“Whilst this is the first time a definition of the term will have been developed for the purposes of an EU regulatory instrument, the definition is being developed for the specific purposes of the guidelines and may not be suitable in other contexts.”

The EBA said it would soon publish a report on the definition of ‘shadow banking entities’ and how it has responded to industry feedback.