Creating a uniform European regulatory environment for real estate lending is an uphill battle that will prove difficult to enforce according to industry experts at Real Estate Capital’s London forum.
“The European Central Bank has outlined commercial real estate as an area they are concerned about and there are attempts to create a more level playing field internationally,” said Shirley Smith, executive director at EY and former principal credit risk specialist at the Bank of England.
“With different regulators within each country and lenders acting internationally some such as German banks are able to be more competitive and maybe be more selective as a result. The ECB has seen this and is attempting the not easy task of creating uniformity.”
Peter Denton, head of European debt for Starwood Capital (pictured) who formerly worked at German banks WestImmo and Eurohypo, said that there are “huge discrepancies” between how some types of European banks are able to operate. German banks have a competitive advantage because of their ability to access cheaper funding through the pfandbrief capital market and fewer regulatory restrictions.
“The German banking system judges its own risks and applies its own capital, whereas the UK banks have a matrix model imposed upon them and as a result you get some very stark results and differences,” he said.
However, he believed that the model imposed upon the UK’s banks by the Bank of England, through slotting, had changed behaviour for the better.“The amount of capital allocated by a UK bank for higher risk lending is extremely high and some feel straight-jacketed but I think those banks have done great and are on an orderly course. If you go to Germany, 80% or 85% loan-to-values are already back for residential and even commercial property.”
How and on which organisations any new regulation or reporting requirement should or could be applied was also an issue of debate. Whilst one school of thought says that regulation should only apply to those institutions fundamental to the future of the economy the opposing view suggests that legislation should be applicable to all lenders, be they banks, insurers or funds in order to create a fair market place.
“Insurance companies and banks have different sources of capital so it doesn’t seem right to regulate them in the same way. It is important to have some sort of consistency but it wouldn’t be appropriate to imagine you could have one size fits all regulatory solution,” said Drew Abernethy, principal at Pricoa Mortgage Capital.
One of the most controversial proposals of the Vision for Real Finance in the UK report which came out this year was the recommendation that lenders should have to contribute to a central loan database, that would be public, an idea that has been seen by some lenders as costly, cumbersome and unwelcome.
A database would have many benefits, however, one being an important way of keeping track of all of the new market participants shaping the real estate lending market and the impact they are having according to Matt Webster, global head of real estate finance at HSBC and part of the working group that created the report.
“At any one point in time any group of lenders could contribute a large portion of the market. If you look at CMBS, that used to make up around 20% of the market and it was accused of doing a large amount of the damage that brought about the crisis; imagine what the damage 45% could do if non-bank lending were to get (that high),” he said.
Smith said the Bank of England had already collected £152bn of loan level data during 2010-2011 and any database would have to be “driven” by the regulator to happen. In 2010, “one of the restrictions” she said, “was the banks inability to produce the right data” and “one of the benefits” of a database would be “it will get banks to produce better data”.