The European Banking Authority has raised concerns about the significant exposure of European Union banks to the commercial real estate sector. In its latest risk report, the EBA revealed that banks across the EU have lent more than €1.4 trillion ($1.5 trillion) to commercial real estate, potentially leaving some lenders vulnerable to market instability.
The EBA's report, which surveyed approximately 80% of the EU banking sector, highlighted that total bank exposures to real estate have increased by 40% over the past decade. This surge in lending has put several banks, particularly smaller institutions, in a precarious position where their exposures now exceed multiples of their equity. Such high levels of exposure make these banks susceptible to market downturns and potential losses.
German and French banks emerged as the most exposed to the commercial real estate sector. Banks in these two countries reported exposures exceeding €280 billion each, followed by Dutch banks with €175 billion. The EBA noted that German banks, in particular, reported an elevated share of their total client lending towards commercial real estate borrowers. This concentration of risk in specific markets and institutions has raised concerns about the potential for localized financial stress.
While the EBA acknowledged that EU banks have already set aside €31 billion to cover potential losses from real estate loans, it emphasized the need for continued vigilance. The watchdog stated that the risks should be "manageable" but pointed to Denmark's capital buffer for property risk as an example of how such risks could be mitigated. This suggests that regulatory bodies may consider implementing similar measures across the EU to safeguard against potential real estate market shocks.
The report also drew attention to the growing role of non-bank financial intermediaries (NBFIs) in the European financial landscape. As of December 2023, the NBFI sector accounted for more than 25% of bank-issued debt. The EBA noted that private credit, or lending by NBFIs directly to households and businesses, has been "rapidly accelerating" in several EU states. While this trend brings welcome competition for borrowers, it also introduces new risks, such as potentially lower lending standards.
The EBA stressed the importance of monitoring the interconnections between banks and NBFIs to detect potential contagion channels early. It called for improved transparency and better data collection on the linkages between these two sectors of the financial system. In response to these developments, the European Commission has begun exploring the possibility of implementing a macroprudential framework for NBFIs, signaling a potential shift in regulatory approach to address emerging risks in the financial sector.
Despite these concerns, the EBA report also contained some positive observations. It noted that capital levels among EU banks are generally "comfortable." However, the watchdog cautioned against excessive optimism, pointing out that planned payouts for 2024 are expected to reach nearly €100 billion for the surveyed banks, the highest volume in years. This increase in payouts, while reflective of higher profits, could potentially erode the capital buffers that banks have built up in recent years.
