Strict capital rules imposed on UK banks will increase costs for commercial developers and have a detrimental effect on the wider market, industry insiders have warned.
The regulations, called slotting, have been introduced by the Financial Services Authority (FSA) and are designed to formalise the method banks use to determine the levels of risk they are exposed to in relation to their holdings. Banks must demonstrate that the methods are in place along with their half-year results this summer.
Andrew Bailey, of the FSA, explained the authority’s position to a parliamentary committee earlier this week.
“We are withdrawing the right of modelling for commercial property because the models are so ropy. We are saying, put your loans into simple buckets. Don’t do pyrotechnics,” he said.
What this means is that property loans will be assigned to one of four ‘buckets’ (or ‘slots’) ranging from 50 to 250 per cent according to the level of risk. These will then determine the amount of capital banks are required to hold against potential losses.
However the move is causing alarm in the industry with many predicting that it will increase the cost of borrowing, make it more difficult to finance commercial developments and cause problems for landlords in the regions where a far greater number of properties are likely to fall into the high-risk category.
A senior banker to the sector predicts that the stricter rules will double the interest charged on commercial loans while another warns that they will push down property values in all but the best locations.
Peter Cosmetatos, of the British Property Federation (BPF), told the Financial Times that slotting will have “potentially dire consequences” in the regional property market where the need for finance is greatest.
The new practice could also have an impact on existing loans as banks seek to dispose of high-risk debt portfolios. This could leave defaulting landlords exposed to enforcement by third parties buying the debt, it has been warned.
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