The European real estate industry has expressed its concerns over draft guidelines from the European Banking Authority (EBA) which could limit how much banks can lend to real estate. The guidelines could also lead to real estate funds being inappropriately caught by future shadow banking regulations.
The EBA has been involved in consultation over guidelines designed to insulate the mainstream banking sector from risk by limiting the sector’s exposure to shadow banking entities. The proposals would classify all Alternative Investment Funds (AIFs) – including real estate funds – as shadow banks and subject them to bank lending limits.
A number of European real estate associations – the British Property Federation (BPF), CREFC Europe, INREV, IPF and the German Property Federation (ZIA) – argue that the guidelines wrongly ‘shoehorn’ all AIFs into the broad definition of shadow banking entities, regardless of their characteristics.
Consequently the associations have urged the EBA to reconsider how it determines which AIFs should be treated as shadow banks. They further argue that real estate debt funds pose limited risk to financial stability as they are already subject to a robust compliance framework and should not have further regulatory burdens imposed on them.
Ion Fletcher, Director of Policy (Finance) at the BPF, said: “It is frustrating to see the EBA take such a broad-brush approach to who should be affected by the news guidelines. While we can see the logic behind imposing limits on exposures to shadow banking entities, the EBA’s view on what constitutes a shadow bank needs further work.”
“Bricks and mortar real estate funds do not carry out bank-like activities and are not shadow banks. By saying that they are, the EBA’s new rules could limit lending to the built environment, which is sorely needed if we want to bring about regeneration in our towns and cities.”
Peter Cosmetatos, CEO of CREFC Europe, reiterated that real estate funds are not involved in bank-like activities and that once a definition of a shadow bank is set in stone it is certain to be used for other purposes. “It’s important to drag the EBA back onto the straight and narrow,” he said.
“It’s also disappointing that Europe’s banking regulator seems determined to ignore the vital role that CRE debt funds are playing in helping credit flow to the real economy, dispersing risk in the financial system and helping banks reduce their exposure to CRE debt,” Cosmetatos continued.
“These funds are mostly closed ended and use little or no leverage, providing credit to property businesses under the regulatory framework of the AIFM Directive. Even based on the EBA’s own reasoning, most CRE debt funds do not present shadow banking risks and they should not be branded a ‘shadow banks’.”
Jeff Rupp, Director of Public Affairs at INREV, urged the EBA to take a ’more tailored approach’ and include only those entities engaged in credit intermediation activities in its definition of shadow banks.
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