ECB suspects banks of overstating commercial property values ​​in lending

Some of the euro zone’s largest banks may have overstated the value of commercial real estate, potentially masking deterioration in lending to industries facing a severe recession, an ECB examination has found.

Commercial property prices have fallen sharply due to higher borrowing costs and weak demand as companies adjust to post-pandemic realities. The European Central Bank estimates prices may have fallen by nearly a tenth in the last year alone.

“The inspection team found a number of issues with the way the banks commissioned or performed their valuations,” the ECB said in a statement. Regulatory announcements released on Wednesday“With rising interest rates and weak demand weighing on key sectors, borrowers are more likely to face debt repayment problems.”

He said some banks had defined market values ​​inappropriately, while others had failed to confront the reality of a deep market downturn, suggesting some of the collateral backing loans might be worth less than expected.

ECB inspectors found in 2022 and 2023 that some banks based their valuations on trading data from 2021 or earlier, claiming there were too few recent transactions to adjust their valuations.

“No adjustments have been made to reflect the market decline and the very different economic environment, in particular higher inflation and ECB interest rates,” said the central bank, which has been carrying out on-site inspections of commercial real estate at property exhibitions.

Some banks also interpret market value as the figure they expect to achieve when they are actually able to sell, although a transaction may take months or even years.

However, the ECB believes that valuations should be based on economic realities on a reference date rather than when market conditions might have been more favourable.

The regulator also objects to banks having different average valuations.

He said when valuations differ, banks should question the methodology rather than just accepting the numbers.

Inspectors also found that some banks failed to apply higher construction costs to new developments and accepted overly optimistic valuations that assumed the buyer made full use of the property.