The European Central Bank (ECB) has asked real estate appraisers to explain the methodology they use, amid growing concern that banks in the region are too slow to write down the value of commercial real estate loans from their balance sheets, Bloomberg reports, citing. from Agerpres.

According to some sources close to the file, who spoke on condition of anonymity, the sharing of information in recent months is part of a broader effort by the ECB to identify potential strikes on banks.

Although banks have built up provisions for possible losses on commercial real estate loan portfolios, it is possible that banks will suffer additional losses if the valuation assigned to those portfolios turns out to be outdated, the sources said.

Over the past decade, some banks have turned to commercial real estate lending to boost revenue as negative interest rates have eroded their profitability. But the asset class has been hit by the expansion of home working and online shopping during the pandemic, and the rapid rise in interest rates over the past year has further dampened demand for commercial real estate.

Prices have already fallen in the US and UK and have started to fall in eurozone markets including Germany.

The ECB launched an investigation into European mortgages last year

“Vulnerabilities in the commercial real estate sector are a major source of risks for the financial sector,” the International Monetary Fund said in a report released Tuesday.

CBRE Group Inc., Jones Lang LaSalle Inc. and Cushman & Wakefield Plc are among the largest real estate valuation providers in Europe. Appraisers often consider recent comparable transactions when valuing a property, but the lack of transactions makes it difficult to determine value.

The reason is that sellers are unwilling to accept prices that are significantly below book value.

In 2022, the ECB said that its inspections of banks had revealed the fact that the cost of guarantees “is a blind spot for many banks”, given that some firms had not updated their valuation reports.

In some cases, banks have accepted valuations offered by customers instead of requesting an independent valuation.