Eurozone banks should take into account the risk of further falls in property prices when they build reserves and plans for their capital, Andrea Enria, president of the ECB’s Banking Supervisory Board, said on Tuesday, Reuters reported, citing Agerpres.

The European property market is under pressure after the ECB significantly raised interest rates, which are now at record levels. While property prices are already falling in some countries, notably Germany, which has seen a boom in a period of low interest rates, Enria told lenders to prepare for further difficulties.

“The current environment of higher interest rates could put even more pressure on housing and office prices, making it harder for commercial building owners and households to repay their debts,” Enria told the European Parliament.

He added:

“Banks must consider these risks when building provisions and capital plans.”

The ECB’s banking supervisory board sets capital requirements for banks and has asked them to delay plans to pay dividends or buy back shares.

The real estate sector is in the center of attention of the European Central Bank

Against the background of low interest rates and large-scale injections of liquidity by the ECB, billions of euros have been invested in the real estate sector over the past decade, especially in rich European countries such as Germany, France and the Netherlands.

The rapid rise in inflation over the past two years has forced the ECB to raise interest rates, halting the rise in property prices, forcing many property developers into bankruptcy. Banks in the euro zone have reduced access to loans, especially mortgage loans, and demand from households and companies is decreasing, ECB data show.

Last month, the European Central Bank asked property appraisers to explain the methodology they use, amid growing concern that the region’s banks are too slow to write the value of commercial real estate loans onto their balance sheets.

The sharing of information in recent months is part of a broader ECB effort to identify potential bank strikes, according to some of the sources, who spoke on condition of anonymity.

Concerns about the portfolios of some banks in Europe

Even if banks have built up provisions for possible losses on their commercial real estate loan portfolios, they are likely to suffer further losses if the valuation assigned to those portfolios turns out to be outdated, the sources said.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.

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 even accepted appraisals offered by customers instead of requiring an independent appraisal.