Imposed risk protection minimums disturb some investors
San Francisco, CA -- (SBWIRE) -- 01/23/2013 -- Property developers within the United Kingdom are now facing higher costs, likely forcing many to scrap projects that lie outside of London as a result of tough new capital rules imposed by the City watchdog.
Both companies and bankers who are involved in the sector have warned that rules will risk derailing the prospects of recovery in commercial real estate values. The rules force banks to hold more capital against loans. This type of ruling is the reaction from the banking crisis that has caused global recessions and economic downturn
“In the near term it will have unintended and potentially dire consequences in terms of capital reaching parts of the regional property market – the very places where finance is most needed,” said Peter Cosmetatos, director of finance at the British Property Federation.
The move is seen as a product of the Financial Service Authority in order to force banks to be safer and prevent use of unreliable models to cut capital requirement.
UK banks have been notified to switch to capital calculation methods called “slotting” for their loans on commercial property, unless they demonstrate models for determining riskiness of their holding are both conservative and accurate.
The FSA bank supervisor, Andrew Bailey, highlighted the maneuver in testimony to the parliamentary committee, stating “We are withdrawing the right of modeling for commercial property because the models are so ropy?.?.?.?We are saying: put your loans into simple buckets. Don’t do pyrotechnics.”
Under the guidelines of slotting, performing property loans are given one of four 'buckets' which categorize the risk weights on said loan. Risk weight are the determiners of the total of capital that must be held against potential losses.
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