This past year saw the Bank of England continue to reflect upon the impact of the global financial crash of 2008 and on measures that could be taken to protect financial stability by increasing the diversity and robustness of market-based financing in the UK. In relation to commercial real estate (CRE) lending, the Real Estate Finance Group published “A Vision for Real Estate Finance in the UK” (the Vision), which contained seven principal recommendations on how the CRE lending market could be structured and regulated to function better and protect financial stability. Our first recommendation was the creation of a CRE loan database containing information on every CRE loan, updated at the point of loan creation and periodically throughout the loan’s life. The Bank of England has since reported that its own experience has demonstrated the value of CRE loan information at a granular level. The majority of respondents to their discussion were supportive of the loan database recommended in the Vision and it will now consider various issues in relation to implementing such a database. So how should we move forward?
Essential to a successful implementation will be a continued focus on the desired benefits of the CRE database for both the regulator and the industry. From a financial stability perspective, a database would increase the regulator’s awareness and understanding of the CRE lending market in a timeframe which allows for effective regulatory action when required. Academics would be able to conduct real-time analysis of portfolios, from which they could then provide the wider CRE community with insight about the strength / vulnerability of the market. Greater insight would also improve the risk assessment of loans throughout the investment cycle. All of these factors would help to stabilise the CRE lending market and therefore the wider economy.
Industry participants would benefit from such a database, as better quality and more relevant information would lead to a lower cost of capital and therefore an increased profit potential for lenders and property investors. Greater transparency would also increase the diversity of lenders operating within the market, giving borrowers more choice and enhancing competition, as well as the liquidity of the market.
What this suggests is that the design and content of the database should be justified by reference to delivery of these benefits. Requirements going beyond that would add little value and should be resisted.
The main concern which has been raised is that the benefits of the database should outweigh the costs. Of course they should. Provided there is a considered, sensible implementation the financial case should be compelling. The cost of providing and submitting relevant information, which well managed lenders should already be collecting and understanding, should be relatively modest in relation to the benefits to be derived from increased financial stability and lower costs of capital.
So it is important that the CRE database is well designed and implemented. In doing this, how might the Bank of England approach the most important early choices about the CRE database?
An important choice relates to the specific information to be included in the database. Here there is already experience and templates which can be considered as a starting point, in the form of the data collections which the PRA currently undertakes and those used for the European Central Bank’s asset quality review, as well as existing industry standards. In terms of approach, one might suggest starting with a relatively simple range of key data to ease testing of the processes of data submission and analysis and then expanding the data range as justified by cost / benefit analysis.
The Bank of England has said it will be considering whether non-regulated CRE lenders should submit loan data to the database. There is an overwhelming case that all organisations within the CRE lending market should participate, in short because a better and fully informed regulator will carry out its role more effectively, enabling the scope of regulation (and those who are constrained by it) to be kept to a minimum. However, implementation may be most effective if it is staged, starting with existing regulated entities under a phased approach which encompasses all CRE lenders over time.
Encouragingly, the Bank of England has said it will engage closely with CRE industry participants to ensure the benefits of the database outweigh the costs. If we want to ensure a well-designed database, it is up to us in the CRE industry to engage constructively with the Bank of England to ensure we get one.