Commercial Real Estate exposures: Lending risks and Regulatory focus
– Team Finserv | finserv@vinodkothari.com
Background
Lending backed by value or liquidity of certain types of assets is regarded as sensitive sector exposure and calls for a special focus of the lending institution from a risk management perspective. Regulators view it with attention, for reasons of the vulnerability of these exposures to cyclical price changes, as also the contribution of such lending to asset bubbles and systemic instability. Capital market and commercial real estate lending are two instances. Lending to capital markets (equity shares) may cause an excess flow of liquidity into stocks, thereby creating an asset bubble. When the bubble bursts, lending goes bad, and of course with several other systemic implications. Same is the case with commercial real estate. Flow of easy or cheap money causes investor interest in CRE to build up, thereby causing prices to spiral up, resulting into asset bubble.
It is for this reason that CRE exposures have always been seen by regulators with concern.
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