Report finds FSA proposals could discourage low-risk lending

Report finds FSA proposals could discourage low-risk lending


The FSA’s introduction of a risk categorisation model for determining how much capital should be held against commercial property has been met with scrutiny after an assessment found that this could discourage lending.

The regulator’s proposals would see commercial property loans categorised into five risk bands – ‘strong’, ‘good’, ‘satisfactory’, ‘weak’ or ‘defaulted’ – to reflect the amount of capital that should be held against them, Financial News reported.

Ratings agency Moody’s has however warned that this new ‘slotting’ regime has the potential to deter lending as the categories are not detailed enough to fully explain the associated risks of the loan.

As a result, this could increase exposure to risky loans as the categories fail to distinguish or effectively express the risk associated with the loan in each band.

Moody’s assessment also found that those low-risk loans falling into the ‘good’ and ‘strong’ categories could dwindle because they would require a large sum of money to be held against them, meaning that the bank would be exposed to more loss should the loan default.

Commenting on the findings, Christophe De Noaillat, Senior Vice President, said: “In its present construction, the slotting method does not provide a comprehensive methodology for improved risk management. Instead it may act to discourage commercial real estate lending altogether and it is likely to discourage low risk lending in particular.”

The Financial News further reported in May that Liz Peace, Chief Executive of the British Property Federation, said the FSA would exercise “extreme caution” in its implementation of the regime “so as not to restrict any signs of recovery in the property sector and further risk making it a less attractive place to invest”.

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