Basel Committee newsletter addresses credit risk in real estate, leveraged lending

The Basel Committee on Banking Supervision today issued a newsletter focusing on credit risk, which has risen in recent months due to inflation and the COVID-19 pandemic. While the newsletter does not constitute new supervisory guidance or expectations, it emphasized that banks should “maintain prudent risk management practices on real estate and leveraged loans, as supervisors have observed higher risk lending and deficient practices in some areas.”

With regard to real estate lending, some jurisdictions have observed loosening in mortgage underwriting standards as well as “innovative financing structures (e.g., home equity lines of credit, reverse mortgages, shared equity mortgages) that may present unique challenges in a downturn,” the newsletter said. Risk to commercial real estate portfolios, meanwhile, remains elevated due to the lingering effects of COVID-19.

The newsletter also noted stresses in leveraged loan and collateralized loan obligations markets, and that “there is an increasing bifurcation between stronger and weaker credits, with the latter likely to struggle to service debt or refinance given higher interest rates and wider credit spreads.” Additionally, expansion of private debt markets could increase risks between banks and non-bank financial institutions, the committee said.