EBA urged to reconsider shadow banking rules for real estate funds

The European real estate industry has expressed concern over draft European Banking Authority (EBA) guidelines that could both limit how much banks can lend to real estate and lead to real estate funds being inappropriately caught by future shadow banking regulations.

The EBA has been consulting on guidelines to impose limits on exposures to shadow banking entities as part of efforts to insulate the mainstream banking sector from risk elsewhere in the financial system.

The proposed guidelines would classify all Alternative Investment Funds (AIFs) – including real estate funds – as shadow banks and subject them to bank lending limits.

In their responses to the consultation, a number of European real estate associations argue that the EBA is proposing to 'shoehorn all AIFs, regardless of their characteristics, into its shadow banking definition'.

The associations go on to explain how real estate equity funds have been identified by the Financial Stability Board, an influential body of regulators, as being 'typically not part of the credit intermediation process', and urges the EBA to reconsider how it determines which AIFs should be treated as shadow banking entities.

Limited risk
Real estate debt funds, although they are involved in the supply of credit, pose limited financial stability risks in Europe and already need to meet the AIFMD’s robust compliance and reporting framework, they explain. It therefore makes little sense to impose additional burdens on them.

'It is frustrating to see the EBA take such a broad-brush approach to who should be affected by the new guidelines. While we can see the logic behind imposing limits on exposures to shadow banking entities, the EBA’s view on what constitutes a shadow bank needs further work,' commented Ion Fletcher, director of Policy (Finance) at the British Property Federation.

Peter Cosmetatos, CEO of CREFC Europe, added: 'A cornerstone of shadow banking regulation should be that it can only apply to entities that carry on bank-like activities. Real estate funds investing in buildings do nothing of the sort.