The introduction of the 'slotting' regime in the UK will force further de-leveraging of banks’ property loan books, according to a study by IPD. The result will be more forced property sales that will further depress the property market, thus creating a vicious cycle of further losses in loans secured by commercial property.

The introduction of the 'slotting' regime in the UK will force further de-leveraging of banks’ property loan books, according to a study by IPD. The result will be more forced property sales that will further depress the property market, thus creating a vicious cycle of further losses in loans secured by commercial property.

The findings are based on a study into the effects of slotting, a practice designed to ensure banks have enough funds set aside to cover losses on property lending. Slotting requires banks to classify the risk of each income-producing commercial real estate loan according to one of five slots ranging from Strong, Good, Satisfactory and Weak to Default. Each slot requires the bank to hold a progressively higher amount of capital.

Commenting on the findings, Phil Tily, managing director of IPD in the UK and Ireland, said slotting could cause serious harm if the impact on the property market and its relationship to the wider economy are not fully understood. 'We see potential for a more a more risk sensitive UK regulatory regime that would provide capital cost incentives to lend in an economically efficient and stabilising manner. We hope to do further research using the IPD Databank to inform the debate.'

Under the current plans, the regulation change would affect all lending that relies on the performance of income-producing commercial property. There is an estimated £212.3 bn (EUR 267 bn) of outstanding loans in this area, according to the latest De Montfort University survey.

The original Financial Services Authority (FSA) consultation guidance was published in 2011, outlining the attributes required for each slot and sparking widespread debate. Although the FSA’s suggested slotting framework parameters were subsequently removed, slotting is still set to be introduced.

The IPD study uses figures from its property databank to simulate what would happen to risk-weighted capital if the slotting regulatory structure was in force and a slump identical to 2007-2009 occurred.

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