Launch of asset quality review for commercial real estate

News
Date 28 January 2013

DNB is examining how banks are coping with the depreciation in the value of commercial real estate (CRE). In the feature ‘Behind the scenes at supervision’, project leader Martijn Schrijvers explains what is involved.

Martijn Schrijvers

What is the purpose of the review?
‘The commercial real estate market is under pressure. More and more offices and retail outlets are vacant, which is depressing the value of commercial real estate in many locations. What we want to know is how the banks are responding to these developments. The CRE Asset Quality Review focuses on a number of key issues. How, and how often, do banks determine the value the commercial real estate that serves as security for their loans? Have they accurately quantified the risks involved and are they retaining sufficient capital to cover them?

Based on its findings, DNB will formulate a series of ‘good practices’ for credit risk management as well as a policy for assessing the value of commercial real estate. It will then evaluate whether the banks are adequately capitalised to cover real estate risks. If not, DNB will apply a pillar 2 capital surcharge for real estate risk as part of its capital and liquidity appraisal (Supervisory Review and Evaluation Process).' 
 
How many banks are taking part?
‘Fourteen: all the leading institutions and a dozen or so smaller and medium-sized banks. They will perform a self-assessment to explain how they value their real estate portfolios and manage the associated risks. They will submit these self-assessments to us by the end of January and we’ll study the analyses they've made. We’ll also be looking at their commercial real estate policies. And we’ll pay them a visit to examine specific real estate loans, to establish whether the policies concerned are being adequately implemented.’
 
When will the overall results be announced?
‘First, we will send the individual banks their own results. These findings will not be publicised. The aggregate results will be communicated to the sector as a whole at the end of May.’
 
And you’re in charge of the project?
‘Yes. I’m coordinating the process and managing the specialists involved. We have a research team of DNB experts, and we’re also bringing in external consultants. I really enjoy managing large projects. I spend the remaining 50% of my time working as a supervisor. I moved over to supervision last year, specialising in market risk; I supervise the trading activities of banks. Before that I worked for DNB’s Financial Markets Division. The professional knowledge and experience I acquired there is something I can apply in a slightly different way in my work as a supervisor.’

 

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