By Huw Jones

LONDON (Reuters) – Banks in Germany, France and elsewhere in the EU have lent more than 1.4 trillion euros ($1.5 trillion) to the commercial real estate sector, leaving some lenders vulnerable to “cracks” in the market, the bloc’s banking watchdog said on Tuesday.

In its latest risks report, the European Banking Authority (EBA) said banks faced “elevated uncertainty” from geopolitical factors, with analysts seeing the French parliamentary election as a potential risk.

Capital levels are “comfortable”, but caution is needed as payouts rise on the back of higher profits, the EBA said.

“Planned payouts in 2024 reach nearly 100 billion euros for the covered sample of banks, which is the highest volume for years,” the EBA said in the report, which surveyed about 80% of the banking sector.

It also scrutinised banks’ exposure to property, private credit and non-bank financial intermediaries (NBFI) such as investment funds.

“Structural and cyclical factors have caused cracks in commercial real estate markets,” EBA said.

Total EU bank exposures to real estate have risen 40% to 1.4 trillion euros over the past decade, with several, mainly smaller banks, having exposures that are now multiples of their equity, making them vulnerable to downturns, the watchdog said.

“Although banks domiciled in France and Germany reported the largest exposure, exceeding 280 billion euros, followed by banks in the Netherlands that reported 175 billion euros, only German banks reported an elevated share of their total client lending towards CREs,” it said, referring to commerical real estate borrowers.

EU banks have already set aside 31 billion euros against loans to real estate going sour, and the risks should be “manageable”, EBA said, adding that Denmark’s capital buffer for property risk is one way of mitigating such risks.

As of December 2023, the NBFI sector accounted for more than a quarter of bank-issued debt, and growth in private credit or lending by NBFI directly to households and business, has been “rapidly accelerating” in several EU states, EBA said.

“The downturn of the real estate market might also have stronger repercussions on market stability, negatively affecting NBFIs significantly exposed to the segment,” the report said.

EU banks’ exposures to NBFI reached 9.2% of total assets in 2023, bringing welcome competition for borrowers, but also risks such as potentially lower lending standards, EBA said.

“To detect potential contagion channels early on, supervisors and macroprudential authorities also need to have a particular focus on the direct and indirect linkages between banks and NBFIs,” it added.

The bloc’s executive European Commission has begun scoping out a macroprudential framework for NBFI. EBA said transparency should be improved, with better data on linkages between banks and non-banks also needed.

($1 = 0.9319 euros)

(Reporting by Huw Jones; Editing by Helen Popper)

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