The Basel Committee newsletter discusses credit risk in real estate and leveraged loans

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

With respect to home loans, some jurisdictions have observed a relaxation of mortgage underwriting standards as well as “innovative financing structures (e.g., home equity lines of credit, reverse mortgages, mortgages with participation) which can present unique challenges in the event of a downturn,” the bulletin said. Risk for commercial real estate portfolios, meanwhile, remains elevated due to the lingering effects of COVID-19.

The newsletter also noted tensions in the leveraged loan and secured loan bond markets, and that “there is a growing bifurcation between the strongest and weakest credits, the latter likely struggling to service debt or refinance given higher interest rates and wider credit spreads. In addition, the expansion of private debt markets could increase risks between banks and non-bank financial institutions, the committee said.