FSA warns of another crisis in Commercial Property Sector
The Financial watchdog, Financial Services Authority (FSA) has warned that another crisis could occur from the meltdown in commercial property.
The FSA has announced new stricter measures to check sustainability of banks. It also expressed concerns that the Banks are not setting aside enough to tackle losses that might occur.
The authority has estimated about £160bn debt relating to the commercial property in the UK to mature in next five years. Many of these properties were given support in the form of forbearance by banks during the recession. FSA said that these banks often sidelined the loan conditions in such cases.
The report by FSA said that banks may decide not to renew the term after it expires. "This could force liquidations and release commercial properties on to the market, possibly triggering further price falls. Leveraged loans to UK companies that were subject to buyouts also face a maturity hump and present similar refinancing changes to the banks in this sector," it said.
It is also suspected that despite the improvements and companies returning to investments, there could be large defaults in the market which are usually financed by debts.
The new stringent norms proposed by the authority demands the banks to maintain enough capital so that they can withstand peak or fall in commercial property values by 60 per cent. The norms are tougher to those in 2009 as it will be demanded that banks shows ability to withstand a fall in GDP of minus 8.1 per cent by 2014 along with a an unemployment rate of 13.3 per cent.
The FSA has also warned against maintaining low interest rates could create problems for building societies. Analysts have said that these new tests increase the stress on those financial institutions that do now maintain enough capital to sustain in difficult times.
