FSA cracks down on commercial property lending

The Financial Services Authority (FSA) is tightening its oversight of commercial property lending in a move which could increase the cost of loans significantly.

The move by the FSA is part of a global effort to prevent banks from understating the risks on their balance sheets to boost their capital position, according to the Financial Times.

The regulator has ordered banks to improve the way their internal models measure risk or switch to more standardised calculations.

While the industry is still negotiating with the regulator on the changes, bankers expect to have to hold more capital against their real estate portfolios. They are likely to respond by charging more for loans or cutting back lending.

The Basel Committee on Banking Supervision and the European Banking Authority have promised to crack down but some national regulators are already intervening in areas that they consider particularly problematic.

The FSA has started with commercial property lending, long an area of concern for Lord Turner, its chairman, who argues that poor loan choices in this area have been central to most recent financial crises.

The Bank of England has reported that a third of the commercial property loans made by the UK's six largest banks, a total value of £50bn, are in forbearance, which means the bank is probably losing money on them and has given the borrower breaks including payment holidays and maturity extensions.