The recommendation for the creation of a UK loans database in the recent A Vision for Real Estate Finance has drawn a strong response from the industry.
It is just one of seven recommendations by the cross-industry Real Estate Finance Group that are aimed at creating a financially stable and strong economic real estate market in the wake of the financial crisis.
But it is the Vision’s first proposal that is referenced in a recent discussion paper on credit conditions by the Bank of England. In calling for feedback on its assessment of the UK commercial real estate lending market – and specifically referencing the creation of a database to ensure lenders and regulators have access to timely information in order to understand the risks that are being taken and to stress-test CRE portfolios appropriately – the BoE has sharpened industry debate.
However, the division of opinion is ?not clear-cut, with support and opposition being voiced on a variety of grounds. There are not simply two sides to the argument.
Just as the recommendations work in tandem with each other, the many and varied arguments against such a system overlap and intertwine.
Here, Estates Gazette attempts to cut through the arguments. Highlighting how controversial many consider this topic to be, most spoke only on condition of anonymity.
Who should be able to see the data?
The main CRE lobbying bodies – the British Property Federation and the Commercial Real Estate Finance Council (CREFC) – both submitted responses to the BoE that expressed qualified support for the introduction of a database.
The BPF says it “envisages the creation of a database”, but is quick to follow this with the statement that “opinion among our members is currently divided as to ?how useful they would find it if it were publicly accessible”.
Public accessibility is definitely one point that opponents to a database have grasped, claiming that it would provide information that would allow banks to steal business from rivals.
The Vision report itself acknowledges that commercial confidentiality and data protection issues mean that certain data should not be publicly accessible in identifiable form. It adds that a balance must be struck between transparency and other benefits of public access, confidentiality and the individual lender’s desire to retain the commercial benefit of the data generated by its own business.
The report considers that it should be uncontroversial for the regulator to have unrestricted access to the entire database and individual lenders to have unrestricted access to their own data.
It goes on to say that all other access should be to anonymised data subject to minimum aggregation rules to prevent the identification of individual assets, loans, borrowers or lenders. It concludes that “it should be possible to find an acceptable compromise”.
How should the data be managed?
This leads on to the question of corporate governance. Even bankers that are in favour of a database – and there are some, although privately the strongest opposition seems to emanate from lenders – raise concerns over how the information would be managed.
One banker acknowledges that, as a lending institution, a certain amount of transparency could be beneficial to creating efficiency and liquidity in a market that does not suffer from large peaks and troughs.
But the right organisation needs to be chosen or put together to run it, says the banker. He explains: “If [a database] is going to mandated by the regulator and collected in some way, shape or form, I don’t think it is prudent for a commercial institution to be collecting that data. But, by the same token, you have to make sure the data is not able to be communicated to anyone in such a granular form that allows people to come in and take it off rivals.”
Concerns around security, vested interest and transparency only scratch the surface; this debate will run and run.
Is the entire concept flawed?
For some database opponents, the whole idea that collecting data from banks would give rise to a situation in which regulators would be able to build up a picture of the market and prick bubbles before they grow is flawed.
One said: “Even if a regulator charged with the data collection obtained data tapes from all the banks, they would need 100 staff to analyse the data. It is laughable to think they could do it better than an in-house team.”
The opponent goes on to suggest that too much data is actually a bad thing. “Even then, the collection of data and comparison of a snapshot of two loans two years apart is not going to give analysts and regulators the information they need to predict a bubble,” he says.
“The product of data and transparency does not necessarily show what is happening in the underlying market. By the time the tenant or landlord defaults, it is too late.”
So another line is drawn between those who see more data as a good thing and those that believe more data means “you won’t see the wood for the trees”.
The Bank of England is expected to take at least another month before it gives any public response to the feedback it received on its discussion paper. And even then, its views are unlikely to be the last word on such a provocative subject.
Who will pay for the database?
The cost of putting together a loans database is another area that raises fierce opinions. The Vision document itself sets out a lengthy acknowledgement of the cost implications of data collection and emphasises that it is not seeking to require the collection of information “for the sake of it”. It moves on to focus on the long-term benefits of such a database, which “should be seen in the context of the Vision as a whole”.
As part of its response, the BPF says the benefits of data collection must outweigh the costs. CREFC’s position is that the cost implications must be considered carefully with a view to ensuring that they are justified and minimised. It then adds that, once in place, an agreed, standardised data dictionary and reporting framework should operate to reduce, rather than increase, costs.
Not all bankers are railing against having to spend money to assemble an information system that would meet the requirements of the recommendation. One believes there has been a long period of under-investment by some banks and this could be the push needed to help banks streamline numerous overlapping independent internal systems or, in fact, establish them.
Although it will cost money in the short term, some acknowledge there is merit in the argument that it will save money in the long term through operational efficiencies. An added benefit could be to reduce regulatory risk if data could be presented in such a way that the regulatory bodies could take a look at the performance of a bank’s book, which could lead to some benefit under, for example, the capital regime, such as an allowance to start reducing capital.
Some go as far as to say that the banks have all the information they would ?ever need to provide to the database, so the costs of providing it would just be incremental.
But this does not wash with everyone. Many insiders claim that banks simply do not have the information that would be required by such a database.
One opponent of the plan argues: “Banks have never invested in systems to monitor covenant compliance, let alone capture data. In reality, banks don’t have the systems or the people to monitor it – they don’t exist.”
The reason these systems have never been set up, the opponent concludes, is that banks are not incentivised to do so, and he questions what the incentive would be with a database.
The short answer to this is the use of a regulatory stick, because the recommendation is for mandatory participation.
bridget.oconnell@estatesgazette.com
