PriyaPatelTLDR:
- Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), warns that global banks will face losses in commercial real estate as valuations drop due to higher borrowing costs and weaker demand.
- Peter Routledge, head of OSFI, states that banks worldwide are likely to experience significant losses in commercial real estate.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has issued a warning that global banks will be hit with losses in commercial real estate. The regulator’s head, Peter Routledge, stated that this is due to valuations sinking as a result of higher borrowing costs and waning demand. He believes that banks across the world will suffer meaningful losses associated with commercial real estate. Canadian banks are expected to feel the impact through higher-than-expected provisions for credit losses, with funds being allocated for loans that may default.
Routledge categorized the risk level for office space in the US as dark red and in Canada as dark orange. While loan defaults in the major Canadian banks’ domestic market are expected to be lower, the regulator is advising these institutions to be prepared for the riskier US market. This caution is due to conditions being less favorable in the Canadian office-space market as interest rates rise, leading to lower demand for newly constructed units and potential losses.
Although commercial real estate only makes up a small portion of the lending portfolios at major banks in Canada, some banks have cited increasing credit risk in this sector in their financial earnings results. If loan losses start impacting the capital levels that banks are required to hold as a cushion against an economic downturn, OSFI could consider lowering the domestic stability buffer (DSB) to free up money for the banks to absorb those losses. However, OSFI believes that the country’s largest banks are currently well-capitalized and have enough cash to withstand an economic downturn.
In conclusion, global banks should be prepared for losses in commercial real estate as valuations decline. Canadian banks specifically may see higher provisions for credit losses, prompting a potential adjustment to the domestic stability buffer. However, OSFI believes that the major Canadian banks are well-prepared to handle this risk and have sufficient capital levels.
