Addressing commercial real estate lending risks with borrower-based measures

This paper explores ways in which borrower-based measures (BBMs) could be applied to commercial real estate (CRE) lending, focusing on suitable metrics and scope. BBMs have already proven to be effective in mitigating credit risks in residential real estate lending by curbing excessive credit growth, limiting high-risk loans and strengthening lender resilience. However, implementing these measures in CRE lending is more complex due to the diverse and intricate financing structures commonly found in CRE markets. BBMs for CRE lending could be effective in mitigating systemic risk by targeting the following metrics: debt service and interest coverage ratios (DSCR/ICR) and limits on aggregate indebtedness at the firm level; and/or loan-to-value (LTV) ratios at the credit facility level. A key challenge is the threat of regulatory leakage, as CRE borrowers often rely on multiple financing sources. This is why firm-level metrics are recommended, aligning with existing market practices and minimising implementation complexity. By limiting credit access from regulated financial entities to CRE firms exceeding these thresholds, such a framework would also indirectly cover lending by non-regulated lenders. National authorities should have the flexibility to calibrate and activate these measures, tailoring them to the unique characteristics of their CRE markets. This paper also aligns with the ESRB Recommendation to the European Commission ESRB/2022/9 D, which calls for activity-based macroprudential tools to address CRE vulnerabilities and to prevent regulatory arbitrage. The paper outlines the rationale, implementation strategy and forward-looking considerations for CRE BBMs. JEL Classification: G20, G28, R33