FSA's 'slotting' capital rules could reshape property finance market, says expert

Gerry Mulholland of Pinsent Masons, the law firm behind Out-Law.com, said that forcing banks to 'slot' property loans into one of four categories reflecting the nature of the credit risk had been "impacting on the market for some time".

"For many prospective borrowers this is a challenge but this, itself, has begun to reshape the market," he said. "Debt funds and non-bank lenders offer interesting alternative avenues."

However, he said that "wider economic circumstances and commitments to deleverage" were "much more relevant" concerns for the sector.

Mulholland was commenting in response to concerns by the property sector that the practice would increase the cost of finance to the point that developers would have to cancel projects outside of London. In an interview with the Financial Times (registration required) Peter Cosmetatos, director of finance at industry body the British Property Federation (BPF), said that slotting would have "unintended and potentially dire consequences" for the regional property market "in the near term".

Slotting requires banks to assign one of four different risk weights, ranging from 50 to 250%, to all property loans on their books. Each risk weight determines how much capital the bank must hold against potential losses on that loan. Banks have been given until this summer to categorise all their loans in this way unless they can demonstrate any alternative model is accurate and conservative.

However, in evidence to a Parliamentary committee earlier this week, the FSA's Andrew Bailey said that the regulator was "withdrawing" banks' ability to use their own risk weighting models for commercial property loans. "The models are so ropey," he said. "We are saying: put your loans into simple buckets. Don't do pyrotechnics."

A report by property analysts Investment Property Databank (IPD) last year warned that slotting could also have a "significant" impact on the wider economy as it would force banks to rid themselves of unsustainable property loans. The forced property sales that would result would "further depress" the property market, creating a "vicious cycle of further losses in loans secured by commercial property".

Gerry Mulholland said, however, that financing opportunities would continue to remain open to those companies with experience and an existing relationship with a bank.

"Lenders remain supportive of established borrowers with experience who place value on the lending relationship, and accept the ratios and pricing needed to reflect the economic environment we find ourselves in and the lender's, legitimate, aspirations as to profitability," he said.