The European Banking Authority (EBA) has raised concerns about the exposure of EU banks to the commercial real estate sector, with loans totalling over €1.4 trillion.

In its latest risk report, the watchdog highlighted potential vulnerabilities in the face of emerging "cracks" in the property market.

According to the EBA, banks in Germany and France have reported the largest exposures, each exceeding €280 billion, followed by Dutch banks with €175 billion. The report noted that German banks, in particular, have an elevated share of their total client lending directed towards commercial real estate borrowers.

The EBA's assessment comes amid a 40 per cent increase in EU banks' total real estate exposures over the past decade. Several smaller banks now have property-related exposures that are multiples of their equity, leaving them susceptible to market downturns.

While the watchdog believes the risks should be "manageable", it highlighted that banks have already set aside €31 billion to cover potential losses from real estate loans. The EBA cited Denmark's capital buffer for property risk as one potential method for mitigating such risks.

The report also drew attention to the growing role of non-bank financial intermediaries (NBFIs) in the lending landscape. As of December 2023, the NBFI sector accounted for more than a quarter of bank-issued debt. The EBA noted that private credit, or direct lending by NBFIs to households and businesses, has been "rapidly accelerating" in several EU states.

While this development brings welcome competition for borrowers, the EBA cautioned that it could also lead to potentially lower lending standards. The watchdog emphasised the need for supervisors and macroprudential authorities to closely monitor the direct and indirect linkages between banks and NBFIs to detect potential contagion channels early on.

In response to these developments, the European Commission has begun exploring a macroprudential framework for NBFIs. The EBA has called for improved transparency and better data on the interconnections between banks and non-banks.

Despite these concerns, the EBA report indicated that capital levels among EU banks remain "comfortable". However, it advised caution as payouts rise on the back of higher profits, with planned payouts in 2024 reaching nearly €100 billion for the surveyed sample of banks—the highest volume in years.

The EBA's findings underscore the complex challenges facing the EU banking sector as it navigates evolving market dynamics and regulatory landscapes.

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