Banks underestimate lending risks to commercial sector

The Bank of England has warned the UKs biggest banks they may have been underestimating the risks associated with lending to the commercial property sector.

Sir Andrew Large, the Banks deputy Governor fort financial stability, says: “In the present benign environment, there is a possibility that lenders, borrowers and investors may be inclined to under-estimate long-run vulnerabilities and take on too much risk.

“Nevertheless, the main firms and sectors within the UK financial system, and the internationally active financial institutions to which they are exposed, appear well placed to withstand any unexpected deterioration in economic conditions in the near term.”

He adds that with this mind it continues to monitor closely the developments in a number of areas, including the search for yield.

The Banks says the proportion of bank lending to the commercial property sector has risen from 20% in 2000 to almost 35% today.

The Bank says that this rapid rise in commercial property lending raised the issue of whether UK banks were sufficiently diversifying its corporate credit rates.