(Bloomberg) -- Denmark’s banks should increase the amount of capital they hold to protect their exposure to commercial real estate, which may spark losses that are significantly larger than historical models can capture.
That’s according to the country’s Systemic Risk Council, which on Tuesday recommended the Danish business minister introduce a sector-specific buffer of 7% for exposures to property companies, from the end of June.
The Danish property market has so far avoided the steep decline seen in Sweden, where landlords are struggling to refinance maturing debt after years of leveraged growth. Even so, the risk council, an advisory unit of the central bank, warned that “there are still unaddressed systemic risks” related to the Danish market.
“A scenario of falling commercial real estate prices combined with high inflation and higher interest rates is rarely seen and may result in losses that are significantly larger than expected based on historical data,” the council said.
Real estate companies face higher financing costs due to higher interest rates, while a continued weakening of economic growth may lead to a rise in vacancy rates and a fall in rental income, it said. This increases the risk of real estate companies defaulting on their loans.
The council said the new buffer will correspond to half a percent of Danish credit institutions’ total risk-weighted exposure amount.
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