The legislative debate on revision of the Capital Requirements Regulation is not yet over, but all signs are that the Council of Ministers and the European Parliament will rubberstamp the European Commission’s transposition of the Basel III concept of ‘prudently conservative valuation criteria’ into the CRR. We are to understand that the international and European banking supervision authorities consider this to be a necessary further safeguard against valuation-induced systemic bank risk.
The CRR lays down that in valuation according to ‘prudently conservative valuation criteria’, “the value excludes expectations on price increases”. The EVSB addresses the issues arising from this in the contexts of:
- Valuation under the income approach
- Using the direct capitalisation model
- Valuations carried out by means of a DCF model
- Treatment of rental increases
- And the developer’s profit in the residual method of valuation
The second CRR requirement for appraisal according to ‘prudently conservative valuation criteria’ is that “the value is adjusted to take into account the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan”. Here the EVSB highlights issues of:
- Distinguishing between ‘market value’ and ‘market price’
- Assessing the sustainability of the value over the life of the loan
- The impact of oversupply of a particular type of property on prices and value
- The impact on future value of declining population of a given locality and other negative factors changing the surroundings of the real estate
Full text of the EVSB commentary here: