ECB warns on finance as real estate closes on pre-crash peak
The European Central Bank warned on Wednesday of the growth of the shadow banking sector and said that commercial real estate values and transactions were at, or approaching pre-crash levels.
The report said that in the European Union assets of the shadow banking sector, which comprises investment funds and other financial institutions, fell slightly to €41.9 trillion at the end of 2018, those domiciled here rose by 0.3pc.
Ireland is one of six countries that account for 85pc of total EU investment fund assets and the report highlighted the growth of investment in real estate here, so-called cuckoo funds, largely by U.S. and UK investors as well as the involvement of Russian sponsors in special purpose vehicles.
“Some non-bank financial institutions remain vulnerable to a repricing of risk, with potential spillovers to funding conditions of other financial sectors and the real economy,” the ECB report warned.
This is especially true in the area of real estate whose boom and loose financing caused the last financial crisis and said low interest rates were boosting the attractiveness of these investments.
“In EU commercial real estate markets, transaction volumes and prices are near their previous peak in 2007. Given the increasing role of non-bank financial institutions, new forms of interconnectedness and transmission channels may arise,” the ECB said.
Irish-domiciled real estate investment firms held €18 billion of Irish property assets in 2018, mainly related to commercial real estate, the report said.
Citing Central Bank of Ireland data, the ECB said that special purpose vehicles here that were not engaged in asset securitisation had €294bn in assets and that around half were sponsored by UK and U.S. investors with a “significant number sponsored by Russian and Irish entities”.
Flows of Russian money have been behind money laundering scandals that have rocked banks across Europe, especially in Scandinavia where Danske Bank and Swedbank have been hit.