The exposure to commercial property have been substantially increased by the banks of Britain, the Bank of England cautioned. The BOE is aware that the increased holdings of the commercial property by banks, both through direct investment and lending and also through complicated financial instruments, such as the ever-increasing mortgage backed securities and commercial property derivatives. 

In a review, the bank commented that the security market has grown rapidly, and it is facilitating the additional leverage of exposures.  The bank further said that there’re indications that the quality of the underlying asset pool might be decreasing. This isn’t the first time that the bank has raised concerns over the expansion of exposure to the commercial property market. It is mentioned in the last two financial stability reviews also.  At that point of time, the caution encompassing lending to those people who’re putting money directly in commercial property is also aimed at those people who’re getting access to the market with complicated financial instruments.

As per Deloitte, there will be GBP1 billion of trades completed before the year 2005 is out. This is a substantial figure in a market that wasn’t there some time ago.  On the same line, the market for CMBS has seen growth. It involves banks originating or buying commercial loans with regards to the property in order to sell them to the investors in the form of CMBS.  Bank of England showed concern about the global imbalances and operational controls in structured credit markets. These are long running issues that have risen many times in the past. It says that the banks in Britain are well positioned to absorb setbacks to their balance sheets. It is a sector, which is full of profits. 

The review doesn’t have any reference to the outgoing Deputy Governor Andrew Large’s speech in November. An appeal was made in the speech by him to the central banks to review the liquidity controls that are placed on the companies under their influence. It was observed in the last review that irrespective of the growing number of bad debts, the banks in Britain remained on a sound footing.