The Financial Supervisory Authority has studied the valuation practices for the residential and commercial real estate collateral of banks under its direct supervision

The objective of the thematic review was to study the valuation practices of credit institutions’ residential and commercial real estate collateral as well as the application of the methods used in valuation. The study surveyed valuation practices in the granting of credit, in monitoring the market values of collateral and in the revaluation of collateral. The valuation of collateral is an essential part of banks’ credit risk management.

According to the thematic review carried out by the Financial Supervisory Authority (FIN-FSA), the valuation practices for the residential and commercial real estate collateral of banks under its direct supervision did not in all respects adhere to regulations. The FIN-FSA requires its supervised entities to correct shortcomings identified in valuation practices and will contact separately those supervised entities in whose activities the most shortcomings were identified.

For some banks, the valuation of residential real estate collateral in connection with the granting of credit is based solely on a deed of sale or a valuation produced by a statistical model, even though a final valuation should be made by an internal or external valuer, according to EBA Guidelines on loan origination and monitoring. A valuation made by a valuer is particularly important in cases where a recent deed of sale is not available for the collateral. In addition, the statistical model used to assist the valuer is not always validated nor its reliability verified. For some banks, there are shortcomings in the use of international valuation standards and in internal guidelines on valuation methods in connection with the granting of credit for commercial real estate.

In the monitoring and revaluation of the market values of residential real estate, the need for some banks to ensure that monitoring is carried out with sufficient frequency was evident. With regard to commercial real estate, some banks lack the capacity for more frequent monitoring when the market situation changes. In addition, in the case of some banks there was evidently a need to ensure that the residential and commercial real estate valuer responsible for revaluation is independent of the decision-making process for granting credit.

For further information, please contact

• Torsten Groschup, Senior Risk Expert, tel. +358 9 183 5333 or torsten.groschup(at)finanssivalvonta.fi
• Maria Suominen, Legal Advisor, tel. +358 9 183 5344 or maria.suominen(at)finanssivalvonta.fi