Supervisory activities conducted by the Single Supervisory Mechanism (SSM) have proven effective in strengthening the management of risks related to commercial real estate portfolios within large euro area banks.
A new study has analysed how two distinct types of supervisory interventions, on-site inspections and off-site targeted reviews, have influenced how financial institutions identify, assess and provision for risks between 2020 and 2026.
Researchers Jae Hyun Jo, Stefano Demartis and Spyros Palligkinis assessed the impact of these measures on the coverage ratio of banks, which acts as a crucial prudential metric linking asset quality to the ability of a bank to absorb potential losses.
The analysis indicates that on-site inspections, which involve intrusive assessments of a bank’s risk-taking and internal controls, are followed by persistent increases in coverage ratios.
These improvements typically begin in the quarter of the intervention and last for at least eight quarters.
In contrast, targeted reviews, which are desk-based exercises designed to benchmark practices across various institutions, are associated with significant immediate improvements that are unfortunately short-lived, often dissipating after two quarters.
The findings highlight the complementary nature of these two activity types, which possess different outreach possibilities and effects.
Supervisors have faced increased pressure in recent years due to rising interest rates, structural changes in demand, such as the growth of remote work and e-commerce, and declining property valuations.
The European Central Bank (ECB) designated the commercial real estate sector as a key supervisory priority in 2021 to intensify oversight.
The strong and persistent effects of on-site inspections make them well suited for driving behavioural change and securing more durable improvements in provisioning and risk management, according to the paper.
Targeted reviews show an immediate effect and can be rolled out quickly across many banks, which allows supervisors to broaden their supervisory reach and spot emerging vulnerabilities at an early stage, the authors added.
A balanced combination of both tools can therefore enhance the overall effectiveness of supervision in the commercial real estate segment, the study concluded.
The empirical framework accounted for observed and time-invariant bank characteristics, though the researchers noted that the results should be interpreted as robust conditional associations rather than definitive causal effects.
This research contributes to the debate on supervisory effectiveness by linking regulatory priorities, sector-specific vulnerabilities and empirical evidence.
It also highlights the value of integrating outcome-based metrics into evaluations of supervisory performance as the financial sector navigates ongoing shifts in the commercial property market.