Editorial: Basel 3 prudently conservative value for loan origination and monitoring
| Date | 08 August 2024 |
| Pages | 321-322 |
| DOI | https://doi.org/10.1108/JPIF-07-2024-229 |
| Published date | 08 August 2024 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Neil Crosby |
Editorial: Basel 3 prudently
conservative value for loan
origination and monitoring
This will be my last contribution to this journal, having served on the editorial board since the
inception of the journal in 1982 before standing down. The Journal of Valuation provided the
first academic outlet for those of us working in that field outside the USA, and it has
continued to provide an important vehicle for communicating advances in our discipline ever
since. Property valuation research is often a practice problem-solving activity, and therefore,
I see an impact on users as a vital activity for real estate academics. I personally have never
understood why some academics see publication of their work as the goal; for me, it will
always be taking the work on, disseminating to users, with the goal of seeking adoption by
the users.
Prudent value is one such opportunity. In 2017, the Bank for International Settlements
Basel Committee, which provides guidance on financial regulation internationally, proposed
a new definition or framework for real estate valuation using prudently conservative criteria.
The Basel Committee produces guidance, and many jurisdictions are committed to following
it wherever possible. The framework relates to valuations for lending purposes at both loan
origination and for monitoring purposes.
The European Commission is the first jurisdiction to declare its intention to adopt this new
valuation framework within its Capital Requirements Regulations (CRR). The UK Prudential
Regulation Authority (PRA), part of the Bank of England, looks likely to follow. It remains to
be seen what other global jurisdictions do, but there is a prospect that prudently conservative
valuation criteria (prudent value) may dominate the lending valuation environment in the
years to come.
Alternatively, it may go the way of a number of other initiatives by the lending
community to impo se a “better”valuation regime. Older UK readers may remember the
ill-fated “estimated real isation price (ERP)”definition of value invented by lenders. The UK
valuation profession “allowed”it to become part of the valuation standards landscape
(before consigning it to the rubbish bin a few years later).
However, that framework or definition was fundamentally flawed, while the concept of
prudent value is not. The driving force for change in valuation bases and frameworks is the
losses sustained by banks in fallen markets. Given that market value (MV) is the main basis
for many loan origination transactions and monitoring, it comes under scrutiny every time
there is a major property market downturn. Most research indicates that MV (without any
major loan-to-value adjustments) is pro-cyclical, with a spiral of increased lending helping to
drive asset values upwards, driving more lending and increasing the subsequent losses when
the “bubble”bursts.
How does prudent valuer differ from MV? The Basel III definition is:
Value of the property: the valuatio n must be appraised independently usin gp rudently conservative
valuation criteria. To ensure that the va lue of the property is appraised in a prudently conserva tive
manner, the valuation must exc lude expectations of price increases and must be ad justed to take
into account the potential for t he current market price to be signific antly above the value that would
be sustainable over the life of the loan. National supervis ors should provide guidance, setting out
prudent valuation criteria wh ere such guidance does not alread y exist under national law. If a
market value can be determined , the valuation should not be hig her than the market value ...
(BCBS, 2017)
Journal of
Property
Investment &
Finance
321
Journal of Property Investment &
Finance
Vol. 42 No. 4, 2024
pp. 321-322
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-07-2024-229
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting