UK: The New "Slotting" Regulations: What Are They And Why Should I Care?

Summary and implications

The UK Banking Sector is facing a number of challenges as a result of increased regulation and supervisory control which may adversely impact commercial real estate lending. The objective is to improve capital ratios and supervision and avoid future bank failure and systemic risk in the wider economy.

As part of the increased regulation, the FCA, formerly known as the Financial Services Authority, has introduced new guidelines in relation to slotting which seek to standardise risk assessment models across the banking sector. The greater the risk, the greater the capital provision and potentially this will further reduce debt in the market.

This article considers:

  • a background to lending in the commercial property sector;
  • the new requirements in relation to slotting; and
  • the impact that the new slotting requirements could have on borrowers.


The UK banking sector has been a key provider of debt to the commercial property sector. Bank exposure to property assets has increased substantially, driven by the sector's attractive marginal profitability and low equity capital requirements. Research by De Montfort University estimated the size of the UK property loan book to be £224bn at mid-2012, a significant increase from the £50bn book of 1999.

However, lending practices have recently come under renewed focus from regulators as they seek to maintain stability in the financial system. The introduction of the Basel reforms sought to reduce the probability and severity of future fiscal crises, including requirements to strengthen the quality and quantity of capital held by banks. The Basel Accords are the regulatory standards on capital that banks must set aside. The latest Basel Accord, Basel III, is in the process of being implemented with a deadline of 2018.

Alongside Basel III, the FCA has placed greater scrutiny on the internal models used by banks when calculating their risk-weighted capital in lending to "specialised" income producing assets, and this includes commercial property. Losses on commercial real estate have at times been volatile, and therefore difficult to model, which increased concern that banks were not setting aside enough regulatory capital to cover these risks.

What is slotting?

All current and future performing property loans are to be assigned to one of four categories ("strong", "good", "satisfactory" and "weak"), with risk weights attached to each ranging from 50 per cent to 250 per cent. These weights then determine how much capital is to be held against potential losses on each loan. The final category is a loan in "default" (category 5). This refers to where there has been an "event of default" under the loan agreement and the bank has decided to accelerate the loan. Once a loan is in category 5, a bank is required to make no allocation to risk-weighted assets because the FCA suggests that the expected loss calculation would have written 50 per cent off the outstanding amount on any loan in default, so no further contingency is necessary.

How will this impact me?

The effect of higher regulation and greater reserve requirements will be increased costs for both the banks and borrowers. Indeed, the FCA initially estimated that slotting could lead to £1bn to £3bn of additional equity capital requirements.

A report by property analysts Investment Property Databank last year warned that slotting could also have a "significant" impact on the wider economy as it would force banks to rid themselves of unsustainable property loans. The forced property sales that would result would "further depress" the property market, creating a "vicious cycle of further losses in loans secured by commercial property".

The British Property Federation (BPF) has also criticised the move from internal risk based models to enforced harmonisation and consistency brought about by "slotting". Commenting on the reforms, the BPF stated that they see these as being "almost certain to result in new systemic risk build-up, because risks cannot safely be assessed in an entirely objective way without perfect knowledge". The BPF's view is that "regulators should focus on encouraging better collection and management of real estate lending data to support better internal risk based models, and not on requiring all banks (which will inevitably have different experience, expertise, customer relationships and business models) to assess risks – which may look 'similar', but almost certainly aren't exactly what they seem to be – in the same way".

Some property companies warn that the move, which could sharply increase their cost of borrowing, will exacerbate the already wide gap in values between buildings in London and those elsewhere in the UK and hinder the chances of economic recovery. The largest lenders to the sector are also concerned that the tougher regulation will constrain their ability to finance new development.

Calculation of default interest

In addition to the new slotting requirements making real estate lending more expensive to borrowers, lenders are also looking to pass on to the borrower any increase in slotting costs during the life of the loan. This is being done by introducing a margin ratchet in the loan documentation where there is an event of default under the loan (but the bank has not decided to accelerate and therefore the loan does not fall into category 5) and thereby increasing the interest payments which the borrower is obliged to make. The rationale for this being, that where there is an event of default (and the bank have not accelerated the loan) this could change the loan from being in categories 1 to 3 and move it into category 4, thereby requiring banks to attribute a greater amount of capital against the loan than envisaged at the outset.

This provision goes further than the standard Loan Market Association documentation, which only provides for default interest on unpaid sums. Furthermore, there is no direct correlation between what the additional amount of capital the banks are required to attribute to the loan and the increase in margin passed onto the borrower if default interest is applied.

Borrowers should be careful when negotiating new loan documents or amending existing deals and if in doubt should speak with an adviser.


The new slotting requirements will make banks review their lending exposure to commercial property. Given the difficulty of finding the additional equity required and the lower returns on capital, slotting may further restrict banks' ability to lend. But this is to be balanced against other developments such as the funding for lending scheme and other efforts by the Government to encourage banks to stay open for business. One should also not forget new entrants to the real estate loan market, such as insurance companies and senior debt funds, to whom the slotting requirements will not apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.