ECB tells banks to factor in further drop in property prices

FRANKFURT (Reuters) -Euro zone banks should factor in the risk of a further fall in property prices when they make provisions and plans about their capital, the European Central Bank's chief supervisor Andrea Enria said on Tuesday.

The European property market has come under pressure from the ECB's steepest and longest streak of increases in interest rates, which are now at record highs.

With real estate prices already falling in several countries, most notably Germany, where there had been a boom during the last decade of low interest rates, Enria told lenders to brace for more pain.

"The current higher interest rate environment could put further downward pressure on office and house prices, making it harder for commercial property owners and households to service their debt," Enria told the European Parliament.

"Banks should account for these risks in their provisioning practices and capital planning."

As the euro zone's top banking supervisor the ECB sets capital requirements for banks, and has been known to push back on their plans to pay dividends or buy back shares.

Fuelled by low interest rates and massive ECB cash injections, billions were funnelled into property in the last decade, particularly in richer European countries such as Germany, France and the Netherlands.

A sudden surge in inflation over the past two years has forced the ECB to tighten the purse strings and put an end to the run in real estate prices, tipping developers into insolvency as bank financing dries up, deals freeze and prices fall.

Euro zone banks have been curbing access to credit, particularly mortgages, and demand from households and companies is also falling, ECB data shows.

Enria, an Italian, is set to step down as the chairman of the ECB's Single Supervisory Board at the end of the year, when he will be replaced by Germany's Claudia Buch.

(Reporting By Francesco Canepa; Editing by Kirsten Donovan and Jan Harvey)