Tag: Basel III

The Roundtable and Coalition Request Reproposal of Basel III Capital Rulemaking as Banking Regulators Face Bipartisan Congressional Opposition

Posted on by Scott Sherwood

The Real Estate Roundtable joined a coalition of 17 national trade associations in a Nov. 14 letter to the Federal Reserve, urging regulators to repropose a sweeping set of proposed rules—known as the “Basel III Endgame”—that would increase capital requirements for the nation’s largest banks. Meanwhile, the nation’s top federal banking regulators testified this week before congressional committees, where they faced stiff bipartisan opposition to the proposal. (U.S. Chamber of Commerce-led coalition letter, Nov. 14 and Axios, Nov. 16)

Bipartisan Opposition

  • In July, the regulators jointly approved the 1,100-page proposed Basel III rulemaking, which aims to guard against potential risk by increasing capital requirements for banks with at least $100 billion in assets. The proposal could have a significant impact on available credit capacity for commercial real estate transactions, as well as undermine liquidity and economic growth. (Roundtable Weekly, Nov. 10 and CQ, Nov. 15)
  • Sen. Chris Van Hollen (D-MD) stated that higher capital standards could impede investment in clean energy while Sen. Bob Menendez (D-NJ) emphasized that higher capital requirements pose a risk for mortgage loans to low-income and minority buyers. (Axios, Nov. 14)
  • Before the hearings, Senate Banking Committee Ranking Member Tim Scott (R-SC) led 38 of his colleagues in a Nov. 13 letter to the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) to withdraw the Basel III Endgame proposal.
  • House Financial Services Committee Chairman Patrick McHenry (R-NC) and Subcommittee on Financial Institutions and Monetary Policy Chairman Andy Barr (R-KY) also sent letters to the regulators on Nov. 14, claiming the Basel III regulations would put the nation’s financial system at a competitive disadvantage.

More Feedback for Basel III

Federal Reserve Vice Chair for Supervision Michael Barr
  • During the hearings, the Fed’s Vice Chair for Supervision Michael Barr defended the proposals, yet responded that regulators are “quite open to comment, and we want to improve the rule before we get to a final rule.”
  • On Oct. 20, the Federal Reserve, FDIC, and OCC announced an extension of the comment period on the Basel capital proposal from Nov. 30, 2023 to Jan. 16, 2024. The agencies also launched a quantitative impact study to clarify the estimated effects of the proposal, with the data collection deadline also due Jan. 16.
  • Since the deadline for stakeholder comments is the same day as the impact study’s final data collection deadline, there is broad concern that the regulators’ failed to provide industry participants with an opportunity to assess and comment on any of the Agencies’ collected data.  (Roundtable Weekly, Oct. 27)

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) discussed the capital requirements proposal during its Nov. 8 meeting in New York. RECPAC welcomes Roundtable membership input as it works on a Basel III comment letter due in January. (Contact Roundtable Senior Vice President Chip Rodgers)

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Policymakers Address Basel III Endgame’s Capital Requirements Proposal

Posted on by Scott Sherwood

This week, policymakers addressed proposed regulations to increase capital requirements for the nation’s largest banks, known as the “Basel III Endgame,” which could have a significant impact on available credit capacity for commercial real estate transactions, as well as undermine liquidity and economic growth.

Congressional Hearings

  • The House Financial Services Subcommittee on Financial Institutions and Monetary Policy, chaired by Rep. Andy Barr (R-KY), held a Nov. 7 hearing focused on an array of federal financial regulations, including the Basel III proposal.
  • Chairman Barr stated that U.S. financial regulators have increasingly ceded portions of their authority to international and domestic intergovernmental organizations, which has decreased transparency in development of U.S. regulatory frameworks and reduced regulators’ accountability. (Barr’s opening remarks, Nov. 7 and Committee memo, Nov. 2)
  • House Financial Services Committee Chairman Patrick McHenry (R-NC) and Subcommittee Chairman Barr recently requested the Government Accountability Office (GAO) to examine the role U.S. federal banking agencies played in developing the recent international Basel proposal. (McHenry-Barr Letter, Oct 20)
  • The Senate Banking Committee announced that top U.S. financial regulators will testify on Nov. 14 about their sweeping plan to increase bank capital requirements.

Views from the Regulators

  • Federal banking regulators announced last month an extension of the comment period on the Basel capital proposal from Nov. 30, 2023 to Jan. 16, 2024. Additionally, the agencies announced a quantitative impact study to clarify the estimated effects of the proposal, with data collection due the same date as the comments—Jan. 16. (Fed news releases, Oct 20)
  • While the quantitative impact study is a positive development, the timing of the study fails to provide industry participants with the opportunity to assess its results or comment on the collected data before the Jan. 16 deadline. Regulators often grant the public ample time (120 days) to analyze and comment on such an impact study after it is released. (Roundtable Weekly, Oct. 27)
  • This week, Fed Governor Michelle Bowman criticized the scope of the Basel proposal in two speeches. On Nov. 7 and today, Governor Bowman stated, “While the capital proposal reflects elements of the agreed upon Basel standards, it is not a mere implementation of the Basel standards. In this proposal, the calibration—with a large increase in capital requirements for U.S. firms—far exceeds the Basel standards mandate. There has been growing support for improving the proposal’s quantitative, analytical foundations, including the need for and impact of capital increases of this scale.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) met in New York City yesterday to discuss the Basel proposal, other federal policies impacting capital and credit issues, and market conditions. RECPAC has established a working group on Basel III to develop comments, due by Nov. 30, on the Basel III Endgame proposal.

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Federal Regulators Announce Extension of Comment Period and Quantitative Impact Study on Basel III Proposal

Posted on by Scott Sherwood

U.S. banking regulators issued two announcements on Oct. 20 related to their sweeping set of proposed rules to increase capital requirements for the nation’s largest banks, which could significantly affect liquidity available for commercial real estate transactions, impact asset values, and influence economic growth. The proposal, known as the “Basel III Endgame,” is the last major regulatory response designed to address failures from the global financial crisis of 2007-2008. (Bloomberg and Reuters, Oct. 20 | Roundtable Weekly, July 28)

Stakeholder Comments

  • The Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) announced an extension of the comment period on the Basel capital proposal from Nov. 30, 2023 to Jan. 16, 2024. Additionally, the agencies announced a quantitative impact study to clarify the estimated effects of the proposal, with data collection due the same date as the comments – Jan. 16. (Fed news releases, Oct 20)
  • While the quantitative impact study is a positive development, the timing of the study fails to provide industry participants with the opportunity to assess its results or comment on the collected data before the Jan. 16 deadline. Regulators often grant the public ample time (120 days) to analyze and comment on such an impact study after it is released.
  • The Basel proposal will be among the topics discussed at The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) Nov. 8 meeting in New York. RECPAC welcomes membership input as it works on a comment letter on the announcements and proposal. (Contact Roundtable Senior Vice President Chip Rodgers)
  • In July, the regulators jointly approved the 1,100-page proposed rulemaking, which would substantially revise the regulatory capital framework for banking organizations with total assets of $100 billion or more
  • Real Estate Roundtable President and CEO Jeffrey DeBoer stated in a March 2023 comment letter to Fed Vice Chair Michael Barr and other key regulators, “At this critical time, it is important that the agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values.

Congressional Opposition

  • Last week, House Financial Services Committee Chairman Patrick McHenry (R-NC), above, and Financial Institutions and Monetary Policy Subcommittee Chairman Andy Barr (R-KY) requested the Government Accountability Office (GAO) to examine the role U.S. federal banking agencies played in developing the recent Basel proposal.  (McHenry-Barr Letter, Oct 20)
  • The House Republicans’ letter claimed the scope and process of the banking regulators’ plan is flawed, and noted how the proposal was opposed by some members on the Federal Reserve and FDIC Boards. Their letter concluded, “Given those fatal problems with your Basel III Endgame proposal, we urge that it be withdrawn.”

Goldman Sachs’ 10,000 Small Businesses Voices recently announced the launch of a multifaceted national media campaign that will urge the Federal Reserve to abandon the proposed Basel III Endgame regulation. The campaign will feature new survey data showing 87% of small business owners say it is important for their elected officials to weigh in with The Fed about the impact of new bank capital requirements.

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House Republicans Urge Federal Regulators to Withdraw Capital Rules Proposal for Large Banks

Posted on by Scott Sherwood

More than two dozen Republicans on the House Financial Services Committee, led by Chairman Patrick McHenry (NC), recently urged banking regulators to withdraw a sweeping set of proposed changes that would significantly increase capital requirements for large banks. The federal Agencies’ proposal—known as the “Basel III Endgame”—represents the final stages of the global regulatory response to the 2008-09 financial crisis. (Bloomberg Government, Sept. 14)

Proposed Agencies’ Rulemaking

  • In July, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly approved the 1,100-page proposed rulemaking, which would substantially revise the regulatory capital framework for banking organizations with total assets of $100 billion or more.
  • The Agencies’ proposal would have a long phase-in period and have not impact community banks. (CNBC, Fed news release, and Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule, July 27)
  • Fed Chairman Jerome Powell voted for the proposal, but noted a significant tone of caution. Powell stated, “Raising capital requirements also increases the cost of, and reduces access to, credit … threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector. I look forward to hearing from all stakeholders on how best to strike that balance,” (Federal Reserve Board Chair Powell statement, July 27)
  • The House Committee Republicans’ letter claims the scope and process of the banking regulators’ plan is flawed, while noting how the proposal was opposed by some members on the Federal Reserve and FDIC Boards. The letter concludes, “Given those fatal problems with your Basel III Endgame proposal, we urge that it be withdrawn. The proposal should be replaced with one based on sound, objective analysis supported by data.”
  • A subsequent hearing on Sept. 19 held by the House Financial Services Subcommittee on Financial Institutions and Monetary Policy—“A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences”—explored the interaction and economic impact of recent federal regulatory proposals, including the Basel III Endgame, new and expanded long-term debt requirements, and changes to resolution plans.
  • Subcommittee Member William Timmons (R-SC), expressed concern during the hearing about how the Basel III capital requirements may exacerbate the strain on bank capital availability. He emphasized “… the fact that billions of dollars of commercial real estate projects must be refinanced the next 36 months, and not all those projects will be profitable when their mortgage payments more than double and banks are prevented from extending additional credit due to increases in capital requirements and an unfavorable interest rate environment.” Rep. Timmons added, “That is the looming crisis that we need to be preparing for, not further restricting capital availability.” (CQ, hearing transcript)

Impact on CRE

  • The proposed changes would increase capital requirements for the nation’s largest banks by as much as 20%, with far broader indirect impacts on bank counterparties and customers and the broader financial markets. The Agencies’ rulemaking could significantly affect available liquidity for commercial real estate transactions, impact asset values, and hinder economic growth. (Roundtable Weekly, July 28)
  • Mortgage Bankers Association (MBA) President and CEO Robert Broeksmit testified during the Sept. 14 House Financial Services Committee hearing. “MBA strongly opposes certain provisions of the proposal that undermine the mortgage market and takes exception to the extremely scant economic analysis regarding how the changes will affect the economy, single-family housing market, and commercial real estate finance markets,” Broeksmit testified. (MBA Newslink, Sept. 19)
  • Real Estate Roundtable President and CEO Jeffrey DeBoer stated in a March 2023 comment letter to Fed Vice Chair Michael Barr and other key regulators, “At this critical time, it is important that the Agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values. A deflationary spiral must be avoided at all costs. As recent events are only amplifying the contraction of credit, it is important for the Agencies to take measures to maintain sufficient liquidity levels and support positive economic activity.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) has established a working group on Basel III that is developing comments, due by Nov. 30, on the Basel III Endgame proposal.

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Real Estate Roundtable Supports Bipartisan Legislation to Clarify the Basel Rule and Aid Economic Growth

Posted on by Trey Jackson

(WASHINGTON) — Bipartisan legislation (H.R. 2148) introduced today by Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA) would help clarify and reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which is negatively affecting certain commercial real estate loans and impairing economic growth. The bill is supported by The Real Estate Roundtable and a coalition of national real estate organizations 1 . 

Real Estate Roundtable President and Chief Executive Officer Jeffrey D. DeBoer said, “Congressmen Pittenger and Scott are to be commended for recognizing the negative economic impact that the HVCRE Rule is having on acquisition, development and construction lending and for taking steps to introduce legislation intended to correct these problems. The Roundtable and our coalition partners support regulatory agencies’ efforts to promote economically responsible CRE lending, and the Pittenger-Scott bill will help guide the agencies in clarifying and reforming the HVCRE Rule, while encouraging sound lending practices, spurring economic growth and creating jobs in local communities.”  

By amending the Federal Deposit Insurance Act to clarify capital requirements for certain acquisition, development, or construction loans (ADC), the legislation would address concerns regarding the HVCRE Rule. 

As currently written, the Rule is overly broad and is applied to many stabilized loans without construction risk, unduly burdening stabilized loans with capital charges after the construction risk has passed. Many banks, including small community financial institutions, have been deterred from making this type of loan – which can represent up to 50 percent of a small bank loan portfolio.  

Since introduction of the HVCRE rules in January 2015, necessary clarification for key elements of the rule have not been provided by regulators despite ongoing requests.  Without modifications, the consequences of the HVCRE rule could have an adverse economic impact on commercial real estate lending, local economies and job creation. Without a response from the regulatory community, the proposed legislation is intended to address the problem. 

Among the clarifications in the legislation are the following:

  • Once the development/construction risk period has passed, and the project is cash flowing, it would allow borrowers to use internally generated cash outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
  • Clarify that loans made to do general upgrades and other improvements on existing properties with rental income do not trigger the capital penalty.
  • Allows banks to establish borrower land value as equity into projects as established by certain safeguards, such as a fully-compliant appraisal and thorough bank review. 
  • Excludes from application and compliance any loans made before January 1, 2015.

As the House Financial Services Committee considers legislation in the 115th Congress to address the HVCRE rule, The Roundtable and its industry partners will continue to encourage policies that permits stable capital formation and balanced lending in a sensible financial regulatory framework.

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1 Building Owners and Managers Association International, CCIM Institute, Commercial Real Estate Finance Council, Institute of Real Estate Management, International Council of Shopping Centers, Mortgage Bankers Association, National  apartment Association, National Association of Home Builders, NAIOP Commercial Real Estate Development Association, National Association of Real Estate Investment Trusts, National Association of Realtors, and National Multifamily Housing Council