Browse Tag: Basel III

Basel III Rule Approved: TBTF Bank Capital Positions To Be Strenghtened

English: The Marriner S. Eccles Federal Reserv...

The Federal Reserve Board’s revisions to capital rules for big banks, approved today, promise in its 972 pages to hike the capital requirements for large, internationally active banks. At the same time, the new rules treat community banks with less stringent regulations.

The rule implements in the US the Basel III capital requirements reforms from the Basel Committee on Banking Supervision.  The Committee is an international committee that formulates broad supervisory standards and guidelines for supervision of banks.  It has no power itself; it’s an informal forum producing non-binding regulation and recommendations for central banks to either adopt, ignore or adapt.  The Federal Reserve Board’s adoption of Basel III, the US banking community, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have been prompted to review and consider the rules as final interim effective July 9, 2013.  Banks will nonetheless have a significant amount of time to adapt to the new capital requirements, with pahse-in for the largest institutions commencing in 2014.

Many S&L Holding Companies Currently Exempt

As noted in a letter from NAR Commercial Policy Representative Vijay Yadlapati, a interesting change from the Basel III proposal has been approved by the Fed:  savings and loan holding companies with significant commercial or insurance underwriting activities will not be subject to the final rule at this time.  The Federal Reserve will take additional time to evaluate the appropriate regulatory capital framework for these entities.

New Leverage Ratios

If telling banks to not overextend themselves seems like draconian regulation to you, either you have forgotten the 2008 meltdown and subsequent bailout or you’re unaware of what “overextended” actually means in the context of too-big-to-fail banks.  The simplified story: under Basel III, banks are being held to a leverage ratio — a requirement to hold onto a minimum amount of capital calculated by taking the amount of “Tier 1” capital it has on the books (the predominant form of Tier 1 capital must be common shares and retained earnings) by the total average of consolidated assets.

The new rules more or less call for not 60% nor 16% but only 6% of bank capital to be held onto as a minimum.  A nickel and a penny of every dollar to be kept around if things go south again.  Seems reasonable, but then again I don’t work for a bank.  Like a lot of people, I just fund the government that bails out the bank when it loses sight of its basic role as capital allocator.

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Latest NAR Commercial Podcast From Bill Armstrong

Picture of NAR Treasurer Bill Armstrong
Bill Armstrong, NAR Treasurer

The latest podcast on NAR Commercial Real Estate issues from Treasurer Bill Armstrong covers:

Market Improvement

The Commercial Real Estate 2Q Market Suvey shows market is stable and even improving in some areas of country.  The survey provides an overview of market performance, sales and rental transactions.

Top Obstacle: Lending VS. Recovery

REALTOR®s define financing as the biggest obstacle in the marketplace now, followed closely by pricing.  Despite these challenges, 7 in 10 commercial REALTORS® clsoed sales transactions during the second quarter.   Sales volume grew 12% from a year ago and leasing activity is up 4% from pervious quarter.
This dovetals with May’s CRE Lending Survey; 75% mentioned lending standards are as stringent as or more stringent than a year ago.  Adding to tight underwriting, down payment conditions also require hefty commitment; 72% of closed sales required a down payment above 20% to secure financing.

NAR Advocacy For Commercial Is Ongoing: FASB, Basel III, EB-5 Visas

Bill mentioned NAR is advocating for better lease accounting rules that will enable increased borrowing. NAR’s efforts have resulted in the FASB and IASB reexamining the potential economic outcomes of their proposed rule that would force many companies to capitalize commercial leases on to their balance sheets.

This month, NAR regulators to study potential impact on real estate of international capital and liquidity requirements for banks known as Basel III that require them to hold more capital back rather than making it available to lend.  While their goals are commendable, said Armstrong,  NAR supports efforts to ensure that Basel III foes not reduce liquidity.

This month, NAR joined a broader coalition of  of real estate organizations asking Congress to support legislation that would re-authorize the EB-5 Visa.  This provides visas to individuals overseas who invest in commercial enterprises and ceate jobs in targeted areas across the us.

NAR continues to push for legislation to increase liquidity in other ways. including raising the lending cap on credit unions.  Also by creating a covered bond market and supporting the extension of the SBA’s commercial refi loan program, set to expire on September 27.

NAR Code Of Ethics Training Due December 31st; Centennial of COE in ’13

Bill reminded us to not forget that 2012 is also the year to complete NAR Code Of Ethics training, which comes up every four years.  You have until December 31st to complete it. NAR’s COE is one of the things that truly sets REALTORS® apart from other real estate licesnsees.   Asked Bill: “How many of you have done your training? I have and it’s pretty painless.” You can do the training thru your local association or online at realtor.org.

2013 also marks Centennial of NAR’s Code Of Ethics. The celebration of the centennial will kick off at the NAR Annual Conference and Expo, Nov 9-12 in Orlando. The celebration will continue  through 2013.

Photo credit: MackintoshRealtors.Com

 

Federal Reserve Updates On Commercial Real Estate: Two Stories At Once?

English: A map of the 12 districts of the Unit...
A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

The Federal Reserve has issued some changes concerning commercial real estate. One is a clear positive in its new Beige Book, or collection of economic conditions across the country, and another change is more ambiguous — a proposed update in the Fed’s capital requirements made of banks.

First, the good news:

The Beige Book: Demand Is Up For Commercial Property Loans

A piece in Credit Union Times tells the tale of the Fed’s new Beige Book, that report of nationwide economic conditions.  The new Beige Book contains reports from several districts across the Federal Reserve System that delinquencies on commercial loans are down, and that has fueled demand for more commercial property loans.

According to the Fed, the Atlanta district led the way with the greatest increase in demand for commercial loans:

A number of districts, including Cleveland, Atlanta, Chicago, Dallas, and San Francisco, said loan pricing remained quite competitive. Several districts noted increased demand for capital spending loans.

The Fed said lending standards were relatively unchanged to slightly easier across districts and loan types. Most district banks said loan delinquencies continued to decline as credit quality remained solid and loan quality improved.

 “Given the woes from the past couple of years, whether intellectually or emotionally perceived, the reports should be seen as good news for the industry,” according to Brian Turner, director and chief strategist at Catalyst Strategic Solutions, a subsidiary of Catalyst Corporate Federal Credit Union in Plano, Texas, in his latest analysis.

Second quarter data from the NCUA shows loan growth at an annualized pace of 0.4% so far this year as a 3.1% increase in vehicle loans and a 1.5% increase in real estate loans were offset by a 13.5% decline in unsecured credit cards, Turner said.

Still, weak consumer spending induced by job insecurity, falling values and volatile stock market performance have all contributed to modest loan growth, Turner noted, adding nationally, this has sent consumer spending growth down to 1.4%.

Prepared at the Federal Reserve Bank of Dallas and based on information collected on or before May 25, the Beige Book contains current economic conditions by district through reports from bank and branch directors and interviews with key business contacts, economists, market experts, and other sources, according to the Fed.

On The Other Hand: Upped Capital Requirements for CRE Lenders Proposed

An interesting contrast to the Beige Book update as it affects commercial property is the nearly concurrent proposed  change made in the Fed’s capital requirement formulations for banks lending to/getting exposure from commercial real estate.  In short, banks are being told to increase their perception of risk when lending in support of commercial real estate:

The Federal Reserve on Thursday released a proposal that would implement a global agreement known as Basel III capital rules for banks, including a measure that would assign a higher risk weight to commercial real estate loans that are included in a calculation for how much capital an institution needs to hold as a buffer. The Fed assigns a higher 150% risk weight to exposures to commercial real estate loans, up from a current 100% risk weight. The Fed said these loans presented elevated risk over “several recent economic cycles.” Based on the proposal, which implements the international accord, banks will be required to hold the strictest form of common-equity capital of 7% of their risk-based assets, phased in between January 2013 and 2019.

While our pinstriped friends will no doubt point to this — or any intervention on the part of their regulators — as the convenient excuse for their current miserly credit posture to secondary-market-and-below commercial property deals, the fact is not much else can or should be expected in the wake of a financial crisis brought on in the first place by monumentally bad risk management on the part of banks.  The question is how many of us will end up dragged into the woodshed with them?