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?