Browse Tag: Federal Reserve System

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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Commercial Real Estate Beige Book Breakdown: March 6, 2013

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

 

The Federal Reserve publication entitled the Beige Book is not, as its title might suggest, a handbook for interior designers with a preference for inoffensive colors.  It is an eight-times yearly published report of the Federal Reserve Board also known as Commentary On Current Economic Conditions.  The reports gather “anecdotal information on current economic conditions” in each of the eight Federal Reserve Bank Districts.

 

The Beige Book publication schedule for 2013 is:

 

  • January 16
  • March 6
  • April 17
  • June 5
  • July 17
  • September 4
  • October 16
  • December 4

 

The commercial real estate industry finds good news in the most recent beige book, along with somewhat mixed indicators.  March 6, 2013’s Beige Book reports:

 

Most [Federal Reserve] Districts reported expansion in consumer spending, although retail sales slowed in several Districts. Automobile sales were strong or solid most Districts, and tourism strengthened in a number of Districts. The demand for services was generally positive across Districts, most notably for technology and logistics firms. Transportation services activity was mixed among Districts, although the majority of contacts were optimistic about future activity. Manufacturing modestly improved in most regions, with several Districts reporting strong demand from the auto, food, and residential construction industries. Residential real estate markets strengthened in nearly all Districts and home prices rose amid falling inventories across much of the country. Commercial real estate activity was mixed or improved slightly in most Districts, and financing for commercial development remained widely available. Overall loan demand was stable or slightly higher across nearly all Districts, and several bankers noted stiff competition for qualified borrowers. Agricultural conditions varied across the country, with some areas continuing to suffer from drought while others reported considerable precipitation and improved soil moisture levels. Districts reporting on energy activity indicated modest expansions in crude oil and natural gas exploration, while mining activity slowed.

[…]

Overall commercial real estate conditions were mixed or slightly improved in most Districts. Commercial real estate activity grew modestly in the Philadelphia, Richmond, Atlanta, and St. Louis Districts, and activity in the San Francisco District expanded. Boston and New York reported mixed activity, while the Kansas City and Dallas Districts noted few changes. Although some modest growth was reported in the Chicago District, the level of activity remained weak, and commercial contractors in the Cleveland District noted a slowing in activity, particularly for defense-related projects. Office vacancy rates declined across most of the New York District, and industrial vacancy rates in upstate New York posted their lowest levels in three years. Richmond contacts described the supply of Class A office space as tight, which they attributed to the absence of new construction. Commercial development and leasing activity increased in the San Francisco Bay and Seattle markets, fueled by sustained growth in the technology sector. Commercial construction improved by varying degrees in the Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City Districts. Respondents in the Boston District expressed concerns about overbuilding in Boston’s apartment market and office sector, while Philadelphia contacts noted an increase in energy-related projects and repair work resulting from Hurricane Sandy. Cleveland, Atlanta, and Chicago reported high demand for manufacturing space, with some Chicago manufacturers leasing temporary space to accommodate increased demand. Credit for commercial development and transactions was widely available, although Boston noted a large decline in loan demand and contacts in the Cleveland District said financing difficulties continued.

[…]

Loan demand was steady or increased across all the Districts that reported. Residential real estate loan demand was strong in the Philadelphia, Cleveland, Richmond, Atlanta and Chicago Districts, mainly driven by refinances due to continued low interest rates. Demand for commercial real estate loans was also strong in the Cleveland, Richmond, and Kansas City Districts. Auto lending increased in the Cleveland and Atlanta Districts, and Philadelphia and Dallas cited growth in energy-related loan demand. San Francisco continued to report a slowdown in venture capital and private equity activity, but contacts noted an increase in the number of private technology companies moving toward an IPO.

Asset quality improved at banks in the Philadelphia, Kansas City and San Francisco Districts. Philadelphia, Richmond, Atlanta and San Francisco lenders reported high competition for qualified borrowers. Borrowing standards were reported to have been loosened in some Districts. Atlanta contacts noted additional loan capacity, but continued to be cautious with loan activity. Cleveland bankers considered cost cutting measures, including layoffs, due to shrinking net interest margins. New York contacts indicated a decrease in loan spreads for all loan categories, particularly residential mortgages, and bankers in the Chicago District said that very few mortgage originations were being kept on their balance sheets and that interest rate swaps were being utilized to hedge against a potential rise in interest rates. Bankers were generally optimistic about future activity in the Philadelphia and Dallas Districts for the near term, but Atlanta bankers expected activity to ease toward the middle of the year.

Find the entire Beige Book for March 06 2013 after the jump.

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Drought Fueling Surge In Farmland Prices

Drought
Source: CNN

On top of a doubling over the last five years, plains states farmland prices have risen 26% in the quarter ending June 30.  Current drought conditions are slowing the market down somewhat, but what’s the long-term picture for agriculture?

A report of survey published this week by the Kansas City Federal Reserve Bank  noted that farmland values across its region rose less than 3% versus the prior quarter, half the rate seen earlier this year. More than 75% of the survey’s respondents expected farmland values to stay roughly flat for the rest of the growing season, which ends in early fall.

RLI President Ray Brownfield of the John Green land company spoke on This Week In Agribusiness on land values and cash rates:  Right now land values are strong with buyers, and if the drought stays as a one-year effect, the long term putlook is good. Ray also mentions seeing 1031 transactions bringing nonfarm interest  –  new investors for smaller tracts.  Want to get started and understand th einevenstment in agriculture.

In the KC Fed report, Nebraska reported the biggest gains, land values for nonirrigated land climbing 37% from a 2011 and irrigated land gaining 35%. Missouri, especially hard-hit by the drought and has little irrigation, saw the value of its farmland climb only 18.6%.

Ian Berry reports:

Much of the Fed district has a relatively dry climate conducive to wheat farms and ranches, although irrigation and improved seed technology has in recent years boosted the amount suitable for corn.

Ranchland values have continued to lag behind land used for crops, as the higher feed costs and lack of pastureland due to the drought has hurt ranchers’ margins. The Fed reported ranchland values in the district, which also includes Colorado and Wyoming, were up 16.2% versus a year ago.

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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?

Roger Altman: Fed Bank Stress Tests “Unmitigated Good News”

Most CRE pros say the banks aren’t where they want them in terms of extending credit.  Financing in all its forms remains high on the want list for the industry as a whole.  But how healthy are banks?   In what state is their capital and liquidity health?  A quick look at a CNBC video in the wake of the Federal Reserve accounting “stress tests”  of the largest banks show a clean bill of health for enough of them that former Deputy Scretary of the Treasury Roger Altman spoke of “unmitigated good news”.

Of course, as he said this, some mitigation in fact appeared on the bottom of the screen, mentioning that four of the nineteen tested banks — Citigroup, Aimtrust, Ally Financial and Metlife — failed the Fed’s testing for a record of 15 out of 19.  In baseball terms, a .789 average is great, maybe not so much in terms of accounting solvency.  More discussion about timing and the politics surrounding the testing follow in the clip.

 

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