New Rules Proposed for Capital Requirements – July 31, 2023
Bank regulatory agencies, including the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, have proposed revisions to bank capital standards, with comments due by Nov. 30. The proposed changes target banks with $100 billion or more in assets and come as a response to the regional bank turmoil we saw this past March.
The regulators estimate that the revised standards will result in an aggregate 16% increase in common equity tier 1 capital requirements for affected bank holding companies, with the increase principally affecting the largest and most complex banks. The effects would vary for each bank based on its activities and risk profile. For commercial real estate as for other industries, there’s a lot to unpack. The Commercial Real Estate Finance Council (CREFC) has scheduled a webinar for Sept. 12 to cover the proposal’s key details. The fact that the webinar is scheduled for early September rather than early August hints at the magnitude of the 1,000-page proposal. Digesting the full implications will take some time. However, CREFC has outlined some big-picture takeaways. “The full impact on the CRE finance market is unclear, but the economic analysis in the proposal points to marginal reduction in capital charges for CRE loans,” according to CREFC. “The same may not be true for securitization.” CREFC notes that the regulators’ proposal introduces several new terms related to commercial and multifamily real estate loans. It assesses risk-weights based on the real estate’s source of repayment, LTV, construction status and default status. “For certain CRE exposures, the risk-weight is reduced from the standard 100% based on the type of loan and its LTV,” according to CREFC. “This could marginally reduce capital requirements for CRE loans, as that same loan now would likely be assessed a 100% risk-weight.” Under the new proposal, a CRE loan with a 60% or less LTV would receive a risk-weight of 70%. LTVs in the 60% to 80% range would receive a 90% risk-weight, and LTVs greater than 80% would be charged 110%. Although CREFC is still analyzing the proposal’s implications for CMBS and CRE CLOs specifically, it does note that for securitization generally, “the new and complex market risk capital standards are expected to substantially increase capital requirements related to trading activities.” The Mortgage Bankers Association (MBA) opposes the proposal. “Without significant revisions, this proposal will increase borrowing costs and reduce credit availability for the very consumers and borrowers this administration ostensibly seeks to assist,” said MBA president and CEO Bob Broeksmit. “The large increases in capital standards will likely stunt macroeconomic growth and reduce banks’ participation as single-family and commercial/multifamily lenders, servicers and providers of warehouse lines and mortgage servicing rights financing.”