CRE FinanCE W Rld

CREFC Policy Outlook: Capital and Liquidity Remain Key Focus in 2017
depending on the composition of a bank’s balance sheet at the
time. It largely treats CRE and CMBS products similarly to other
wholesale asset classes, but it is also redundant in many ways.
Moreover, it is considered to be particularly onerous in its treatment
of short-term/repo funding, which will further compromise CMBS
market liquidity.
In July, CREFC signed an industry letter along with The Clearing
House and SIFMA, and also led a group effort with other CRE
trade associations in the drafting of an industry-focused letter.
The central issue in both letters that is of most importance to the
CREFC community was the treatment of credit products, which
we recommended be recalibrated. We have, and will continue to
participate in conversations with the U.S. regulators and monitor
European implementation, which appears to be tracking a more
flexible set of standards. We will also begin to educate the new
Congress and Administration regarding the harsh treatment of CMBS
products under Basel III in comparison to both their performance
during the crisis, and their performance relative to other asset
classes that were treated less harshly under the new Basel rules.
• HVCRE: The High Volatility Commercial Real Estate rule is
the piece of Basel III that covers acquisition, development and
construction (ADC) lending and has been in effect since January
2015. CREFC has formed a working group to address some of
the many challenges of the HVCRE rule, which requires that
1.5 times the capital historically required be held against ADC
loans. Other issues that CRE members have faced with the rule
include several necessary clarifications of the definition of equity,
conditions under which capital can be removed from a project,
and also when a loan can be reclassified as a permanent facility.
If you have any questions or want to get involved regarding the
regulatory issues facing CRE finance, please contact Christina
Zausner (czausner@crefc.org) or David McCarthy (dmccarthy@
crefc.org). For more information on the legislative agenda, please
see Marty Schuh’s article in this edition. For a comprehensive
reference regarding regulation affecting the CMBS sector, please
see Patrick Sargent’s publications page to view “The Dawn of
CMBS 4.0: Changes and Challenges in a New Regulatory Regime”,
available at Alston.com/professionals/Patrick-sargent.
1 Chairman of the House Financial Services Committee, Jeb Hensarling
(R-TX), introduced the CHOICE Act in May 2016, which included
several provisions that would subject rulemaking procedures to certain
standards (e.g., cost-benefit analyses), in addition to the Administrative
Procedures Act, which provides little room for stakeholder engagement
with the Agencies around the goals and design of new rules.
2 Chairman Martin Gruenberg of the FDIC announced that he intends to
stay in office through his tenure in 2018.
3 As of this writing, Steve Mnuchin, the nominee for Secretary of the
Treasury, has not yet shared his specific views on TBTF and/or breaking
the banks up. He has said that the regulatory framework is too complex,
specifically mentioning the Volcker rule, which is often cited as the
modern version of Glass-Steagall. While Treasury itself wields no direct
regulatory power over banks outside of money-laundering, the Secretary
of the Treasury wields tremendous influence over the process as (a)
chair of the Financial Stability Oversight Council and (b) as manager of
the regulatory process when multiple regulators are involved, such as
risk retention.
4 STS is a package of mitigations allowed under Basel III for securitizations
that meet certain criteria that together favor large and granular securitization
pools. The U.S. regulators rejected the idea, whereas the Europeans
are adopting it. One area where there is divergence in treatment
between the two regions due to the difference of opinion about the STS,
is in the implementation of the Liquidity Coverage Ratio. The Europeans
allowed for less stringent treatment of certain securitization asset
classes than is the case in the U.S. CMBS, however, is excluded from
benefits under the STS program in Europe and under the BCBS model,
mostly because CRE and multifamily mortgages do not fully amortize.
5 The Basel IV package includes many measures that directly impact the
CRE sector, including the risk-based capital treatment of stabilized loans
(BCBS 347), ADC loans (BCBS 347), loans to financial institutions
(BCBS 362), securitizations held in the trading book (e.g., Fundamental
Review of the Trading Book, BCBS 352) and investment books (BCBS
303), and warehouse lines (BCBS 303). In addition, there are other features
included in Basel IV that are expected to drive capital requirements
higher broadly across business lines, such as changes to operational risk
measurement (BCBS 355)and a new capital floors framework (BCBS
306).
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