Banking regulators released a proposal to help improve bank capital standards, called Basel III. Though NAR supports strong capital requirements for the global banking system, under the current proposal, we have substantial concerns regarding the high proposed risk weights for certain commercial asset classes. The proposal creates a new risk-based capital category – High Volatility Commercial Real Estate Exposures (HVCRE) for commercial acquisition, development, and construction (ADC) loans. Specifically, the proposed changes raise the risk-weight for an ADC loan from 100 percent to 150 percent. In response to the potential changes, it is highly likely that banks would substantially change their current lending practices and reduce the amount of available commercial real estate credit in order to avoid the higher capital charges associated with ADC loans.
Basel III agreement will require banks to hold more capital. The changes could significantly curtail the flow of capital to real estate and harm the commercial and residential property market and property values.
While NAR supports the Basel Committee’s objective to prevent another financial crisis, NAR is concerned that requiring banks to hold far more capital could further exacerbate credit challenges for real estate and broader credit capacity. Furthermore, NAR seeks to protect and enhance the flow of capital to commercial and residential real estate by making sure that the capital rules do not require excessive capital to be held by banks.
Proponents of Basel III argue that by requiring banks to hold more capital, they improve their ability to absorb shocks arising from financial and economic stress, and improve their risk managment. They also believe that the heightened capital requirements strenghten banks’ transparency and their disclosures.
NAR submitted comments to the Federal Reserve, FDIC, and OCC prior to the agencies’ October 2012 comment deadline. The final rulemaking was completed in July 2013 and will go into effect on January 1, 2015.
The final rule clarifies that the definition of HVCRE does not apply to the purchase or development of agricultural land if the valuation of the land is limited to the value of the land for agricultural purposes or to ADC loans that otherwise qualify as community development investments. Loans permanently financing owner occupied commercial real estate are not considered HVCRE under the final rule. No other changes were made to the HVCRE definition and HVCRE loans are risk-weighted at 150% under the final rule.
Erin Stackley, firstname.lastname@example.org, 202-383-1150
Ken Wingert, email@example.com, 202-383-1196
Stephanie Spear, firstname.lastname@example.org, 202-383-1018