The big picture: The 1,000 page proposal will take time to digest, but big policy changes are below:
- Increased Overall Capital Requirements: The additional capital will rise depending on bank size and complexity, according to Politico. GSIBs capital requirements will go up 19%; non-GSIB larger than $250 billion will go up 10%; and $100 billion to $250 billion will go up by 5%. Regulators expect most banks will already meet these levels.
- Regional Bank Crisis Response: The Proposal would repeal most of the so-called tailoring for $100 billion to $250 billion sized banks and subject them to the same standards as most larger banks.
- Recognizing Unrealized Losses: Large banks would have to include unrealized gains and losses from certain securities in their capital ratios.
- Market Risk Capital: Changes to the market risk capital are part of the unfinished Fundamental Review of the Trading Book proposal and will significantly increase capital charges for banks with trading operations.
- Standardized Approach: The proposal would impose a standard capital charge for credit risks and operational risks, rather than relying on internal bank models.
CRE Impact: CREFC will be analyzing the specific impact on commercial and multifamily real estate finance, but some initial areas to note are below.
Commercial Real Estate Exposure Risk-Weights
- Expanded Real Estate Categories: The 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.
- Lower CRE Capital Charges? For certain CRE exposures, the risk-weight is reduced from the standard 100% based on the type of loan and its LTV. This could marginally reduce capital requirements for CRE loans, as that same loan now would likely be assessed a 100% risk-weight.
- CRE Risk-Weights: A CRE loan with a 60% or less LTV would received a risk-weight of 70%. LTVs in the 60% to 80% range would receive a 90% risk-weight, and LTVs over 80% would be charged 110%.
- The High Volatility Commercial Real Estate (HVCRE) standards are unchanged and apply a 150% risk weight to certain acquisition, development, and construction (ADC) loans.
- ADC loans can still be exempt from the higher HVCRE charge if they meet certain requirements, which Congress enshrined into statute in 2018. Non-HVCRE ADC loans receive a 100% risk-weight.
Securitization: The new and complex market risk capital standards are expected to substantially increase capital requirements related to trading activities.
- Additionally, banks that provide third-party loan servicing and manage properties post-foreclosure could see some impact.
- CREFC is analyzing the potential impact to CMBS and CRE CLOs and will report back.
The bottom line: The capital rules are complex. CREFC will examine how various provisions interact as this dynamic will be critical to understanding their broader impact.
CREFC will form a working group to comment on the proposal. Please contact Sairah Burki at sburki@crefc.org and David McCarthy dmccarthy@crefc.org with any questions or to join the working group.