Much of CMBS Becomes Uneconomical

The rules will force banks to hold a lot more capital against a business that is becoming less profitable, Christina Zausner, vice president of Policy and Industry Analysis at the CRE Finance Council, told GlobeSt.com.

"The final rules are requiring a fraction of what earlier reports had suggested they would require, but the bottom line is that they have made non-investment grade bonds uneconomical by requiring the bank to hold more capital than the market value of the bond," she said.

It is not just the non-investment grade conduits. The rules also require banks to hold more capital than the market value of the bond for single-asset single borrower conduits and floating-rate conduits.

It is difficult to say what the real-world impact this will have on issuance. It could be that banks may want to support their new issuance desks and will be willing to subsidize them, Zausner said.

But even if that is the case, there is also the specter of a spiraling effect. The theory is that if there is not enough issuance in the market, CMBS investors will start reallocating the money earmarked for CMBS to another asset class. "But no one knows what that threshold is," Zausner said.

A Complex, Opaque, Still Incomplete Process

Actually, no one knows the precise percentage of the capital reserve requirement of the rules. That 40% everyone is citing?

It is a rough conclusion made by several banks and entities after studying what are incredibly complex rules that have lumped together different asset classes within different regions and their performance under a variety of modeling tests that are also incredibly complex.

You get a sense of this reading the statement released by the Global Financial Markets Association (GFMA), the Institute of International Finance (IIF) and the International Swaps and Derivatives Association (ISDA) last week, following Basel's announcement.

"Overall, we are concerned that despite [Basel's] reiteration not to significantly increase overall capital requirements, trading book capital will increase by 40% under the new rules based on [Basel's] impact assessment. We worry that the rules may have a negative effect on banks' capital markets activities and reduce market liquidity," the statement said.

"Further impact assessment needs to be run to assess if the gap between the standard and internal models based capital outcomes is reasonable, considering [Basel's] future work on standardized floors."

And not all of the details have been released yet. As Stefan Ingves, chairman of the Basel Committee and Governor of Sveriges Riksbank, said when the rules were first announced last week: "The Committee expects to publish further details of proposed revisions to the risk-weighted assets framework following its March meeting."

One of Many Rules

This rule is one of many that will affect securitization and CMBS, CREFC President Steve Renna told GlobeSt.com. "FRTB will be another burden on top of what are already heavy new rules for securitization."

"The fact that Basel backed off of its original levels is helpful, but the whole idea of a trading book review may have been unhelpful from the beginning."