NEW YORK CITY-During a time when the commercial real estate world needs capital available, US banks have a tough road ahead, according to finance experts at locally based Deloitte during a Webinar Tuesday. The company hosted a presentation on the controversial new rules and regulations of the international Basel III and the US Dodd-Frank Act, with predictions being that the measures will reduce capital markets trading and tighten lending.
Banking experts still haven’t given up on protesting the plans. Leaders such as David Kotz, who recently stepped down as Inspector General for the SEC, and American Bankers Association president and CEO Frank Keating recently vocally criticized Dodd-Frank for posing threats to the US lending industry. While global institutions have been gearing up to follow the proposed Basel III rules, foreign banks have declared that US-based banks must step up their compliance to balance out potential disparities.
At the core of the Basel III framework, adopted by leading countries, is revised capital standards, enhanced capital definitions an systemic risk overlays along with a new international framework for liquidity risk, said Andrea Di Giovanni, a Deloitte director, during the Webinar. What’s remarkably new from Basel II rules are increased liquidity expectations, he said.
The US banks have repeatedly expressed intent to commit to the seven-year international timetable for Basel III, Di Giovanni said, and many companies have already announced strategic actions to mitigate adverse capital impacts. The cost cutting includes, of course, layoffs, including the loss of thousands of jobs at Morgan Stanley, Citigroup and Bank of America announced late last year.
Robert Maxant, a partner at Deloitte, said many banks still have a ways to go to meet the Basel III requirements, including the enhanced responsibilities of boards in terms of liquidity oversight. “These rules preclude an institution from overlooking its shortcomings, it’s quite novel,” Maxant said. “The bottom line is, institutions are now going to have to hold more capital and to be more stable. Senior management will have to make difficult decisions about bringing a company into compliance, and there will likely be a need for a different talent mix. Add the expenses of new processes and technology, and you’re going to see an impact on returns and profitability.”
Also, US banks feel they have enough to contend with in having to deal with the Dodd-Frank Act, which creates more regulatory agencies for all aspects of the US finance system, as well as imposing increased reporting standards, said Alok Sinha, a Deloitte principal. The additional requirements include explicit stress tests, counterparty exposure limits, remediation triggers and risk committee and compensation expectations.
“The act will create certain areas of divergence with international standards,” Sinha said. “With all these changes, mortgage credit may see tighter lending standards and a return to traditional products and collateral requirements, which seems counterintuitive to what the United States is doing to reinvigorate the mortgage market with shorter rates.”
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