A Fresh New Hell for CMBS

The Federal Reserve Bank helps sets the US rules for Basel requirements.

WASHINGTON, DC—Last week, The Global Financial Markets Association, the CRE Finance Council, CREFC Europe and the Real Estate Roundtable, responded in writing to a consultative document the Basel Committee on Banking Supervision published on December 17, 2015, called “Identification and Measurement of Step-in Risk.” Step-in risk deals with banks that sponsor, originate loans or provide servicing for securitizations. Once those loans are off the balance sheet  — they have been securitized and sold in other words – the regulators assume that there is the possibility that the bank might have to “step in” and provide capital to save the securitization if  the deal starts to falter. Don’t be embarrassed if this is the first you have heard of step in risk. In truth, when the consultative document was first released, many in the industry were scratching their heads about what it meant and under  what circumstances this might happen as, in the history of CMBS at least, it never has before. Fortunately (or not) in its December document Basel defined the factors that could prompt a bank to step in. These include capital ties, sponsorship, provision of financial facilities, decision making and operational ties. The question the regulators asked in the consultation is, how much capital should the sponsors hold against this particular risk – if any at all. To state the obvious, to many in the market it is unclear why the bank should have to hold capital or even, for that matter, why the bank would step in after the deal has left its balance sheet. That, after all, is the nature of securitization. Basel argues that the bank might very well salvage a deal it helped create or maintain because its name is on it or because it wants to protect the CMBS market. The associations responded that while they “understand and agree with the Basel Committee’s desire that banks’ interactions with off-balance sheet entities should not give rise to unexpected and unmanageable transitions of large amounts of assets back on-balance sheet…” they have a number of concerns with regulating step in risk. One is that the regulatory response to the financial crisis – which has included changes to accounting standards, new regulatory capital rules and the imposition of new requirements for liquidity management — has already largely addressed securitization risks. Also, the association argued, the factors that could lead to step in risk – and Basel said any one of those factors could be a trigger – are very broad “and vastly overestimates the scale of this risk and does not appropriately provide the opportunity to analyze transaction-specific factors.” This may be the beginning of a long process, CREFC’s Christina Zausner told GlobeSt.com. “Anytime you have a consultation from Basel, especially about capital, you usually go through 2 to 4 consultative periods  in which Basel publishes the consultative document, the industry comments on it, the regulators gather the data, analyze it, and put out a new document.” And the range of proposed regulatory remedies vary widely as well, she also noted from actual capital allocation, which would be very onerous, to measuring and monitoring.