If you haven’t heard of Basel III, you’ve got company. International banking regulations aren’t typical beach reading. But some people who have been poring through these new banking regulations are not looking happy.
Bob Broeksmit, CEO and president of the Mortgage Bankers Association, has been speaking out loudly against the rule and the trouble it will cause. “Basel III could be the end of bank real-estate finance as we know it,” he said in a speech at the recent 2024 MBA Commercial/Multifamily Convention and Expo.
To better understand what is going on, let’s address some of the obvious questions.
What is Basel?
The Basel Committee on Banking Supervision (BCBS) is an organization set up by central bankers from the G10 countries in 1974. The Bretton Woods structure had fallen apart when the U.S. moved off the gold standard. The committee wanted to build a new international system to address banking regulation in a more globalized world. It now has 45 members from 28 jurisdictions.
What is Basel III?
The BCBS issues regulations in the Basel accords. There are Basel I, Basel II, and Basel III so far, with a possible Basel IV in the future. Forgetting the previous regulatory packages, Basel III was a response to the Global Financial Crisis, according to the Bank for International Settlements. They are supposed to improve bank regulation and risk management. That includes standards on how much capital banks must have on hand and requiring limitations on leverage. Each country has to decide how to implement a set of rules so as to work with domestic law.
What is the Basel III End Game?
It sounds like the title of a comic book-inspired movie. Instead, it has been the proposed regulatory rules in the U.S. that would implement Basel III. As Deloitte put it, the rules included “broad, sweeping revisions to the entirety of the existing regulatory capital framework for all banks,” with significantly higher requirements for holding capital.
U.S. banks have taken to the proposed rules negatively. CEOs of major banks have strongly criticized the capital plans, as the Financial Times has reported.
How will it affect CRE lending?
This is hard to say. “Basel III could be the end of bank real-estate finance as we know it,” Broeksmit said in that conference this week.
He gave two reasons. One is the increased levels of capital requirements. “Basel III targets banks, and banks handle about 50 percent of all commercial real estate lending,” he added. The more capital that has to be held in reserve, the less is available to lend.
The other reason is how banks would have to handle defaulted commercial real estate loans. “If just one loan goes bad, regulators want to assign a 150% risk weight not only to that loan, but to all of that borrower’s loans,” Broeksmit said. “It reflects the old adage that ‘one rotten apple spoils the whole barrel.’ But while that may be true in other industries, it has absolutely no bearing on ours. The fact is that each commercial financial transaction is separate and distinct. If you have an office loan that goes bad in Manhattan, it has nothing to do with a loan on a multifamily property in Miami.”
When does it go into effect?
The public comment period ended January 16, after having been previously extended. There is typically a period of at least 30 days before the final rule is published in the Federal Register. Agencies also can take longer before issuing a final rule.
Are the rules still subject to change?
The rule can change anytime up to publication in the Federal Register. Then there is a period of at least 30 days before the rule goes into effect. A rule can also be rejected by Congress and the President.