Stricter bank capital requirements could halt lending recovery

US bank lenders will face stricter capital requirements with proposed regulatory changes.

US regulators are looking to bulk bank capital requirements, a move that could further complicate commercial real estate lending deals among the most sizable institutions.

The Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency outlined in a July 27 proposal that banks with at least $100 billion in assets would need to increase the amount of common equity capital requirements by about 16 percent.

The widely anticipated revisions – which are now in an open comment period until the end of November – have already drawn mixed responses from the commercial real estate industry because of the perceived effects on banks’ ability to lend and on the cost of originating debt capital.

A July 28 statement from the New York-based trade organization Commercial Real Estate Finance Council noted the full suite of revisions would most notably increase overall capital requirements.

Capital requirements will increase 19 percent for global systemically important banks (GSIBs), which are defined by the Financial Stability Board on an annual basis. The current GSIB roster includes JPMorgan Chase, Bank of America, Citigroup and HSBC, among others, and was last updated November 2022. Credit Suisse was designated as a global systemically important bank in 2022 prior to its acquisition by UBS, which was completed in June.

Other key features highlighted by CREFC in the Basel III proposal include:

  • A capital requirement increase of 10 percent for banks with more than $250 billion in assets
  • A capital requirement increase of 5 percent for banks with $100 billion-$250 billion in assets
  • A lowered threshold for long-term debt and risk capital requirements for banks with $100 billion assets compared with the prior mark of $700 billion
  • A requirement for large banks to include unrealized gains and losses from certain securities in their capital ratios
  • A significant increase in capital charges for banks with trading operations 
  • A standard capital charge for credit risks and operational risks in place of internal bank models

Sairah Burki, CREFC’s head of regulatory affairs and David McCarthy, CREFC’s chief lobbyist and head of legislative affairs, noted in the industry group’s initial analysis that the proposed risk capital standards are expected to substantially increase capital requirements to trading activities.

Burki and McCarthy wrote that banks providing third-party loan servicing and managing properties post-foreclosure could see some impact. The trade organization is still analyzing the impact to commercial mortgage-backed securities and commercial real estate collateralized loan obligations.

Washington, DC-based trade group Mortgage Bankers Association issued a disapproving response to the proposed revisions.

“The large increases in capital standards will likely stunt macroeconomic growth and reduce banks’ participation as single-family and commercial/multifamily lenders, servicers and providers of warehouse lines and mortgage servicing rights financing,” said Bob Broeksmit, president and chief executive officer of the MBA.

Broeksmit said regulators should instead be taking steps to encourage banks to better support real estate finance markets. “These proposed changes do precisely the opposite during a time of near record-low single-family delinquencies and pristine underwriting,” he said. “This proposal also undermines several current policy objectives, from closing the racial homeownership gap to promoting competition over consolidation.”

Broeksmit called for a quantitative impact study to accompany the regulators’ proposed capital rules as was done with previous Basel reform measures. He noted the MBA strongly opposed key aspects of the proposal and would be working toward creating a full response to the revisions, including recommendations to mitigate adverse impacts to borrowers and the residential and commercial markets.

During a July 27 board meeting, FDIC chairman Martin Gruenberg said strengthening capital requirements for large banking organizations would better enable them to absorb losses with reduced disruption to financial intermediation and the US economy.

“Enhanced resilience of the banking sector supports more stable lending through the economic cycle and diminishes the likelihood of financial crises and their associated costs,” he added.