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House Republicans Urge Federal Regulators to Withdraw Capital Rules Proposal for Large Banks

Posted on September 22, 2023October 27, 2023 by Abigail Grenadier

More than two dozen Republicans on the House Financial Services Committee, led by Chairman Patrick McHenry (NC), recently urged banking regulators to withdraw a sweeping set of proposed changes that would significantly increase capital requirements for large banks. The federal Agencies’ proposal—known as the “Basel III Endgame”—represents the final stages of the global regulatory response to the 2008-09 financial crisis. (Bloomberg Government, Sept. 14)

Proposed Agencies’ Rulemaking

In July, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly approved the 1,100-page proposed rulemaking, which would substantially revise the regulatory capital framework for banking organizations with total assets of $100 billion or more.

The Agencies’ proposal would have a long phase-in period and have not impact community banks. (CNBC, Fed news release, and Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule, July 27)

Fed Chairman Jerome Powell voted for the proposal, but noted a significant tone of caution. Powell stated, “Raising capital requirements also increases the cost of, and reduces access to, credit … threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector. I look forward to hearing from all stakeholders on how best to strike that balance,” (Federal Reserve Board Chair Powell statement, July 27)

The House Committee Republicans’ letter claims the scope and process of the banking regulators’ plan is flawed, while noting how the proposal was opposed by some members on the Federal Reserve and FDIC Boards. The letter concludes, “Given those fatal problems with your Basel III Endgame proposal, we urge that it be withdrawn. The proposal should be replaced with one based on sound, objective analysis supported by data.”

The Sept. 13 letter was sent in conjunction with last week’s House Financial Services Committee hearing, “Implementing Basel III: What’s the Fed’s Endgame?”

A subsequent hearing on Sept. 19 held by the House Financial Services Subcommittee on Financial Institutions and Monetary Policy—“A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences”—explored the interaction and economic impact of recent federal regulatory proposals, including the Basel III Endgame, new and expanded long-term debt requirements, and changes to resolution plans.

Subcommittee Member William Timmons (R-SC), expressed concern during the hearing about how the Basel III capital requirements may exacerbate the strain on bank capital availability. He emphasized “… the fact that billions of dollars of commercial real estate projects must be refinanced the next 36 months, and not all those projects will be profitable when their mortgage payments more than double and banks are prevented from extending additional credit due to increases in capital requirements and an unfavorable interest rate environment.” Rep. Timmons added, “That is the looming crisis that we need to be preparing for, not further restricting capital availability.” (CQ, hearing transcript)

Impact on CRE

The proposed changes would increase capital requirements for the nation’s largest banks by as much as 20%, with far broader indirect impacts on bank counterparties and customers and the broader financial markets. The Agencies’ rulemaking could significantly affect available liquidity for commercial real estate transactions, impact asset values, and hinder economic growth. (Roundtable Weekly, July 28)

Mortgage Bankers Association (MBA) President and CEO Robert Broeksmit testified during the Sept. 14 House Financial Services Committee hearing. “MBA strongly opposes certain provisions of the proposal that undermine the mortgage market and takes exception to the extremely scant economic analysis regarding how the changes will affect the economy, single-family housing market, and commercial real estate finance markets,” Broeksmit testified. (MBA Newslink, Sept. 19)

Real Estate Roundtable President and CEO Jeffrey DeBoer stated in a March 2023 comment letter to Fed Vice Chair Michael Barr and other key regulators, “At this critical time, it is important that the Agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values. A deflationary spiral must be avoided at all costs. As recent events are only amplifying the contraction of credit, it is important for the Agencies to take measures to maintain sufficient liquidity levels and support positive economic activity.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) has established a working group on Basel III that is developing comments, due by Nov. 30, on the Basel III Endgame proposal.

# # #

Federal Regulators Approve Proposal to Increase Bank Capital Requirements, Internal Dissent Signals Cautious Approach to Final Rules

Posted on July 28, 2023October 27, 2023 by Trey Jackson

Federal bank regulators this week approved a sweeping set of proposed changes that would increase capital requirements for the nation’s largest banks by as much as 20%, which could significantly affect liquidity available for commercial real estate transactions, impact asset values, and influence economic growth. Dissenting votes on the proposed rulemaking revealed rare disagreement among regulators, and Fed Chairman Jerome Powell signaled a cautious approach to consideration of any final rule as a 120-day public comment period begins. (Axios and PoliticoPro, July 27)

New Capital Framework

The Fed, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly approved the proposal, which would substantially revise the regulatory capital framework for banking organizations with total assets of $100 billion or more. Stakeholder comments on the 1,100-page proposed rulemaking are due by Nov. 30. (See Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule, July 27)

Fed Chairman Powell voted for the proposal, but noted a significant tone of caution, stating, “Raising capital requirements also increases the cost of, and reduces access to, credit … threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector.” He added, “While there could be benefits of still higher capital, as always we must also consider the potential costs. As the financial system evolves, it is important that regulation evolve with it. I look forward to hearing from all stakeholders on how best to strike that balance.” (Federal Reserve Board – Statement by Chair Jerome H. Powell)

Statements were also issued by Fed Governors Michelle W. Bowman and Christopher J. Waller, who voted against the proposal. Extensive background information on the proposal is available on the Fed’s website, including a video of the Fed’s July 27 Open Board Meeting, Board memo, Fact Sheet, Statements and Federal Register Notices.

The proposed changes to large bank capital requirements would implement the final components of international banking regulations known as the Basel III “endgame” following the U.S. banking turmoil in March 2023. The agencies’ proposal would have a long phase-in period and not impact community banks. (CNBC, July 27)

Real Estate Roundtable President and CEO Jeffrey DeBoer stated in a March 2023 comment letter to Fed Vice Chair Michael Barr and other key regulators, “At this critical time, it is important that the Agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values. A deflationary spiral must be avoided at all costs. As recent events are only amplifying the contraction of credit, it is important for the Agencies to take measures to maintain sufficient liquidity levels and support positive economic activity.”

CRE Challenges

The Wall Street Journal this week quoted Roundtable Chair John Fish, above, (SUFFOLK Chairman and CEO) and Roundtable Board Member Scott Rechler, (RXR Chairman and CEO) on the influence of the agencies and their positive joint policy statement issued last month that granted flexibility for CRE workouts. Agencies’ joint statement, June 29 and Roundtable Weekly, June 30)
Fish noted that the agencies’ recent policy statement “is a bridge to the other side. It’s what the real-estate industry was asking for.” Rechler also praised the new policy and added, “Since the failure of the regional banks, regulators have come on very hard.”
Major refinancing pressures facing CRE are shown in new Trepp data released this week, which estimates $528.7 billion of commercial mortgages will mature this year—and increase to $532.8 billion next year. (TreppTalk, July 25)
Trepp notes the data indicates “the market is facing a wall, if not a mountain, of maturities that would make the 2015-2017 wall of maturities look almost inconsequential. During that period, roughly $1.1 trillion of loans were scheduled to come due.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) plans to work on industry comments in response to the agencies’ proposed rulemaking.

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Banks Increase CRE Workouts to Prevent Defaults

Posted on July 21, 2023October 27, 2023 by Trey Jackson

Banks are increasing their efforts to modify troubled commercial real estate loans to prevent defaults, according to recent media reports. (GlobeSt and Bisnow, July 14)

Momentum on Modifications

“Lenders are offering borrowers loan extensions and modifications, selling derivatives to fix interest costs, and offering subsidized loans to investors to purchase defaulted loans” according to CRE analysts and industry data quoted by Reuters on July 12
The reported increase in modifications follows a joint policy statement from federal regulators last month that encouraged financial institutions to work with borrowers on pending loan maturities. (Agencies’ joint statement, June 29 and National Law Review, July 9)
Real Estate Roundtable President and CEO Jeffrey DeBoer commented on the positive action by regulators. “This major step forward by federal regulators provides the flexibility that The Roundtable has consistently encouraged, and the relief many in the industry need, as the economy and communities struggle to move beyond the repercussions of the global pandemic,” DeBoer said. (Roundtable Weekly, June 30 and Roundtable letter to regulators, March 17)

Need for Liquidity

On July 20, Roundtable Chair John Fish (SUFFOLK Chairman and CEO) discussed the pressures facing CRE and the recent policy accommodation from regulators on Bloomberg’s What Goes Up podcast. “The biggest problem right now is the capital markets nationally have frozen,” Fish said.
On July 14, Roundtable Board Member Scott Rechler, above, (RXR Chairman and CEO) joined CNBC’s Closing Bell Overtime to discuss the impact of the credit crunch and the need for more liquidity in the market. (Watch interview)
A July 6 article by Carl White, senior vice president of the St. Louis Fed’s Supervision, Credit and Learning Division, shows that the proportion of nonperforming CRE loans remains low on an average basis and has continued to decline since 2020.

Low occupancy rates for downtown offices in various cities are leading municipal governments to incentivize adaptive reuse by encouraging the conversion of often-older office buildings into residential properties. A report this week from RentCafe forecasts that conversions may increase by 63% in coming years, after adaptive reuse peaked from 2019 to 2020. (GlobeSt, July 19)

# # #

Fed Outlines Tighter Bank Capital Requirements Amid Congressional Concerns About Market Liquidity

Posted on July 14, 2023October 27, 2023 by Trey Jackson

Federal Reserve Vice Chair for Supervision Michael Barr this week said higher capital requirements for banks with $100 billion or more in assets are likely to be one of several regulatory proposals expected soon from federal banking regulators. The Roundtable has warned that such a policy “would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on (commercial real estate) asset values.” (Barr’s speech, July 10 and Roundtable letter to federal regulators, March 17)

Fed Proposals

Barr added that the rules would be the equivalent of requiring the largest banks to hold an additional $2 of capital for every $100 of their risk-weighted assets. He also commented that the changes—including long-term bank debt requirements and adjustments to how banks measure their financial market risks—“would not be fully effective for some years” because of the formal rulemaking comment process and a lengthy transition period for implementation. (Barr’s speech, The Wall Street Journal and Axios, July 10)
Roundtable President and CEO Jeffrey DeBoer noted during an April 6 Walker Webcast that “The concept of additional regulations and expanding liquidity are kind of counter to each other. [The financial turmoil] has to be allowed to settle through and transition. We ought to be working together and the federal government ought to be helping people transition to that new world.” (Roundtable Weekly, April 7)
The Roundtable’s June 13 Annual Meeting featured a joint RECPAC and Research Committee meeting discussion with Senate Banking Committee Member Bill Hagerty (R-TN) on liquidity concerns and possible new regulations, along with a presentation by CBRE industry experts on CRE conditions.

Bipartisan Congressional Concerns

During a June 21 Senate Banking Committee hearing on President Biden’s three nominations for the Federal Reserve Board, Sen. Mark Warner (D-VA), above, shared concerns raised by his Republican colleagues Bill Hagerty (TN), Tim Scott (SC), and Thom Tillis (NC) on Barr’s agenda to increase capital requirements for banks.
Sen. Warner stated, “I do worry, when we’ve got as aggressive a monetary policy as we have … that if there’s not a phase-in on some of these new capital standards, we could have the perfect storm of these two entities intersecting, and dramatically decreasing access to credit, at a moment when we’ve got large segments of our economy, commercial real estate in particular, could really be hit hard.”
House Financial Services Committee Chairman Patrick McHenry (R-NC) said during a June 21 hearing featuring Fed Chairman Jerome Powell that “… a massive increase in capital standards for medium and large institutions… would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need.” (Roundtable Weekly, June 23)
The top members of the House subcommittee focused on bank regulation—Reps. Andy Barr (R-KY) and Bill Foster (D-IL)—wrote to Barr on July 7, urging him to “minimize negative impacts as we enter a phase of potential credit tightening. We must strike the right balance between safeguarding our financial system and ensuring banks of all sizes can support communities’ access to credit.” The bipartisan letter also requested a “cost-benefit analysis, including supporting data, for any rulemaking you intend to propose.” (Letter to Barr and Politico Pro, July 7)

What’s Next

Barr added in his speech this week, “I will be pursuing further changes to regulation and supervision in response to the recent banking stress, including how we regulate and supervise liquidity. I expect to have more to say on these topics in the coming months.”
Former Fed Vice Chair for Supervision Randal Quarles, above, on July 12 criticized the Fed’s bank capital requirements proposal. Quarles said, “It’s a mistake. It will restrict the ability of the financial system to provide support for the real economy.” (Bloomberg, July 12). Prior to Barr, Quarles contributed to the Fed’s report on the failure of Silicon Valley Bank that concluded the central bank’s supervisory approach was partially to blame for the banking crisis. (Associated Press, April 28)
Fed Governor Michelle Bowman spoke out against tougher baking regulations on June 25, stating, “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.” She added, “It is abundantly clear that regulatory and supervisory reform is on the way.” (Bowman speech and Bloomberg, June 25)

RECPAC will continue to work on Roundtable responses to potential federal regulatory proposals affecting bank liquidity and CRE.

# # #

Federal Agencies Encourage Commercial Real Estate Loan Accommodations and Workouts in Major Step Forward for CRE

Posted on June 30, 2023October 27, 2023 by Trey Jackson

In a positive development for the commercial real estate industry, federal regulatory agencies issued a joint policy statement yesterday on CRE loan accommodations and workouts that calls for “financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress.” (Agencies’ joint statement, June 29)

Real Estate Roundtable President and CEO Jeffrey DeBoer, above, said, “We enthusiastically welcome and applaud the action of federal regulators to accommodate commercial real estate borrowers and lenders as the industry endures a time of historic, post-pandemic transition. Maturing office loans in particular face a new environment of higher operating and financing costs, much tighter bank lending requirements, and uncertainty in business space needs. This major step forward by federal regulators provides the flexibility that The Roundtable has consistently encouraged, and the relief many in the industry need, as the economy and communities struggle to move beyond the repercussions of the global pandemic.”

CRE Relief

This significant action fulfills recent Real Estate Roundtable requests for regulators to provide more supervisory flexibility that would allow for the responsible restructuring of maturing CRE loans. The guidance is expected to encourage debt restructuring for certain office assets under pressure from remote work, high interest rates, and post-pandemic demand. (Roundtable Weekly, May 11 | Roundtable letter to regulators, March 17)
The June 29 joint agency statement was issued by the Office of the Board of Governors of the Federal Reserve System (the Fed), the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA).
The agencies noted that their policy statement builds on existing supervisory guidance issued in 2009, updates existing interagency supervisory guidance on commercial real estate loan workouts, and adds a section on short-term loan accommodations.
The new section on accommodations includes an agreement to defer one or more payments, make a partial payment, or provide other assistance or relief to a borrower who is experiencing a financial challenge. The statement also addresses recent accounting changes for estimating loan losses and provides examples of how to classify and account for loans affected by workout activity. (See 90-page policy statement on “Prudent Commercial Real Estate Loan Accommodations and Workouts”)
Approximately $1.5 trillion in CRE mortgages will mature in the next three years were originally financed when base rates were near zero. Refinancing this wave of maturing loans is complicated by the current debt environment, characterized by much higher interest rates, uncertain asset values, and illiquid capital markets.

CRE Part of Fed Stress Test

2023 Federal Reserve Stress Test results

This week, the Federal Reserve also released the results of its annual bank stress tests, which included a severe hypothetical scenario of global recession, a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 38% decline in house prices. The Fed noted the stress test focus on CRE illustrates that 23 large banks would be able to continue lending in the hypothetical scenario, despite heavy losses. (2023 Fed stress test results and CNBC, June 28)
“Today’s results confirm that the banking system remains strong and resilient,” Vice Chair for Supervision Michael S. Barr said. “At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.” (Fed news release, June 28)
The 2023 adverse test scenario model stated that declines in CRE prices should be assumed to be concentrated in properties most at risk of a sustained drop in income and asset values—offices that may be affected by remote work or hospitality sectors that continue to be affected by reduced business travel.
The Fed’s stress test report added, “The May 2023 Financial Stability Report highlighted elevated prices on CRE and the possibility of a large correction in property values that could lead to substantial losses for banks. The demand for offices, downtown retail, and hotels has seen dramatic and countervailing changes over the past several years due largely to the pandemic and resulting changes. While many bank CRE loans are held by smaller banks not subject to the supervisory stress test, the banks subject to the stress test hold approximately 20% of office and downtown retail CRE loans.”
Regulators have also recently signaled they are likely to adopt increased capital requirements for the nation’s biggest banks, while Fed governor Michelle Bowman this week spoke out against tougher regulations. (Axios, June 21 and June 26)

“We need to consider whether examiners have the appropriate tools and support to identify important issues and demand prompt remediation,” Bowman stated. “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.” She added, “It is abundantly clear that regulatory and supervisory reform is on the way.” (Bowman speech and Bloomberg, June 25)

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Fed Chairman Addresses CRE as Leading Economic Concern During Congressional Hearings

Posted on June 23, 2023October 27, 2023 by Trey Jackson

Federal Reserve Chairman Jerome Powell testified this week before congressional committees on the state of the economy, identifying commercial real estate as an area the central bank is “very focused on” as the office sector faces significant pressures from declining demand and remote work issues.

Banks & CRE

During Powell’s appearances before the House Financial Services Committee on Wednesday and the Senate Banking, Housing, and Urban Affairs Committee on Thursday, policymakers noted in their Q&A that an estimated $1.5 trillion of CRE loans will mature in the next three years. Powell responded that the Fed is applying a “supervisory toolkit” to banks it has identified with high concentrations of commercial real estate loans.

During the Senate hearing, committee member Bob Menendez (D-NJ) said he was concerned CRE mortgages could be “a ticking time bomb” for many banks as office property values decline and interest rates increase. Powell noted, “We’re being pretty proactive about reaching out to these institutions and trying to help them get through these significant issues.” Click on video clip above to watch the Menendez-Powell exchange or scroll to :31:33 in the full Senate hearing.
In his opening remarks, House Financial Services Committee Chairman Patrick McHenry (R-NC) stated, “Now we are told these (bank) runs represent a systemic threat to the stability of our financial system. Add in the commercial real estate exposure facing financial institutions and it becomes very easy to understand the mounting anxiety of consumers and job creators. I share in that anxiety.” (Scroll to 1:44 in the House hearing)

McHenry, above, also warned, “… a massive increase in capital standards for medium and large institutions… would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need.” (The Roundtable wrote to federal regulators on March 17 about the importance of not engaging in pro-cyclical policies such as requiring financial institutions to increase capital.)
Rep. Young Kim (R-CA) asked Powell during the House hearing if the Fed is thinking about policies that could provide time for refinancing commercial real estate loans—a position strongly advocated by The Real Estate Roundtable. Powell answered, “There’s a playbook for working your way out of these loans. And it’s particularly in the office sector where work from home is still a material factor in some areas.” (Scroll to 1:26:04 in the House hearing for Kim-Powell exchange)
On June 16, a statement from the Financial Stability Oversight Council—which includes the heads of the Federal Reserve, the Treasury Department, and the Securities and Exchange Commission—addressed the results of their recent meeting where potential risks in the CRE market were on the agenda. The group commented, “Regulators are taking steps to emphasize risk management and examine exposures to CRE loans at their regulated institutions.”

Roundtable Response

On June 21, CNBC’s Last Call interviewed Roundtable Board Member Scott Rechler, above right, (Chief Executive Officer and Chairman, RXR) on how a rise in office vacancies could have sweeping implications for the economy. Roundtable Board Member Barry Sternlicht (Chairman and CEO, Starwood Capital Group) joined CNBC’s Squawk Box on June 22 for a discussion about the Fed’s inflation fight and commercial real estate.

The dropping value of various investments, including offices that provide crucial property taxes to fund municipalities, were the focus of a June 20 Wall Street Journal report “Wall Street Sours on America’s Downtowns.”
Real Estate Roundtable President and CEO Jeffrey DeBoer recently remarked on The Roundtable’s Q2 Sentiment Index findings and the role federal regulators can play as CRE faces these significant market developments. “Federal financial institution regulators must act quickly to provide greater supervisory flexibility—as they did in 2009, 2020, and 2022—to allow lenders and borrowers to responsibly restructure the large amount of maturing commercial real estate loans,” DeBoer said. (Roundtable Weekly, June 9)

“Businesses and individuals need more time to transition their space needs to the post-pandemic economy. Greater certainty in demand will allow commercial real estate markets, particularly the office sector, to stabilize and revert to its dominant position as the source for local budget revenue. In addition to regulatory flexibility, positive public and private action to encourage in-person, return-to-work policies is needed, where appropriate. As some buildings will need to be reimagined entirely, policy reforms are needed to encourage those buildings to convert to other uses such as housing,” DeBoer added.

# # #

Economic Pressures on CRE a Top Concern of Federal Regulators

Posted on June 17, 2023October 27, 2023 by Trey Jackson

Federal Reserve Chairman Jerome Powell, above, commented on Wednesday about the economic pressures on banks that hold a significant concentration of commercial real estate loans. Powell said, “We of course, we’re watching that situation very carefully. There’s a substantial amount of commercial real estate in the banking system. A large part of it is in smaller banks.” He added, “those banks will experience larger losses” but since the loans are “well distributed,” the issue is not likely to “suddenly hit and work its way into systemic risk” to the overall economy. (Fed news conference transcript, page 24 and Fortune, June 14)

Market Conditions

The Fed Chairman spoke after the Federal Open Market Committee declined to raise interest rates this week for the first time in 15 months, after the Fed funds rate jumped from zero to more than 5% in less than a year and a half—the sharpest spike in rate increases in nearly 40 years. (Axios, June 15)
Real Estate Roundtable President and CEO Jeffrey DeBoer stated during an April 7 Walker Webcast, “I don’t think anybody assumed a 12-year period of basically zero interest rates, followed by a steep 500bps increase in financing costs, immediately following a once-every-hundred-years pandemic that shut everything down and changed a lot of the ways the built environment would be used. I think all of this has to be allowed to settle through.” (Walker Webcast video and Connect CRE, April 5)
The Real Estate Roundtable continues to emphasize the need for federal regulators to allow more flexibility for lenders and borrowers to restructure commercial real estate loans facing potential default—as the Federal Reserve reported recently that CRE poses a potential risk to financial stability. (Fed’s Financial Stability Report, May 2023)
Today, Treasury Secretary Janet Yellen presided over a meeting of the multi-agency Financial Stability Oversight Council, which will address financial stability vulnerabilities, developments in the commercial real estate market, and receive an update on the banking sector.

Maturing CRE Loans

Roundtable Member Willy Walker (CEO, Walker & Dunlop), above left, was interviewed June 15 on CNBC’s Squawk on the Street about defaults and other pressures facing commercial real estate, the industrial sector, and multi-family supply coming to market.
Nearly $1.5 trillion in CRE loans will mature by 2027, with some $270 billion coming due this year, according to real estate data provider Trepp. (Reuters, June 14) Trepp this week released its Mid-Year Report entitled “Cracks in the Foundation: Office Problems Could Extend Far Beyond CRE.”

The Roundtable’s joint RECPAC and Research Committee meeting this week included a real estate capital market panel with CRE leaders and a presentation by CBRE industry experts on the economy and CRE conditions. The session also included a discussion with Sen. Bill Hagerty (R-TN), a member of the Senate Banking Committee.

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Senators Urge Regulators to Assess Risks to U.S. Financial System; Roundtable Leaders Voice Concerns

Posted on April 7, 2023October 27, 2023 by Trey Jackson

Senate Banking Committee Chairman Sherrod Brown (D-OH), above, and 11 other committee members urged Treasury Secretary Janet Yellen, who oversees the Financial Stability Oversight Council (FSOC), to identify risks and vulnerabilities brought to light during the recent banking crisis and provide regulatory, legislative, or other recommendations. (March 31 Letter and Politico Pro)

Regulatory Action

The committee letter called upon the Oversight Council’s members to conduct a thorough assessment that should include “traditional, quantifiable risks within prudential regulation, such as liquidity and interest rate risk management of less durable funding sources like non-core or uninsured deposits, and concentrations in asset classes like commercial real estate & long duration bonds.” (March 31 Letter)

The Federal Reserve is conducting a separate review of federal banking oversight, with a report expected by May 1 that will recommend regulatory and supervisory actions. Fed Chair Jerome Powell has stated he will support the report’s regulatory recommendations. (Barr congressional testimony, March 30 and The Hill, March 28)
A recent House Financial Services Committee (HFSC) hearing—“The Federal Regulators’ Response to Recent Bank Failures”—featured testimony from Federal Reserve Vice Chair for Supervision Michael Barr, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Treasury Undersecretary for Domestic Finance Nellie Liang.
HFSC Chairman Patrick McHenry (R-NC) on March 31 stated, “As we heard from [President] Biden’s own regulators at this week’s hearing, supervisory incompetence was the leading cause of the failures. There is no evidence that the original Dodd-Frank would have prevented these bank runs. Additionally, no recent stress test has considered the current economic conditions—most notably the Fed’s rapid rate increases to combat Democrat-induced inflation—that contributed to the fall of these institutions.”

Roundtable Leaders Respond

Capital concerns affecting commercial and multifamily markets were a focus this week of the Walker Webcast, which featured Roundtable President and CEO Jeffrey DeBoer and National Multifamily Housing Council President Sharon Wilson Géno. Roundtable Member Willy Walker (Chairman & CEO, Walker & Dunlop) led the wide-ranging discussion on April 5, which addressed the federal response to the bank failures, the debt ceiling, and affordable housing.

DeBoer said, “I don’t think anybody assumed a 12-year period of basically zero interest rates, followed by a steep 500bps increase in financing costs, immediately following a once-every-hundred-years pandemic that shut everything down and changed a lot of the ways . . . (in which) . . . the built environment would be used,” DeBoer said. “I think all of this has to be allowed to settle through.” (Walker Webcast video and Connect CRE, April 5)
Similar observations were offered this week by the head of the International Monetary Fund, who cautioned that a more volatile global economy would bring slower growth and greater financial fragility. “There is simply no way that interest rates would go up so much after being low for so long and there would be no vulnerabilities. Something is going to go boom,” IMF Managing Director Kristalina Georgieva said. (PoliticoPro, April 6)
DeBoer also noted The Roundtable’s recent letter urging federal regulators “to take action immediately to provide increased latitude for financing institutions to work constructively with borrowers. Such action will avert what we believe would be an unnecessary crisis.” (Roundtable Weekly, March 17)

This week, Roundtable Board Members Bill Rudin, above, (Co-Chairman and CEO, Rudin Management Co.) and Barry Sternlicht (Chairman & CEO, Starwood Capital Group) also discussed concerns about the recent bank turmoil on CNBC’s Squawk Box. (Watch April 6 Rudin interview and April 4 Sternlicht interview)
On March 20, Squawk Box featured a discussion with Roundtable Board Member Scott Rechler (Chairman and CEO of RXR) on liquidity pressures and CRE. (Roundtable Weekly, March 24 and Commercial Observer, March 22)

The challenges facing the industry due to recent interest rate hikes, bank failures, and continued widespread remote work will be a top focus of The Roundtable’s Spring Meeting on April 24-25 in Washington, DC (Roundtable-level members only).

# # #

White House Prods Agencies to Tighten Regulations for Mid-Sized Banks

Posted on April 1, 2023October 27, 2023 by Trey Jackson

The White House proposed tighter regulations yesterday for regional banks with between $100 billion to $250 billion in assets—after bank regulators testified this week before congressional committees that they are considering similar measures. (White House Fact Sheet and Reuters, March 30 | AP and American Banker, March 28)

Regulatory Changes

Fed Vice Chair for Supervision Michael Barr, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Treasury Undersecretary for Domestic Finance Nellie Liang, above, testified on the need to strengthen capital standards for mid-sized banks in the wake of this month’s bank failures. (BGov, March 28)
The Biden administration stated that federal regulators could expand long-term debt requirements and reinstate banking rules that were rolled back in the previous administration. (White House Fact Sheet and CNBC, March 30)
Reuters reported that according to a senior White House official, “These are all actions that can be taken under existing law and as a result, there’s no need for congressional action in order to authorize the agencies to take any of these steps.”
The Fed’s Michael Barr is conducting a review of federal oversight of SVB, with a report expected by May 1 that will recommend regulatory and supervisory actions. Fed Chair Jerome Powell has stated he will support the report’s regulatory recommendations. (Barr congressional testimony, March 30 and The Hill, March 28)
Bank Policy Institute head Greg Baer issued a statement emphasizing how imposing more regulation on all banks would drive costs higher in the economy. “It would be unfortunate if the response to bad management and delinquent supervision at SVB were additional regulation on all banks. The Fed has barely begun its promised review. This has a strong feeling of ready, fire, aim,” he stated. (Reuters, March 30)

Roundtable Recommendations

The Roundtable recently cited market uncertainty from regional bank turmoil—along with a steady increase in looming debt maturities, rising interest rates, and remote work’s negative influence on office space demand—as coalescing factors that have put pressure on liquidity and decreased refinancing options for CRE assets. (Roundtable letter to regulators, March 17)
The March 17 letter from Real Estate Roundtable President and CEO Jeffrey DeBoer to federal banking regulators recommended the reestablishing a troubled debt restructuring (TDR) program for commercial real estate that would give financial institutions increased flexibility to refinance loans with borrowers and lenders.
The Roundtable urged regulatory bank Agencies to avoid any pro-cyclical policies, such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. “These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values,” the letter states.

Agency Actions

The Roundtable letter also notes that regulators have taken significant action four times since 2009 to assist commercial real estate loan modifications during periods of economic instability. DeBoer added, “Now is the time to take action again. Our request is for immediate action, given increasing credit and liquidity constraints. Time will allow markets still struggling with post pandemic uncertainties to stabilize.” (Roundtable letter to regulators, March 17)

This month’s Roundtable letter urged federal regulators to “take action immediately to provide increased latitude for financing institutions to work constructively with borrowers. Such action will avert what we believe would be an unnecessary crisis.”

# # #

Roundtable Urges Federal Bank Regulators to Reestablish CRE Troubled Debt Restructuring Program

Posted on March 18, 2023October 27, 2023 by Trey Jackson

The Real Estate Roundtable today requested federal bank regulators to reestablish immediately a troubled debt restructuring (TDR) program for commercial real estate that would give financial institutions increased flexibility to refinance loans with borrowers and lenders. (Roundtable letter to regulators, March 17)

Roundtable Liquidity Concerns

The letter from Real Estate Roundtable President and CEO Jeffrey DeBoer, above, cites rising interest rates, a steady increase in looming debt maturities, remote work’s negative influence on office space demand, and heightened uncertainty from this week’s bank turmoil as contributing factors that have exerted pressure on liquidity and decreased refinancing options for CRE assets.
DeBoer added, “Regulators have taken significant action four times since 2009 to assist commercial real estate loan modifications during periods of economic instability—and now is the time to take action again. Our request is for immediate action, given increasing credit and liquidity constraints. Time will allow markets still struggling with post pandemic uncertainties to stabilize.”
Minutes from last month’s Fed Open Market Committee meeting confirmed economic pressures on CRE assets. The FOMC minutes state, “In particular, the staff noted that measures of valuations in both residential and commercial property markets remained high, and that the potential for large declines in property prices remained greater than usual.”

Fed Intervention

The Fed is reviewing tougher capital and liquidity requirements for midsize banks, along with more stringent annual stress tests to assess their ability to weather recessionary pressures. New rules may target mid-sized banks with assets totaling between $100 billion to $250 billion. (Wall Street Journal | Financial Times | Reuters, March 14)
The Fed this week acted to quell turmoil caused by the collapse of three mid-sized banks, including expanding its balance sheet to nearly $300 billion after months of shrinking it through a quantitative easing program. (Axios, March 17)
The Fed announced on Sunday night, March 12, the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions that pledge U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The BTFP is backstopped up to $25 billion from the Exchange Stabilization Fund. (Fed announcement, March 12)
Additionally, a Fed report released yesterday showed a huge outflow of $153 billion in loans at the Fed’s “discount window,” a funding resource that helps depository institutions manage their liquidity risks. The previous record for discount window borrowing was $111 billion during the 2008 financial crisis.

Remote Work

DeBoer’s letter to the Agencies also emphasized the lingering effect of the global pandemic on hospitality, senior housing, retail (including the enclosed shopping center market), office and other property sectors.
The ongoing pressure of remote work arrangements has altered the current demand for office space nationwide, created significant concerns about the future of office use, and the cast doubt on the future of American cities that heavily depend on property tax revenue to fund needed community services. (Roundtable letter, March 17)
The wide adoption of remote work may have been a factor in Silicon Valley Bank’s collapse, according to the bank’s 2023 annual report filed in February. SVB acknowledged in a filing with the Securities and Exchange Commission that it faced “risks from a prolonged work-from-home arrangement as well as our implementation of a broader plan to return to the office.” (Fortune, March 16 and Axios, March 17)

The Roundtable’s letter concludes by urging the federal regulators to “take action immediately to provide increased latitude for financing institutions to work constructively with borrowers. Such action will avert what we believe would be an unnecessary crisis.”

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