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House Subcommittee Examines Bank Capital Proposal 

September 18, 2023

On September 14, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy held a hearing entitled “Implementing Basel III: What’s the Fed’s Endgame?”

Witnesses included:

• Greg Baer, Bank Policy Institute
• Andrew Olmem, Mayer Brown
• Robert Broeksmit, Mortgage Bankers Association
• Alexa Philo, Americans for Financial Reform

Policymakers and industry witnesses shared their differing perspectives on the banking agencies’ proposed revised bank capital standards. The proposed standards, which target large banks with over $100 billion in assets, will implement the final international Basel III rules and respond to some of the early -2023 regional bank turmoil.

Why it matters: Implementation of the current version of the proposed rule would significantly increase capital requirements for the larger U.S. banks, with negative implications for the cost and availability of credit to U.S. businesses and consumers.

Key themes from the hearing included:

• The proposal does not share the underlying data that served as the basis for the proposed risk weights. (In a letter submitted to regulators on September 12, banking trades argued that the proposal violates the Administrative Procedure Act (APA) because it lacks sufficient public data and analysis. )
• U.S. banks would be at a competitive disadvantage versus European banks given the proposed elimination of internal models in most instances, among other changes.
• Regional banks would be subject to a new set of regulations that are not suited for banks their size.
• The proposed changes could impact the ability of the U.S. to meet requirements of the Inflation Reduction Act (IRA) and climate change treaties.

What they’re saying: Unlike the implementation of Basel reforms over a decade ago, market participants believe there is bipartisan interest in ensuring that this proposal does not restrict capital availability to the U.S. economy.

Additionally, regulators also appear relatively open to feedback. In a statement accompanying the proposal’s release, Fed Chair Jerome Powell noted:

“While there could be benefits of still higher capital, as always we must also consider the potential costs. This is a difficult balance to strike, and striking it will require public input and thoughtful deliberation.”

CREFC is closely monitoring these policy developments and has convened a working group to respond to the proposal. Please contact Sairah Burki at sburki@crefc.org if you would like to join this effort.

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Capital Markets Update Week of 9/18

September 18, 2023

Private-Label CMBS and CRE CLOs

• Only one transaction priced last week, a $679 million conduit backed primarily by 10-year loans (BBCMS 2023-C21).
• Year-to-date, the private-label CMBS and CRE CLO issuance stood at $28.6 billion, 69% behind last year’s tally at this time of $92.5 billion.

Active Pipeline Over Next Two Months

• Two transactions are currently in the market, including one conduit and one CRE CLO.
• In addition, Commercial Mortgage Alert reports that the issuance pipeline will be flush over the next couple of months with multiple conduit and SASB offerings.

CMBS Spreads Steady

• Benchmark CMBS spreads in the secondary market were unchanged across the capital stack last week. LCF AAA, AA, and A spreads remained at 138, 250, and 410, respectively, while BBB- spreads stayed at 915.
• AAA SASB spreads were tighter by 2 bps, in a range of 145 – 217.

Benchmark Rates Remain Elevated

• The 10-year Treasury yield was up 7 bps last week to 4.33%. The 10-year yield hit a YTD high of 4.34% on August 21, the highest since 2007.
• CME 1M Term SOFR was unchanged last week at 5.33%, its highest level of 2023, and up 97 bps since the beginning of the year.
• Inflation data released last week raised fears of a reacceleration in prices. Annual inflation accelerated to 3.7% in August, following a jump in energy prices. While core inflation registered its lowest annualized level in almost two years, it still recorded a larger-than-expected monthly gain of 0.3%. “We expect the committee to continue shifting to a message of ‘higher for longer,’” said Oscar Munoz, Chief US Macro Strategist at TD Securities. “… Fed officials aren’t likely to fully close the door to additional rate increases.”
• Traders are pricing in a 98% chance that the Federal Reserve will keep its benchmark interest rate steady in September and an approximately 30% chance that it will raise the interest rate one more time by the end of the year, according to CME’s FedWatch Tool. In addition, they are pricing in a 36% likelihood that the central bank will keep the policy rate at its current range of 5.25% to 5.5% until June next year.

Agency CMBS

• Agency issuance totaled $1.8 billion last week, consisting of $1.2 billion in various Freddie transactions and $600 million in Fannie DUS. For the year, agency issuance stands at $79.4 billion, 28% lower than the $110.3 billion for the same period last year.

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Lawsuit Challenges Interpretation on 144A Bond Disclosures

September 18, 2023

On September 12, the National Association of Manufacturers (NAM) filed a federal lawsuit against the SEC for its new interpretation that would require 15c2-11 public disclosures to private-issue 144A bonds. At issue is the SEC’s application of the rule to fixed income bonds without a new rulemaking.

“The SEC’s attempt to force private companies to disclose confidential financial information publicly is a clear violation of the Administrative Procedure Act,” said NAM Chief Legal Officer Linda Kelly.

Why it matters: Starting in January 2025, broker-dealers would be required to verify that certain issuer (or asset-backed) information is publicly available on 144A securities to freely quote the bonds. For CREFC members, this change would impact Single Asset Single Borrower CMBS and CRE CLOs, among others.

The interpretation was originally supposed to go into effect in January 2023, but CREFC and other organizations worked with Congress and the SEC to get an extension. While CREFC continues to work on a legislative fix, the interpretation would go into effect in 2025 absent action from Congress, the courts or the SEC.

What they’re saying: NAM’s suit alleges procedural deficiencies in the SEC’s rulemaking process.

• Since Rule 15c2-11 was introduced in 1971, it has always been treated as applying exclusively to the equity markets. NAM says that expanding the rule would have to follow the Administrative Procedures Act.
• But the SEC now claims the rule has always applied to fixed income and the rulemaking is unnecessary.

What’s next: The lawsuit was filed in the Eastern District of Kentucky, which is in the Sixth Circuit Court of Appeals.

• While finally resolving the litigation could take years, observers expect the district court could issue a “nationwide injunction” to temporarily pause application of the rule during the challenge.
• The injunction could quickly be appealed up through the levels, including to the Supreme Court, before the case is even heard on the merits. Thus, the change could be paused while the litigation proceeds.

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