CREFW-Fall2015

CRE Finance World Autumn 2015

James Manzi, CFA

Senior Director,

Structured Finance Research

Standards & Poor’s

Darrell Wheeler

Head of Research for

Global Structured Finance

Standard & Poor’s

t numerous conferences this year, including the

Commercial Real Estate Finance Council (CREFC)

Annual Conference in New York, one particular topic has

remained at the forefront: global capital requirements,

which have the potential to become impediments to

providing financing via securitized products. Just based on how

much time was spent on the subject at these events, we believe

that regulatory treatment of certain instruments is and will become

a key driver of investment demand and liquidity in the coming years

versus any typical collateral analysis investors currently consider.

Of particular investor focus recently are various regulators’

evaluations of what actually constitute “high-quality” liquid assets

in order to calculate the Basel III liquidity coverage ratio and the

associated market value haircuts. This topic has transcended

international borders, as regulators seem to have interpreted what

“high-quality” and “liquid” mean through somewhat of a national

policy lens, perhaps without knowing the impact of decisions made

in other countries. As a result, there is still uncertainty as to what

final standards may emerge for global institutional investors, as

rules will likely be further adjusted.

What Are The LCR And HQLA?

As part of Basel III, regulators designed the Liquidity Coverage

Ratio (LCR) to ensure that banks have enough high-quality liquid

assets (HQLA) on hand to cover the total net cash outflows over

a prospective 30-calendar-day stress period. The ratio has total

HQLA as the numerator and net cash outflows as the denominator.

Each nation has divided potential HQLA into three levels, 1, 2A, and

2B, with increasing market value haircuts applied to the HQLA assets

based on the level, in an attempt to allow for fire sale-like liquidation

conditions that could occur in an economic crisis. Additionally, the

levels include some general caps on the total percentage of assets

and certain types of assets that can be held. Under the general