CREFW-Fall2015

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CRE Finance World Autumn 2015
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Christina Zausner
Vice President, Industry
Policy and Analysis
CRE Finance Council
ith a goal of the improving long-term stability of
the financial system, new regulatory initiatives have
emerged as defining features of today’s marketplace.
In the spring of 2015, CREFC undertook a study
to broadly assess the qualitative and quantitative
impacts of regulation on the commercial real estate sector specifically.
CREFC conducted more than two dozen interviews with industry
leaders representing the full range of real estate capital sources
and with regulatory professionals. Financial and economic analyses
complemented the interviews with quantitative evaluations of
regulatory costs.
The scope of the Commercial Real Estate Regulatory Impact
(CRERI) study encompassed a wide range of post-financial crisis
banking and securities regulations that impact the CRE sector,
including provisions of the new Basel Capital Accords (Basel III)
and the Dodd-Frank Wall Street
Reform and Consumer Protection
Act. Assessments were conducted on
the bank and non-bank markets and
the quantitative impacts are meant to
apply starting in July 2015.
While the interviews yielded a range of views on the magnitude
of regulatory costs, key themes did emerge. At the highest level,
CREFC members believed that new regulations had the effect of
reducing leverage in the system, albeit on the margins, but that low
interest rates and the cyclical expansion were masking the effects.
In turn, the tightening of capital availability could support better
credit decisions.
However, the majority of interviewees converged on the view that
regulations were unlikely to achieve better underwriting outcomes
due largely to poor design. Several study participants from banks
and nonbanks cited specific instances where a new regulatory
standard had or was likely to drive adverse selection in lending or
a degradation of prevailing underwriting standards for one or more
capital sources.
Amongst the key themes emerging from interviews with CREFC
members, the cost and uncertainty of a mutable regulatory
environment, reduced leverage and liquidity, unevenness in the
regulatory burden across capital sources, and an ambiguous impact
on overall loan quality and systemic risk all featured prominently:
1. Cost of Regulatory Burden and Uncertainty
Now six years after the G20 regulatory agenda was articulated and
five years since the Dodd-Frank Act became law, implementation
details of key regulatory initiatives are still being designed. With
major changes awaiting the financial services industry, CREFC
members note that regulatory burden and uncertainty have become
features of the marketplace. Fragmentation of regulatory authority
across a large number of domestic and international agencies has
allowed for parallel — and sometimes overlapping — regulatory
initiatives, which has added to the overall burden and time horizon
of uncertainty.
For the largest global banks facing
the highest regulatory burden,
satisfying new rules related to
capital and liquidity may require an
additional 300 bps or more of capital
and adjustments to the risk profile
of debt held on balance sheet. For large banks, CREFC estimated
additional and ongoing regulatory costs for commercial mortgage
loans averaging roughly 46 bps. While other classes of financial
institutions will likely bear fewer regulatory costs on an absolute
basis, smaller banks in particular are feeling a greater relative
burden.
2. New Regulation Raises Borrowing Costs and Reduces
Lending Volume
Recently implemented and pending regulatory reforms raise banks’
and other lenders’ costs for making CRE and construction loans,
reducing their incentives to lend to the sector. Since allocations
to CRE will place greater demands on finite capital reserves,
CREFC members noted that bank lending in other sectors will be
negatively impacted as well. From the perspective of the borrower
facing higher relative costs of financing, levered returns on
investment will be lower, thereby reducing the incentive to borrow.
Sam Chandan
The Wharton School of the
University of Pennsylvania
“Regulatory burden and uncertainty have
become features of the marketplace.”