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CREFW-Fall2014 10.15.14

A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 23 Liquidity Coverage Ratio Supplementary Leverage Ratio Covered Institutions Domestic banks, Savings & Loans with $250 billion in total assets; modified LCR applies to institutions with $50 billion in total assets Advanced approaches banks under Basel III (the largest banks) Numerator Highly Qualified Liquid Assets (HQLAs) = cash and cash equivalents mostly Tier I capital Denominator Outflows = undrawn commitments and funding obligations (assuming a 30-day stress for the larger institutions, 21-day stress period under the modified approach) Total Assets (including certain off balance sheet exposures) Ratio Requirements — Holding Companies HQLAs ≥ Outflows 5% Ratio Requirements — Insured Depositories HQLAs ≥ Outflows 6% Calculation Frequency Daily Monthly Conformance For large institutions, must meet 80% of HQLA requirements by 01/01/15 and 100% by 01/01/17; daily reporting requirements effective on 01/07/15 Must disclose as of 01/01/15 and be in full compliance by 01/01/18 Disciplinary Measures After 3 days of noncompliance by any amount, institution must file a plan with the regulators At the holding company level, regulators will decide whether to allow an institution to issue dividends and/ or bonuses; at the depository level, must enter into “Prompt Corrective Action” regime Game Changers Even before these rules were finalized, the regulators were forcing the banks to take action. In the final eSLR rule, the agencies noted that the banks have already closed the leverage requirement gap from 2013 when it stood at $46 billion to where it now stands in 2014 at $15 billion. On the LCR side, the BCBS estimated that globally banks had a shortfall of roughly $456 billion (EUR 353 billion) as of June 30, 2013. In the U.S., banks have been providing preliminary LCR data for years and have already reoriented their balance sheets to a certain degree toward more liquid assets, though it is not clear how far they have gone. As a result of these supervisory actions and other reforms, we can see major changes at big banks now four years after Dodd-Frank enactment. Looking outside of the CRE and securitization world at another business – interest rates – the combined effects of operational requirements and rising capital costs have resulted in thinning margins. In turn, banks are shedding interest rates activities noticeably. The Two Playbooks – Monetary and Regulatory Policy The Senate Banking Committee hearing “Wall Street Reform: Assessing and Enhancing the Financial Regulatory System” held in September gave key Senators the opportunity to grill regulatory heads about their agendas, during which time five agency leaders reiterated that there is more change yet to come. Federal Reserve Board Governor Daniel Tarullo called this period in rulemaking the “beginning of the end”, not the end. Indeed, the list of open items is getting smaller and regulators can now claim that they have partially implemented most of their key reform planks, but several key measures remain outstanding. At this point, Chair Janet Yellen must be anxious to finish off on the major reforms. In and of itself, outstanding Dodd-Frank obligations are a political liability. This work is also important, because it will lay the groundwork for further removal of monetary policy support. As the head of the central bank, Yellen will want to see that the financial system has absorbed the brunt of structural changes mandated by the Dodd-Frank Act before it begins to challenge the marketplace’s current low-rate mode. Structural de-leveraging through reforms can have the same effect as raising rates. Both reduce leverage and financial activity, though reforms also address many other issues beyond the reach of monetary policy. With that in mind, it is likely that the Chair Yellen and other members of the Financial Open Market Committee will hope that timing allows for a buffer zone between major structural change and raising rates. Game On: Basel III Rules Poised to Extract Leverage from the System


CREFW-Fall2014 10.15.14
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