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CRE Finance World, Summer 2013

conduit’s appetite will exert pressure on banks’ underwriting. As we have seen at least once before, a severe imbalance in the incentives of different lender classes can lead banks to make substantially riskier loans on stabilized assets and to overextend into construction financing. Interest rate risks assumed in an environment of artificially low rates and hyperbolic discounting imply a shift in credit risk that many banks seem ill equipped to anticipate. Figure 7 National Debt Yield Trends By Property Type Across Bank, Life Company, and Conduit Lending, Rolling Averages Source: Chandan CRE Finance World Summer 2013 34 Broader Outlook for Banks Across institutions of all sizes, factors external to the decisions of any one bank are shaping the outlook. They run the gamut from the macroeconomic context of lending to regulations with ambiguous implications for profitability. The drawdown in loan losses and opportunities for new lending that have contributed to rising bank income depend on an improving economy and dynamic asset value appreciation. For some community banks, the productivity of their capital will not rise fast enough to offset higher reserve requirements. Following years of oft-bemoaned regulatory uncertainty, more explicit regulatory requirements will begin to emerge over the next year. The drivers of consolidation among the smallest institutions will shift away from distress and towards changing cost structures and the profit equation. In some tertiary markets, the deleterious consequence of otherwise well-intentioned policymaking will be diminished access to consumer banking services. Renewed calls for active regulation imply higher long-term costs for financial intermediaries both large and small. The recalcitrance of the debate about financial services regulation reflects an important reality on the ground that bears directly on commercial real estate lending. Cyclical attention to risk is being proffered as a substitute for meaningful structural change. On the balance sheet and in the securitization platform, there has been no sea change in our industry’s fundamental capacity to measure, manage, and mitigate risk. State of the Banks


CRE Finance World, Summer 2013
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