By Kevan McCormack
When President Donald Trump was elected in November 2016, he made many campaign promises that he has been delivering on at a dramatic pace, including the renegotiation of NAFTA signed just today.
President Trump’s first move to make good on his banking reform promises came on May 24, 2018 when he signed legislation that provided relief for smaller regional banks who have been burdened since 2010 with the same regulations that some of the country’s largest banks must abide by, banks considered “Too Big to Fail.” This was accomplished by simply raising the threshold from $50 billion in assets to $250 billion leaving just 12 banks facing the strictest regulations.
No longer will these smaller banks be required to reserve so much capital to cover potential losses on their balance sheets. Additionally, these banks will not be burdened with the constant oversight and “health testing,” now only needing to test periodically vs. every year. This has freed up fresh capital and resources for banks to lend to small businesses at the local level and further supporting national growth and employment.
The administration is making further efforts to simplify the banking regulations and remove sources of confusion revolving around these rules and regulations. One rule, in particular, is called the Volcker Rule. This rule put merely prevents Wall Street banks, such as Goldman Sachs, from engaging in “proprietary trading” which is making bets on the movement of financial markets using their own money. The defining characteristic of “proprietary trading” or speculative trading according to the rule has been positions held by banks for less than 60 days. Trump’s administration is making progress in amending this rule by removing or modifying the 60-day threshold which should be a boon for Wall Street banks if this is amended this year.
Beyond local banking changes being championed by the Trump Administration, at the international level, a set of commonly adhered to rules known as Basel III is also in the midst of being refined to address some of its’ most confusing and contested definitions concerning what is known as HVCRE or High Volatility Commercial Real Estate. These new set of rules, known as Basel IV, are not complete yet but should provide some relief to real estate developers and investors. Most notably, the changes to Basel III will likely allow for land to be contributed to development projects at market value versus the original cost basis. This will dramatically reduce the amount of cash equity needed to close development loans in cases where a developer has owned the land for a while or has improved the value of their land through material entitlement work. Additional changes are expected to ease the burden to banks who make development loans and who must reserve against these loans for potential losses because they are considered HVCRE. Base IV may remove the requirement to amortize loans, that are otherwise performing and stabilized, just to remove the “HVCRE” label and the corresponding capital restrictions.
I believe most educated readers understand that “one size fits all” regulations rarely work and that, to the extent, they are even needed, they must be tailor fit for the regulated and for the era of time or else unintended consequences will occur. In this case, the unintended consequences were the hamstrung growth for eight years at the national level caused by restricted access to capital by our country’s small to medium size businesses, which form the backbone of our economy.
The combined effect of all of these changes will put more liquidity in the national and global capital market. This is never a bad thing!
The evolving and ever-changing world of bank regulations can be confusing and worse yet, have a negative impact on financing your next commercial real estate project. However, fear not, Metropolitan Capital Advisors is here to help navigate these choppy waters.
The Author, Kevan McCormack, is a Senior Director at MCA. Kevan can be reached at 972-267-0600 or firstname.lastname@example.org.