Basel Capital Standards for Banks and Thrifts

Overview

International, voluntary regulatory capital standards for banks are developed by the Basel Committee on Banking Supervision. The most recent round of updates, referred to as Basel III, has been in an implementation cycle since 2013.

Since 2015, the risk-based capital category High Volatility Commercial Real Estate Exposures (HVCRE) for commercial acquisition, development, and construction (ADC) loans has been the standard. Under it, the risk-weight for an ADC loan is 150% - an increase from the pre-HVCRE level of 100%.  Legislation has been introduced in the 115th Congress to resolve confusion among lenders related to the application of the HVCRE risk-weight and its exceptions.  In addition, the Federal Banking Agencies (the Federal Reserve, the FDIC, and the OCC) issued a notice of proposed rulemaking in late 2017 to replace HVCRE with a new risk-weight category – High Volatility Acquisition, Development, and Construction, or HVADC. The proposed category would have a lower risk-weight of 130%, but would remove several exceptions found in HVCRE, thus increasing the number of loans it applies to.

Political Advocacy

Current Legislation/Regulation

Basel III Final Rule
H.R. 2148, Clarifying Commercial Real Estate Loans
S. 2405, Clarifying Commercial Real Estate Loans
S 2155 - Economic Growth, Regulatory Relief, and Consumer Protection Act 


In-Depth

Letters to Congress
Letters to federal agencies
Issue summary
NAR Federal Issues Tracker


Legislative Contact(s):

Erin Stackley, estackley@realtors.org, 202-383-1150

Helen Devlin, hdevlin@realtors.org, 202-383-7559


Regulatory Contact(s):

Erin Stackley, estackley@realtors.org, 202-383-1150

Helen Devlin, hdevlin@realtors.org, 202-383-7559


NAR Committee:

Commercial Legislation and Regulatory Advisory Board

What is the fundamental issue?

International, voluntary regulatory capital standards for banks are developed by the Basel Committee on Banking Supervision. The most recent round of updates, referred to as Basel III, has been in an implementation cycle since 2013.

In January 2015, the standard was changed to create a new risk-based capital category – High Volatility Commercial Real Estate Exposures (HVCRE) for commercial acquisition, development, and construction (ADC) loans. These changes raised the risk-weight for an ADC loan from 100 percent to 150 percent. These changes made commercial loans less attractive to lenders, and many banks adjusted their lending practices and reduced the amount of available commercial real estate credit in order to avoid the higher capital charges associated with ADC loans. Additionally, the lack of clarity around the new standard created confusion, resulting in different applications of the requirements by different lenders all trying to stay in compliance.  

In response, legislation was introduced in Congress to clarify and amend the HVCRE rules, and the federal banking agencies also proposed regulations to adjust them.  In May 2018, Congress passed S. 2155, a regulatory relief package which clarifies definitions and exemptions in the HVCRE rule.  The federal banking agencies have since taken up the rulemaking process to propagate final regulations in adherence to the law.

I am a real estate professional. What does this mean for my business?

Basel III agreement will require banks to hold more capital. The changes could significantly curtail the flow of capital to real estate and harm the commercial and residential property market and property values. Further, the creation of the HVCRE standards means that loans used for commercial acquisition, development and construction loans will become more complex.

NAR Policy:

While NAR supports the Basel Committee's objective to prevent another financial crisis, NAR is concerned that requiring banks to hold far more capital could further exacerbate credit challenges for real estate and broader credit capacity. Furthermore, NAR seeks to protect and enhance the flow of capital to commercial and residential real estate by making sure that the capital rules do not require excessive capital to be held by banks.

Legislative/Regulatory Status/Outlook

The new HVCRE standard went into effect in 2015. Among other things, the final rule clarified that the definition of HVCRE does not apply to the purchase or development of agricultural land if the valuation of the land is limited to the value of the land for agricultural purposes or to ADC loans that otherwise qualify as community development investments.  Loans permanently financing owner occupied commercial real estate are not considered HVCRE under the final rule.  No other changes were made to the HVCRE definition and HVCRE loans are risk-weighted at 150% under the final rule.

In the Fall 2017 the federal banking agencies (OCC, FDIC, and Federal Reserve) proposed replacing HVCRE with a new standard, "HVADC" (High Volatility Acquisition, Development, and Construction loans), which would have a lower risk-weight of 130%.  However, the HVADC standard would also remove several exceptions to the HVCRE rule, thus broadening the types of loans included in the higher risk-weight.  NAR sent two comment letters to the agencies - one as sole author, one as part of a commercial real estate coalition - urging them to consider further lowering the risk-weight to pre-HVCRE levels of 100%, and to include the exceptions from the HVCRE rule.  

In 2017, Representatives Robert Pittenger (R-NC) and David Scott (D-GA) introduced H.R. 2148,the "Clarifying Commercial Real Estate Loans Act." This legislation would provide much-needed clarity to lenders about which loans should be categorized as HVCRE ADC, and thus subject to the higher risk-weight, as well as how to apply the exceptions to the rule. NAR worked with a coalition of commercial real estate groups to assist in crafting the legislation, and urged for its passage in the House.  The bill was approved by the Financial Services Committee on November 7, 2017, it passed the House of Representatives.  In February 2018, Senators Cotton (R-AR) and Jones (D-AL) introduced companion legislation in the Senate, S. 2405.  NAR supported that bill as well and urged its passage.  In May 2018, S.2405 was included in a regulatory relief package bill (S.2155), which passed the Senate and House and was signed into law.  The federal banking agencies are finalizing regulations bringing the rules into accordance with the law.  

The new law defines which loans are "HVCRE" and under what circumstances a loan can be exempted from that category.  These exemptions include one-to-four unit family residential properties, investments in community development or agribultural land, and certain well-capitalized loans.  Taken as a whole, it clarifies and modifies the HVCRE rule to ensure that it is properly tailored, while still promoting economically responsible commercial lending.

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