Commercial Real Estate Finance Council (CREFC) Highlights of US Proposals Implementing Basel III Framework

Transcription

1 Cmmercial Real Estate Finance Cuncil (CREFC) Highlights f US Prpsals Implementing Basel III Framewrk On June 7, 2012, US banking regulatrs released three ntices f prpsed rulemaking (the Prpsals ) and ne ntice f final rule, which tgether wuld substantially revise the current capital rules in the U.S. Cmments n the Prpsals are due n later than September 7, The Prpsals wuld implement the regulatry capital refrms recmmended in December 2010 by the Basel Cmmittee n Banking Supervisin, cmmnly referred t as Basel III, as well as additinal capital refrms required by the Ddd-Frank Act. Amng ther things, the Prpsals revise minimum capital adequacy standards and prpse changes t existing risk-weights, including thrugh the intrductin f new risk-weighting methdlgy with respect t securitizatin expsures. Cmment Perid Deadline: September 7, 2012 Prpsed Effectiveness Dates: Capital Ratis: January 1, 2013, subject t phase-in and varius cmmencement dates, with full cmpliance with mst aspects f the rule nt required until January 1, Standardized Apprach: January 1, 2015 (subject t early pt-in). Advanced Appraches: n specified effective date. Market Risk Capital Rule: January 1, 2013 Implementatin: The Prpsals wuld implement Basel III framewrk subject t sme ntable distinctins drawn under the Ddd-Frank Act and as a plicy matter: Ddd-Frank 939A Requires the U.S. banking agencies t remve all reference t external credit ratings frm federal regulatins and replace with alternative standards f creditwrthiness. The U.S. banking agencies shall seek t establish, t the extent feasible, unifrm standards f creditwrthiness. Cllins Amendment Generally requires that insured depsitry institutins and depsitry institutin hlding cmpanies be subject t the same generally applicable risk-based capital and leverage rules. The framewrk articulated under the Basel III Prpsal and the Standardized Apprach Prpsal wuld be the generally applicable risk-based capital rules fr purpses f the Cllins Amendment, and wuld be the flr fr calculatin f capital requirements. Other (exclusin f mnline insurers as eligible guarantrs, changes t definitin f financial cllateral, etc.) Basel III Prpsal: Scpe f Applicatin: All U.S. federal and state-chartered banks and savings assciatins. U.S. bank hlding cmpanies with mre than $500 millin in ttal cnslidated assets.

2 U.S. savings and lan hlding cmpanies (including thse with ttal cnslidated assets f less than $500 millin). Effectiveness Dates: Capital ratis wuld be effective as f January 1, 2013, but full cmpliance with mst aspects f the rule wuld nt be required until January 1, Regulatry Capital effect is t increase minimum regulatry capital requirements and require verall higher quality capital: Three capital ratis New cmmn equity tier 1 capital rati (4.5%) Cmmn equity tier 1 capital tracks Basel III definitin and generally means paid-in cmmn equity plus retained earnings plus accumulated ther cmprehensive incme plus certain cmmn equity tier 1 minrity interests. Mst new/revised regulatry adjustments and deductins will be applied t cmmn equity tier 1 capital, and include: Gdwill; mrtgage servicing assets (MSAs); certain deferred tax assets (DTAs); and Unrealized gains and lsses n available-fr-sale (AFS) securities, which wuld flw thrugh t cmmn equity tier 1 capital. Higher tier 1 capital rati (increased frm 4% t 6%) Tier 1 capital rati numeratr equals cmmn equity tier 1 capital plus additinal tier 1 capital. Deductins and adjustments wuld include after-tax gain n sale assciated with a securitizatin expsure. Additinal tier 1 capital wuld cntinue t include nn-cumulative perpetual preferred stck. Trust-preferred securities and cumulative perpetual preferred stck wuld be phased ut f tier 1 capital as required under the Cllins Amendment. Unchanged ttal capital rati (8%) 2

3 New Capital Buffers Capital Cnservatin Buffer: Must equal at least 2.5% f risk-weighted assets in rder t avid being subject t limitatins n capital distributins and discretinary bnus payments t executive fficers. Wuld increase the three risk-based capital ratis by 2.5% (applies t tier 1 cmmn equity capital). Phase-in begins January 1, Cuntercyclical Capital Buffer (fr advanced appraches banking rganizatins) must be maintained in rder t avid being subject t limitatins n capital distributins and discretinary bnuses t executive fficers Leverage Ratis (tw leverage ratis): Tier 1 Leverage Rati: Higher minimum tier 1 leverage rati (nw 4% fr all; previusly certain banking rganizatins culd apply 3%). Supplementary Leverage Rati (fr advanced appraches banking rganizatins): Denminatr wuld include certain ff-balance sheet expsures. Nt applicable until January 1, 2018, but must be calculated and reprted beginning January 1, Prmpt Crrective Actin (PCA) framewrk: Applies t insured depsitry institutins. Wuld incrprate new risk-based capital and leverage ratis. Revised definitin f tangible equity. Changes effective January 1, Treatment f mrtgage servicing assets (MSAs): Currently banking rganizatins may include MSAs (when calculated with certain ther assets) generally up t 100% befre deductin is required. Under the Prpsals, nly 10% f the value f MSAs may be cunted (and up t 15% when cunted with deferred tax assets arising frm temprary differences that an rganizatin culd nt realize thrugh net perating lss carry backs and significant investments in ther cmmn shares f uncnslidated financial institutins) befre deductin is required. 3

4 The amunt f readily marketable MSAs that a banking rganizatin may include in regulatry capital cannt be valued at mre than 90% f their fair market value. Subject t phase-in ver 5 years. 250% risk weight fr MSAs that are nt deducted (currently 100%). Standardized Apprach Prpsal Scpe f Applicatin All U.S. federal and state-chartered banks and savings assciatins. U.S. bank hlding cmpanies with mre than $500 millin in ttal cnslidated assets. U.S. savings and lan hlding cmpanies. Prpsed Effective Date: January 15, 2015 (subject t early pt-in). Frmula: A banking rganizatin s ttal risk-weighted assets wuld be the sum f: (i) its riskweighted assets fr general credit risk, ff-balance sheet items, OTC derivative cntracts, transactins cleared thrugh central cunterparties, unsettled transactins, securitizatin expsures and equity expsures; plus (ii) its risk-weighted assets fr market risk calculated under the market risk rules (as amended by the Market Risk Capital Rule), if applicable; less (iii) the prtin f its allwance fr lan and lease lsses that is nt included in Tier 2 capital. Risk-Weights Generally Applicable t Cmmercial Real Estate Assets As nted belw, calculatin f the risk weights applicable t securitizatin expsures under the grss-up apprach r simplified supervisry frmula apprach typically will require calculatin f the risk weights f the underlying expsures. Cmmercial Real Estate expsures generally 100% r 150% risk weight HVCREs (defined in Annex A) 150% risk-weight. 1 Nn-HVCRE wuld generally be treated as a crprate expsure subject t 100% risk weight. GSE expsures: Ginnie Mae multifamily securities zer risk weight s lng as they are uncnditinally guaranteed by the US gvernment (currently such securities wuld be assigned a 20% risk weight). Fannie Mae and Freddie Mac multifamily pass-thrugh securities that d nt invlve the tranching f credit risk generally may be assigned a 20% risk weight. 1 The agencies have slicited cmment n the treatment f HVCRE expsures. 4

5 Fannie Mae and Freddie Mac nn-credit enhancing IO securities 100% risk weight. Statutry multifamily lans 50% risk weight. Past Due Expsures 150% risk weight fr the unguaranteed and unsecured prtin f past due expsures (ther than nn-svereign and nn-residential mrtgage expsures). Risk-Weighting fr Securitizatin Expsures: General: Eliminatin f Ratings-Based Apprach, which relies n external credit ratings, and replacement with alternative standards f creditwrthiness, as required under Sectin 939A f Ddd-Frank. Minimum risk weight f 20%. Hierarchy f Appraches t Risk-Weighting Securitizatin Expsures (as defined in Annex A): A banking entity must deduct frm cmmn equity tier 1 capital any after-tax gain-n-sale resulting frm a securitizatin and must apply a 1,250% risk weight t the prtin f any credit-enhancing interest nly strip (CEIO) that des nt cnstitute after tax gain-n-sale. Tw ptins fr determining risk weights fr ther securitizatin expsures (must chse ne r the ther and apply cnsistently, and may nt chse grssup apprach if banking rganizatin is subject t the Market Risk Capital Rule): Grss-Up Apprach: Banking rganizatins that are nt subject t the Market Risk Capital Rule may elect t fllw a grss-up apprach, similar t existing rules. Under this apprach, senir securitizatin tranches generally are assigned the risk weight assciated with the underlying expsures. Fr subrdinate securitizatin tranches, a banking rganizatin must hld capital fr the subrdinated tranche and each tranche fr which it prvides credit supprt. Simplified Supervisry Frmula Apprach (SSFA): The risk weight fr a psitin is determined by a frmula and is based n the risk weight applicable t the underlying expsures, the relative psitin f the securitizatin psitin in the structure (subrdinatin), and measures f delinquency and lss n the securitized assets. Resecuritizatin expsures als may be calculated under SSFA, subject t higher capital requirements than that applicable t securitizatin expsures. The agencies state that [a]t the inceptin f a securitizatin, the SSFA as prpsed wuld require mre capital n a transactin-wide basis than wuld be required if the pl f assets had nt been securitized. That is, if the banking rganizatin held every tranche f a securitizatin, its 5

6 verall capital charge wuld be greater than if the banking rganizatin held the underlying assets in prtfli. Alternatively, a banking rganizatin may generally apply a 1,250% risk weight. Operatinal Requirements fr Securitizatin Expsures: Due Diligence Requirements: 2 If an investing banking rganizatin is unable t demnstrate t the satisfactin f the applicable regulatr a cmprehensive understanding f the features f a securitizatin expsure that wuld materially affect the perfrmance f the expsure, the investing banking rganizatin must assign the securitizatin expsure a risk weight f 1,250% (except fr expsures that are deducted frm cmmn equity tier 1 capital). Must cnduct an analysis f the risk characteristics f a securitizatin expsure prir t acquiring the expsure, and dcument such analysis within three business days after acquiring the expsure, in additin t satisfying ther cnditins. Requires nging analysis, review and update (n less frequently than quarterly). Operatinal Requirements fr Traditinal Securitizatins (see definitin in Annex A) If a banking rganizatin that transfers expsures it has riginated r purchased t a securitizatin special purpse entity r ther third party in cnnectin with a traditinal securitizatin fails t satisfy the applicable cnditins, then it must hld risk capital against the underlying expsures as if they had nt been securitized. The underlying expsures must nt be reprted n the banking rganizatin s cnslidated balance sheet under GAAP. The banking rganizatin has transferred t ne r mre third parties credit risk assciated with the underlying expsures. Any clean-up calls must be eligible clean-up calls (see Annex A fr definitin). The securitizatin des nt (i) include ne r mre underlying expsures in which the brrwer is permitted t vary the drawn amunt within an agreed limit under a line f credit; and (ii) cntains an early amrtizatin prvisin. Other peratinal requirements are specified fr synthetic securitizatins. 2 The agencies request cmment n challenges invlved with meeting due diligence requirements and fr which securitizatin expsures. 6

7 Exceptins: Certain ABCP, OTC derivative cntracts and securitizatins f small business lans, amng thers. Credit Risk Mitigatin: May substitute the risk weight f an eligible guarantr fr the risk weight therwise applicable t the prtin f the expsure guaranteed if cnditins are satisfied. Expands scpe f eligible guarantrs in the secnd prng f the definitin t include investment-grade crprate entities, subject t certain limitatins. Mnline insurers, re-insurers and special purpse entities are excluded. Prvides certain adjustments fr maturity mismatches and currency mismatches. Expands definitin f financial cllateral t include, amng ther things, investmentgrade crprate debt securities and publicly traded equity securities and cnvertible bnds. With the exceptin f cash n depsit, a banking rganizatin wuld be required t have a perfected, first-pririty security interest in cllateral. Servicer Cash Advance Facilities: Treated as securitizatin expsures. A banking rganizatin wuld be required either t apply the SSFA r the grss-up apprach (if permitted), r assign a 1,250% risk weight t its expsure under the servicer cash advance facility. If the servicer cash advance facility is an eligible servicer cash advance facility, the servicing banking rganizatin wuld nt be required t hld risk-based capital against the undrawn prtin f an eligible servicer cash advance facility. If the servicer cash advance facility is nt an eligible servicer cash advance facility, then the servicer generally wuld be required t apply 1,250% risk weight t undrawn prtin f the facility (based n the ntinal amunt and the rules fr calculatin f ff-balance sheet expsures). Risk-Weighting fr Certain Off-Balance Sheet Expsures: General: A banking rganizatin must calculate the expsure amunt f an ff-balance sheet item by multiplying the ff-balance sheet cmpnent, which is usually the ntinal amunt, by the applicable credit cnversin factr (CCF). Credit enhancing representatins and warranties: Credit enhancing representatins and warranties n assets sld r therwise transferred t third parties wuld be treated as ffbalance sheet guarantees subject t a 100% CCF. Credit enhancing representatins and warranties in the frm f early default clauses r premium-refund clauses wuld n lnger be carved ut. Disclsure Requirements Apply nly t banking rganizatins representing the tp cnslidated level f the banking grup with $50 billin r mre in ttal cnslidated assets r that is subject t the advanced appraches rules. 7

8 Advanced Appraches Prpsal Scpe f Applicatin: Banking rganizatins described abve and their subsidiaries with $250 billin r mre in ttal cnslidated assets. Banking rganizatins described abve and their subsidiaries that have cnslidated ttal n-balance sheet freign expsure at the mst recent year-end equal t $10 billin r mre. Banking rganizatins that pt in and are permitted t use advanced appraches. Als wuld extend Market Risk Capital Rule t savings and lan hlding cmpanies with significant trading activity. General: Eliminatin f ratings-based apprach and internal assessments apprach. Securitizatin Expsures: 3 Hierarchy f Appraches: Supervisry Frmula Apprach (SFA): If a securitizatin expsure des nt require deductin r a 1,250% risk weight, the banking entity must apply SFA t the expsure if the banking entity and the expsure qualify fr SFA. Simplified Supervisry Frmula Apprach (SSFA): If a securitizatin expsure des nt require deductin r a 1,250% risk weight and des nt qualify fr SFA, the banking entity may apply SSFA. A banking rganizatin shuld be able t explain and justify circumstances in which it uses the SSFA rather than the SFA fr its securitizatin expsures. If nne f the abve apply, the banking entity must apply a 1,250% risk weight t the securitizatin expsure. Revised standard supervisry market price vlatility haircuts fr investment grade securitizatin expsures in the expsure-at-default (EAD) adjustment apprach. Due Diligence Requirements: generally tracks that specified under Standardized Apprach Prpsal. Enhanced Disclsure Requirements. Applicatin f 1,250% risk weight t CEIOs, lw-rated securitizatin expsures and high-risk securitizatin expsures subject t SFA instead f the deductin. 3 Definitins f securitizatin expsure and traditinal securitizatin track thse specified under the Standardized Apprach Prpsal. 8

9 Minimum risk weight f 20%. Maximum risk-based capital requirement fr all securitizatin expsures held by a single banking entity assciated with a single securitizatin (excluding any risk-based capital requirements that relate t the banking entity s gain-n-sale r CEIOs assciated with the securitizatin) may nt exceed the sum f: The ttal risk-based capital requirement fr the underlying expsures as if the banking entity directly held the underlying expsures; and ttal ECL (expected credit lss) f the underlying expsures. Credit Risk Mitigatin: May apply PD substitutin apprach r LGD adjustment apprach t whlesale expsure fr which credit risk is fully cvered by an eligible guarantee r eligible credit derivative. Eligible guarantr same definitin as under Standardized Apprach Prpsal. Eligible duble default guarantr reference t insurance cmpanies in the business f prviding credit prtectin (such as a mnline bnd insurer r re-insurer) has been remved. 9

10 Eligible clean-up call means a clean-up call that: Annex A Certain Definitins (1) Is exercisable slely at the discretin f the riginating [BANK] r servicer; (2) Is nt structured t avid allcating lsses t securitizatin expsures held by investrs r therwise structured t prvide credit enhancement t the securitizatin; and (3) (i) Fr a traditinal securitizatin, is nly exercisable when 10 percent r less f the principal amunt f the underlying expsures r securitizatin expsures (determined as f the inceptin f the securitizatin) is utstanding; r (ii) Fr a synthetic securitizatin, is nly exercisable when 10 percent r less f the principal amunt f the reference prtfli f underlying expsures (determined as f the inceptin f the securitizatin) is utstanding. High vlatility cmmercial real estate (HVCRE) expsure means a credit facility that finances r has financed the acquisitin, develpment, r cnstructin (ADC) f real prperty, unless the facility finances: (1) One- t fur-family residential prperties; r (2) Cmmercial real estate prjects in which: (i) The lan-t-value rati is less than r equal t the applicable maximum supervisry lan-t-value rati in the [federal agency] s real estate lending standards at 12 CFR part 34, subpart D and 12 CFR part 160, subparts A and B (OCC); 12 CFR part 208, Appendix C (Bard); 12 CFR part 365, subpart D and 12 CFR (FDIC); (ii) The brrwer has cntributed capital t the prject in the frm f cash r unencumbered readily marketable assets (r has paid develpment expenses ut-f-pcket) f at least 15 percent f the real estate s appraised as cmpleted value; and (iii) The brrwer cntributed the amunt f capital required by paragraph (2)(ii) f this definitin befre the [banking rganizatin] advances funds under the credit facility, and the capital cntributed by the brrwer, r internally generated by the prject, is cntractually required t remain in the prject thrughut the life f the prject. The life f a prject cncludes nly when the credit facility is cnverted t permanent financing r is sld r paid in full. Permanent financing may be prvided by the [banking rganizatin] that prvided the ADC facility as lng as the permanent financing is subject t the [banking rganizatin] s underwriting criteria fr lng-term mrtgage lans. Securitizatin expsure means: (1) An n-balance sheet r ff-balance sheet credit expsure (including credit-enhancing representatins and warranties) that arises frm a traditinal securitizatin r synthetic securitizatin (including a resecuritizatin), r (2) An expsure that directly r indirectly references a securitizatin expsure described in paragraph (1) f this definitin.

11 Traditinal securitizatin means a transactin in which: (1) All r a prtin f the credit risk f ne r mre underlying expsures is transferred t ne r mre third parties ther than thrugh the use f credit derivatives r guarantees; (2) The credit risk assciated with the underlying expsures has been separated int at least tw tranches reflecting different levels f senirity; (3) Perfrmance f the securitizatin expsures depends upn the perfrmance f the underlying expsures; (4) All r substantially all f the underlying expsures are financial expsures (such as lans, cmmitments, credit derivatives, guarantees, receivables, asset-backed securities, mrtgage-backed securities, ther debt securities, r equity securities; (5) The underlying expsures are nt wned by an perating cmpany; (6) The underlying expsures are nt wned by a small business investment cmpany described in sectin 302 f the Small Business Investment Act; (7) The underlying expsures are nt wned by a firm an investment in which qualifies as a cmmunity develpment investment under sectin 24 (Eleventh) f the Natinal Bank Act; (8) The [AGENCY] may determine that a transactin in which the underlying expsures are wned by an investment firm that exercises substantially unfettered cntrl ver the size and cmpsitin f its assets, liabilities, and ff-balance sheet expsures is nt a traditinal securitizatin based n the transactin s leverage, risk prfile, r ecnmic substance; (9) The [AGENCY] may deem a transactin that meets the definitin f a traditinal securitizatin, ntwithstanding paragraph (5), (6), r (7) f this definitin, t be a traditinal securitizatin based n the transactin s leverage, risk prfile, r ecnmic substance; and (10) The transactin is nt: (i) an investment fund; (ii) a cllective investment fund; (iii) a pensin fund regulated under the ERISA r a freign equivalent theref; r (iv) regulated under the Investment Cmpany Act f 1940 r a freign equivalent theref. Tranche means all securitizatin expsures assciated with a securitizatin that have the same senirity level. 11