Posted on Monday, April 4, 2011
Gensler Discusses Staggered Approach to Implementing “Mosaic” of Dodd-Frank Rules
Citing improved profitability, loan quality and borrower demand, as well as a flattening out or slowdown in the rate of bank failures, Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair on March 22 said the community banking system is on the mend, but still vulnerable to some of the same factors that brought on the financial crisis.
Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair
She maintained that “excess leverage, unregulated credit derivatives, skewed incentives from securitization, too big to fail. . . have yet to be fixed,” while noting that many regulations needed to implement last year’s financial overhaul law are still being developed. She conceded Dodd-Frank “is not a perfect law,” but said she expects it “will strengthen, not weaken, community banks” (BNA Daily Report for Executives, March 23).
While emphasizing the significant role that weak underwriting of commercial mortgages played in community bank failures in recent years, Bair said many institutions have learned to better manage their portfolios. “We need to learn from the success stories and promote broader adoption of proven risk-management tools for banks concentrated in CRE,” she said.
The FDIC’s board will meet in an open session on Tuesday, March 29, to discuss forthcoming regulations to implement Dodd-Frank’s 5% risk retention standard for CMBS issuers.
Under this provision, issuers must retain on their books 5 percent of the credit risk of any loan sold as part of a pool of loans backing an ABS (asset-backed securities) issuance. Appropriately, the final version of the law included language permitting third-party investors (“B-piece” buyers) to satisfy risk retention requirements for CMBS, as long as such investors perform due diligence, purchase a first-loss position, and retain this risk in accordance with the statute. This flexibility was urged by The Roundtable and national real estate groups to help mitigate the impact of new accounting rules requiring CMBS issuers to reconsolidate the other 95 percent of the credit risk back onto their balance sheets — on the grounds that these institutions retain “control” of 5 percent.
Sen. Mike Crapo
Although the CMBS market is returning to life — with new issuance projected to reach as much $45 billion this year — capacity remains well below the 2007 peak of $237 billion, and well below what is needed to refinance hundreds of billions of dollars in maturing debt. Additionally, there is considerable uncertainty among market participants about the new risk retention standards [Roundtable Weekly, March 11].
Some on Capitol Hill are also concerned about how regulators might interpret Dodd-Frank’s provisions on securitization, as well as the potential effect of new rules in this area on recovering commercial real estate markets.
With the April deadline looming for final interagency rules on risk retention, Sen. Mike Crapo (R-ID) stated in a March 2 letter to Treasury Secretary Geithner, regulators have not yet given Congress or market participants a joint proposal to review. Crapo also expressed concern about the possibility of a “one-size-fits-all” risk-retention rule “that could stifle a commercial real estate recovery before it can occur.” [Roundtable Weekly, March 4]
Similar concerns were raised in an Oct. 2010 Fed report, which recommended that forthcoming regulations be tailored to various classes of securitized assets, such as auto and student loans, and residential and commercial mortgages [Roundtable Weekly, Oct. 22]. The report also suggested that poorly structured risk-retention rules — combined with accounting and risk-based capital standards — could lead to reduced credit availability.
CFTC May Implement “Mosaic” of Dodd-Frank Rules in Stages
In another area of the Dodd-Frank law with important implications for commercial real estate, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler on March 16 said his agency may try to finalize Dodd-Frank rules in three stages, and then further stagger their implementation.
Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler
“We are looking to phase in implementation, considering the whole mosaic of rules,” Gensler said (BNA Daily Report for Executives, March 16).
Although 42 rules have already been proposed, there are a few left, including three requiring significant coordination with other regulators. These include derivatives-related rules concerning capital and margin requirements, product definitions, and the so-called Volcker Rule on proprietary bank activity
In terms of finalizing rules, the “early group” might contain derivatives-related rules on entity definitions, associated swap dealer and major swap participant registration requirements, and a final rule on the end-user exception from clearing. Gensler referred to them as “important rules that many market participants have indicated they hope we consider early.”
At a series of hearings on Capitol Hill last month, Gensler expressed support for a broad-based exemption from margin requirements for non-financial companies, although he noted the important role of other regulators in determining this issue, the Financial Times reported Feb. 16.
“Proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions that involved non-financial end-users,” he said. “We’ll get this margin thing right — we understand congressional intent on that” [Roundtable Weekly, Feb. 18].
Meanwhile, a bipartisan group of Senators wrote to financial regulators on Feb. 8, urging “careful and thoughtful implementation” of Dodd-Frank, particularly its derivatives provisions — warning them to pay “close attention to the array of unintended consequences that may arise.”
The Roundtable and its partners in the Coalition for Derivatives End-Users have been working over the past year to ensure that non-financial companies (including real estate companies) can continue to use over-the-counter (OTC) derivatives to hedge everyday business risks, such as the risk of interest rate spikes.