Despite ongoing regulations that have deterred banks on high-risk commercial real estate lending, a new survey from American Bankers Association shows that a majority of them (82 percent) plan to increase capital concentrations in the sector.
Of 136 participating banks surveyed, 51 percent said they planned to increase both CRE and construction loans; 30 percent said they’d increase CRE loans only; 18 percent said neither; and just 1 percent said they would increase construction loans only.
Regulations were the second most cited challenge behind competition from other banks lenders — followed by competition from non-bank lenders, some of which have stated their intentions to increase their market share in the industry as they dodge the regulations that impact the banks.
One of the greatest deterrents to the banks is the ‘super-capital’ charge in the Basel III regulations, under which so-called High-Volatility Commercial Real Estate (HVCRE) receives a heightened 150 percent risk weighting for regulatory capital purposes on a bank’s balance sheet, versus the 100 percent requirement for other CRE loans.
Banks with heavy exposure to these loans are either pulling back or taking measures to mitigate the increased capital requirements, leading to a range of requirements they pass on to borrowers. The ABA survey found that exactly half the banks surveyed currently have outstanding loans classified as HVCRE, and approximately one-third of respondents increased pricing after the rule went into effect to reflect the additional capital costs.
Among other findings, 50 percent of the banks reported that demand, liquidity, cap rates and underwriting standards are all in line with levels seen in 2014. About 45 percent reported loan-to-values between 70-80 percent, and 25 percent said LTVs were between 60-70 percent; and 60 percent said they originate interest-only loans.
Of the survey participants, 77 percent were commercial banks and 23 percent were savings institutions.