How Will Bank Lending Be Affected By New Banking Standards?

[Corey Dutton]

Although people will strongly argue that banks should have higher standards imposed for liquidity and leverage, opponents of the Basel III have said that it will put many of the smaller, local banks in the U.S.A. out of business. Given its name from Basel, Switzerland, the Basel Committee on Banking Supervision, is the International oversight body for banks. A newly passed regulation called the Basel III, will certainly not induce U.S. banks to loosen up lending in the next several years, given that they must comply with much higher liquidity and leverage standards by as soon as 2015.

Although the Basel III standards have been softened somewhat this month, I believe that lending in the U.S. will continue to remain tight over the next several years. As banks make efforts to comply with Basel III by 2015, they will be looking to deleverage their balance sheets, and will not be eager renew current loans to their commercial borrowers. And in issuing new debt in coming years, banks will likely cherry-pick which loans they do, only selecting the best loans.

But what should borrowers do in response to this potential threat to bank lending? Get a head start on your real estate financing needs for 2013 and be prepared to find multiple options for financing, including private money loans.

[Gene Hacker]

Corey,

I am not familiar with the particulars of these new standards so my post may be way off base.

It sounds like one of the main requirements is that the banks delevarage their balance sheets. With this in mind, instead of the being more picky about the loans they do...isn't possible that they just focus more on their abilities to resell newly created loans as quickly as possible on the secondary market? As part of QE3 the fed is buying 40 Billion a month in MBS, so there is a market (for now and the immediate future anyhow). Most of the bigger banks focus on this already, as do most small banks.

I guess this mostly affect the small portfolio lenders. But many of them that survived the last few years likely have reasonable balance sheets as it is....one would hope anyhow.

[Bill Gulley]

I doubt investors at the level of investment we discuss on BP will not see much of anything from these international concerns.

I have not read the requirements and I doubt I will as I understand that liquidity issues has more to do with loan concentrations than individual loan underwriting especially in residential lending.

There is usually a cut off for the applicability of reserves for state chartered banks and different than national banks. Loan concentrations by category or to one borrower may require increased reserves, but even with a small bank, say at 50M, 2% is 1M to one borrower. Most here I doubt will hit that, but buy and hold types could get there, at which time they go down the street....and,

Banks may increase participations with affiliate banks to deversify risk in thier portfolio. This may be done without the knowledge of a borrower and is common in commercial lending.

Larger commercial borrowers may feel the pinch, I can see loan to values dropping on larger transactions,but big deals usually go to other sources of funds not local commercial banks.

[Corey Dutton]

Yes you are correct Bill Gulley. This will primarily affect commercial real estate investors. Thanks for your insightful comment.