Last week, President Trump issued an executive order to Federal agencies to cut 10 regulations for every new one they institute. This regulation-light approach could have some positive implications for commercial real estate bank lending, which has fallen off considerably in recent years.
For example, big banks, those with assets of $100 billion or more, may get a reprieve from the new capital reserve requirements of the Basel III Endgame, a sweeping set of rules proposed by the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC.
Under Basel III Endgame, which is scheduled to begin in less than six months, common equity, tier 1 capital for affected bank holding companies will increase by an aggregate 16 percent, according to the Brookings Institute.
Meanwhile, it will raise the cost of bank capital to borrowers by roughly 20 percent, according to James Millon, president of U.S. debt & structured finance for CBRE.
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The case against Basel III
Basel III is an international alliance that was formed in 2009 to prevent another financial meltdown like the GFC. Basel III Endgame, also known as “Basel IV,” is intended to be the final set of rules, and it is focused on capital reserve requirements. Some member countries are already implementing their Endgame rules while others are in various stages of formulating them.
& Head of Regulatory Affairs and Sustainability
But are the rules necessary for the U.S.? “Many larger money-center banks have been under close regulatory scrutiny since the GFC, with many undergoing quarterly stress tests and audits by regulators,” Millon said, noting banks have easily passed those stress tests.
With the new U.S. administration’s deregulation promises, bankers and commercial real estate interests are hopeful that Basel III Endgame will not be finalized in its current, proposed form.
“There are signals that it might be reproposed in a form that is capital neutral,” said Sairah Burki, CREFC managing director & head of regulatory affairs and sustainability.
Will the US be in step with other countries?
While market participants are hopeful that Trump’s deregulatory stance will translate into a softening or reversal of cumbersome and unnecessary regulation, not complying with or making major changes to the Basel Accords could have mixed results, noted Dr. Victor Calanog, who serves on the Economic Advisory Council of the Counselors of Real Estate.
“On the one hand, it may mean less regulation for banks and fintech firms, allowing banks to potentially lend more,” he added. “On the other hand, less regulation may mean the return of higher risk, which these regulations were designed to mitigate.”
Economic Advisory Council of the Counselors of Real Estate
Burki noted that undoing regulations does not happen overnight and typically must go through a notice and response process.
In the case of Basel III, for example, she said, all three banking regulatory agencies need to agree to new proposals and noted that the Fed’s former vice chair of Supervision Michael Barr, prior to resigning, said that the Fed would not engage in significant rulemaking activity until new leadership is installed at the OCC and FDIC.
“Deregulation advocates need to encourage the administration and Congress to focus on key priorities, and what specifically needs to be deregulated and how,” suggested David McCarthy, CREFC managing director & head of Legislative Affairs. “Deregulation is not monolithic, even within the CRE finance industry.”
“There are opportunities to pare back burdensome regulation for efficiency and pro-growth at the federal level, and we’re working with Congress and the administration to do that,” he said. “We also have to be cautious when rolling things back so as not to take away certainty or stability or potentially leave something open to a future, less friendly regulator to tinker with.”
New Trump policies and Fed rates
The big banks had pulled back from the commercial real estate lending market for some time due to limited payoffs, which restricted the amount of capital available to originate new loans. Many opted instead to focus on warehouse lines for institutional funds.
President of U.S. Debt & Structured Finance for CBRE
With improvements in capital markets in the third and fourth quarters of 2024, however, banks experienced quicker-than-expected payoffs and began to originate new loans again.
Now, Millon said: “The uncertainty of Basel III created issues in modeling proper ROE (return on equity) and, in some cases, took banks out of the (CRE lending) market completely.”
Meanwhile, there are a number of new Federal policies taking shape that could further restrict lending, namely tariffs and mass deportation. Trump has already imposed tariffs on Canada, Mexico and China—though he has put the Canadian and Mexican tariffs on hold—and he has vowed to deport immigrant workers who are in the country illegally.
“If new trade and labor policies prove restrictive, it will push up inflation, potentially slowing rate cuts or even forcing the Fed to raise rates,” Calanog warned. “Long-term rates like the 10-year U.S. Treasury rose by about 100 basis points even as the Fed cut short-term rates by 100 basis points.”
Higher interest rates for longer could raise the cost of capital for CRE investment, “dampening deal flow,” Burki said.
Trump’s low-rate push
CREFC Managing Director & Head of Legislative Affairs
The Fed is independent of any branch of government, but Trump is likely to continue messaging it on his monetary policy desires. Following last week’s short-term rate pause, the president said the Fed was signaling weakness in the economy or “playing politics” by not cutting rates.
Fed chairman Jerome Powell was appointed by Trump during his first presidential term, but they’ve had a bit of a rocky relationship, Burki said. He cannot legally fire Powell, whose term doesn’t end until next year. Besides, Powell cannot alone lower rates, it takes a vote by the entire board, which will retain a Democratic majority until 2026.
Until there’s more certainty around how policies are finalized and actually implemented, Calanog noted, “expect volatility for interest rates, which also likely means volatility in CRE cap rates.”
