Basel III will 'stifle' property loans: Paul Hastings

Regulations contained in the new Basel III requirements introduced on 12 September could stifle capacity for new property loans, according to law firm Paul Hastings. Under measures to improve banks' liquidity coverage ratios, Basel III penalizes institutions for securitizing loans, encouraging them to lend through the more secure covered bond market instead.

Banks that provide loans through the covered bond market must keep the debt on their balance sheet, thereby exposing them to greater risks and claims on the bank itself in the event of default, Charles Roberts, finance partner at Paul Hastings, pointed out: ‘Regulators know this is crazy but lending through asset-backed securities (ABS) is perceived to be flawed. Everyone is spooked about it.’

Speaking at an event organized by Paul Hastings in London last week on Commercial Mortgage Backed Securitization (CMBS), Roberts added that Basel III was a ‘bundle of contradictions’. In the event of another downturn, covered bond lending would cause the same problem for banks as they face today, he argued. ‘ABS allows the bank to move the debt and the risk onto other investors, whereas covered bonds keep the obligation to repay the debt with the bank. We shouldn’t make banks keep debt on their balance sheets because it leaves them too exposed to those loans and ties up their capital.’

Roberts said that Basel III and the wider regulatory environment had had a 'chilling effect' on the market. 'Banks do not see why they should do deals this year when they don’t know how they will be treated by regulation. So they are keeping their heads down,' he said.

Conor Downey, finance partner at the firm, said that covered bonds had only been able to retain their image as a safe product due to significant levels of government assistance whereas investors had suffered losses on ABS loans. In the past two years the European covered bond market has received EUR 60 bn of credit support from the European Investment Bank - the EU’s long-term lending arm - to revive the market.

ABS lending has suffered from an image problem since the onset of the financial crisis. Europe’s CMBS market - which is a vital source of funding for commercial real estate investors - has been shut since 2008 as the credit crunch took hold. But a revival of the commercial property market largely depends on the return of the CMBS market.

The full story appears in the November issue of PropertyEU. Click here to order a free copy: