Commercial mortgage-backed securities analysts predict that the new proposal recently issued by the Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) should increase demand for CMBS by commercial banks, savings institutions and credit unions, if adopted literally by U.S. banking regulators. However, this benefit to the sector may not be seen for years to come.
According to Banc of America Securities, banking regulations currently impose a 100% risk weight on commercial real estate loans and related securities. In contrast, the same regulations impose a much more lenient 20% risk weight on all obligations issued or guaranteed by a GSE. The BIS proposal, therefore, will eliminate the competitive disadvantage of the most highly rated classes of CMBS relative to GSE debt and MBS.
"Under a regime of equal risk weightings, the superior yields and equivalent call protection of triple-A and double-A-rated CMBS should attract interest from regulated institutions that hold GSE securities," said a report from BofA. Any significant substitution of CMBS for agency pass-throughs or multiclass securities held by large commercial banks could significantly increase demand, given the relatively small size of the CMBS market: $175.9 billion as of Sept. 30, 2000.
However, BofA noted two caveats: first, large commercial banks and thrift institutions are already active commercial real estate lenders, and participate actively in the syndicated real estate debt market, which may limit interest in CMBS. Secondly, analysts are expecting the U.S. regulatory authorities to propose and enact complying regulations sometime before 2004, but not likely in 2001.
Therefore, any favorable influence on CMBS relative value as a result of the proposal will be delayed, BofA said.
