Basel proposal may boost CMBS down the road, increasing relative value

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.