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Shopping Centers Today -> April 2001
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CAPITAL STANDARDS TO GET REVISION
By Donna Mitchell
The Basel Committee on Banking Supervision, a Switzerland-based regulatory body, has introduced new proposals to update its Capital Accord and make capital standards for banks more risk-sensitive.
Yet several lenders were either unfamiliar with the proposals or had not digested them well enough to offer an opinion when contacted by SCT.
The retail real estate market is a by-product of the primary focus of the proposals, which is to adjust risk “so that banks are required to get more capital relief for stronger credits, and less capital relief for the weaker ones,” said Glen Grebelsky, a New York City-based bank analyst for Fitch, an international rating agency. The new proposals for setting minimum capital requirements call for some input from rating agencies.
The Basel Committee’s proposals are going to affect all corporate credit, like the syndicated loans and lines of credit extended to mall owners and developers. Those credits could be unsecured or secured by specific projects, like shopping centers, in which case a REIT’s creditworthiness would depend on the property type, Grebelsky said.
The Basel Committee is comprised of central banks and bank regulators from the world’s major industrialized countries, including the United States. Each member country interprets Basel’s guidelines to formulate rules for their respective banking systems. The section of the January proposal that is expected to deal with retail real estate funding — Project Finance — is forthcoming, because the committee believes that it should be dealt with separately.
“There will be a further development. It was part of the capital accord, but it was not finished,” said Kevin Mukri, spokesman for the U.S. Office of the Comptroller of the Currency. The Basel Committee did not indicate when it would complete the Project Finance section, Mukri said.
The Project Finance section stands alone. It would be based on stabilized rent projections, which would let a lender know how creditworthy a mall owner or developer might be, Grebelsky said.
The Basel proposal seeks to fine-tune the capital requirements that were established in 1988, by setting more concrete and borrower-specific ways for banks to measure credit risk (the likelihood that a borrower will default on an outstanding loan). Basel currently requires internationally active banks to hold a minimum cash reserve equal to 8% of their risk-weighted loans. Risk weighting determines what portion of the 8% cash reserve a bank must set aside as regulatory capital for a specific type of asset. Loans are grouped into general risk-weighted categories by type, so that all commercial or mortgage-backed loans, for instance, get the same risk-capital treatment.
Instead of requiring a one-size-fits-all rule for assets by type, the committee now says banks should use the corporate ratings of each company, as assigned by a rating agency, to come up with four risk-weight categories: 20%, 50%, 100% and 150%. Alternatively, banks could use an internal ratings-based approach, which means the minimum regulatory capital will be determined on a loan-by-loan basis, said Mark F. Schmidt, an associate director at the U.S. Federal Deposit Insurance Corp., who oversees bank supervision policies. .
Currently, commercial real estate loans, the broad category that sometimes includes retail real estate loans, typically carry a risk weighting of 100%. That means each bank with that type of a loan would typically have to set aside at least 8% of the loan amount as minimum regulatory capital, said Schmidt.
Source: Salomon Smith Barney.
The Retail REIT Index was designed by Salomon Smith Barney for Shopping Centers Today. The index is based on total returns (including dividends) starting at a base of 100 on December 31, 1995. For the period ending Feb. 28, the regional mall index is at 173.92, down 1.5%; the strip center index (including power, neighborhood and community centers) is at 168.71, down .4%; and the factory outlet index is at 116.30, up 6.4%. The index is updated monthly.
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