Tougher Capital Rules For Regional Banks Means More Pressure On CRE Lending

Federal regulators are set to require regional banks to boost their capital reserves by 3% to 4% to address vulnerabilities in how they manage interest-based assets, according to a Reuters report. This move follows the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank in early 2023.

Higher capital requirements often frustrate banks, as it restricts funds available for lending and investment. The issue arose partly because banks, accustomed to low interest rates, heavily invested in Treasury and mortgage-backed securities, which lost value when rates rose.

Banks account for government debt using two methods: available-for-sale (AFS), which allows for regular market repricing, and held-to-maturity (HTM), which doesn’t reflect market changes. The latter approach backfired for troubled banks when rising interest rates devalued their HTM bonds, leaving them unable to cover large withdrawals.

Regulators are pushing for more capital to ensure banks can withstand financial shocks. Analysts predict banks may recover about 25% of unrealized losses in the coming years. However, uncertainty remains, with rising 10-year Treasury yields suggesting expectations of higher long-term rates, and additional capital reserves potentially limiting loan availability.

 

Source:  GlobeSt.