Comments to Banking Agencies on HVCRE Exposures

The American Bankers Association (ABA) appreciates the opportunity to comment on the Agencies’ proposal entitled “Regulatory Capital Treatment for High Volatility Commercial Real Estate (HVCRE) Exposures” (HVCRE Proposal). The HVCRE Proposal would amend the regulatory capital rule by revising the definition of HVCRE exposure to conform to the statutory definition of “high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan,” in accordance with section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Additionally, to facilitate the consistent application of the revised HVCRE exposure definition, the agencies propose to interpret certain terms in the revised HVCRE exposure definition generally consistent with their usage in other relevant regulations or the instructions to the Consolidated Reports of Condition and Income (Call Report), where applicable.

In 2013, the banking agencies finalized the Basel III capital standards. As part of that standard, the banking agencies promulgated a new definition of HVCRE exposures and applied a heighted 150% risk weight to these HVCRE exposures. As the agencies acknowledged, the application of HVCRE definitions and loans qualifying were inconsistent due to lack of clarity arising from many different lending scenarios and interpretations of the rule. Clarification from Congress in the passing of the EGRRCPA coupled with this proposed rulemaking sets consistent industry standards.

Section 214 of the EGRRCPA sets a limit on the banking agencies’ ability to apply a higher risk weight to HVCRE exposures. Specifically, Section 214 states:

The appropriate Federal banking agencies may only require a depository institution to assign a heightened risk weight to a high volatility commercial real estate (HVCRE) exposure…under any risk-based capital requirement if such exposure is an HVCRE ADC loan.

Section 214 then defines HVCRE ADC as a substantially narrower subset of HVCRE exposures. As a result, Section 214 excludes most HVCRE exposures from a heightened risk weight. In fact, many ABA members who are major ADC lenders would see only a small fraction, if any, of their portfolios subject to the heighted risk weight category.

While this is an extremely positive step, the definition of HVCRE ADC is still complex and a burden for banks to define at origination and track. We note that EGRRCPA does not require the banking agencies to apply a heightened risk weight to HVCRE ADC exposures. Rather, EGRRCPA simply prohibits the banking agencies from applying a heightened risk weight to HVCRE exposures unless the exposures also meet the HVCRE ADC loan definition. ABA supports efforts to simplify and improve the current regulatory capital framework, and we appreciate this important step by the Agencies in this important process, positive both for better supervision and improved bank management. However, considering the complexity of the HVCRE ADC definition and the small fraction of exposures that will be captured by that definition, we believe that the HVCRE ADC should not be treated as a separate class so that all ADC lending is subject to the general 100% risk weight and wholesale correlation factor.

Should the agencies move forward with a final standard that includes a distinct category for HVCRE, we offer the following responses to the proposal’s questions.