Almost two weeks ago the Dodd-Frank Wall Street Reform and Consumer Protection Act, is being hailed as the most sweeping reform of the financial system since the Great Depression.reform bill emerged from an arduous conference process where members of the House and Senate worked out differences between bills that had previously passed in each chamber of Congress. What came out, now known as the
The House passed the bill last week. The Senate is due to vote on the bill next week, after Congress comes back from its July 4 recess. But the bill’s passage has been thrown into doubt by the death of West Virginia Sen. (D.) Robert Byrd. It’s unclear whether the bill now has a filibuster-proof majority. The bill has already changed once since it first emerged from conference. A $19 billion levy that was to be placed on banks over five years was dropped. Democratic leaders now are working to secure the votes necessary to get the bill through the Senate.
Much of the discussion of the 2,319-page bill has centered on its potential effects on Wall Street firms. But the bill will have far reaching effects. For example, Section 941 of the bill requires originators of asset-backed securities to retain 5 percent of the securitizations on balance sheets. There are exceptions to this requirement, however, including for commercial real estate mortgages. The bill allows regulators to permit alternative risk-retention arrangements for the commercial mortgage-backed securities market.
Retail Traffic talked with Sam Chandan, global chief economist atCity-based real estate research firm Real Capital Analytics and an adjunct professor at Wharton, to gauge what effects the bill could have on commercial real estate and to analyze whether the bill will be enacted in its current form.
Retail Traffic: What’s the status of the financial reform legislation?
Chandan:The House of Representatives passed the conference report on the financial reform bill—now known as the Dodd-Frank Wall Street Reform and Consumer Protection Act—last Wednesday. The Senate is expected to vote shortly after it reconvenes on July 12.
Timely passage is not guaranteed since the Democrats must still muster 60 votes to fend off procedural delays. At least one Democrat, Senator Russ Feingold, has indicated that he will vote against bill. In a prepared statement on June 28, Senator Feingold wrote that “the lack of strong reforms is clear confirmation that Wall Street lobbyists and their allies in Washington continue to wield significant influence on the process.”
At the other extreme, most Republicans will be voting against the bill because they believe it goes too far.
RT: What are the big takeaways in the financial reform package for commercial real estate lending?
Chandan: The big takeaway is that we will have to wait and see how the legislation, if passed, is implemented.
Many of the bill’s key provisions are left intentionally open ended, with ultimate authority for implementation falling to new and incumbent regulatory authorities.
The proposed Financial Stability Oversight Council is a case in point. It’s stated roles will be to identify threats to stability, to promote market discipline, and to respond to emerging threats. Exactly what the council will deem a threat to stability is unclear; even less so, how exactly it will respond. An exception is the council’s mandate in cases where a bank with $50 billion or more in assets is deemed to pose a “grave threat” to stability.
In any case, we know that sensitivity to risk generally fades as we move further from the point of crisis. That’s a consideration when thinking about the vigor or regulatory oversight as well as private market participants’ risk-taking activities.
RT: Ultimately, does this bill do anything to prevent another credit crisis from occurring?
Chandan: The new regulatory authorities make it unlikely that a crisis of similar magnitude will result from exactly the same systemic failures.
It is not clear, however, that the reforms address underlying incentives for private risk-taking or the capacity of well-informed market participants to transfer risks wholesale to less-informed counterparties. Inasmuch as information asymmetries and myopic assessments of risk still confound private and public decision-making, the current reforms do not preclude another crisis.
We can certainly improve on our ability to anticipate and mitigate problems that arise, and Dodd-Frank will help in that regard. But we should not expect that we are entering a new era of unprecedented stability.
RT: Does the bill affect particular kind of banks—investment banks,, regional banks—more or less than others? And how might that affect the commercial real estate lending picture?
Chandan: From the outset, larger banks have come under far more scrutiny than their smaller counterparts. In large part, this has resulted from the view that larger institutions present greater risks to the economy.
At the same time, the perceived role of larger institutions as drivers of the crisis has elicited a political response. As the legislation has moved through reconciliation, some of the provisions that would be costliest for large banks have been reworked or removed.
The so-called Volcker Rule survives, but many institutions have already been downsizing their proprietary trading businesses. Immediate costs, such as the multi-billion dollar assessment on large banks, have been stripped from the bill.
Smaller community banks may actually benefit from the bill’s provisions relating to FDIC premiums. Ultimately, 2,300 pages of legislation mean that you can find something good and something bad for each affected institution.
RT: Is there anything in the bill that ultimately will affect how the credit agencies operate?
Chandan: Title IX includes provisions relating to the regulation of credit rating agencies. The provisions are fairly benign, requiring the nationally recognized statistical rating organizations to file reports on their ratings processes, empowering the Securities and Exchange Commission to revoke rating authority, and enhancing transparency of ratings. It’s worth noting that much of the rulemaking has been delegated to the commission and is not specified in the legislation itself.
One of the key amendments to the Senate legislation, introduced by Al Franken, would have created a Credit Rating Agency Bureau with powers to mediate the relationship between raters and issuers. This provision of the Senate legislation was eliminated during reconciliation.
While that may be a welcomefor some, it also means that a key area of policy concern has yet to be addressed. At some point, the issue is likely to come up again, either in Congress or through the commission.