New Basel III standards have prompted banking regulators, includingthe FDIC, to propose tougher capital rules on banks of all assetsizes that could hamper the for-profit institutions' ability tofund commercial real estate.

|

Specifically, large and community banks would be subjected to a150% risk weight that would apply to some loans that finance theacquisition, development or construction of commercial real estate,according to proposed rules posted on FDIC's website.

|

Banks have complained in trade publications that thosestruggling to meet new capital benchmarks will have to reducebusiness lending as a result.

|

“Of course it will give credit unions an opportunity,” saidNAFCU President/CEO Fred Becker of memberbusiness lending.

|

However, Becker said that the extent to which credit unions canleverage decreased bank business lending will depend upon current legislation that would raise the member businesslending cap from 12.25% of assets to 27.5%.

|

“Absent the cap, we could obviously do more,” he said.

|

Rex Rollo, executive vice president of operation/support at the$5.4 billion America First Credit Union of Riverdale, Utah, agreedthat the new Basel standards could benefit credit unions, and hewould welcome it.

|

“We are always open to commercial lending,” he said.

|

Rollo said the 12.25% cap is not restricting his 570,000-membercredit union's ability to make business loans. However, hecautioned that, as the new Basel standards suggest, commercialloans bring with them higher risk onto lender balance sheets.

|

“Just because it might become easier to grab, doesn't mean we'lltry to grab a big market share,” Rollo said. “Especially right now,because even though the economy is getting better, commercial isnot that strong in our area. We won't be aggressive about it, butwe will be there for members it would make sense to lend to.”

|

Devin Blum, president of Potomac Business Services LLC, a business lending CUSO locatedin Kensington, Md., said although new Basel standards might resultin some short term credit union gains, he doesn't see it having along term effect.

|

“For me, the bigger issue is how credit unions and theirregulatory agency position themselves in market for the future,” hesaid.

|

Specifically, Blum takes issue with Reg 723.7(b), which requiresthat business principals “provide their personal liability andguarantee” when obtaining a credit union business loan.

|

Private equity firms, which back high-quality assets, areunwilling to give a personal guarantee and will go elsewhere forfunding, he said.

|

That leaves credit unions competing for borrowers that arerequired by banks to provide personal liability, which usuallymeans the loans are of lower credit quality.

|

“The NCUA shut off the juiciest part of the middle market,” Blumsaid. “Now, instead of hunting for potential gold nuggets, creditunions are scrounging around in the dirt, looking for golddust.”

|

Lending to borrowers that qualify for SBA loans is fine, Blum said, but credit unions should havemore options.

|

The business lending cap is a concern, he said, as is the rulethat prohibits credit unions from charging pre-payment penalties tomembers.

|

“What that means is that your portfolio tends to be more liquidover time, and you have to replenish principal in any given loanpool more quickly than a bank would,” Blum said. “Strongercredit leaves so you have to find credit of equal credit strengthto replace it, which is hard to do because the market is socompetitive.”

Complete your profile to continue reading and get FREE access to CUTimes.com, part of your ALM digital membership.

  • Critical CUTimes.com information including comprehensive product and service provider listings via the Marketplace Directory, CU Careers, resources from industry leaders, webcasts, and breaking news, analysis and more with our informative Newsletters.
  • Exclusive discounts on ALM and CU Times events.
  • Access to other award-winning ALM websites including Law.com and GlobeSt.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.