First Basel, now Volcker?

Earlier this week, Basel III restrictions fell victim to pressure from banks, and there are now calls to dilute the Volcker Rule as well.

With the global financial crisis of 2008 disappearing further and further into the rearview mirror, the watering down of regulatory standards seems to now be the norm.

Witness the recent situation with Basel III. While meeting in Switzerland, a committee of bank regulators from 26 countries quietly eased the restrictions within the Basel III regulations, such as pushing back the enhanced liquidity deadline for banks by four years and including residential mortgage-backed securities among the liquid assets that banks may hold as a buffer against losses. So, not only is implementation pushed far into the future, but mortgages – a large part of the reason for the global collapse – will now be considered an acceptable backstop for riskier investments such as real estate.

While Basel III is not expected to have a major impact in the private equity real estate industry, the practice of concession making appears to be catching in areas of regulation that would be more relevant to certain of the bigger players still in the space. Indeed, this week also witnessed a call by influential US Congressman Spencer Bachus for the repeal of the already-delayed Volcker Rule before it’s even completely defined and acted upon.

From a real estate perspective, the Volcker Rule only would affect a handful of banks — JPMorgan, Morgan Stanley, Goldman Sachs and Deutsche Bank — that still have such platforms and funds. On the private equity side, however, more banks are affected, and proposed proprietary trading restrictions would affect every bank.

Although some industry insiders don’t think Congressman Bachus’ actions will delay the release of the Volcker Rule’s final draft, many do suspect that the rule will be yet another in a line of regulations that become diluted before officially being implemented.

Is this just the result of legislators forgetting the reasons for these regulations as we move further and further away from the global financial crisis? Now that we appear to be out of the tall grass, is the need for strict regulation becoming less of a priority? 

Lawyers and industry observers stress that we have seen a marked uptick in regulation since the financial crisis. In addition, some believe the relaxation of certain rules is driven less from the lessons of the global banking collapse being forgotten and more from a belief that banks cannot lend if too many burdens are put upon them.

Still, the further we are away from the financial meltdown of 2008, the harder it seems to be to get these laws enacted as they originally were intended. Although concessions do need to be made (as well as having a nodding acquaintance with the reality of lending), it’s essential both that regulators make sure mistakes of the past are not repeated but also that true entrepreneurialism is not needlessly curtailed either. A tough balancing act for sure.

It remains to be seen what will happen with the Volcker Rule. Certain lawyers told PERE they still expect a final draft to come out this quarter. They add that they expect it to be diffused even more than it already has been.

For further analysis of the impending Volcker Rule and its possible impact on the private real estate sector, be sure to check out the February edition of PERE magazine.