Changing Bank Capital Rules: Impact on Loan Structures and Loan Documentation

Description

In October 2018, as a result of the 2018 Dodd-Frank reform bill, the federal banking agencies proposed rules to tailor U.S. bank capital and liquidity requirements. As proposed, capital and liquidity requirements will vary according to which of four asset categories a bank belongs. This may impact the cost of borrowing as certain banks may be required to retain more capital and meet liquidity and stable funding ratios concerning certain loan portfolios and others may not.

Terms and provisions in loan documents can affect the classification of certain loans and their treatment under the capital rules, and some loans can be structured to avoid being subject to avoid certain of the capital rules. Bank counsel must have a thorough understanding of the nuances of the capital rules in order to minimize its impact on profitability in any given transaction.

Distinct requirements for high volatility commercial real estate loans used to finance acquisition, development or construction (HVCRE ADC loans) increase risk weighting for certain commercial real estate loans which, in turn, requires lenders to retain more capital. To avoid HVCRE ADC classification, real estate loans must meet complex LTV and borrower investment requirements, most recently revised under the 2018 Dodd-Frank reform bill.

Listen as our authoritative panel of regulatory and finance attorneys analyzes the current and proposed U.S. capital rules, the impact on the commercial lending environment, and how lenders may alter loan structures and loan documentation to minimize its effects.