If there’s a worry bead left to worry, hold it in reserve for Basel III. Basel III (its informal name – it’s actually a patch job on the never really fully implemented Basel II) is the most recent effort by the Basel Committee on Banking Supervision to fix the worldwide financial system. I am far from a master of the nuances of this enormous regulatory undertaking, but I know enough to be worried. As a friend and colleague said, “if the only right answer on Jeopardy to ‘What is Basel?’ were ‘a delightful walled medieval city,’ we might be better off.”

Basel II was never fully implemented, certainly not in the United States. While Basel II generally resulted in a significant relaxation of capital requirements for most lending activities, (that worked well, right), it stipulated that many types of commercial real estate loans warranted uniquely higher capital changes.  These loans, called High Volatility Commercial Real Estate or HVCRE, include acquisition and development loans, construction loans and loans to sectors deemed by the applicable regulators to have higher risks of default and greater loss expectancy.  As Basel II was never implemented here, these CRE rules never really bit.

Now, with the horses well and thoroughly out of the barn, we’re gonna jack up capital. Unfortunately, when everyone agrees “something must be done,” the rush to judgment often results in rules that can do as much harm as good. If implementation chokes off lending, we’ll end up with very well capitalized banks clipping U.S. Treasuries and the economy will remain moribund.

Basel was on everyone’s screen half a decade ago and I, frankly, haven’t paid a great deal of attention to it in the intervening years. But now that G20 is insisting that Basel Committee produce new and improved guidance by December, this has got to get back on everyone’s screen. The politics suggest that whatever comes out of Basel will, this time, be implemented in the United States.  The instincts of our internationalist leaning administration, coupled with a driving need to do something and a naive conviction (to give all concerned the benefit of the doubt) that more capital is an unalloyed good, is almost certain to result in a commitment to rapid implementation. I’ve spoken to many of the CRE organizations and urged them to open initiatives on Basel tout suite. We need to get into the conversation.

While Basel III is not intended to be implemented before the end of 2012, if supported by the Obama administration, it will begin influencing U.S. bank behavior immediately.  Some have estimated that Basel III will require banks to raise as much as a trillion dollars in equity and obtain over $5 trillion in committed facilities to meet new capital and liquidity requirements.  Moreover, the gnomes of Basel continue to think that commercial real estate is worthy of special attention and, particularly HVCRE. The problem is an awful lot of the market is in that HVCRE bucket.  I’ve heard suggestions that, under Basel III, in order for commercial real estate to be a competitive asset class for the banks, the risk spread would have to increase over 200 basis points.  This may simply drive commercial real estate out of the banks.  That’s what’s called, Not Good.

Certainly the whole notion of more robust capital, pro cyclicality breaks and the like are good and meritorious.  Our job as an industry is to try, and keep trying, to manage the regulatory process by-blow of unintended consequences.  We need to ensure the Basel constituencies and our U.S. representative organizations at the Basel party, are fully aware of how CRE markets function, what can be helpful and what can be unnecessarily burdensome or damaging.  Reportedly, following the recent July 15th meeting, there will be new guidance published soon on what the Committee is thinking.  Standby for this.

Yes, I know that the regulators roll their eyes every time we say unintended consequences, but it doesn’t make them right.  Good regulation should fully account for benefits and burdens of things they do.  Our job is to help them get there.