Roundtable Weekly

BUDGET & TAX POLICY
Opening Round of Fiscal Cliff Talks Deemed “Constructive”; Negotiations Set to Resume After Thanksgiving

CAPITAL & CREDIT
Senate Banking Committee Holds Hearing on Basel III; Roundtable, Coalition Partners Warn of Basel’s Unintended Consequences, Impacts on “Main Street” Businesses  


 

BUDGET & TAX POLICY

Opening Round of Fiscal Cliff Talks Deemed “Constructive”; Negotiations Set to Resume After Thanksgiving  

Amid a new spirit of compromise that has emerged since last week’s elections, President Obama and congressional leaders met at the White House today to kick off what are likely to be weeks of negotiations toward a potential deal for averting hundreds of billions in automatic spending cuts and tax increases (scheduled to take effect Jan. 2). Although no details were given, both sides appeared willing to give ground on their cherished positions, and voiced optimism after the meeting about the prospects for a deal.

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 “I believe we can do this and avert the fiscal cliff,” said House Speaker John Boehner
(R-OH)
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“I believe we can do this and avert the fiscal cliff,” House Speaker John Boehner (R-OH) told reporters on the White House lawn after meeting with the president. Senate Majority Leader Harry Reid (D-NV) was reportedly equally upbeat (CNBC.com, Nov. 16). “We feel we understand what the problem is. And I feel very good about what we were able to talk about in there,” he said. 

Obama went into today’s meeting with an opening bid of $1.56 trillion in new tax revenue over 10 years — double the amount that GOP lawmakers were willing to accept in the failed 2011 debt ceiling talks — proposing that this come from raising tax rates on top earners, narrowing deductions for this income segment, and from some 70 other changes in the tax code, many of them specific to certain industries (e.g., raising taxes on options traders, oil and gas companies, and some golf courses). Obama on Wednesday also echoed Reid’s statement that the House should simply approve legislation passed by the Senate this summer extending the Bush tax cuts for individuals earning up to $200,000 ($250,000 for couples) — while letting taxes rise for higher-income taxpayers.

Yet Republicans remained positive going into the meeting, apparently encouraged by the fact that Obama had not “explicitly draw[n] a red line on raising income-tax rates,” The Wall Street Journal reported yesterday.

In terms of the potential for compromise, Obama could agree to let the top tax rate (currently 35 percent) rise to something less than the 39.6 percent he wants. Another option would be to limit the tax increase to households earning more than $500,000 annually, instead of the $250,000 threshold that Obama has been advocating (CNBC, Nov. 16).

2012_11_14 MultiIndustry Comment Letter Unsustainable Programs
A coalition of 232 business organizations (led by the U.S. Chamber of Commerce and including The Real Estate Roundtable) on Nov. 14 urged President Obama and Congress to immediately begin a process for restructuring “unsustainable” federal entitlement programs

In addition to short-term action to avert the fiscal cliff, a coalition of 232 business organizations (led by the U.S. Chamberof Commerce and including The Real Estate Roundtable) on Wednesday urged Obama and Congress to immediately begin a process for restructuring “unsustainable” federal entitlement programs, citing this as the biggest contributor to the nation’s skyrocketing debt.

While recognizing these as “daunting” challenges, the coalition said “demographic facts, the fundamental reality of a broken financing mechanism [combined with extending life expectancy] and, 77 million more people entering these programs require taking action now.”

The coalition statement came a day after Obama met with labor unions and other liberal interest groups, who reportedly pressed the president to take Social Security and Medicare off the negotiating table.

During the 2011 debt ceiling negotiations, Obama tentatively agreed to increase Medicare premiums, raise the eligibility age for the program to 67, and to modestly reduce Social Security payments by using a less-generous formula for cost-of-living increases. After those talks collapsed, Obama not include similar proposals in his fall 2011 debt-reduction plan, and his re-election last week may have reduced the need for him make concessions.

But, as the business coalition concluded in its letter this week, “Our nation’s entitlement programs are unsustainable. If we do not make sensible reforms, the programs will go bankrupt — and so will the nation.”

Full negotiations on the fiscal cliff are not expected to begin in earnest until after Thanksgiving.

Given the scramble for revenues and the potential for a rushed, 11th hour deal that could single out industry winners and losers, The Roundtable will actively work to educate current as well as incoming policymakers about real estate’s vital role in job creation and the economy — along the lines of the policy forums hosted by the real estate industry at the GOP and Democratic national conventions.  

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CAPITAL & CREDIT

Senate Banking Committee Holds Hearing on Basel III; Roundtable, Coalition Partners Warn of Basel’s Unintended Consequences, Impacts on “Main Street” Businesses  

At a Senate Banking Committee hearing on Wednesday, lawmakers expressed wide-ranging concern about pending regulations to implement the international Basel III capital accord, including the proposed rules’ complexity, potential impact on community banks and insurers, proposed risk weightings, and compliance costs. 

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The Senate Banking Committee hearing on Basel III capital accord  (watch webcast here)

At a Senate Banking Committee hearing on Wednesday, lawmakers expressed wide-ranging concern about pending regulations to implement the international Basel III capital accord, including the proposed rules’ complexity, potential impact on community banks and insurers, proposed risk weightings, and compliance costs.

Witnesses testifying at this week’s hearing included Michael S. Gibson, director, Division of Banking Supervision and Regulation, U.S. Federal Reserve; John Lyons, chief national bank examiner, Office of the Comptroller of the Currency (OCC); and George French, deputy director of policy, Division of Risk Management Supervision, Federal Deposit Insurance Corporation (FDIC). 

The three agencies first unveiled their draft implementing proposal in June. Since then, they have received some 1,500 comment letters from industry stakeholders (including a real estate industry comment letter on Oct. 22), as well as letters of concern from Capitol Hill. (Fifty-three Senators of both parties sent a letter to the agencies on Sept. 27, warning that the proposed regulations could make it more difficult for smaller community banks to raise capital and provide credit to communities [Roundtable Weekly, Oct. 5]).

According to a Nov. 15 hearing summary published in Bloomberg Government, committee Chairman Tim Johnson (D-SD) emphasized that a strong capital base is essential for a strong financial system, but noted that capital alone will not prevent the kinds of company failures that occurred during the financial crisis several years ago. He emphasized the need for capital standards to be well calibrated with other rules, and suggested that the agencies coordinate their rulemakings.

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The Real Estate Roundtable signed on to the Nov. 14 coalition letter, on Basel III

A coalition letter sent to the committee in advance of the hearings carried a similar message.

The Nov. 14 letter, signed by The Real Estate Roundtable and other organizations interested in fostering entrepreneurship, cited a host of pending regulatory initiatives with “direct impacts upon the ability of non-financial businesses to mitigate risk and raise the capital needed to expand and create jobs” — including Dodd-Frank regulations on the Volcker Rule and derivatives end-user exemptions, and pending lease accounting changes.

The coalition (which included real estate and insurance industry groups, along with general business organizations such as The Business Roundtable and U.S. Chamber of Commerce) said regulators have “failed to consider the impacts of Basel III upon Main Street businesses and how Basel III may interact or conflict with these other initiatives.”

Sen. Richard Shelby (R-AL), the top Republican on the Senate Banking Committee, said that since the primary goal of Basel III is to strengthen bank capital requirements, regulators should have to prove that their proposals for recapitalizing banks are supported by data and proper analysis. He said that when regulators were previously asked how they determined that the proposed rules would leave the banking system well-capitalized, it turned out that they had relied on data from only “the very largest banks.” Shelby argued that, without further data and analysis, it would be impossible to gauge if the pending regulations will prove effective in adequately capitalizing U.S. banks.

  2012_10_22 IMAGE - Basel III Letter
The Oct. 22 comment letter to regulators from The Roundtable and national real estate trade groups on the proposed Basel III rules.

As currently drafted, the regulations would raise capital reserve requirements for all 7,307 U.S. banks, and would force financial institutions to rely more on equity than debt to fund their operations. More specifically, the new Basel accord would require banks to hold Tier 1 capital in the amount of 6 percent of total assets, up from the current requirement of 2 percent. In addition, banks would have to reserve an additional capital conservation buffer of 2.5 percent of total assets to withstand future periods of stress in the global economy, bringing the total amount of capital needed to 8.5 percent.

In their Oct. 22 comment letter to regulators, The Roundtable and national real estate trade groups urged further study of how the proposed Basel III implementing rules would affect U.S. real estate markets and the economy — and for regulators to use this information to overhaul existing proposals in this area [Roundtable Weekly, Oct. 26].

While expressing support for “efforts to ensure the safety and soundness of the banking system through revisions to the risk-based capital framework,” the real estate letter warned that “several aspects of the proposed regulations would have seriously harmful effects on the availability and cost of credit to commercial and residential real estate borrowers and on the U.S. economy in general.”

Basel III was supposed to be implemented in the U.S. by the end of this year, although U.S. regulators said recently they will not be able to meet that deadline. The public comment period was initially scheduled to end on Sept. 7, but was extended to Oct. 22. At this week’s hearing, Lyons (of the Fed) said regulators would review each of the 1,500 comment letters received and take them into consideration as they move forward with a final rule.  

Source:  The Real Estate Roundtable

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