On May 22, 2018, Congress passed a financial regulatory reform bill, S. 2155, the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (the “Reform Bill”). Among other things, the Reform Bill clarifies the treatment of acquisition, development, and construction (ADC) loans characterized as high volatility commercial real estate (HVCRE) exposures under the U.S. Basel III capital rules. It is expected that President Trump will soon sign the legislation.

Under the “standardized approach” for risk weighting bank assets, the existing capital rules require ADC loans that are deemed to be “HVCRE exposures” to be risk weighted at 150% rather than the 100% risk weighting accorded to other commercial loans. This higher risk weighting increases the capital that banks are required to carry against HVCRE exposures. The complexity of the current HVCRE exposure definition has created uncertainty in its application, and the definition has been criticized for covering certain ADC loans that may not merit higher capital requirements. In response to these criticisms, the Reform Bill requires that HVCRE exposures must also meet a new, narrower definition of “HVCRE ADC loans” to trigger the 150% risk weight.