These measures, which have been interpreted to mean areintroduction of tighter controls over the risks banks wereallowed to take under the Glass-Steagall Act, would be on top ofthe proposed Consumer Protection Financial Agency that has beenintroduced in legislation. Angst over the proposed measure iswidespread, both in the general market and the more narrowcommercial real estate finance space.

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Much of the concern is that the proposed measures introduce yetanother element of uncertainty in what has been a turbulent year,says Ellen Marshall, co-chair of the Banking and Specialty FinancePractice group at Manatt, Phelps & Phillips, LLP.

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"That just leads to an even greater reluctance on the part ofbanks to lend," she tells GlobeSt.com. "Bankers who do not know ifthey are going to be restricted in how they can finance theirportfolio of loans or hedge them, will certainly become morereluctant to expand that portfolio, at least until the new rulesare in place."

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In the short-term, any major changes introduced in the bankingindustry today will only cause more harm to the economy, saysattorney Edward A. Mermelstein of New York City-based Edward A.Mermelstein Associates.

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"If anything like these proposed plans were to be implemented,it should be over a longer period of time, simply because thecommercial real estate market is in shambles," he tellsGlobeSt.com. "If banks are forced to liquidate positions or adjustpositions in their real estate investment portfolios, it willsimply cause further havoc."

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Despite concern over the short- and medium-term volatility thatis likely to be introduced in the run-up to any new legislation,there is a contingency of investors that wish to see a newregulatory regime.

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The problem is simple: too big to fail is too big to exist, andthe Congress has allowed investment banks and commercial banks tomerge and expand into areas that were previously divided, saysWayne Rogers of Wayne Rogers & Co.

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"With the erosion of the Glass-Steagal Act, money-center bankswere able to grow to a point at which they were too big to fail,through the activities of underwriting securities, trading stocksand bonds, selling derivatives and more," he tells GlobeSt.com."Trying to correct this by regulation will only sow the seeds ofanother financial debacle." It must be done legislatively instead,he concludes.

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Were these measures to pass, there would clearly be someupheaval among institutions--but also new entrepreneurialopportunities, as big banks spin off proprietary trading andprivate equity business lines to attract their own risk-adjustedcapital, according to Jim Clark, managing principal of Alter AssetRecovery.

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The downside, of course, is that the possible higher capitalcost required to fund these activities and independent businessesmay lead to increased capital to the end recipient of suchinvestments, Clark tells GlobeSt.com--similar to the rise in gasprices at the pump when oil prices ticked up.

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Another factor to consider is that foreign banks, which may notbe subject to such restrictions, are likely to have a competitiveadvantage in such services as balance sheet financing forsecurities offerings or mergers and acquisitions transactions."Thus, foreign banks may move in on the market share of USinvestment banks," Clark continues.

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From the commercial real estate perspective specifically, "tothe extent these proposals may restrict banks from using theirbalance sheets to warehouse mortgage loan originations in advanceof securitization, it would obviously be one more factor curtailinga revival of CMBS issuance," Clark says. But, he hastens to add,"it is not clear from what I've read so far that this is thecase."

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.