BB&T-SunTrust union invites stricter regulation

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WASHINGTON — When BB&T and SunTrust announced their proposed merger Thursday morning, both institutions were forgoing the promise of regulatory relief that the banking industry has sought for years.

But their decision to join forces demonstrates that the best way to address regulatory burden may be to become so big that you don't have to care.

If the merger is finalized, the combined bank would grow to an estimated $442 billion of assets. Under the Federal Reserve's proposed changes to its post-crisis supervisory regime, the merged institution would therefore likely jump to a tougher regulatory category, with potentially greater capital, liquidity and stress-testing requirements than before.

Yet with both BB&T and SunTrust inching closer to the pivotal regulatory asset threshold of $250 billion ($225 billion and $205 billion, respectively) they could have been headed to a tougher supervisory rung anyway.

Their proposed merger would blow them well past the regulatory trigger, and that result may be intentional. With greater scale, the combined bank could be better positioned to compensate for higher regulatory costs down the road.

Karen Shaw Petrou, managing partner of Federal Financial Analytics, said the prospect of which regulatory category a bank falls into invokes the Greek myth of Procrustes, the demigod who would invite visitors to stay in an iron bed but make them fit by cutting off their arms or legs.

“BB&T and SunTrust faced this bed as they separately grew close to the $250 billion threshold at which costly new rules kick in,” Petrou said. “Their solution: cuddle up to get so big that the bed collapses. By choosing to define their own fate — not let the Fed do it for them — BB&T and SunTrust are redefining U.S. regional banking.”

Banks have criticized the post-crisis asset thresholds originally put in place by the Dodd-Frank Act, viewing them as arbitrary and not true indicators of risk. Last year's regulatory relief law enacted by Congress revised those thresholds to provide some regional banks with less burden, but the industry did not get everything it wanted.

To implement the new law, the Fed proposed revisions to its post-crisis enhanced prudential standards by creating four regulatory tiers of banks with more than $100 billion of assets. They range from Category I — made up of the eight largest "global systemically important banks," or G-SIBs — that faces the toughest set of requirements, to Category IV banks — less complex institutions with between $100 billion and $250 billion of assets — on the other end.

Under the proposed merger, BB&T and SunTrust would move to Category III, comprising banks with at least $250 billion of assets that are not G-SIBs or do not have much in overseas assets.

But the change could be meaningful. Under the Fed's proposal, the category in which both banks currently sit avoids post-crisis liquidity standards such as the Liquidity Coverage Ratio, gains the ability to opt out of Accumulated Other Comprehensive Income accounting and effective this year is subject to biannual stress testing cycles.

In contrast, by combining into an estimated $442 billion bank, the merged firm would be subject to potentially greater liquidity requirements under the LCR, the countercyclical capital buffer, and both quantitative and qualitative stress testing every year.

But even though the banks could face a tougher supervisory class as a result of the proposed merger, the deal could also reflect the general deregulatory mood under the Trump administration as being a potential motivator for M&A activity.

Ian Katz, analyst at Capital Alpha Partners, said that the merger was the predictable outcome of the deregulatory environment and a pent-up desire in the industry to attempt big deals.

“Beyond deregulation, there has been pent-up M&A demand going back to the financial crisis,” Katz said. “So the industry was due for a big deal. There’s also an unoccupied super-regional space in the U.S. market that could be filled by future M&A.”

Reflecting the deregulatory atmosphere, at least one federal regulator appeared to praise the merger on Thursday. Comptroller of the Currency Joseph Otting said BB&T and SunTrust are “very well-managed banks and very thoughtful in the way that they approach their markets.” (He noted that the Office of the Comptroller of the Currency supervises neither institution.)

He said the timing appears right for a pickup in merger activity.

“If you go back and look at prior cycles, mergers occur at the optimal period of credit quality, meaning that when the portfolios are the cleanest is when we’ve seen mergers and we’re in that sector right now,” Otting said at a luncheon speech in Washington. “So this is a relatively high-confidence period to conduct acquisition activity.”

But the deal is not yet done. A Fed spokesperson said the agency, which must approve the merger, “will evaluate the application against the relevant statutory factors when we receive it.”

Those factors — which apply equally to banks of whatever size — include effects on competition, financial and managerial resources of the companies, the prospects of a combined firm, the impact on financial stability, each institution's track record on anti-money-laundering and Community Reinvestment Act activities, and whether a combined institution would be convenient for communities affected.

That review can take time, and there is no deadline for the Fed to act. However, in practice, the Fed has only denied one application since 2014, and most are either approved, withdrawn, sent back or mooted within 30-45 days.

Rachel Witkowski contributed reporting this for article.

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M&A Minimum capital requirements LCR Stress tests Regulatory reform Regulatory relief Federal Reserve BB&T SunTrust