CIT Group is not big enough to attend a Friday meeting of the Federal Reserve Board and several large institutions, though the assembly could help keep the specialty lender out of such parties for a long time.
CIT, through its pending acquisition of OneWest Bank, is set to balloon to $67 billion in assets, thrusting it well above the current $50 billion threshold for institutions deemed systemically important. By crossing it, CIT is set to encounter a slew of added oversight and would become part of the Fed's Comprehensive Capital Analysis and Review.
But momentum is building to consider increasing the threshold, which many view as arbitrary and too low. And on Friday, Fed Reserve Gov. Daniel Tarullo will meet with a dozen executives from banks with $50 billion to $150 billion in assets to discuss regulatory issues facing that group, including the so-called SIFI threshold, a Fed spokeswoman said.
John Thain, the $44 billion-asset CIT's chief executive, was asked during a conference call Tuesday if he would be at the meeting. Thain noted that invitations were limited to institutions that are already over the limit, though he's keenly interested in raising the threshold.
"Obviously, to the extent that there is talk about raising that SIFI level, we are very supportive of that," Thain said, addressing a suggestion by Tarullo to raise the threshold to $100 billion.
The costs associated with being as well as preparing to become a SIFI are significant. For instance, James Herbert, chairman and chief executive of the $46.7 billion-asset First Republic Bank, said earlier this month that he expects compliance-related costs to rise by $10 million per quarter tied to the run-up to becoming a systemically important. Without an acquisition, First Republic is on pace to top $50 billion in assets next year.
"Companies can spend tens of millions annually on the" required stress testing, said Sameer Gokhale, an analyst at Janney Montgomery Scott, who asked Thain about the Fed meeting during the conference call. "It could be in the range of $20 million to $40 million as they are developing it. A change to the threshold would be meaningful. It could improve the economics of the deal and the whole business."
Thain and Scott T. Parker, CIT's chief financial officer, declined during Tuesday's call to quantify what a change could mean to annual expenses. Parker also downplayed the effect, given the size of the OneWest deal.
"Depending on what is part of raising the limit if it was less activity and less work, then, yeah there's some opportunities on the expense side," Parker said. "But we still believe that we want to continue to enhance several aspects of our business, consistent with the size of the institution."
A representative for CIT also declined to comment beyond what the company's executives said during the conference call.
The $3.4 billion deal between CIT and IMB Holdco, the holding company for OneWest, is the biggest deal announced so far this year, and is among the largest since M&T Bank agreed to buy the $44 billion-asset Hudson City Bancorp in 2012 for $3.7 billion. The Hudson City sale is still pending, delayed since April 2013 by issues tied to M&T's compliance with the Bank Secrecy Act.
During CIT's call, several analysts sought reassurances that the OneWest deal will close in the first half of 2015, or any early indications of trouble for the deal. Kenneth Bruce at Merrill Lynch, for instance, asked for "visible milestones" that would indicate how the deal is progressing. He left empty-handed.
"There's nothing to indicate at least at the moment that there's any issue, but that ongoing dialogue will take place really between us and the regulators," Thain said. "So, there really isn't a very good milestone for you to look at other than you can see whether we continue to reiterate that we expect the deal to close in the first half of 2015, which of course we did say that today."