There's broad agreement that $50 billion is too low a threshold for labeling a bank as "systemically important," but until policymakers figure out where the cutoff should be banks nearing that asset size have little choice but to prepare for the added regulatory scrutiny.
Take First Republic Bank in San Francisco.
Barring a major acquisition, the $46.7 billion-asset bank is not likely to cross the $50 billion mark until late next year, by which time the threshold could conceivably be raised. Still, the bank isn't taking any chances and has begun to invest heavily in hiring the necessary staff, attorneys and consultants who can help it deal with the additional regulation that comes with being designated a "systemically important financial institution," or SIFI.
In the third quarter, First Republic spent $18.4 million on professional fees, an increase of nearly 70% from just three months earlier and roughly three times what it spent in the same quarter last year. Salary and employee benefit costs increased nearly 5% from the prior quarter and were up 24% from a year earlier, to $122.6 million, the company said in its third-quarter earnings report released Thursday.
The increased investment in personnel comes at a time when many banks are attempting to reduce overhead to help offset shrinking margins. Fifth Third Bancorp, KeyCorp, BB&T and other regional banks all reduced their personnel costs in the third quarter and plan to continue doing so until interest rates rise and loan yields increase.
That's not really an option for First Republic. The bank is paring staff where it can, but executives made clear in a conference call with analysts Thursday that it would not be eliminating any compliance positions. Indeed, Chairman and Chief Executive James Herbert said he expects compliance-related costs to increase by roughly $10 million per quarter in the run-up to SIFI status.
Congress is expected to debate the issue of raising the SIFI threshold next year after the mid-term elections, but Herbert is not spending much time worrying about how it plays out.
"It would be nice if they raised the limit, but I doubt it would impact us that much because we intend to run a bank that is going to grow well past $50 billion anyway," Herbert said on the conference call.
Investors seem to have accepted the fact that First Republic's expenses will continue to rise as the company inches toward $50 billion of assets. In July, shares plummeted after Herbert discussed how much the bank was spending on compliance, but on Thursday shares increased slightly following the earnings call.
It helped, too, that First Republic reported solid third-quarter results.
For the quarter, the bank reported net income available to shareholders of $122 million, up 20% from the same period last year, on strong revenue growth. Earnings per share increased 16%, to 86 cents, handily beating consensus analysts' estimates.
Interest income climbed nearly 9% year over year, to $376.4 million on a 6% increase in loans and a 27% increase in investments.
Noninterest income nearly doubled in the quarter, thanks to a $13.7 million gain on the sale of home loans and a net $23.6 million gain on the sale of investment securities, compared to a $369,000 loss on investments in the same period last year. Even excluding those sales, noninterest income still increased roughly 25% year over year as a result of higher fees from brokerage and investment advisory services.