WASHINGTON — When it comes to federal regulations resulting from the Dodd-Frank Act, midsize banks often feel stuck in a Catch-22.
They face enhanced regulatory requirements from the law since they are above a crucial $10 billion asset cutoff, yet they are several times smaller than the regional leaders and Wall Street giants able to create economies of scale to more easily absorb higher compliance costs.
“It is frustrating when we get compared to banks that are a hundred times larger than us and in reality we are much closer to a bank that has $1 billion in assets if you look at our operations,” said Roy Whitehead, chairman and CEO of the $15 billion-asset Washington Federal in Seattle.
Whitehead sat with two other midsize bank CEOs for an interview on a wide range of topics related to the industry’s push for regulatory relief. They are watching for the next moves by the Trump administration and Congress, hoping that the direction of federal banking policy moves more in the industry’s favor.
In general, the bankers had some nice things to say about Dodd-Frank, and even commended the Consumer Financial Protection Bureau — the oft-criticized agency created by the 2010 law. But they are still urging changes, and top among them is raising the $10 billion threshold that forces them to conduct stress tests, face limits on debit interchange fees and fall under the CFPB’s supervisory umbrella.
Also high on their list are reforms to the tax code to eliminate exemptions for credit unions and other changes to ease the bank lending process.
In general, the bankers said one of the unfortunate outcomes of Dodd-Frank is that it made lending too formulaic.
“What we would like to see is a little less structural requirement from the Congress and our regulatory colleagues and a little bit more emphasis on the ability to build relationships with clients,” said John Hairston, president and CEO of the $24 billion-asset Hancock Holding in Gulfport, Miss. “Dodd-Frank has made it unintentionally ... much more challenging for banks to loan money at the lower end of business because we are forced to justify every loan such that a model has to be applied.”
The bankers, who were in the capital for meetings with lawmakers and regulators, say they feel encouraged by a change of tone in Washington. They say even those who had supported Dodd-Frank now sound open to bipartisan compromise on reforms to ease the regulatory burden.
“We have been in an age where getting anything accomplished in Washington is extremely difficult,” said E. Philip Wenger, chairman, president and CEO of the $19 billion-asset Fulton Financial in Lancaster, Pa. But, he added, “As an industry we have a lot more optimism than we had two years ago.”
“It is a crowded agenda as always, but based on what we heard today from those who I would call our champions, they still seem pretty optimistic that progress can be made this year and are intent on doing that,” Whitehead said.
Hairston said it used to be difficult to convince certain lawmakers that anything from the 2010 regulatory reform law needed to be fixed.
“The difference is we hit a wall for a long time” hearing “that every component of Dodd-Frank is infallible,” Hairston said. “That is what is different: Reasonable minds can now work together and there is a chance that a bill will get passed and perhaps get signed.”
To be sure, the road to reforming Dodd-Frank still appears quite steep. Despite ample legislative proposals to relieve the burden, many of the bills offered so far — particularly House Financial Services Committee Chairman Jen Hensarling’s Financial Choice Act — contain sweeping measures sure to be opposed by Democrats in the Senate, who still have enough votes to mount a filibuster and kill any legislation.
Still, Hairston said, while Dodd-Frank generally lumped diverse banks together into categories that subject them to burdensome regulatory requirements, the law itself does not need a complete overhaul.
“We are not way out of plumb,” he said, making an analogy to a carpenter’s level. “We are just about a half a bubble off plumb.”
In addition to Dodd-Frank changes, the bankers also expressed hope that new appointees to assume leadership roles at the regulatory agencies will be more sympathetic to the industry’s concerns. The number one thing they would like to see in the new regulatory principals is industry experience.
“Just by virtue of understanding what it is that we deal with every day … because you have been on a bank board or have some experience with the industry gives some appreciation of the good work done by banks,” Whitehead said.
‘Raise the thresholds’
When asked what would be at the top of his wish list of legislative changes, Whitehead said, “Raise the thresholds.”
Banks above the $10 billion asset threshold are subject to the Durbin amendment — added by Dodd-Frank by Sen. Dick Durbin, D-Ill. — which imposed a cap on fees banks charge for swipe-fee processing. They also get examined for consumer compliance by the CFPB, and must run internal stress tests known as DFAST (for Dodd-Frank Act Stress Test.) Meanwhile, banks above a $50 billion asset threshold are subject to even tougher requirements, including more rigorous stress tests.
The three bank CEOs said a framework in which banks were regulated based on their specific business model and how much risk they take would be ideal, but with little political appetite to make such a change, the second-best option is raising the thresholds.
“We don’t think that is going to happen anytime soon, because of the politics so our position is raise all the thresholds and raise them high is essentially the next best thing and that is why we support that,” Hairston said.
Hairston said Hancock’s reduction of its branch network was triggered by the interchange fee cap.
“We have closed a sizable number of branches, about 40% of our branches over time, and the primary reason for that was because it was harder to break even and to make a profit in those branches, and that was due primarily to the interchange fee issue,” Hairston said. “We were primarily a consumer bank in those days, and the ability to make money in the consumer bank was significantly handicapped.”
The bankers also pointed to annual company-run stress tests as a strain. They said the scenarios they have to test against their balance sheet are not always relevant to their institutions. The models force them to test their institution’s response to national economic trends, but usually it is regional factors that are applicable.
“If you are a bank that spans the entire country, the whole country, then real estate prices everywhere matter to you,” said Hairston. “The DFAST requirements have forced us to build very good stress testing tools but to publish what happens in a national recession, to us doesn’t make a whole lot of sense.”
“The price of real estate in Nevada just doesn’t affect our company, because we are so far away,” he added.
The bankers said shrinking to avoid the regulatory effect of being over $10 billion isn’t an option.
“We are generating new capital every year so we can either give it back to our shareholders or we have to grow in order to generate a return on that capital so it is not something we spend a lot of time thinking about,” Whitehead said. “We generally are focused on growing the bank, gathering more deposits, making more loans.”
Wenger at Fulton Financial agreed, saying that banks just below the $10 billion or $50 billion asset thresholds have to prioritize growth over avoiding regulation.
“There are institutions that are $9 billion and $49 billion that spend a lot of time figuring out if it is worth going over or staying under, but we can’t shrink,” he said. “At the end of the day we have to provide a return to our shareholders and you can’t do that by shrinking. You have to grow.”
Hairston also said the $50 billion asset threshold is low as a demarcation line.
“If you take the three of us and you sit us along [with banks with assets of] $50-$60-$70 billion, we don’t look very different, it is just more markets, more branches and more customers,” he said. “You really have to go pretty high up there before you see the business model change.”
CFPB can be improved, but relationship is good
As for the CFPB, which has come under attack by the GOP, the bankers said they would like to see the bureau’s leadership structure changed as well as other reforms to the new agency. Yet they generally commended the bureau.
“The professionalism, the consistency really on all accounts, it’s an organization that has matured nicely and I think the relationship with the industry is pretty good at this point,” Whitehead said of the bureau.
Hairston, meanwhile, saluted the agency for concentrating on the nonbank sector.
“We would applaud the of-late focus of the CFPB in enhancing oversight of nonbank financial service providers” which don’t have a prudential regulator, he said. They “may not be treating people as well as banks treat them. Lately the bureau has been quite focused on those areas and we think that is a healthy and good thing to do.”
But Whitehead noted the challenges of having to answer to two different regulators, one for consumer compliance and another prudential regulator, which supervises the institution for safety and soundness and other measures such as the Community Reinvestment Act. (Washington Federal is a national bank regulated by the Office of the Comptroller of the Currency.)
“We find ourselves in double jeopardy from time to time, so, yeah, I think at least my view is that it would be much more efficient and I think we would have a more understandable compliance environment if we could look to one regulator,” Whitehead said.
The bankers said tax reform is another top priority.
They acknowledged that they would benefit from a lower tax rate, but said if tax reform increases business investment then midsize banks are in prime position to support that investment.
“What we would look for in tax reform is not us paying less tax necessarily,” Hairston said. “It is the people who are then freed to use that cash flow to reinvest, to hire, to borrow, to build."
“That is really the ultimate benefit for our industry, is allow us the opportunity to go do that clearing-house work to match those people together in markets and across the markets," he continued. "The more money available to people to invest the more we can match people up.”
The bankers said midsize banks CEOs have also joined with community banks in attempting to fight the credit union tax exemption. They said they feel the competitive pressure from institutions gaining in size that pay no taxes.
Whitehead’s Washington Federal is the largest bank headquartered in the state of Washington, and his largest competitor also based there is the Boeing Employees Credit Union, which has assets of $16 billion. He noted that his institution and BECU have roughly the same pretax income, but his bank pays $80 million in federal income taxes, while BECU pays none. He also noted that removing the credit union tax exemption would help reduce the federal deficit.
“What a splendid opportunity to fix the gross unfairness that exists in our relative taxable requirements versus the credit union industry,” Whitehead said. “We should be looking into every nook and cranny for tax revenues that are low-hanging fruit.”