Most of the analysis of the regulatory relief bill that passed the Senate earlier this year has focused on how it will help small and regional banks, but the measure — which could face a House vote as early as next week — also contains provisions that could provide significant benefits to midsize banks.
The bill, if passed, would relieve banks with less than $10 billion of assets of a number of requirements around mortgage lending, capital management and data collection and ease regulatory scrutiny of regional banks by lifting the threshold for which they are deemed “systemically important financial institutions,” or SIFIs, from $50 billion to $250 billion.
The big benefit for banks in between these two groups — those with $10 billion to $50 billion of assets — is that they would no longer be subject to mandatory Dodd-Frank Act stress tests. Banks spend a significant amount of time, money and energy preparing for these annual examinations and eliminating them could go a long way toward easing their regulatory burden.
That’s not to say bankers in this group are pleased with everything in the bill. They would, for example, like to see Congress raise the threshold for which banks are subject to caps on interchange fees well above the current $10 billion asset level.
Still, don’t expect the leaders of midsize banks to do any last-minute lobbying to convince Congress to insert provisions that would directly benefit their institutions.
In a roundtable discussion over a breakfast with an American Banker reporter last month, senior executives said that they see Senate Bill 2155 as “a good first step” toward broader regulatory relief for the industry, and they are not about to do anything that could hold it up. (The bill is expected to be approved by the House next week.)
“Pass the bill that’s on the table,” said Edward Willingham IV, the chief operating officer at the $34 billion-asset First Citizens Bancshares in Raleigh, N.C.
Willingham was one of four bankers present at the roundtable, which was hosted by the American Bankers Association and was designed to provide insight into the issues and opportunities facing midsize banks. The others were: Alessandro DiNello, the president and CEO at the $17.7 billion-asset Flagstar Bank in Troy, Mich.; Brent Beardall, the president and CEO at the $15.6 billion-asset Washington Federal in Seattle; and Richard Ehst, the president and chief operating officer at the $10.8 billion-asset Customers Bancorp in Wyomissing, Pa.
Regulatory relief was the dominant theme of the discussion, but it was not all that was on bankers’ minds. Some are deeply concerned about their ability to attract and retain talent and they had mixed opinions on how recent tax cut signed into law by President Trump late last year will affect customers’ borrowing decisions. What follows is an edited transcript of the discussion.
It’s been a couple of years since we sat down with senior leaders from midsize banks, and the big concern then was that you were feeling a little bit squeezed. You have a lot of the same compliance costs as the big banks but don’t have the same efficiencies, and there was a sense that midsize banks might be going away. How are you feeling about where you are at, sizewise?
ALESSANDRO DINELLO: I don’t think anything has really changed that much. A midsize bank is really going to be in a different place. You look at the rest of the landscape, and you’ve got so many that are below $10 billion, then you’ve got these behemoths that are bigger than $100 billion and we just get less attention. We have to be our own advocates [and] go up to [Capitol Hill] and talk to [Congress] about what’s important to midsize banks.
And what is important?
DINELLO: Operating with flexibility — we’ve been stifled by regulations for a long time. That’s starting to ease a little bit, but we can’t take it for granted.
EDWARD WILLINGHAM: We want to see what happens with the Senate bill; we hope that it moves through. We have been regulated as a bigger bank than we are. We were half this size 10 years ago and the level of change we’ve had to go through has been remarkable. The size of our risk organization is 10 times what it was 10 years ago. We are continuing to spend huge amounts of energy around stress testing.
BRENT BEARDALL: One of my biggest questions is why the $10 billion arbitrary threshold? So many things have latched on to that. The tax law for example. If you are under $10 billion [of assets], FDIC premiums are deductible. If you are over $10 billion, they are not deductible. That $10 billion, it’s a number — you have to look at the risk of the organization, how much capital they have — but yet it is a bright line.
The regulatory relief bill doesn’t touch the $10 billion threshold but would raise the SIFI threshold from $50 billion to $250 billion. Is that important to banks like yours?
WILLINGHAM: It’s the biggest issue in the bill for us. [First Citizens has $34 billion of assets.] We’re never going to get to $250 billion in our lifetime, but the question is, if we are not going to be at that next level of supervision, what does that mean in terms of how [regulators] view our activities? Is it going to change the regulatory lens, how they look at us, or do they continue to do what they’re doing now?
DINELLO: Moving the designation above $50 billion is significant. I think two banks have gone over $50 billion since Dodd-Frank was passed. [New York Community Bancorp] has been at $49 billion for five years.
There are a lot of good things going on [in Washington] right now. Senate Bill 2155 is a good first step toward making changes to Dodd-Frank. There’s good work being done at the [Consumer Financial Protection Bureau] in that that they are finally listening to bankers. There are some proposals by the [Office of the Comptroller of the Currency] and the Treasury Department with regard to the Community Reinvestment Act. CRA is so old. The way it’s looked at and the way we are evaluated makes absolutely no sense. You can be doing nothing good in the community and still pass the test.
BEARDALL: I agree there are a lot of good things going on. Who would’ve thought a year ago sitting here that we’d have a 21% federal tax rate? That is huge. Among our biggest competitors are credit unions, which pay zero in taxes, so being able to close that gap has been huge for us.
I wanted to ask you about the recent tax cuts. Are you seeing the benefits already, not just to your own bottom lines, but in the confidence level of your customers?
RICHARD EHST: It’s conflicted [because] you’ve got rising interest rates at the same time you have this tax benefit. By and large, my customers are concerned about the ever-increasing cost of money. The danger to our economy today is that the Fed acts too quickly. If they start ramping rates two or three times this year, that could significantly dampen economic growth.
DINELLO: We have more capital to invest because we have 20% tax rate, instead of 35%, and that allows us to grow more. That means we are going to make more loans available to our customer base. Our customers think the same way. They are entrepreneurs. They are going to take the capital that they are generating from their business and they are going to reinvest in their businesses and they are going to grow.
But we keep hearing that competition for loans already is so fierce, especially in commercial lending …
DINELLO: Has anybody here ever been in a situation where they felt it wasn’t competitive? Sometimes the pricing is more competitive, sometimes it’s the type of business you want to lend in. I’ve been in this business for 40 years and there’s never been a year when I’ve thought, “There’s not much competition right now.”
EHST: Yes, but what does happen in this type of environment is that we see banks start to loosen their credit underwriting standards, or extend the terms [in order to win business]. And we’ve spoiled the clients over the last 10 or 15 years. In the middle-market world, you have your A clients and your C clients, and over time what’s happened is that they all think they should get the best rate possible.
I want to come back to SIFI. If the threshold is lifted, do you see more consolidation coming among your group because there’ll be less concern about bumping up against $50 billion?
WILLINGHAM: First Horizon and Capital Bank just merged [creating a $40 billion-asset institution] and you might see other midsize banks try to get much bigger now.
DINELLO: The costs associated with going over $50 billion no longer come into play, so I think naturally there’s going to be more potential for banks [to merge].
BEARDALL: [Suggesting that a scarcity of talent could drive consolidation] You can only stay in business as long as you have the right people in the right positions. [Bank Secrecy Act compliance] is an area where you can’t find enough people with the right talent. The price is going up, and there are so many people in our industry that are nearing retirement age; are we going to have sufficient human capital coming in with the skills to do those things? We are in Seattle. Are we going to be able to attract the talent to Washington Federal versus Amazon, versus Microsoft? Those are tough questions.
EHST: And cybersecurity. The price of trying to make sure that you’ve got the right people and the right systems in place to protect your company is skyrocketing.
Another challenge for midsize banks is deposit competition. I recently read a comment from the CEO of a midsize bank that he felt like big banks had an advantage over banks like yours because of the perception that they are more technologically advanced and it’s therefore easier for them to acquire new depositors. Do you agree with that?
BEARDALL: It’s a tale of two cities. Some of the big banks are investing so much in technology that it’s really hard for the small and medium-size banks to keep up. That is the reality. On the other side, big banks have so much invested in their systems, they can’t be nimble enough to make changes and that’s a real opportunity for us to partner with some of these fintechs … to take market share.
DINELLO: As a midsize bank, we are in a unique position to provide that community-type feel to the operation, and if we can maintain that I think there’s an edge there over the technology in the long run. But it’s a challenge. We can never spend enough money to build the brand awareness that [JPMorgan Chase] or [Bank of America] have. There’s no way. So you have to do it on the back of service, and that’s what we try to do.
BEARDALL: It has never been easier for people to move money around. You have internet banks that are basically paying fed funds rate on deposits, yet none of us have seen the outflows.
DINELLO: Not yet.
BEARDALL: Maybe. I think the one thing I’ve been surprised by is the stickiness of deposits.
WILLINGHAM: The checking account is sticky, but you have lot of money parked in accounts with low interest rate positions that could be a flight risk.
DINELLO: Deposit betas did go up every quarter last year, even with modest increase in Fed funds rates, so it’s happening out there. People have just been waiting to get something out of their savings and CDs and they are going to be more price conscious than they were historically, and are going to be more likely to move around. I hope I’m wrong.
One last question before we run out of time: What’s the one message you want to get across to policymakers specific to midsize banks?
WILLINGHAM: Pass the bill that’s on the table.
DINELLO: Right. It is not often that the entire banking industry comes together on something, but we are 100% behind this bill. Let’s get it done.