Will regulators lift $100B threshold? Industry's hopes rise.

• Key Insight: Bankers are hopeful that regulators will increase the asset size for Category IV banks, a key regulatory threshold that's currently set at $100 billion.
  
• What's at Stake: Raising the threshold could lower costs and reduce regulatory burdens for banks, including those that are approaching the $100 billion threshold.
  
• Forward Look: Bankers will be watching for action from regulators.

Bankers, analysts and investors are increasingly optimistic that a key asset threshold used in the oversight of regional banks will be substantially increased in the current deregulatory environment.
At an industry conference this week, many attendees expressed their belief that the existing $100 billion-asset mark for being designated as a so-called Category IV bank would be lifted to $250 billion. Such a change would bring cost savings to a number of banks that are approaching or have crossed over the threshold.

Christopher Del Moral-Niles, the chief financial officer of East West Bancorp, was pleased with what he heard from attendees. East West, based in Pasadena, California, has about $78.2 billion of assets.

"I love the enthusiasm," he said in response to a conference poll showing that two-thirds of the audience expect the threshold to rise to $250 billion. "I look forward to that being the outcome."

If a threshold revision is imminent, regulators are keeping it close to the vest. The Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. each declined to comment for this story.

Still, in recent comments, some agency heads have continued to focus on loosening up certain rules.

The OCC, for instance, "is reviewing the entire post-2008 chartering, regulatory and supervisory framework" of the banking industry, Jonathan Gould, comptroller of the currency, said in prepared remarks Wednesday to the Financial Stability Oversight Council. That includes focusing on capital and liquidity reforms and the regulatory frameworks for national banks.

In a June speech at Georgetown University, Michelle Bowman, the Fed's vice chair for supervision, said that "both regulators and legislators should consider whether the bank regulatory framework includes appropriate thresholds for defining distinct categories of institutions, and whether simple fixes — for example, the indexing of thresholds to inflation or growth — could better ensure a sound, tailored approach that remains durable over time."

A month later, the FDIC issued a proposed rule to index key oversight thresholds for inflation.

The proposed changes "would provide a more durable regulatory framework by helping to preserve, in real terms, the level of certain regulatory thresholds set forth in the FDIC's regulations," the FDIC said in the proposed rule.

Doing so, the agency argued, would avoid "the undesirable and unintended outcome where the scope of applicability for a regulatory requirement changes due solely to inflation rather than actual changes in an institution's size, risk profile or level of complexity."

The $100 billion threshold came up frequently at this week's Barclays conference, where analyst Jared Shaw polled audiences during the presentations of banks nearing the dividing line .

Shaw wanted to know what audience members thought will happen to the size threshold for Category IV banks. The audience had four potential answers to choose from — nothing will happen, the size gets indexed to inflation, it moves up to $250 billion, or it gets removed entirely.

In many of the sessions, most of the attendees chose the third option, that the threshold would go up to $250 billion.

During the three-day conference, Shaw moderated fireside chats with executives from several regional banks, including East West, Flagstar Financial and Webster Financial, as well as Pinnacle Financial Partners and Synovus Financial , whose plan to merge would create a $116 billion-asset bank.

In preparing to cross over the $100 billion threshold, Pinnacle and Synovus expect to spend about $45 million on one-time costs to update the necessary infrastructure and comply with Category IV requirements, Synovus CEO Kevin Blair said during the conference. If the threshold gets changed, that $45 million would get redeployed into areas like data, people and infrastructure.

"What you shouldn't take away from that, if we don't have to comply, is that we won't be prudent," Blair said. "We're going to continue to do stress testing. It just won't cost us the [the large majority of the $45 million], and we'll redeploy it into revenue producers."

Long Island-based Flagstar, which was previously known as New York Community Bancorp, was the first bank to pass the Category IV threshold after the Fed rolled out stricter rules in 2019 for banks with more than $100 billion of assets.

Flagstar grew quickly by completing two back-to-back acquisitions. Less than a year later, it was fighting to survive, due to a mix of factors, including souring commercial real estate loans and "material weaknesses" in its loan review processes.

Joseph Otting, the comptroller of the currency during the first Trump administration, took over as Flagstar's chairman and CEO last year. He has since shrunk Flagstar's balance sheet, in part by reducing its commercial real estate loans and selling non-core businesses. As of June 30, Flagstar had $92.2 billion of assets.

At the conference, Otting posed a question: Should Flagstar be regulated like a large bank?

"A bank our size, does it really require that enhanced regulatory infrastructure that is very costly to manage and maintain?" Otting said. "And can those monies and resources be used to support communities and customers?"

On Thursday, Shaw told American Banker that "it feels like the consensus is really there" in terms of elevating the Category IV designation to $250 billion.

"There's this expectation that we should see something, and that it will be a fairly significant benefit," he said in an interview. "What they're waiting for is this concrete announcement."

Meanwhile, banks that are closing in on $100 billion of assets say they are moving forward with the necessary investments to handle Category IV requirements.

That list includes First Horizon Bank in Memphis, Tennessee. The $82.1 billion-asset bank is "not sitting around waiting for the threshold," CEO Bryan Jordan said during the conference.

"We have a pretty good punch list, we think, in terms of our gaps to preparedness," Jordan said. "There's a list of things that we think are really good tools that will make us a better managed organization between here and $100 billion, wherever that threshold ends up."

At least among banks, there's a sense that raising the threshold is not a distant event, Shaw said.

"I don't feel like this is something that's going to drag out for years," he said.