The movement to raise the asset thresholds at which banks face greater regulation appears to be gaining momentum. That's good news. But regulators should ensure that midsize banks get relief as quickly as possible so they can start redirecting resources to the business of banking.
The current "bright line" regulatory thresholds are $10 billion for midsize banks and $50 billion for larger banks. Banks above the $10 billion line face stress tests and other interchange rules. Those with more than $50 billion in assets are subject to the Federal Reserve's Comprehensive Capital Analysis and Review as well as intensified regulatory compliance and stress testing processes.
These lines were established by the agencies to try and avoid "one size fits all" regulation. But experience shows that these seemingly arbitrary limits have unintended consequences. The burden of hiring additional staff to handle Dodd-Frank Act Stress Test requirements as well as the costs of additional data gathering, quantitative work and documentation have led several larger community banks to hover just under the $10 billion asset level. These banks have stunted their own business models a result that artificially hinders growth and profitability.
Several high-profile past and present regulators have come forward in recent months to recommend changes to the current system. Former Federal Deposit Insurance Corp. head Sheila Bair suggested in a recent American Banker interview that while she supports the $10 billion asset threshold, banks in the $10 billion to $50 billion asset range could be better suited to streamlined stress tests. And FDIC vice chairman Thomas Hoenig recommended in a recent op-ed that banks with traditional, lower-risk business models should benefit from less burdensome regulatory requirements. Regulating banks based on risk, not size, makes a good deal of sense. Even Fed Chair Janet Yellen recently told the House Financial Services Committee that community banks' burden is "really quite high, and they're struggling with it." Yellen added that the Fed is trying to "do everything in our power to reduce the regulatory burden."
If regulators do move the $10 billion line, it would free up the capital and resources that banks nearing the threshold have been putting aside to deal with the stress tests. Right now, many community banks at or near $7 billion in assets have been gearing up for stress-testing infrastructure, getting vendors in line, preparing to hire more employees, gathering data-forming committees and setting up projects to get infrastructure in place.
Once the $10 billion line is lifted banks that had opted to stop their growth at $10 billion in assets would be likely to move to expand. The potential impact of a higher threshold would be huge, and it would be a significant shot in the arm for the community banking market as well.
Of course, a possible consequence of the growing momentum for raising the asset threshold may be that some banks near the $10 billion threshold would consider halting preparation for the stress tests completely. They may gamble that the bright line will get lifted before their own banks have to deal with it. In these days of margin compression, this might seem like a reasonable gambit.
If the government is leaning toward raising the $10 billion threshold, it would be to the benefit of the community banking sector for the decision to happen quickly. This would allow midsize and pre-midsize banks to free up scarce resources and rebound into growth mode.
Let's not create a new unintended consequence and paralyze a whole tier of banks by making them uncertain about whether they will have to comply with the arbitrary $10 billion threshold in their foreseeable future.
Peter Cherpack is a principal at Ardmore Banking Advisors.