Regulatory Relief In Sight For Banks: STI, BBT, ZION & More

The long wait for relief of regulatory burden may finally be over. While the Trump administration continues to push for the reversal the Dodd Frank Act, a bipartisan agreement announced on Monday came as a breather. This is expected to pave the way for significant changes and bring major relief to banks.

Highlights of the Agreement

The major relief from the plan, unveiled by the Senate Banking Committee Chairman Mike Crapo, is likely to come in the form of reduction in the number of banks labeled as systemically important financial institutions (SIFI). The bill aims to raise the threshold for SIFI to $250 billion in assets from the current $50 billion.

This will lower the number of SIFI banks to just around a dozen from the present 40. Thus, the banks including SunTrust Banks, Inc. (NYSE:STI) , BB&T Corporation (NYSE:BBT) , Citizens Financial Group, Inc. and Zions Bancorporation (NASDAQ:ZION) , which are presently under stringent supervision, will heave a sigh of relief.

The move is expected to not only lower regulatory compliance costs but also lead to a wave of M&As for the banking industry. At present, consolidation in the industry is few and far between as banks try to put off crossing the threshold levels that trigger tougher rules.

Per the plan put forward under the bipartisan deal, banks with assets in the range of $50-$100 billion will get immediate relief once the bill is enacted while those with assets between $100 billion and $250 billion will be exempted 18 months later.

Further, the bill gives authority to the Federal Reserve to fast-track the exemption. Notably, the Fed will be required to conduct stress test for banks in the $100-$250 billion range periodically.

For several regional banks with more than $250 million in assets, the bill is not so important. Some of these Zacks Rank #3 (Hold) banks like The PNC Financial Services Group, Inc. (NYSE:PNC) , Capital One Financial Corp. (NYSE:COF) and U.S. Bancorp, though functioning as community banks, will stay subjected to stricter regulations. This will put them in a disadvantageous position to some extent in terms of lower costs.

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Other Benefits

The bill also has something to offer to the smaller community banks and credit unions with total assets of less than $10 billion. These will be exempted from implementing Volcker Rule (prevents proprietary trading) and from following stringent capital and liquidity rules as long as leverage ratio is in the range of 8-10%. Also, it aims to ease mortgage rules for small banks.

Moreover, the bill is expected to be beneficial to trust and custodial banks like State Street Corporation (NYSE:STT) and Northern Trust Corporation (NASDAQ:NTRS) . There is a provision that prevents deposits held at the Fed by such banks to be included in calculating the supplementary leverage ratio. This will aid these companies in clearing the annual stress tests.

Reactions & Road Ahead

Bankers and the overall banking industry cheered the deal. The KBW Regional Banking Index closed the day 1.3% higher.

Rob Nichols, president and CEO of the American Bankers Association in a statement said, “While this legislation could go much further, ABA still views this bipartisan bill as an important first step in right-sizing the rules for America’s banks.”

Further, Crapo said, “The bipartisan proposals on which we have agreed will significantly improve our financial regulatory framework and foster economic growth by right-sizing regulation, particularly for smaller financial institutions and community banks.”

Nonetheless, the road ahead is expected to be bumpy. The deal is not as aggressive as expected by many large banks and not enough to make sweeping changes in the regulations.

Still, it is the most important step taken by the Senate to fulfill President Trump’s election promise of lessening banking regulations, which are stifling economic growth. Also, it is critical in securing the support that was lacking from the earlier efforts to lessen undue regulatory burden.

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