On the surface, it seems like banks have plenty of incentive to avoid the $10 billion asset threshold that was put in place by Dodd-Frank a little more than six years ago.
After all, banks that cross that threshold become subject to supervision and regulation from the Consumer Financial Protection Bureau (CFPB), a cap (imposed by the Fed in 2011) on the interchange fees they charge merchants when shoppers use their debit cards, and they become subject to Dodd-Frank’s annual stress tests—which are costly to the banks and result in increased public scrutiny, since the banks are required to publicly disclose the stress test results. In the 2016 Dodd-Frank Act Stress Tests, 33 bank holding companies were reviewed.
With those prospects on the horizon, are banks making an effort to avoid crossing over the magical $10 billion asset mark? According to an analysis issued by the New York Fed authored by Donald P. Morgan and Bryan Yang, they are not.
“There are plenty of anecdotes about banks avoiding the $10 billion threshold or waiting to cross with a big merger, but we’ve seen no systematic evidence of this avoidance behavior,” the authors stated.
The New York Fed researchers found when examining the cumulative distribution of bank-quarter assets in the $9 billion to $11 billion asset range both five years before and after Dodd-Frank passed in 2010, there was a significant shift in the distributions after Dodd-Frank (77 percent of observations) compared to before (48 percent). The researchers found no such shift in the distributions in the $7 billion to $9 billion range.
Vincent Hui, Senior Director at Cornerstone Advisors, said he believes banks are not necessarily avoiding crossing the $10 billion threshold—but he believes they may be delaying it in order to prepare themselves for the increased expenses and regulations.
“They really want to understand, 'How much is this going to cost me? What type of resources do I need to put in place? What type of capabilities do I want to put in place?’” Hui said. “Publicly held institutions, in particular, need to manage shareholder expectations and be able to say, ‘It's going to cost this amount of money and this is how we're going to address it in order to make sure that our profitability or our earnings growth rate are not negatively impacted.’ I think a lot of it is more a delaying tactic to sort out what they want to do—not just to be in ‘compliance’ with CFPB and other regulations like Dodd-Frank, and also take into account the Durbin Amendment, but also what are they going to do to replace lost revenues to offset increased expenses.”
The delaying tactic could potentially work against the bank, however, because “If you're a publicly held bank, if you delay things too much, you start negatively impacting earnings growth and ultimately the share price, which ultimately doesn't do a lot of good for shareholders,” Hui said.
Ultimately, it just isn’t good for business when banks say they intend to put a dollar limit on the amount of assets they want to hold, Hui said.
“What do people want? They want earnings per share growth,” he said. “And one of the drivers for earnings per share growth is to grow your balance sheets, because most banks are balance-sheet driven in terms of their earnings. Even for private companies, they have a little more flexibility, but at the end of the day their shareholders want to have increasing dividends and increasing share value, so there is that external pressure for them to grow. Very few banks have figured out how to grow earnings without growing their balance sheet. If they have, more power to them.”