How recent and upcoming regulatory changes will impact US regional banks moving forward?

As we enter 2019, it is important to reflect on some of the recent and upcoming changes that will positively impact US regional banks in the coming months and years. Before diving into some of these regulatory changes, we should first define what is considered a “regional bank.” Officially, a regional bank is considered a bank that only operates in certain states that offers the traditional practices of a bank (e.g. retail banking) but does not possess the capital to operate at a national or global level. More specifically, for the sake of this article, we will define a regional bank as one that operates in a specific region of the United States and has under $250 billion in assets. For example, SunTrust Bank (that has recently announced its merger with BB&T) and Fifth Third Bank that operate in the Southeast and Midwest respectively fall within the traditional definition of regional banks (pre-merger for SunTrust).

In the aftermath of the 2008 crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), a response to the various “bailouts” provided by the Fed under the Troubled Asset Relief Program (TARP). This act affected various aspects of the US financial system including preventing banks from using customer deposits for their own profits, also known as the “Volcker Rule.” Although necessary given the conditions of the US Financial System between 2008-2010, the act served as a major roadblock to banks, especially smaller regional ones, to continue to display strong earnings growth to their investors. Combine this constraint with the advent of Fintech firms providing best-in-class technology and competitive interest rates on loans, and regional banks have found themselves battling serious headwind over the last few years.

This article aims at identifying these changes, highlighting some of the impacts associated with them, and ultimately showcasing how Wavestone can assist in ensuring proper adaptation of these reforms.

On May 24, 2018, the biggest rollback of bank rules since the Financial Crisis was approved by Congress and signed by the President. This bill, called the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” (EGRRCPA), was largely supported by both parties and served as the first major win for proponents of less stringent banking regulations post-crisis. Though this act was largely applauded by all actors across the financial system spectrum, it was especially celebrated by smaller regional banks, community banks, and credit unions.

Post 2018-Mid-term elections, democratic leadership in the Congress has stated an interest in focusing legislative actions on protecting customers and investors. In November 2018 remarks delivered to the House Financial Services Committee, Representative Maxine Waters, the new Chair of the House Financial Services Committee, confirmed a strong stance of congressional supervision of the American banking system.

• Optimization of risk and compliance functions: US regional banks must anticipate continued regulatory change and be ready to implement solutions efficiently.
• Stronger investment in Sales & Trading Operations: The rollback of the proprietary trading restrictions on smaller institutions opens an opportunity to invest in human capital and technology to further participate in capital markets activities that regional banks were otherwise previously unable to do.
• Awareness of an ongoing trend of US commercial bank mergers and industry consolidation: Over a period of 10 years and several presidential administrations, the number of US commercial banks continues to be on steady decline and mergers play a large role. The inverse relationship between regulations and mergers suggests that this trend of consolidation should be monitored by regional banks (i.e. the easing of regulations generally leads to a less scrutinized antitrust-environment). Additionally, the number of new FDIC-insured bank charters in the US has decreased substantially.