“The regulatory environment today is the most tension-filled, confrontational and skeptical of any time in my professional career.” – H. Rodgin Cohen, senior chairman, Sullivan & Cromwell LLP
Six years after the worst financial crisis since the Great depression, bankers and their advisors are still complaining about regulation and the regulators. Cohen, who some people consider to be the dean of U.S. bank attorneys, made that statement back in March at a legal conference. Is the regulatory environment today really that bad? There are really two banking industries in this country—the relative handful of megabanks that Cohen has spent the better part of his career representing, and smaller regional and community banks that make up 99.99 percent of the depository institutions in this country.
There is no question that the megabanks have remained under intense regulatory scrutiny well after the financial crisis ended and the banking industry regained its footing. Overall, the industry is profitable, well capitalized and probably safer than before the crisis. But the regulators, led by the Federal Reserve, have never relaxed their supervision of the country’s largest banks, including the likes of JPMorgan Chase & Co., Bank of America Corp. and Citigroup. If the senior management teams and boards at those institutions are feeling more than a little paranoid, it’s probably for good reason. Joseph Heller, the author of Catch-22, wrote in his novel, “Just because you’re paranoid, doesn’t mean they aren’t after you.” The regulators might not be “out to get” the megabanks, but they clearly see them as a systemic threat to the U.S economy, and for that reason, have kept them on a short leash.
What about the rest of the industry—the other 99.99 percent? Has the regulatory environment improved for smaller banks? Based on comments that I hear at our conferences and elsewhere, I would say it has. The cost of regulatory compliance has increased for all banks, including even the smallest of institutions, in part because there are more regulations, but also because regulations are being enforced more strictly than was the case prior to the crisis. In an interview that I did in the first quarter 2015 issue of Bank Director magazine with Camden Fine, chief executive officer at the Independent Community Bankers of America, Fine pointed to a general improvement in the level and tone of supervision throughout much of the country. Five years ago, bank examinations were “very harsh and inflexible,” to quote Fine. Now, exams generally seem more reasonable—which is understandable since the industry is in much better shape than it was six years ago.
But the regulatory environment might never be as relaxed as it was prior to the financial crisis. Today, the regulators want to be informed of any major decision, such as a potential acquisition or the launching of a new business line, which could impact the safety and soundness of the bank. You might not have thought that you had a “relationship” with your bank’s regulator, in the same way that you have a relationship with your outside legal counsel, investment banker or any number of consulting firms that management or the board might turn to for advice, but you do. That relationship certainly isn’t consultative in the sense that they won’t necessarily help you fix a problem, although it isn’t entirely authoritarian either, because you’re not necessarily asking permission, for example, to acquire another bank. Based on what I’ve been told by lawyers and investment bankers, regulators might express some concerns about the acquisition you have in mind, and they might even outline some areas of specific concern (like pro-forma capitalization). They might say it would be hard to approve the deal if those issues aren’t addressed, but they probably wouldn’t forbid you from going through with it.
I would say that managing the regulatory relationship is one of the key responsibilities for your bank’s CEO. Kelly King, the chairman and CEO at BB&T Corp., told me during an interview last year that he meets regularly with BB&T’s primary federal regulator—the Federal Deposit Insurance Corp.—and keeps it well appraised of the bank’s acquisition plans, which are key to its overall growth strategy. There is also an important role for the board to play—particularly the nonexecutive chairman or lead director—in maintaining a strong regulatory relationship. Those individuals might want to meet periodically with the bank’s regulator as well to drive home the point that the bank’s independent directors are engaged in the affairs of the bank.
I am sure that many older bank CEOs and directors resent the fact that the regulators have intruded so deeply into the business of the bank, but it’s a fact of life in the post-crisis world of banking—and an important relationship that needs to be carefully managed.