What Happened to Regulatory Reform

Provident Bank is nearing an important mark in its history. With $9.5 billion in assets, over the next year, the New Jersey-based institution expects to organically surpass the $10 billion mark. Under the Dodd-Frank Act, that yardstick means the bank will have to take on added restrictions and regulations, including conducting a yearly stress test and facing increased oversight from another regulator, the Consumer Financial Protection Bureau (CFPB).

“We’ve been planning for this for three years,” says CEO Chris Martin.

But since President Donald Trump’s victory in the 2016 election, the talk of Wall Street has been the possibility that many Dodd-Frank regulations would go away. One of the key provisions of a Treasury report outlining goals to change Dodd-Frank oversight was to increase the threshold for mandatory stress tests from the $10 billion asset mark Provident currently nears to $50 billion. If such a rule passed, it would significantly lessen Martin’s regulatory burden in the next year or two. And, yet, Martin affirms that he’s “not afraid of $10 billion [nor] afraid of stress testing.”

Martin and Provident Bank face what many financial leaders must deal with as the Trump presidency marches on. With the promises of a regulatory relaxation, there’s hope for future easing of oversight, whether it’s from the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), Office of the Comptroller of the Currency (OCC) or the CFPB. But as of now, much of that hope comes in the form of discussions with other banks or regulatory heads, and less from forward momentum in Congress. While some CEOs have seen slight changes at the ground level, without sweeping regulatory moves, banks are reacting the only way they can: by continuing compliance efforts.

“It’s all talk,” says Deborah Stephenson, executive vice president of compliance and regulatory at the $10.3 billion asset Berkshire Bank, located in Pittsfield, Massachusetts. Because nothing has become law, Stephenson says there’s been no change in how the bank interacts with its regulators. “We don’t know what direction any of it will go. You can’t change your planning … you have to stay status quo.”

Part of the reason banks haven’t seen many changes to the regulatory burden-or even the personality of the agents assigned to their cases-has to do with the leadership of the various regulators. Trump has been historically slow in naming nominees to fill roles within a number of different agencies, while the Senate has blocked numerous names to reduce the pace of confirmations. To put this in perspective, Trump made 492 nominations, excluding judiciary nominees, by early December, and has only secured 254 confirmations, according to a CNN analysis. President Obama, by the same time in his presidency, had 616 nominations and 413 confirmations. President George W. Bush had 705 nominations and 481 confirmations. Trump also lags in the number of Treasury and Commerce officials named. The OCC nominee Joseph Otting finally passed confirmation in November after a five-month process. Meanwhile the FDIC nominee to replace Martin Gruenberg, whose term ended in November 2017, withdrew from consideration in July; the White House named Jelena McWilliams, chief legal officer at Fifth Third Bancorp as the FDIC nominee in December.

It’s an issue that will continue to rear its head in 2018, as a string of top financial leaders will see their tenure run out. Most notably, Federal Reserve Chairwoman Janet Yellen’s term will run through early February 2018, and Trump has nominated Fed Governor Jerome Powell as her replacement. And Trump’s pick to run the CFPB in an acting role, Mick Mulvaney, has taken up shop, although a leadership battle ensued over who had the right to name a successor to the former director, Richard Cordray.

But this uncertainty so far hasn’t impacted the regulatory interaction with banks during exams or oversight. “I think, the more well-reasoned clients are not assuming that people in Washington are going to influence the day-to-day,” says David Wright, managing director of banks and securities at Deloitte. “They’re more hopeful in the long run in the policy shift and shift in focus that they believe is more relevant.”

However, Wright says he has seen a client take a slight step back in fixing some of the issues that the previous administration would have questioned. He says, without going into specifics, that the client’s move is not a dramatic change, but it’s based on the belief that Trump will peel back some of the oversight. Wright wouldn’t suggest most organizations follow a similar game plan, because on-the-ground regulators will continue to conduct business as usual until a regulatory change takes effect.

It’s in the merger and acquisition approval process where First Horizon National Corp. Chief Risk Officer Yousef Valine says he’s already noticed a difference. In May of 2017, First Horizon, which has nearly $30 billion in assets, agreed to purchase Capital Bank Financial Corp. for $2.2 billion. “It’s important for us to feel confident [that] if we’re going to merge with somebody, we will get regulatory approval,” says Valine.

That approval process must come in a “timely fashion,” or the bank could lose some of the economic value the company hoped to gain by merging, he adds. In the past few years, First Horizon had seen that process slow to a grind, as Valine felt regulators took too long to decide on approval or would weigh the concerns of uninformed community groups more so than Community Reinvestment Act ratings or the company’s track record. While every acquisition is different, it took regulators nearly a year to approve First Horizon’s purchase of FirstAtlantic Bank for $80 million in October 2014.

The Capital Bank merger? Five months after the deal was announced, it closed. Valine credits the faster timeline to acting OCC Comptroller Keith Norieka, who took the helm in May as Otting awaited confirmation.

But many of the changes that banks hope for, like scaling back Dodd-Frank, reducing regulations on $10 billion and $50 billion asset banks, and cutting the CFPB’s power remain question marks.

“We liked many of the things [the Treasury] recommended in the community banking report,” which suggested regulatory changes for President Trump to pursue, says Christopher Cole, senior regulatory counsel at the Independent Community Bankers of America. “So much of that requires legislation.”

For Martin, the head of Provident Bank, he’s hopeful that changes will come, but isn’t relying on them. Instead, he’s focusing on what he knows based on the current laws, regulations and interactions with compliance. “This business hasn’t changed dramatically,” says Martin. “It’s still about customers and knowing how to run a regulated company.”

That’s true, no matter who operates the OCC.