As a wise compliance banker once told me, “You have to be forward-looking: not only with your business planning, but with your compliance planning… When you hit a threshold, you’re too late.” Banks actively trying to increase their assets size must already have compliance reporting needs tested prior to meeting that threshold; once the bank crosses that line, they are responsible for compliance.
On June 2, 2015, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a statement “Agencies Release Statement on Dodd-Frank Act Company-Run Stress Tests at Medium-Sized Financial Companies.” Given this information, it would be prudent of bank’s approaching the $10 billion dollar threshold to already ensure that they have created adequate stress testing models to ensure compliance with the stress testing requirements. Additionally, with the public disclosure, your bank’s public image could be hurt with failing to adequately prepare for this threshold requirement.
Federal banking agencies today reiterated the disclosure requirements for the annual stress tests conducted by financial institutions with total consolidated assets between $10 billion and $50 billion. These medium-sized companies are required to conduct annual, company-run stress tests– implementing a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act–with the results disclosed to the public for the first time this year.
The firms are required to disclose certain information including: a description of the types of risks included in the stress test; a summary description of the methodologies used in the stress test; estimates of losses, revenue, and net income; post-stress capital ratios; and an explanation of the most significant causes for the changes in regulatory capital ratios.
Given the current climate of mergers and acquisitions, I read the previous release and have concerns that many banks have their sights set on increasing asset size to increase efficiency. The release got me thinking about what other asset size thresholds banks need to be aware of:
Regulation C – Home Mortgage Disclosure Act $44 million. HMDA and the CFPB’s Regulation C require most mortgage lenders located in metropolitan areas to collect, report, and disclose data about applications for, and originations and purchases of, home purchase loans, home improvement loans, and refinancings.
Regulation Z – Truth in Lending $2.060 million. The threshold exempts creditor requirements to establish an escrow account for a higher-priced mortgage loan, small-creditor portfolio, and balloon-payment qualified mortgages.
Community Reinvestment Act – “Small bank” or “small savings association” means an institution that, as of December 31 of either of the prior two calendar years, had assets of less than $1.221 billion. “Intermediate small bank” or “intermediate small savings association” means a small institution with assets of at least $305 million as of December 31 of both of the prior two calendar years, and less than $1.221 billion as of December 31 of either of the prior two calendar years.
Bankers need to be fully aware of their institution’s asset size when planning on either organic growth or increasing asset size through mergers or acquisitions. Bankers should be proactive in the education, training, and execution of compliance requirements.