CEOs of small banks nationwide may have been relieved when lawmakers last month passed legislation scaling back the Dodd-Frank Act, but for community banks approaching or that recently crossed the $10 billion asset threshold, actual relief is likely to be minimal.

These banks have already begun incurring or completely incurred costs to set up infrastructure associated with the Dodd Frank Act Stress Test (DFAST), which they no longer are required to complete. And the two community banks in Massachusetts that would have been subject to DFAST, Eastern Bank and Berkshire Bank, both say they do not intend to downsize their current regulatory structure, at least at this time.

“The regulatory reform bill provides the greatest relief for banks under $10 billion and over $50 billion,” Steven Antonakes, executive vice president and director of enterprise risk management at Eastern Bank, told Banker & Tradesman. “With $11 billion in assets, Eastern is between those two thresholds and relief is actually quite modest. The most impactful change is the elimination of mandatory stress testing. Nevertheless, we have already invested significantly in this area. What also remains unclear at this time is the extent to which there will still be regulatory expectations that some form of stress testing be conducted as a best practice.”

The Federal Reserve defines DFAST as an annual exercise to assess whether banks have sufficient capital to continue operating in times of financial and economic stress. The modeling is complex and results in thousands of pages of explanation.

When Dodd-Frank was initially passed, all banks over $10 billion in assets were subject to DFAST stress testing. But under the new law recently signed by President Donald Trump, only banks over $100 billion or $250 billion (federal agencies could not provide a conclusive answer as of press time) in assets must do so.

DFAST Costs

Setting up the infrastructure associated with Dodd-Frank and DFAST is no easy task.

Berkshire Bank’s parent company spent $5 million over the prior three years to implement a full-service enterprise risk management system, adding 40 people to its compliance and risk departments, according to Berkshire Bank’s investor presentation from August 2017.

Berkshire spent $750,000 to prepare for DFAST in 2016 and was projected to spend another $1.75 million in 2017, according to the presentation.

Berkshire and Eastern Bank are not alone.

Rockland Trust and Boston Private, which declined to comment for this article, have surpassed $8 billion in assets and therefore have certainly had stress testing on their mind.

Independent Bank Corp., the holding company of Rockland Trust, has already been gradually incurring expenses to prepare for DFAST, CFO Robert Cozzone said in a recent earnings report.

Going Forward

The roughly $11.5 billion asset Berkshire Bank won’t dismantle its current regulatory infrastructure, but might consider changing things around.

“We feel strongly that stress testing in and itself is a very important part of our risk management program,” said Gregory Lindenmuth, executive vice president and chief risk officer at Berkshire Bank. “To us, it would not be about downsizing, it would be about right-sizing and customizing stress scenarios to the risk profile of Berkshire Bank.”

For instance, last year’s DFAST scenario modeled the most recent financial crisis. But the financial crisis hit states such as Florida and Nevada a lot harder than the Northeast and therefore might not be as applicable to the bank, Lindenmuth said.

Banks won’t be unravelling their current regulatory structure just because of the relief package, said Collyn Gilbert, managing director of community and regional banks at the Boston office of Keefe, Bruyette & Woods, a New York-based banking investment firm.

Gilbert acknowledged there might be some pressure on banks from investors to modify expense structures to further push profits, but she thinks it would more likely be in the form of paring back future expenses incurred.

DFAST was not a one-time expenditure – in its investor presentation, Berkshire had projected a run rate of $1.5 million to $2 million annually for future DFAST expenses.

Ultimately, Gilbert said she thinks most financial institutions believe stress testing is a prudent way to run a bank.

“If we think more broadly of where we are in the cycle, we are more likely at the end,” she said. “This is not the time when you want to pull back on any risk management processes. These are the areas you want to be investing in, not de-emphasizing.”