When news came out in November that the U.S. Senate Banking Committee had filed a bipartisan bill that would scale back large portions of the Dodd-Frank Act, the banking community cheered.
Advocacy groups praised the bill and community banks – companies that have for years said they had very little to do with the financial crisis – breathed a sigh of relief after incurring costs to keep up with the regulation.
But for those banks and institutions in Massachusetts flirting with or exceeding $10 billion in assets, the cheers were likely to be subdued.
Among may other provisions, Dodd-Frank raised capital ratios, eliminated proprietary trading (the Volcker rule), further regulated derivatives, created the Consumer Financial Protection Bureau and, most relevant to many community banks in Massachusetts, implemented stress testing for banks that reach $10 billion in assets.
Notably, the proposed reform, called the Economic Growth, Regulatory Relief and Consumer Protection Act, would end stress testing entirely for banks with under $100 billion in assets.
In Massachusetts, Eastern Bank, at $10.7 billion in assets, and Berkshire Bank, now up around $11.5 billion in assets, only crossed $10 billion in 2017; Berkshire didn’t until the second half of the year, by which time it had already spent the time setting up the new regulatory infrastructure and incurring associated expenses for stress testing.
“We have been planning for the requirements of surpassing $10 billion in assets for close to three years. While the prospects for regulatory reform remain uncertain, the current bill would likely provide marginal benefit for Eastern,” Steve Antonakes, chief compliance officer at Eastern Bank and the former number two at the Consumer Financial Protection Bureau, told me via email. “The opportunity that would be missed is to reconsider the appropriateness of the $10 billion threshold as a definition for large banks. Absent any indexing or risk consideration, this figure becomes less relevant with every passing year, but will continue to be enshrined in Dodd-Frank and possibly new legislation.”
While it was difficult to estimate the costs that Eastern Bank incurred while preparing to cross the $10 billion threshold, it was a lot easier to find those costs for the publicly traded Berkshire Hills Bancorp, the holding company of Berkshire Bank.
According to the company’s most recent investor presentation, Berkshire has spent $5 million over the last three years to implement the regulatory framework, adding 40 people to its compliance and risk departments. The current expense run-rate as of Sept. 30 was for another half a million per year.
Berkshire and Eastern are not alone.
Three other financial institutions in Massachusetts – Rockland Trust, Boston Private and Digital Federal Credit Union – have surpassed $8 billion in assets and therefore have definitely had stress testing on their mind.
Independent Bank Corp., the holding company of Rockland Trust, has already been gradually incurring expenses to prepare for Dodd-Frank stress testing, CFO Robert Cozzone said in the company’s latest earnings report.
These community banks probably wished reform could have happened sooner, before they began beefing up staff and spending millions to set up a regulatory framework, parts of which they may never use. But even bipartisan legislation – a rarity in Congress these days – is no guarantee, so best be prepared for the worst.