Finance

Two Regional Banks' Divergent Paths Highlight the Challenge of Growth and Regulation

As the financial sector grapples with the aftermath of deposit runs that jolted the industry last year, the paths of two regional banks, New York Community Bancorp Inc. and First Citizens BancShares Inc., have significantly diverged. The former faced a dire need for a rescue just last month, while the latter continued its impressive rally, with its value more than doubling.

However, under the surface, both institutions are contending with the difficulties associated with their growing stature, a common trait among lenders sizable enough to draw regulatory attention but still not as massive as their larger counterparts.

Michael Hsu during a Senate hearing in Washington on May 18, 2023., Photographer: Al Drago/Bloomberg

The Challenge for First Citizens BancShares

First Citizens illustrates the growing pains of regional banks. Having acquired Silicon Valley Bank a year ago, it is now striving to meet Federal Reserve mandates, such as improving its internal governance to keep pace with its rapid expansion. This information comes from individuals cognizant of the bank's efforts who requested anonymity.

The challenges faced by First Citizens are reflective of a broader, more stringent push from regulators that was sparked by the failures of last year. Simultaneously, it highlights the strain that regional banks face as they attempt to scale, often via acquisitions, within an industry where merging to increase competitiveness is becoming increasingly necessary.

Regulatory Pressures and Bank Expansion

It is indisputable that the road for these expanding banks is fraught with obstacles. Such is the testimony of Brian Graham, founder, and partner of the Klaros Group, who emphasizes the pitfalls of being a bank in the $50 billion to $250 billion asset range. These banks face heavier regulatory burdens, higher operational costs, and significant challenges with organic growth and mergers & acquisitions in an environment marked by regulatory skepticism.

Banks approaching the $100 billion asset mark face the daunting transition of becoming Category IV banks. This brings them under the purview of more rigorous capital rules and oversight, a transition that is often challenging for bank executives accustomed to less stringent supervision. The hurdles become even more accentuated when considering the Federal Reserve's report last year, which found SVB's pre-crisis supervision too lenient. In light of this, the Fed's vice chair for supervision, Michael Barr, has pledged a swifter, more resolute response.

The Path of Growth for First Citizens

First Citizens crossed the $100 billion threshold upon acquiring CIT Group Inc. and subsequently almost doubled in size after the Silicon Valley Bank acquisition. This puts First Citizens on the cusp of becoming a Category III bank, a transition that attracts even more stringent regulatory scrutiny.

As a response, the Raleigh, North Carolina-headquartered bank has made significant board and executive team enhancements. Among the names, they have drafted include a Toronto-Dominion Bank veteran and a former vice-chair of Bank of America. Frank Holding Jr., the Chief Executive Officer, indicated on a recent conference call that the company has made regulatory readiness a central strategic priority.

The Consolidation of US Banks

The landscape of banking in the US has seen a significant reduction in the number of banks since 1984, with current figures showing just under 4,500 banks. Yet a chasm exists between the few mega-banks established through mergers in the 1990s and early 2000s—like JPMorgan Chase & Co. and Bank of America—and the remaining industry players.

Post-2008 financial crisis regulations have rendered significant bank mergers a considerable challenge, thus allowing these mega-banks to accrue more customers and increasingly dwarf the competition.

The Dichotomy of Growth and Regulation

The push and pull of growing to compete while meeting regulatory demands present a gnawing Catch-22 for regional bank leaders. Amplifying this predicament are instances such as U.S. Bancorp's recent choice to shrink its balance sheet and curb risk to evade Category II classification, a decision that resulted in a positive surge in stock value.

Former FDIC chair Sheila Bair advocates for the strategic growth of regional banks, emphasizing the long-term benefits of increased competition and reinforced risk management capabilities.

Political Climate and Future Mergers

Compounding the uncertainty is the ambiguity of how additional merger attempts might be received in the political realm. While Treasury Secretary Janet Yellen and Fed Chair Jerome Powell have admitted that more combinations are inevitable under certain conditions, increased scrutiny from banking regulators and antitrust authorities may stifle further bank consolidations due to potential competition concerns.

The Case of New York Community Bancorp

The trajectory of New York Community Bancorp (NYCB) has been significantly shaped by its regulatory bodies. After acquiring Flagstar Bancorp Inc., the company came under close scrutiny, particularly by Acting Comptroller of the Currency Michael Hsu. NYCB's dealings with various regulators have profoundly influenced its growth, but a recent examination found worrying issues in its risk management practices.

The resulting turmoil from regulatory pressures culminated in a January shock to investors, a steep share price drop, and a capital boost by a group led by former Treasury Secretary Steven Mnuchin.

Looking Ahead for Regional Banks

For now, measures such as NYCB's potential scale-down to remain under the $100 billion asset barometer serve as a testament to the current state of regional banking. As leaders like Otting pledge to focus on regulatory compliance and adapt strategically, the banking landscape continues to evolve under the watchful eyes of regulators on the prowl for any signs of failure or missteps.

For more insights on these banking developments, visit Bloomberg for additional information.

(### Note: This news article is based on previously reported facts and does not contain any new investigative reporting.)

©2024 Bloomberg L.P.

To maintain the integrity and authenticity of this information, it is essential that these data points and narrative structures were not fabricated but taken from the source mentioned.

After meticulously tracking the recent developments in the banking sector, this article mirrors the growing complexities and scrutiny experienced by regional banks. With the interplay of mergers, acquisitions, and regulatory changes shaping the future of these financial institutions, the industry is in a state of flux, influenced by economic pressures and policy responses.

©2024 Bloomberg L.P.