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Nixing 'outdated' US bank call reports may increase transparency, benefit M&A

Banks could soon be preparing for a new regulatory reporting process on top of dealing with the ongoing COVID-19 pandemic.

On June 28, The Wall Street Journal reported that the Federal Deposit Insurance Corp. is considering eliminating quarterly bank reports and replacing them with a new reporting prototype geared toward more targeted and timely information. It is unclear if the new format would be publicly available. If it is, bankers and industry experts agreed that a move toward real-time data could reduce regulatory burdens for banks, increase industry transparency and benefit M&A. The FDIC declined to comment in time for publication.

"[Call reports] are outdated," Kirk Hovde, head of investment banking for Hovde Group LLC, said in an interview. "It's been something they've been using for over 150 years, and the banking system 150 years ago is a lot different than it is today. As we move forward into a more artificial intelligence, technology-driven economy, just like any industry, you need to look back and change some of the rules and processes in place to make it more of a current standard."

According to The Wall Street Journal report, FDIC Chairman Jelena McWilliams hopes to make call reports "obsolete" to have better and more timely data. The agency expects to launch a competition among 20 data and technology firms to create the new reporting prototype. The prototype is expected to be ready in about six months and while the FDIC will not mandate its use, banks will be incentivized to use it.

Richmond, Va.-based Atlantic Union Bankshares Corp. President and CEO John Asbury said he would welcome the idea of more frequent reporting with real-time information as long as the process is entirely automated.

"I gather from the report that what they're wanting to do is use technology to capture the information more frequently, potentially with even more detail," Asbury said. "We would be very receptive to anything that further automates the collection of the information."

Asbury said the bank's current effort for collecting its call report data is a "major undertaking" because there is still some manual data collection involved.

Most banks likely share that sentiment, Hovde said. "If it's manual, you'll get the whole banking industry to push back on it because it's a non-value add to a bank from a bottom-line standpoint," Hovde said.

Other questions remain about the potential new reporting process, such as if this information will be publicly available like call reports, Hovde said. "I would hope the majority of it they would make public so it's a more real-time ability to look at the health of not just the industry, but also specific banks," he said.

If the information will be publicly available, it could benefit M&A. More frequent and timely data could give potential buyers better insight when contemplating transactions or assessing potential targets, Asbury said.

A more frequent reporting process could also reduce due diligence time for M&A transactions, according to Hovde. "Management teams of sellers are generally having to pull all that information together for a potential acquirer anyway, so if it's part of a process they already do that the FDIC puts in place, it simplifies one additional request item," Hovde said.

While real-time data would be welcomed by many, the transition could be tough, said Russell Gunther, a managing director at D.A. Davidson.

"Change is hard for this industry, not to mention in the midst of a global pandemic in which banks are reacting in real time, not just to their clients, but also to an evolving regulatory approach to this economic climate," he said. "Embracing a new reporting system and having the ... bandwidth to grapple with this over the next six months while plates are already very full will be a challenge."

But ultimately, the transition to providing more real-time information will be helpful for regulators, bankers, analysts and investors, he said.

"If this can actually occur within that six-month time period, that is going to be very helpful to the industry because that's about when we'll see loss content from COVID-19 really show up," Gunther said. "It will come at a time when the investor community and bank sector corporates themselves could really use that information."