Banks seeking to grow past $10 billion in total assets may no longer have to worry about the costs of submitting company-run stress tests, assuming a bipartisan bill in the Senate becomes law and dramatically changes the asset threshold regime of the post-crisis Dodd-Frank regulatory framework.
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The centerpiece of the legislation is raising the $50 billion threshold for enhanced prudential standards to $250 billion, but the bill also proposes eliminating the requirement for Dodd-Frank Act stress tests for all firms below $250 billion. If passed, the bill would exempt 86 of the 98, or 88%, of firms currently submitting DFAST. The bill cleared the Senate Banking Committee on Dec. 5 and will be considered by the full Senate at a later date.
Stress tests are perhaps most relevant for companies approaching the $10 billion asset threshold above which companies are currently subject to DFAST submissions, in addition to examinations from the Consumer Financial Protection Bureau and Durbin amendment limits on interchange fees. Although Durbin remains the No. 1 burden for most banks crossing the threshold, by removing the stress test requirement, banks growing past $10 billion would have at least one less thing to worry about.
Kalispell, Mont.-based Glacier Bancorp Inc. has been thinking about the $10 billion threshold and the costs of stress testing for years.
"We plan on being ready long before it's required," then-President and CEO Michael Blodnick told investors in 2015, when the bank had $8.8 billion in total assets.
Now with $9.80 billion in total assets, the bank is prepared to surge past the $10 billion mark by buying Bozeman, Mont.-based Inter-Mountain Bancorp. Inc. in an all-stock deal expected to close in early 2018. If approved, the deal would lead to Glacier crossing $10 billion in the first quarter of 2018, meaning that its first stress test submission would be due in 2020.
Randall Chesler, who took over as president and CEO in August, said in an interview that preparing for stress tests is expensive, adding that it costs hundreds of thousands of dollars annually just to have a third party validate the firm's credit models to ensure air-tight DFAST submissions. But Chesler said he still plans on doing company-run stress testing even if Congress scraps the requirement under Dodd-Frank, although the change would remove costs associated with piecing together a regulatory filing and "showing the work to your homework."
"We just like really understanding everything and being prepared so we're going to do it," Chesler said.
Jeff Rulis, senior research analyst at D.A. Davidson & Co., said in an interview that he could see other banks using stress tests even if the law does not require them to do so.
"It wasn't all a negative item," Rulis said of DFAST, adding that the tests provide management with a good tool to develop stronger internal controls.

There are currently 26 banks with between $8 billion and $10 billion in total assets, within striking distance of the key threshold. But Rulis said these firms have likely already paid the costs of developing DFAST compliance systems. He said that banks that are slightly smaller in total assets may be the main beneficiaries of the proposed legislation since they are likely more flexible with their corporate strategy of possibly growing past $10 billion.
Martinsville, Va.-based Carter Bank & Trust has $4.19 billion in total assets and is not immediately concerned with the $10 billion threshold. CEO Litz Van Dyke said in an interview that the company is pursuing an "internally focused" growth strategy, and is choosing to conduct its own stress testing. Still, Van Dyke applauded his state's senator, Democrat Mark Warner, for reaching across the aisle to strike a deal that would pare back DFAST and other regulations, such as Home Mortgage Disclosure Act and qualified mortgage requirements.
"Both sides of the aisle recognize that the pendulum has swung too far," Van Dyke said.
Did you enjoy this analysis? Click here to access a template that includes the top-tier filers of the 2017 Dodd-Frank Act stress-test results. Click here for the first article on this year's midsize companies' Dodd-Frank Act stress test results and here for the second article. To view an article on bank holding companies that filed their mid-year Dodd-Frank Act stress test results, click here. To view a video training session on CCAR and DFAST, click here. |


