Zions Bancorp.'s bid to eliminate its holding company and the related heightened scrutiny that it incurs comes after a multiyear effort to improve and simplify the bank, and it could potentially lay out the game plan for other institutions seeking regulatory relief.
The bank announced Nov. 17 that it is planning to merge its holding company into ZB NA or another unit, which will allow it to challenge its designation as a systemically important financial institution with the Financial Stability Oversight Council, or FSOC. The move follows a trend of banks eliminating their holding companies to simplify regulatory oversight, but Zions would be the first systemically important financial institution, or SIFI, to make the change. If successful, banks of similar asset size and business lines could follow suit.
For years, Zions has taken steps to shore up its balance sheet, smooth out earnings and cut expenses with the additional benefit of simplifying some aspects of the bank. Some of those steps included selling a portfolio of bank trust-preferred securities to comply with the Volcker rule, which prohibits proprietary trading, in 2013 and combining its bank units under a single charter in 2015. Those steps and others have positioned the bank to seamlessly fold its holding company with minimal interruption to operations.
Vining Sparks analyst Marty Mosby noted that as part of some of those changes, the bank got rid of investments that would not be considered bank-eligible.
"Zions had synthetic types of investments that you usually made at your holding company. So what they're saying [with this move] is that we're going to be pretty plain vanilla with bank-eligible types of investments," he said. "They've sold all those, so I don't think they want to dip back into that well again."
The lack of a holding company means the bank would be able to challenge its status as a SIFI. The rule currently applies to bank holding companies with more than $50 billion in assets and comes with a bevy of heightened regulatory standards, plus the annual Comprehensive Capital Analysis and Review process.
"Management believes that Zions' size and lack of complexity does not warrant the systemically important designation and is optimistic that the FSOC will arrive at that conclusion," wrote Raymond James analyst David Long in a Nov. 20 report. "Overall, we think the merging of the [bank holding company] and pursuit of a 'not systemically important' designation makes good sense, especially given Zions' regional banking franchise and lack of complexity."
Keefe Bruyette & Woods analyst Brian Klock said he believes the bank has a valid point in arguing that the bank's size and focus on commercial lending are not systemically risky, and that other banks could make the same point.
"The reason it works for someone like Zions is because they're as close to a community bank and as far away a really complex bank as anyone that's in [CCAR]," he said.
He added that if Zions is able to receive shareholder approval to eliminate its holding company and its SIFI petition is approved before lawmakers and regulators meaningfully amend the Dodd-Frank Act, the bank's management team will "look like geniuses."
There are numerous larger banks that could follow Zions if the bank is ultimately successful, wrote Wells Fargo senior analyst Jared Shaw in a Nov. 20 note. He pointed out that banks with less than $250 billion, such as Comerica Inc., SVB Financial Group, People's United Financial Inc., East West Bancorp Inc., Western Alliance Bancorp., BOK Financial Corp., Synovus Financial Corp., F.N.B. Corp. and Associated Banc-Corp, could consider a similar process if they are willing to endure the regulatory uncertainty and overhang of petitioning the FSOC.