Macro

Winners of Bank Crisis Face Fed Scrutiny Amid Growth

Regional banks face divergent fortunes and regulatory challenges amid industry shakeup, with First Citizens' growth spotlighting the harsh realities of rapid expansion.

By Mackenzie Crow

4/4, 08:40 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
New York Community Bancorp, Inc.
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Key Takeaway

  • First Citizens BancShares Inc. faces Federal Reserve scrutiny, emphasizing the challenges regional banks encounter amid growth and stricter regulatory oversight.
  • The banking sector's consolidation trend is complicated by regulatory hurdles, impacting banks' strategies for growth and competition with mega-banks.
  • NYCB's recent distress and leadership changes highlight the intense pressure on banks crossing the $100 billion asset threshold, underscoring regulatory impact on bank operations and market stability.

Regional Banks' Divergent Fortunes

Two regional banks, New York Community Bancorp Inc. and First Citizens BancShares Inc., have experienced vastly different outcomes in the wake of deposit runs that have shaken their industry. While New York Community Bancorp required a frantic rescue last month, First Citizens has seen its value more than double. However, First Citizens is privately working to meet demands from the Federal Reserve, including enhancing its internal governance to better accommodate its rapid growth. This situation highlights the challenges faced by regional banks as they expand, particularly through acquisitions, amidst an industrywide crackdown following last year's bank failures.

Regulatory Hurdles and Growth Challenges

Regional banks are navigating a complex landscape of capital rules and regulatory scrutiny as they grow. Banks approaching $100 billion in assets face stiffer capital rules and oversight, becoming Category IV banks. This transition is challenging for bank executives accustomed to lighter supervision, requiring sophisticated risk and compliance processes. The Federal Reserve's internal watchdog has criticized the central bank's examination approach for being too slow to recognize problems, prompting a vow from Michael Barr, the Fed’s vice chair for supervision, to act more forcefully.

Strategic Moves Amid Scrutiny

First Citizens, after acquiring CIT Group Inc. and Silicon Valley Bank, is nearing the $250 billion asset threshold, which would place it under even more regulatory scrutiny. The bank has been bolstering its senior management and making regulatory readiness a top priority. Despite the challenges, First Citizens maintains strict compliance with all regulatory requirements, emphasizing its commitment to refining and maturing its processes to support its increased size and complexity. The broader banking sector has seen a significant reduction in the number of banks since 1984, with a growing gap between mega-banks and the rest of the industry.

Street Views

  • Brian Graham, Klaros Group (Neutral on regional banks):

    "The toughest spot to be in is to be a bank between $50 billion and $250 billion, because you’re suddenly subject to these much heavier regulatory burdens and you’re not anywhere near as big as a JPMorgan or Wells or BofA or what have you. You’ve got a much higher fixed cost of running your business. That’s going to drive you to be bigger, but it’s really hard to grow organically and it’s going to be very challenging to grow through M&A given regulatory skepticism."

  • Sheila Bair, former chair of the FDIC (Neutral on regional bank mergers):

    "Regulators seem determined to chill regional bank M&A, which is exactly the wrong approach if you want to avoid failures by allowing stronger banks to acquire weaker ones. Longer term, growth among regional banks is a good thing if it brings more competition, greater diversification and more-sophisticated risk-management capabilities."

Management Quotes

  • Frank Holding Jr., CEO of First Citizens BancShares Inc.:

    "First Citizens Bank has maintained strict compliance with all regulatory requirements and will continue to do so as our growth moves the bank to a higher level of regulatory oversight... We have made meaningful progress in continuing to refine and mature our processes support the change in First Citizens’ size and complexity."