KBW: HereÕ how Shelby bill will affect banks and mortgage finance

Digging deeper, there’s a lot more there

Keefe, Bruyette & Woods’ analysts looked at Senate Banking Chair Richard Shelby’s, R-Ala., new banking reform bill, and in a note to clients explain some of the ramifications.

Two weeks ago, the Senate Committee on Banking, Housing and Urban Affairs passed “The Financial Regulatory Improvement Act of 2015" on Thursday.

This is a big deal for housing and mortgage finance.

Among the most significant proposals in the 216-page draft bill is a requirement raising the SIFI bank threshold from $50 billion to $500 billion, altering the $10 billion threshold, and targeting specific GSE changes. This would, in effect, free smaller lenders from the heavy capital requirements and strict oversight currently enforced against the big banks. It also includes a provision increasing the $50 billion SIFI threshold to $500 billion, while maintaining some degree of FSOC review.

Other proposals in the bill take aim at mortgage finance firms Fannie Mae and Freddie Mac, "systemically important" designations to nonbanks and insurance industry supervision.

Additionally, the bill would require the Federal Housing Finance Agency to withdraw its proposed rule revising Federal Home Loan Bank membership requirements while GAO studies the issue, and grant credit unions parity with community banks in the definition of community financial institutions under the Federal Home Loan Bank Act.

First up, the SIFI buffer could be raised to $150 billion. 

“As a political matter, we think it is unlikely that Congress will raise the SIFI threshold to $500 billion, as recommended in the Shelby bill. Instead, we think either the $100 billion threshold suggested by Gov. Tarullo or $150 billion is more likely. Regardless of where Congress sets the SIFI threshold, we expect that the Fed would continue to require some banks that fall below the threshold to continue to participate in the Comprehensive Capital Analysis and Review,” KBW analysts write. “We think this is a key and misunderstood point because CCAR is critical in determining capital deployment by participating banks.”

As for how it benefits which banks, KBW said there are three areas where banks could benefit if they were no longer designated as SIFIs: 

  1. potentially lower non-permanent regulatory costs (i.e. consulting costs);
  2. potential balance sheet restructuring to either unwind liquidity coverage ratio (LCR) build or to not continue building high-quality liquid assets (HQLA);
  3. and potential to be more aggressive on capital return upon moving to internal company stress tests.

“In this note we show a quantification of the potential benefits for the 14 banks that are in the ~$40 billion in assets to ~$130 billion range. Generally, we do not see much of an ability for these banks to lower regulatory costs or to reposition their balance sheets. Furthermore, some of these banks are already have high payout ratios. The average potential increase in EPS is only about 4%, but ETFC (+20%) and ZION (+7%) could benefit more than the group. We also believe that ZION could benefit meaningfully from a qualitative aspect as management could be more focused on managing the bank to maximize profitability again instead of managing to comply with the CCAR requirements,” KBW says. “In addition, we believe there is some overhang on CIT's shares related to the risks around becoming a CCAR bank in 2017 as a result of the closing of the OneWest deal and thus the shares could react positively to the SIFI threshold being raised.”

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