Most companies obsess over growth, but not New York Community Bancorp (NYSE:NYCB). The $48 billion bank made it clear on its latest conference call that it wants to hold the line on asset growth until Congress redefines what it means to be too big to fail and thus subject to enhanced capital requirements and regulatory scrutiny.
The too-big-to-fail designation under current law kicks in at $50 billion. If a bank exceeds that threshold, it's assumed to be a systemically important financial institution, or SIFI, and must operate with less leverage than smaller lenders and submit to the Federal Reserve's annual stress tests.
However, a proposal making its way through the U.S. Senate could radically alter this designation. The bill, introduced by Sen. Richard Shelby, chairman of the Senate Banking Committee, seeks to exclude banks with less than $500 billion in assets from being classified automatically as SIFIs.
That would leave only six American banks in that category: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.
The biggest impact would be on the amount of capital that banks with between $50 billion and $500 billion in assets are required to hold. Firms that qualify as SIFIs are subject to an additional tranche of capital known as a SIFI buffer. For example, JPMorgan Chase, the nation's biggest bank by assets, must hold 4.5% more capital relative to liabilities than a bank that isn't subject to the surcharge.
Of equal significance is the impact that the SIFI designation has on a bank's regulatory and compliance costs. M&T Bank's experience serves as a case in point. In his 2013 letter to shareholders, M&T CEO Robert Wilmers explained that the $98 billion regional bank based in Buffalo, New York built a team of 69 professionals focused exclusively on stress testing and capital planning. It has also invested millions of dollars to update its systems and backroom processes in order to streamline compliance.
For its part, New York Community Bancorp has already begun to see these additional costs make their way onto its income statement. On its third-quarter conference call last year, CFO Thomas Cangemi estimated that the bank had already spent "easily north of $30 million" over the past three-and-a-half years in anticipation of breaching the $50 billion threshold.
But with the U.S. Senate contemplating an increase in the limit, New York Community Bancorp has decided to stand pat in order to allow the proposal to go through the political process. As CEO Joseph Ficalora noted at the conclusion of the latest call:
As we all know, in the world of politics, there is no certainty as to when enough people come together to actually do something. ... In this unique case, there is an overwhelming awareness that [the $50 billion] metric is not appropriate. Even Barney Frank himself has publicly said that, so the reality is that this should be and will be addressed; it's just a matter of when.
In the meantime, as opposed to originating its bread-and-butter commercial real estate mortgages and then putting them on its balance sheet, as it would normally do, New York Community Bancorp has begun selling portions of new loans to outside investors. In the three months ended June 30, 2015, it did so with $477.6 million worth of participations, and that was on top of the more than $500 million it sold in the first three months of the year.
The good news is that New York Community Bancorp's holding pattern, so to speak, has proved profitable. The $8.8 million in gains that it recorded on loan sales last quarter in lieu of balance sheet growth fueled an 18% increase in the bank's noninterest income. The net result for shareholders is that, at least until Congress makes a decision on the SIFI threshold or New York Community Bancorp charges ahead with its much-anticipated transformative acquisition, you shouldn't expect to see the New York-based bank's balance sheet expand as it would at a bank that isn't perched on the SIFI precipice.