Highlight of the Week
Implications of Crossing the $100 Billion Threshold and Becoming a Category IV Bank
- In recent earnings, New York Community Bank announced meaningful efforts and changes being done to align themselves with peer banks and comply with Category IV regulations. In Q4, NYCB increased wholesale borrowings and reduced dividends to improve liquidity and capital positions, respectively. NYCB also built up reserves against future loan losses, bringing their ACL coverage in line with peer banks.
- NYCB’s efforts have sparked many regulatory conversations within the past week, particularly about the implications of crossing regulatory thresholds and the dangers of growing too quickly. The $100 billion threshold has strict capital, liquidity, and supervisory implications.
- Capital implications: Banks that cross the $100 billion mark are subject to biennial supervisory stress tests and the resulting Stress Capital Buffer. Category IV banks must also submit annual capital plans to the Federal Reserve.
- Liquidity implications: Category IV banks are subject to LCR and NSFR requirements if the banks have more than $50 billion of short-term wholesale funding. These banks are subject to quarterly Internal Liquidity Stress Tests and must maintain the resulting liquidity buffer. They must also have a detailed liquidity risk management framework and an established independent review function to review these processes.
- Supervisory implications: Banks with more than $100 billion in assets are overseen by the Large and Foreign Banking Organization, which subjects banks to increased supervision and more frequent examinations. The LFBO frequently uses horizontal exams to compare banks to their peer groups and ensure they are properly aligned.
- The capital requirements at the $100 billion threshold will be greatly exacerbated if Basel Endgame is implemented. Proposed requirements for Category IV banks include, but are not limited to, the incorporation of AOCI in capital, changes to RWA calculations, and supplementary leverage ratio requirements.
- These current and proposed implications of the $100 billion threshold require several years of preparation. As the former president of the Boston FRB said “the time to worry about risk management for an institution going over $100 billion is before they go over $100 billion”.
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