The Federal Reserve has issued a series of private warnings to several regional banks with assets of $100 billion to $250 billion, urging them to take corrective actions on various issues related to their risk management, capital, liquidity, technology and compliance, according to a Bloomberg News report.
Fed steps up supervision of mid-sized lenders
The Fed has intensified its scrutiny of mid-sized lenders in the wake of the collapse of three such banks earlier this year, which exposed their vulnerabilities to rising interest rates and customer withdrawals. The Fed has also increased its use of “matters requiring attention” (MRAs), which are formal notices that identify deficiencies and demand remedial actions from banks.
Among the banks that received MRAs from the Fed were Citizens Financial Group Inc., Fifth Third Bancorp and M&T Bank Corp., the report said, citing people familiar with the matter. The MRAs covered a wide range of issues, such as lenders’ capital and liquidity planning, stress testing, data quality, cybersecurity, anti-money laundering and consumer protection.
The Fed did not comment on the report, while the banks declined to confirm or deny the existence of MRAs, saying they do not discuss supervisory matters publicly.
MRAs can have significant consequences for banks
MRAs are not public documents, but they can have significant consequences for banks that fail to address them in a timely and satisfactory manner. For example, MRAs can limit banks’ ability to pay dividends, buy back shares, make acquisitions or expand into new businesses. MRAs can also affect banks’ ratings by regulators and credit rating agencies, as well as their reputation among investors and customers.
According to the report, some of the MRAs issued by the Fed were related to the implementation of a new rule that requires banks with more than $100 billion in assets to submit resolution plans, or “living wills”, that outline how they would wind down their operations in a crisis without taxpayer bailouts. The rule, which was finalized in 2019, applies to 23 domestic and foreign banks operating in the U.S., including eight regional banks.
The report said that some of the regional banks struggled to meet the deadline for submitting their first resolution plans in July this year, and received feedback from the Fed that their plans were inadequate or incomplete.
Regional banks face challenges amid changing environment
The increased regulatory pressure on regional banks comes at a time when they are facing challenges from a changing economic and competitive environment. Regional banks have been hit hard by the low interest rate environment, which has squeezed their net interest margins and profitability. They have also faced increased competition from larger national banks and fintech firms that offer digital banking services and products.
To cope with these challenges, some regional banks have pursued mergers and acquisitions to gain scale and diversify their revenue streams. For example, M&T Bank agreed to buy People’s United Financial Inc. for $7.6 billion in February this year, while Huntington Bancshares Inc. merged with TCF Financial Corp. for $6 billion in June.
However, such deals also pose integration risks and regulatory hurdles for regional banks, especially if they cross the $250 billion asset threshold that subjects them to stricter oversight by the Fed.
