Crossing the USD 10 billion asset threshold is a significant milestone for any bank in the USA, marking a transition from a relatively low-regulatory environment to a more stringent and complex regulatory landscape. But it comes with increased scrutiny, higher compliance costs, and more operational complexity[1]. As US banks approach this threshold, they need to make critical changes across their systems, data, and processes to remain compliant and competitive. Overcoming the USD 10 billion asset threshold significantly changes a bank’s operational landscape, necessitating comprehensive adjustments in systems, data management, and regulatory compliance. To outline the necessary changes, banks should ensure compliance with regulatory requirements and maintain operational efficiency. The aim of this point of view is to cover the key aspects of system changes, data, and process modifications, as well as the relevant regulations that banks must adhere to.
Mid-sized banks in the USA that cross the USD 10 billion threshold face significant regulatory changes, and compliance with the following is essential:
US banks must adhere to CFPB supervision, which includes strict consumer protection rules. These rules cover fair lending practices, privacy policies, and transparency in loan disclosures. Upon reaching the USD 10 billion asset threshold, banks become subject to the CFPB for the first time[2].
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Under the Dodd-Frank Act (DFA), banks are required to perform periodic stress tests to ensure they can withstand economic shocks. These tests must be integrated into the bank’s capital planning processes and require sophisticated risk modeling tools[3]. However, this is for banks above USD 250 billion in assets, but Comprehensive Capital Analysis and Review (CCAR) is done for banks with at least USD 100 billion in assets[4].
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As banks grow, they face increased scrutiny over AML practices. A larger asset base requires enhanced monitoring for suspicious activities, as well as more rigorous Know Your Customer (KYC) processes.
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The Volcker rule restricts certain trading activities and becomes applicable, impacting profitability and requiring adjustments in business strategies.
The Durbin amendment reduces the amount of interchange income a financial institution may collect on debit and credit card transactions[5].
Banks will face higher deposit insurance premiums when crossing this threshold. They need to adjust their financial planning to accommodate this added expense, which is directly tied to the size of their asset base. There are also heightened expectations of consumer protection, fair lending practices, and Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs)
As a result, banks and financial service providers are not only prohibited from strong-arming or deceiving their customers into making unwilling purchases through misleading statements and product information, but their actions are monitored and regulated. Failure to comply will lead to scrutiny enforced by federal organizations like the CFPB and the Federal Trade Commission (FTC).
Banks need to ensure and implement an enhanced Compliance Management System (CMS) that can effectively address the complexities of new regulations built on comprehensive policies, risk assessments, monitoring, training, etc., tailored to risks.
Data accuracy and process efficiency are critical when scaling to USD 10 billion. Banks need to streamline their operational processes and ensure data integrity for regulatory reporting.
Banks must ensure that they have a comprehensive master guideline or documentation system in place to manage compliance. This includes outlining all policies, charters, and risk assessments in a well-organized format for regulators. It’s vital that these documents cover all operational aspects, including capital adequacy, consumer protection, and liquidity.
Banks should develop a stronger internal audit team to ensure that compliance functions are adequately monitored. A “three lines of defense” model is often adopted, where operational managers, risk management teams, and internal auditors work together to monitor risks.
Centralized data repository: Establish a centralized data repository to ensure accurate reporting and compliance with new regulations. Enhanced data analytics capabilities will be essential for risk management and decision-making.
As banks grow, so do their loan portfolios. It is important to enhance loan review processes, especially to meet the CFPB's standards, which are stricter after reaching the USD 10 billion mark. Independent loan review teams should be established to assess credit quality independently from the internal audit
CFPB supervision[6] refers to the process by which the Consumer Financial Protection Bureau (CFPB) oversees certain financial institutions to ensure they comply with federal consumer financial protection laws. Through supervision, the CFPB examines how these companies operate, manage risks, and treat their customers.
Banks crossing the USD 10 billion asset mark must enhance their systems to manage the broader range of regulatory requirements. These institutions will now be subject to oversight from the CFPB and will need to implement the DFAST.
This requires significant investments in:
Banks need to work with IT and technology service providers/Managed Service Providers (MSPs)/vendors to help the banks implement their strategic risk platforms and functionalities. For example, recommending a bespoke implementation in a phased manner to de-risk the business across lines of defense. Below is an overview of ensuring empowerment and accountability across lines of defense upon implementing a centralized repository of risk and controls.
While crossing the USD 10 billion asset mark is a significant milestone for any bank, it brings significant regulatory challenges and operational complexities. Early preparation is essential. Banks should invest in upgrading their risk management, data, and compliance systems. Furthermore, collaboration across all business lines, with a strong tone from leadership, is crucial for ensuring a smooth transition into the USD 10 billion+ asset space.
Banks need to ensure adequate staffing and resources to manage compliance effectively, as well as thorough preparation and strategic planning to ensure compliance and mitigate risks associated with growth.
To successfully navigate this threshold, banks must view compliance not as a burden but as an opportunity to build competitive advantages through robust governance and risk management practices.
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