THE CEO CORNER – How to Get a Green Light on Your Future Plans

A large “capital war chest” may not be enough to gain regulatory approval to move forward on a planned merger or acquisition – or even just a strategic plan. We have seen indications that regulators are showing red and yellow flags to banks that want to acquire another institution. Some of these would-be acquirers had demonstrated strong capital positions. At issue was whether they provided enough assurance to their regulators that they fully understand the new regulatory environment.

Banks should incorporate capital stress testing into their strategic planning if they want to pass muster with examiners. The OCC has said strategic planning is a top focus in the coming year. (See p.4)

For acquisitions, bank executives will need to show that they know that the new regulatory paradigm entails more than the historical requirements of accretion to earnings, cost savings, economies of scale and capital to support any shortfalls. CEOs are now expected to provide detailed facts not only on their capital strength against their assets and all other areas that threaten their capital, but they also must be able to shoulder the burden of the target bank’s regulatory capital profile.

The process of due diligence must be enhanced to incorporate the concerns of regulators. Make no mistake: Dodd-Frank and Basel III as a practical matter are impacting all banks. Astute executives and their boards of directors are taking a proactive strategy by using capital adequacy stress testing to pre-empt unnecessary delays to their plans.

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