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Complex Bank Holding Companies Need to Watch Their M’s and Q’s During M&A

By David Risdon, Senior Managing Director Special Opportunities Group


CCAR Overview – The M’s & Q’s

The Comprehensive Capital Analysis and Review (CCAR) is the Federal Reserve’s primary supervisory mechanism for assessing the capital adequacy of large, complex Bank Holding Companies (BHCs). Beginning in November 2011, all U.S.-domiciled, top-tier BHCs with assets of $50 billion or more are required to develop and submit annual capital plans and stress testing to the Federal Reserve. The BHCs are required to complete CCAR forms including FR-Y-14M and FR-Y-14Q (the “M’s and Q’s”).

CCAR Activity – Watch the M’s & Q’s

By the time M&T’s BHC closed on its acquisition of Hudson City BHC (the first acquisition by a CCAR BHC after Dodd-Frank had become law in 2011), it had taken just over three years for the Fed to approve the deal. That transaction paved the way for all but the largest BHCs to complete post-Dodd-Frank acquisitions. The largest U.S. BHCs (those over $500 billion in assets) have been told by the Fed that any sizable acquisition would likely not garner regulatory approval. Since the M&T deal closed, five major BHCs (each under $500 billion in assets) – CIT, BB&T, RBC, Key Bank and NY Community Bank – have announced acquisitions.

Sluggish loan demand and higher compliance costs have created an attractive environment for U.S. bank holding companies with over $50 billion and below $500 billion in assets to put together acquisition deals. However, something often overlooked by acquirers is that such transactions will require a substantial and immediate commitment to data aggregation at the target entity.

In each of the deals cited above, the targets were above $10 billion and below $50 billion in assets. This means that in each case the acquired BHCs had experience completing the Dodd-Frank Act Stress Tests (DFAST), but did not have to provide loan data as required on  the M’s and Q’s. When CCAR first came into effect, the Fed allowed the BHCs some reasonable amount of time to pull together the substantive historical and roll-forward data required under the M’s and Q’s. But at the present time, the Fed is holding to a much stricter schedule. And regulators are not likely to be sympathetic to BHCs using proxy data to report for newly acquired entities. So, if the Fed approves an acquisition, it is expected that the M’s and Q’s for the purchased bank will be reported in their entirety on the appointed submission date.

The issue for the BHCs, however, is that most of the data elements required under the M’s and Q’s are not always easy to obtain. Banks typically keep data elements in digital format for what is required to service a loan, rather than what is required for Fed reporting. Additionally, data aggregation requirements for a target entity are not always a top priority as a deal nears closing. This can result in considerable last-minute scrambling to pull substantive amounts of origination and roll-forward data for loans held by an acquired entity.

The same issue can arise as two DFAST BHCs ($10 billion to $50 billion in assets) come together to create a CCAR BHC (over $50 billion in assets). In this case, both BHCs will need to pull together the M’s and Q’s for their respective loans. For such an instance, the Fed may extend reporting deadlines for the first reporting period, but, after that, the regulators will want the required data in a timely manner.

The answer is to make data aggregation for a to-be-acquired or merged entity a priority. A timeline needs to be laid out that will result in the M’s and Q’s for acquired or merged DFAST entities being pulled together and uploaded within a few months after transaction consummation. This may not sound difficult, but assuming your digital data trove is lacking forty data elements across forty thousand loans (that would be 1.6 million elements), it would require substantial internal resources (25 years of full-time work for one person!) to collect the required data.

Another issue of concern is data from newly-originated loans. While many CCAR BHCs have pulled together the M’s and Q’s for the required historical data series, banks are having difficulty implementing systems that will capture the required data on an on-going basis – that is, as new loans are booked. Personnel can be allocated to pull together the M’s and Q’s for newly originated loans, but banks need to find a way to make that data collection flow seamlessly into digital warehouses from loan origination and approval through booking. Until that happens, BHCs will be in a constant state of catch-up with regard to needed data from new originations for Fed reporting.


David is Senior Managing Director of Cushman & Wakefield’s Special Opportunities Group, which focuses on time-of-the-essence loan portfolio due diligence, CCAR/DFAST regulatory stress testing, data aggregation, and bank M&A advisory services.


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