On April 9, 2015, the Board of Governors of the Federal Reserve issued final rules amending its Small Bank Holding Company Policy (the “policy"), which will become effective May 15, 2015.
Pursuant to the final rules, certain small bank holding companies (“BHCs”) and savings and loan holding companies (“SLHCs”) will not be required to comply with the Basel III capital standards or reporting requirements.
The scope of the policy was expanded to include BHCs and SLHCs that meet the following qualitative requirements:
- less than $1 billion in assets (up from $500 million);
- not involved in significant non-bank activities;
- no significant off-balance sheet activities conducted through a non-bank subsidiary; and
- no material SEC-registered debt or equity securities outstanding (other than trust preferred securities).
While holding companies that will soon qualify for the policy are excluded from consolidated capital requirements, their depository institution subsidiaries (which must maintain “well-capitalized” status) continue to be subject to minimum capital requirements.
As a result of these changes, more community BHCs and now SLHCs should qualify for the benefits of being a small bank holding company under the policy, including the following benefits:
- expanded capability to finance acquisitions through holding company debt financing;
- ability to transfer assets (subject to the requirements of Section 23A and Section 23B of the Bank Holding Company Act) between a holding company and its subsidiary to assist in capital planning;
- greater ability to fund dividends or stock repurchases through holding company debt financing;
- ability to replace higher-cost subordinated bank debt or capital (e.g., TARP, SBLF, and trust preferred securities) with lower-cost senior BHC or SLHC debt; and
- expanded ability to optimize investment strategies due to the fact that BHCs and SLHCs subject to the policy will not be subject to Basel III capital requirements.
These changes potentially benefit more than just existing BHCs and SLHCs. Smaller banks and savings and loan associations that do not currently have a holding company structure will likely find it advantageous to shift to a holding company structure to take advantage of these recent changes to the policy.
