The Federal Reserve Board has adopted amendments to its policy statement that gives special treatment to small bank holding companies (BHCs) in order to facilitate the sale of small community financial institutions. The final rule raises the asset threshold of the Small Bank Holding Company Policy Statement from $500 million to $1 billion in total consolidated assets and also extends the application of the policy statement to savings and loan holding companies (SLHCs). The Fed last raised the asset threshold in 2006, when it increased it from $150 million to $500 million.
According to the notice, the Fed has generally discouraged the use of debt by holding companies to finance the acquisition of banks or other companies because high levels of debt can impair the ability of the holding company to provide stability to its subsidiary banks. However, in 1980, the Fed issued the policy statement to address concerns that smaller holding companies often do not have the access to equity financing enjoyed by larger holding companies—requiring them to finance acquisitions using more debt. The policy statement allows the acquiring holding company to operate with a higher level of debt than otherwise would be permitted.
Qualifications. Under the amended policy statement, BHCs and SLHCs with total consolidated assets of up to $1 billion are permitted to finance up to 75 percent of an acquisition using debt as long as they: (1) are not engaged in significant nonbanking activities; (2) do not conduct significant off-balance sheet activities; and (3) do not have a material amount of debt or equity securities outstanding, other than trust preferred securities, that are registered with the Securities and Exchange Commission.
In addition, there are four ongoing requirements:
- The holding company must pay its debt in a way that will allow the debt to be retired within 25 years of being incurred.
- The holding company must reduce its debt-to-equity ratio to no higher than .3-to-1 within 12 years of the debt being incurred.
- Each subsidiary insured depository institution must be kept well capitalized.
- The holding company may not pay any dividends until it has reduced its debt-to-equity ratio to no higher than 1-to-1.
While BHCs and SLHCs that qualify for the policy statement are excluded from consolidated capital requirements, their depository institution subsidiaries continue to be subject to minimum capital requirements.
Comments. The Fed received 11 comments in response to its proposed change. Comments were submitted by financial trade associations, individuals associated with financial institutions, and a law firm that represents bank holding companies and savings and loan holding companies. The Fed indicated that comments were generally supportive; however, some commenters recommended revisions. Among the suggestions:
- One commenter suggested that the threshold be increased to $5 billion. The Fed responded that the asset limit is set by statute, and the Dodd-Frank Act effectively prevents the threshold from being raised any higher.
- One commenter urged the Fed to rescind the qualitative requirement that would disqualify a bank holding company or savings and loan holding company with a material amount of outstanding SEC-registered debt or equity securities. The Fed responded that the exclusion reflects its view that "SEC registrants typically exhibited a degree of complexity of operations and access to multiple funding sources."
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