On April 9 the Federal Reserve Board adopted final amendments to its Small Bank Holding Company Policy Statement. The effect of the amendments, which become effective in mid-May, is to loosen leverage requirements and ease capital requirements for bank holding companies with total assets between $500 million and $1 billion. The Policy Statement is found in Appendix C to Regulation Y (12 CFR Part 225).
The Fed’s Small Bank Holding Company Policy Statement has been in effect since 1980. Initially applicable to BHCs with assets of less than $150 million, the original intent of the Policy Statement was to clarify and ease the Fed’s expectations concerning a BHC’s use of leverage in connection with the purchase or sale of small community banks – the Fed acknowledged that larger BHCs are more likely to have access to public capital markets and thus can raise capital from those markets to facilitate acquisitions, while small BHCs are much more likely to be dependent upon leverage to facilitate acquisitions.
The Fed increased the threshold for “small” BHCs from $150 million to $500 million in 2006. The action taken by the Fed on April 9 now raises that threshold to $1 billion.
Under the Policy Statement and its corresponding provisions in Regulation Y small BHCs are not subject to the Fed’s consolidated risk-based capital guidelines otherwise applicable to BHCs. However, the Policy Statement does impose leverage limitations on small BHCs. Specifically, qualifying BHCs may use debt to finance up to 75% of the purchase price of an acquisition, i.e., have a debt-to-equity ratio of up to 3.0:1, subject to expectations on how quickly that debt will be amortized and a prohibition on paying dividends until a BHC’s debt-to-equity ratio is reduced to 1.0:1. In addition, each insured depository institution of a small BHC must be well-capitalized, and presumably the Fed would tolerate a BHC going to the upper range of the leverage allowed by the Policy Statement only for well-managed organizations.
The amendments to the Policy Statement also make certain other technical changes to regulatory requirements applicable to BHCs now considered “small” (assets of less than $1 billion), such as pro forma financial information that must be filed in connection with a notice required for redemptions in excess of a certain amount of a BHC’s stock and the pro forma financial information that must be filed in connection with “expedited action” for certain BHC transactions.
As amended the Fed’s Policy Statement applies to all bank holding companies with pro forma consolidated assets of less than $1 billion that meet the following requirements: (i) they are not engaged in significant non-banking activities either directly or through a non-bank subsidiary, (ii) they do not conduct significant off-balance sheet activities (such as securitizations) either directly or through a non-bank subsidiary, and (iii) do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC.
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