Financial Reform: Small Bank Holding Company Threshold

Financial Reform: Small Bank Holding Company Threshold

February 23, 2018
Financial Reform: Small Bank Holding Company Threshold
Small bank holding companies and small thrift holding
activities, (2) conduct significant off-balance-sheet
companies (hereafter collectively referred to as small
activities, and (3) have a “material” amount of outstanding
BHCs) face less stringent regulation related to debt
debt or equity securities (except for trust preferred
financed acquisitions and capital requirements pursuant to
securities) registered with the Securities and Exchange
the Federal Reserve’s Small Bank Holding Company Policy
Commission. The Fed has the discretion to exclude any
Statement and the “Collins Amendment” to the Dodd-Frank
BHC, regardless of asset size, from the policy statement if
Wall Street Reform and Consumer Protection Act (P.L.
the Fed determines such action is warranted for supervisory
111-203; Dodd-Frank). Currently, a BHC must have less
purposes. After an acquisition, the BHC is required to
than $1 billion in assets, as well as meet certain qualitative
gradually reduce its debt levels over several years, and
requirements, to qualify. Bills in the 115th Congress would
faces restrictions on paying dividends until the debt level is
increase this threshold, thus providing regulatory relief to
reduced. This policy is motivated by recognition that small
certain BHCs with assets between $1 billion and the
banks typically have less access to equity financing for
proposed higher thresholds.
acquisitions than larger banks.
Background
The policy statement was issued in 1980 with a threshold of
Many depositories such as banks and thrifts are owned by a
$150 million in assets. The Fed subsequently raised the
parent holding company. To use this structure, a banking
threshold to $500 million in 2006 to address the effects of
organization must get approval from and is subject to
“inflation, industry consolidation, and normal asset growth
regulation (at the parent level) by the Federal Reserve (the
of BHCs.” More recently, the 113th Congress in P.L. 113-
Fed). An organization may choose this structure for a
250 (enacted on December 18, 2014) mandated that the
variety of reasons related to its circumstances and business
threshold increase from $500 million to $1 billion and the
model. Being a BHC may increase access to certain capital
policy statement be extended to cover savings and loan
markets, allow greater diversification of business activities
(thrift) holding companies. The Fed issued a final rule on
through the operation of nonbank subsidiaries, and make it
April 9, 2015, implementing these statutory changes.
easier to merge or acquire other banks.
The policy statement is also referenced in other banking
BHCs vary widely in size and complexity. Some are among
statutes and regulations besides those related to acquisition
the largest financial institutions in the world with thousands
debt. Generally, banks subject to the policy statement are
of subsidiaries, many of which are not depositories, such as
granted exemptions for or relaxed treatment in complying
broker-dealers or insurance companies. On the other end of
with certain requirements, most of which are reporting
the spectrum, many BHCs are in practice just a legal entity
requirements. The most significant regulation linked to the
that owns and shares management with a single small bank.
statement is the Collins Amendment.
Both the subsidiary depositories and the parent BHCs are
Collins Amendment
subject to prudential regulation intended to ensure the
BHCs subject to the Small BHC Policy Statement are
institutions operate in a safe and sound manner. However,
exempted from Section 171 of the Dodd-Frank (12 U.S.C.
the prudential regulations facing depositories and BHCs are
§5371, sometimes called the Collins Amendment), which
not necessarily the same. Under a long-standing regulatory
subjects holding companies to the same capital and leverage
principle, enacted into law by Dodd-Frank, the Fed expects
requirements as their depository subsidiaries. BHCs subject
BHCs to act as a “source of strength” (i.e., be able to
to the policy statement are also exempted from the rule
provide financial assistance) in the event its depositories
applying Basel III capital requirements at the holding
became distressed. Likewise, distress at nondepository
company level (although their depository subsidiaries are
subsidiaries should not threaten the health of the
still subject to this rule). The policy of subjecting BHCs to
despository subsidiaries. If a BHC has large debts or little
the same capital requirements as depositories is motivated
capital, it is likely the BHC would be less able to assist its
by the goal of having holding companies serve as a source
subsidiaries.
of strength to their depository subsidiaries.
Small BHC Policy Statement
A key issue with the Collins Amendment is the treatment of
The Federal Reserve’s Small BHC Policy Statement
Trust Preferred Securities (TruPS). Prior to the Collins
(Appendix C to 12 C.F.R. §225) allows BHCs with less
Amendment, BHCs were allowed to use TruPS to help meet
than $1 billion in assets to use more debt than would be
capital requirements even though they had debt-like
permitted to larger BHCs to finance the acquisition of
features, making them less able to absorb losses. However,
another bank, provided the debt does not exceed 75% of the
small banks argue that TruPS are a necessary instrument for
purchase price of the bank acquired. To qualify, the holding
their capital needs. Under the Collins Amendment, BHCs
company may not (1) be engaged in significant nonbank
could no longer count new TruPS toward capital
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Financial Reform: Small Bank Holding Company Threshold
requirements unless they were subject to the Small BHC
or that providing relief based on size creates inefficient
Policy Statement. If more BHCs are subject to that
distortions in the allocation of credit or bank funding. The
statement, more BHCs would be eligible to use TruPS
possibility of the former would be mitigated if the Fed
toward capital requirements.
prudently exercises its discretion to exempt potentially
riskier institutions from the policy statement.
Policy Discussion
The effectiveness of the Fed’s Small BHC Policy Statement
Legislation in the 115th Congress
arguably depends on the degree to which holding
A number of bills in the 115th Congress would change the
companies subject to the policy statement have the ability
asset threshold criterion, provided the BHC meets the other
to complete mergers and acquisitions without incurring
three criteria found in the statement. In addition, these bills
relatively large amounts of debt. If they lack that ability,
would not disturb the qualitative requirements or the Fed’s
then the policy statement may afford a means of relaxing
discretion “to exclude any bank holding company,
regulations that restrict BHCs from growing and responding
regardless of asset size, ...if it determines that such action is
to economic and business conditions through acquisitions.
warranted for supervisory purposes.” However, the
If they have that ability, however, the policy statement may
proposed thresholds differ. For example,
needlessly encourage BHCs to take on relatively risky
liabilities, and thus reduce their own safety and ability to
 Section 207 of S. 2155, as reported, and H.R. 4771, as
act as a source of strength for their depositories.
passed by the House, would raise the policy statement
threshold to $3 billion;
As noted above, some banks adopt a holding company
structure with their assets and activities predominantly in
 S. 1284 would raise the existing exemption to $5 billion;
banking subsidiaries, whereas other holding companies
and
have significant activities in nonbank subsidiaries. The
effectiveness of the Collins Amendment arguably depends
 Section 526 of H.R. 10 as passed by the House would
on whether a holding company has meaningful activities
raise the existing exemption to $10 billion.
outside of its depository subsidiaries. If it does not, then
there would be few nonbank subsidiary assets that the
Determining how many BHCs are currently subject to the
Collins Amendment would require BHCs to hold capital
policy statement and how many would be under the
against. In this case, the bank may not face regulatory
proposed thresholds is difficult due to the qualitative
burden from the requirement to hold additional capital
nonasset-sized-based criteria. According to 2015 Fed
(although it may face a compliance burden in calculating
testimony, 89% of bank holding companies and 81% of
and reporting the necessary capital measures).
thrift holding companies were covered by the policy
statement. Approximating how many BHCs would meet the
In general, smaller BHCs derive less income from nonbank
size-based criteria is possible, however. As of June 30,
subsidiaries than larger BHCs, as shown by the means in
2017, approximately 3,922 BHCs had less than $1 billion in
Table 1. In addition, the medians show that most BHCs do
assets. Figure 1 illustrates how many additional holdings
not have significant nonbank income. However, as the final
companies fall under each ascending threshold.
column illustrates, certain small BHC do have relatively
high nonbank income. Thus, the higher the threshold is
Figure 1. Additional BHCs Meeting Proposed Asset
raised, the more institutions with meaningful activities
Thresholds
outside of banking subsidiaries could potentially be exempt
from the Collins Amendment. These exemptions could be
curtailed to some degree depending on how many of these
institutions do not meet the qualitative criteria of the policy
statement and how often the Fed would exercise its
discretion to exclude certain BHCs.
Table 1. Nonbank Subsidiary Operating Income
Percentage of Total Operating Income, as of 3rd quarter 2017
Top
Assets
Mean
Median
Decile
$1 billion-$3 billion
1.9%
0.0%
16.2%
$3 billion-$10 billion
2.3%
0.3%
12.5%
$10 billion +
11.0%
0.6%
61.6%
Source: Federal Reserve BHC Performance Report.

Source: CRS calculations, Federal Reserve form Y9-C data.
In general, proponents of bills that would raise the threshold
Note: Based on total assets reported as of June 30, 2017.
view the legislation as providing well-targeted regulatory
relief to banks with between $1 billion in assets and the
Marc Labonte, Specialist in Macroeconomic Policy
new higher threshold. Opponents may object on the
David W. Perkins, Analyst in Macroeconomic Policy
grounds that it may weaken the ability of holding
companies to act as a source of strength for affected banks,
IF10837
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Financial Reform: Small Bank Holding Company Threshold

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