Circular
Regulation Y -- Bank Holding Companies and Change in Bank Control
November 5, 1996
Circular No. 10887

Interim Rule Regarding "Well-Capitalized" Bank Holding Companies Comments Requested by December 2

To All Bank Holding Companies, and Others Concerned, in the Second Federal Reserve District:

The following is from a statement issued by the Board of Governors of the Federal Reserve System:

The Federal Reserve Board has announced an interim rule and requested comment on certain definitions in connection with easing provisions of Regulation Y (Bank Holding Companies) to eliminate the requirement that bank holding companies seek Board approval before engaging de novo in permissible nonbanking activities if the bank holding company is well-capitalized and meets other criteria specified in the new Economic Growth and Regulatory Paperwork Act.

The interim rule also implements provisions of the act to establish expedited procedures for well-capitalized bank holding companies that meet the criteria to obtain Board approval to acquire smaller companies that engage in any permissible nonbanking activities listed in Regulation Y as well as to engage in nonbanking activities that the Board has approved only by order.

The interim rule is effective immediately.

Comment on the definitions noted below is requested by December 2, 1996.

Since the statutory changes, which were recommended by the Board, are effective immediately, the Board will apply the procedures now to qualifying proposals. Proposed amendments to Regulation Y will be issued in the near future to implement the changes.

For purposes of determining the capital levels at which a bank holding company shall be considered "well-capitalized" under section 2208 of the act and Regulation Y, the Board has adopted, as an interim rule, risk-based capital thresholds that are the same levels as the levels set for determining that a state member bank is well-capitalized under the provisions established under section 38 of the Federal Deposit Insurance Act, and a modified leverage ratio. This definition was effective October 23, on an interim basis. The Board invites public comment on this definition and will adjust the definition as appropriate in light of public comment. The Board also invites comment on how the statutory definitions in section 2208 should be applied to foreign banking organizations.

Criteria to be used in carrying out these procedures are outlined below.

Under amendments to the Bank Holding Company Act enacted in section 2208 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 3009), a well-run bank holding company that proposes to engage in a nonbanking activity listed in section 225.25 of Regulation Y is no longer required to seek prior Board approval of a proposal to engage de novo in a nonbanking activity listed in Regulation Y. A bank holding company that qualifies for this procedure is required only to notify the Board within 10 business days after the activity has been started.

To qualify for this exemption:

  • The bank holding company, its lead insured depository institution and insured depository institutions that control at least 80 percent of the aggregate total risk-weighted assets of insured depository institutions controlled by the holding company must be well-capitalized;
  • No insured depository institution controlled by the holding company may be undercapitalized;
  • The bank holding company, its lead insured depository institution and insured depository institutions representing at least 90 percent of the aggregate total risk-weighted assets of insured depository institutions controlled by the bank holding company must have received at least a composite 2 examination rating and a "satisfactory" rating for management at the most recent examination;
  • No insured depository institution controlled by the bank holding company may have received a composite examination rating of 4 or 5 at the latest examination; and
  • There may not be any supervisory or enforcement action pending against the bank holding company or any of its insured depository institutions.

For purposes of determining the capital levels at which a bank holding company shall be considered "well-capitalized" under the statute and Regulation Y, the Board has adopted, as an interim rule, risk-based capital thresholds that are the same as the levels set for determining that a state member bank is well-capitalized under the provisions of section 38 of the Federal Deposit Insurance Act, and a modified leverage ratio. The Board will propose definitions of the capital levels applicable to foreign banks in the near future.

The Economic Growth and Regulatory Paperwork Reduction Act also establishes an expedited procedure for such well-capitalized bank holding companies that meet these criteria to obtain Board approval to acquire companies that engage in any permissible nonbanking activities listed in Regulation Y as well as to engage in nonbanking activities that the Board has approved only by order. In addition to meeting the criteria described above, an acquisition qualifies under the statute if the acquired assets or company represent less than 10 percent of the total risk-weighted assets of the acquiring bank holding company and the consideration paid for the assets or company does not exceed 15 percent of the consolidated Tier 1 capital of the acquiring bank holding company.

Under the statutory change, the bank holding company must provide the Board with at least 12 business days' advance notice of a proposed acquisition or of a proposal to engage in an activity approved only by order, and the Board may notify the bank holding company during that period that a full application is required. By the terms of the statutory change, this expedited procedure is not available for acquisitions of savings associations.

Bank holding companies that do not meet these criteria must seek prior approval under the procedures currently set forth in Regulation Y.

The text of the interim rule and request for comments, as published in the Federal Register of November 1 is available. Comments thereon should be submitted by December 2, 1996, and may be sent to the Board, as specified in the notice, or to our Banking Applications Department.