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6000 - Bank Holding Company Act
{{6-6-80 p.6171}}
POLICY STATEMENT OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM FOR ASSESSING THE FINANCIAL FACTORS IN THE FORMATION OF SMALL
ONE-BANK HOLDING COMPANIES PURSUANT
TO THE BANK HOLDING COMPANY ACT
In acting on applications filed under the Bank Holding Company Act,
the Board has adopted, and continues to follow, the principle that bank
holding companies should serve as a source of strength for their
subsidiary banks. When bank holding companies incur debt and rely upon
the earnings of their subsidiary banks as the means of repaying such
debt, a question arises as to the probable effect upon the financial
condition of the company and its subsidiary bank or banks.
The board believes that a high level of debt at the parent holding
company level impairs the ability of a bank holding company to provide
financial assistance to its subsidiary bank and in some cases the
servicing requirements on such debt may be a significant drain on the
bank's resources. For these reasons the Board has not favored the use
of acquisition debt in the formation of bank holding companies.
Nevertheless, the Board has recognized that the transfer of ownership
of small banks often requires the use of acquisition debt. The Board
therefore has permitted the formation of small one-bank holding
companies with debt levels higher than would be permitted for larger or
multibank holding companies. Approval of these applications has been
given on the condition that the small one-bank holding companies
demonstrate the ability to service the acquisition debt without
straining the capital of their subsidiary bank and, further, that such
companies restore their ability to serve as a source of strength for
their subsidiary bank within a relatively short period of time.
In the interest of furthering its policy of facilitating the
transfer of ownership in banks without diluting bank safety and
soundness, the Board has reexamined the analytical framework and
financial criteria it applies when considering the formation of small
one-bank holding companies and has adopted certain revisions in its
procedures and standards as described below.
The revised criteria shift the focus from debt repayment to the
relationship between debt and equity at the parent holding company. The
holding company will have the option of improving the relationship of
debt to equity by repaying the principal amount of its debt or through
the retention of earnings, or both. Under these procedures, newly
organized small one-bank holding companies will be expected to reduce
the relationship of their debt to equity over a reasonable period of
time to a level comparable to that maintained by many large and
multibank holding companies.
In general, this policy is intended to apply only to one-bank
holding companies that would not have significant leveraged nonbank
activities and whose subsidiary bank would have total assets of
approximately $150 million or less at the time the application is
filed. Small one-bank holding companies formed before the effective
date of this policy may switch to a plan that adheres to the intent of
this policy provided they comply with criteria 2, 3, and 4 set forth
below.
The criteria are as follows:
General. In evaluating applications filed pursuant to
Section 3(a)(1) of the Bank Holding
Company Act, as amended, when the applicant intends to incur
debt to finance the acquisition of a small bank, the Board will take
into account a full range of financial and other information, including
the recent trend and stability of earnings of the bank, the past and
prospective growth of the bank, the quality of the bank's assets, the
ability of the applicant to meet debt servicing requirements without
placing an undue strain on the bank's resources, and the record and
competency of management of the applicant and the bank. In addition,
the Board will require applicants to meet the minimum requirements set
forth below. As a general rule, failure to meet any of these
requirements will result in denial of the application; however, the
Board reserves the right to make exceptions if the circumstances
warrant.
{{6-6-80 p.6172}}
1. Minimum Down Payment. The amount of acquisition debt should not
exceed 75 percent of the purchase price of the bank to be acquired.
When the owner(s) of the holding company incur debt to finance the
purchase of the bank, such debt will be considered acquisition debt
even though it does not represent an obligation of the bank holding
company, unless the owner(s) can demonstrate that such debt can be
serviced without reliance on the resources of the bank or bank holding
company.
2. Maintenance of Adequate Capital. An applicant proposing to use
acquisition debt must demonstrate to the satisfaction of the Board that
any debt servicing requirements to which the bank holding company may
be subject would not cause the subsidiary bank's ratio of gross capital
to assets to fall below 8 percent during the 12-year period following
consummation of the acquisition. Gross capital is defined as the sum of
total stockholders' equity, the allowance for possible loan losses, and
subordinated capital notes and debentures.
3. Reduction in Parent Company Leverage. The applicant must
demonstrate to the satisfaction of the Board that the parent holding
company's ratio of debt to equity will decline to 30 percent within 12
years after consummation of the acquisition. The holding company must
also demonstrate that it will be able to safely meet debt servicing and
other requirements imposed by its creditors.
The term "debt," as used in the ratio of debt to equity, means
any borrowed funds (exclusive of short-term borrowings that arise out
of current transactions, the proceeds of which are used for current
transactions), and any securities issued by, or obligations of, the
holding company that are the functional equivalent of borrowed funds.
The term "equity," as used in the ratio of debt to equity,
means the total stockholders' equity of the bank holding company
adjusted to reflect the periodic amortization of "goodwill"
(defined as the excess of cost of any acquired company over the sum of
the amounts assigned to identifiable assets acquired, less liabilities
assumed) in accordance with generally accepted accounting principles.
In determining the total amount of stockholders' equity, the bank
holding company should account for its investments in the common stock
of subsidiaries by the equity method of accounting.
Ordinarily the Board does not view redeemable preferred stock as a
substitute for common stock in a one-bank holding company formation.
Nevertheless, to a limited degree and under certain circumstances the
Board will consider redeemable preferred stock as equity in the capital
accounts of the holding company if the following conditions are met: 1)
the preferred stock is redeemable only at the option of the issuer and
2) the debt to equity ratio of the holding company would be at or
remain below 30 percent following the redemption or retirement of any
preferred stock. Preferred stock that is convertible into common stock
of the holding company may be treated as equity.
4. Dividend Restrictions. The bank holding company is not expected
to pay any corporate dividends on common stock until such time as its
debt to equity ratio is below 30 percent. However, some dividends may
be permitted provided all of the following conditions are met: a) the
applicant has begun making scheduled repayments of principal on the
acquisition debt; b) such scheduled repayments of principal are
reasonable in amount, will be made at least annually, and will allow
for the retirement of the acquisition debt over a period not to exceed
25 years; and c) the applicant can clearly demonstrate at the time the
application is filed that such dividends will not jeopardize the
ability of the holding company to reduce its debt to equity ratio to 30
percent within 12 years of consummation of the proposal or cause the
gross capital to assets of the subsidiary bank to fall below 8 percent
over the same period. Also, it is expected that dividends will be
eliminated if the holding company is not meeting the projections made
at the time the application was filed regarding the ability of the
holding company to reduce the debt to equity ratio to 30 percent within
12 years of consummation of the proposal.
Board of Governors of the Federal Reserve System, March 28, 1980.
[Source: 45 Fed. Reg. 24233, April 9, 1980]
[The page following this is 6175.]
{{6-30-87 p.6175}}
POLICY STATEMENT REGARDING COMPLIANCE WITH THE 1980 REQUIREMENTS
OF THE BANK HOLDING COMPANY ACT
Pursuant to the provisions of
section 4(a)(2) of the Bank Holding
Company Act ("BHCA"), a bank holding company that became
subject to the BHCA as a result of the 1970 Amendments to the BHCA
generally may not retain nonbanking subsidiaries or activities beyond
December 31, 1980, if it also wishes to remain a bank holding company
beyond that date. In its December 12, 1979, policy statement the Board
stated that it will regard as an extremely serious matter a violation
of section 4 of the BHCA resulting from a bank holding company's
failure to divest or obtain approval for retention prior to December
31, 1980, and that with respect to such violations, it intends to
enforce the provisions of the BHCA through appropriate actions,
including initiation of cease-and-desist proceedings and assessment of
civil money penalties or referral for criminal prosecution. In previous
statements the Board has urged bank holding companies to file a plan of
divestiture with respect to each subsidiary or activity that is subject
to the divestiture requirements of section 4(a)(2) of the BHCA.
While bank holding companies have met these voluntary deadlines, a
number of companies must take action on or before December 31, 1980, in
order to avoid violation of the 1980 requirements. The purpose of this
statement is to set forth a program the Board intends to follow for the
final six months of the ten-year divestiture period to guide the
remaining companies with 1980 obligations toward orderly compliance and
to enable the Board to monitor their progress. Accordingly, bank
holding companies with 1980 obligations should observe the following
program:
1. Applications to Retain Under
Section 4(c)(8). Any
application for Board approval to retain a nonbanking subsidiary or
activity subject to the 1980 divestiture requirements should be
submitted to the appropriate Federal Reserve bank no later than July 1,
1980. Failure to file retention applications by July 1, 1980, will be
considered by the Board to be a declaration by the company that it does
not intend to retain such nonbank subsidiary or activity. Moreover, the
Board expects an affected company to be actively engaged in steps to
divest or discontinue all impermissible nonbanking subsidiaries and
activities that it does not intend to retain (including those it has
not applied to retain).
2. Requests for Special Extension. Section 701(b) of
the Monetary Control Act of 1980 (P.L. 96-221) contains a provision
amending section 4(a)(2) of the BHCA to provide that the Board may
extend the 1980 divestiture date to December 31, 1982, for the
divestiture by a bank holding company of interests in real estate. The
amendment specifies that the Board may grant the extension where it
finds the company has made continuing good faith efforts to divest, and
that the extension is necessary to avert substantial loss to the
company. Any bank holding company wishing to take advantage of this
special provision must submit its request to the Board no later than
July 1, 1980. Each such request should provide information to enable
the Board to evaluate the financial impact of immediate divestiture, as
well as the company's prior efforts to divest. The appropriate Federal
Reserve bank may be contacted for more information on how to file
requests for this extension.
3. Monthly Reports. A bank holding company that has not
filed an application or request to retain any nonbanking subsidiary or
activity under paragraphs 1 and 2 above by July 1, 1980, is required to
file with the Board a monthly progress report concerning its actions
either to divest or discontinue such nonbanking subsidiaries or
activities, or to divest its bank. These reports should be in letter
form and must be filed with the appropriate Reserve bank on the first
day of each month, with the initial report due on August 1, 1980.
By Order of the Board of Governors of the Federal
Reserve System, effective May 9, 1980.
[Source: 45 Fed. Reg. 32117, May 15, 1980]
[The page following this is 6177.]
{{6-30-87 p.6177}}
POLICY STATEMENT ON THE RESPONSIBILITY OF BANK HOLDING COMPANIES
TO ACT AS SOURCES OF STRENGTH TO THEIR SUBSIDIARY BANK
A fundamental and long-standing principle underlying the Federal
Reserve's supervision and regulation of bank holding companies is that
bank holding companies should serve as sources of financial and
managerial strength to their subsidiary banks. It is the policy of the
Board that in serving as a source of strength to its subsidiary banks,
a bank holding company should stand ready to use available resources to
provide adequate capital funds to its subsidiary banks during periods
of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources
for assisting its subsidiary banks in a manner consistent with the
provisions of this policy statement.
Since the enactment of the Bank Holding Company Act in 1956, the
Board has formally stated on numerous occasions that a bank holding
company should act as a source of financial and managerial strength to
its subsidiary banks. As the Supreme Court recognized in the 1978
First Lincolnwood decision, Congress has expressly endorsed
the Board's long-standing view that a holding company must serve as a
"source of strength to subsidiary financial
institutions." 1
In addition to frequent pronouncements over the years and the 1978
Supreme Court decision, this principle has been incorporated explicitly
in Regulation Y since 1983. In particular, § 225.4(a)(1) of
Regulation Y provides that:
A bank holding company shall serve as a source of financial and
managerial strength to its subsidiary banks and shall not conduct its
operations in an unsafe or unsound manner.
The important public policy interest in the support provided by a
bank holding company to its subsidiary banks is based upon the fact
that, in acquiring a commercial bank, a bank holding company derives
certain benefits at the corporate level that result, in part, from the
ownership of an institution that can issue federally insured deposits
and has access to Federal Reserve credit. The existence of the federal
"safety net" reflects important governmental concerns regarding
the critical fiduciary responsibilities of depository institutions as
custodians of depositors' funds and their strategic role within our
economy as operators of the payments system and impartial providers of
credit. Thus, in seeking the advantages flowing from the ownership of a
commercial bank, bank holding companies have an obligation to serve as
sources of strength and support to their subsidiary banks.
An important determinant of a bank's financial strength is the
adequacy of its capital base. Capital provides a buffer for individual
banking organizations to absorb losses in times of financial strain,
promotes the safety of depositors' funds, helps to maintain confidence
in the banking system, and supports the reasonable expansion of banking
organizations as an essential element of a strong and growing economy.
A strong capital cushion also limits the exposure of the federal
deposit insurance fund to losses experienced by banking institutions.
For these reasons, the Board has long considered adequate capital to be
critical to the soundness of individual banking organizations and to
the safety and stability of the banking and financial system.
Accordingly, it is the Board's policy that a bank holding company
should not withhold financial support from a subsidiary bank in a
weakened or failing condition when the holding company is in a position
to provide the support. A bank holding company's failure to assist a
troubled or failing subsidiary bank under these circumstances would
generally be viewed as an unsafe and unsound banking practice or a
violation of Regulation Y or both. Where necessary, the Board is
prepared to take supervisory action to require such assistance.
Finally, the Board recognizes that there may be unusual and limited
circumstances where flexible application of the principles set forth in
this policy statement might be necessary, and the Board may from time
to time identify situations that may justify exceptions to the policy.
This statement is not meant to establish new principles of
supervision and regulation; rather, as already noted, it builds on
public policy considerations as reflected in banking laws and
regulations and long-standing Federal Reserve supervisory policies and
practices. A
{{6-30-87 p.6178}}bank holding company's failure to
meet its obligation to serve as a source of strength to its subsidiary
bank(s), including an unwillingness to provide appropriate assistance
to a troubled or failing bank, will generally be considered an unsafe
and unsound banking practice or a violation of Regulation Y, or both,
particularly if appropriate resources are on hand or are available to
the bank holding company on a reasonable basis. Consequently, such a
failure will generally result in the issuance of a cease-and-desist
order or other enforcement action as authorized under banking law and
as deemed appropriate under the circumstances.
[Source: 52 Fed. Reg. 15707, April 30, 1987, effective April 24,
1987]
[The page following this is 6181.]
1 Board of Governors v. First Lincolnwood Corp., 439
U.S. 234, 252 (1978), citing S. Rep. No. 95-323, 95th Cong., 1st Sess.
11 (1977). Go Back to Text
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