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7500 - FRB Regulations


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.

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]


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]


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 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]

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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