Sunday, December 14, 2014

Senate Clears Legislation for President Easing Capital Formation for Community Banks

The Senate passed by unanimous consent and sent to the President for his signature legislation raising the threshold for small bank holding company regulatory relief to up to $1 billion. H.R. 3329 would direct the Federal Reserve to increase the qualifying asset threshold of the Fed’s Small Bank Holding Company Policy Statement from $500 million to up to $1 billion, enabling small bank holding companies with under $1 billion in assets to be regulated under the Small Bank Holding Company Statement, which allows simplified reporting requirements and less stringent capital standards that reflect the traditional banking services that these smaller banks provide. The current policy statement applies only to financial institutions below $500 million in assets. The House passed the legislation earlier this year.

H.R. 3329 provides targeted regulatory relief for small bank holding companies. It conditions the relief on the financial institution not being engaged in any nonbanking activities involving significant leverage and having a significant amount of outstanding debt that is held by the general public. A third condition added by a Senate amendment to H.R. 3329 is that the financial institution cannot have a material amount of debt or equity securities outstanding , other than trust preferred securities that are registered with the SEC. The House agreed to the amendment.

It is estimated that the change will reduce regulatory burdens for 89 percent of bank holding companies, up from 75 percent today. This policy change is supported by the Federal Reserve Board, with Fed Governor Daniel Tarullo calling on Congress to boost the policy statement threshold to $1 billion in a speech in November. It has also been endorsed by the Independent Community Bankers of America and the American Bankers Association.

In his remarks, Governor Tarullo noted that since the policy statement was issued by the Fed one might think that the Board could raise the threshold on its own. However, he explained that Section 171 of the Dodd-Frank Act, the Collins Amendment, effectively eliminates any authority of the Board to extend the capital treatment in the policy statement to holding companies with assets greater than the threshold in effect on May 19, 2010, or to savings and loan holding companies of any size. Thus, legislation was needed to effect these changes.

According to Rep. Blaine Luetkemeyer (R-Mo), the sponsor of the legislation, community banks face unique challenges with regards to capital formation, which is a particular concern at a time when regulators are demanding higher capital levels in response to Basel III. (Cong. Record, May 6, 2014, p. 3425).