Fed Interim Rule Lets Holding Companies Add Services Without Advance

The Federal Reserve Board on Wednesday made it substantially easier for well-capitalized holding companies to offer brokerage, leasing, and other nonbank services.

The Fed estimated its move will save the industry between $313,000 and $520,000 a year.

The proposal, approved as an interim rule, makes three major changes.

First, it eliminates a requirement that holding companies seek permission before offering many nonbank services. Instead, the holding company must notify the Fed within 10 days of entering one of these businesses. In addition to brokerage and leasing, this so-called laundry list of permissible activities includes trust, loan servicing, management consulting, data processing, and futures commission merchant activities.

Second, it eases the rules for banking companies to acquire a firm that already offers these services. Instead of filing an application, the institution must submit a notice at least 12 days before completing the deal.

Finally, the rule makes it easier to enter a nonbanking business - such as securities underwriting - not included in the laundry list. Rather than file an application, holding companies may provide a 12-day advance notification. The Fed, however, reserved the right to require complete applications whenever it deems it necessary.

The expedited procedures, required by the 1996 law capitalizing the thrift insurance fund, do not apply to the acquisition of a bank or thrift. Bankers may comment on the changes for the next 30 days.

"This is tremendous relief for bank holding companies," said Melanie Fein, a partner at the Washington law firm of Arnold & Porter. "It relieves bank holding companies of delays and bottlenecks that frequently hold things up at the staff level."

The Fed also defined a "well-capitalized" holding company for the first time. To earn that rating it must maintain a total risk-based capital ratio of at least 10% on a consolidated basis; also, its Tier 1 capital ratio must beat least 6%. These requirements mirror those for a well-capitalized bank.

The definition, however, differs for the leverage capital ratio, which is computed by dividing equity by total assets. Holding companies that have instituted the Fed's new market-risk rules must have a leverage ratio of at least 3%. All other holding companies must have at least 4%. Banks, however, need a leverage capital ratio of 5% to qualify as well capitalized.

These changes complement a separate Regulation Y reform proposal that would eliminate the anti-tying rules for nonbanks and slash application processing time in half. That plan is out for comment until Oct. 31.

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