- Key insight: The proposal would raise the credit limit imposed on insiders for the first time since 1979 and would establish an indexing system to ensure the threshold keeps pace with broader economic growth.
- Expert quote: "Community banks often face challenges recruiting experienced business leaders to serve as members of bank boards and as bank executives. Many potential board members are business owners whose expertise is invaluable." — Fed Vice Chair for Supervision Michelle Bowman
- Forward Look: The request for comments was approved unanimously, but Fed Gov. Michael Barr flagged potential issues related to the indexing approach in the proposal.
Banks could soon lend nearly $2 million to their own executives, major shareholders and other "insiders" without getting board approval or making a public disclosure.
The Fed on Friday morning
The proposal makes the following adjustments to the framework's cutoff for what is considered an extension of credit:
- Credit card debt: $15,000 to $60,000.
- Interest-bearing overdrafts associated with preauthorized credit plans: $5,000 to $20,000.
- Prohibition against paying an overdraft to an executive officer or director for inadvertent overdrafts: $1,000 to $4,000.
- The "other purpose" exception for unsecured lending to executive officers: $100,000 to $400,000.
The proposal would also raise the level at which an extension of credit or loan to an insider requires approval from a bank's board of directors and triggers a public disclosure requirement from $500,000 to $2 million.
Moving forward, these thresholds will be updated automatically every five years based on nominal growth of gross domestic product.
Fed Vice Chair for Supervision Michelle Bowman said the changes were necessary to help community banks recruit board members, noting that many candidates for such positions are business owners that rely on bank lending.
"Today's proposal modernizes Regulation O by updating outdated dollar-based thresholds and ensuring their future relevance, while preserving necessary safeguards," Bowman said in a statement released alongside the proposal. "Community banks often face challenges recruiting experienced business leaders to serve as members of bank boards and as bank executives. Many potential board members are business owners whose expertise is invaluable. This rule recognizes that value by providing clearer, more straightforward standards that protect against potential conflicts of interest while supporting effective governance."
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The reform also addresses the increasing ownership of bank shares by exchange-traded funds and adjusts the parameters of the regulation to ensure it does not "hinder lending relationships between a substantial and increasing number of banks and portfolio companies owned by the same fund group."
As of the end of last year, fund groups are the principal owners of 66 banks and "might be presumed" to have controlling stakes in more than 2,000 companies in their portfolios.
The proposal aims to provide "permanent compliance burden relief" to banks with this type of ownership structure.
Regulation O was created in 1978 after Congress passed the Financial Institutions Regulatory and Interest Rate Control Act, which directed the Fed to address self-dealing within banks and to limit the ability of bank insiders to jeopardize the stability of their institutions for their own gain. The limits imposed by the rule have not been amended since it was first promulgated in 1979.
The Fed's Board of Governors voted unanimously to issue the proposal for comment. Fed Gov. Michael Barr — the former vice chair of supervision who has regularly voted against many of the central bank's policy reforms during the past year — supported seeking comment on the change, but noted that he will consider the comments carefully before he supports finalizing the rule.
Specifically, Barr noted that he was not convinced that indexing the thresholds to nominal GDP growth rather than inflation-linked growth was the best way forward. He also said he will look to incoming public comments to shape his thinking about the treatment of fund-owned banks and their relationships with portfolio companies.
"While I vote in favor of releasing the proposal, it raises a set of tradeoffs, and I look forward to public comment," Barr said. "In particular, I am interested in views on whether nominal gross domestic product is the most relevant variable to use for indexing the regulation's lending limits, or whether the consumer price index would be more appropriate. Additionally, I would like to hear a range of views on how the rulemaking can best address the treatment of banks' loans to their corporate borrowers when passive asset managers own equity positions in both the banks and their borrowers."
The proposal will be published in the Federal Register and the public will have 60 to submit comments.
Mutual Holding Company proposal
Along with its proposed changes to Reg O, the Fed
The reform would enable mutual holding companies — which are owned by depositors and borrowers instead of shareholders — to use mutual capital instruments to satisfy regulatory capital requirements.
The proposal also calls for several other changes to mutual holding company oversight, including making it easier for them to waive dividends to increase capital and removing regulatory barriers between converting from mutual ownership stakes to stocks.
"This proposal will allow mutual banks to continue to grow and more effectively serve communities across the country, while preserving their unique depositor-owned structure," Bowman said in a statement.
The Fed has overseen mutual holding companies since 2011. It assumed responsibility for these institutions from the Office of Thrift Supervision, which was dismantled as part of the Dodd-Frank Act in response to its handling of the subprime mortgage crisis.
This proposal was also issued for comment with unanimous approval by the Board of Governors. Barr said the proposal contains "many" useful updates to the regulatory framework around mutual holding companies, but he said it also raises some important questions to be addressed by commenters.
"I reserve judgment on the final rule to determine if there are sufficient safeguards on potential conflicts of interest and sufficient accountability for both dividend waivers and conversions," he said. "I also hope comments will focus on how new instruments like mutual capital certificates and special deposits might perform as viable loss-absorbing capital under stressed conditions. Finally, I welcome comments about the positive and negative effects of this proposal on competition among entities with different charters and corporate forms."
The public also has 60 days to comment on this proposal.
