WASHINGTON The Federal Reserve Board finalized a rule Thursday that could spur small bank deals by expanding the number of bank holding companies that qualify for an exception allowing them to carry more debt.
The move raises the threshold from $500 million to $1 billion in consolidated assets for small bank holding companies to finance new deals with up to 75% in debt. It also allows savings and loan companies to qualify for the exemption.
The rule was mandated by Congress as part of a bill enacted in December, but Fed officials had called for the increase. The Fed said in its rule that while it "has generally discouraged the use of debt by bank holding companies to finance the acquisition of banks or other companies" it does recognize that smaller institutions generally have less access to equity markets than larger institutions.
The exception was originally implemented in 1980 to encourage small community-based bank deals. The last time it was raised was in 2006 when the asset threshold was increased from $150 million to $500 million.
The rule continues a recent trend of increasing the size of financial institutions that qualify for regulatory exemptions. Many have asserted that smaller institutions are being stifled by a multitude of new regulations that have been implemented as a result of the Dodd-Frank Act and that rules could be better tailored.
While small bank holding companies will now be able to use more debt to finance deals, the parent company will still be required to comply with additional constraints, including reducing the newly acquired debt in 25 years, and achieving a debt-to-equity ratio of at least 3% in 12 years along with a number other requirements.
The Fed also said that while certain holding companies that fall under the exemption will be excluded from consolidated capital requirements, their depository subsidiaries will still be subject to minimum capital requirements.
The rule maintains a number of qualitative requirements related to participation in nonbanking and off-balance sheet activities as well outstanding debt and securities.
The Fed issued a proposal on the issue in January and received only 11 comments on it, all of whom generally supported the plan.