More Small Banks Should Get Debt Cap Exemption, Fed's Tarullo Says

WASHINGTON — Policymakers should consider changing rules that limit the amount of debt that holding companies can carry in order to exempt more community banks from the restrictions, a senior Federal Reserve Board official said Friday.

Fed Gov. Daniel Tarullo called for a "statutory amendment" to raise the asset threshold for holding companies that must comply with debt limits under the central bank's Small Bank Holding Company Policy Statement. The limits were intended to curb the overuse of debt to finance acquisitions. Tarullo proposed doubling the threshold to $1 billion.

"Such an increase would entail some policy tradeoffs, of course, which obviously become of greater concern as the threshold rises further," Tarullo said at a community bankers meeting in Chicago. "But I think the balance of considerations argues for taking this action to facilitate transfers of ownership of small banks."

Tarullo estimated that 85% of bank holding companies had been under the $500 million threshold when it was raised from $150 million in 2006. But today, only 75% of bank holding companies qualify for the exemption. Raising the threshold to $1 billion would increase that proportion to 89%, Tarullo said.

Karen Thomas, head of government relations for the Independent Community Bankers of America, praised Tarullo's call for the threshold to be raised. Thomas said expanding the exemption would not only facilitate mergers and acquisitions, but would also allow smaller bank holding companies to lend more freely to subsidiary banks they already own.

"This is something we have been working on for some time," Thomas said. Although the ICBA has been pushing for the cap to be raised to $5 billion, she said Tarullo's "concept is a good one."

Tarullo noted that the Fed had originally issued the policy statement without needing congressional action. But a capital measure authored by Sen. Susan Collins, R-Maine, in the Dodd-Frank Act "effectively eliminates" the Fed's authority to raise the threshold without lawmakers getting involved, he said.

However, Thomas said "that has not been our impression." She said the ICBA's view to date has been that the Fed could unilaterally raise the limit, and the trade group was prepared to ask Congress to compel the Fed to raise the limit if the agency did not do so on its own.

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Law and regulation Dodd-Frank Community banking
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