New proposal aims to ease director shortage at community banks

Register now

WASHINGTON— Federal banking regulators issued a proposal Thursday to allow more directors and management officials to serve at more than one bank or depository holding company in an effort to provide relief to community banks.

The current "management interlock rules" prohibit officials at depository organizations with more than $2.5 billion in assets from serving simultaneously at a different institution with more than $1.5 billion in assets, without first seeking an exemption from the regulators.

Under the proposal from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, both thresholds would be raised to $10 billion in assets.

This would exempt 764 depository institutions from the prohibition as of Dec. 31, 2017, according to the proposal.

The agencies cited the increasing consolidation and growth within the financial services industry as the primary reason behind the proposed increase, and argued that the new threshold would help smaller depository organizations find qualified directors while eliminating the need to ask for an exemption from the rule.

The $10 billion prohibition threshold would be small enough to prevent interlocks between larger banks, “which could present a risk of anticompetitive conduct at the national banking market level,” but would be large enough to exempt smaller community banks that do not present the same competitive risks at the national level, the regulators said.

The agencies also asked for public comment on three alternative approaches to the $10 billion prohibition threshold, two of which are based on market changes and one that is based on inflation.

The proposal was developed in response to comments submitted to the agencies under the Economic Growth and Regulatory Paperwork Reduction Act. The 1996 law requires the agencies to undertake a review every 10 years to identify outdated or unnecessary rules.

After the proposal is officially published in the Federal Register, the public will have 60 days to comment on the changes.

For reprint and licensing requests for this article, click here.