WASHINGTON — The Federal Housing Finance Agency released a final rule Monday that may help encourage the merger of some of the Federal Home Loan Banks.
The banks are already allowed to merge under the Housing and Economic Recovery Act, but until now did not have any regulatory guidelines on under what conditions such a merger would be approved. The rule provides specific guidelines and procedures for the voluntary merger of any of the 12 banks.
The final rule appears largely similar to the proposal released a year ago. The plan provided some ideas but left open for discussion certain key details, including what kind of voting programs would be appropriate for obtaining members' approval of a proposed merger; how those should be structured; and how to address the transition from a separate board of directors to a combined board.
The final rule addressed which both issues and several others raised by commenters. The FHFA offered some accommodations by offering some flexibility in terms of the level of detail that would need to be included up front in the merger agreement; but said at a minimum banks' had to include the size and composition of the board of directors in their proposed merger agreements.
"In order for the director to make an informed decision about the appropriate size and composition of the board of the continuing bank, both immediately after the merger and over the longer term, the directors should have the benefit of the Banks' views on those matters, and thus the final rule requires the Banks to provide that information," according to the final rule.
FHFA also altered its approval process into a single step after the banks said the two-step approach would be "overly lengthy and burdensome." The agency had initially proposed a two-step preliminary process to win FHFA approval. Instead, the final rule would create a single approval process where conditions would have to be met and certified by the agency before the merger could go through.
It also altered the voting rights of each member of a constituent bank in order to ensure "equity and appropriate corporate governance."
"The final rule should not permit a result where one bank member is authorized to vote a materially different number of shares than another similarly-sized member that is located within a different state in the same bank district," according to the rule.
Under the final rule, each member of the bank will be allowed to cast one vote for each share of bank stock that the member was required to own by a certain date.
Additionally, the agency was clear that there were limitations to the rule and that it was only meant to apply to voluntary mergers. Any cases of liquidations or any reorganizations would not apply and still must be carried out by the director of the agency.
Separately, the agency also broadened how it defined merger to go well beyond cases where a surviving entity would absorb another disappearing entity. It also includes consolidating, a purchase, and any other type of business combination that could occur among the banks — a measure welcomed by the banks.
The intent, according to the FHFA's rule, was to provide the Banks with "wide latitude" to pursue endeavors with other banks.
"The final rule clears the way not just for intra-system bank mergers, but also for more innovative resolution strategies FHFA could deploy if one of the increasing number of weaker Banks heads for the exit," Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc. wrote in a note to clients. "However, if FHFA needs to pull a bank's plug, then the process established in the final rule would not apply."