Fed proposes to codify how it determines when a firm takes control of a bank

A proposal for determining when a firm has obtained control of a bank and must register as a bank holding company was released for a 60-day comment period by a unanimous vote of the Federal Reserve Board during its open meeting Tuesday.

As a bank holding company, a firm is subject to Federal Reserve Board supervision and certain restrictions on operations.

“Providing all stakeholders with clearer rules of the road for control determinations will responsibly reduce regulatory burden,” Chair Jerome H. Powell said. “As a result, it will be easier for banks, particularly community banks, to raise capital to support lending and investment.”

Federal Reserve Board Vice Chair for Supervision Randal Quarles described the previous method for determining bank control as largely ad hoc and complicated. He said the proposed rule would improve transparency of the Fed Board’s control framework by incorporating it into a comprehensive public regulation. As a result, the proposal would reduce complexity and burden for banking organizations and their investors, and provide clarity so that a wide range of stakeholders can better understand the control rules.

“The board’s control framework has developed over time through a Delphic and hermetic process that has generally not benefited from public comment,” Quarles said. “This proposal would place substantially all of the board’s control positions into a comprehensive public regulatory proposal and allow public comment on those positions to improve their content and consistency.”

(In the short video, the Fed’s Randal Quarles discusses the former process used in bank control determinations; Chair Jerome H. (“Jay”) Powell may be heard in the background, chuckling.)

The proposal presents several factors and thresholds that the Fed Board will use to determine if a company has control over a bank. The key factors include the company’s total voting and non-voting equity investment in the bank; director, officer, and employee overlaps between the company and the bank; and the scope of business relationships between the company and the bank.

The number of presumptions that could be used in determining whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act or the Home Owners’ Loan Act would be significantly expanded, according to the notice of proposed rulemaking. These presumptions, to be codified in the Fed’s Regulation Y and Regulation LL, generally would be consistent with the Fed Board’s historical practice with respect to the types of relationships that do or do not raise significant controlling influence concerns. However, several of the proposed presumptions would represent “targeted adjustments” relative to historical practice, it states.

The proposed rule would also include various definitions and ancillary rules to ensure that the application of the proposed presumptions is clear, transparent, and consistent, according to the notice.

Federal Reserve Board invites public comment on proposal to simplify and increase the transparency of rules for determining control of a banking organization