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From Banking and Finance Law Daily, November 5, 2014

Fed finalizes concentration limits for bank M&As

By J. Preston Carter, J.D., LL.M.

The Federal Reserve Board issued a final rule implementing the concentration limits found in Section 622 of the Dodd-Frank Act. The final rule takes effect on Jan. 1, 2015.

Background. Section 622, which is codified at 12 U.S.C. §1852, established a financial sector concentration limit that prevents a “financial company” from merging or consolidating with, acquiring all or substantially all of the assets of, or otherwise acquiring control of another company—a “covered acquisition”—if the resulting company’s consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies.

The Dodd-Frank Act concentration limit supplements a nationwide deposit cap in federal banking law that generally prohibits the appropriate federal banking agency from approving an application by a bank holding company, insured depository institution, or savings and loan holding company to acquire an insured depository institution located in a different home state than the acquiring company if the acquiring company controls, or following the acquisition would control, more than 10 percent of the total amount of deposits of insured depository institutions in the United States.

Final rule. While the final rule is substantially similar to the proposal issued in May (see Banking and Finance Law DailyMay 9, 2014), the Fed made changes, as follows, in response to comments. The final rule:

  • provides that financial sector liabilities will be calculated as of Dec. 31, 2014, for purposes of the period beginning July 1, 2015, and ending June 30, 2016, and the two-year average will be adopted for each year thereafter;

  • removes the prior notice requirement for acquisitions by financial companies with total consolidated liabilities equal to or greater than 8 percent of aggregate financial sector liabilities;

  • provides prior consent for a covered acquisition that would result in an increase in the liabilities of the financial company that does not exceed $100 million, when aggregated with all other covered acquisitions by the financial company during the 12 months preceding the consummation of the transaction and set forth a process and standard of review for de minimis transactions;

  • removes the exception for merchant banking investments and added an exception for securitization transactions to the definition of “covered acquisition”; and

  • provides more specific details of the methodology used for calculating financial sector liabilities.

The final rule generally defines liabilities of a financial institution as the difference between its risk-weighted assets, as adjusted to reflect exposures deducted from regulatory capital, and its total regulatory capital. Firms not subject to consolidated risk-based capital rules would measure liabilities using generally accepted accounting standards.

Financial companies subject to the limit include insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies designated by the Financial Stability Oversight Council for Fed supervision.

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