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From Banking and Finance Law Daily, May 9, 2014

Fed seeks comments on proposed concentration limits for bank M&As

By John M. Pachkowski, J.D.

The Federal Reserve Board issued a proposed rulemaking to implement the concentration limits found in section 622 of the Dodd-Frank Act. Comments on the proposed rulemaking are due by July 8, 2014.

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.

FSOC recommendations. The Fed developed its proposed rule based on recommendations made in a January 2011 report issued by the Financial Stability Oversight Council that was required by section 622. The report found that that the concentration limit would have a positive impact on U.S. financial stability by reducing the systemic risks created by increased financial sector concentration arising from covered acquisitions involving the largest U.S. financial companies. In addition, the FSOC report concluded that the concentration limits would have little or no effect on moral hazard. Finally, the report found that there would be a “positive” impact on competitiveness, but the FSOC expressed concern that there could be the potential for disparate treatment of covered acquisitions between the largest U.S. and foreign firms, depending on which firm is the acquirer or the target. For example, the section 622 concentration limit could allow a large foreign-based firm with a small U.S. presence to purchase a U.S. target but prevent an equally-sized U.S.-based firm from making the same acquisition because the statute would count only the U.S. assets of a foreign acquirer, but would count the global assets of a U.S. acquirer, when determining compliance with the concentration limit.

In light of the report’s conclusions, FSOC recommended that:

  • the measurement of a financial company’s liabilities not subject to consolidated risk-based capital rules using U.S. generally accepted accounting principles or other applicable accounting standards;

  • the Fed use a two-year average to calculate aggregate financial sector liabilities and publish annually by July 1 the current aggregate financial sector liabilities applicable to the period of July 1 through June 30 of the following year; and

  • the “failing bank exception” should be extended to apply to the acquisition of any type of insured depository institution in default or in danger of default.

“Financial companies”. If adopted, the regulatory concentration limits would apply to insured depository institutions, bank holding companies, savings and loan holding companies, other companies that control an insured depository institution, foreign banks or companies that are treated as bank holding companies, and nonbank financial companies supervised by the Fed.

Liabilities. Also, the regulatory concentration limits would define 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. The proposal would also provide that the Fed would measure and disclose the aggregate liabilities of financial companies annually, and would calculate aggregate liabilities as a two-year average.

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