The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a new regulatory framework for the supervision of financial holding companies and their non-bank subsidiaries, and provides new standards for interstate bank mergers, interstate bank acquisitions by bank holding companies, de novo branching for national and state banks, and charter selection and conversion (see Title VI).

Increasing Supervision of Holding Companies and Their Subsidiaries

Sections 604 and 605 of the conference report broaden the supervisory powers afforded to the Federal Reserve Board to supervise the activities of holding companies and their non-bank subsidiaries.  The conference report permits the Federal Reserve to review other supervisory materials – “reports and supervisory information” – provided to regulators by the holding company or any of its subsidiaries to get a better sense of the risk profile of non-depository subsidiaries of the holding company.  In addition, the Federal Reserve is permitted to commence examinations of the holding company and its subsidiaries, with a particular focus on prudential concerns such as the safety and soundness of the institution, the overall stability of the U.S. financial system, as well as a review of the compliance of the holding company and its subsidiaries with relevant provisions of federal law.

The conference report attempts to reduce the burden of additional regulatory examinations on financial institutions and regulators, with the Federal Reserve instructed to rely on reports from prior examinations by other federal or state regulators in order to get a preliminary picture of the condition of the holding company and its subsidiary.  The conference report further requires the Federal Reserve to coordinate its activities with the functional regulator of a subsidiary; for example, should the conference report be enacted, the Federal Reserve is required to consult with the OCC for its review of a national bank and to consult with the Securities Exchange Commission for its review of a securities or brokerage subsidiary.

The conference report extends Federal Reserve supervision to non-depository subsidiaries engaged in activities that could otherwise be performed by a bank subsidiary, with a primary example being mortgage lending.  These types of subsidiaries will be subjected to the same supervisory regime that currently applies to depository institutions, with the Federal Reserve acting as lead examiner, with shared or alternating regulatory supervision with a state regulator possible if the subsidiary is currently under the supervision of a state agency.  Further, should the Federal Reserve fail to conduct examinations of the non-depository subsidiary, the lead federal bank regulator for the bank holding company’s insured depository institution may recommend to the Federal Reserve that it performs the examination.  If the Federal Reserve fails to either begin an examination within 60 days of the written request or provides a written explanation of why such an examination is unnecessary, the lead federal bank regulator may conduct the examination of the non-banking subsidiary for standard prudential concerns and systemic risk, exercising so-called “back-up authority.”   The examining agency is permitted to assess the subsidiary a fee or other charge deemed necessary to cover the costs of the examination.

Should the examining regulator determine that remedial action is needed by the subsidiary and its parent holding company, it must present its findings to the Federal Reserve, which may then impose some form of enforcement action against the subsidiary.  Should the Federal Reserve choose not to act, the banking agency responsible for the examination has back-up authority to take enforcement action against the subsidiary.  Section 606 of the conference report places an additional requirement on the bank holding company to be both “well-capitalized and well-managed” in order to engage in “expanded financial activities.”  Ultimately, should the risk profile of the non-depository subsidiary raise concerns, the Federal Reserve is likely to use this new requirement as a means to encourage the holding company to raise or hold additional capital to improve its overall condition.

While the conference report encourages coordination and cooperation among all federal and state banking regulators, as well as functional regulators such as the SEC and the CFTC, the Federal Reserve has a clear invitation to expand its supervisory powers over a variety of non-depository subsidiaries of bank holding companies, and to coordinate supervision of larger, more complex financial institutions.

New Standards for Interstate Bank Mergers, Bank Acquisitions and De Novo Branching

Title VI of the conference report continues Congress’ efforts to better regulate systemic risk in the nation’s financial markets, as previously discussed regarding the Office of Financial Research and the Financial Stability Oversight Council. Section 604 of the conference report requires that the Federal Reserve consider whether “a proposed acquisition, merger or consolidation would result in greater or more concentrated risks to the stability” of the U.S. banking system as part of its evaluation of the application.  Similar considerations are made in bank merger transactions – the Federal Deposit Insurance Act is amended to include consideration of systemic risk, alongside standard concern for the “convenience and needs of the community to be served.”  In addition, a financial holding company cannot acquire a company without the prior approval of the Federal Reserve if the total consolidated assets acquired exceed $10 billion, providing another regulatory check on growth of large financial institutions.

Section 607 of the conference report tightens existing standards for approval of interstate bank mergers and the acquisition of banks by holding companies.  For holding company acquisitions of banks located outside of the company’s home state, the conference report amends the Bank Holding Company Act, which currently requires holding companies to be “adequately capitalized and adequately managed” in order to complete an acquisition, to now require that the holding company must be “well capitalized and well managed” at the time of the acquisition.  Similarly, the conference report amends the Federal Deposit Insurance Act, which currently requires that the banks be “adequately capitalized and adequately managed” in advance of the transaction, and must also “continue to be adequately capitalized and adequately managed” following the combination.  The conference report maintains the requirement that banks must be adequately capitalized and adequately managed in advance of the combination; however, Dodd-Frank amends current law such that the resulting institution “will be well capitalized and well managed.”  In other words, two institutions that are currently less than well capitalized for regulatory purposes may be allowed to merge, but in order to complete the transaction, there must be an additional capital infusion to cause the resulting institution to be well capitalized for regulatory purposes.

While it is unlikely to affect community or regional banks, Section 623 of the conference report places a further restraint on mergers and acquisitions.  Under this section, interstate bank mergers, interstate acquisitions of banks by bank holding companies, and savings and loan holding company acquisitions may not be permitted if the resulting institution controls more than 10% of the total deposits in the United States, unless the institution being acquired is deemed to be effectively insolvent by its federal regulator.

Finally, Section 613 of the conference report amends the National Bank Act and the Federal Deposit Insurance Act to largely eliminate state law provisions that can bar de novo branching for non-domestic banks.  Current law allows federal approval of an interstate de novo branch application only if a particular state expressly permits out-of-state banks to establish a de novo branch.  The conference report amends federal law to allow both national and state-chartered banks to establish a de novo branch across state lines provided a state bank chartered under the laws of that particular state would be permitted to establish the de novo branch.  So while each state is permitted to have standards for the establishment of de novo branches in its state, all banks – whether national banks, state banks chartered under the laws of another state, or domestic state banks – will now effectively follow the same branching requirements in a given state.

New Restrictions on Charter Selection and Charter Conversion

Title VI of the conference report establishes a moratorium on the granting of certain types of financial institution charters, and largely prevents the charter conversion of troubled financial institutions.

Section 603 of the conference report places a three-year moratorium on the granting of charters to credit card banks, industrial banks and trust banks.  In addition, the conference report bars a change in control of a credit card bank, an industrial bank or a trust bank if the transaction would result in a commercial firm taking control of the financial institution.

Section 612 of the conference report curtails the ability of troubled financial institutions to convert to another type of charter.  National banks, federal savings associations and state banks and savings associations are not permitted to convert to another charter at a time in which the institution is subject to or has notice of a memorandum of understanding or a formal regulatory order.  The only exception to the general prohibition is if the primary federal regulator following the conversion provides the current federal regulator with a written plan to address the regulatory concerns raised by the enforcement action.