The Federal Reserve Board has approved a rule that places new limits on mergers and acquisitions in the banking industry, effectively slowing the growth of the largest institutions in yet another strike against “too big to fail” banks. The rule prohibits a financial company from combining with another company if the ratio of the resulting company's liabilities exceeds 10 percent of the aggregate consolidated liabilities of all financial companies.
Liabilities of a financial institution are defined in the final rule as the difference between its risk-weighted assets, 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 Board supervision.
The final rule, although substantially similar to a proposal issued in May, does include modifications in response to discussions that emerged during the public comment period. One change: under the final rule, if a bank has reached the 10 percent concentration limit, it can not acquire control of another company under merchant banking authority. The final rule also adds an exemption to clarify that a financial company may continue to engage in securitization activities if it has reached the limit.
Other changes and clarifications:
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.
Removing a prior notice requirement for acquisitions by financial companies with total consolidated liabilities equal to or greater than 8 percent of aggregate financial sector liabilities.
Providing 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 twelve months preceding the consummation of the transaction and set forth a process and standard of review for de minimis transactions.
The rule, which amends the Bank Holding Company Act, was mandated by the Dodd-Frank Act. It becomes effective on Jan. 1, 2015. Among banks that are already nearing the forthcoming 10 percent concentration limit are Bank of America, JPMorgan, and Citigroup.