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FRB Lifts Threshold for Financial Stability Review

In its March 2017 approval of People United Financial, Inc.’s merger with Suffolk Bancorp (the “Peoples United Order”), the Federal Reserve Board eased the approval criteria for certain smaller bank merger transactions by expanding its presumption regarding proposals that do not raise material financial stability concerns and providing for approval under delegated authority for such proposals.  The Dodd-Frank Act amended Section 3 of the Bank Holding Company Act to require the Federal Reserve to consider the “extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system.”

In a 2012 approval order, the Federal Reserve established a presumption that a proposal that involves an acquisition of less than $2 billion in assets, that results in a firm with less than $25 billion in total assets, or that represents a corporate reorganization, may be presumed not to raise material financial stability concerns absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risks factors.  In the Peoples United Order, the Federal Reserve indicated that since establishing this presumption in 2012, its experience has been that proposals involving an acquisition of less than $10 billion in assets, or that results in a firm with less than $100 billion in total assets, generally do not create institutions that pose systemic risks and typically have not involved, or resulted in, firms with activities, structures and operations that are complex or opaque.

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Congress Makes Capital Requirements Easier for Small Banks

Author’s Note: On April 9, 2015, the Federal Reserve adopted a final rule to implement the changes discussed below.  The final rule will be effective 30 days after publication in the Federal Register.

For many years, bankers have asked the question, “What size is the right size at which to sell a small community bank?”  Some offer concrete asset size thresholds, while others offer more qualitative standards. We have always believed the best answer is “whatever size allows an acquirer’s profits and capital costs to deliver a better return than yours can.” While that answer is typically greeted with a scratch of the head, a recent change in law impacts the answer to that question for smaller companies. Given a proposed regulatory change by the Federal Reserve, a growing number of small bank holding companies will soon have lower cost of capital funding options that are not available to larger organizations.

President Obama recently signed into law an act meant to enhance “the ability of community financial institutions to foster economic growth and serve their communities, boost small businesses, and increase individual savings.” The new law directs the Board of Governors of the Federal Reserve System to amend its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $500 million to $1 billion and to include savings and loan holding companies of the same size. By design, more community banks will qualify for the advantages of being deemed a small bank holding company.

The Federal Reserve created the “small bank holding company” designation in 1980 when it published its Policy Statement for Assessing Financial Factors in the Formation of Small One-Bank Holding Companies Pursuant to the Bank Holding Company Act. The policy statement acknowledged the difficulty of transferring ownership in a small bank, and also acknowledged that the Federal Reserve historically had allowed certain institutions to form “small one-bank holding companies” with debt levels higher than otherwise would be permitted for larger or multibank holding companies. The first version of the policy statement had a number of criteria for what constituted a small bank holding company, most importantly that the holding company’s subsidiary bank have “total assets of approximately $150 million or less.” The asset threshold has been revised on several occasions, most recently in 2006 to the current level of $500 million in consolidated assets.

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A Significant Change in the Regulatory Oversight of Third-Party Relationships

Both Banks and Their Vendors Must Pay Attention


First there was the bulletin about third-party vendors issued by the Consumer Financial Protection Bureau (CFPB) in April 2012. Then it was the FFIEC’s guidance on IT service providers in October 2012Next came the FDIC’s September 2013 Financial Institution Letter about payment-processing relationships with high-risk merchants.  Then there was the news on October 30, 2013 about the OCC’s guidance on third-party relationships, followed shortly by the Federal Reserve Board’s guidance on managing outsourcing risks in December 2013.

Let’s face it. There has always been guidance and concern about banks and their relationships with third-party service providers. But in recent years it has become quite obvious that the bar has been raised on how banks relate to their third-party processors, program managers, and other service providers. These changes have occurred over time, by a matter of degrees. But it is increasingly plain that we are seeing a significant sea change in how regulators approach the relationships between banks and their third-party vendors. Examiners are digging deeper — especially into the content of bank contracts — and the scope of review is extending to more and more vendors.

In recent months, public commentary from some of the regulators has revealed even more clearly how this recent guidance will impact banks and their vendors. In this article we will describe the regulatory developments and provide some practical guidance as to what this will mean — not only for banks, but for their processors and other service providers.  (A print-friendly version is also available.)

Recent Regulatory Developments

Banks and other financial institutions have always been expected to choose their vendors carefully and to monitor the performance of those vendors. Most institutions have done a reasonably good job in this regard. However, recent regulatory publications and the focus of recent regulatory examinations and enforcement actions indicate that the standards and expectations are now much higher.

The CFPB issued a bulletin on April 13, 2012 regarding the use of service providers, accompanied by a press release stating, “CFPB to Hold Financial Institutions and their Service Providers Accountable.”  This bulletin, CFPB Bulletin 2012-03 (the CFPB Bulletin), states that the CFPB “expects supervised banks and nonbanks to oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer financial law.” (emphasis added).

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The Way Forward for Banking: An Interview with Walt Moeling

Walt Moeling recently sat down with Donna Fay, the Director of Examinations for the Federal Reserve Bank of Atlanta, to discuss the future of community banking in connection with the Federal Reserve’s 2014 Banking Outlook Conference.

As noted by the disclaimer at the beginning of the video, Walt’s views unfortunately don’t necessarily represent the views of the Federal Reserve Bank of Atlanta. However, we can be hopeful that the Federal Reserve Bank of Atlanta continues to be open to our point of view.

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District Court Judge Strikes Down Federal Reserve Board’s Interchange Rule

Decision Favoring Merchants Could Potentially Cost Banks Billions

A U.S. District Court judge recently granted summary judgment against the Board of Governors of the Federal Reserve System (the “Federal Reserve” or “Board”), ruling that the Federal Reserve disregarded Congress’s statutory intent by “inappropriately inflating all debit card transaction fees” and considering data it was not permitted to use in setting a 21-cent cap on debit-card transaction fees under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). In NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia (Washington), Judge Richard J. Leon also ruled in favor of the retailers’ challenge to the network non-exclusivity and routing provisions, stating that the Board’s rule is inconsistent with the “clear, defined language in the network non-exclusivity and routing provisions” and does not support competition or choice in the marketplace.


Pursuant to the so-called “Durbin Amendment” (which implemented Section 920 of the Electronic Fund Transfer Act, as enacted by Section 1075 of the Dodd-Frank Act), the Federal Reserve was directed to establish standards to determine whether debit card interchange fees are “reasonable and proportional to the cost incurred by the issuer” with respect to a transaction. Congress provided specific guidelines to establish interchange transaction fee standards, and called upon the Federal Reserve also to prescribe rules related to network non-exclusivity for routing debit transactions.

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Fall 2012 Update on Regulatory and Legal Changes Affecting Community Banks

Bank regulators have been as busy as usual in 2012, but some of the more interesting regulatory and legal changes have come from non-bank regulators and the courts. And, the JOBS Act changes described below actually lifts the regulatory burden on banks a bit, a rare respite in an otherwise challenging regulatory environment.

The JOBS Act eases bank capital activities and M&A.  The Jumpstart Our Business Startups Act affects community banks in 4 key ways:

  • “Going public” is easier. Banks that have less than $1 billion in gross revenue can qualify as an “emerging growth” company and take advantage of relaxed rules that allow them to “test the waters” and obtain a confidential prior review of an IPO filing by the SEC, provide reduced executive compensation disclosures and file without a SOX 404 attestation by the bank’s auditors.
  • The “crowdfunding” rule (expected in early 2013) will provide banks significant flexibility in raising $1 million per year from their community without IPO-type expenses and without adding new investors to their shareholder count.
  • Private offerings are easier. Rules affecting private offerings are being relaxed so that a bank will be able to use public solicitation and advertising to attract investors as long as the bank takes reasonable steps to ensure that those investors are accredited.
  • Going or staying private is easier because the shareholder count triggering “going public” was raised from 500 to 2,000. And, shareholders from a bank’s “crowdfunding” offerings and from employee compensation plans are now excluded from the shareholder count. These helpful changes to shareholder count rules mean that some banks can bring in new investors or even acquire another bank without triggering the obligation to “go public,” a significant cost and compliance barrier. Also, banks with a shareholder count under 1,200 can “go private” following a 90-day waiting period.
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Opposition to Imposing Basel III Regime on Community Banks Growing; Comment Period Ends on October 22, 2012

In recent weeks, we have been closely monitoring a flurry of activity among many banking organizations to respond formally to the proposed Basel III rules. With few exceptions, the response of the banking industry, particularly with respect to the impact of the proposed Basel III rules on community-focused financial institutions, has been roundly negative.

In mid-September, U.S. Senator Mark Warner (D-VA) and U.S. Senator Pat Toomey (R-PA) circulated a letter  to the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation that has garnered the signature of 51 of their colleagues in the U.S. Senate. The senators’ letter raises their concerns with the “significant, unintended consequences for community banks” that may stem from the proposed capital rules that would make it tougher for smaller banks to raise capital or result in reduced lending in the communities they serve.

Another prominent critic of the proposed rules has been FDIC Director Thomas Hoenig, a former chief executive of the Federal Reserve Bank of Kansas City, who recently proposed that the entire Basel III proposal be scrapped in favor of a more simple capital calculation based on tangible common equity ratios. While Director Hoenig’s proposal would result in higher minimum capital requirements for all banks, it could potentially avoid many of the pitfalls associated with the proposed rules, particularly with respect to the complex deductions from capital and new asset risk-weights that are part of Basel III.

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Federal Reserve Board Issues Final Rule on Interchange Fraud Adjustment

The Federal Reserve Board (FRB) announced an amendment to the fraud-prevention adjustment provisions of Regulation II’s debit card interchange fee standards. When Reg. II was initially released in July 2011, the section addressing this adjustment was issued as an interim final rule.

To be eligible for the adjustment of no more than one cent per transaction, an issuer must develop and implement policies and procedures reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions, including developing and implementing cost-effective fraud prevention technology.

According to the Board’s press release, the final rule simplifies the elements required to be included in the issuer’s fraud prevention policies and procedures, which now must address:

  • Methods to identify and prevent fraudulent electronic debit transactions;
  • Monitoring volume and value of its fraudulent electronic debit transactions;
  • Appropriate responses to suspicious electronic debit transactions to limit the costs to all parties from and prevent the occurrence of future fraudulent electronic debit transactions;
  • Methods to secure debit card and cardholder data; and
  • Other factors as the issuer may consider appropriate.
  • In addition, the issuer must review its fraud prevention policies and procedures, and their implementation, at least annually and update them as necessary in light of:
    • Their effectiveness in reducing the occurrence of, and cost to all parties from, fraudulent electronic debit transactions involving the issuer;
    • Their cost effectiveness; and
    • Changes in the types of fraud, methods used to commit fraud and available methods for detecting and preventing fraudulent electronic debit transactions that the issuer identifies from its own experience or information; information provided to the issuer by its payment card networks, law enforcement agencies, and fraud monitoring groups in which the issuer participates; and applicable supervisory guidance.
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Financial Services Update – August 26, 2011

Bernanke Signals No New Fed Stimulus

On Friday, Federal Reserve Chairman Ben Bernanke offered an upbeat assessment of the domestic economy that offered little indication of any immediate monetary stimulus by the Fed. However, Bernanke did acknowledge that the nation faces significant challenges, including high unemployment and an unsustainable federal debt. Bernanke also offered an unusual critique of the government’s fiscal policy, criticizing the political battle over raising the debt-ceiling. While Bernanke failed to signal any future Fed action, he did say the issue of potential action would be discussed at the next meeting in late September.

Treasury Department Announces OFAC Settlement with JPMorgan Chase

On Thursday, the Treasury Department announced that JPMorgan Chase has agreed to pay $88.3 million as part of a settlement over a series of transactions involving Cuba, Iran and Sudan. The Treasury Department’s Office of Foreign Assets Control (OFAC) said in a news release that JPMorgan processed wire transfers totaling around $178.5 million for Cuban nationals in late 2005 and early 2006, violating United States embargo laws. The bank was also fined for a 2009 incident in which it made a $2.9 million loan to a bank that had ties to Iran’s government-owned shipping line, a violation of United States sanctions against Iran. The third violation occurred in 2010 and 2011, when the bank failed to give up documents about a wire transfer that referred to Khartoum, the capital of Sudan. According to the release, the agency gave JPMorgan a list of documents believed to be possessed by JPMorgan. In response, JPMorgan, which previously said it had no such documents, produced more than 20 of the items in question.

S&P President Resigns

On Tuesday, McGraw-Hill, parent company of Standard & Poor’s (S&P), announced that S&P President Deven Sharma will step down from his position by the end of the year and be replaced by Douglas Peterson, the chief operating officer at Citigroup. McGraw-Hill said Sharma’s decision was not influenced by the United States’ credit rating downgrade or an investigation by the Justice Department over S&P’s rating of its subprime securities. The company said the decision to replace Sharma took place over six months ago when the Board of Directors decided to split the company into four divisions due to increasing pressure from investors.

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Financial Services Update – July 22, 2011

Debt Limit Negotiations Continue

On Tuesday, the House passed its “Cut, Cap and Balance” legislation which would cut government spending now, cap it in the future and approve a constitutional amendment to balance the federal budget. On Friday, the Senate voted to table a motion to consider the measure. However, after another tense week of negotiations between the Senate Republicans, Senate Democrats, House Republicans, House Democrats, and the President Obama, the outline of a purported deal seemed to emerge late Thursday. Congressional Democrats reported that President Obama discussed with them a deal he had reached with Speaker John Boehner to raise the debt ceiling by $2.4 trillion, enough to get through the 2012 elections, with at least as much in immediate spending cuts and a promise of  “tax reform”  in 2012. On Friday, in response to the news of a “deal,” Speaker Boehner told the House Republican Conference there was “no deal,”  but that he will continue to negotiate with the White House over the weekend. The most important questions remaining are how many House Republicans will vote for a deal that does not include immediate tax increases but does include the promise of broader “tax reform” next year and how many House Democrats will vote for a deal with no tax increases.

Greece Gets Another Bailout

On Thursday, European finance ministers agreed to a new $157 billion financial aid package for Greece in exchange for forcing Greece’s bond holders to accept a bond exchange that gives them less than originally promised. The new plan for Greece will provide for the euro zone’s bailout fund and the International Monetary Fund to lend Greece $157 billion over the next three years at 3.5% interest. Private creditors who hold Greek debt that matures in the coming years will “voluntarily” turn in their bonds and accept new ones that mature far in the future.

The EU also agreed Thursday to an expansion of its bailout fund. That vehicle, once restricted to lending to countries near the brink of collapse, will now be able to buy euro-zone bonds on secondary markets to move prices and lend directly to countries even before they lose access to private funding and could even include lending to finance bank recapitalizations. The leaders also agreed to cut the once-lofty interest rates that the bailout fund charges and extend to as much as 30 years the maturities of the loans it provides. Ireland and Portugal, both currently receiving European aid, will get breaks on their interest rates to 3.5%. Ireland was paying around 6% on the EU portion of its euro 67.5 billion bailout.

Treasury Sells Off Remaining Stake of Chrysler

On Thursday, the Treasury Department sold its remaining stake in Chrysler losing a total of $1.3 billion. Italian automaker Fiat purchased the U.S. government’s remaining 6% stake in Chrysler for $560 million, formally concluding the $12.5-billion bailout.

Suit Against Goldman Dismissed

On Thursday, former Australian hedge fund Basis Yield Alpha’s legal challenge to Goldman Sachs’ infamous Timberwolf 2007-1 collateralized debt obligation was dismissed by Judge Barbara Jones of the U.S. District Court for the Southern District of New York. Jones cited a Supreme Court decision that held that U.S. securities-fraud laws apply only to domestic transactions.

Senate Banking Hearing on One Year Anniversary of Dodd-Frank

On Thursday, in a hearing before the Senate Banking Committee, federal banking regulators testified on the implementation of the Dodd-Frank Wall Street Reform Act. Regulators said they are moving fast enough to give markets certainty, but slow enough to get hundreds of new rules right. A handful of regulatory agencies are writing hundreds of new rules to police the swaps market, reduce risk at the biggest financial firms, and bring the so-called shadow banking system — which includes hedge funds and non-traditional lenders — into the traditional regulatory framework. The SEC and CFTC have struggled to keep pace with the swift rule-writing timeline laid out in Dodd-Frank, and are months behind schedule on many key rules. However, in a surprising move, Federal Reserve Chairman Ben Bernanke said federal bank regulators may rethink their crackdown on derivatives if a global agreement cannot be reached on margin requirements thereby acknowledging that U.S. banks would be at a significant competitive disadvantage if their foreign rivals do not have to demand margin, or collateral, for derivatives trades.

More Information:

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
1 314 259 2463

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