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FEDERAL RESERVE BANK
OF N EW YORK
r Circular No. 8 7 1 5 1
L
December 21,
1979 J
BA NK HOLDING COMPANIES
— Policy Statement on Violations of 1980 Divestiture Requirements
— Proposed Policy Statement on Criteria Used in Considering
One-Bank Holding Company Formations
To All Commercial Banks and Bank Holding Companies, and Others Concerned,
in the Second Federal Reserve District:
Violations o f 1980 Divestiture Requirements
T h e B o a r d o f G o v e rn o rs o f the F e d e r a l R e se r v e S y ste m h a s issu e d a policy sta te m e n t em
p h a siz in g th a t a n y v io la tio n o f the B a n k H o ld in g C o m p an y A c t a s a re su lt o f the fa ilu r e o f an
a ffe c te d b an k h o ld in g co m p an y to com ply w ith the D e c e m b e r 31, 1980 d ead lin e f o r d iv e stitu re
o f n o n b an k in g a c tiv itie s w ill be c o n sid e red an “ e x tre m e ly se rio u s m a tte r ” th a t w ill p o ssib ly r e
su lt in civil p e n altie s o r r e f e r r a l f o r p ro secu tio n . T h e fo llo w in g is qu o ted fr o m the B o a r d o f G o v
e r n o r s ’ p r e ss sta te m e n t on th is m a t t e r :
The Board’s message was contained in a policy statement directed to certain companies that became
bank holding companies by virtue of the 1970 amendments to the Bank Holding Company Act. These are one
hank holding companies that acquired nonbank activities between June 30, 1968 and December 30, 1970. The
1970 amendments generally require that unless these companies drop their bank they must (1 ) divest such
nonbank subsidiaries or (2) get Board approval to keep them, by December 31, 1980. The policy statement
concerns companies that have not yet complied fully with the 1980 requirements of the Act.
In earlier statements, the Roard advised these companies to submit their plans for complying with the
law. The Board said it is concerned about the companies that have failed to respond or have responded only
partially, and stressed that it has no authority to extend the 1980 deadline, or make exceptions.
Thus, the Board noted, for companies subject to the 1980 divestiture provisions of the Act, retention
by a bank holding company of any nonbanking subsidiaries or activities for which the company has not re
ceived approval by the Federal Reserve beyond December 31, 1980, will be a violation of the Act.
The Board’s statement continued :
The Board will regard any violation of section 4 of the BH C A resulting from failure to divest or ob
tain approval for retention prior to December 31, 1980 as an extremely serious matter . . .
The Board intends to enforce the provisions of the BH C A by
tiation of cease-and desist proceedings, . . . assessment of civil
prosecution . . . against the bank holding company, as well as
the severity of a violation will not be mitigated because a bank
retention . . . pending at the Board December 31, 1980, or has
cation.
taking appropriate actions, including ini
money penalties, or referral for criminal
its officers and directors. Generally, the
holding company has an application for
appealed the Board’s action on an appli
The Board said that it would act as expeditiously as possible on all applications and requests concerning
the 1980 deadline, but it reminded companies that applications to keep subsidiaries might be denied, and
that they should therefore allow sufficient time for divestiture if that occurs.
In a related action the Board is sending a letter to the Reserve Banks for transmittal to those bank
holding companies that have not responded to the Board’s earlier advice for submission of plans to comply
with the 1980 deadline. The Board’s letter requires each such company to submit by January 31, 1980, a
statement of its intent and a timetable for compliance with the 1980 deadline. The letter also emphasizes the
contents of the policy statement.
E n c lo se d — fo r b a n k h o ld in g co m p an ie s in th is D is t r ic t — is a copy o f the B o a r d ’s policy s t a t e
m en t on d iv e stitu re s. T h e state m e n t w ill be p u b lish ed in the Federal Register, an d co pies w ill a lso
be fu r n ish e d upon r e q u e st d ire cte d to o u r C ir c u la r s D iv isio n . Q u e stio n s r e g a r d in g th is m a tte r m ay
be d ire cte d to o u r D o m e stic B a n k in g A p p lic a tio n s D e p a rtm e n t (T e l. N o . 2 1 2 - 7 9 1 - 5 8 6 1 ).
( over)
Criteria Used in Considering One-Bank Holding Company Formations
T h e B o a r d o f G o v e rn o rs h a s in v ited co m m en t, by J a n u a r y 31, 1980, on a p ro p o se d policy
sta te m e n t r e g a r d in g a c h a n g e in the c r ite r ia to b e u se d in c o n sid e rin g a p p lic atio n s f o r fo r m a tio n s
o f o n e-b an k h o ld in g co m p an ies. T h e re v ise d po licy is d e sig n e d to help m a in ta in the s a fe t y an d
so u n d n e ss o f the b a n k in g sy ste m , p a r tic u la rly o f sm all co m m u n ity b an k s, an d to fa c ilita te the
c h a n g e o f o w n e rsh ip o f su ch b an k s. T h e fo llo w in g is q u o ted fr o m the B o a r d ’s p r e ss state m e n t on th is
m a tte r:
The proposed policy would apply to one-bank holding companies meeting both of the following condi
tions : total assets of approximately $100 million or less, and no significant nonbank activities that use large
amounts of debt in their businesses.
It would permit acquisition by one-bank holding companies of small community banks under revised
terms. The proposed terms would continue in more flexible form the Board’s standing policy of permitting
transfer of ownership of such banks on less demanding terms than those the Board applied in considering ap
plications involving larger banks.
The Board gave this background to its proposal:
In acting on applications filed under the Bank Holding Company Act, the Board has adopted, and
continues to follow, the cardinal principle that bank holding companies should serve as a source of
strength for their subsidiary banks . . .
The Board believes that a high level of acquisition debt impairs the ability of a bank holding com
pany to come to the aid of its subsidiary bank in times of need, and in some cases the servicing re
quirements on such debt may be a drain on the bank’s resources. For these reasons, the Board has not
favored the use of acquisition debt in bank holding company formations. Nevertheless, the Board has
recognized that the transfer of ownership of small community banks, and the maintenance of local own
ership in those banks, often requires the use of acquisition debt. The Board, therefore, has permitted
the formation of small one-bank holding companies with debt levels higher than would be permitted
for larger or multi-bank holding companies.
While continuing to adhere to these principles, the Board has re-examined the factors it applies to ap
plications from small one-bank holding companies with a view to improving the flexibility of these companies
in dealing with their debt obligations.
Present policy calls for repayment of all acquisition debt within 12 years, while maintaining a satisfac
tory level of capital in the company’s bank subsidiary.
The revised policy would provide that the holding company’s debt-to-equity ratio be reduced to no more
than 30 percent within 12 years, which is approximately the level maintained by many multi-bank holding
companies.
This can be accomplished by direct debt repayment, or by building up equity through the retention of
earnings.
In any case, the proposed criteria would call for no dividend payments until such time as the company’s
debt-to-equity ratio had reached 30 percent or less, while maintaining capital at no less than 8 percent of assets.
E n c lo se d — fo r co m m e rc ial b a n k s an d b an k h o ld in g co m p an ies in th is D is tr ic t— is a copy o f
the B o a r d ’s p ro p o se d policy sta te m e n t on th is m a tte r. T h e p ro p o se d state m e n t w ill be pu b lish ed
in the Federal Register, an d co p ies w ill a lso be fu rn ish e d upon re q u e st d irected to o u r C ir c u la r s
D iv isio n . Q u e stio n s r e g a r d in g the p ro p o sa l m ay be d ire cte d to o u r D o m e stic B a n k in g A p p lic a tio n s
D e p a rtm e n t (T e l. N o . 2 1 2 - 7 9 1 - 5 8 6 1 ).
T
homas
M. T
im l e n
,
First Vice President.
FEDERAL RESERVE SYSTEM
Violations of the 1980 Requirements
of the Bank Holding Company Act
Policy Statement
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Statement of Policy.
SUMMARY: This Policy Statement outlines the penalties for violations
of the 1980 divestiture requirements by companies that became bank
holding companies as a result of the 1970 Amendments to the Bank
Holding Company Act.
FOR FURTHER INFORMATION CONTACT: Bronwen Mason, Senior Attorney (202/
452-3564), Legal Division, Board of Governors of the Federal Reserve
System.
SUPPLEMENTARY INFORMATION:
of policy:
The Board has issued the following statement
Policy Statement Regarding
Violations of the 1980 Requirements
of the Bank Holding Company Act
Pursuant to the provisions of section 4(a)(2) of the Bank
Holding Company Act ("BHCA"), bank holding companies that became subject
to the BHCA in 1970, as,a result of the 1970 Amendments to the BHCA,
generally may not retain nonbanking subsidiaries or activities beyond
December 31, 1980. In statements dated October 13, 1977, and December 20,
1978, the Board advised bank holding companies to file on or before
June 30, 1978, and September 30, 1979, respectively, plans of divestiture
with respect to each subsidiary or activity that is subject to the
divestiture requirements of section 4(a)(2) of the BHCA. At the same
time, the Board urged bank holding companies wishing to retain any of
such nonbanking subsidiaries or activities under the provisions of
section 4(c)(8) of the BHCA to file applications for retention by these
dates in order to allow sufficient time for Board action on applications
well before December 31, 1980. While a substantial number of affected
bank holding companies have responded to the Board's statements, the
Board is concerned about those companies that have failed to respond
or have only partially responded.
In its statements the Board stressed that it has no authority
to extend the December 31, 1980 divestiture deadline in general, or
in particular hardship situations. Thus, absent an approved application
under section 4(c)(8) or some other exemption under section 4 of the
BHCA, retention by a bank holding company of any nonbanking subsidiaries
or activities beyond December 31, 1980 will be a violation of the BHCA.
[Enc. Cir. No. 8715]
( over )
-2-
Moreover, the Board notes that Congress allowed a very liberal period
of time for bank holding companies to comply with the provisions of
section 4 of the Act. Accordingly, the 3oard believes that there has
been ample time for affected companies to inform themselves of their
responsibilities under section 4(a)(2) of the BHCA and take steps to
meet those responsibilities in a timely and orderly manner.
The Board will regard a violation of section 4 of the BHCA
resulting from failure to divest or obtain approval for retention prior
to December 31, 1980, as an extremely serious matter. With respect
to such violations, the Board intends to enforce the provisions of the
BHCA through appropriate actions, including initiation of cease-anddesist proceedings under the Financial Institutions Supervisory Act,
and assessment of civil money penalties or referral for criminal pro
secution pursuant to section 8 of the BHCA, against the bank holding
company as well as its officers and directors. Generally, the severity
of a violation will not be mitigated because a bank holding company
has an application for retention under section 4(c)(8) pending at the
Board on December 31, 1980, or has appealed the Board s action on an
application.
Finally, the Board recognizes that efforts by most bank holding
companies to comply with the provisions of section 4(a)(2) will necessitate
some Board action.
In its previous statements the 3oard has emphasized
the need for prompt filing of all retention applications and requests
concerning 1980 divestitures, in order to ensure timely Board action.
While the Board intends to act as expeditiously as possible on such
applications and requests, companies are also reminded to allow suffi
cient time for divestiture in the event of denial of retention applica
tions. Moreover, the Board wishes to call attention to the fact that
under the provisions of the Bank Holding Company Tax Act of 1976, a
bank holding company would forfeit its tax benefits for a_ll divestitures
in the event of its failure to make one timely divestiture.
(5 U.S.C.
1101(e)).
Board of Governors of the Federal Reserve System, effective
December 12, 1979.
Theodore E. Allison
Secretary of the Board
FEDERAL RESERVE SYSTEM
POLICY STATEMENT
FOR ASSESSING FINANCIAL FACTORS IN
THE FORMATION OF SMALL ONE-BANK HOLDING COMPANIES
PURSUANT TO THE BANK HOLDING COMPANY ACT
[Docket No. R.-0265J
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Proposed policy statement.
SUMMARY: In the interest of helping to maintain the safety and
soundness of the banking system and, in particular, of small community
banks, as well as to improve the transferability of ownership of such
institutions and facilitate local ownership of these banks, the Federal
Reserve Board is proposing for public comment a policy statment for
assessing financial factors in the formation of small one-bank holding
companies.
DATE:
Comments must be received on or before January 31, 1980.
ADDRESS: Theodore E. Allison, Secretary, Board of Governors of the
Federal Reserve System, Washington, D.C. 20551. All materials submitted
should include the Docket Number R-0265.
FOR FURTHER INFORMATION: James I. Garner, Division of Banking Supervision
and Regulation (202-452-2415), Board of Governors of the Federal Reserve
System, Washington, D.C. 20551.
POLICY
OF THE BOARD OF GOVERNORS
FOR ASSESSING THE
THE FORMATION OF SMALL
PURSUANT TO THE BANK
STATEMENT
OF THE FEDERAL RESERVE SYSTEM
FINANCIAL FACTORS IN
ONE-BANK HOLDING COMPANIES
HOLDING COMPANY ACT
In acting on applications filed under the Bank Holding Company
Act, the Board has adopted, and continues to follow, the cardinal principle
that bank holding companies should serve as a source of strength for their
subsidiary banks. When bank holding companies incur debt and rely upon the
earnings of their subsidiary banks as the means of repaying such debt, a
question arises as to the probable effect upon the financial condition of
the company and its subsidiary bank or banks. Incurring debt under these
circumstances is of particular concern when the debt proceeds are used for
acquisitions rather than for internal purposes such as meeting the capital
needs of a subsidiary bank.
The Board believes that a high level of acquisition debt impairs
the ability of a bank holding company to come to the aid of its subsidiary
bank in times of need and in some cases the servicing requirements on such
[Enc. Cir. No. 8715]
- 2 -
debt may be a drain on the bank's resources, For these reasons, the
Board has not favored the use of acquisition debt in bank holding
company formations. Nevertheless, the Board has recognized that the
transfer of ownership of small community banks and the maintenance of
local ownership in those banks often requires the use of acquisition
debt. The Board, therefore, has permitted the formation of small onebank holding companies with debt levels higher than would be permitted
for larger or multi-bank holding companies. Approval of these applica
tions has been given on the condition that the small one-bank holding
companies demonstrate the ability to service the acquisition debt without
straining the capital of their subsidiary bank and, further, that such
companies restore their ability to serve as a source of strength for their
subsidiary bank within a relatively short period of time.
The Board continues to subscribe to these principles. In the
interest of furthering its policy of encouraging local transfer and owner
ship of banks in the one-bank holding company format, without diluting
bank safety and soundness, the Board has reexamined the analytical frame
work and the criteria it applies when considering small one-bank holding
company formations. To these ends, it proposes certain revisions in its
procedures and standards described below.
The proposed criteria shift the focus from debt repayment con
tained in existing criteria to the relationship between debt and equity at
the parent holding company. The holding company would have the option of
improving the relationship of debt to equity by either repaying the principal
amount of its debt or through the retention of earnings. Under these pro
cedures, newly organized small one-bank holding companies would be expected
to reduce the relationship of their debt to equity over a reasonable period
of time to a level comparable to that maintained by many large and multi
bank holding companies.
In general, this policy is intended to apply only to one-bank
holding companies that do not have significant leveraged nonbank activities
and whose subsidiary bank w§uld have total assets of approximately $100
million or less at the time the application is filed.
The proposed criteria are as follows:
General
In evaluating applications filed pursuant to Section 3(a)(1) of
the Bank Holding Company Act, as amended, where the applicant intends to
incur debt to finance the acquisition of a small bank, the Board will take
into account a full range of financial and other information, including the
recent trend and stability of earnings of the bank; the past and prospective
growth of the bank; the quality of the bank s assets, the ability of the
applicant to meet debt servicing requirements without placing an undue strain
on the bank's resources; and the record and competency of management of the
applicant and the bank. In addition, the Board will use the following
criteria in assessing acquisition debt:
-3-
(1) Minimum Down Payment
The amount of acquisition debt should not exceed 75 percent of
the purchase price of the bank to be acquired.
(2)
Maintenance of Adequate Capital
An applicant proposing to use acquisition debt must demonstrate
to the satisfaction of the Board that any debt servicing requirements to
which the bank holding company may be subject would not cause the bank’s
ratio of gross capital to assets to fall below 8.0 percent during the
12-year period following consummation of the acquisition. —
Gross capital
is defined as the sum of total stockholders' equity, the allowance for
possible loan losses and subordinated capital notes and debentures.
(3)
Reduction in Parent Company Leverage
The applicant must demonstrate to the satisfaction of the Board
that the holding company's ratio of debt to equity would decline to 30 per
cent within 12 years after consummation of the acquisition.
2/
The term "debt",— as used in the ratio of debt to equity, means
any borrowed funds (exclusive of short-term borrowings which arise out of
current transactions, the proceeds of which have been or are to be used for
current transactions), and any securities issued by, or obligations of, the
holding company that are the functional equivalent of long-term debt.
The term " e q u i t y " a s used in the ratio of debt to equity, means
the total stockholders' equity of the bank holding company adjusted to
reflect the periodic amortization of "goodwill" (i.e., the excess of cost of
any acquired company over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed) in accordance with generally
accepted accounting principles. In determining the total amount of stock
holders' equity, the bank holding company should account for its investments
in the common stock of subsidiaries by the equity method of accounting.
1/
The applicant will be required to submit projected financial statements
covering the 12-year period for the bank holding company (parent only)
and the bank to be acquired. Such financial statements may be condensed
but should identify principal groups of balance sheet and income state
ment items.
2/ Redeemable preferred stock will be treated as equity if, by its terms,
_ it is not redeemable until after the ratio of debt to equity at the
holding company is below 30 percent and would remain at 30 percent or
less subsequent to the redemption. If the preferred stock is redeemable
under other conditions, it will normally be treated as the functional
equivalent of debt. Preferred stock that is convertible into common
stock of the holding company will be treated as equity.
X
-4-
(4)
Dividend Restrictions
The bank holding company is not expected to pay any corporate
dividends until such time as its debt to equity ratio is below 30 percent.
Board of Governors of the Federal Reserve System,
December 13, 1979.
Theodore E. Allison
Secretary of the Board
@FedFRASER