Common Questions and Answers on Regulation H

Common Questions and Answers on Regulation H of the Federal Reserve Board

I. Background
II. Expedited Procedures
III. Other Information Regarding Regulation H

I. Background

1. What is Regulation H?

Regulation H implements those portions of the Federal Reserve Act that affect state member banks. As such, Regulation H defines membership requirements for state-chartered banks, as well as the privileges and requirements of membership; sets forth procedures for approval for state member banks to establish branches and for requesting voluntary withdrawal from membership; provides information for registering and filing financial statements; and outlines the procedures to follow for state member banks that are less than adequately capitalized.

2. Why did the Federal Reserve streamline Regulation H?

The Federal Reserve amended Regulation H as part of a broad effort to "risk-focus" the supervisory process and to reduce the regulatory burden on well-run banks. This process started with the revision of Regulation Y in April 1997.¹ Similar to the changes in Regulation Y for bank holding companies, the amended Regulation H streamlines applications procedures and timeframes for well-managed and well-capitalized state member banks. The regulation introduces a new definition, "eligible bank," to serve as the qualification for expedited treatment of membership and branch applications.

3. What is an eligible bank?

An eligible bank is defined as a bank that:

• Is well-capitalized (total and tier 1 risk-based and leverage capital ratios of 10, 6 and 5 percent, respectively);
• Has a safety and soundness (CAMELS) rating of "1" or "2";
• Has a Community Reinvestment Act (CRA) rating of "Outstanding" or "Satisfactory";
• Has a compliance rating of "1" or "2"; and
• Has no major unresolved supervisory issues outstanding.

If a bank has not yet received compliance or CRA ratings, it is still considered eligible if it is owned by a bank holding company, and the bank holding company meets the criteria for expedited processing under Regulation Y.

II. Expedited Procedures

4. How does the expedited procedure for membership applications work?

Expedited membership applications submitted by eligible banks will be acted on within 15 days of receipt of the application. In addition, there is no requirement to publish a newspaper notice of membership applications.

Occasionally, based on the size and other circumstances unique to the applying bank, a pre-membership examination may be necessary before submission of a final membership application. Please contact the Reserve Bank if you have any questions in this regard.

5. How does the expedited procedure for branch applications work?

The public comment period for all branch applications has been reduced to 15 days, and the required newspaper publication can occur up to seven days before filing. Absent a substantive and timely protest, an expedited branch application submitted by an eligible bank will be approved within 3 to 5 business days after expiration of the comment period.

6. What if a transaction does not qualify for these processing procedures (i.e. the bank does not meet the eligible bank definition)?

Non-qualifying transactions typically require somewhat more in-depth review, but will also be processed more quickly than in the past. From the date of filing, an applicant can generally expect that most applications, membership or branch, will be acted upon within 30 days; cases raising significant issues may take up to 60 days. Review of the application will focus on the reasons the bank does not qualify as an eligible bank and the pro forma implications of those issues.

7. What other application or notice requirements have been simplified in the new regulation?

• A member bank may file a single consolidated branch application for all branches it plans to establish in any one-year period; and
• The notice period for investments in premises has been reduced from 30 to 15 days.²

III. Other Information Regarding Regulation H

8. Aside from streamlining of the applications process, what are some of the other significant changes?

The regulation also:

• incorporates a new section designed to provide guidance to banks regarding permissible investments in securities;
• expands the circumstances under which the Board of Governors will consider waiver of the usual conditions of membership;
• clarifies and limits the definition of a "branch" in a manner consistent with OCC regulations and decisions;
• eliminates the requirement for one week prior notice of a branch opening and, instead, establishes a requirement that notice be given 30 days after the opening of an approved branch;
• defines the term "capital stock and surplus" to mean Tier 1 and Tier 2 capital plus any allowance for loan and lease losses not already included in Tier 2 capital;
• revises provisions concerning payment of dividends and withdrawal of capital; and
• includes various other changes to eliminate outdated provisions, update and reorganize remaining material, and incorporate new provisions designed to reduce burden on state member banks.

Please feel free to contact the Reserve Bank for additional discussion of any of the above points.

9. Who can I contact for more information?

Elisa Johnson, Manager, Applications, at (415) 974-3005 or toll-free at (800) 227-4133, ext. 9743005; or
Kenneth R. Binning, Vice President, Applications & Enforcement, at (415) 974-3007 or toll-free at (800) 227-4133, ext. 9743007.