Common Questions and Answers on Regulation Y
1. What is Regulation Y?
Regulation Y governs the corporate practices of bank holding companies and certain practices of state-member banks. Regulation Y also describes transactions for which bank holding companies must seek and receive the Federal Reserve’s approval. Common transactions requiring approval include:
- When a bank holding company acquires a bank or merges with another bank holding company;
- When a bank holding company engages in a nonbanking activity, either directly or through a subsidiary;
- When an individual (or group of individuals) acquires control of a bank holding company or state-member bank;
- When a bank holding company or state-member bank in troubled condition appoints a new senior officer or director.
2. Why did the Federal Reserve streamline Regulation Y?
The Federal Reserve amended Regulation Y as part of a broad effort to “risk-focus” the supervisory process and to reduce the regulatory burden on well-run organizations. The Federal Reserve emphasized two important principles in developing these amendments:
First, burden and delay will be reduced for well-run bank holding companies that meet objective and verifiable standards; and
Second, the applications process will focus exclusively on an analysis of the specific proposal and will no longer be used as a vehicle to comprehensively analyze supervisory and compliance issues not related to the transaction. The supervisory process, including on-site inspections, is a more appropriate forum for review of matters not directly related to a specific transaction.
3. What actual changes were made by the Board to streamline regulatory requirements?
The Board reduced the information necessary for the completion and filing of applications. Additionally, applications procedures were streamlined for well-managed institutions. In some cases, application requirements have been eliminated entirely. Many restrictions previously applicable to the conduct of nonbanking activities were also removed.
II. Expedited Procedures
4. How does the expedited procedure for banking acquisitions work?
A qualifying bank holding company may publish the required newspaper notice up to 15 days in advance of submission of the formal notice to the Federal Reserve. The public comment period remains 30 days and, absent a substantive and timely protest, approval is anticipated within 3 to 5 business days after expiration of the comment period. In other words, the actual time the Reserve Bank takes to process the notice can be as short as 18 days (30 + 3 – 15).
A notice submitted by a qualifying bank holding company is generally expected to be approved under the expedited procedure. If, however, a significant issue is identified, the Federal Reserve may review the issue in greater depth by redesignating the notice as an application. This type of action will only occur under limited circumstances, such as the receipt of a substantive and timely protest.
5. How does the expedited procedure for nonbanking acquisitions work?
A qualifying bank holding company may immediately engage de novo in any nonbanking activity that the Board has determined to be permissible. Within ten days after commencing the activity, the qualifying bank holding company must notify the Reserve Bank. No prior approval or notice is required.
For a qualifying bank holding company, an acquisition of an existing company engaged in a permissible activity may be consummated after providing a twelve day prior notice to the Reserve Bank.
Other transactions, including those filed by non-qualifying organizations or involving activities that have not already been determined by the Board to be permissible, are subject to a thirty-day prior notice period.
6. Who can take advantage of the streamlined processing?
Well-managed organizations whose transactions meet guidelines with respect to size, competitive effects, community convenience and needs and legality. These items are discussed in more detail in numbers 7, 8, and 9 below.
7. What is a well-managed banking organization?
A well-managed organization meets well-capitalized standards, is satisfactorily rated, and is not, and has not recently been, the subject of a formal supervisory action. (To be satisfactorily rated both the composite and management ratings must be satisfactory, as well as the compliance rating if such a rating is assigned.)
8. In addition to being well-managed, what other criteria must be met in order for a bank transaction to qualify for expedited processing?
The other qualifying criteria for bank acquisitions are:
- Compliance with convenience and needs criteria, including satisfactory Community Reinvestment Act records;
- No substantive, timely and adverse public comments;
- Pro forma deposit market-share of less than 35 percent and no significant changes in market concentration;
- Target banking organization has total risk-weighted assets of less than $7.5 billion and, when combined with all other expedited transactions within the past year, comprises less than 35 percent of pro forma risk-weighted assets; (Note: The 35 percent size limitation does not apply if the acquiring bank holding company, following consummation of the transaction, would have consolidated risk-weighted assets of less than $300 million.)
- Compliance with interstate banking statutes; and
- In the case of a foreign bank, compliance with comprehensive home-country supervision requirements.
9. For well-managed bank holding companies, what are the other qualifying criteria for nonbank transactions?
The other qualifying criteria for nonbank transactions are:
- The activity has been previously determined by regulation or order to be permissible;
- In the case of an acquisition, a pro forma market share of less than 35 percent and no significant change in market concentration; and
- Target company has total risk-weighted assets of less than $7.5 billion and, when combined with all other expedited transactions within the past year, comprises less than 35 percent of pro forma risk-weighted assets; also, gross consideration paid must be less than 15 percent of the filer’s Tier One capital. (Note: The 35 percent size limitation does not apply if the acquiring bank holding company, following consummation of the transaction, would have consolidated risk-weighted assets of less than $300 million.)
III. Other Information Regarding Regulation Y
10. What proportion of acquisitions actually meet the criteria for expedited processing?
We estimate that about half of the bank and nonbank acquisition proposals will qualify for expedited processing.
11. What if a transaction does not qualify for expedited processing?
Non-qualifying transactions typically require somewhat more in-depth review. From the date of filing, an applicant can generally expect that any application will be acted upon within 30 to 60 days.
12. Who can I contact for more information?
Joseph Cuenco, Assistant Vice President, Formations + Transactions, at (415) 974-2094 or toll-free at (800) 227-4133