House Panel Approves Measure Easing Small Bank Debt Issuance

By Jeff Bater

Dec. 9 — The House Financial Services Committee approved a bill that would enable more small lenders to make acquisitions and form new bank and thrift holding companies.

The committee voted 33-21 for H.R. 3791, which would increase the consolidated asset threshold under the Federal Reserve's Small Bank Holding Company Policy Statement to $5 billion from $1 billion.

The policy statement, issued by the regulator in 1980, facilitates the transfer of ownership of small community banks by allowing small, non-complex bank holding companies to operate with higher levels of debt than would normally be permitted.

Easier to Issue Debt

“The policy statement makes it easier for a community bank to raise capital and issue debt and to make acquisitions and form new bank- and thrift-holding companies,” a co-sponsor of the bill, Rep. Blaine Luetkemeyer (R-Mo.), said during the markup. “These are all important tools to ensure that our smallest institutions can continue to lend in the communities, hire new loan officers and staff, and survive what remains a difficult time for community banks.”

This year, the Fed finalized a rule implementing legislation that raised the asset threshold to $1 billion from $500 million. That increase helped roughly 500 banks and thrifts, according to Rep. Mia Love (R-Utah), the sponsor of H.R. 3791. She said raising the asset threshold to $5 billion means that more than 400 additional small banks and thrift holding companies will qualify for coverage under the policy statement and therefore be exempt from certain regulatory and capital guidelines.

“Many holding companies that are above the current threshold face challenges with regard to capital formation, which is of particular concern at a time where regulators are demanding higher capital levels,” Love said during the markup.

In a 2014 speech, Fed Governor Daniel Tarullo had suggested raising the threshold to $1 billion as a way of tailoring banking regulation and distinguishing small lenders from their bigger brethren.

The Fed generally discourages the use of debt by bank holding companies to finance acquisitions, but it recognizes limited access to equity funding by small institutions. The transfer of ownership of small banks often requires the use of acquisition debt, Tarullo had said in remarks to a community banking symposium last year (217 BBD, 11/10/14).

He had said post-crisis attention focused on too-big-to-fail issues and other sources of systemic risk. “Now is a good time to look at the other end of the banking industry, where the contrast is substantial,” Tarullo said. “Smaller banks present a very different set of business models. Their risks and vulnerabilities tend to grow from different sources. An explicit and sustained tailoring of regulation and supervision for community banks not only seems reasonable, it seems an important and logical next step in financial regulatory reform.”

Banking Groups Praise Bill

Banking industry groups support H.R. 3791. The Independent Community Bankers of America said in a letter to the committee leadership dated Dec. 7 that qualifying bank and thrift holding companies must not have significant outstanding debt or be engaged in nonbanking activities that involve significant leverage.

The American Bankers Association, in a letter to committee members, said the bill, by facilitating the ability of community banks to issue debt and raise capital, enables lenders to increase their involvement in promoting the growth of their local economies. “This is extremely important as regulators have proposed through other regulations to increase capital requirements significantly for both community banks and larger institutions in the coming years.”

Tool for Acquisitions?

Rep. Maxine Waters (D-Calif.), the ranking member of the committee, opposed raising the threshold to $5 billion and urged a vote against the bill. She said the primary purpose of the policy statement is to make it easier for small community banks to buy other small institutions.

“Setting the threshold at $1 billion makes it more likely that if a bank is acquired, it will be by an institution that has similar roots in the community,” Waters said. “I'm very concerned that a bank with a $5 billion footprint would not provide the same kind of personal service a smaller institution might, and I'm further concerned that raising the threshold could encourage aggressive growth at a firm that is more concerned with its bottom line.”

Waters said that allowing institutions with as much as $5 billion in assets to operate under a lower set of capital standards and with fewer reports to regulators put communities at the deposit insurance fund at higher risk. “Setting the threshold at $1 billion is the prudent balance between acceptable risk and allowing most community banks to benefit from the economies of scale a merger or acquisition provides,” she said. “Multiplying that threshold five times over less than one year after the threshold has already been doubled is, frankly, reckless.”

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To contact the editor responsible for this story: Seth Stern at