Dodd-Frank: Title VI - Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions

 

INTRODUCTION: 

Title VI provides for heightened regulation of bank holding companies (BHCs), savings and loan holding companies (SLHCs), and depository institutions to ensure that these institutions do not threaten the United States’ financial stability. This title also introduces the “Volcker Rule,” which prohibits banking entities from engaging in proprietary trading.

Provisions: 

Examination Improvements

 Title VI amends the Bank Holding Company Act (BHCA) to provide that examinations conducted by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) require BHCs to inform the Federal Reserve of financial, operational, and other risks the BHCs may pose to the United States’ financial stability. See 15 U.S.C. § 1844(c)(2). Title VI also amends the Home Owners’ Loan Act (the “HOLA”) to require the same disclosures in the examination provisions regarding SLHCs. See 12 U.S.C § 1467a(b)

Mergers & Acquisitions

 Title VI amends the BHCA with regard to bank acquisitions by BHCs. Title VI requires the Federal Reserve to consider whether a proposed acquisition of a bank, a merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system. See 12 U.S.C. § 1842(c)(7). For acquisitions of nonbanks by BHCs, the Federal Reserve is required to consider whether the acquisition poses any risk to the stability of the United States banking or financial system. See 12 U.S.C. § 1843(j)(2)(A). No prior approval is needed when a financial holding company (FHC) acquires a company engaged in financial activity, unless the acquisition exceeds $10 billion in total consolidated assets. See 12 U.S.C. § 1843(k)(6)(B). Finally, Title VI amends the Bank Merger Act (BMA) to require any reviewing banking agency to consider whether a transaction under the BMA poses any risk to the stability of the United States banking or financial system.  See 12 U.S.C. § 1828(c)(5).  

Capitalization and Management

Several provisions of Title VI require BHCs to be well capitalized and well managed.  First, the BHCA is amended to require that BHCs be well capitalized and well managed before undertaking certain activities. See 12 U.S.C. § 1843(l). Second, BHCs must be well capitalized and well managed before seeking control of a bank located in another state. See 12 U.S.C. § 1842(d)(1)(A). Similarly, BHCs must be well capitalized and well managed before seeking approval of an interstate merger under the Federal Deposit Insurance Act (FDIA). See 12 U.S.C. § 1831(b)(4)(B)

Title VI also requires that capital requirements set by the Federal Reserve be countercyclical. See 12 U.S.C. § 1844(b). Additionally, Title VI amends the FDIA to require a BHC, SLHC, or any company directly or indirectly controlling an insured depository institution to serve as a source of financial strength for any depository institution subsidiary. See 12 U.S.C. § 1831o-1(a),(b). 

Lending Limits 

Title VI amends the National Bank Act’s (NBA) lending limits, redefining “loans and extensions of credit” to include credit exposure to an individual or entity arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction between the national bank and the person. See National Bank Act, 12 U.S.C. § 84(b) as amended by the Dodd-Frank Act §610(a). Additionally, Title VI amends the FDIA to condition an insured state bank’s ability to engage in derivative transactions on the lending limits law of the chartering state; this law must take into consideration credit exposure to derivative transactions. See 12 U.S.C. § 1828(y).  

Volcker Rule

Title VI amends the BHCA to prohibit banking entities from engaging in proprietary trading, or from acquiring or retaining any equity, partnership, or other ownership interest in or sponsorship of a hedge fund or a private equity fund. See 12 U.S.C. § 1851(a)(1). This prohibition was first proposed by Paul Volcker, the former Chairman of the Federal Reserve, and is consequently known as the Volcker Rule. Nonbank financial companies supervised by the Federal Reserve that engage in proprietary trading, or hedge fund or private equity fund activities, are subject to capital requirements and quantitative limits on trading. See 12 U.S.C. § 1851. Notwithstanding these restrictions, Title VI has outlined some “permitted activities,” which include exceptions to the prohibition on propriety trading, hedge fund and private equity fund trading activities. See id.  Additionally, Title VI limits the business relationships of banking entities and nonbank financial companies supervised by the Federal Reserve with hedge fund and private equity funds they advise, organize, or sponsor. See id. 

Miscellaneous Provisions

 Title VI imposes a three-year moratorium on the approval of deposit insurance applications by the FDIC for an industrial bank, a credit card bank, or a trust bank that is directly or indirectly owned or controlled by a commercial firm, which is any company and its affiliates with consolidated revenues that are less than 15% financial in nature. See Dodd Frank Wall Street Reform and Consumer Protection Act § 603[H1] . This moratorium also applies to the change in control of these entities. See id[H2] . Title VI also restricts charter conversions (from a nationally-chartered bank to a state-chartered bank, or vice versa) when there is an existing enforcement action or “memorandum of understanding,” which is an agreement that a bank negotiates with bank regulators, promising to not engage in certain restricted activities. See 12 U.S.C. § 214(d). Further, there are several amendments made to laws related to transactions with affiliates and insider lending, which reflect concern about credit exposure to derivative transactions. See 12 U.S.C. § 371c; see also 12 U.S.C. § 375b(9)(D)(i); see also 12 U.S.C. §1828(z). Finally, Title VI repeals a prohibition of interest-bearing transaction accounts on demand deposits. See 12 U.S.C. § 371a; see also 12 U.S.C. § 1464(b)(1)(B); see also 12 U.S.C. § 1828(g). 

Purpose & Implementation:

 Title VI’s purpose is to improve the regulation and supervision of bank holding companies, savings association holding companies, and depository institutions. 

Federal agencies have initiated rulemaking activity pursuant to this section, including a proposed rule by the OCC, Federal Reserve, FDIC and SEC to implement the Volcker Rule of Section 619.