Bank Capital Requirements: Federal Reserve Issues Final Rule Clarifying the Application of the Common Equity Tier 1 Capital Requirement to the Capital Structures of "Non-Stock Form" Depository Institution Holding Companies

Sullivan & Cromwell LLP - December 14, 2015

On December 4, 2015, the Federal Reserve adopted a final rule (the “Final Rule”) clarifying the application of its definition of common equity tier 1 capital (“CET1”) to ownership interests in bank holding companies (“BHCs”) and savings and loan holding companies (“SLHCs”) that are organized in “non-stock form” as limited liability companies (“LLCs”) or partnerships (collectively, “non-stock holding companies”).  The Final Rule provides several examples of how the definition of CET1 would apply to ownership interests issued by non-stock holding companies, including with respect to features that are commonly found in the capital structures of non-stock holding companies such as:  (i) the unlimited liability for the general partner of a partnership; (ii) disproportionate allocation of profits and/or losses among classes of equity; (iii) mandatory distributions; (iv) liquidation preferences; and (v) “clawbacks” or reallocations of prior distributions.
In addition, the Final Rule grants an exemption from the Federal Reserve’s capital requirements for SLHCs that are personal or family trusts (and not business trusts) and non-stock holding companies that are employee stock ownership plans (“ESOPs”), until such time as the Federal Reserve finalizes future regulations to apply its capital framework to such organizations.
The Final Rule will become effective on January 1, 2016, but permits organizations to rely on its guidance prior to its effective date.  Non-stock holding companies whose capital instruments do not qualify as CET1 due to the requirements of the Final Rule are permitted to treat such instruments as CET1 until July 1, 2016.