- Key takeaway: Industry advocates believe the proposed rule changes are game-changers that could result in the formation of new mutuals, while also convincing some credit unions to consider switching charters.
- Forward look: The Federal Reserve is accepting comments on the proposed changes through Oct. 5.
- Expert quote: "This is smart regulation and largely well thought-out," Kip Weissman, a partner at the law firm Luse Gorman
For decades, the mutual banking sector has seen steady erosion, as hundreds of depositor-owned institutions have converted to stock ownership.
But the rapidly shrinking sector may soon be thrown a lifeline from federal regulators. Leaders in the mutual banking industry are hailing a package of proposed new rules unveiled Friday by the Federal Reserve, which aim to make it easier for mutuals to raise capital.
Kip Weissman, a partner at the law firm Luse Gorman in Washington, D.C., described the Federal Reserve's proposal as an "earthquake," and "stunning in its breadth."
"This is smart regulation and largely well thought-out," Weissman told American Banker.
At 150 pages, the proposed rules address numerous issues, but its core reforms, the ones Weissman and other experts are most focused on, are intended to broaden depositor-owned banks' access to capital.
For first-step mutual holding companies — those that have sold a minority interest to investors — the proposal streamlines the process for waiving dividends that would be paid to the institution, since it holds the majority of shares.
Waivers are important because they let institutions funnel more capital to shareholders.
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Though partial stock sales are possible today, the dividend-waiver process is cumbersome and costly, involving regular shareholder-approval votes, along with an agreement by insider investors to waive their rights to a payout.
The Fed's proposal also ensures that special deposits and mutual capital certificates are treated as regulatory capital, including Common Equity Tier 1 capital in some instances.
Under the current regulatory framework, which has remained largely unchanged since 1993, retained earnings constitute the only cost-effective way that most mutuals can raise capital. The only other option, subordinated debt, is priced at premium levels since investors agree to stand in the back of the line for payment in case of a default.
Both Weissman and Tom Fraser, CEO of the $3.2 billion-asset First Mutual Holding Company in Lakewood, Ohio, said the rule changes would energize the sector, convincing existing banks to retain their depositor-owned status while encouraging the formation of de novo mutuals. Only one new mutual bank has been formed since the 1970s.
The proposed rules could also prompt some credit unions to consider converting charters, Weissman and Fraser added.
"If implemented, it will have the effect of preserving mutuality well into the future," Fraser told American Banker.
"Subordinated debt is expensive to raise," Fraser said. "For institutions that might want to raise capital or want to do more advanced capital planning, having these tools [available], whether it's a mutual capital certificate or a special deposit, really opens up many options for us, while protecting the interest of our depositors."
Prominent industry groups are lining up behind the Fed's proposal. In a press release Friday, American Bankers Association CEO Rob Nichols called it "a significant and long overdue step to ensure that these unique institutions can continue to thrive and remain competitive in our banking system."
"It provides everything we've worked for and much more," Douglas Faucette, counsel to the America's Mutual Banks trade association, wrote Monday in a letter to the group's members.
Both Weissman and Faucette said it's likely that the Office of the Comptroller of the Currency and state regulatory agencies will move to align their mutual-bank rules with the Federal Reserve's amended framework, resulting ultimately in a comprehensive overhaul.
The Fed has overseen mutual holding companies since 2011. It assumed responsibility for the sector from the Office of Thrift Supervision, which was dismantled as part of the Dodd-Frank Act in response to its mishandling of the subprime mortgage crisis.
The Fed is accepting comments on the proposed rule changes through Oct. 5.
"This helps the industry a lot," Weissman said.
