Federal Reserve Finalizes M&A Rule for Financial Firms

The U.S. Federal Reserve Board recently issued a final rule to implement section 622 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The new rule, which goes into effect on January 1, 2015, prohibits a financial company from combining with another company if the liabilities of the newly formed company between the two exceed 10 percent of aggregate consolidated liabilities of all financial companies.

A financial institution's liabilities are typically defined as the difference between risk-weighted assets and total regulatory capital, with the assets adjusted to include exposures from the regulatory capital. Generally accepted accounting standards would be used to measure liabilities for firms that are not subject to consolidated risk-based capital rules. Institutions that are required to comply with the rule include depository institutions and companies that control insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, and non-bank entities the Financial Stability Oversight Council for Board Supervision should designate.

Based on comments made in the last few months, the Fed made minor changes to the rule, which was originally proposed in May. The company cannot acquire control of another company under merchant banking authority of the company has exceeded the 10 percent limit. There is an exemption in the final rule, however, that allows a financial company to continue securitization if it has gone over the 10 percent limit.