Fed mutual bank capital proposal opens comment on updated rules

The Fed mutual bank capital proposal opened for public comment on July 31, setting out a possible overhaul of rules that the Federal Reserve says have not been updated since 1993. The proposal would give certain mutual banking organizations greater flexibility to raise capital by clarifying which instruments qualify as regulatory capital and reducing procedural requirements, but it would not take effect unless adopted in a final rule.

The Federal Reserve said mutual banks are owned by depositors rather than shareholders, and that more than 90% hold less than $3 billion in total assets. The Board took supervisory and regulatory responsibility for these institutions from the Office of Thrift Supervision in 2011.

The central bank said the existing rules had become overly burdensome and complex over time. Vice Chair for Supervision Michelle Bowman said the proposed revision was the first update to mutual-bank regulations in 30 years. She said it was intended to help the institutions grow and serve communities while retaining their depositor-owned form.

What would the Fed mutual bank capital proposal change?

The proposal would update the regulatory framework rather than prescribe a final list of eligible capital instruments in the announcement. Its stated measures include clearer treatment of instruments that count as regulatory capital, fewer procedural burdens and other broader revisions to the framework, according to the Fed.

For depositor-owned banks, the ownership structure differs from that of a shareholder-owned bank: depositors, rather than stockholders, own the institution. The Fed’s proposal is designed to preserve that structure while offering specified mutual banks more flexibility to raise capital, the agency said.

The Board is accepting comments for 60 days after the proposal is published in the Federal Register. The Fed has not supplied a calendar deadline in its announcement.

What issues remain open before a final rule?

Governor Michael Barr supported issuing the proposal for comment but said he had not reached a view on a final rule. In a separate statement, Barr said he wanted feedback on protections against possible conflicts of interest and on accountability in dividend waivers and conversions.

He also invited comment on whether mutual capital certificates and special deposits could perform as viable loss-absorbing capital in stressed conditions, and on the proposal’s potential competitive effects among institutions with different charters and corporate forms.

The industry has already pressed for greater clarity. In June, the American Bankers Association said it supported the Fed’s effort to create more uniform treatment for mutual capital certificates. The association said the Fed had released an FAQ and two draft templates in the prior year for banks considering instruments that could qualify as common-equity Tier 1 or additional Tier 1 capital. The ABA sought clearer qualification standards and more flexibility in features such as dividends, redemption and loss-absorption terms, while calling for prudential safeguards.

Those industry recommendations are separate from the July proposal. Barr’s concerns are among the issues on which he invited public comment.

This story draws on original reporting from PYMNTS.