Michael T. Escue
Michael T. Escue ()

Recently, the Board of Governors of the Federal Reserve System issued guidance, which discusses various issues that may prevent the Federal Reserve from acting favorably on applications and notices submitted by banking organizations.1 In addition, the guidance describes the Federal Reserve’s approach to processing applications and notices that present such issues and provides relevant statistics for the period 2009 to 2012.

According to the guidance, to date, when Federal Reserve staff identify a problematic issue relating to an application or notice filed by a financial institution,2 they have typically informed the applicant or notificant of the issue and requested additional information. If the issue cannot be resolved during the review process and the staff are prepared to recommend that the proposal be denied, the general practice has been to provide the filer the option to withdraw the application or notice.

The guidance indicates that from 2009 to 2012, the Federal Reserve received approximately 7,000 applications and notices, 700 of which were withdrawn. More than one-third of these withdrawals related to “significant issues identified by [staff]…that would have led to staff recommending denial to the [Federal Reserve] Board.”3

Issues and Considerations

The guidance identifies six primary issues and two “additional considerations” that may prevent favorable Federal Reserve action on a banking organization’s application or notice.

1. Less-Than-Satisfactory Examination Ratings and Enforcement Actions. As part of the application review process, the Federal Reserve considers the examination ratings of an organization in its evaluation of relevant statutory factors, such as financial, managerial and “convenience and needs” factors. When issues at an institution “have resulted or will result in a less-than-satisfactory rating” for safety and soundness, Community Reinvestment Act (CRA) or consumer compliance, or the issuance of a formal enforcement action, the application or notice “usually is not consistent with the requirements for approval.”

The guidance reiterates that the Federal Reserve expects an institution that has received a less-than-satisfactory rating in these areas, or is operating under an enforcement action, to resolve these issues before seeking approval to engage in any expansionary activities.

The guidance describes less-than-satisfactory ratings for safety and soundness as presenting “significant barriers” to approval, and notes that the Federal Reserve views as particularly important the risk-management and financial condition components of a holding company’s rating and the management and capital components of a bank’s rating. Deficiencies in these areas will, in most cases, be viewed unfavorably—even if the institution’s composite rating is satisfactory.

The guidance states, however, that, in “very limited circumstances,” the Federal Reserve may view favorably a proposal by an organization with one or more component ratings or a composite rating of less-than-satisfactory. In these cases, the institution must show that it has responded appropriately to and made “notable progress” in addressing the concerns, “convincingly demonstrat[e]” that the proposal would not “ distract management” or further exacerbate the deficiencies and convince the Federal Reserve that the proposal would strengthen the organization.

2. Other Financial Factors. The Federal Reserve also considers a variety of financial factors in evaluating an application or notice, including a general expectation that banking organizations remain in “sound financial condition on a current and pro forma basis.” Accordingly, applications and notices that raise concerns regarding asset quality, liquidity, capital or that otherwise would significantly weaken the financial condition of an institution, face substantial challenges.

The guidance expands on potentially problematic financial issues related to capital levels and structures, “source of strength” at the holding company level and expansionary proposals funded by excessive debt, noting, in particular, that proposals that present source of strength concerns face “significant barriers” to approval.

3. Other Managerial Factors. The “competence, experience, and integrity” of an applicant’s officers, board of directors, senior management and principal shareholders are “essential factors” in the Federal Reserve’s evaluation of applications and notices. In instances in which the backgrounds of these individuals raise questions about their integrity, financial responsibility or competence, the Federal Reserve may view the application or notice unfavorably.

The guidance highlights three specific managerial issues with proposed principals that have complicated the approval process: (1) insufficient banking experience among proposed directors and managers; (2) a history of financial irresponsibility; and (3) other background information that raises concerns, including criminal history and noncriminal acts that have resulted in adverse actions taken by a federal or state agency. In assessing banking experience and other background information, a proposal that would result in control by an individual who was associated with a failed depository institution, who was responsible for a depository institution’s troubled condition or who has been convicted of a crime faces “significant barriers” to approval.

4. Bank Secrecy Act/Anti-Money Laundering Compliance. In evaluating certain applications and notices, the Federal Reserve is required by statute to consider an organization’s compliance with the Bank Secrecy Act4 and other anti-money laundering requirements (BSA/AML). The guidance notes that a less-than-satisfactory BSA/AML compliance program presents “substantial barriers” to approval of an application.

5. Business Plan. The Federal Reserve also assesses an organization’s proposed business plan in its consideration of certain applications and notices. Business plans that raise risk-management or safety and soundness concerns due to strategies considered to be overly aggressive, undue concentrations, premature entry into new business lines or failure to address known deficiencies at the organization are described as presenting “barriers” to approval.

6. Section 23A and Regulation W Exemption Requests. If the proposed transaction contemplates an exemption under Section 23A of the Federal Reserve Act5 and Regulation W,6 the guidance cautions that the Federal Reserve will act favorably on the application or notice only with the consent of all appropriate supervisors, including the FDIC. The guidance specifically notes that the Federal Reserve expects the applicant seeking a Section 23A/Regulation W exemption to contact the appropriate supervisor and the FDIC.

Additional Considerations

The guidance identifies two “additional considerations” that may prevent the Federal Reserve from acting favorably on an application or notice, but that, in practice, have resulted in relatively few withdrawals:

Adverse Public Comments. “Substantiated public comments” with allegations related to consumer compliance have in some cases presented “barriers” to approval.

Competitive and Financial Stability Factors. In acting on certain applications and notices, the Federal Reserve is required to consider the effect of the proposed transaction on competition and financial stability. The guidance notes that a transaction that raises competitive or financial stability concerns may nevertheless be viewed favorably if mitigating actions are taken.

Semi-Annual Report

In the guidance, the Federal Reserve also announced the forthcoming publication of a new semi-annual report that will include aggregate statistics regarding the consideration and disposition of applications and notices, including the length of time taken to process them, the number of approvals, denials, and withdrawals, and the primary reasons for withdrawals.

Currently, the Federal Reserve releases a weekly report7 that details, among other things, its actions on banking applications and notices, but this publication does not include aggregate data, explanations for actions or other information regarding these applications and notices. The first semi-annual report will cover the first half of 2014 and will be published in the second half of 2014.

Remaining Questions

Although much of the guidance’s substance is not new, it provides some useful insight into the supervisory issues the Federal Reserve takes into account in considering a banking application or notice. Coupled with the statistics to be provided in the semi-annual report, this information could be helpful in assessing the likelihood of favorable Federal Reserve action before an institution moves forward with a proposal that will require an application or notice. Likewise, the guidance and semi-annual report may assist institutions in identifying issues that present the greatest risk of garnering negative attention and anticipating questions that may arise during the Federal Reserve’s review.

It is still unclear, however, how much detail will be provided in the semi-annual report. The Federal Reserve’s press release accompanying the guidance refers merely to the release of “aggregate data and other information.” In particular, aggregate data may mask what appears to be an increasing application-processing period for applications that involve relatively large banking organizations, are protested or that raise relatively new or difficult issues (such as the application of “financial stability factor”). Finally, although the guidance does not describe any absolute barriers to favorable action on applications and notices, phrases such as “usually is not consistent with…approval” and “significant barriers to approval” should be read as meaning approval is highly improbable absent extraordinary circumstances.

Michael T. Escue is a partner in the financial institutions group of Sullivan & Cromwell. Jennifer L. Sutton, special counsel at the firm, assisted with the preparation of this article.


1. Board of Governors of the Federal Reserve System, SR 14-2/CA 14-1, Enhancing . Transparency in the Federal Reserve’s Applications Process (February 2014), available at http://www.federalreserve.gov/newsevents/press/bcreg/20140224a.htm.

2. The guidance applies to state-chartered banks that are members of the Federal Reserve System, bank and savings and loan holding companies and foreign banks with U.S. operations.

3. The guidance is silent with respect to the reasons for which the other two-thirds were withdrawn.

4 31 U.S.C. §310.

5 12 U.S.C. §371c.

6 12 C.F.R. Part 223.

7. Board of Governors of the Federal Reserve System, H.2., Actions of the Board, Its Staff, and the Federal Reserve Banks; Applications and Reports Received, available at http://www.federalreserve.gov/releases/h2/.