The Federal Reserve has finalized a rule to allow small banks to exceed debt limits when financing mergers and acquisitions.
The new rule will raise the asset-size threshold for regulatory exemption for community bank holding companies to $1bn from the current threshold of $500m in total assets.
The move will make it easier for small banks to pursue mergers allowing them to take on debt unlike the existing capital requirements that had limited the parent companies’ ability to borrow.
Under the policy statement, holding companies will be able to use debt to finance up to 75% of the purchase price of an acquisition after fulfilling certain requirements, including requirements to repay all debt within 25 years and reduce the debt to equity ratio to .30:1 or less within 12 years.
The parent companies will also require to well capitalize each of its subsidiary insured depository institution and will be restricted from paying dividends until it reduces its debt to equity ratio to 1.0:1 or less.
The revised regulations will also apply to savings and loan holding companies.