ABA Letter to the Agencies on Management Interlocks Act Rules

Dear Sir or Madam:

The American Bankers Association (ABA) appreciates the opportunity to provide comments onthe joint notice of proposed rulemaking issued by the Office of the Comptroller of the Currency,Federal Reserve Board of Governors, and Federal Deposit Insurance Corporation (Agencies)regarding an increase in the major assets thresholds found in the Depository InstitutionManagement Interlock Act (DIMIA) regulations. The Agencies’ proposal seeks to raise themajor assets thresholds for the first time since they were raised by Congress in 1996. This effortfulfills a commitment made by the Agencies in their March 2017 final report published pursuantto the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review.

DIMIA seeks to foster competition between banks by generally prohibiting shared managementofficials between two unaffiliated depository organizations within the same “community” or“relevant metropolitan statistical area” (RMSA). Regardless of geographic overlap, DIMIA alsoprohibits shared management officials between two depository organizations that exceed the major assets thresholds. Unchanged since 1996, the major assets thresholds prevent amanagement official at a depository organization with total assets exceeding $2.5 billion fromconcurrent service as a management official of an unaffiliated depository organization with totalassets exceeding $1.5 billion. However, depository organizations can ask the Agencies for anexemption from the major assets prohibition. The Agencies consider whether to grant anexemption based on whether there is competitive harm in permitting the interlock. ABA notesthat this determination does not appear to involve an analysis based on asset size.

The Agencies’ proposal seeks to set both of the major assets thresholds at $10 billion. Thiswould mean that management officials at a depository organization with total assets exceeding$10 billion would not be able to serve at the same time as a management official at anunaffiliated depository organization with total assets exceeding $10 billion, absent regulatoryapproval. However, the Agencies also offer three alternative approaches to adjusting the majorassets thresholds based on (1) the percentage of banks covered by the prohibition in 1996; (2) theasset growth of the banking industry since 1996; or (3) inflation since 1996.

The Agencies’ Proposal Can Avoid Embracing Arbitrary Thresholds

ABA appreciates the intent of this proposal and supports an increase in the major assetsthresholds, a welcome step in modernizing an outdated regulation. However, ABA cautionsagainst the use of an arbitrary line dividing or defining community banks. In ABA’s view, theAgencies’ effort to provide relief under DIMIA should not rely upon or require any arbitrarydefinition of what identifies a particular class of bank, but rather should rest upon an evaluationof competitive concerns as embodied in the statute. The purpose of DIMIA is to “foster competition by generally prohibiting a management official from serving two nonaffiliateddepository organizations in situations where the management interlock likely would have an anti-competitive effect.” (emphasis added).

The Agencies state in this proposal that “having a single, consistent asset threshold (i.e. $10billion) would simplify the [A]gencies’ DIMIA regulations and enable depository organizationsto identify more easily whether they may be subject to the major assets prohibition.”8ABA notesthat the validity of such an assertion will erode if the Agencies make further adjustments to thisthreshold to account for inflation, as they propose to do.

ABA supports the Agencies’ commitment to adjust the major assets thresholds and support theAgencies in any upward adjustment to account for inflation. However, ABA observes that anyupward adjustment that accounts for inflation or market changes will quickly shift the majorassets thresholds to something other than the “single, consistent asset threshold” (i.e. $10 billion)that this proposal highlights as a clear line for applicability. Said differently, the only way forthese thresholds to remain easily identifiable at $10 billion would be for the Agencies to fallshort on their commitment to revise these thresholds to account for inflation on a regular basis.

ABA recognizes that these arbitrary asset thresholds were originally set by Congress in 1978 andthen revised by Congress in 1996. However, the statutory text empowers the Agencies to takeinto account inflation or market changes in revising these thresholds. ABA believes that there may be better approaches than merely setting new arbitrary thresholds (albeit at more up-to-datelevels). This effort to modernize DIMIA’s major assets thresholds should make full use of thesestatutory powers to revise these thresholds to account more adequately for market changes.

Consider Alternative Measures for the Thresholds for the Major Assets Prohibition

As noted above, the policy objective of DIMIA is to foster competition between banks andaddress anticompetitive concerns. ABA believes that threshold adjustments should be rootedmore fully in the policy objectives of the relevant statute and should avoid reinforcing similararbitrary thresholds found elsewhere. To that end, ABA believes that a better approach to changeDIMIA’s thresholds would be based on analysis related to competitive effect, recognizing thatthe market and the competitive profile of the industry has changed, and will change, over time.

One approach the Agencies should consider is an upward revision of the major assets thresholdsbased on a bank’s share of total industry assets, which bears more directly on bank competitionthan other alternatives offered in the proposal. In 1996, the major assets thresholds of $1.5 billionand $2.5 billion captured banks with market shares of total industry assets of 0.027 percent and0.045 percent, respectively. Today, these unchanged thresholds capture banks with marketshares of total industry assets of 0.008 percent and 0.014 percent. Then and now, the majorassets thresholds capture too many institutions that have a very low market share of total industryassets. ABA does not believe it is sensible to presume anticompetitive risk for institutions thathave such a low market share of total industry assets.

To that point, ABA suggests that the Agencies revise the major assets prohibition thresholds toprovide relief based on a modern look at the share of total industry assets. Even with a veryconservative measure, where both major asset thresholds were set to extend to anyone with nomore than 0.1 percent in total industry assets, the Agencies would set the thresholds at $17.9billion. If the Agencies used 0.5 percent of total industry assets, this would place the assetthresholds at $89.7 billion. As an additional benefit, by incorporating a measure based on abank’s share of total industry assets into the Agencies’ regulations, the Agencies could avoid theneed for continuous notice and comment rulemaking to revise this threshold.

Further, the banking industry has also changed considerably in the past two decades, with a trendtoward consolidation that shifts what can fairly be treated as a large institution. For instance, theaverage assets per bank was $490 million in 1996. Today, it is nearly seven times that, at $3.3billion per bank. If the Agencies used an alternative measure for the thresholds for the majorassets prohibition centered on the growth in the average assets per bank from 1996 to 2018, the$1.5 billion and $2.5 billion thresholds would be raised to $10.1 billion and $16.9 billion,respectively.

Exempt Non-U.S. Affiliates from Management Interlock Requirements

In March 2016, ABA wrote a letter in response to the Agencies’ decennial review of theirregulations mandated by EGRPRA. In that letter, ABA noted that the major assets prohibitionextends to non-U.S. affiliates, which gives global reach to the limits found in DIMIA. Thisrequires depository organizations operating in countries beyond the United States to monitorpotential management interlocks on a global scale, since most depository organizations with aglobal presence will have assets well above the major asset thresholds the Agencies set. Such arequirement exists for a depository organization’s smallest affiliates, even if a sharedmanagement official’s service spans different countries or continents, and even if the affiliatesare not engaged in business activities in the United States.

ABA continues to believe that the Agencies should develop an exception for depositoryorganizations’ foreign affiliates that are not engaged in business or activities in the United States.DIMIA was not intended to have a global reach. Rather, DIMIA’s focus is on limiting sharedmanagement officials in the same “city, town, or village” or the same “metropolitan statisticalarea.” Further reinforcing the local focus of this statute are the listed exceptions, which includeEdge Act Corporations and foreign depository institutions that do not do business within theUnited States. As evidenced by the policy objectives and geographic focus of the rules, thecompetitive concerns that Congress appeared most concerned about are simply not present withforeign affiliates not doing business in the United States. Accordingly, providing an expressexemption for management officials of foreign affiliates would provide a benefit to impactedfirms without compromising the policy objectives of DIMIA.

Conclusion

ABA appreciates the Agencies’ effort to modernize DIMIA by increasing the major assetsthresholds. However, ABA prefers an approach that would be based on an analysis more closelyresting upon the competitive issues on which the statute is based. Such an approach would alsoavoid any confusion that a new threshold is intended to reinforce use of an arbitrary threshold todivide or define classes of banks. Workable, more tailored alternatives that provide more reliefare available. We encourage the Agencies to consider these alternatives and hope that the

Agencies will also consider modernizing DIMIA by exempting foreign affiliates not engaged inbusiness in the U.S. Should you have any questions, please do not hesitate to contact theundersigned at [email protected] or (202) 663-5253.

Sincerely,

Shaun Kern
Senior Counsel
Office of Regulatory Policy