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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations and transactions with the parent organization that may impact the industrial bank also could be taken into consideration.
The FDIC also sought comment on whether the rule should include a commitment that the parent company will maintain its own capital at some defined level on a consolidated basis. A
number of commenters argued that creating consolidated capital requirements for the parent company would ensure that it is able to serve as a source of strength for its subsidiary industrial bank. Some commenters argued that such capital standards should be comparable to those imposed on BHCs of similar size and systemic significance. These commenters also argued that the absence of a consolidated capital standard for the parent company creates a lower standard of supervision than is imposed by the BHCA. One commenter recommended that such requirements should be greater than the requirements applicable to other FDIC-insured depository institutions due to the enhanced risk of the Covered Company on the industrial bank and the DIF.
By contrast, several commenters argued that applying a capital standard on the parent company itself is not encompassed within the FDICs statutory mandate to preserve the safety and soundness of insured depository institutions. Other commenters observed that for many industrial bank parent companies, measures of tangible equity are not often the most pertinent indicator of the financial health of the company or its ability to serve as a source of strength. These commenters argued that given the diversity of industrial bank parent company operations, a more tailored approach would be appropriate.
The FDIC does not believe that the final rule should impose capital requirement commitments on Covered Companies because a one-size-fits all regulatory approach to capital requirements would not be appropriate, given the idiosyncratic business models and operations of such parent companies. The FDIC believes that the final rule and its supervisory framework adequately ensure that a parent company of an industrial bank has the ability to serve as a source of strength.
5. Section 354.5Restrictions on Industrial Bank Subsidiaries of Covered Companies Section 354.5 of the proposed rule required the FDICs prior written approval before an industrial bank that is a subsidiary of a Covered Company may take certain actions. These
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restrictions, like the required commitments discussed above, are generally intended to provide the safeguards and protections that the FDIC
believes would be prudent to impose with respect to maintaining the safety and soundness of industrial banks that become controlled by companies that are not subject to Federal consolidated supervision. Accordingly, the proposed rule required prior FDIC approval for the subsidiary industrial bank to take any of five actions set forth in 354.5a.
In order to ensure that the industrial bank does not immediately after becoming a subsidiary of a Covered Company engage in high-risk or other inappropriate activities, the subsidiary industrial bank would have been required to obtain the FDICs prior approval to make a material change in its business plan after becoming a subsidiary of a Covered Company paragraph a1. In order to limit the influence of the parent Covered Company, the subsidiary industrial bank would have been required to obtain the FDICs prior approval to add or replace a member of the board of directors or board of managers or a managing member, as the case may be paragraph a2; add or replace a senior executive officer paragraph a3; employ a senior executive officer who is associated in any manner with an affiliate of the industrial bank, such as a director, officer, employee, agent, owner, partner, or consultant of the Covered Company or a subsidiary thereof paragraph a4; or enter into any contract for material services with the Covered Company or a subsidiary thereof paragraph a5. Pursuant to proposed 354.5b, the FDIC would have been able to, on a case-by-case basis, impose additional restrictions on the Covered Company or its controlling shareholder if circumstances warrant.
The FDIC is adopting revisions to the restrictions in 354.5a2, 3, and 4
and removing 354.5b, as discussed below.
The FDIC sought comment on whether these restrictions should be time-limited. A number of commenters generally argued that the restrictions should only apply during the industrial banks de novo period i.e., the first three-years of operation. Some commenters suggested that the FDIC
should or could apply ongoing restrictions beyond the de novo period when special circumstances exist. One commenter proposed that the FDIC
implement a process to allow an industrial bank to request a waiver of the requirements at the conclusion of the de novo period. Two commenters recommended limiting the restrictions
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to the de novo period except for paragraph a4 covering employment of a senior executive officer who is also currently associated with an affiliate of the industrial bank. Most of these commenters were concerned that the ongoing restrictions in these sections created greater burdens on industrial banks than required of non-industrial banks.
By contrast, other commenters argued that these restrictions should be perpetual in duration and viewed them as important safeguards on the actions of a Covered Company with respect to an industrial bank subsidiary. One commenter argued that given the unique and significant risks posed by industrial banks and their parent companies, the restrictions should not be limited to any number of years after an industrial bank becomes a subsidiary of a Covered Company.
The FDIC previously has imposed restrictions similar to those contained in 354.5 in prior actions on filings involving industrial banks. The agencys experience indicates that there are advantages and disadvantages to imposing such restrictions on a perpetual basis, just as there are advantages and disadvantages to imposing the restrictions on a timelimited basis. The relative advantages and disadvantages vary depending on the nature of the particular restriction.
Nevertheless, certain items are believed so directly related to the industrial banks ongoing safe and sound operation that a perpetual restriction is warranted. As such, the FDIC is adopting the restrictions regarding material changes to business plans, entering into contracts for material services with a Covered Company or its subsidiaries, and employing a senior executive officer that is associated with an affiliate of the industrial bank as proposed, with one exception noted below.
However, having considered commenters suggestions regarding the restrictions on the appointment of directors paragraph a2 and senior executive officers paragraph a3, the FDIC is modifying the final rule to apply a three-year period to filings approved by the FDIC for an industrial bank that is a subsidiary of a Covered Company.
This modification provides flexibility for industrial banks to timely appoint directors and officers. The FDICs supervisory efforts and enforcement authorities remain fully accessible if an industrial banks director or officer selection raises concerns. Further, consistent with 354.6 of the final rule, the FDIC may impose additional restrictions if appropriate to a particular
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