Increase in Major Assets Prohibition of the Depository Institution Management Interlocks Rules May Benefit Community Banks in Director Searches
The federal banking regulators have issued a final rule adjusting the major assets prohibition thresholds of the Depository Institution Management Interlocks Rules, which could benefit community banks encountering difficulty in identifying new or potential directors. Prior to October 10, 2019, a management official of a depository institution with total assets exceeding $2.5 billion could not serve at the same time as a management official of an unaffiliated depository organization with total assets exceeding $1.5 billion, regardless of the location of the two depository organizations. The final rule increases both thresholds to a single $10 billion, the first change since 1996.
The Depository Institution Management Interlocks Act and implementing regulations were designed to foster competition by prohibiting a management official from serving at the same time as a management official of an unaffiliated depository organization in situations where the management interlock may have an anti-competitive effect. The first of three prohibitions precludes management of a depository organization from serving at the same time as a management official of an unaffiliated organization if the depository organizations in question have offices in the same community, with community defined to mean a city, town, or village and contiguous and adjacent cities, towns, or villages within a 10-mile radius. The second prohibition applies the same standard to institutions located in a relevant metropolitan statistical area (RMSA). The third prohibition precluded, prior to October 10, 2019, a management official of a depository organization with total assets exceeding $2.5 billion from serving at the same time as a management official of an unaffiliated depository organization with total assets exceeding $1.5 billion, regardless of the location of depository organizations. The first two prohibitions capture the risk of anti-competitive effects from management interlocks between organizations operating within overlapping geographical areas. The major assets prohibitions restrict management interlocks between depository organizations that are large enough that a management interlock may present anti-competitive concerns despite the fact that the involved organizations may not have offices in the same community or RMSA.
Significantly, community banks may benefit from the increase to $10 billion, because the small market share exemption under Subsection .5 of each of the regulations (12 CFR 26 (OCC), 12 CFR 212 (Board) and 12 CFR 348 (FDIC)) provides an interlocks exception if the interlock is within the major assets prohibition (formerly $2.5 billion/$1.5 billion, now $10 billion) and the depository organizations hold, in the aggregate, no more than 20% of the deposits in each RMSA or community of overlap. The effect of the rule change is to limit application of interlocks rules to those banks having more than $10 billion in assets and to those banks having less than $10 billion in assets competing within a community or RMSA only if the banks control, on a combined basis, more than 20% of the market. This may provide opportunities to recruit experienced directors currently serving on banks that involve some degree of competition. State law prohibitions should be consulted to determine if there are any state restrictions against serving on competing boards, and any director serving on two or more boards that compete in the same market must be cognizant of observing the director’s duty of loyalty and of avoiding any conflicts of interest.