Membership Application Process: De Novo Banks
SECTION 9 OF THE FEDERAL RESERVE ACT and SECTION 208.3 OF REGULATION H
De Novo banks in existence for less than five years, as well as all Thrifts, Edge Act Companies and Industrial Banks, proposing to be members of the Federal Reserve System must file a membership application covered by these procedures. (Refer to separate procedures for existing state chartered banks or national banks converting to a state charter that have been in existence for more than five years proposing to become a member of the Federal Reserve System.) A de novo bank must also apply directly to the FDIC for its deposit insurance. The application for deposit insurance should be filed prior to filing a membership application with the Federal Reserve System. The bank should also have received at least preliminary approval for a state banking charter prior to filing a membership application with the Federal Reserve System. If the de novo bank will be owned by a bank holding company, a filing under section 3 of the Bank Holding Company Act will also be required. Refer to those procedures for additional information.
There are no publication requirements for Federal Reserve membership applications.
Information to submit - forms - number of copies
Refer to form FR 2083. An original and three copies of the application should be submitted.
The following items should also be included with the filing:
- copies of policies regarding loans, investments, asset/liability management, bank security, and compliance with the Bank Secrecy Act;
- identification of the designated compliance officers responsible for general banking regulations, the Bank Secrecy Act, and the bank's security;
- a statement that the bank will use accrual accounting;
- a statement regarding blanket bond coverage (i.e., the name of the carrier and amounts of primary and excess coverage); and
- a statement of whether the bank will have annual external audits. Annual external audits are strongly encouraged for at least the first five years of operations.
Expedited Membership Applications
Expedited procedures are available to a de novo bank if it is controlled by a multi-bank holding company that meets the expedited criteria under section 225.14(c) of Regulation Y. Upon request, the Reserve Bank will provide guidance as to whether a bank meets the expedited criteria. An expedited membership application requires submission of the same information as a nonexpedited membership application.
Processing time frames
For membership applications processed by the Reserve Bank on an expedited basis, the application will be acted on no later than the 15th calendar day following the Reserve Bank's receipt of a complete application, unless the Reserve Bank notifies the bank that the application is not eligible for expedited review. A nonexpedited membership application will normally be acted on by the Reserve Bank no later than 30 days following receipt of a complete application. If the membership application is referred to the Board of Governors, the application will be acted on within 60 days of receipt of a complete application, unless the Board notifies the bank that the processing period is being extended and discloses the reasons for the extension.
Name checks
Name checks are performed on all organizers, senior officers, directors, and shareholders owning 10 percent or more of the bank's voting securities if the individuals are not known to banking. An individual is considered to be known to banking if they have more than five years of banking experience. Biographical and financial information should be submitted on the Interagency Biographical and Financial Report (FRB 7100-0134).
Factors reviewed during processing
The following matters will be given special consideration during the review of the application:
- the bank's financial history and condition and the general character of its management;
- the adequacy of the bank's capital structure in relation to the character and condition of its assets and to its existing and prospective deposit liabilities and other corporateresponsibilities, and its future earnings prospects;
- the convenience and needs of the community to be served by the bank; and
- whether the bank's corporate powers are consistent with the purposes of the Federal Reserve Act.
Meeting with the Board of Directors
Prior to approval and pursuant to SR 91-17, Reserve Bank staff should meet with the bank's full board of directors to discuss applicable statutes, regulations, policies, and supervisory procedures, and to become better acquainted with the organizers. After an application is approved, but before the bank is opened, the Reserve Bank should again meet with the directorate to reiterate the System's expectations for newly formed institutions. The directors should be apprised of their individual and group responsibilities, particularly as they apply to Regulation O and Sections 23A and 23B of the Federal Reserve Act. Directors should also be aware of their fiduciary responsibilities and the need for adherence to sound operating policies.
Capital Standards
Initial capital in a de novo state member bank should be reasonable in relation to State law and the FDIC minimum of $2.0 million, its location, business plan and competitive environment. At a minimum, however, a de novo bank must maintain a tangible tier 1 leverage ratio of 9 percent for the first three years of operations. The bank must provide projections of asset growth and earnings performance that reasonably support the bank's ability to maintain this ratio without reliance on additional capital injections. Even though a 9 percent tangible leverage ratio is not required after year three, de novo banks are expected to maintain capital ratios commensurate with ongoing safety and soundness concerns and, generally, well in excess of regulatory minimums.
Outside Directors Directors with prior banking experience provide a de novo institution with additional managerial strength. Accordingly, the board of directors of a de novo bank normally should include at least two outside directors with prior banking-related experience. This guideline may be waived if, in the opinion of the Reserve Bank, it will be difficult to find outside directors with prior banking experience, as may be the case for institutions located in rural areas.
Consummation period/information
A bank may be admitted to membership in the Federal Reserve System any time within 90 days after approval. Approval of Federal Reserve membership is subject to the following conditions:
- the bank shall at all times conduct its business and exercise its powers with due regard to safety and soundness;
- except with the permission of the Board of Governors of the Federal Reserve System, the bank shall not cause or permit any change to be made in the general character of itsbusiness or in the scope of the corporate powers it exercises at the time of admission to membership;
- the bank's capital shall be at all times adequate in relation to the character and condition of its assets and to its existing and prospective liabilities and other corporate responsibilities; and
- the bank shall comply at all times with Regulation H and any other conditions of membership prescribed by the Board.
Upon notification of approval of the membership application and acceptance of the above conditions of membership, the bank should send a certified copy of its board's resolutions to this effect. The Reserve Bank will then make arrangements to accept payment for Federal Reserve Bank stock and to issue an advice of holdings in Federal Reserve Bank stock. In addition, the bank should submit a list of current bank officers and directors, the bank's street location, and mailing address when returning the resolutions.
If the bank is owned by a bank holding company and the bank's name is changing, a Quarterly Report of Changes in Organizational Structure (FR Y-10) should also be submitted. Please note that in multi-tier bank holding company organizations, only the top-tier bank holding company is required to submit a FR Y-10.
Effective Date of Membership
A bank's membership will become effective upon such date as its Federal Reserve Bank stock is credited to its account in accordance with the Board's Regulation I. As of such date, the bank will be issued a certificate of stock of the Reserve Bank pursuant to its application for membership. However, in the case of a mutual savings bank not authorized to purchase Reserve Bank shares, the Reserve Bank shall accept a deposit on account in place of issuing shares.2 The bank's membership shall become effective on the date of such acceptance.
1 A mutual savings bank not authorized to purchase Federal Reserve Bank stock may apply for membership evidenced initially by a deposit, but if the laws under which the bank is organized are not amended at the first session of the legislature after its admission to authorize the purchase, or if the bank fails to purchase the stock within six months of the amendment, its membership shall be terminated.
2 A mutual savings bank not authorized to purchase Federal Reserve Bank stock may apply for membership evidenced initially by a deposit, but if the laws under which the bank is organized are not amended at the first session of the legislature after its admission to authorize the purchase, or if the bank fails to purchase the stock within six months of the amendment, its membership shall be terminated.
Contact
Michael Watson, Vice President
Regional and Community Banking
Michael.Watson@bos.frb.org
