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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

DIVISION OF CONSUMER AND 

COMMUNITY AFFAIRS

SR 14-2

CA 14-1

February 24, 2014

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK AND TO FINANCIAL INSTITUTIONS

SUPERVISED BY THE FEDERAL RESERVE

SUBJECT: Enhancing Transparency in the Federal Reserve’s Applications Process

Applicability: This guidance applies to all financial institutions supervised by the Federal 

Reserve, including those with $10 billion or less in consolidated assets.

The purpose of this letter is to provide financial institutions1 and the general public with a 

better understanding of the Federal Reserve’s approach to applications and notices that may not 

satisfy statutory requirements for approval of the proposal or otherwise raise supervisory or 

regulatory concerns. The matters discussed herein are intended to improve transparency in the 

applications process.

When Federal Reserve staff identifies substantive issues under the statutory factors that 

must be evaluated in an application or notice, staff typically will inform the applicant or 

notificant and request additional information. Often, these issues are resolved through the 

provision of additional information about or changes to the proposal, and the Federal Reserve 

ultimately approves or does not object to the application or notice. However, there are instances

when substantive issues are not resolved during the application review process, and Federal 

Reserve staff recommends that the Board deny the proposal. In such cases, the Federal 

Reserve’s general practice has been to inform the filer before final Board action that staff would 

recommend denial of the proposal to the Board in order to provide the filer the option to 

 1 For purposes of this guidance, “financial institutions” refers to state member banks, bank and savings and loan 

holding companies (including their nonbank subsidiaries), and foreign banks with operations in the United States.
 

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withdraw the application or notice. Typically, the application or notice is withdrawn and the 

withdrawal is noted on the Federal Reserve’s public H.2 Release.2 

To enhance transparency in the Federal Reserve’s applications process and provide the 

banking industry and general public with better insight into the issues that could prevent the 

Federal Reserve from acting favorably on a proposal, the Federal Reserve will start publishing a 

semi-annual report that provides pertinent information on applications and notices filed with the 

Federal Reserve. The report will include statistics on the length of time taken to process various 

applications and notices and the overall volume of approvals, denials, and withdrawals, and 

provide the primary reasons for withdrawals. The first report will be released in the second half 

of 2014 and include filings acted on from January through June 2014. 

From 2009 to 2012, there were approximately 7,000 applications and notices filed with 

the Federal Reserve. Over the same time period, approximately 700 applications and notices 

were withdrawn. The majority of the filings were withdrawn at the prerogative of the filer; 

however, more than a third of the withdrawals were due to significant issues identified by 

Federal Reserve staff during the application review process that would have led to staff 

recommending denial to the Board. The issues identified have most often been related to the 

safety and soundness of the financial institution or consolidated organization, or to a failure to 

meet another statutory requirement for approval. The common issues identified by the Federal 

Reserve that have resulted in applications and notices being withdrawn are discussed below. 

Organizations with Less-than-Satisfactory Ratings or Enforcement Actions

The Federal Reserve has received applications from organizations with issues that have 

resulted or will result in a less-than-satisfactory rating for safety and soundness, Community 

Reinvestment Act (“CRA”), or consumer compliance, and/or the issuance of a formal 

enforcement action. Organizations rated less than satisfactory or operating under a formal 

enforcement action are expected to resolve the issues that led to the less-than-satisfactory rating 

or the enforcement action prior to seeking approval from the Federal Reserve to engage in any 

expansionary activities, including mergers, acquisitions, asset purchases, investments, new 

activities, and branching.3

 As part of the application review process, the Federal Reserve 

considers the examination ratings of an organization in its evaluation of relevant statutory 

factors, such as financial, managerial, and convenience and needs factors. When these issues at 

the organization are evaluated under the applicable statutory requirements of a proposal, the 

application or notice usually is not consistent with the requirements for approval. 

Safety and Soundness

Applications and notices filed by organizations in less-than-satisfactory condition face 

significant barriers to approval and generally have been discouraged. In addition, applications 

and notices, particularly for expansionary activities, filed by holding companies with less-than-

 2 http://www.federalreserve.gov/releases/h2/

3 See SR letter 13-7/ CA letter 13-4, “State Member Bank Branching Considerations” for further guidance on the 

Federal Reserve’s policy for branching activities by state member banks in less than satisfactory condition. 
 

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satisfactory ratings for the risk management or financial condition components, or banks with 

less-than-satisfactory ratings for the management or capital components, generally have been 

viewed unfavorably despite having a satisfactory composite rating. In the majority of such cases, 

the financial and managerial considerations of the proposal were not consistent with approval. 

Under very limited circumstances, the Federal Reserve may consider proposals from 

organizations with one or more component ratings of “3” or a composite rating of “3” for safety 

and soundness. In addition to convincingly demonstrating that the proposal would not distract 

management from addressing the existing problems of the organization or further exacerbate

these problems, the applicant or notificant would have to demonstrate that the proposed 

acquisition would strengthen the organization. The organization also must be responding 

appropriately to and must have made notable progress in addressing supervisory concerns. 

Consumer Compliance and CRA 

The Federal Reserve considers an institution’s record of complying with consumer 

protection laws and regulations as part its assessment of managerial factors. Proposals involving 

institutions with less-than-satisfactory consumer compliance ratings or other significant 

consumer compliance issues face barriers to approval and have been discouraged.4

 Under 

limited circumstances when such proposals have been submitted, however, the Federal Reserve 

considers a number of factors, including: 

• The nature and severity of the issues that led to the less-than-satisfactory rating or 

weaknesses in the consumer compliance program.

• Whether the less-than-satisfactory rating was consecutive or whether the identified 

weaknesses or issues are of a repeat nature. 

• The corrective action taken to date, including the primary federal regulator’s view of such 

action and examiner documentation indicating substantial and verified corrective action.

• The size of the institution with less-than-satisfactory ratings or other significant consumer 

compliance issues relative to the organization’s consolidated assets.

• Whether the proposal would pose a material distraction to management in its efforts to 

achieve corrective action.

A less-than-satisfactory CRA rating has been an impediment to favorable action on an 

application or notice. However, consideration may be given for a branch opening to address a 

particular weakness in the bank’s CRA performance identified by examiners or for a branch 

opening in a low- or moderate-income or minority census tract, provided that the opening of the 

branch would address an unmet need for banking services and not detract from efforts to address 

any non-branch related CRA deficiencies. 

 4 Near term or in process consumer compliance or CRA examinations could cause a delay in the applications 

decision process.
 

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Other Financial Factors

Relevant banking statutes and the Board’s regulations generally require the Federal 

Reserve to consider financial factors when evaluating an application or notice. In order for the 

Federal Reserve to approve or not object to a proposal, an organization is expected to be in sound 

financial condition on a current and pro forma basis. Applications and notices for proposals that 

raise concerns with respect to asset quality, liquidity, or capital, or that otherwise would 

significantly weaken the financial condition of a financial institution have not been viewed 

favorably. Common financial issues that have made applications and notices problematic 

include the following: 

• Capital – Proposals in which the resulting organization’s capital levels or structure do not 

provide adequate support to the organization have been viewed as deficient. Pro forma 

capital levels are expected to be commensurate with the organization’s risk profile. 

Insured depository institutions (“IDIs”) and holding companies subject to the Board’s 

capital adequacy guidelines are expected to be at least well capitalized on a pro forma 

basis. The quality of the organization’s capital also is considered. Further, capital 

structures for existing and proposed holding companies with consolidated assets greater 

than $500 million should comply with the Board’s revised capital framework. 

• Source of strength – Holding companies are required to serve as “a source of strength” to 

their subsidiary IDIs.

5

 Proposals involving holding companies that are unable to clearly 

demonstrate their ability to serve as a source of strength have faced significant barriers to 

approval. Holding companies with insufficient financial resources at the parent, limited 

access to capital, and/or high levels of debt, often lack the ability to provide adequate 

support to their subsidiary IDIs. In some instances, such holding companies expose their 

subsidiary IDIs to additional risks due to the reliance on significant dividend payments

from the IDIs to meet the obligations of the parent. 

• Acquisition debt – Expansionary proposals funded by debt are expected to meet the 

requirements of relevant regulatory policies and guidance, such as the Small Bank 

Holding Company Policy Statement.6

 Applicants and notificants are expected to clearly 

demonstrate the ability to service any debt incurred under the terms of the obligation

without reliance on sustained high levels of dividends or other payments from their IDIs. 

In addition, acquisitions should not be funded by short-term debt; expansionary proposals 

funded by debt maturing in less than three years generally have been viewed unfavorably. 

Other Managerial Factors

The competence, experience, and integrity of the officers, directors, and principal 

shareholders of an applicant, its subsidiaries, and the related IDIs and holding companies are 

essential factors in the Federal Reserve’s evaluation of applications and notices. As part of the 

application review process, the Federal Reserve conducts extensive reviews of the background, 

 5 12 USC 1831o-1.

6 12 CFR part 225, appendix C.
 

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financial history, and professional experience of the proposed principals of an organization. 

Principals, particularly directors and managers, whose backgrounds raise questions regarding 

their integrity, financial responsibility, or competence, or otherwise raise doubt about their 

ability to fulfill the responsibilities of their respective roles within the organization, have been 

viewed unfavorably. Common managerial issues identified that have made approval of 

applications and notices problematic include the following: 

• Insufficient banking experience – Proposed directors and managers of an organization

should have experience commensurate with the duties required for the position being 

sought, taking into consideration the size and complexity of the organization. For 

example, individuals with extensive large bank or investment banking experience may 

not necessarily have the appropriate experience to manage community or regional banks. 

Proposals that consider individuals with limited relevant banking or business experience 

for key management or decisionmaking positions have been discouraged. Further, 

proposals that would result in individuals who have been associated with failed IDIs or 

IDIs that are or were in troubled condition as a result of their actions or decisions being 

appointed in key management or decisionmaking positions or serving as principal 

shareholders, have faced significant barriers to approval. 

• Financial responsibility – Proposed principals of an organization are expected to have the 

financial resources and integrity to meet their financial obligations. For example, 

proposed principals, particularly directors and senior executive officers, either 

individually or through related business interests, who have a history of bankruptcy 

filings or defaults on obligations that have resulted in losses to IDIs or the Deposit 

Insurance Fund, or exhibit other behaviors that indicate a lack of financial responsibility,

have been a barrier to approval. Further, individuals unable or unwilling to demonstrate 

the financial capacity to meet their personal obligations have not been viewed favorably. 

• Other background information – The Federal Reserve contacts other federal, state, and 

local government agencies regarding the background of proposed principals as part of its 

review of applications and notices. Proposals involving principals who have been 

convicted of crimes have faced significant barriers to approval. Noncriminal acts 

committed by proposed principals that have resulted in adverse actions taken by a federal 

or state agency, such as the assessment of a civil money penalty or issuance of an 

enforcement action, also are considered and have made approval of applications and 

notices problematic. 

Other Factors 

Other common issues identified during the application review process that have led to the 

withdrawal of applications and notices include the organization’s compliance with the Bank 

Secrecy Act, the appropriateness of the organization’s business plan, and the need for an 

exemption from Section 23A of the Federal Reserve Act and Regulation W. These issues, 

discussed below, can raise significant safety and soundness concerns at the organization and 

typically do not meet the statutory requirements for approval. 
 

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Compliance with the Bank Secrecy Act 

As discussed in SR letter 02-8, “Implementation of Section 327 of the USA Patriot Act in 

the Applications Process,” the Federal Reserve is required to consider an organization’s 

effectiveness in combatting money laundering activities in its evaluation of certain applications 

and notices. As part of the application review process, Federal Reserve staff considers the 

primary supervisor’s assessment of the organization’s compliance with the Bank Secrecy Act

and its anti-money laundering program. Bank Secrecy Act compliance and anti-money 

laundering programs with significant program violations and/or deficiencies that have resulted in 

the issuance of a formal or informal enforcement action generally are considered to be less than 

satisfactory. Proposals from financial institutions with less than satisfactory Bank Secrecy Act 

and anti-money laundering compliance programs face substantial barriers to approval and 

generally have not received favorable consideration. 

Business Plan

In considering the future prospects of an organization, staff assesses the proposed 

business plan in conjunction with the organization’s current condition, economic environment, 

and other relevant factors. Proposed business plans that substantially increase the risk to an 

organization or raise safety and soundness concerns have been viewed unfavorably and have 

been a barrier to approval. Common issues with business plans include the following:

• Overly aggressive – Business plans that include overly aggressive strategies, such as 

rapid or excessive growth, significant out-of-territory lending, or reliance on less stable 

funding (for example, brokered deposits). 

• Concentrations – Business plans that would result in a concentration of assets, liabilities, 

product offerings, customers, revenues, geography, or business activity without effective 

mitigants (for example, additional capital, liquidity, or other support). 

• Managerial deficiencies – Business plans that contemplate entry into significant new 

lines of business in which the organization does not have demonstrated managerial 

experience or expertise, has not developed appropriate risk management policies, and

lacks credible plans to acquire sufficient managerial expertise and risk management 

policies.

• Ineffective – Business plans that do not satisfactorily address known deficiencies at the 

organization.

Section 23A and Regulation W Exemption Requests 

Proposed transactions that contemplate an IDI receiving a Regulation W exemption 

require consultation with, and approval from, the primary supervisor of the IDI and the FDIC (if 

the FDIC is not the primary supervisor) for the Regulation W exemption. Regulation W 

exemption requests in connection with a merger or acquisition will be carefully reviewed to 

ensure that an exempt transaction is consistent with the safety and soundness requirements of the 

statute and the regulation. The Board expects the applicant to contact the appropriate supervisor 
 

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and the FDIC. In all instances, the FDIC must concur with an exemption request and the 

relevant agencies must find that the exemption is in the public interest and consistent with the 

purposes of section 23A, and the FDIC must find that the exemption does not present an 

unacceptable risk to the Deposit Insurance Fund.7 The Board will not act on a proposal that 

involves a request for a Regulation W exemption without the approval of the appropriate 

supervisors (including the FDIC). In cases where the Board is the appropriate supervisor of the 

IDI, the Board considers the size and quality of the assets and liabilities proposed to be 

transferred, the likely effect on the operations of the IDI, whether the transaction provides 

diversification benefits to the IDI, the ability of the parent to protect the IDI against losses on 

transferred assets, and other relevant factors. The Board also will consult with the FDIC. 

Additional Considerations

The items discussed below have not resulted in a significant number of withdrawals, but

they are required to be considered under the statutory factors for certain applications and notices. 

As part of the application review process, the Federal Reserve strongly considers substantive 

public comments and the effect a proposed transaction could have on competition and financial 

stability. Significant issues identified would have to be resolved before Federal Reserve staff 

would recommend approval of a proposal. 

Adverse Public Comments

Substantiated public comments with allegations related to consumer compliance, 

including fair lending, or CRA performance, have presented barriers to approval of proposals. 

The Federal Reserve provides on its public website a list of pending applications and notices 

subject to public comment.

8

Competitive and Financial Stability Factors

In certain cases, relevant banking laws require the Board to consider the effect of 

proposed transactions on competition and financial stability. The Board has developed criteria 

for competitive and financial stability factors that allow most cases to be delegated to a Reserve 

Bank for approval, if the application raises no other issues. Applications that do not meet the 

delegation criteria may be approved by the Board, if the facts presented by the proposed 

transaction suggest that competitive and financial stability considerations are consistent with 

approval. In instances where competitive or financial stability issues raise concerns, mitigating 

actions may be considered. Mitigating actions could include, for example, divestiture of some 

branches, assets, or businesses of either the target financial institution or the acquiring financial 

institution to address the competitive or financial stability issues raised by the proposal. 

 7 See 12 USC 371c(f)(2).

8 http://www.federalreserve.gov/apps/h2a/h2aindex.aspx
 

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Supervisory Expectations

The issues discussed above are not intended to be exhaustive, but should be taken into 

consideration by all financial institutions and individuals when contemplating filing an 

application or notice with the Federal Reserve. As noted above, applicants and notificants are 

generally expected to resolve their outstanding substantive supervisory issues prior to filing an 

application or notice with the Federal Reserve. Applicants and notificants with proposals that 

present unique or novel issues are encouraged to use the Federal Reserve’s pre-filing process 

described in SR letter 12-12/ CA letter 12-11, “Implementation of a New Process for Requesting 

Guidance from the Federal Reserve Regarding Bank and Nonbank Acquisitions and Other 

Proposals” to receive feedback on potential issues on a filing prior to submitting a formal filing. 

The semi-annual report on applications and notices will update the issues identified in 

applications and notices withdrawn. 

Reserve Banks are asked to distribute this letter to the supervised organizations in their 

districts and to appropriate supervisory staff. Questions regarding this guidance may be directed 

to:

• Division of Banking Supervision and Regulation: Katie Cox, Manager, Domestic 

Banking Acquisitions and Activities, at (202) 452-2721; Betsy Howes-Bean, Manager, 

International Banking Acquisitions and Activities, at (202) 452-3096; Susan Motyka, 

Manager, Domestic Banking Acquisitions and Activities, at (202) 452-5280; or 

Jevon Gordon, Senior Supervisory Financial Analyst, Domestic Banking Acquisitions 

and Activities, at (202) 973-7384.

• Division of Consumer and Community Affairs: Melissa Vanouse, Manager, 

Applications, at (202) 452-3488; or Charles Fleet, Senior Supervisory Consumer 

Financial Services Analyst, Applications, at (202) 452-2776.

• Legal Division: Alison Thro, Assistant General Counsel, Banking Regulation and Policy 

Group, at (202) 452-3236. 

In addition, questions may be sent via the Board’s public website.9 

Michael S. Gibson

Director

Division of Banking Supervision

and Regulation

Tonda Price

Deputy Director

Division of Consumer

and Community Affairs

 9 http://www.federalreserve.gov/apps/contactus/feedback.aspx. 
 

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Cross-references to:

• SR letter 13-7 / CA letter 13-4, “State Member Bank Branching Considerations”

• SR letter 12-12 / CA letter 12-11, “Implementation of a New Process for Requesting 

Guidance from the Federal Reserve Regarding Bank and Nonbank Acquisitions and 

Other Proposals”

• SR letter 02-8, “Implementation of Section 327 of the USA Patriot Act in the 

Applications Process”