All Things FinReg


Prior to the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), bank holding companies and nonbank financial companies supervised by the Federal Reserve with $50 billion or more of total consolidated assets were subject to enhanced prudential standards (SIFIs). The EGRRCPA raised that threshold to $100 billion or more of total consolidated assets, and the SIFI threshold will eventually increase to $250 billion in total consolidated assets.

Zions Bancorporation (Zions) has around $66.5 billion in total consolidated assets and, prior to EGRRCPA, was a SIFI. Post-EGRRCPA, Zions is no longer a SIFI, which one would think would be the end of the story and Zions could walk away a happy non-SIFI bank.

However, Zions had elected to undergo a restructuring in which it will merge the bank holding company into the national bank and the national bank will be the surviving entity, a measure that a number of banking organizations have been evaluating. This action triggers in a rather odd manner a provision in Title I of Dodd-Frank Act (Section 117, sometimes called the “Hotel California” provision) that was designed to prevent some banking organizations from escaping enhanced prudential supervision through restructurings such as this.

Under Section 117, if an entity that was a bank holding company with $50 billion or more in total consolidated assets on July 10, 2010, and that received financial assistance under the TARP program during the financial crisis ceases to be a bank holding company, that successor entity is required to be treated as a “nonbank financial company” supervised by the Federal Reserve and is a SIFI. Unlike the EGRRCPA provisions that increased the SIFI bank holding company asset threshold to $100 billion (and then $250 billion), the $50 billion threshold in Section 117 was, for reasons unknown, not changed. Therefore, by eliminating its bank holding company, a banking organization of $50 billion or more would be designated a nonbank financial company subject to the supervision of the Federal Reserve as a SIFI.

To prevent this counterintuitive result, Zions applied to the Financial Stability Oversight Council (FSOC) under Section 117’s appeal procedures for a ruling that the national bank surviving the Zions reorganization would not be designated a nonbank financial company subject to the supervision of the Federal Reserve. FSOC issued a unanimous ruling proposing to grant Zion’s request, subject to certain conditions and a final determination by FSOC in accordance with the procedures set forth in Section 117. Zions is expected to hold a shareholder vote on the proposed reorganization in September.

The lesson in all of this is that, despite the EGRRCPA’s intent to lift SIFI designations for bank holding companies with less than $250 billion in assets, the reach of Dodd-Frank’s SIFI and FSOC provisions is still long and could prove to be a stumbling block to corporate reorganizations of other mid-size banks that might otherwise think they are now free and clear of enhanced prudential standards.