Without ECIP Fix, Many Eligible CDFIs, MDIs Will Be Left Out of Key Investment Opportunity

By Christopher Gray
ABA Viewpoint

The March 18 deadline is quickly approaching for banks to declare how much capital they plan to take under Treasury’s $8.7 billion Emergency Capital Investment Program–but America’s many mutual banks and Subchapter S institutions remain in limbo due to inaction by the Federal Reserve.

On December 29, 2021, ABA—along with multiple other bank trade associations—asked Federal Reserve Chairman Jerome Powell to revise the agency’s capital treatment of ECIP investments for Subchapter S and mutual banks. Under the current regulations, community development financial institutions and minority depository institutions operating as Subchapter S or mutually owned banks may not be able to accept their full amount of eligible ECIP funds

Sub S structures, in which the bank’s income is passed through directly to its owners as individual taxpayers, are common among CDFI banks and minority banks. They are also strongly represented among ECIP recipients. Fully one-third—34 out of the 101 bank recipients—have made Subchapter S elections. Of these, 28 are CDFIs and six are MDIs.

However, these banks are heavily disfavored compared to C corporations under the terms of the ECIP program and the Fed’s existing regulatory requirements. These banks are limited to receiving ECIP subordinated debt only, rather than preferred equity. Some banks estimate that the current regulations might limit S-corp and mutual banks’ ECIP capital to only 2 percent or 5 percent of assets, a fraction of the potential (up to 15 percent for banks with assets greater than $2 billion, and 25 percent for those with $500 million to $2 billion, and 30 percent for those under $500 million) allowed under ECIP rules.

Without an exemption for ECIP allocations under the Federal Reserve’s debt to equity/leverage ratio and double leverage ratio, these banks may be forced to limit the ECIP capital they accept or terminate their Subchapter S election or take other, potentially costly and time-consuming, corporate structure actions. For mutuals, a change in corporate structure would be a dramatic and costly step that would likely negate any benefit to be received from the ECIP.

The Fed can fix this quickly and simply. The Fed board can modify its Small Bank Holding Company Policy Statement to create an ECIP-specific exception. This should allow S-corp and mutual bank holding companies to exceed a 1.0:1 debt-to equity ratio and still issue dividends. Providing such an exception to exclude 100 percent of ECIP sub debt from the Fed’s debt-to-equity and double leverage ratios would be consistent with the position the Board took with respect to the Troubled Asset Relief Program in 2008. We are also urging the Fed to modify the bank holding company double-leverage ratio as part of its overall safety and soundness supervisory review of the organization.

There is precedent for the Federal Reserve to offer such an exemption for capital infusion programs offered by Treasury. However, without a uniform and equitable exemption for every impacted institution, ECIP will fall short of meeting its congressionally mandated purpose, and distressed communities served by Subchapter S and mutual CDFI and MDI banks will see only a fraction of the benefit relative to those served by C corporations. This uniform approach would enable every impacted institution to fully participate and would assure maximum participation and ensure more communities benefit from this transformative program.

Time is running out for the Fed to take this straightforward action.

Christopher Gray is a VP in ABA’s Office of Strategic Engagement.

ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.