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Supervision News Flash

August 2019

Permissible or Not Permissible? That Is the Question

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Banking regulations have historically placed certain restrictions on what financial institutions are permitted to do with premises that they directly own or lease. For example, a state member bank would not be permitted to build a Taj Mahal-like facility and then lease this entire facility out to unrelated entities since this leasing activity would not be considered an appropriate banking activity. While most of our state member banks are not considering building the Taj Mahal, some are pondering what to do with branches and other facilities that they have acquired through M&A activity or existing facilities that they previously closed in an effort to reduce expenses and improve profitability. If the decision is to simply divest of an acquired or previously operated property, the light should be green for this course of action. 

If, however, the course of action under consideration is to lease or sub-lease an acquired or previously operated property, then the light could be yellow or red depending on the circumstances. In these cases, a number of factors might need to be considered to determine the color of the light, including whether the property in question is owned/leased by the bank or the bank holding company, whether the entire property will be leased/sub-leased or just a portion of it, etc. Unfortunately, the question of permissibility is fact and situation specific, and there is often no bright line that determines permissibility. The topic of permissibility is expected to receive more attention given the increased pace of M&A activity. Examiners have recently encountered situations involving M&A activity where permissibility was an issue. As such, management is encouraged to discuss the permissibility of its plans with regard to premises with its supervision contacts prior to finalizing the transaction to avoid red light situations. 

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