New Law Changes Regulations on Public Welfare Investments

January 01, 2007

The Financial Services Regulatory Relief Act of 2006 went into effect Oct. 13, 2006. The legislation is designed to provide regulatory relief to banking organizations and to increase efficiency in the banking system.

The new law modifies a number of statutes related to banking and other financial services. Among other things, it changes and enhances the authority for banks to make public welfare investments.

Specifically, it raises the cap on the maximum aggregate public welfare investments state-member and national banks can make from 10 percent to 15 percent of the bank's unimpaired capital and surplus. Generally, banks may make public welfare investments of up to 5 percent of their capital and surplus without prior approval from a regulatory agency. State-member banks must continue to obtain Federal Reserve approval for any investments that would cause them to report aggregate public welfare investments that exceed 5 percent of the bank's unimpaired capital and surplus.

The FSRR Act also redefines a permissible "public welfare" investment as one that primarily benefits low- and moderate-income (LMI) communities or families. State-member and national banks had been permitted to make investments that primarily promoted the public welfare, with LMI-focused investments included as the principal example of a permissible investment.

Although the standard for permissible public welfare investments has changed, most common public welfare investments benefiting LMI communities and families, such as low-income housing tax credit projects, will continue to be authorized. Further, any public welfare investment or written commitment to make such an investment made before the new law was enacted will not be affected.

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Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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