Regulation H, which implements Federal Reserve Act Section 24A (Section 24A), generally requires a state member bank to request approval prior to investing in bank premises unless the bank’s aggregate amount of investment in bank premises is less than or equal to the capital (as defined) of the bank.
For state member banks that have operating leases (particularly for branch locations), there was concern regarding potential violations of Regulation H (Reg. H) upon the adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). While ASU 2016-02 addresses many areas relating to accounting for leasing transactions, one of the most significant impacts is on lessee accounting for operating leases. Under current guidance, operating leases are not recorded on the balance sheet and therefore have no effect on the Reg. H calculation. ASU 2016-02 changes the guidance to require operating leases (with limited exceptions) to be brought onto the balance sheet through the recording of a right-of-use asset and lease liability.
Upon the adoption of ASU 2016-02, the carrying value of bank premises will include leases recorded on the balance sheet and may result in a situation where the aggregate investment in bank premises exceeds capital (as defined), thereby creating a potential Reg. H violation. ASU 2016-02 became effective for public business entities for fiscal years beginning after December 15, 2018, and for all other entities for fiscal years beginning after December 15, 2019.
To address this potential issue, the Federal Reserve Board of Governors (Board) issued SR 19-7, which states that “if prior to adoption of the new (lease) accounting standard, a state member bank’s investment in bank premises is less than capital stock, but that investment increases to an amount in excess of capital stock by adopting the new standard, the bank need not seek the Board’s approval under Section 24A.” However, SR 19-7 goes on to state that “approval will be required under Section 24A for any bank premises investment in excess of capital stock made following adoption of the new standard.”
This guidance should be beneficial for banks that have a significant amount of operating lease arrangements. For more information, reach out to your BKD trusted advisor or use the Contact Us form below.