08/05/26

The Federal Reserve has proposed the first comprehensive modernization of the federal regulatory framework for mutual banking organizations in more than three decades. The proposal would update Regulation MM, reduce several procedural burdens and—most importantly—provide greater certainty regarding the ability of mutual institutions to raise regulatory capital without abandoning their depositor-owned structure.

Mutual banks occupy an important but increasingly pressured segment of the Ohio banking industry. Unlike stock institutions, mutuals cannot simply issue common stock when they need additional capital to support growth, invest in technology, expand lending or respond to changing economic conditions. Instead, they have traditionally depended heavily on retained earnings. That model supports long-term stability, but it can also constrain otherwise healthy institutions that want to grow while remaining independent and locally owned.

The Federal Reserve’s proposal directly addresses that structural disadvantage. It would clarify that mutual capital certificates and certain special deposits may qualify as common equity tier 1, additional tier 1 or tier 2 capital when the instruments satisfy the applicable regulatory requirements. The proposal would also incorporate model mutual capital certificate term sheets into the Federal Reserve’s capital rule, creating a clearer roadmap for institutions considering an issuance.

This is significant because mutual capital should not be viewed merely as another financial instrument. Properly structured, it can provide a mutual institution with loss-absorbing capital similar to that available to a stock bank while allowing the institution to preserve its mutual form. In practical terms, it could give mutuals another way to finance organic growth, technology investments, acquisitions or balance-sheet expansion without forcing them to pursue a stock conversion simply to gain access to capital.

The proposal builds upon the frequently asked questions and model term sheets issued by Federal Reserve staff in October 2025. OBL has been actively discussing mutual capital with the Federal Reserve, FDIC and OCC and encouraging regulators to provide a workable, consistent framework for these instruments. Codifying the Federal Reserve’s guidance in its capital rule would be an important step toward moving mutual capital certificates from a theoretical option to a more credible capital-planning tool.

The proposal also recognizes the competitive environment facing mutual institutions. Mutual banks are tax-paying, for-profit institutions, yet their member-owned structure limits their access to traditional equity capital. The Federal Reserve specifically acknowledged that mutuals compete against tax-exempt credit unions for deposits and loans while facing more stringent regulatory requirements. Greater capital flexibility can help preserve this distinct form of community banking and reduce pressure on mutuals to consolidate or convert solely because the regulatory framework has failed to keep pace with the modern banking marketplace.

Beyond mutual capital, the proposal would simplify dividend-waiver requirements something the OBL has been advocating for years, reduce burdens associated with mutual-to-stock conversions, revise certain post-conversion restrictions and eliminate the requirement that subsidiary holding companies of mutual holding companies obtain federal charters. The Federal Reserve noted that more than 90 percent of mutual banking organizations have less than $3 billion in assets and that the existing rules, originally developed in 1993, have become unnecessarily complicated and burdensome for smaller institutions.

The proposal is a meaningful step forward, but additional work will be necessary. The usefulness of mutual capital certificates will ultimately depend on consistent regulatory treatment, workable issuance terms, governing-law and charter authority, and the development of a viable investor market. OBL will review the proposal with Ohio mutual institutions and continue advocating for a coordinated interagency approach that gives mutuals a practical path to raise capital while preserving their unique structure.

Comments on the proposal are due October 5, 2026. OBL welcomes feedback from affected members as it develops its response to the Federal Reserve.