Scope of regulation...

What does this revised regulation mean for my state chartered bank?

It is a streamlined procedure for state banks to take advantage (as principal) of activities not permissible for national banks. It makes it easier for you to seize business opportunities allowed by your state and state bank supervisor.

With an application or notice to the FDIC, you may be able to conduct activities not allowed for national banks, if the FDIC determines the activity does not present a threat to the deposit insurance fund. State member banks and banks in a holding company may have to comply with other regulations. Attached is a list of applications that the FDIC has already approved on a case-by-case basis.

What is an "activity permissible for a national bank?"

Any activity authorized for a national bank under federal law or interpretation

Are agency activities subject to the new regulations?
What other activities are not covered and therefore need no notice or application to the FDIC?

Agency activities are not restricted and do not require notice or application to the FDIC. Nor does this regulation govern activities conducted as agent for a customer, conducted in a brokerage, custodial, advisory or administrative capacity or conducted as a trustee. Common examples include selling insurance, securities or real estate as an agent, or providing safekeeping services, personal financial planning services or acting as a trustee.
 
This regulation does not apply to equity investments acquired in connection with debts previously contracted (DPC) that are held within the time limits set by state or federal law, whichever is shorter. However, both federal and state laws on DPC generally require that bank management actively market their DPC property, and mark it to market as appropriate.

What activities are specifically prohibited?

This regulation does not flatly prohibit any activity permitted by a state bank charter, as long as the FDIC permits the activity, except that state-chartered banks generally may not underwrite insurance except in those limited areas allowed for national banks.

Activities of Insured State Banks

What expanded activities may a state bank or its subsidiary conduct as principal?

This new regulation provides a streamlined notice procedure for banks that want to invest in real estate or underwrite securities. It also makes clear that state nonmember banks may apply to the FDIC be able to do many other activities not permitted to a national bank.

What equity investments may an insured state bank make?

Again, a state nonmember bank may make any equity investment permitted for a national bank. State banks may invest in majority-owned subsidiaries, and (under certain circumstances) they may use these subsidiaries to make types of investments prohibited for a national bank.

A state bank may own less than a controlling interest in a company that engages in any activity permissible for a national bank, as long as that company is controlled by insured depository institutions.

May an insured state bank invest in low-income housing projects?

Without notice or application to the FDIC, an insured state bank may invest, as a limited partner or a limited liability company, in acquiring, rehabilitating, or building new residential housing projects that are intended to benefit lower income people, as long as the total of these investments do not exceed 2 percent of the bank's total assets.

May insured state banks underwrite insurance or invest in insurance companies?

Yes, under certain circumstances. This regulation does not restrict insurance agency activities. Insured state banks may underwrite insurance, or invest in insurance companies only to the extent that national banks are permitted to do so - but under current law, except for credit related insurance, national banks generally can't do either of these things. However, this regulation clarifies certain statutory exceptions:
 

• State banks may hold up to 10 percent of the outstanding stock of a corporation that underwrites financial institution directors' and officers' liability insurance.

• Insured state banks in New York, Massachusetts and Connecticut may underwrite savings bank life insurance through a department of the bank.

• State banks that underwrote crop insurance reinsured by the Federal Crop Insurance Corporation before September 30, 1991 may continue these activities.

• Grandfathered state banks that have been previously approved to underwrite insurance through a department or subsidiary may be able to continue these activities.

Various restrictions and limitations apply to state banks conducting any of these insurance activities.

Activities of subsidiaries of insured state banks. . .

What activities may an insured state bank conduct through a majority owned subsidiary?

State bank subsidiaries may do any principal activity allowed for a national bank subsidiary, plus a wide array of activities not permitted for a national bank--including real estate, securities and some insurance activities. This reflects the FDIC's view that many activities not permitted for national banks, when conducted within certain parameters, do not threaten the deposit insurance funds.

How do the regulations treat real estate investment?

The regulations allow state chartered banks to engage in real estate activities through a majority-owned subsidiary, with the FDIC's consent. The regulations set up a notice procedure that establishes eligibility requirements, investment and transaction limits, and a capital deduction standard that a bank and its subsidiary must meet in order to use the expedited process for real estate activities. If the level of real estate investment activity is less than two percent of Tier One capital, the requirements for the subsidiary are lower. An application procedure is available for state-chartered banks that do not meet the standards for the notice procedure, or want to operate outside those standards.

It is important to note that real estate activities will still fall under these procedures if approved for a national bank subsidiary, but not for a national bank directly.

May a state chartered bank engage in real estate leasing?

State banks can lease real estate out of a majority owned subsidiary without application or notice to the FDIC under the following conditions: the lease in question qualifies as a capital lease under GAAP; the bank does not provide servicing or repairs; the subsidiary acquires the real estate only after it has entered into the lease or a legally binding agreement; the subsidiary spends no more then 25 percent of its investment in the real estate to make the property suitable for the lessee; and at the expiration of the initial lease, the subsidiary has to re-lease or divest the property in two years, unless an application is filed to retain the property for a longer period. The application procedure is available for banks that want to operate outside these conditions.

How do the regulations treat securities underwriting?

A state nonmember bank may conduct securities underwriting activities not permitted to a national bank through a majority owned subsidiary, with the FDIC's consent. The expedited notice procedure is also available to state chartered banks that want to underwrite securities. The notice procedure incorporates the eligibility requirements, the investment transaction limits, and the capital deduction standard that apply to the real estate notice procedure, with additional restrictions to address the unique risks associated with underwriting securities. AGAIN, an application procedure is available for state-chartered banks that do not meet the standards for the notice procedure or that want to operate outside those standards.

What about municipal bond underwriting?

National banks have long been able to underwrite general obligation bonds directly. Accordingly, state banks may also underwrite general obligation bonds, without notice to the FDIC.

The OCC recently approved municipal revenue bond underwriting in an operating subsidiary of a national bank, although national banks cannot underwrite municipal revenue bonds directly. The FDIC has proposed a rule that will address activities that are permissible for a subsidiary of a national bank, but not permissible for the national bank itself. Until that regulation is finalized, current regulations requiring notice for securities underwriting will apply (12 CFR Part 337).

Standards for the expedited notice procedures. . .

What is an "eligible" depository institution?

An eligible depository institution must:
 

• Be chartered and operating for at least three years (unless the regional director finds that the institution is owned by an established, well-capitalized, well managed holding company or is managed by seasoned management)

• Have a 1 or 2 Uniform Financial Institutions Rating System (UFIRS) rating (including a 1 or 2 in the management component)

• Have a 1 or 2 compliance rating

• Have a satisfactory CRA rating

• Not be subject to a cease and desist order, consent order, prompt corrective action directive, formal or informal written agreement, or other administrative agreement with its primary federal regulator or chartering agency.

What is an "eligible" subsidiary?

An eligible subsidiary:
 

• Meets applicable statutory, regulatory and capital standards

• Is physically separate from the bank

• Maintains separate accounting and other business records

• Observes separate business formalities, such as separate board of directors meetings

• Has a CEO who is not an employee of the bank

• Maintains a majority of its board of directors who are neither directors nor officers of the bank

• Conducts its business according to independent policies, including notice to customers that the subsidiary is a separate organization

• Has a single business purpose

• Has an appropriate current written business plan

• Has adequate management and employees for the proposed activity, including all required licenses and memberships

• Sets policies, procedures and infrastructure adequate to the business.

What investment or transaction limits apply to activities conducted through a majority owned subsidiary?

This regulation sets specific investment limits and arm's-length transaction requirements for transactions between an eligible depository institution and its subsidiaries. These limits are similar to those established by the Federal Reserve. The provisions impose a 20% aggregate investment limit (not including equity) on all subsidiaries that engage in the same activity; require that loans from a bank to its subsidiaries be fully-collateralized; prohibit the bank from taking a low quality asset as collateral on these loans; require banks and their subsidiaries to keep their transactions on an arms length basis and include anti-tying restrictions.

What special capital standards apply?

If a bank uses the NOTICE process to invest in a subsidiary to conduct certain expanded activities, it would have to deduct its equity investment in the subsidiary, as well as its share of retained earnings of the subsidiary, from its consolidated report of income and condition.

As before, an application procedure is available for state chartered banks that do not meet the standards for the notice procedure or that want to operate outside those standards.

Notice and application provisions. . .

How different are the new notice and application procedures?

The contents of an APPLICATION and NOTICE are identical. Each may be in letter form, or the FDIC can use a copy of a notice or application your bank has filed with another federal or state regulatory authority, if it contains all of the required information.

The application or notice should include a brief description of the activity and how the bank plans to conduct it; the amount of the bank's existing or proposed direct or indirect investment in the activity; a copy of the business plan; and a citation of the state law, regulation or order that permits the activity; a copy of the approval from the appropriate regulatory authority if such approval is necessary and has been granted; a brief description of the bank's policy regarding any anticipated insider involvement; and a description of the bank's expertise in the activity.

How quickly may a bank start a new activity?

An eligible bank may engage in activities subject to a NOTICE unless the FDIC objects within 30 days. The FDIC will respond to all notices. The FDIC will usually act on an APPLICATION within 60 days of receiving it, unless it sends a written 30-day extension notice to the bank.