Recent Developments Affecting Depository Institutions
by Valentine V. Craig*
REGULATORY AGENCY ACTIONS
The federal bank and thrift regulatory agencies are engaging in joint or
coordinated efforts in a number of regulatory areas that are mentioned
specifically in this issue of the Review. These joint initiatives concern:
Bank Management Interlocks Rule Changes
On August 2, 1996, the Office of the Comptroller of the Currency (OCC),
the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
(FRB), and the Office of Thrift Supervision (OTS) published a joint final
rule that reinterpreted the Depository Institution Management Interlocks
Act (12 U.S.C. 3201-3208). The new rule permits management interlocks within
a relevant metropolitan statistical area (MSA) when either of the depository
institutions in the MSA has assets of less than $20 million. The intent
of this new rule is to expand the pool of available managerial talent for
small depository institutions. The final rule implements provisions of
the Riegle Community Development and Regulatory Improvement Act, which
requires the agencies to review their regulations in order to streamline
and modify regulations to improve efficiency, reduce unnecessary costs,
and eliminate unwarranted constraints on credit availability.
The OCC, the FRB, the FDIC, the OTS, the Farm Credit Administration (FCA),
and the National Credit Union Administration (NCUA) adopted a final rule
implementing the requirements of the National Flood Insurance Reform Act
of 1994. Under the rule, financial institutions are required to escrow
flood insurance premiums on properties used as collateral for loans that
are located in special flood hazard areas participating in the National
Flood Insurance Fund. Lenders are not required to monitor loan portfolios
continuously to determine the status of flood insurance coverage. Institutions
may charge a fee to determine the need for flood insurance.
OCC News Release, NR 96-90, 8/29/96; FR, Vol. 61, No. 169, pp. 45683-45716.
Proposal to Amend Risk-Based Transaction Requirements
The OCC, the FRB, the FDIC, and the OTS proposed a rule to amend their
respective risk-based capital standards to establish uniform treatment
for transactions supported by qualifying collateral. The proposal would
allow banks, bank holding companies, and savings associations to hold less
capital for transactions collateralized by cash or qualifying securities.
In order to receive such capital treatment, the lending institution would
need to maintain control over the collateral.
Final Rule Amending Risk-Based Capital Requirements
The OCC, the FRB, and the FDIC issued a joint final rule, effective January
1, 1997, amending their respective risk-based capital standards to incorporate
a measure for market risk for all positions in an institution's trading
account and foreign-exchange and commodity positions. The final rule implements
an amendment to the Basle Capital Accord, and requires that any bank or
bank holding company with significant exposure to market risk to measure
the risk using its own internal value-at-risk model and hold a commensurate
amount of capital. Mandatory compliance is not required until January 1,
FDIC, FIL-84-96, 10/10/96; FR, pp. 47358-47378, 9/6/96.
Guidelines Establishing Standards for Safety and Soundness
The OCC, the FRB, the FDIC, and the OTS jointly amended the Inter-agency
Guidelines Estalishing Standards for Safety and Soundness to include asset
quality and earnings standards. The guidelines complete the safety-and-soundness
standards required by the Federal Deposit Insurance Corporation Improvement
Act of 1991. The guidelines give the insured depository institutions the
flexibility to adopt systems appropriate to their size and the nature and
scope of their activities, and should not require well-managed institutions
to modify their operations. The guidelines direct that the systems should
be capable of identifying emerging problem assets and preventing deterioration
in those assets; and that the systems be able to evaluate and monitor earnings,
and ensure they are sufficient to maintain adequate capital and reserves.
FR, Vol. 61, No. 167, pp. 43948-43952; OTS Transmittal, Number 156, 9/3/96.
The U.S. Department of the Treasury held a two-day conference in September
on electronic banking and commerce, at which it announced the formation
of an inter-agency task force to examine consumer protection issues related
to the use of stored-value cards, smart cards, Internet banking, and other
electronic banking and commerce products. The task force consists of the
U.S. Department of the Treasury, the Federal Trade Commission (FTC), the
FRB, and the FDIC. The U.S. Department of the Treasury is also examining
international monetary policy, law enforcement, and payment systems regarding
the global use of computers to conduct business. It expects to report its
conclusions at the Group of Seven meeting next June in Denver, Colorado.
BBR, pg. 436, 9/23/96.
The Bank Fraud Working Group, composed of representatives of the OCC, the
Federal Bureau of Investigation, the FDIC, the FRB, Internal Revenue Service,
the Justice Department, the OTS, the Postal Inspector, and the Secret Service,
has produced a booklet entitled “Check Fraud: A Guide to Avoiding Losses.”
The booklet describes common check fraud schemes and fraud prevention techniques.
Copies can be obtained from the Office of the Comptroller of the Currency,
Communications Division, Washington, DC, 20219.
OCC News Release, NR 96-125, 11/12/96.
Federal Financial Institutions Examination Council (FFIEC)
Community Reinvestment Act (CRA) Information Document
The OTS, the OCC, the FDIC, and the FRB, under the auspices of the FFIEC,
produced a document, “Inter-agency Questions and Answers Regarding Community
Reinvestment.” The document was published in the Federal Register on October
21, 1996. It consolidates information about the revised CRA regulations
issued by the agencies on May 4, 1995, and attempts to answer the most
frequently asked questions about community reinvestment. Public comment
is invited on a continuing basis.
FR, pp. 54647-54667, 11/21/96.
Bank Rating System Updated
The FFIEC has expanded the Uniform Financial Institutions Rating System,
in effect since the late 1970s, to take into consideration an additional
risk component. The bank rating system known as “CAMEL” (which stood for
Capital Adequacy, Asset Quality, Management Administration, Earnings, and
Liquidity) has now been changed to “CAMELS” to adjust for a sixth component,
Sensitivity to Market Risk. The new component reflects an institution's
sensitivity to interest-rate changes, foreign-exchange rate changes, or
commodity or equity price movements.
BBR, pg. 1052, 12/23/96.
Proposed Electronic Filing Requirement for Call Reports
The FRB, the FDIC, and the OCC, under the aegis of the FFIEC, requested
comments on whether to discontinue Call Reports in hard copy form and to
require them to be filed electronically or on computer diskette with the
agencies' electronic collection agent. Written comments were required by
January 3, 1997.
FR, pp. 56737 -56740, 11/4/96.
Federal Deposit Insurance Corporation
Electronic Banking Issues
On September 12, the FDIC hosted a day-long public hearing on the technological
changes occurring in banking, finance and commerce as a result of the evolution
of electronic banking. The hearing focused on the use of stored-value cards
and federal insurance; what disclosures financial institutions should provide
to consumers; and safety-and-soundness concerns. The hearing followed
an FDIC Board decision that funds represented by stored-value cards are
not generally protected by federal deposit insurance.
Subsequent to this public hearing, the FDIC has begun a monthly “Cyberbanking
Speakers Series” for its employees, which is concerned with issues related
to electronic banking. The series focuses on the latest electronic technologies
and the implications for the financial regulatory system. The first event,
held on November 6, 1996, focused on two new developments: “smart-cards”
and the government's plans to pay all benefits electronically by the year
1999. The second event, held in December, focused on regulation in the
world of electronic banking.
FDIC News, pp. 1-6, 10/96.
Semiannual Agenda of Regulations
The FDIC published its most recent semiannual regulatory agenda in the
Federal Register on November 29, 1996. The FDIC publishes the agenda to
inform the public of its regulatory actions and to encourage participation
in rulemaking. Many of the rules have been sponsored jointly with the other
financial regulatory agencies. Some are in response to the Federal Deposit
Insurance Corporation Improvement Act and the Riegle Community Development
and Regulatory Improvement Act of 1994.
The agenda provides information about the FDIC's current and projected
rulemakings, as well as information on existing regulations under review,
and completed rulemakings. There are 34 final or proposed changes to FDIC
regulations in the most recent agenda. Included in this agenda is the action
imposing the one-time special assessment on SAIF-insured institutions and
the final rule lowering SAIF assessments.
FDIC News Release, PR-91-96, 12/3/96; FR, pp. 63460-63469, 11/29/96.
Expansion of Data on World Wide Web
The FDIC expanded it presence on the World Wide Web by providing statistical
data on individual FDIC-insured depository institutions. Users are now
able to search FDIC records by institution, state, charter type, and asset
or deposit size. Available data include quarterly and annual statistics
on income and expenses and key profitability ratios; institutional health
and performance ratings are not available, however. There is no charge
for the service. The Internet address for the FDIC service, called the
Institution Directory, or ID service, is www.fdic.gov.
Bank Insurance Fund (BIF) Premiums Remain at Same Level
Due to the current financial strength of the banking industry and the Bank
Insurance Fund (BIF), the FDIC Board of Directors voted to maintain assessment
rates for the BIF at current levels (0 to 27 cents per $100 of assessable
deposits) for the first six months of 1997. The Board also voted to collect
an assessment against BIF-assessable deposits to be paid to the Financing
Corporation (FICO) as authorized by the Deposit Insurance Funds Act of
1996 (Funds Act); eliminated the $2,000 minimum annual assessment as required
by the Funds Act; and authorized the refund of the fourth-quarter portion
of the semiannual minimum assessment ($500) charged to all BIF members.
Approximately 8,700 institutions will receive the refund of $500 plus interest.
As of June 30, 1996, the BIF reserve ratio was 1.32 percent.
BBR, pg. 911, 12/2/96; FDIC, FIL-99-96, 12/9/96.
Savings Association Insurance Fund (SAIF) and FICO Assessments Set
The FDIC lowered SAIF assessment rates to a range of 0 to 27 cents per
$100 in assessable deposits for the first six months of 1997. The new rates
are identical to those previously approved for BIF members, and became
effective October 1, 1996, for Sasser and Oakar institutions, and January
1 for all other SAIF-insured institutions. The Board had previously established
a risk-based schedule for SAIF assessment rates ranging from 4 to 31 cents
per $100 of assessable deposits, and was permitted to adjust the schedule
by as much as five cents without notice-and-comment rulemaking.
The FDIC Board also set FICO assessment rates for the 1997 first semiannual
period at 6.48 basis points for SAIF members and 1.30 basis points for
BIF members. These rates are in addition to the insurance funds' assessments.
FDIC News Release, PR-95-96, 12/11/96.
Oakar Bank Reporting Requirements
The FDIC has adopted a final rule, effective January 1, 1997, limiting
Oakar institutions to membership in their primary insurance fund only.
Oakar institutions belong to one FDIC insurance fund but hold deposits
that are insured by the other FDIC insurance fund. According to the new
rule, BIF-member banks will continue to be BIF-members after acquiring
SAIF-insured deposits in Oakar transactions.
BBR, pg. 911, 12/2/96.
Real-Estate Markets Continue to Improve
The outlook for the nation's real-estate markets continued to be favorable
during the third quarter of 1996 according to the FDIC's October 1996 Survey
of Real Estate Trends. The quarterly survey asks field personnel from all
federal bank and thrift regulatory agencies about developments during the
prior three months in their local real-estate markets. The national composite
index, summarizing assessments of both commercial and residential real-estate
markets, stood at 67 in October, down slightly from 68 in July. Values
above 50 indicate that more examiners and asset managers at federal bank
and thrift regula tory agencies thought conditions were improving than
Respondents to the survey were especially positive concerning trends in
commercial markets. The October commercial summary index rose to 72, the
most positive assessment of this market in over two years. Almost half
of the respondents — 46 percent — reported improving conditions in the commercial
market compared to 38 percent in the previous quarterly survey. Additionally,
29 percent of the respondents reported an oversupply of commercial space — the
lowest level since the survey began. Eighty-four percent reported above-average
or average commercial property sales.
The commercial real-estate survey results showed strong geographic differences.
While 68 percent of the respondents considered the commercial market in
the West a little better or a lot better than three months before, 48 percent
in the South, 39 percent in the Northeast, and 33 percent in the Midwest
felt similarly. Only 2 percent of all respondents considered the direction
of the commercial market to be a little worse.
Residential markets, while continuing to be strong, did not register the
improvements in these markets observed earlier. The summary index for residential
markets fell to 63 in October from 69 registered in July. Overall, 35 percent
of the respondents to the October survey considered the general direction
of the housing market better than three months before; in July, 45 percent
of the respondents saw an improved housing market.
Again, the residential survey results showed wide geographic disparities.
The assessment for the West again was the most positive, with 55 percent
of respondents reporting better housing conditions there over the quarter.
This compares to 35 percent of the respondents in the Northeast and South,
and 24 percent in the Midwest reporting improvements.
The positive real-estate assessments reported from the West reflect to
a large extent improved conditions in California. Almost two-thirds of
the respondents reported improving commercial markets in California, and
70 percent reported a strengthened California residential market.
Survey of Real Estate Trends, July 1996 and October 1996.
Federal Reserve Board
FRB Adopts Final Reg M Rule
On September 18, the FRB adopted a final rule amending Regulation M, substantially
changing the way auto-leasing firms disclose the cost of leasing a car.
The final rule requires that charges be presented in a more intelligible
format, and for the first time, requires disclosure of the total amount
due when a lease is signed. According to the Consumer Bankers Association,
leasing has increased 30 to 40 percent annually over recent years at some
banks. The new disclosure requirements go into effect on October l, 1997.
BBR, pg. 438-439, 9/23/96.
FRB Recommends Additional Day for Holding Deposits
On October 9, 1996, the FRB recommended to Congress that banks be allowed
to hold funds deposited by check an additional day before requiring consumer
access to the funds. Current law allows banks to hold funds for two days,
but most banks allow access to the funds before the two-day period due
to competitive pressures. Check fraud costs the financial industry $600
million a year. According to the FRB study, an additional day-hold would
catch 80 percent of all local returned checks before the funds were released.
BBR, pg. 623, 10/14/96.
Amendment to Loans to Insiders Regulation
In November 1996, the FRB amended its Regulation O, which imposes limits
on loans to insiders and insiders of affiliates, and requires that any
such insider loans not be on terms unavailable to those not affiliated
with the bank or affiliate. The amendment was in response to, and conforms
with, the Economic Growth and Regulatory Paperwork Reduction Act of 1996,
which amended the preferential lending prohibition by allowing extension
of credit to insiders as long as the credit was available to all employees
of the lending bank, and insiders were not given preference over other
employees. The OTS has also incorporated the FRB amendment, and savings
associations and their subsidiaries will be treated in the same manner
as banks in this regard.
Rules Amended Expediting Bank Entry into Other Businesses
On October 23, the FRB issued interim rules expediting the application
process for well-capitalized bank holding companies to enter new non-bank
lines of business. The new rule implements provisions of the Economic Growth
and Regulatory Paperwork Reduction Act, signed by the President on September
30, which allowed bank holding companies to enter activities permitted
under Regulation Y without first notifiying the FRB.
The new rule applies only to well-capitalized bank holding companies. Under
the new rule, the FRB defines well-capitalized bank holding companies as
those which, on a consolidated basis: (1) maintain a total risk-based capital
ratio of 10 percent or more; (2) maintain a Tier 1 risk-based capital ratio
of 6 percent or more; (3) maintain either a Tier 1 leverage ratio of 4
percent or more, or have a composite 1 rating, or have implemented risk-based
capital measures for market risk; and (4) are not subject to any written
agreements to meet and maintain capital levels for any capital measure.
BBR, pg. 683, 10/28/96.
Preferred Stock to Count for Core Capital
The FRB announced on October 21, 1996, that bank holding companies may
use certain cumulative preferred stock to meet Tier 1 capital requirements.
The preferred stock should be issued by special-purpose wholly-owned subsidiaries,
who lend the proceeds of the offerings to the parent through long-term,
BBR, pg. 685, 10/28/96.
External Audits for Poorly Managed Foreign Branches to Be Required
The FRB, in a November 12 guidance to bank examiners, is requiring all
foreign bank branches, with mangement ratings of three or lower, to hire
independent accountants to perform audits of the branches. The auditors
are to look for unreported losses; to verify the accuracy of reports filed
with regulators; and to recommend improvements to internal controls and
oversight. This development follows the Daiwa bank scandal, in which a
New York branch of this Japanese bank hid a $1.1 billion loss from regulators.
Fees for Electronic Funds Transfers Reduced
Effective January 2, 1997, the FRB lowered the price for Fedwire funds
transfers to 45 cents per transaction. The FRB estimates that this reduction,
coupled with one made in September, should save the industry over $18 million
annually. The FRB has also lowered fees on automated clearinghouse transactions.
Other FRB Actions
Effective November 12, 1996, the FRB will exclude corporate and municipal
bond interest of “easily-sold” securities from the cap on commercial underwriting
revenue. This change will permit certain Section 20 subsidiaries to earn
more from underwriting activities. Effective October 21, the FRB also revised
the list of fees that banks must disclose under the Truth-in-Lending Act.
The FRB also provided some lawsuit relief to banks by increasing the amount
by which they could misstate finance charges and avoid liability.
At a meeting of the FRB on December 20, the FRB withdrew a proposal that
would have encouraged banks to record the race and gender of consumer and
small-business borrowers. At the same meeting, the FRB raised the revenue
limit on securities underwriting by commercial banks through their Section
20 subsidiaries from 10 percent to 25 percent. It also adopted a rule protecting
the confidentiality of fair-lending self-tests.
AB, pg. 3, 9/13/96; AB, 12/23/96; WSJ, 12/23/96.
Office of the Comptroller of the Currency
Derivatives Activity Increases
The OCC reported that commercial bank derivatives activity increased dramatically
in the second quarter of 1996, with the notional amount of bank derivatives
rising $1.2 trillion to $19 trillion for the quarter. Nine banks accounted
for 94 percent of the total notional amount of derivatives; 507 banks held
derivatives during the quarter, an increase of 42 over the previous quarter.
Interest-rate and foreign-exchange contracts accounted for 98 percent of
the notional amount of the derivatives. Approximately $8 trillion of the
derivatives were futures and forward trades; swaps constituted almost $7
trillion; and over $4 trillion of the derivatives were options.
OCC News Release, NR 96-97, 9/13/96.
OCC Provides Incentives to Banks Entering Low-Income Areas
The OCC has waived branching or chartering fees for national banks entering
low- and moderate-income areas that are unserved by other depository institutions.
These fees range from $700 for opening a branch to $17,400 for receiving
an independent bank charter. According to the OCC, 12 million U. S. households,
or 12.5 percent of the population, do not have an account with a depository
institution. The OCC is also planning an educational forum to assist bankers
in understanding the banking needs of this population.
In November, the OCC gave permission to First Union Corp. and Mellon Bank
to sell and market insurance anywhere, including from bank offices, as
long as the insurance applications were processed, and the agent commissions
paid, from a town with fewer than 5,000 persons.
AB, pg. 2, 11/14/96.
Expedited Process Allowing Bank Entry into Other Activities
The OCC issued a final rule on November 20, 1996, revising OCC Part 5 rules
governing bank corporate activities. The new rule creates an expedited
approval process for well-managed and well-capitalized banks (banks with
a CAMEL 1 or 2 rating, a Satisfactory CRA rating, and without enforcement
orders against them) to enter into other bank-related businesses through
their subsidiaries. Banks may also apply for approval to engage in business
activities through subsidiaries that are impermissible for the parent,
but these requests will not receive expedited approval. The new rule is
expected to facilitate entry into securities and insurance underwriting,
data processing, and information delivery by bank subsidiaries. The rule
took effect on December 31, 1996.
BBR, pp. 873-875, 11/25/96.
OCC Amends Rules on National Bank Trust Activities
Effective January 29, 1997, the OCC has eliminated several restrictions
governing bank fiduciary activities. The new rules removed many restrictions
on collective investment funds. They rescind an OCC provision barring individual
trust accounts from constituting more than 10 percent of a collective investment
fund; eliminate another provision barring banks from putting more than
10 percent of a fund into one investment; eliminate restrictions on treatment
of a fiduciary's money before it is invested; and codify an earlier OCC
interpretive ruling that national banks in a particular jurisdiction have
the same powers as state-chartered fiduciaries.
Office of Thrift Supervision
Lending and Investment Regulations Streamlined
The OTS issued a final rule, effective October 30, 1996, that updated,
reorganized and streamlined its lending and investment regulations. The
final rule almost cut in half the number of lending and investment regulations — from
43 to 22 — and brings OTS regulations more in line with those of the other
banking agencies. In many instances, more general rules have replaced detailed
rules to allow institutions greater flexibility. For convenience, all lending-related
regulations have been reorganized in new Part 560. Other changes are: the
rule increases thrifts' commercial lending authority through service corporations;
does away with limits on the amount of loans relative to the value of collateral
and payback periods for manufactured housing; modifies requirements for
the selection of indices to set interest rates on adjustable-rate mortgages;
narrows disclosure requirements for adjustable-rate mortgages; modifies
restrictions on federal savings institutions in regard to investment in
state housing authorities and government obligations; and relaxes limits
The Economic Growth and Regulatory Paperwork Reduction Act of 1996, passed
by Congress on September 30, 1996 — the same day as the OTS new regulation — expands
thrift lending powers in many instances beyond that provided in the final
rule. The OTS will issue guidance to thrifts on the impact of this new
OTS Transmittal, No. 158, 10/24/96; FR, pp. 50951-50984, 9/30/96.
Expanded Lending and Investment Authority for Thrifts
The OTS published interim rules on November 27 expanding thrifts' ability
to make credit-card, education, and small-business loans. Although the
regulation is in effect immediately, the OTS invites comments for 60 days.
The rule changes implement provisions of the Economic Growth and Regulatory
Paperwork Act of 1996 (EGRPRA). EGRPRA permits thrifts to make credit-card
and educational loans without any percentage of assets investment limit.
Additionally, it permits loans secured by business or agricultural real
estate to be made in amounts up to 400 percent of capital, with additional
secured and unsecured business and farm loans allowed in amounts of up
to 20 percent of assets. It restricts loans above 10 percent of assets
to small-business loans. The new law also amends the qualified thrift lender
(QTL) test of the Home Owners' Loan Act to count small-business, credit-card,
and educational loans as qualified thrift investments without restriction;
other consumer loans can now count as qualifed thrift investments in amounts
up to 20 percent of the thrifts' assets. The legislation also gives thrifts
the option of complying with the amended QTL test requirements or the Internal
Revenue's domestic building-and-loan association compliance requirements.
BBR, pg. 929, 12/2/96; OTS Transmittal, Number 163, 12/2/96; FR, Vol. 61,
pp. 60179-60185, 11/27/96.
Corporate Governance Rules Streamlined
The OTS revised its corporate governance rules, effective January 1, 1997.
The revisions, the first since 1983, reduced by 36 percent the number of
charter and bylaw rules and policy statements on corporate governance.
Savings institutions may now notify the OTS after adopting charter and
bylaw amendments that have been preapproved by the agency rather than filing
an application and paying a fee. The final rule permits federal stock savings
associations, and in some cases federal mutual savings associations, to
follow the corporate governance law of their home state, their holding
company's home state, or Delaware General Corporation Law or the Model
Business Corporation Act. Other revisions remove restrictions on the location
of shareholder meetings; authorize the gathering of proxies by telephone
or electronically; and remove requirements for formal stockholder meetings
when unanimous written consent of shareholders exists. The revisions do
not require any institutions to change their charters.
A three-judge D. C. Circuit Court ruled on July 30 (First National Bank
& Trust Co.
v. National Credit Union Administration) that federal credit
unions may only serve members of a single occupational group. At year-end
1995, almost 2,000 of the approximate 7,300 federal credit unions had multiple-group
fields of membership. The NCUA has permitted multiple-occupational groups
for federal credit unions since 1982.
Following the Circuit Court ruling, the NCUA requested a delay to enforcement
of a October 25 injunction banning federal credit unions from adding new
groups from outside the single occupational common bond to existing fields
of membership. Also, on November 14, the NCUA adopted interim rules permitting
occupation-based credit unions to serve an entire profession rather than
just the employees of a single company, subject to certain distance restrictions.
The NCUA plan also would allow credit unions with members at several local
companies to retain members by converting to community-based institutions,
and expanded the community credit union charter to permit institutions
to serve occupational groups, associational groups, and community groups
in areas with populations of less than a million people.
The banking industry asked the court to block the NCUA membership policy
on the grounds that the agency violated the Administrative Procedures Act
by not publishing advanced notice of the November 14 meeting and by not
providing advanced notice of the rule change. On December 4, the U. S.
District Court for D.C. set aside the NCUA interim field of membership
policy and declared null and void all charter conversions and common bond
redesignations approved by the NCUA under its new policy. The Court also
denied the NCUA's request for a delay of the October 25 injunction. On
December 24, the U. S. Court of Appeals granted a temporary stay on the
injunction and allowed credit unions the right to serve all companies within
their existing fields of membership, but prevented them from signing up
new “non-core” members.
The National Association of Credit Unions on December 30 asked the Supreme
Court to hear the case; the American Bankers Association has also filed
a brief asking the Supreme Court to reject the case.
The state of California enacted legislation, effective January 1, 1997,
protecting banks from toxic waste cleanup liability under state and local
law. The new statute provides immunity from environmental clean-up costs
to unsecured lenders and fiduciaries if they were not responsible for the
contamination and did not manage the property before foreclosure. The state
statute expands recently passed federal protections, which protected only
lenders with a security interest in the property. California environmental
laws are considered to be the toughest in the nation according to its state
banking trade group.
Banks in Delaware are eligible to receive a $400 tax credit for every new
employee hired above a minimum of 50 beginning in 1997. In order to qualify
for the credit, the banks must invest a minimum of $15,000 per new employee.
The credit may not exceed half of the bank's franchise tax.
AB, pg. 3, 11/15/96.
State regulators in Florida have proposed a new state savings bank charter
that would allow either mutual or stock form of ownership. The state currently
offers charters for commercial banks and savings and loans; the state did
away with mutual ownership in 1992. The proposed state charter would allow
thrifts to continue in business should the federal thrift charter be merged
into a federal bank charter. It might also be used by credit unions to
convert to state savings banks should the courts ultimately disallow expansion
outside a credit union's original common bond. Thirty other states currently
offer a state savings bank charter.
The Michigan Financial Institutions Bureau reduced many of the fees it
charges its financial institutions, beginning in October 1996. Bank application
fees were reduced to $6200 from $9000; consolidation application fees were
cut to $1800 from $2200; and fees to convert to a state bank were decreased
to $1300 from $2200. It also abolished the requirement that banks publish
the relocation of principal offices and new branches, and abolished the
BANK AND THRIFT PERFORMANCE
President Signs Small-Business Tax Bill
On August 20, 1996, President Clinton signed the Small Business Jobs Protection
Act, which contains some major provisions affecting depository institutions.
Of special importance, it repeals the Internal Revenue Code Section 593
bad-debt reserve recapture requirements for thrifts. Under this new law,
thrifts need only record as income bad-debt reserves set aside after 1987
rather than their entire bad-debt reserves. This removes a major financial
disincentive for thrifts converting to banks. Additionally, the new law
allows for tax-free conversion of common trust funds to mutual funds; subject
to certain restrictions, repeals the 50 percent interest exclusion on Employee
Stock Ownership Plan loans made by financial institutions; creates “financial
asset securitization investment trusts (FASITs), allowing for the securitization
of debt obligations; and allows some financial institutions to be eligible
for Subchapter S Treatment.
BBR, pg. 281, 8/26/96.
SAIF Capitalization Bill Enacted
On September 30, 1996, President Clinton signed legislation capitalizing
the SAIF and warding off a default on FICO bonds. The legislation also
approximately equalized the premiums that banks and savings and loans pay
for insurance. Legislation to capitalize the SAIF had been debated for
two years. The new legislation requires the banking industry to assist
in paying the $8 billion in interest on FICO bonds. According to the legislation,
the thrift industry is responsible for approximately 59 percent of the
$780 million annual interest for the next three years, and the banking
industry the remainder. After three years, the two industries will share
the cost on a pro rata basis. Thrifts are also required to make a one-time
payment of $4.7 billion to capitalize the SAIF. The only exception to the
special assessment is for banks that own thrift deposits (for example,
Sasser and Oakar banks), whose special assessment has been reduced by 20
The Washington Post, 10/2/96; FDIC News, pg. 1, 11/96; AB, 10/2/96.
Commercial Banks' Earnings
Commercial bank earnings were $38.6 billion for the first nine months of
1996, a 4.8-percent increase from the same nine-month period a year before,
according to preliminary data released by the FDIC.
Approximately $13.2 billion in net earnings were reported for the third
quarter of 1996. This represented the third-highest quarterly net income
ever reported, but is a 4.5-percent decline ($618 million) from the previous
quarter, and a 4.8-percent decline ($666 million) from third-quarter earnings
a year earlier. However, almost all of the third-quarter earnings decline
was due to the one-time SAIF assessment. The commercial banks' share of
the assessment was approximately $1 billion, with an after-tax net income
impact of approximately $650 million.
Third-quarter net interest income was a record $41.4 billion, a 5.2-percent
increase over the third quarter of 1995. More than half — 58 percent — of insured
banks reported earnings gains for the 1996 third quarter, and almost three-quarters
reported return on assets (ROA) in excess of one percent. Third-quarter
ROA for the industry was an annualized 1.19 percent. Asset-quality indicators
remained favorable overall, with noncurrent loans falling to the lowest
level in the 15 years that they have been reported. However, an increase
in troubled loans to individuals, primarily credit-card loans, was reported.
At the end of the third quarter, 2.71 percent of credit-card loans were
reported 30-89 days overdue; 1.83 percent were reported past 90 days overdue
or in non-accrual status; and an annualized year-to-date net charge-off
rate of 4.31 percent was reported.
Profitability at FDIC-insured savings institutions remained strong despite
a reported net loss of $55 million for the third quarter of 1996. This
loss was largely due to the $3.5 billion special SAIF assessment levied
on the industry. Net earnings for the quarter would have been approximately
$2.2 billion, compared to $2.6 billion in the previous quarter, absent
the SAIF assessment. Almost two-thirds of institutions reported losses
for the quarter. However, of the 340 savings institutions with no SAIF
deposits, only 5 percent were unprofitable for the quarter. Net earnings
for the first three quarters of 1996 were $4.9 billion, a decrease of $1.1
billion from net earnings for the third quarter the previous year.
The SAIF became fully capitalized as of October 1, 1996. A special assessment
against all SAIF-assessable deposits raised $4.5 billion, which brought
the SAIF reserve ratio to 1.27 percent of insured deposits.
The FDIC Quarterly Banking Profile, Second Quarter 1996 and Third Quarter
1996; FDIC News Release, PR-75-96, 9/11/96; PR-96-96, 12/13/96.
Delinquency Rates Improve in Third Quarter
According to an OCC survey of examiners at the 82 largest national banks,
released on September 11, credit risk increased for the 12-month period
ending May 1996, despite tightening of retail underwriting standards. The
survey reported that credit cards, middle-market commercial loans and indirect
consumer loans were responsible for most of the increased risk during the
At the same time, the FDIC reported a sharp rise in charge-off rates, with
levels rising from 1.40 percent of loans during the second quarter of 1994
to 2.24 percent of loans during the second quarter of this year. The American
Bankers Association (ABA) also reported a 13-basis point rise in late credit-card
payments during the second quarter of 1996, raising the late-payment ratio
to 3.66 percent, the highest level since 1974. However, according to the
ABA, this ratio fell to 3.48 percent during the third quarter of 1996,
the first improvement in two years.
Meanwhile, the Mortgage Bankers Association reported that the third quarter
of 1996 represented the third straight quarter of improvement in mortgage
delinquency rates. For the three months ended September 30, mortgage delinquencies
fell to 4.16 percent on a seasonally adjusted basis from 4.35 percent the
previous quarter. Improvements in mortgage delinquencies occurred in all
categories — 30-day, 60-day, and 90-day-or-more delinquencies.
AB, pg. 1, 9/12/96; BBR, pg. 439, 9/23/96; The Washington Post, 12/14/96;
Tax Ruling Affecting Banks
The U.S. Tax Court upheld the Internal Revenue Service (IRS) in a dispute
over international tax laws, ruling that Riggs National Bank of Washington,
DC, was not entitled to the tax write-offs it had taken to reduce taxes
on profits from loans to Brazil. The Tax Court ruled that bank and Brazilian
officials in an “elaborate legal fiction” came up with a plan to withhold
taxes from the interest paid to the bank, thereby creating a U.S. tax write-off
that the bank passed on to Brazil in the form of lower interest rates.
The decision is expected to cost 300 American banks hundreds of millions
of dollars in federal taxes.
The Washington Post, 12/12/96.
Thrifts May Seek “Lost Profits”
The U. S. Court of Federal Claims ruled that thrifts may use the “lost-profits”
theory to determine damages against the government for reneging on favorable
goodwill accounting. Under the lost-profits theory, a plaintiff can sue
for profits that would have been earned had there been no breach-of-contract.
In 1989, the Congress changed the period for goodwill amortization from
40 years to five years, forcing many thrifts into bankruptcy. The suit
of Glendale Federal Bank, the first of the more than 100 thrifts seeking
redress, will begin on February 24.
Merger of Federal Banking Regulators Suggested
In a recently issued report, the General Accounting Office found the bank
oversight system in the United States to be duplicative and inefficient,
and recommended collapsing the OTS, the OCC, and the supervisory and regulatory
responsibilities of the FDIC into a new independent federal banking agency.
It recommended that the FRB maintain its independence, and also concluded
that the FDIC retain its power to examine any bank.
The three major U. S. card companies — MasterCard, American Express, and
Visa — continue to work on developing consumer-friendly “smart-cards.” MasterCard
announced that it had acquired 51 percent of Mondex International, a British
maker of “smart cards.” The Mondex card combines credit, debt and stored-value
functions. American Express has also announced an agreement with Banksys,
a Belgian company, to test market its smart card. Visa International has
also developed a smart card.
Sears Roebuck, which issues its own proprietary store card, has introduced
a cobranded card with MasterCard International, and is testing it in several
markets in the Midwest and Texas. The issuer of the card is Sears National
Bank of Phoenix. People's Bank in Connecticut has also announced that it
is issuing a cobranded VISA card with T.J. Maxx amd Marshalls. L.L. Bean
recently issued a cobranded Visa card with MBNA Bank of Delaware.
AB, pg. 1, 9/11/96.
Fidelity and Schwab Work With Banks’ Trusts and Mutual Funds
Fidelity Investments of Boston, MA, the mutual fund giant and number two
discount broker in the United States, bought part of a bank trust-processing
firm in May through which it plans to offer record-keeping services linking
Fidelity funds and the Fidelity fund supermarket to bank trust departments.
Charles Schwab, the number one discount broker in the United States, has
announced plans to serve as a fund-trading clearinghouse for bank brokerage
firms and trust departments, permitting them to offer Schwab's fund supermarket
to bank customers under their own names.
WSJ, pg. A5, 9/23/96.
NationsBank Offering Its Mutual Funds through Schwab and Fidelity
NationsBank Corp. of Charlotte, NC, has announced that it will offer seven
of its 44 mutual funds through the Charles Schwab OneSource network. The
bank also offers its own fund supermarket, called Fund Solutions, and its
funds are also available through Fidelity Investment's FundsNetwork. After
its acquisition of Boatmen's Bancshares of St. Louis is completed, NationsBank
will be the fourth-largest bank manager of mutual funds.
AB, pg. 1, 9/11/96.
Home Banking Network
IBM and 15 major banks, representing more than half the retail banking
population of the United States and Canada, formed a home banking network,
Integrion Financial Network. Integrion will offer bank-branded remote banking
services through the Internet, on-line consumer networks, personal financial
software, and telephone. The network is expected to compete with systems
currently operated by Microsoft and Intuit, which have been providing on-line
banking software that connects to dozens of financial institutions. Integrion
will allow any bank to join its network, and says it is interested in signing
up banks as either additional co-owners or customers. Both owner-banks
and customer-banks will be charged the same service rates. On December
2 the FRB approved purchases of voting shares in Integrion for Norwest
Corp. of Minneapolis and several foreign banks.
AB, pg. 1, 9/10/96, The Washington Post, 9/10/96; BBR, pg. 954, 12/9/96.
Foreign Bank Activities
Japanese bank regulators announced the closure of Hanwa Bank, the first
closure of a Japanese bank in the postwar era. Hanwa, a regional commercial
bank, made substantial real-estate loans through two affiliates during
the 1980s, and has reported $694 million in bad loans. The Bank of Japan
is reportedly extending more than $360 million in loans to repay depositors.
The Washington Post, 11/22/96.
The government of Mexico plans to begin to dispose of the estimated $40
billion in assets (book value) that it acquired in its bank-bailout effort.
The assets consist primarily of loans and real estate. The government has
created an agency called Asset Valuation and Sale (VVA). The VVA is expected
to begin the sales by holding two auctions early in 1997.