The FDIC Board of Directors voted today to seek comment on a proposal
that would allow insured state banks and thrifts meeting certain eligibility
requirements to engage through subsidiaries in real estate and securities
activities authorized under state law without filing formal applications.
The proposal would also establish safety and soundness standards for
state bank subsidiaries that engage in real estate activities not permissible
for national banks. In addition, it consolidates rules governing bank and
thrift activities and investments into a single section - Part 362 of the
FDIC's regulations - and provides similar treatment for state-chartered banks
"The regulation we are proposing will ensure that state-chartered
banks engaging in activities authorized under state law operate in a safe and
sound manner," said FDIC Chairman Andrew C. Hove, Jr. "At the same time, it
streamlines the procedures for entering new business lines."
The proposal, which supersedes a more narrowly drafted notice of
proposed rulemaking issued August 23, 1996, does not grant new powers. State-
chartered banks or thrifts exercise powers authorized by the states that have
also been granted to national banks. Under the Federal Deposit Insurance
Corporation Improvement Act, the FDIC may also consent to additional powers
authorized by the states for well-capitalized institutions if the agency
finds no significant risk to the deposit insurance funds. The exceptions set
forth in this proposal use that authority.
The rule establishes the concept of an "eligible depository
institution." To qualify, a bank or thrift must :
- Be chartered and in operation for at least three years;
- Have a composite rating of 1 or 2 on the five-point CAMELS scale, with a 1
or 2 rating for the management component;
- Have a satisfactory or better CRA rating;
- Have a compliance rating of 1 or 2 on a five-point scale used by examiners;
- Not be subject to any cease and desist order, a prompt corrective action
directive, or any other administrative agreement with its regulator.
Under the proposal, eligible institutions would be able to undertake
securities underwriting and distribution and real estate investment
activities through majority-owned subsidiaries by filing notice with the
FDIC. The activity would be deemed approved if the agency does not object
within 30 days.
The proposal distinguishes between real estate subsidiaries in which
an eligible institution has only a minimal investment - less then 2 percent
of Tier 1 capital - and those in which it has a more substantial interest.
Subsidiaries in which institutions have invested more than 2 percent
of their capital would be required, among other restrictions, to have a chief
executive officer who is not employed by the bank, and a board controlled by
directors who are not also directors or officers of the bank. Those
restrictions would not apply to subsidiaries in which banks maintain
investments of less than 2 percent.
Banks that do not meet all of the requirements for eligible
depository institutions can obtain approval for new activities by filing an
application. The content of the application does not differ from the
documents used in the notice process. However, while notices are
automatically approved in 30 days if the FDIC does not object, the agency has
60 days to consider an application, and it may extend that period for an
additional 30 days if it chooses. An application must be formally approved.
The proposal would also set transaction limits on state banks with
real estate subsidiaries that are similar to the 23 A and B restrictions that
the Federal Reserve applies to holding company affiliates. However, the FDIC
rule was specifically tailored to fit the relationship between a state bank
and its subsidiaries.
Under the proposed rules, a bank could lend no more than 10 percent
of its Tier 1 capital to any one such subsidiary. A bank could have more
than one subsidiary conducting the same activity, but its loans to units
engaged in the same activity would be capped at 20 percent.
The rule would require insured institutions to deduct their
investment in equity securities of the real estate subsidiaries from Tier 1
capital. However, no deduction is required when applying the transaction
Currently, the Office of the Comptroller of the Currency is
considering an application that would allow a national bank to engage in real
estate development through an operating subsidiary. If approved, state banks
would be able to conduct the same activity through a subsidiary. However,
the state institutions may not be bound by any safeguards established by the
OCC. The proposed rule would ensure that appropriate safety and soundness
standards apply to all FDIC-supervised institutions.
Anticipating future situations in which state banks would gain new
powers that are granted national banks, the FDIC's proposed rule establishes
safeguards to ensure that banks engaging in real estate activities operate in
a safe and sound manner.
In addition to other capital, investment and transaction
requirements, banks with subsidiaries engaged in securities underwriting
would be subject to a number of other conditions. Among them are requirements
that the subsidiary register with the Securities and Exchange Commission and
that the bank establish procedures governing its participation in financing
transactions underwritten or arranged by the underwriting unit. The proposed
regulations governing the securities underwriting subsidiary are nearly
identical to current rules. They are being relocated to Section 362 and
rewritten for clarity without substantive changes.
The proposal continues to allow a majority-owned subsidiary of a
state-chartered bank to purchase a controlling interest in a company that
engages in activities which the Federal Reserve has found to be closely
related to banking.
Subsidiaries of eligible institutions that remain well capitalized
after the capital deduction would be able to purchase equity securities
representing less than 10 percent of a company's outstanding voting shares.
However, the bank would not be able to extend credit to the subsidiary or
exercise control over the issuer of the securities purchased by the unit.
The proposal would outline standards for institutions that have
grandfathered insurance underwriting activities conducted through a
subsidiary. The rule does not allow non-grandfathered institutions to engage
in insurance underwriting.
Congress created the Federal Deposit Insurance Corporation in 1933 to restore
public confidence in the nation's banking system. The FDIC insures deposits
at the nation's 11,337 banks and savings associations and it promotes the
safety and soundness of these institutions by identifying, monitoring and
addressing risks to which they are exposed.