Footnotes: A Unified Federal Charter for banks and Savings Associations
1 Technically, there are two distinct federal thrift charters, a federal
savings-and-loan association charter and a federal savings bank charter.
With the very limited exception of mutual state-chartered savings banks
that convert to a federal savings bank charter, the two have identical
powers and are referred to collectively in this paper as savings associations.
2 Parenthetically, it is worth mentioning that Section 28 of the Federal
Deposit Insurance Act (FDI Act), as added by Section 222 of the Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, generally
limits state-chartered savings associations to activities and equity investments
permissible for federal savings associations (12 U.S.C. §21831e).
3 Federal Home Loan Bank Board, Agenda for Reform, Washington, DC, March
1983.
4 To qualify as a domestic building-and-loan association, a thrift must
pass a test similar to the QTL test. According to 26 U.S.C. §7701(19),
at least 60 percent of the institution's total assets must fall within
certain categories, largely assets related to real-estate financing. Qualifying
assets are similar, but not identical, to assets specified for the QTL
test. While no longer relevant to tax treatment, the building-and-loan
test may be passed as an alternative to the QTL test to be considered a
qualified thrift lender.
5 Under the experience method, an institution maintains a bad-debt reserve
-- for which taxable deductions may be taken -- that in general is based
on the institution's bad-debt experience over the previous six years. Under
the percentage-of-income method, the additions to the bad-debt reserve
are based on a percentage of the institution's taxable income.
6 For tax years prior to January 1, 1987, this percentage was 40 percent.
7 Not less than one-half of investments in service corporations that exceed
1 percent of a federal association's assets must be primarily for community,
inner-city, and community development purposes (12 U.S.C. §1464(c) (4)(B)).
Thus, the maximum unfettered investment in service corporations is 2 percent
of an association's assets.
8 Two recent Supreme Court cases have provided authority for national banks
to enter insurance-related markets previously unavailable to them. In NationsBank
of N.C., N.A. v. Variable Annuity Life Insurance Co., 115 S. Ct. 810 (1995),
the Court held that because annuities are not insurance for purposes of
the "town of 5,000" rule, national banks may sell annuities in any location.
And in Barnett Bank of Marion County, N.A. v. Nelson, 116 S. Ct. 1103 (1996),
the Court held that states cannot restrict the federal authority granted
to national banks under 12 U.S.C.§92 to sell insurance in towns with populations
of less than 5,000, although it is still uncertain whether national banks
may use this authority to sell insurance in larger towns.
9 While non-thrift activities are essentially unrestricted, dividend payments
from thrift to parent are restricted to avoid abuses.
10 Qualifying supervisory transactions consist of transactions involving
failed or failing institutions and the participation or oversight of the
FDIC or the FSLIC.
11 One of the exceptions to the Management Interlocks Act is for a person
who serves simultaneously as a director of (1) a diversified savings-and-loan
holding company and (2) an unaffiliated depository institution or depository
institution holding company [12 U.S.C. §3204 (8)(A)]. Also, effective October
1, 1996, the OCC, the FDIC, the FRB, and the OTS issued a final rule permitting
management interlocks between institutions with less than $20 million in
assets and institutions with more than $20 million in assets that are both
located in the same metropolitan statistical area. Management interlocks
between unaffiliated institutions in the same community continue to be
impermissible, regardless of size.
12 Although not provided for in existing legislation, the BIF and the SAIF
could be merged without unifying the two charters. Indeed, thrifts, in
the form of state-chartered savings banks, are already insured by the BIF.
Similarly, if regulatory consolidation were thought to be desirable, a
single regulatory apparatus could be established without charter unification.
13 Board of Governors of the Federal Reserve System, Flow of Funds. Measuring
market shares of the mortgage market by the percentage of mortgages directly
held results in a slight understatement of the position of savings institutions
in the market. Savings institutions also hold securities issued or guaranteed
by the government-related issuers of mortgage-backed securities. If their
holdings of these securities were considered, savings institutions' share
of the total mortgage market in 1994 would increase from approximately
13 percent to approximately 15 percent.
14 The Mortgage Market Statistical Annual for 1995, Inside Mortgage Finance
Publications, Inc.
15 The relationship between the legal limit and actual use of other powers
of federal savings institutions as of year-end 1995 was: loans secured
by nonresidential real estate -- the limit is approximately 32 percent of
assets (400 percent of capital, which for the industry stands at approximately
8 percent of assets), loans amounted to 6 percent of assets; unsecured
residential construction loans -- the limit is the greater of 5 percent of
assets or 100 percent of capital (which is approximately 8 percent of assets),
residential and nonresidential construction loans together totaled 2 percent
of assets. Of course, individual institutions may be closer to these limits.
16 As discussed earlier, recent judicial decisions have narrowed the differences
between banks and thrifts in the sale of insurance.
17 The FDIC presents the risks in detail in the Federal Register publication,
61 FR 43486, "Proposed Rule: Activities and Investments of Insured State
Banks," August 23, 1996.
18
Institutions that were eventually taken over by the RTC held $11.1 billion
of this amount.
19 The FDIC has dealt with real-estate investments by depository institutions
in conjunction with applications made by state-chartered banks under Section
24 of the Federal Deposit Insurance Act (12 U.S.C. §1831a). The FDIC deals
with each Section 24 case individually. However, in many cases, the FDIC
has conditioned its approval of an application from a state-chartered bank
to engage in real-estate investment on the following conditions: that the
real-estate activity be conducted in an adequately capitalized, separately-operated
subsidiary with at least one separate director; that the bank's investment
in the subsidiary (except arm's-length end loans) be deducted from capital;
that the capital deduction is also used for setting risk-related premiums
and prompt corrective action; and that the restrictions of Section 23A
and 23B of the Federal Reserve Act apply to transactions with the subsidiary.
The FDIC has also proposed a "safe harbor" rule under which institutions
meeting certain conditions may engage in real-estate activities after notice
to the FDIC if the FDIC does not object.
20 Because unrestricted savings-and-loan holding companies are essentially
unregulated, only limited data on their activities exist. This makes it
difficult to gauge, except in the most general terms, the number engaged
in nonfinancial activities, or activities not permissible to a bank holding
company.
21 Under current law, a state-chartered thrift must apply to the FDIC to
engage in any activity not permissible to a federal savings association
(12 U.S.C. §1831e).
22 State-chartered savings banks are presently subject to the Bank Holding
Company Act unless they elect under §10(e) of the Home Owners Loan Act
to be treated as a thrift for purposes of §10 and comply with the QTL test.
23 One state-chartered savings-and-loan association, Wauwatosa Savings and
Loan Association, managed to exit the system in April 1993.
