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FDIC Federal Register Citations

[Federal Register: February 5, 2007 (Volume 72, Number 23)]

[Proposed Rules]

[Page 5217-5228]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr05fe07-12]

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[[Page 5217]]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 354

RIN 3064-AD15

Industrial Bank Subsidiaries of Financial Companies

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking

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SUMMARY: The FDIC is publishing for comment proposed rules that would

impose certain conditions and requirements on each deposit insurance

application approval and non-objection to a change in control notice

that would result in an insured industrial loan company or industrial

bank (collectively ``industrial bank'' or ``ILC'') \1\ becoming, after

the effective date of any final rules, a subsidiary \2\ of a company

that is engaged solely in financial activities and that is not subject

to consolidated bank supervision by the Federal Reserve Board or the

Office of Thrift Supervision (``Federal Consolidated Bank

Supervision''). The proposed rules would also require that before any

industrial bank may become a subsidiary of a company that is engaged

solely in financial activities and that is not subject to Federal

Consolidated Bank Supervision (a ``Non-FCBS Financial Company''), such

company and the industrial bank must enter into one or more written

agreements with the FDIC. Simultaneously with the proposed rules, the

FDIC is publishing a Notice to extend for one year its moratorium for

applications for deposit insurance and change in control notices for

industrial banks that will become subsidiaries of companies engaged in

non-financial activities (``commercial companies'').\3\ By this action,

however, the FDIC is not expressing any conclusion about the propriety

of ownership or control of industrial banks by commercial companies.

The FDIC has determined that it is appropriate to provide additional

time for review of such ownership and the related issues by the FDIC

and by Congress.

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\1\ The term ``industrial bank'' or ``ILC'' means any insured

State Bank that is an industrial bank, industrial loan company or

other similar institution that is excluded from the definition of

``bank'' in the Bank Holding Company Act pursuant to 12 U.S.C.

1841(c)(2)(H).

\2\ The term ``subsidiary'' means any company that is

controlled, directly or indirectly, by another company.

\3\ A financial activity is generally any activity that is

permissible for a financial holding company or a savings and loan

holding company. See the proposed section 354.2 for a detailed

definition of the term. Any other activity is ``non-financial.''

DATES: Written comments must be received by the FDIC no later than May

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7, 2007.

ADDRESSES: You may submit comments, identified by RIN number 3064-AD15,

by any of the following methods:

Federal eRulemaking Portal: http://www.regulations.gov;

submissions must include the agency's name (``FDIC'') and the RIN

(3064-AD15) for this rulemaking,

Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html

,

Mail: Robert E. Feldman, Executive Secretary, Attention:

Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429.

Hand Delivery/Courier: The guard station at the rear of

the 550 17th Street Building (located on F Street), on business days

between 7 a.m. and 5 p.m., or

E-mail: comments@FDIC.gov. Include RIN number 3064-AD15 in

the subject line of the message.

Public Inspection

Comments may be inspected and photocopied in the FDIC

Public Information Center, Room E-1002, 3501 North Fairfax Drive,

Arlington, VA, between 9 a.m. and 4:30 p.m. on business days.

Comments received will be posted without change to

http://www.FDIC.gov/regulations/laws/federal/propose.html

and will include any

personal information provided, except that the FDIC may redact any

inappropriate matter.

FOR FURTHER INFORMATION CONTACT: Robert C. Fick, Counsel (202) 898-

8962, A. Ann Johnson, Counsel (202) 898-3573 or Thomas P. Bolt,

Counsel, (202) 898-6750, Federal Deposit Insurance Corporation, 550

17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Background

I. History Of Industrial Banks

Industrial banks were first chartered in the early 1900's as small

loan companies for industrial workers. Over time the chartering states

have expanded the powers of their industrial banks to the extent that

some industrial banks now have generally the same powers as state

commercial banks.\4\

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\4\ Most of the industrial banks operating today do not offer

demand deposits. Even in those states that have authorized

industrial banks to offer demand deposits, industrial banks

generally do not offer them. Offering demand deposits could, under

certain circumstances, make any company that controls the industrial

bank subject to supervision under the Bank Holding Company Act. See

generally, The FDIC's Supervision of Industrial Loan Companies: A

Historical Perspective, Supervisory Insights (Summer 2004).

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Industrial banks are state-chartered banks,\5\ and all of the

existing FDIC-insured industrial banks are ``state nonmember banks''

under the Federal Deposit Insurance Act (FDI Act). As a result, their

primary Federal banking supervisor is the FDIC. The FDIC generally

exercises the same supervisory and regulatory powers over industrial

banks that it does over other state non-member banks.

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\5\ 12 U.S.C. 1813(a)(2).

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While industrial banks are ``banks'' under the FDI Act,\6\ they

generally are not ``banks'' under the Bank Holding Company Act

(BHCA).\7\ One result of this difference in treatment is that a company

that owns an FDIC-insured industrial bank could engage in commercial

activities and/or may not be subject to Federal Consolidated Bank

Supervision. By contrast, bank holding companies or savings and loan

holding companies are generally prohibited from engaging in commercial

activities. Another result is that some of the companies that own

insured industrial banks are not subject to Federal Consolidated Bank

Supervision. The FDIC has noted a recent increase in deposit insurance

applications for, and change in control notices with respect to,

industrial banks that would be affiliated with commercial concerns or

other companies that would not have a


[[Page 5218]]


Federal Consolidated Bank Supervisor.\8\ Some members of Congress, the

Government Accountability Office, the FDIC's Office of Inspector

General, and members of the public have expressed concerns regarding

the lack of Federal Consolidated Bank Supervision, the uncertainty

regarding the parent company's willingness or ability to serve as a

source of strength to the subsidiary industrial bank, the potential

risks from mixing banking and commerce, the potential for conflicts of

interest, and the potential for an ``uneven playing field.''

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\6\ 12 U.S.C. 1813(a)(2).

\7\ See 12 U.S.C. 1841(c)(2)(H).

\8\ The term ``Federal Consolidated Bank Supervisor'' means

either the Federal Reserve Board or the Office of Thrift

Supervision.

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In 1987 Congress enacted the Competitive Equality Banking Act

(CEBA) \9\ which exempted companies that control certain industrial

banks from the BHCA. The industrial bank industry has grown and evolved

significantly since CEBA was enacted. As of year-end 1987, 105

industrial banks reported aggregate total assets of $4.2 billion and

aggregate total deposits of $2.9 billion. The reported total assets for

these industrial banks ranged from $1.0 million to $411.9 million, with

the average industrial bank reporting $40.0 million in total assets and

$27.3 million in total deposits.

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\9\ Public Law 100-86, 101 Stat. 552 (codified as amended in

various sections of title 12 of the U.S. Code).

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Between 1987 and 2006 total assets held by industrial banks grew

from $4.2 billion to $177 billion. In 1996 one large financial services

firm moved its entire credit card operation into its subsidiary

industrial bank, increasing the assets in the industry to $22.6

billion. Within the period from 1999 to 2000 another large financial

services firm moved approximately $40 billion from uninsured funds into

insured deposits in its subsidiary industrial bank.\10\

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\10\ Since 2000 at least three additional financial services

firms that control industrial banks have offered their clients the

option of holding their cash funds in insured deposits in the firms'

industrial banks.

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As of year-end 1999, the FDIC insured 55 industrial banks with

aggregate total assets of $43.6 billion and aggregate total deposits of

$22.5 billion. The reported total assets for these industrial banks

ranged from $2.4 million to $15.6 billion, with 10 institutions

reporting total assets of more than $1 billion. The four largest

institutions reported total assets of $15.6 billion, $4.4 billion, $3.8

billion, and $3.0 billion. Six other institutions reported total assets

of $1.1 billion to $2.5 billion. The remaining portfolio of industrial

banks, on average, reported total assets of $152.5 million.

Since January 1, 2000, 24 industrial banks became insured.\11\ As

of January 30, 2007, there were fifty-eight insured industrial banks

\12\ with aggregate total assets of approximately $177 billion. Six

industrial banks reported total assets of $10 billion or more; eleven

other industrial banks reported total assets of $1 billion or more. The

remaining forty-one institutions, on average, reported total assets of

approximately $231.8 million. Forty-five of those fifty-eight operated

in Utah and California.\13\ Of the fifty-eight existing industrial

banks, forty-three were either owned by one or more individuals or

controlled by a parent company whose business is financial in nature.

As of January 30, 2007, thirty-one of the fifty-eight existing

industrial banks were owned by financial companies that were not

subject to Federal Consolidated Bank Supervision. Fifteen industrial

banks were subsidiaries of holding companies that are commercial in

nature. Eight of the fifty-eight industrial banks (representing

approximately sixty-nine percent of industrial bank industry assets)

were owned by companies that were engaged solely in financial

activities and were subject to consolidated supervision by the FRB or

the OTS. Four of the fifty-eight industrial banks were owned by

individuals.

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\11\ During 2000, four new industrial banks were insured; two

during each of 2001 and 2002; five during 2003; six during 2004;

four during 2005; and one in 2006.

\12\ The difference between 79 (55 industrial banks at the end

of 1999 plus 24 new ones since then) and 58 results from various

mergers, conversions, voluntary liquidations and one failure.

Aggregate asset figures are as of September 30, 2006, the most

recent reported data.

\13\ Industrial banks also operate in Colorado, Hawaii, Indiana,

Minnesota and Nevada.

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Recent Developments


While some of the industrial banks insured after CEBA are subject

to Federal Consolidated Bank Supervision, many of the recent

applications and notices are from companies that would have no Federal

Consolidated Bank Supervisor. Currently, eight applications for deposit

insurance for industrial banks are pending before the FDIC. In 2006,

the FDIC also received seven notices of change in bank control to

acquire an industrial bank.\14\ None of the potential parent companies

of the current industrial bank applicants or the potential acquirers of

industrial banks would be subject to Federal Consolidated Bank

Supervision.

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\14\ Five of the change in control notices have been withdrawn,

and one was approved.

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In 2005, the Government Accountability Office (GAO) expressed its

concern that industrial banks owned by commercial companies or other

entities without a Federal Consolidated Bank Supervisor created an

uneven playing field when compared to banks and thrifts owned by

holding companies subject to Federal Consolidated Bank Supervision.\15\

The GAO questioned whether the FDIC's examination, regulation, and

supervision authorities were sufficient to protect such industrial

banks. The concerns regarding the lack of consolidated supervision and

the possible limitations of the FDIC's authority echoed those

previously expressed by the FDIC's Office of Inspector General in a

2004 report.\16\

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\15\ U.S. Gov't Accountability Office, GAO-05-621, Industrial

Loan Corporations: Recent Asset Growth and Commercial Interest

Highlight Differences in Regulatory Authority 79-80 (2005)

(hereinafter ``GAO Report 05-621'').

\16\ See Federal Deposit Insurance Corporation Office of

Inspector General, Report No. 2004-048, The Division of Supervision

and Consumer Protection's Approach for Supervising Limited-Charter

Depository Institutions (2004) (hereinafter ``OIG Report'').

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Some industrial banks continue to be small, community-focused

institutions. However, the FDIC has noted a recent increase in the

number of applications for deposit insurance and notices of change in

control for industrial banks that would be affiliated with commercial

companies or other entities that would not be subject to Federal

Consolidated Bank Supervision. These companies are often large

organizations that tend to have complex business plans, and their

subsidiary industrial banks tend to provide specialty lending programs

or financial services or other support to the company.

Whatever their purpose or structure, the industrial bank charter

has generated a significant amount of public interest in recent years

as various entities have explored the feasibility and advantages

associated with including an industrial bank as part of their

operations.

In 2006, the FDIC received more than 13,800 comment letters

regarding the proposed Wal-Mart Bank's 2005 deposit insurance

application.\17\ Most of these comments expressed opposition to

granting deposit insurance to this particular applicant; however, some

commenters raised more universal concerns about industrial banks. Over

640 of the more general comments were specifically focused on the risk

posed to the Deposit Insurance Fund by industrial banks owned by

holding companies without a Federal Consolidated Bank Supervisor.

Similar


[[Page 5219]]


sentiments were expressed by witnesses during three days of public

hearings held by the FDIC regarding the Wal-Mart application. In

addition, The Home Depot also filed a change in control notice in

connection with its proposed acquisition of EnerBank, a Utah industrial

bank. In response to the request for public comment on the change in

control notice, the FDIC received approximately 830 comment letters;

almost all of them expressed opposition to the proposed acquisition.

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\17\ See the FDIC's web site at http://www.fdic.gov/regulations/laws/walmart/

.
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Congress also has had a continuing interest in the industrial bank

charter. Most recently, on July 12, 2006, the House Committee on

Financial Services (Committee) held a hearing regarding industrial

banks. At this hearing, General Counsels from the FDIC and the Federal

Reserve Board (``FRB'') testified before the Committee, discussing the

history, characteristics, current industry profile, and supervision of

industrial banks.\18\ The FDIC's testimony noted that today's

industrial banks are owned by a diverse group of financial and

commercial entities. Among such entities are industrial banks that

serve a particular lending, funding, or processing function within a

larger organizational structure, and those that directly support one or

more affiliate's commercial activities. The FDIC further noted that

industrial banks may share employees and obtain critical support from

affiliated companies. The business plans for these industrial banks

differ substantially from the consumer lending focus of the original

industrial banks. In addition to the hearings, three bills were

introduced in the House in the last two years for the purpose of making

either the FDIC or another banking agency the Federal consolidated bank

supervisor for industrial bank holding companies and prohibiting

ownership or control of an industrial bank by a commercial firm.\19\

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\18\ Industrial Loan Companies: A Review of Charter, Ownership,

and Supervision Issues: Hearing Before the H. Comm. on Financial

Services, 109th Cong. (2006). The Committee also heard testimony

from G. Edward Leary, Commissioner for the Utah Department of

Financial Institutions; Rick Hilman, Director of Financial Markets

and Community Investment, U.S. Government Accountability Office;

George Sutton, Former Commissioner for the Utah Department of

Financial Institutions; Terry Jorde, Chairman, President, and CEO of

CountryBank USA, Chairman of ICBA; John L. Douglas, Partner, Alston

& Bird; Arthur C. Johnson, Chairman and CEO of United Bank of

Michigan; Prof. Lawrence J. White, Professor of Economics, Stern

School of Business of New York University; Michael J. Wilson,

Director, Legislative and Political Action Department, United Food

and Commercial International Union. Also, several organizations

submitted record statements.

\19\ 19 See H.R. 698, 1st Sess. 110th Cong. (2007); H.R. 5746,

109th Cong., 2d Sess. (2006); H.R. 3882, 109th Cong., 1st Sess.

(2005).

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To evaluate the concerns and issues raised with respect to

industrial banks, on July 28, 2006, the FDIC imposed a six-month

moratorium on FDIC action with respect to certain industrial bank

applications or notices.\20\ The FDIC declared the moratorium to enable

it to further evaluate (i) industry developments, (ii) the various

issues, facts, and arguments raised with respect to the industrial bank

industry, (iii) whether there are emerging safety and soundness issues

or policy issues involving industrial banks or other risks to the

insurance fund, and (iv) whether statutory, regulatory, or policy

changes should be made in the FDIC's oversight of industrial banks in

order to protect the Deposit Insurance Fund or important Congressional

objectives.\21\

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\20\ See Moratorium on Certain Industrial Loan Company

Applications and Notices, 71 FR 43482 (August 1, 2006).

\21\ Id. at 43483.

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II. Request for Comments

On August 23, 2006, the FDIC published in the Federal Register a

Notice with a Request for Public Comment on a wide range of issues

concerning industrial banks.\22\ The Notice presented 12 specific

questions for consideration by commenters. The issues presented by the

questions included the current risk profile of the industrial bank

industry; safety and soundness issues uniquely associated with

ownership of such institutions; the FDIC's practice with respect to

evaluating and making determinations on industrial bank applications

and notices; whether a distinction should be made when the industrial

bank is owned by an entity that is commercial in nature; and the

adequacy of the FDIC's supervisory approach with respect to industrial

banks.

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\22\ See Industrial Loan Companies and Industrial Banks, 71 FR

49456 (August 23, 2006).

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The FDIC received over 12,600 comment letters in response to the

Notice during the comment period.\23\ Approximately 12,485 comments

were generated by what appears to be organized campaigns either

supporting or opposing the proposed industrial bank to be owned by Wal-

Mart or the proposed acquisition of Enerbank, also an industrial bank,

by The Home Depot. The remaining comment letters were sent by

individuals, law firms, community banks, financial services trade

associations, existing and proposed industrial banks or their parent

companies, the Conference of State Bank Supervisors, and two members of

Congress. Of the total comments received, seventy-one commenters

addressed specific substantive issues concerning the industrial bank

industry and its regulation.

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\23\ See http://www.fdic.gov/regulations/laws/federal/2006/06comilc.html

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Summary of the Substantive Responses by Topic

i. The Current Risk Profile of the Industrial Bank Industry

Some commenters stated that the significant growth in total

industrial bank industry assets and deposits has not adversely affected

the risk profile of the industry and, therefore, industrial banks,

regardless of ownership, present no unique safety and soundness

concerns. These commenters argued that the industrial bank industry

presents significantly less risk, and is therefore superior in

comparison to, the industry profiles for other insured institutions.

These commenters also contended that a supervisory approach that

focuses on the bank itself, as opposed to consolidated supervision, is

more effective for their supervision because current restrictions on

affiliate transactions adequately address conflicts of interest and

other potential forms of risk. Some of these commenters questioned the

propriety of measuring risk on an industry-wide basis, and encouraged

the FDIC to assess risk on an institution-by-institution basis. In

addition, these commenters largely discouraged assessing risk

differently for industrial banks based on considerations such as

whether an institution's owner is subject to Federal Consolidated Bank

Supervision, arguing that what mattered was the individual institution

and its particular characteristics. In the view of these commenters,

these distinctions are arbitrary because there is no evidence showing

that any particular form of ownership or supervision is safer in terms

of risk than another.

Many commenters opposed any mixing of banking and commerce. Other

commenters, however, also noted the recent growth in total industry

assets and deposits and were concerned about the risks that may emerge

from such growth, including for example, dilution of the Federal

deposit insurance system, i.e., the growth of deposits at industrial

banks could result in an increase of bank insurance premiums in order

to bring the deposit insurance funds back to the designated reserve

ratio. These commenters also noted an increase in the number of

industrial banks owned by entities that are commercial in nature. They

are concerned that these industrial banks present unique risks compared

to other insured institutions


[[Page 5220]]


primarily because they are not subject to Federal Consolidated Bank

Supervision and, with respect to publicly traded parent companies of

industrial banks, are primarily concerned with maximizing shareholder

profit. Others also asserted that commercial ownership requires

consolidated supervision because the FDIC lacks legal authority, staff

or expertise to adequately supervise industrial banks owned by large

commercial companies. Additionally, one commenter stated that absence

of consolidated supervision for companies not subject to the Bank

Holding Company Act meant that both commercial ownership and financial

ownership posed increased risks, while some asserted that commercial

ownership presents greater risks than financial ownership and others

(discussed above) asserted that only commercial ownership poses risks.

As to determining how to distinguish between a company that is

financial or commercial in nature, one commenter suggested that a

company should be considered ``financial'' if 80 percent of its

revenues came from financial activities, while another commenter

proposed that 85 percent should be the determinative number.

ii. FDIC's Current Practice When Making Determinations on Industrial

Bank Applications and Notices

Some commenters encouraged the FDIC to continue evaluating all

industrial bank applications on a case-by-case basis. These commenters

believe that the statutory criteria for evaluating industrial bank

applications and notices are thorough and comprehensive, and asserted

that any departure from those criteria might be held by a court to be

arbitrary and capricious agency action. These commenters also urged the

FDIC to continue conditioning Federal deposit insurance on a case-by-

case basis, and they objected to any proposals to impose general

restrictions on industrial banks that are not subject to consolidated

supervision, arguing that general restrictions predicated solely on the

nature or form of industrial bank ownership are arbitrary and

capricious.

Other commenters proposed that the FDIC augment its current

practice with respect to evaluating industrial bank applications and

notices, and presented additional factors for the FDIC to consider.

They argued that the FDI Act authorizes the FDIC to consider any factor

reasonably related to safety and soundness, the risk presented to the

Deposit Insurance Fund, and/or the convenience and needs of the

community; therefore the FDIC may evaluate a parent company's

motivation or purpose for chartering or acquiring an industrial bank,

as well as the parent company's reputation, market reach, and corporate

strategy with respect to competition. However, some of these commenters

also opined that FDIC action on any application or notice which is

based on considerations that are not specifically authorized under the

FDI Act would be arbitrary and capricious.

Several commenters supported extending the FDIC's moratorium on

deposit insurance applications for new industrial banks and

acquisitions of existing industrial banks until Congress has the time

to enact legislation prohibiting affiliations between industrial banks

and commercial or other entities that are not subject to Federal

Consolidated Bank Supervision. Others believed that congressional

action is not required and that the FDIC has the authority to deny any

industrial bank application or notice if the industrial bank would be

controlled by an entity not subject to Federal Consolidated Bank

Supervision. Several commenters also asserted that an affiliation

between an industrial bank and an entity not subject to Federal

Consolidated Bank Supervision--primarily, a commercial entity--

presented several safety and soundness concerns, and that industrial

banks which serve as a support mechanism for an affiliated entity do

not serve the convenience and needs of the community. Another commenter

encouraged the FDIC to discontinue its practice of conditioning Federal

deposit insurance on a case-by-case basis, arguing that conditions lack

a binding effect because they may be removed by the FDIC at a later

time. Some commenters suggested restricting affiliations between

industrial banks and commercial or other entities without a Federal

Consolidated Bank Supervisor by regulation.

iii. Comments Regarding Commercial Ownership of Industrial Banks

Some commenters discounted the concerns commonly expressed

concerning commercially-owned industrial banks, re-emphasizing that

such institutions are subject to regulations that prevent tying and

that, they believe, effectively restrict transactions with affiliates.

Other commenters disagreed, contending that commercially-owned

industrial banks are more likely to have conflicts of interest than

other insured institutions because they have an inherent incentive to

advance the interests of their commercial affiliates. According to

these commenters, this necessarily requires frustrating the interests

of competitors, and creates a propensity for industrial banks to

discriminate in the provision of banking services. Some commenters also

encouraged the FDIC to prohibit commercial entities from chartering or

acquiring an industrial bank because, as mentioned earlier, they

believe that the current statutory and regulatory structure does not

sufficiently mitigate the risks unique to such institutions.

Some commenters disputed the belief that commercially-owned

industrial banks have a significant competitive advantage over other

insured institutions because, in their view, unlike a traditional bank,

an industrial bank operates under a limited-purpose charter which

narrows the range of services an industrial bank may offer. Also, they

asserted that there are public benefits obtained when an industrial

bank provides banking services to discrete customer groups. Other

commenters disagreed, and reiterated their view that industrial banks

have an inherent competitive advantage over other depository

institutions because industrial banks have greater access to capital,

customers, and marketing opportunities through their parent companies.

They also argued that access to niche banking services is already

provided by community banks, and that some industrial banks have the

potential to cause more harm than good because their rapid growth has

added a significant amount of insured deposits to the system in recent

years, thereby diluting the Federal Deposit Insurance Fund.

Some commenters again stated that conditions should only be imposed

on industrial banks on a case-by-case basis because, in their view,

conditions cannot, as a matter of law, be imposed uniformly on such

institutions. Other commenters reiterated their concern that industrial

banks owned by commercial firms present a greater risk to the Federal

Deposit Insurance Fund, and again proposed prohibiting commercial firms

from owning industrial banks, or at a minimum, making these forms of

ownership subject to standard conditions.

iv. Comments on the Need for Supervisory Change

Some commenters urged the FDIC to consider the sound performance

record to date of the industrial bank industry, and the adverse affect

that restricting ownership and growth would have on the dual-banking

system. These commenters also argued that the FDIC lacks authority to

impose restrictions on


[[Page 5221]]


industrial banks concerning affiliations, growth, or operations by

regulation because industrial banks are explicitly exempt from Federal

Consolidated Bank Supervision under the BHCA. In their view, the FDIC's

authority is limited to imposing conditions on deposit insurance

applications and change in control notices until Congress acts to

expand consolidated supervision to cover industrial banks. On the other

hand, one commenter urged the FDIC to compare the current landscape of

the industrial bank industry to the one that existed when Congress

exempted industrial banks from the BHCA, suggesting that Congress did

not intend for the exemption to apply to the kind of industrial banks

that exist today. Other commenters argued that the FDIC has authority

to impose standard conditions on industrial banks by regulation, as

long as such action promotes safety and soundness or mitigates risks

posed to the Federal Deposit Insurance Fund. Some commenters favored

extending the moratorium until Congress has an opportunity to enact

legislation to impose Federal Consolidated Bank Supervision on the

owners of all industrial banks.


III. Necessity for Additional Supervisory Measures


The FDIC's experience suggests no risk or other possible harm that

is unique to the industrial bank charter. Rather, the concerns that

have been raised focus on the ownership or control of the industrial

bank and on the proposed industrial bank's business model or plan.

Consequently, the FDIC's analysis below of how to proceed focuses

primarily on the entities that would control the industrial bank.

The mission of the FDIC is to promote the stability of, and public

confidence in, the nation's banking system. The FDIC's statutory duties

include insuring the deposits of all insured depository institutions,

and maintaining and administering the Deposit Insurance Fund.\24\ While

the bank and thrift chartering agencies seek to maintain the safety and

soundness of the institutions subject to their jurisdiction, the FDIC

has a unique responsibility for the safety and soundness of all insured

banks and savings associations in that it is the only agency which has

the power to grant deposit insurance to a bank or savings association,

and it is the only agency that has the power to take it away.\25\ In

granting deposit insurance, the FDIC must consider the factors listed

in section 6 of the FDI Act; \26\ these factors generally focus on the

safety and soundness of the proposed bank or savings association and

any risk it may pose to the Deposit Insurance Fund. Similarly, the FDIC

can terminate an institution's deposit insurance if the FDIC finds that

the institution is engaging in an unsafe or unsound practice or is in

an unsafe or unsound condition. Moreover, the FDIC is the sole Federal

regulator with responsibility for the safety and soundness of all state

nonmember banks, including industrial banks. Not only does the FDIC

have the responsibility to decide whether to grant or terminate deposit

insurance for state nonmember banks based upon safety and soundness

considerations, but it also can issue cease and desist orders and

impose civil money penalties based upon safety and soundness

considerations.\27\ Finally, the FDIC may permit or deny various

transactions (e.g., branching, mergers, and changes in bank control) by

state nonmember banks based to a large extent on safety and soundness

considerations and on its assessment of the risk posed to the Deposit

Insurance Fund.\28\

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\24\ See sections 1 & 11 of the FDI Act, 12 U.S.C. 1811, 1821.

\25\ See sections 5 & 8(a) of the FDI Act, 12 U.S.C. 1815,

1818(a).

\26\ 12 U.S.C. 1816.

\27\ See section 8 of the FDI Act, 12 U.S.C. 1818.

\28\ See sections 7(j), 18(c), & 18(d) of the FDI Act, 12 U.S.C.

1817(j), 1828(c), & 1828(d).

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As described above, the FDIC has a statutory duty to monitor,

evaluate, and take necessary action to ensure the safety and soundness

of state nonmember banks. In order to carry out that responsibility,

the FDIC must interpret and apply the law to circumstances that may not

have been envisioned or, at least, clearly addressed by statutes

written many years in the past. Furthermore, the FDIC has a duty to be

proactive, not just reactive; the FDIC does not have to wait until

problems or losses occur before it takes action. The FDIC believes that

recent developments in the industrial bank industry mandate that the

FDIC take action now to ensure the safety and soundness of industrial

banks and to protect the Deposit Insurance Fund.

As described above, one of the notable recent developments is the

significant growth of the industrial bank industry. In its 2005 report

on industrial banks, the GAO highlighted the growth in total industrial

bank assets. The GAO noted that between 1987 and 2004, industrial bank

assets grew over 3,500 percent.\29\ The GAO also noted that in 2004,

six industrial banks had at least $3 billion in total assets, and one

had over $66 billion in total assets. The report further stated that

this growth was primarily concentrated in a few large industrial banks

owned by financial services firms. Moreover, the report indicated that

as of the end of 2004, six industrial banks owned $119 billion in

assets or eighty-five percent of the total industrial bank industry

assets and controlled about $64 billion in insured deposits.\30\

Finally, the GAO noted that between 1999 and 2005 the insured deposits

held by all industrial banks grew by more than 500 percent.\31\

---------------------------------------------------------------------------


\29\ See GAO Report 05-621, p. 18.

\30\ Id.

\31\ See Id. at 20.

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Also, as noted above, industrial bank powers have expanded

significantly since the first industrial bank was chartered. When the

first industrial banks were chartered, their powers were generally

limited to consumer lending. However, as time progressed, the states

that chartered industrial banks expanded their powers to the extent

that today many industrial banks have virtually the same powers as a

state commercial bank.\32\

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\32\ California industrial banks currently have the same powers

as California commercial banks except that industrial banks are not

permitted to offer demand deposits. See Cal. Fin. Code sections

1401, 1411, & 1412. Utah industrial banks have essentially the same

powers as Utah commercial banks except that industrial banks have

more limited securities powers and less specific investment

authority than commercial banks. See Utah Code Ann., Title 7,

Chapters 1, 3, & 8. Nevada industrial banks have essentially the

same powers as Nevada commercial banks, except for certain insurance

and securities powers, which require the approval of the

Commissioner of Financial Institutions. See Nev. Rev. Stat. Sec.

657.005, et seq.

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Another circumstance that has raised concerns is the interest shown

by large companies in owning industrial banks. Some of these companies

are engaged in activities that are predominantly commercial in nature,

e.g., manufacturing, retail sales, and trucking. Some of these

companies tend to utilize their subsidiary industrial banks in ways

that involve unusual, affiliate-dependent business plans. It has been

argued that despite the statutory limitations on transactions with

affiliates and on tying between banks and their affiliates, there is

nevertheless a substantial potential for conflicts of interest in the

absence of Federal Consolidated Bank Supervision. Specifically, a bank

may have a strong incentive to take risks, especially credit risks,

that it would not otherwise deem prudent or it may engage in illegal

tying conduct in order to aid its parent company or other affiliates.

A further consideration is that the banking industry as a whole has

enjoyed a period of extraordinary economic


[[Page 5222]]


stability in the recent past. There have been no bank or thrift

failures in over two and one-half years--a record in the recent history

of banking. As a result, the financial viability of industrial banks

that are owned by companies not subject to consolidated oversight is

largely untested in times of economic stress or a downturn in the

economy. There is almost no track record that indicates how such

ownership structures might perform under stress and, specifically,

whether such ownership would tend to cause or exacerbate any risks to

the subsidiary industrial banks or the Deposit Insurance Fund.

Consolidated Federal supervision generally includes reporting,

examination, and minimum capital requirements that provide, at a

minimum, transparency for the early identification of emerging risks in

the affiliated entities. In addition, to the extent that a bank's

parent company can serve as a source of strength to the subsidiary bank

under Federal Consolidated Bank Supervision, the bank has an additional

resource for capital should its financial condition deteriorate. The

sometimes limited transparency of companies that are not subject to

consolidated oversight makes it more difficult to identify and to

control these risks before they may become significant risks to the

industrial bank subsidiary. Also, such companies may have no

expectation that they should serve as a source of strength to their

subsidiary banks. Furthermore, it has been argued that since regulation

necessarily imposes a cost on the regulated entity, it is unfair, from

a competitive standpoint, to allow companies that control one or more

industrial banks to conduct essentially the same business as bank

holding companies, financial holding companies, or thrift holding

companies that are subject to Federal Consolidated Bank Supervision. It

has been argued that to continue to permit this situation would provide

an incentive to those institutions that are subject to Federal

Consolidated Bank Supervision to migrate to the industrial bank model.

Such an incentive would seem contrary to Congress's long-standing

preference for Federal Consolidated Bank Supervision.

The main concerns regarding an industrial bank being controlled by

another company or layers of companies that lack Federal Consolidated

Bank Supervision include (i) the mixing of banking and commerce when a

commercial company controls an industrial bank, (ii) the need for the

parent company to serve as a source of capital for the subsidiary

industrial bank, and (iii) the difficulty in identifying problems or

risks that may develop in the company or its subsidiaries and

controlling or preventing the extent to which they impact the

industrial bank. The FDIC believes that it can deal with the latter two

concerns in the manner detailed by the proposed rules

Banks that are owned by one or more individuals, of course, have

neither a parent company nor parent company subsidiaries, and as a

result, they generally do not present the same potential for problems

as banks owned by companies. Industrial banks that are controlled by

companies, however, do present some significant risks. Because

industrial banks are generally excluded from the definition of ``bank''

under the BHCA, companies, whether engaged in commercial activities or

financial activities, that own an industrial bank would not necessarily

be subject to Federal Consolidated Bank Supervision.

Because the financial services industry continues to evolve to meet

the needs of the marketplace, the regulation of insured depository

institutions needs to continue to evolve to accommodate those changes.

In that regard, the FDIC's views on the supervision of industrial banks

to be owned by companies have also evolved. While any one of the

developments that have occurred in the industrial bank industry over

the last two decades might not, in isolation, be sufficient to warrant

regulatory action, the convergence of all of these developments at this

point in time argues for caution and for an approach designed to

provide greater transparency and to limit potential risks to industrial

banks and to the Deposit Insurance Fund resulting from control by

companies that are not subject to Federal Consolidated Bank

Supervision. The adoption of a set of comprehensive safeguards would

provide a Federal set of standards and requirements \33\ that the FDIC

can apply and enforce independent of the state authorities in a manner

that fulfills the FDIC's mission efficiently and to the fullest extent

possible.

---------------------------------------------------------------------------


\33\ While some of the chartering states do have supervisory

authority over companies that control industrial bank subsidiaries,

that is not true of all of the states that charter industrial banks.

---------------------------------------------------------------------------


The FDIC believes that it is prudent to limit or control the

exposure presented by some of these ownership structures by imposing

controls on them now before there is a substantial proliferation of

them. There is no reason to believe that interest in industrial banks

will subside; in fact, there is a good possibility that it may

intensify. If problems were to develop once a large number of

industrial banks are controlled by companies not subject to

consolidated oversight, the risks could be magnified greatly and become

more difficult to address than if appropriate regulatory action is

taken now.

The FDIC recognizes that companies that are only engaged in

financial activities are engaged in activities that are generally well-

understood by, or at least, familiar to, the Federal banking agencies.

The FDIC also recognizes that the Federal banking agencies generally

have effective systems and procedures for dealing with the risks

presented by most financial activities. However, unlike companies

subject to Federal Consolidated Bank Supervision, financial companies

that are not subject to consolidated federal supervision (Non-FCBS

Financial Companies) that own industrial banks may not provide the same

level of transparency nor the same opportunity for supervisors to deal

with the risks. As deposit insurer and as the primary Federal banking

supervisor for industrial banks, the FDIC must ensure that the risks

arising from the business activities of the owners of insured

industrial banks do not impair the safety and soundness of those

industrial banks or impose undue risks on the Deposit Insurance Fund.

This requires a focus on the risks from the insured institution's

activities as well as the activities of its owner. Where insured

industrial banks are owned by Non-FCBS Financial Companies, it is

increasingly important for the FDIC to exercise its powers as deposit

insurer and as the primary Federal banking supervisor for industrial

banks to provide oversight to control the risks that may be created by

such owners.

The regulatory action that the FDIC is proposing today is directed

only at industrial banks that will become subsidiaries of Non-FCBS

Financial Companies, that is, companies that (i) are engaged only in

financial activities, and (ii) are not subject to Federal Consolidated

Bank Supervision. As noted in the notice of limited extension of the

moratorium published elsewhere in the Federal Register today, the FDIC

is not proposing any changes in its regulation or supervision of

industrial banks that will be directly controlled by one or more

individuals. Furthermore, the FDIC is not proposing any changes in its

regulation or supervision of an industrial bank that will become a

subsidiary (direct or indirect) of an FCBS Financial Company, that is,

a company that (i) is engaged only in financial activities and (ii) is

subject to Federal Consolidated Bank Supervision


[[Page 5223]]


(i.e., a bank holding company, a financial holding company, or a

savings and loan holding company). With respect to industrial banks

that will be owned by companies engaged in commercial activities, the

FDIC is extending the moratorium to allow more time for study by the

FDIC and to allow time for Congress to consider the issues presented by

such an ownership model. In publishing the proposed rules, and in

extending the moratorium for one year, the FDIC is not expressing any

conclusion about the propriety of control of industrial banks by

commercial companies. Rather, the FDIC has determined that it is

appropriate to provide additional time for review of such ownership and

the related issues by the FDIC and by Congress.

As noted above, the proposed rules are limited in their application

to industrial banks that will become subsidiaries of Non-FCBS Financial

Companies. The current limitation is essential to limit any change in

the nature of the corporate owner's business to financial activities

until such time as the moratorium expires or other appropriate action

is taken by the FDIC or Congress.

Access to current and complete information about the potential

risks to an insured industrial bank that may be created by the

operations of its parent company or its affiliates is especially

critical today because of the speed with which an industrial bank or

its parent company can move into new and more risky business

operations. Changes in the overall corporate focus of the owners of

even well-rated institutions could lead to participation in risky or

emerging activities that could jeopardize the insured institution's

safety and soundness well before supervisory ratings would typically be

adjusted. More fundamentally, under current regulations the FDIC may

not always have timely access to information about the risks posed by

changes in the business focus of parent companies without direct access

to these owners. We believe that it is prudent to issue the proposed

Part 354 in order to gain an understanding of the emerging risks that

may be developing in some of the large and complex companies that may

desire to control an industrial bank.

With respect to industrial banks that become subsidiaries of Non-

FCBS Financial Companies, the proposed rules are intended to provide

the safeguards that the FDIC believes could be helpful to identify and

avoid or control, on a consolidated basis, the safety and soundness

risks and the risks to the Deposit Insurance Fund that may result from

that kind of company-ownership model. The proposed rules would,

therefore, provide enhanced transparency and a system of controls that

should effectively deal with the risks presented by such ownership

structures.

The proposed rules would not apply to industrial banks that are

already owned by financial companies not subject to Federal

Consolidated Bank Supervision. However, the FDIC will continue to

exercise close supervision of these industrial banks and any risks that

may be created in the future from their parent companies or affiliates

to ensure that these institutions continue to operate in a safe and

sound manner.

Finally, while the proposed rules are pending, the FDIC will

consider deposit insurance applications and change in control notices

with respect to industrial banks that will be controlled by financial

companies that are not subject to Federal Consolidated Bank Supervision

on a case-by-case basis. After any final rules are adopted, the FDIC

will consider requests to modify any conditions and requirements agreed

to during the period between issuance of the proposed rules and the

effective date of the final rules to conform such conditions and

requirements to those in the final rules.


IV. Authority for Additional Supervisory Measures


The FDIC has the authority to issue such rules and regulations as

it deems necessary to carry out the provisions of the FDI Act \34\

including rules to ensure the safety and soundness of industrial banks

and to protect the Deposit Insurance Fund.\35\ The FDIC also has the

authority to issue rules to ensure the safety and soundness of insured

depository institutions. As noted above, the mission of the FDIC is to

promote the stability of, and public confidence in, the nation's

banking system and to protect the Deposit Insurance Fund. Moreover, as

deposit insurer, the FDIC has a unique responsibility for the safety

and soundness of all insured banks and savings associations. In

granting deposit insurance for any insured depository institution,

including industrial banks, as well as in terminating it, the FDIC must

assess the safety and soundness of the institution.\36\ The FDIC also

can issue a cease and desist order against, or impose civil money

penalties on, an industrial bank and any institution-affiliated party

(including a parent company of the industrial bank) based upon the

FDIC's assessment of safety and soundness considerations.\37\

Furthermore, the FDIC can order an industrial bank and its parent

company to take other corrective action, e.g., provide indemnification,

dispose of any asset, or rescind contracts based upon safety and

soundness considerations.\38\ Finally, the FDIC may permit or deny

various transactions (e.g., branching, mergers, and changes in bank

control) by industrial banks based on, at least in part, safety and

soundness considerations and risk to the Deposit Insurance Fund.

---------------------------------------------------------------------------


\34\ See sections 9(a)(Tenth) and 10(g) of the FDI Act, 12

U.S.C. 1819(a)(Tenth), 1820(g).

\35\ See section 8 of the FDI Act, 12 U.S.C. 1818.

\36\ See sections 5, 6, & 8(a) of the FDI Act, 12 U.S.C. 1815,

1816, & 1818(a).

\37\ See section 8(b), (i) of the FDI Act, 12 U.S.C. 1818(b),

(i).

\38\ See section 8(b)(6) of the FDI Act, 12 U.S.C. 1818(b)(6).

---------------------------------------------------------------------------


Also as discussed above, the FDIC has a statutory duty to monitor,

evaluate, and take necessary action to ensure the safety and soundness

of industrial banks. Courts have recognized that the determination of

what is safe and sound is committed to the expertise of the regulatory

agencies.\39\ The proposed rules reflect the FDIC's concern that,

without the provisions detailed in the proposed rules, control of

industrial banks by financial companies that are not subject to Federal

Consolidated Bank Supervision limits the FDIC's ability to oversee the

potential risks to the industrial bank and to the Deposit Insurance

Fund from such owners. Importantly, the FDIC has a duty to take

appropriate action to guard against threats to the safety and soundness

of industrial banks and to the Deposit Insurance Fund; the FDIC does

not have to wait until problems or losses occur before it takes

action.\40\ The FDIC believes that the recent developments in the

industrial bank industry described above mandate that the FDIC take

action now in the form of the proposed rules to ensure the safety and

soundness of industrial banks controlled by such financial companies

and to protect the Deposit Insurance Fund.

---------------------------------------------------------------------------


\39\ See Groos National Bank v. Comptroller of the Currency, 573

F.2d 889, 897 (5th Cir. 1978), First National Bank of LaMargue v.

Smith, 610 F.2d 1258, 1265 (5th Cir. 1980).

\40\ See Independent Bankers Ass'n of Am. v. Heimann, 613 F.2d

1164, 1169 (D.C. Cir. 1979), cert. denied 449 U.S. 823 (1980);

Investment Company Institute v. FDIC, 815 F.2d 1540, 1549 (D.C. Cir.

1987); National Council of Savings Institutions v. FDIC, 664 F.

Supp. 572 (D.D.C. 1987) see also First Nat'l Bank of Lamarque v.

Smith, 610 F.2d 1258 (5th Cir. 1980).

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V. Discussion of Proposed Rules


Some of the principal concerns that have emerged regarding

industrial banks to be controlled by Non-FCBS Financial Companies

center on the transparency


[[Page 5224]]


of such parent companies and their subsidiaries, the need for a source

of strength for the industrial bank subsidiary, capital maintenance,

and dependence by the industrial bank on the parent company and its

subsidiaries. Generally, the proposed rules would assure, through

reporting and examinations, that the FDIC has the ability to obtain

transparency with respect to a parent company and its subsidiaries.

Furthermore, the proposed rules would require that the parent company

serve as a resource for additional capital for the industrial bank.

Finally, the proposed rules would provide some control over the

dependence of the industrial bank on the parent company and its other

subsidiaries. For example, the proposed rules would limit a parent

company's representation on the board of a subsidiary industrial bank

to 25%. Additionally, the proposed rules also would require prior FDIC

approval before the industrial bank may make a material change in its

business plan or add or replace a board member or senior executive

officer during the first three years after becoming a subsidiary of a

financial company.

The conditions and requirements proposed in part 354 are not novel.

In many cases financial companies, e.g., companies engaged in

securities or mortgage lending, come under some type of supervision

already and, therefore, are used to some form of regulatory scheme and

supervision. Moreover, some of the requirements that would be imposed

by these proposed rules have been imposed in the past on a case-by-case

basis. For example, in the course of considering deposit insurance

applications or change in control notices, the FDIC has required parent

companies to execute written agreements to maintain a subsidiary bank's

capital and liquidity at certain minimum levels; in addition, the FDIC

has required that a bank maintain its capital at a certain level and

obtain the FDIC's prior consent before it changes its business plan or

replaces a board director. The FDIC has concluded that the statutory

objectives of maintaining the safety and soundness of industrial banks

and controlling the risks to the Deposit Insurance Fund would be

furthered if the proposed requirements were imposed uniformly on all

industrial banks that are to be owned by Non-FCBS Financial Companies.

The following is a section-by-section discussion of the proposed rules.


Section 354.1 Scope


This section describes the industrial banks that are subject to the

requirements detailed in part 354. The requirements described in the

following sections of part 354 are in addition to the statutory and

regulatory requirements otherwise applicable to applications and

notices filed with respect to such industrial banks. The industrial

banks that are subject to the following requirements are those that

will, after the effective date of the rules, become subsidiaries of

companies that are engaged solely in financial activities and that are

not subject to Federal Consolidated Bank Supervision by the FRB or the

OTS, that is, Non-FCBS Financial Companies. The proposed rules would

apply to such industrial banks whether they become subsidiaries of such

Non-FCBS Financial Companies as a result of the grant of deposit

insurance to a newly-chartered industrial bank, as a result of a change

in control with respect to the industrial bank, or as a result of a

merger or consolidation of a parent company of the industrial bank with

one or more other companies. Thus, this part would not apply to any

industrial bank that will, after the effective date of the rules,

become a subsidiary of any company that is engaged solely in financial

activities and that is, or will be, subject to Federal Consolidated

Bank Supervision by the FRB or the OTS, that is, a FCBS Financial

Company. In addition, this part does not apply to any industrial bank

that will be wholly, and directly, owned by one or more individuals

(i.e., the industrial bank will not be controlled, directly or

indirectly, by any company). Finally, this part does not apply to any

industrial bank that will become a subsidiary of any company engaged in

non-financial activities (i.e., activities other than financial

activities as that term is defined in section 354.2).


Section 354.2 Definitions


This section lists the definitions that apply to this part. The

term ``control'' would be defined as it is in the FDIC's change in

control regulations at 12 CFR 303.81(c) and specifically would include

the rebuttable presumption of control at 12 CFR 303.82(b)(2).

Under these provisions a person (including a company) would control

an industrial bank if the person would have the power, directly or

indirectly, to (i) vote 25 percent or more of any class of voting

shares of any industrial bank or any company that controls the

industrial bank (i.e., a parent company), or (ii) direct the management

or policies of any industrial bank or any parent company. In addition,

the FDIC presumes that a person would have the power to direct the

management or policies of any industrial bank or any parent company if

the person will, directly or indirectly, own, control, or hold with

power to vote at least 10 percent of any class of voting shares of any

industrial bank or any parent company, and either the industrial bank's

shares or the parent company's shares are registered under section 12

of the Securities Exchange Act of 1934, or no other person (including a

company) will own, control or hold with power to vote a greater

percentage. If two or more persons (including companies), not acting in

concert, will each have the same percentage, each such person will have

control. As noted above, control of an industrial bank can be indirect.

For example, company A may control company B which in turn may control

company C which may control an industrial bank. Company A and company B

would each have indirect control of the industrial bank, and company C

would have direct control. As a result, the industrial bank would be a

subsidiary (as defined below) of each such company. The term

``financial activity'' would be defined to include any activity that

either of the following entities may engage in: (i) A financial holding

company, as described in the BHCA and the implementing regulations of

the FRB,\41\ or (ii) a savings and loan holding company, as described

in the Home Owners' Loan Act (``HOLA''). The FDIC intends to follow the

written guidance of the FRB and OTS in its interpretations of the term

``financial activity'' and to consult with the FRB and/or OTS before

making any decisions. The term ``Non-FCBS Financial Company'' would be

defined to mean any company that is not subject to Federal Consolidated

Bank Supervision and that is engaged solely in financial activities.

This definition, therefore, would exclude financial companies that are

subject to Federal Consolidated Bank Supervision by the FRB or OTS

(``FCBS Financial Companies''), as well as commercial companies. The

term ``industrial bank'' would be defined to mean any insured state

bank that is an industrial bank, industrial loan company or other

similar institution that is excluded from the BHCA definition of

``bank.'' The term ``senior executive officer'' would have the meaning

given to it in the FDIC's regulations on changes in senior executive

officer at 12 CFR 303.101(b). The term ``subsidiary'' would be

specifically defined to mean any


[[Page 5225]]


company which is controlled, directly or indirectly, by another

company. Finally, the terms ``company'' and ``insured depository

institution'' would have the meanings given them in the FDI Act.

---------------------------------------------------------------------------


\41\ Bank holding companies are not separately listed because

financial holding companies can engage in every activity that a bank

holding company can.

---------------------------------------------------------------------------


Section 354.3 Written Agreement


This section would prohibit any industrial bank from becoming a

subsidiary of a Non-FCBS Financial Company unless the Non-FCBS

Financial Company enters into one or more written agreements with the

FDIC and the industrial bank. In such agreements the company would make

certain commitments to the FDIC including those listed in paragraphs

(a) through (h) of section 354.4 and such other provisions as the FDIC

may deem appropriate in the particular circumstances. When two or more

financial companies will control (as the term ``control'' is defined in

section 354.2), directly or indirectly, the industrial bank, each such

financial company would have to execute such written agreement(s). This

circumstance could occur, for example, (i) when two or more Non-FCBS

Financial Companies will each have the power to vote 10% or more of the

voting stock of an industrial bank or of a company that controls an

industrial bank which stock is registered under section 12 of the

Securities Exchange Act of 1934, or (ii) when one Non-FCBS Financial

Company will control another financial company that directly controls

an industrial bank.


Section 354.4 Conditions and Provisions of Written Agreement


This section would include a list of the commitments that the Non-

FCBS Financial Company would agree to observe. There are eight

commitments lettered (a) through (h); they are intended to provide the

safeguards and protections that the FDIC believes would be prudent to

impose with respect to maintaining the safety and soundness of

industrial banks that are controlled by Non-FCBS Financial Companies.

In order to provide the FDIC with more timely and more complete

information about the activities, financial condition, operations, and

risks of each parent Non-FCBS Financial Company and its subsidiaries,

the FDIC believes that each such Non-FCBS Financial Company that

controls the industrial bank must furnish the FDIC an initial listing,

with annual updates, of all of the company's subsidiaries (commitment

(a)); consent to the FDIC's examination of the company and each of its

subsidiaries (commitment (b)); submit to the FDIC an annual report on

the company and its subsidiaries, and such other reports as the FDIC

may request (commitment (d)); maintain such records as the FDIC deems

necessary to assess the risks to the industrial bank and to the Deposit

Insurance Fund (commitment (e)); and cause an independent annual audit

of each subsidiary industrial bank to be performed during the first

three years after the industrial bank becomes its subsidiary

(commitment (f)). In order to ensure that each Non-FCBS Financial

Company parent remains a financial company, it would also have to

commit that it will engage, directly or indirectly, only in financial

activities (commitment (c)). In order to ensure that the subsidiary

industrial bank maintains sufficient capital and/or liquidity, each

parent financial company would commit to maintain each industrial bank

subsidiary's capital and/or liquidity at such levels as the FDIC deems

appropriate and/or take such other action as the FDIC deems appropriate

to provide each industrial bank with a resource for additional capital/

or liquidity (commitment (h)). Finally, in order to limit the extent of

each parent financial company's influence over the subsidiary

industrial bank, each such company would commit to limit its

representation on the industrial bank's board of directors to 25% of

the members of the board, or if the bank is organized as a limited

liability company and is managed by a board of managers, to 25% of the

members of the board of managers, or if the bank is organized as a

limited liability company and is managed by its members, to 25% of

managing member interests (commitment (g)). For example, if company A

controlled company B which had 15% representation on the industrial

bank's board, company B's representation would be attributed to company

A, and company A would be limited to 10% direct representation on the

bank's board.

This section would also provide that each approval of a deposit

insurance application and each issuance of a non-objection to a change

in control with respect to an industrial bank that would become a

subsidiary of a financial company would be conditioned on each parent

Non-FCBS Financial Company complying with (a) through (h) of the

commitments.


Section 354.5 Restrictions on Industrial Bank Subsidiaries of Financial

Companies


This section would require the FDIC's prior written approval before

an industrial bank that becomes a subsidiary of a Non-FCBS Financial

Company may take certain actions. These restrictions, like the

commitments discussed above, are generally intended to provide the

safeguards and protections that the FDIC believes would be prudent to

impose with respect to maintaining the safety and soundness of

industrial banks that become controlled by financial companies not

subject to Federal Consolidated Bank Supervision. Accordingly, the

proposed rules would require prior FDIC approval if the subsidiary

industrial bank wanted to take any of five actions. In order to ensure

that the industrial bank does not immediately after becoming a

subsidiary of a Non-FCBS Financial Company engage in high-risk or other

inappropriate activities, the bank would have to get the FDIC's prior

approval to make a material change in its business plan during the

first three years after becoming a subsidiary of a financial company

(paragraph (a)). In order to limit the influence of its parent Non-FCBS

Financial Company, the bank would have to get the FDIC's prior approval

to add or replace a member of the board of directors or board of

managers or a managing member, as the case may be, during the first

three years after becoming a subsidiary of a financial company

(paragraph (b)); add or replace a senior executive officer during the

first three years after becoming a subsidiary of a financial company

(paragraph (c)); employ a senior executive officer who is associated in

any manner with an affiliate of the industrial bank, e.g., as a

director, officer, employee, agent, owner, partner, or consultant of

the financial company or a financial company subsidiary (paragraph

(d)); or finally, enter into any contract for essential services with

the financial company or a financial company subsidiary (paragraph

(e)).


Request for Comments


The FDIC is seeking comments on all aspects of the proposed rules,

including the following questions:

1. The requirements described in this notice would apply to

industrial banks that become subsidiaries of companies that are engaged

solely in financial activities, but that are not subject to Federal

Consolidated Bank Supervision, and to those financial companies (``Non-

FCBS Financial Companies''). Some of the provisions include continuing

requirements, e.g., to maintain capital or to engage only in financial

activities. Should the regulations include a cure period in the event

that the industrial bank or its parent company initially comply with

these requirements, but


[[Page 5226]]


later fall out of compliance? If so, should such a cure period be

provided for all requirements or just some of them (please specify)?

For example, section 4(m) of the BHCA, 12 U.S.C. 1843(m), generally

provides a 180-day cure period for a financial holding company if any

of its subsidiary depository institutions fails to be well-capitalized

and/or well-managed.

2. With regard to such continuing requirements, whether or not

there is a cure period, should the rules provide for remedies beyond

cease and desist orders and civil money penalties, e.g., should

violations of some of these requirements require divestiture of the

industrial bank similar to the divestiture provisions in section

4(m)(4) of the BHCA, 12 U.S.C. 1843(m)(4)? If so, for which

requirements? Should the written agreement with the parent company and

the industrial bank include a provision requiring the parent company to

divest the industrial bank if the parent company begins to engage,

directly or indirectly, in non-financial activities? Alternatively,

should the FDIC simply rely on section 8(b)(7) of the FDI Act, 12

U.S.C. 1818(b)(7), to order divestiture? \42\

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\42\ Section 8(b)(7) generally provides that in the event that

an institution-affiliated party engages in an unsafe or unsound

practice, violates any law, regulation, or condition imposed in

writing in connection with the granting of any application or

request by the depository institution, or any written agreement

entered into with the agency, the FDIC may ``place limitations on

the activities or functions of an insured depository institution or

any institution-affiliated party.'' The term ``institution-

affiliated party'' would include a company that is a controlling

stockholder of the bank and any person who has filed or is required

to file a change in control notice with the FDIC.

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3. Under the Bank Holding Act, a commercial company that becomes a

bank holding company has a period of time after becoming a bank holding

company subject to the supervision of the FRB in which to divest itself

of its nonconforming commercial activities or, alternatively, of its

bank(s). Should a commercial company seeking to acquire an industrial

bank and to divest itself of its commercial activities so that it would

become a Non-FCBS Financial Company similarly be given a period of time

by the FDIC within which it would be subject to the FDIC's supervisory

oversight, but would be allowed to divest itself of its commercial

activities or its industrial bank(s)? If so, for what period of time?

4. Should the FDIC further define ``services essential to the

operations of the industrial bank'' as that phrase is used in the

proposed section 354.5(e)? Should the restriction in that section be

clarified to include core banking services or risk management

functions?

5. For purposes of transparency and identifying any potential risks

to the industrial bank, we have included commitments requiring

examination and reporting. Is this approach the best way to gain that

transparency, or is there a better way? To what extent, if any, is the

FDIC's supervision enhanced by requiring a parent company of an

industrial bank to consent to examination of the company and each of

its subsidiaries as proposed in part 354? Is there another way to

identify any potential risks?

6. Is it appropriate for the FDIC to impose reporting and

recordkeeping requirements on a parent company of an industrial bank

and/or the parent company's subsidiaries?

7. The Gramm-Leach-Bliley Act of 1999 imposed certain restrictions

on the extent to which a Federal banking agency may regulate and

supervise a functionally regulated affiliate of an insured depository

institution.\43\ For example, such restrictions limit the FDIC's

authority to require reports from, examine, and impose capital

requirements on such a functionally regulated affiliate. In view of

these restrictions, should the conditions and requirements contained in

the proposed rules be modified to the extent that they might apply to

insurance companies and securities companies that may wish to control

an industrial bank?

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\43\ See section 45 of the FDI Act, 12 U.S.C. 1831v.

---------------------------------------------------------------------------

8. The proposed regulation does not apply to a financial company

that is supervised by the FRB or the OTS. Should this treatment be

extended to a financial company that is subject to consolidated Federal

supervision by the U.S. Securities and Exchange Commission as a

``consolidated supervised entity'' pursuant to 17 CFR 240.15c3-1(a)(7),

240.15c3-1e, 240.15c3-1g, 240.17a-4(b)(12), 240.17a-5(a)(5) and (k),

240.17a-11(b)(2) and (h), 240.17h-1T(d)(4), and 240.17h-2T(b)(4)?

9. In order to ensure that each parent financial company can serve

as a source of strength to its industrial bank subsidiary and fulfill

its obligation under a capital maintenance agreement, should the FDIC

include a commitment that the parent company will maintain its own

capital at such a level that the Tier 1 capital ratio for the company,

on a consolidated basis, is at least 4% or some other level in some or

all circumstances?

10. If, at the conclusion of the moratorium, Congress has not acted

on legislation, how should the FDIC address the pending and any future

applications by commercial companies?


Regulatory Analysis and Procedure


A. Solicitation of Comments on Use of Plain Language


Section 722 of the Graham-Leach-Bliley Act requires the Federal

banking agencies to use ``plain language'' in all proposed and final

rules published after January 1, 2000. The FDIC invites comments on

whether the proposed rules are clearly written and if not, how the

language of the proposed rules might be improved.


B. Regulatory Flexibility Act


When an agency issues a rulemaking proposal, the Regulatory

Flexibility Act (``RFA'') (5 U.S.C. 601 et. seq.) requires the agency

to prepare and make available for public comment an initial regulatory

flexibility analysis (5 U.S.C. 603) or certify, in lieu of preparing an

analysis, that the proposed rules, if adopted, would not have a

significant economic impact on a substantial number of small entities

(5 U.S.C. 605). The proposed rules directly affect two types of

entities: (i) Any financial company that is not subject to Federal

Consolidated Bank Supervision that after the effective date of the

rules becomes the parent company of an industrial bank, and (ii) the

financial company's subsidiary industrial bank formed or acquired after

the effective date of the rules. Based on its experience with deposit

insurance applications and change in control notices involving

industrial bank subsidiaries of financial companies (as defined in the

proposed rules) from 1996 through 2005, and focusing particularly on

the period from 2001 through 2005, the FDIC estimates for purposes of

the threshold RFA analysis that in the future the proposed rules will

affect an average of three entities per year, only one of which will be

a small entity. One entity is not a substantial number. Therefore, the

FDIC certifies that the proposed rules will not have a significant

economic impact on a substantial number of small entities.


C. Paperwork Reduction Act


In accordance with the Paperwork Reduction Act (44 U.S.C. 3501 et

seq.), the FDIC may not conduct or sponsor, and a person is not

required to respond to, a collection of information unless it displays

a currently valid Office of Management and Budget (OMB) control number.

The collection of information contained in the proposed rules has been

submitted to OMB for review.


[[Page 5227]]




ADDRESSES: Interested parties are invited to submit written comments to

the FDIC concerning the Paperwork Reduction Act implications of this

proposal. Such comments should refer to ``PRA-Industrial Banks.''

Comments on Paperwork Reduction Act issues may be submitted by any of

the following methods:

http://www.FDIC.gov/regulations/laws/federal/propose.html.. E-mail: comments@FDIC.gov. Include ``PRA--Industrial


Banks'' in the subject line of the message.

Mail: Steve Hanft (202-898-3907), Federal Deposit

Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.

Hand Delivery: Comments may be hand-delivered to the guard

station at the rear of the 17th Street Building (located on F Street),

on business days between 7 a.m. and 5 p.m.

A copy of the comments may also be submitted to: OMB desk

officer for the FDIC, Office of Information and Regulatory Affairs,

Office of Management and Budget, New Executive Office Building,

Washington, DC 20503.

Comment is solicited on:

(1) Whether the proposed collection of information is necessary for

the proper performance of the functions of the agency, including

whether the information will have practical utility;

(2) The accuracy of the agency's estimate of the burden of the

proposed collection of information, including the validity of the

methodology and assumptions used;

(3) The quality, utility, and clarity of the information to be

collected; and

(4) Ways to minimize the burden of the collection of information on

those who are to respond, including the use of appropriate automated,

electronic, mechanical, or other technological collection techniques or

other forms of information technology; e.g., permitting electronic

submission of responses.

(5) Estimates of capital or start-up costs and costs of operation,

maintenance, and purchases of services to provide information.

Title of the collection: Industrial Banks.

Summary of the collection: The collection consists of reporting and

recordkeeping requirements associated with the supervision of insured

industrial loan companies or industrial banks that become subsidiaries

of financial companies after the effective date of the rules. More

specifically, the collection consists of an initial listing of all of

the company's subsidiaries, and an annual update to that list; an

annual report regarding the company's operations and activities;

occasional other reports regarding the activities, financial condition,

risk monitoring systems, transactions with the subsidiary industrial

bank, and compliance with Federal laws, of, or by, the company and each

of its subsidiaries; quarterly reports on capital ratio calculations;

external audits; Board membership; maintenance of capital and

liquidity; maintenance of certain records; and notices and applications

seeking FDIC approval to take certain actions. These information

collections are contained in sections 354.4 and 354.5 of the rules.

Frequency of the collection: For the listing of all of the

company's subsidiaries, and the report regarding the company's

operations and activities, the frequency of response is annual; the

other collections occur on occasion.

Annual burden estimate:

Estimated number of respondents: Three.

Estimated annual burden per respondent: 255 burden hours.

Total estimated annual burden: 765 burden hours.


The Treasury and General Government Appropriations Act, 1999--

Assessment of Impact of Federal Regulation on Families


The FDIC has determined that this proposal will not affect family

well-being within the meaning of section 654 of the Treasury and

General Government Appropriations Act, 1999, Public Law 105-277, 112

Stat. 2681.


List of Subjects in 12 CFR Part 354


Bank deposit insurance, Banks, Banking, Finance, Holding companies,

Industrial banks, Insurance, Reporting and recordkeeping requirements,

Savings associations.


For the reasons set forth in the preamble, the Board of Directors

of the Federal Deposit Insurance Corporation proposes to add 12 CFR

part 354 as follows:


PART 354--INDUSTRIAL BANK SUBSIDIARIES OF FINANCIAL COMPANIES


Sec.

354.1 Scope.

354.2 Definitions.

354.3 Written agreement.

354.4 Conditions and provisions of written agreement.

354.5 Restrictions on industrial bank subsidiaries of financial

companies.


Authority: 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a)

(Seventh) and (Tenth), 1820(g), 3108, 3207.




Sec. 354.1 Scope.


(a) This part, in addition to applicable notice or application

procedures in part 303 of this chapter, establishes certain

requirements for an industrial bank to become, after the effective date

of the rules, a subsidiary of a company that is engaged solely in

financial activities and that is not subject to Federal Consolidated

Bank Supervision by the Federal Reserve Board (FRB) or the Office of

Thrift Supervision (OTS) (a ``Non-FCBS Financial Company'').

(b) This part does not apply to:

(1) Any industrial bank that will become, after the effective date

of the rules, controlled by a company that is engaged solely in

financial activities and that is subject to Federal Consolidated Bank

Supervision by the FRB or the OTS,

(2) any industrial bank that will not become a subsidiary of a

company, and

(3) any industrial bank that will become, after the effective date

of the rules, a subsidiary of a company engaged in non-financial

activities.




Sec. 354.2 Definitions.


For purposes of this part the following definitions apply.

(a) The term ``control'' has the meaning given it in 12 U.S.C.

1817(j)(8) and 12 CFR 303.81(c) and includes the rebuttable presumption

of control at 12 CFR 303.82(b)(2).

(b) The term ``financial activity'' includes

(1) banking, managing or controlling banks or savings associations;

(2) any activity permissible for financial holding companies under

12 U.S.C. 1843(k), any specific activity that is listed as permissible

for bank holding companies under 12 U.S.C. 1843(c) and activities that

the Federal Reserve Board (FRB) has permitted for bank holding

companies under 12 CFR 225.28 and 225.86, and

(3) any activity permissible for all savings and loan holding

companies under 12 U.S.C. 1467a(c).

(c) The term ``Non-FCBS Financial Company'' means a company that is

not subject to Federal Consolidated Bank Supervision by the FRB or the

OTS, and that is solely engaged, directly or indirectly, in financial

activities.

(d) The term ``industrial bank'' means any insured State Bank that

is an industrial bank, industrial loan company or other similar

institution that is excluded from the definition of ``bank'' in the

Bank Holding Company Act (BHCA) pursuant to 12 U.S.C. 1841(c)(2)(H).

(e) The term ``senior executive officer'' has the meaning given it

in 12 CFR 303.101(b).


[[Page 5228]]


(f) The term ``subsidiary'' means any company which is controlled,

directly or indirectly, by another company.

(g) The terms ``company'' and ``insured depository institution''

have the meanings given them in section 3 of the Federal Deposit

Insurance Act, 12 U.S.C. 1813.




Sec. 354.3 Written agreement.


No industrial bank may become a direct or indirect subsidiary of a

Non-FCBS Financial Company unless the Non-FCBS Financial Company enters

into one or more written agreements with the FDIC and the subsidiary

industrial bank which contain commitments by the company to comply with

each of paragraphs (a) through (h) in Sec. 354.4 and such other

provisions as the FDIC deems appropriate in the particular

circumstances.




Sec. 354.4 Conditions and provisions of written agreement.


The commitments required to be made in the written agreements

referenced in Sec. 354.3 by each Non-FCBS Financial Company that will

control an industrial bank are listed as paragraphs (a) through (h) of

this section. In addition, each grant of deposit insurance and each

issuance of a non-disapproval of a change in control with respect to an

industrial bank subject to this part will be conditioned on each parent

Non-FCBS Financial Company complying with paragraphs (a) through (h) of

this section:

(a) Submitting to the FDIC an initial listing of all of the

company's subsidiaries, and updating that list annually;

(b) consenting to examination of the company and each of its

subsidiaries to monitor compliance with the provisions of the Federal

Deposit Insurance Act or any other Federal law that the FDIC has

specific jurisdiction to enforce against such company or subsidiary and

those governing transactions and relationships between any depository

institution subsidiary and its affiliates;

(c) engaging, directly or indirectly, only in financial activities;

(d) submitting to the FDIC an annual report regarding the company's

operations and activities, in the form and manner prescribed by the

FDIC, and such other reports as may be requested by the FDIC to keep

the FDIC informed as to financial condition, systems for monitoring and

controlling financial and operating risks, and transactions with

depository institution subsidiaries of the company; and compliance by

the company or subsidiary with applicable provisions of the Federal

Deposit Insurance Act or any other Federal Law that the FDIC has

specific jurisdiction to enforce against such company or subsidiary;

(e) maintaining such records as the FDIC may deem necessary to

assess the risks to the industrial bank or to the Deposit Insurance

Fund;

(f) causing an independent annual audit of each subsidiary

industrial bank to be performed during the first three years after the

industrial bank becomes a subsidiary of the company;

(g) limiting its representation, direct and indirect, on the board

of directors or board of managers, as the case may be, of each

subsidiary industrial bank to no more than 25% of the members of such

board of directors or board of managers, in the aggregate, and, in the

case of a subsidiary industrial bank that is organized as a member-

managed limited liability company, limiting its representation as a

managing member to no more than 25% of the managing member interests of

the subsidiary industrial bank, in the aggregate;

(h) maintaining the subsidiary industrial bank's capital and

liquidity at such levels as the FDIC deems appropriate, and/or taking

such other actions as the FDIC deems appropriate to provide the

industrial bank with a resource for additional capital and liquidity

including, for example, pledging assets, obtaining and maintaining a

letter of credit, and indemnifying the industrial bank.




Sec. 354.5 Restrictions on industrial bank subsidiaries of financial

companies.


Without the FDIC's prior written approval, no industrial bank that

becomes a subsidiary of a Non-FCBS Financial Company after the

effective date of the rules shall:

(a) Make a material change in its business plan during the first

three years after becoming a subsidiary industrial bank,

(b) add or replace a member of the board of directors, board of

managers, or a managing member, as the case may be, of the subsidiary

industrial bank during the first three years after becoming a

subsidiary industrial bank,

(c) add or replace a senior executive officer during the first

three years after becoming a subsidiary industrial bank,

(d) employ a senior executive officer who is associated in any

manner (e.g., as a director, officer, employee, agent, owner, partner,

or consultant) with an affiliate of the industrial bank, or

(e) enter into any contract for services essential to the

operations of the industrial bank (for example, loan servicing

function) with its parent financial company or any subsidiary thereof.


Dated at Washington, DC, this 31st day of January, 2007.


By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Valerie J. Best,

Assistant Executive Secretary.

[FR Doc. E7-1854 Filed 2-2-07; 8:45 am]

BILLING CODE 6714-01-P
 


Last Updated 02/05/2007 Regs@fdic.gov