4000 - Advisory Opinions
Federal Insurance for Deposit-Taking Activities of Trust Company
October 16, 1985
Alan J. Kaplan, Counsel
This will respond to your letter of September 25, 1985, in which you request our views as to whether your client, *** ***, is eligible to obtain federal deposit insurance.
Your letter describes *** present and proposed deposit-taking activities as follows:
*** is a trust company chartered under the laws of the State of New York. Pursuant to applicable law, *** possesses the power to perform any of the powers set forth in Article 3 of New York's Banking Law, including the power to accept deposits and make commercial loans. *** has never exercised these powers and has confined its activities to those permitted to a trust company pursuant to the provisions of Section 225.25(b)(3) of Regulation Y of the Board of Governors of the Federal Reserve System (the "Board").
*** now proposes to expand the scope of its banking activities. Specifically, *** will make commercial loans and will issue large denomination certificates of deposit in amounts of not less than $100,000.
The Board has requested that upon *** exercise of the powers detailed in the preceding sentence, *** becomes a "bank" for the purposes of the Bank Holding Company Act of 1956, as amended (the "BHCA"), and, that prior thereto, its parent companies, *** and ***, apply to become, and upon Board approval, register as, bank holding companies. In order to accommodate the Board's request, *** will maintain five to ten demand deposit accounts for officers and/or employees of ***. With the exception of these demand deposit accounts, *** will not engage in any retail deposit activity.
Section 5(a) of the Federal Deposit Insurance Act ("FDI Act") (12 U.S.C. § 1815(a)) provides in part that "any State nonmember bank, upon application to and examination by the Corporation and approval by the Board of Directors [of the FDIC], may become an insured bank." Section 3(b) of the FDI Act (12 U.S.C. § 1813(b)) defines "State nonmember bank'' to mean "any State bank which is not a member of the Federal Reserve System." Section 3(a) of the FDI Act (12 U.S.C. § 1813(a)) defines "State bank'' to mean "any bank, banking association, trust company, savings bank, industrial bank or similar financial institution . . . or other banking institution which is engaged in the business of receiving deposits, other than trust funds as . . . defined [in Section 3(p) of the FDI Act], and which is incorporated under the laws of any State. . . ." Section 3(p) of the FDI Act (12 U.S.C. § 1813(p)) defines "trust funds'' to mean "funds held by an insured bank in a fiduciary capacity and includes, without being limited to, funds held as trustee, executor, administrator, guardian, or agent."
***, you have stated, is a trust company incorporated under the laws of the State of New York and, I presume, is not a member of the Federal Reserve System. Thus, in order for *** to be eligible for federal deposit insurance, *** must be "engaged in the business of receiving deposits, other than trust funds" (i.e., funds held in a fiduciary capacity).
You have stated that *** intends to conduct two types of deposit-taking activities: first, it will issue certificates of deposit in amounts of not less than $100,000, and second, it will maintain five to ten demand deposit accounts for certain of its officers and/or employees.
From the facts presented, it appears that the only reason *** intends to maintain a few demand deposit accounts for several of its officers and/or employees is to accommodate the Federal Reserve Board's request that it become a "bank" for the purposes of the Bank Holding Company Act. To do this, it must accept demand deposits. In my view, such limited demand deposit activity, taken alone, would be insufficient to meet the requirement that, to be eligible for deposit insurance, *** must be "engaged in the business" of receiving deposits.
However, *** also proposes to issue large-denomination certificates of deposit in amounts of not less than $100,000. Assuming that *** intends to receive such deposits in the usual course of business from individuals, corporations, partnerships, or other eligible entities, acting in their respective rights and capacities as such (i.e., from the public-at-large), it would appear that this type of deposit-taking activity would constitute being "engaged in the business" of receiving deposits.
Accordingly, in my opinion, under the facts presented, *** would be eligible to obtain federal deposit insurance if it receives deposits in the manner stated above.
Of course, as you are no doubt aware, eligibility is just a threshold question, and the FDIC will grant deposit insurance only if the factors enumerated in section 6 of the FDI Act (12 U.S.C. § 1816) are favorably resolved. Those factors are: the financial history and condition of the bank; the adequacy of its capital structure; its future earnings prospects; the general character of its management; the convenience and needs of the community to be served by the bank; and whether or not its corporate powers are consistent with the purposes of the FDI Act. An applicant which, although eligible to make application to become an insured bank, is determined by the FDIC, upon consideration of the foregoing statutory factors, to constitute an unacceptable risk to the Federal deposit insurance fund will be denied deposit insurance.