4000 - Advisory Opinions
A State-Chartered Savings Association Which Converted to a SAIF Member State Bank Prior to Effective Date of 12 C.F.R. § 333.3 May, Despite Capital Deficiency, Apply for Permission to Retain Its Equity Investment in a Subsidiary That Conducts Impermissible Activities
July 3, 1991
Pamela E.F. LeCren
This letter is in way of follow-up on the issues raised at our *** meeting. As you will recall, the meeting was held at your request for the purpose of discussing the impact of a recent amendment to Part 333 of the FDIC's regulations on your client *** ("[Bank]").
[Bank] is a SAIF member state chartered commercial bank that converted from a savings association charter prior to the date the FDIC first solicited comment on the proposed amendment to Part 333. The final amendment as adopted reimposes on SAIF member state chartered commercial banks certain of the activity, investment, and capital requirements found in FIRREA that are applicable to savings associations. The regulation applies to such institutions even if they converted to commercial banks prior to the effective date of the regulation (June 5, 1991).
You indicated at our meeting that [Bank] presently owns a subsidiary that is engaged in insurance underwriting activities. The subsidiary is engaged in an activity that would not be permissible for a national bank or permissible for a service corporation of a federal savings association. [Bank] has had the insurance subsidiary for four or five years, i.e., the operation was ongoing before the institution converted from a state chartered savings association. You also indicated that [Bank] presently is in compliance with the FDIC's capital requirements under Part 325 of the FDIC's regulations and that the FDIC in a past examination report commented favorably on the bank's insurance operation and its contribution to the bank's overall condition.
Part 333 as amended in effect treats any SAIF member state bank for the purposes of the FIRREA restrictions as though the institution is still a state savings association. Under section 28 of the FDI Act as added by FIRREA (12 U.S.C. 1831(e)) and implemented by section 303.13 of the FDIC's regulations (12 C.F.R. 303.13) a state savings association may not, subject to the following exception, directly engage in any activity, nor make any equity investment, that is not permissible for a federally chartered savings association. A state savings association, with the consent of the FDIC, may directly conduct an activity impermissible for a federal savings association, and/or acquire or retain an equity investment in a service corporation that conducts an activity that is impermissible for a service corporation of a federal savings association, provided that: (1) the institution meets its fully phased-in capital requirements, and (2) the FDIC determines that the equity investment does not pose a significant risk of loss to the insurance fund. Under section 333.3(a) of the final rule, section 303.13(b) applies to all SAIF member state banks. (Section 303.13(b) recites the above described requirement and establishes application procedures). For the purposes of applying section 333.3, the relevant capital level is that set by Part 325 of the FDIC's regulations and not the fully phased-in capital requirements referenced in FIRREA. Section 333.3, however, does incorporate to a certain extent the capital requirements applicable to savings associations. Under section 333.3(c) a SAIF member state bank in determining whether it has met its capital requirement under Part 325 of the FDIC's regulations is required to deduct from its capital its investment in, and extensions of credit to, any subsidiary that engages in any activity that is not permissible for a national bank. (Again there are certain exceptions to the deduction rule none of which are relevant here.)
SAIF member state banks that converted prior to June 5, 1991 that are as of that date engaging in an activity that requires prior consent, or which as of that date have an equity investment that requires prior consent, will not be considered to be in violation of the regulation provided that the institution files an application for permission to retain the investment or permission to continue the activity. The activity may be conducted and/or the equity investment retained while the application is pending. If the application is denied, the institution must cease the activity as soon as prudently possible and/or the equity investment must be divested by July 1, 1994.
If an institution that converted prior to June 5, 1991 has an equity investment in a subsidiary that is conducting activities that are not permissible for a national bank and if deducting on June 5, 1991 the total amount of the bank's investment in and extensions of credit to such subsidiary will cause the bank to fail to meet its capital requirement under Part 325, the institution must file a capital plan with the appropriate FDIC regional office by July 5, 1991. There are no specific requirements for the capital plan in terms of timing or substance. While the institution is required under the regulation to take the deduction when calculating its capital, it is our opinion that the regulation does not require that the converted institution deduct from its capital its investment in and extensions of credit to the subsidiary in the precise manner set out in section 5(t)(5)(D) of the Home Owners' Loan Act ("HOLA", 12 U.S.C. 1464(t)(5)(D)). Thus, provided that the plan is acceptable to the regional office, the bank may spread the deduction out over a longer period of time than otherwise accorded savings associations under HOLA. If the plan is satisfactory to the regional office, the bank operates in accordance with the plan, and the circumstances under which the plan was drawn up do not change, the bank should not be concerned with an enforcement action by the regional office based upon capital.
In the case of your client, the insurance underwriting subsidiary apparently is engaged in an activity that is not permissible for a federal savings association. If the bank wishes to retain the subsidiary, it must file an application with the Atlanta Regional Office of the FDIC. The regulation also would appear to require that the bank deduct from its capital the total amount of its investment in, and extensions of credit to, the insurance subsidiary. If taking that deduction on June 5 would result in the bank not meeting its capital requirement under Part 325, that fact might be taken to preclude the bank from being granted permission to retain the subsidiary. (As indicated above, a precondition of a state savings association being granted permission to retain an impermissible equity investment in a service corporation is that the applicant meets its capital requirement.) We do not, however, so read the regulation in the case of an institution that converted prior to June 5, 1991. The regulation allows for giving such institutions the additional latitude to retain an investment while coming into capital compliance.1 Thus, despite any capital deficiency, [Bank] can apply for, and in the agency's discretion obtain, permission to retain its investment.
As can be inferred from the above, the bank will need to file a capital plan with the Atlanta Regional Office if, taking into consideration the deduction of its investment in and extensions of credit to its insurance subsidiary, the institution does not meet its capital requirement on June 5, 1991. Again, if the FDIC determines that the continued operation of the insurance subsidiary does not pose a significant risk to the insurance fund, the bank may continue to retain and operate the subsidiary while it comes into capital compliance.
Your client should keep in mind that any determination on the part of the FDIC that there is no significant risk to the fund for an institution to retain and operate a subsidiary that conducts activities that are impermissible for a federal savings association is dependent upon the facts and circumstances in existence at the time of approval. The FDIC is not precluded from taking any appropriate regulatory action in the event of changed circumstances. Likewise, if the capital circumstances of an institution that converted prior to June 5 which is being given the latitude to retain its equity investment in a subsidiary while it comes into capital compliance alters for the worse, the FDIC is not precluded from taking appropriate regulatory action.
I hope that the above clarifies how the adoption of section 333.3 may affect your client. If you have any further questions, please do not hesitate to contact me.
1Institutions that convert after June 5, 1991 are not accorded the same latitude. Such institutions will have made the decision to convert with advance knowledge of the requirement under section 333.3 to deduct their investments in and extensions of credit to certain subsidiaries. There is thus no justification to construe the regulation so as to allow such institutions the additional flexibility of retaining the investment while coming into capital compliance. Of course, if such an institution meets its capital requirement (despite the deduction) before divestiture is accomplished, the institution may apply for permission to retain the investment based on the argument that the retention of the investment does not pose a significant risk of loss to the insurance fund. Go back to Text