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4000 - Advisory Opinions
Whether Deposit Insurance of National Bank Will Continue Under FDI
Act if Bank Converts to State Charter and Terminates Its Membership in
the Federal Reserve System
FDIC-92-18
April 3, 1992
Mark A. Mellon, Attorney
This is in response to your letter of March 13, 1992. Based on your
letter, it is my understanding that you wish to ascertain whether the
deposit insurance of a national bank will terminate pursuant to the
Federal Deposit Insurance Act (the "FDIA") if that entity
converts to a state charter and terminates its membership in the
Federal Reserve System (the "FRS").
Section 4(c) of the FDIA (12 U.S.C. § 1814(c)) provides that any
state-chartered depository institution which results from the
conversion of any insured federally-chartered depository institution
will continue as an insured depository institution. Since national
banks are typically FRS members, section 4(c) appears to be in conflict
with section 8(o) of the FDIA (12 U.S.C. § 1818(o)) which states that
if an insured depository institution ceases to be a member of the FRS,
its insured status shall be terminated. Section 8(o) states, however,
that this requirement does not apply to those depository institutions
that are provided for in section 4(b) of the FDIA (12 U.S.C.
§ 1814(b)).
A literal reading of section 8(o) leads to an illogical result. This
is because section 4(b) is currently inapplicable to the issue of
whether the deposit insurance of a depository institution should
continue despite the loss of FRS membership. Prior to the enactment of
the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (the "FIRREA"), section 4(b) included the provision that
deposit insurance will continue subsequent to the conversion of a
depository institution from a federal to a state charter. Section 205
of the FIRREA moved this provision to a new subsection 4(c). The
post-FIRREA section 4(b) of FDIA pertained to the granting of deposit
insurance to a depository institution once it had been certified by the
appropriate federal financial regulatory
agency. 1
The fact that section 8(o) refers to an irrelevant subsection
indicates that Congress omitted to make a necessary technical amendment
when it revised sub-section 4(b). Federal case-law states that although
a statute should be interpreted to give effect to every provision, a
provision which is the result of obvious mistake should not be given
effect, particularly when it overrides common sense and evident
statutory purpose. United States v. Babcock, 530 F.2d 1051
(D.C. Cir. 1976) (quoting United States v. Brown, 333 U.S.
18 (1948)). See Berg v. Shannon (In re Shannon),
670 F.2d 904 (10th Cir. 1982); New York State Higher Education
Services Corp. v. Adamo (In re Adamo), 619 F.2d 216 (2d Cir.
1980), cert. denied, 449 U.S. 843 (1980).
Prior to FIRREA, there was an exception to the requirement that
deposit insurance be terminated for institutions that cease to be FRS
members. Deposit insurance would continue if loss of membership
occurred in connection with a conversion from a federal to a state
charter. The FIRREA in effect eliminated this exception by having
sub-section 8(o) refer to a sub-section of the FDIA which is
inapplicable, an illogical result in conflict with common sense which
must have been a mistake of Congress. Since the judicial test set out
in Babcock has been satisfied, my view is that section 8(o)
of the FDIA may be interpreted to refer to sub-section 4(c) rather than
sub-section 4(b). This interpretation will restore the exception for
federal-to-state conversions that was eliminated as the result of an
inadvertent error by Congress.
Therefore, if a national bank plans to convert to a state charter
and, incident to that transaction, simultaneously files an
application for withdrawal from the FRS, the transaction can be
interpreted as coming within the exception provided for in section
4(c)
{{6-30-92 p.4619}}of the FDIA and the deposit insurance
of the converted institution should continue in effect. If, however, an
application for withdrawal is filed after the date of
conversion from a federal to a state charter, it seems clear that the
deposit insurance of the institution would be terminated pursuant to
section 8(o).
I hope that this answer is responsive to your query. Please do not
hesitate to contact me if you should have any questions about this or
any other matter.
1Section 4(b) has been amended again by section 115 of the FDIC
Improvement Act of 1991; it now deals solely with the continuation of
deposit insurance for an institution which becomes a member of the FRS
or converts to a national bank. Go Back to Text
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