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4000 - Advisory Opinions

Application of Section 44 of the FDI Act to the merger of an insured branch of a foreign bank with an affiliated U.S. subsidiary


May 13, 1996

William F. Kroener, III, General Counsel

Thank you for your April 8, 1996 letter requesting an interpretation of Section 44 of the Federal Deposit Insurance Act (FDI Act) as added by section 102 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Pub.L.No. 103-328 (1994) (Riegle-Neal).1 According to your letter, you are seeking an interpretation that would govern the merger of an insured branch of a foreign bank with an affiliated U.S. subsidiary.

Summary of Section 44

Section 44 provides a structure for interstate mergers and only applies to interstate mergers. Once a bank has established branches in a host State through an interstate merger transaction, such bank may establish and acquire additional branches at any location in the host State where any bank involved in the interstate merger transaction could have established or acquired branches under applicable Federal or State law.

Section 44 permits the responsible Federal regulator to approve the acquisition of a branch of an insured bank without the acquisition of the entire bank only if the law of the State in which the branch is located permits out-of-State banks to acquire a branch of a bank without acquiring the entire bank. Nothing in Section 44 or its legislative history discusses the impact of these provisions on insured branches of foreign banks or gives any guidance as to how insured branches of foreign banks should be treated.


X requests that the FDIC interpret the statutory language of Section 44, so that insured branches of foreign banks may merge under the provisions governing the merger of a stand-alone domestic bank with an out-of-state bank, rather than the provisions governing the merger of a single branch of a domestic bank with an out-of-state bank. For the purposes of Section 44, X requests that the FDIC determine that an insured branch of a foreign bank be considered an "insured bank" using the general definitions contained in the FDI Act.

X articulates a compelling policy argument by advancing the view that regulators should facilitate the merger of insured branches of a foreign bank parent into its out-of-state U.S. bank subsidiaries. This consolidation is consistent with the view that it is preferable for foreign banks to operate through subsidiaries than through branches.2

Legal Analysis

X concedes that any interstate mergers of insured branches of foreign banks must be subject to Section 44. The question that remains is whether a merger of an insured branch of a foreign bank should be handled under the subsections governing bank acquisition mergers or the subsections governing branch acquisition mergers.

The terms used in Section 44 are: 1. "insured banks" and 2. "branch of an insured bank."3 In an effort to determine which subsection should govern the acquisition of an insured branch, X suggests looking at the definitions of "bank" and "insured bank" in the FDI Act.

Section 3(a)(1)(a) and (h) of the FDI Act state:4

(a)  Definitions of bank and related terms

(1)  Bank The term "bank"--

(A)  means any national bank, State bank, and District bank, and any Federal branch and insured branch.

(h)  Insured bank The term "insured bank" means any bank (including a foreign bank having an insured branch) the deposits of which are insured in accordance with the provisions of this chapter; and the term "noninsured bank" means any bank the deposits of which are not so insured.

I do not find that looking at these definitions compels the conclusion that an insured branch of a foreign bank is itself an insured bank for the purposes of Section 44. Therefore, I considered the legislative history of Section 44 and these definitions as well as numerous related definitions in the FDI Act, the International Banking Act, the Bank Holding Company Act and in the FDIC's interpretative regulations. Still, no conclusive answer emerged as to which of the two subsections of Section 44 is appropriate to govern interstate mergers of insured branches of foreign banks. I have found that the definitions are not particularly helpful and the language of Section 44 itself, is somewhat circular when trying to apply it to entities that were probably not considered when this language was drafted.

In order to discern the appropriate interpretation of the language of Section 44, it must be examined in the context of the Riegle-Neal legislation. Riegle-Neal had two main purposes: (i) to facilitate the transition to national interstate banking, and (ii) to provide competitive equality for foreign banks. Most of Riegle-Neal is aimed at achieving these two goals.

Riegle-Neal amended the statutes governing interstate banking, and also amended the International Banking Act (IBA) in many significant respects in order to conform the powers and duties imposed on foreign banks operating in the United States to those granted to state and national banks. Most of the Riegle-Neal amendments to the IBA expand foreign banks' access to interstate banking. While permitting acquisition transactions to occur, the legislative history indicates that Congress was concerned about perceived competitive advantages enjoyed by direct branches of foreign banks.5

In contrast, Riegle-Neal has no language dealing with the consolidation of existing foreign bank entities or the acquisition of an insured branch of a foreign bank by an unaffiliated entity. Section 44 attempts to provide for interstate banking through mergers while being sensitive to states' rights to opt-out of branch banking and to limit the acquisition of individual branches within their borders. The language chosen by Congress in these merger provisions does not clearly explain how insured branches of foreign banks are to be treated.

Given the ambiguity in Section 44 and the statutory definitions, it is my view that Section 44 should be interpreted to give effect to all of the language and purposes of Riegle-Neal when the FDIC acts on interstate merger applications. Therefore, the FDIC will consider the insured branch of a foreign bank as an insured bank for the purpose of the merger provisions of Section 44 of the FDI Act, except where a foreign bank has more than one insured branch in a state that does not permit the sale of a single branch. In those states, the FDIC will require that the foreign bank sell all of its insured branches in that state to the same affiliated or unaffiliated acquiror.

This construction meets most of the goals of foreign banks with insured branches and the concerns of the Institute without sacrificing the competitive equality and the states' rights, which Riegle-Neal sought to preserve.

Please feel free to contact me if you need any additional information.

112 U.S.C. § 1831u (1994). Go back to Text

2See Section 214 of the Federal Deposit Insurance Improvement Act of 1991 (Foreign Bank Supervision Enhancement Act of 1991), Pub.L.No. 102--242 (1991). Go back to Text

3Although X did not mention this definition, Section 44 defines "branch" to mean "any domestic branch." 12 U.S.C. § 1831u(f)(4). However, that definition does not dispose of the question under consideration nor advance our analysis as the primary emphasis of that definition appears to be to distinguish between branches located in the U.S. and those located outside the U.S. Go back to Text

412 U.S.C. § 1813(a)(1)(A) and (h) (1994). Go back to Text

5See 12 U.S.C. § 3104(a) (1994) and House Conference Report No. 103--651, pp. 126--127, 1994 WL 405911 (August 2, 1994). Go back to Text

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