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FDIC Banking Review

Recent Developments Affecting Depository Institutions
by Valentine V. Craig*


Inter-Agency Actions

The federal bank and thrift regulatory agencies are engaging in joint or coordinated efforts in a number of regulatory areas that are mentioned specifically in this issue of the Review.  These joint initiatives concern:

Bank Management Interlocks Rule Changes

On August 2, 1996, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), and the Office of Thrift Supervision (OTS) published a joint final rule that reinterpreted the Depository Institution Management Interlocks Act (12 U.S.C. 3201-3208).  The new rule permits management interlocks within a relevant metropolitan statistical area (MSA) when either of the depository institutions in the MSA has assets of less than $20 million.  The intent of this new rule is to expand the pool of available managerial talent for small depository institutions. The final rule implements provisions of the Riegle Community Development and Regulatory Improvement Act, which requires the agencies to review their regulations in order to streamline and modify regulations to improve efficiency, reduce unnecessary costs, and eliminate unwarranted constraints on credit availability.

FR, Vol. 61, No. 150. pg. 40293, 8/2/96, OTS Transmittal, No. 154, 9/3/96.

Flood Insurance

The OCC, the FRB, the FDIC, the OTS, the Farm Credit Administration (FCA), and the National Credit Union Administration (NCUA) adopted a final rule implementing the requirements of the National Flood Insurance Reform Act of 1994. Under the rule, financial institutions are required to escrow flood insurance premiums on properties used as collateral for loans that are located in special flood hazard areas participating in the National Flood Insurance Fund.  Lenders are not required to monitor loan portfolios continuously to determine the status of flood insurance coverage.  Institutions may charge a fee to determine the need for flood insurance.

OCC News Release, NR 96-90, 8/29/96; FR, Vol. 61, No. 169, pp. 45683-45716.

Proposal to Amend Risk-Based Transaction Requirements

The OCC, the FRB, the FDIC, and the OTS proposed a rule to amend their respective risk-based capital standards to establish uniform treatment for transactions supported by qualifying collateral.  The proposal would allow banks, bank holding companies, and savings associations to hold less capital for transactions collateralized by cash or qualifying securities.  In order to receive such capital treatment, the lending institution would need to maintain control over the collateral.

FR, Vol. 61, No. 160, pp. 42565-42570; OTS Transmittal, No. 155, 9/3/96.

Final Rule Amending Risk-Based Capital Requirements

The OCC, the FRB, and the FDIC issued a joint final rule, effective January 1, 1997, amending their respective risk-based capital standards to incorporate a measure for market risk for all positions in an institution's trading account and foreign-exchange and commodity positions.  The final rule implements an amendment to the Basle Capital Accord, and requires that any bank or bank holding company with significant exposure to market risk to measure the risk using its own internal value-at-risk model and hold a commensurate amount of capital.  Mandatory compliance is not required until January 1, 1998.

FDIC, FIL-84-96, 10/10/96; FR, pp. 47358-47378, 9/6/96.

Guidelines Establishing Standards for Safety and Soundness

The OCC, the FRB, the FDIC, and the OTS jointly amended the Inter-agency Guidelines Estalishing Standards for Safety and Soundness to include asset quality and earnings standards.  The guidelines complete the safety-and-soundness standards required by the Federal Deposit Insurance Corporation Improvement Act of 1991.  The guidelines give the insured depository institutions the flexibility to adopt systems appropriate to their size and the nature and scope of their activities, and should not require well-managed institutions to modify their operations.  The guidelines direct that the systems should be capable of identifying emerging problem assets and preventing deterioration in those assets; and that the systems be able to evaluate and monitor earnings, and ensure they are sufficient to maintain adequate capital and reserves.  

FR, Vol. 61, No. 167, pp. 43948-43952; OTS Transmittal, Number 156, 9/3/96.    

Electronic Banking

The U.S. Department of the Treasury held a two-day conference in September on electronic banking and commerce, at which it announced the formation of an inter-agency task force to examine consumer protection issues related to the use of stored-value cards, smart cards, Internet banking, and other electronic banking and commerce products.  The task force consists of the U.S. Department of the Treasury, the Federal Trade Commission (FTC), the FRB, and the FDIC.  The U.S. Department of the Treasury is also examining international monetary policy, law enforcement, and payment systems regarding the global use of computers to conduct business.  It expects to report its conclusions at the Group of Seven meeting next June in Denver, Colorado. 

BBR, pg. 436, 9/23/96.

Check Fraud

The Bank Fraud Working Group, composed of representatives of the OCC, the Federal Bureau of Investigation, the FDIC, the FRB, Internal Revenue Service, the Justice Department, the OTS, the Postal Inspector, and the Secret Service, has produced a booklet entitled “Check Fraud:  A Guide to Avoiding Losses.”  The booklet describes common check fraud schemes and fraud prevention techniques.  Copies can be obtained from the Office of the Comptroller of the Currency, Communications Division, Washington, DC, 20219. 

OCC News Release, NR 96-125, 11/12/96.

Federal Financial Institutions Examination Council (FFIEC)

Community Reinvestment Act (CRA) Information Document

The OTS, the OCC, the FDIC, and the FRB, under the auspices of the FFIEC, produced a document, “Inter-agency Questions and Answers Regarding Community Reinvestment.”  The document was published in the Federal Register on October 21, 1996.  It consolidates information about the revised CRA regulations issued by the agencies on May 4, 1995, and attempts to answer the most frequently asked questions about community reinvestment. Public comment is invited on a continuing basis.

FR, pp. 54647-54667, 11/21/96.

Bank Rating System Updated

The FFIEC has expanded the Uniform Financial Institutions Rating System, in effect since the late 1970s, to take into consideration an additional risk component.  The bank rating system known as “CAMEL” (which stood for Capital Adequacy, Asset Quality, Management Administration, Earnings, and Liquidity) has now been changed to “CAMELS” to adjust for a sixth component, Sensitivity to Market Risk.  The new component reflects an institution's sensitivity to interest-rate changes, foreign-exchange rate changes, or commodity or equity price movements.

BBR, pg. 1052, 12/23/96.

Proposed Electronic Filing Requirement for Call Reports

The FRB, the FDIC, and the OCC, under the aegis of the FFIEC, requested comments on whether to discontinue Call Reports in hard copy form and to require them to be filed electronically or on computer diskette with the agencies' electronic collection agent. Written comments were required by January 3, 1997.

FR, pp. 56737 -56740, 11/4/96.

Federal Deposit Insurance Corporation

Electronic Banking Issues

On September 12, the FDIC hosted a day-long public hearing on the technological changes occurring in banking, finance and commerce as a result of the evolution of electronic banking.  The hearing focused on the use of stored-value cards and federal insurance; what disclosures financial institutions should provide to consumers; and safety-and-soundness concerns.  The hearing followed an FDIC Board decision that funds represented by stored-value cards are not generally protected by federal deposit insurance.

Subsequent to this public hearing, the FDIC has begun a monthly “Cyberbanking Speakers Series” for its employees, which is concerned with issues related to electronic banking.  The series focuses on the latest electronic technologies and the implications for the financial regulatory system.  The first event, held on November 6, 1996, focused on two new developments: “smart-cards” and the government's plans to pay all benefits electronically by the year 1999.  The second event, held in December, focused on regulation in the world of electronic banking.

FDIC News, pp. 1-6, 10/96.  

Semiannual Agenda of Regulations

The FDIC published its most recent semiannual regulatory agenda in the Federal Register on November 29, 1996.  The FDIC publishes the agenda to inform the public of its regulatory actions and to encourage participation in rulemaking.  Many of the rules have been sponsored jointly with the other financial regulatory agencies.  Some are in response to the Federal Deposit Insurance Corporation Improvement Act and the Riegle Community Development and Regulatory Improvement Act of 1994.  

The agenda provides information about the FDIC's current and projected rulemakings, as well as information on existing regulations under review, and completed rulemakings.  There are 34 final or proposed changes to FDIC regulations in the most recent agenda.  Included in this agenda is the action imposing the one-time special assessment on SAIF-insured institutions and the final rule lowering SAIF assessments.

FDIC News Release, PR-91-96, 12/3/96; FR, pp. 63460-63469, 11/29/96.

Expansion of Data on World Wide Web

The FDIC expanded it presence on the World Wide Web by providing statistical data on individual FDIC-insured depository institutions.  Users are now able to search FDIC records by institution, state, charter type, and asset or deposit size. Available data include quarterly and annual statistics on income and expenses and key profitability ratios; institutional health and performance ratings are not available, however.  There is no charge for the service.  The Internet address for the FDIC service, called the Institution Directory, or ID service, is www.fdic.gov.

BBR, pg. 1004, December 16, 1996; FDIC News Release, PR-94-96, 12/10/96.

Bank Insurance Fund (BIF) Premiums Remain at Same Level

Due to the current financial strength of the banking industry and the Bank Insurance Fund (BIF), the FDIC Board of Directors voted to maintain assessment rates for the BIF at current levels (0 to 27 cents per $100 of assessable deposits) for the first six months of 1997.  The Board also voted to collect an assessment against BIF-assessable deposits to be paid to the Financing Corporation (FICO) as authorized by the Deposit Insurance Funds Act of 1996 (Funds Act); eliminated the $2,000 minimum annual assessment as required by the Funds Act; and authorized the refund of the fourth-quarter portion of the semiannual minimum assessment ($500) charged to all BIF members.  Approximately 8,700 institutions will receive the refund of $500 plus interest. As of June 30, 1996, the BIF reserve ratio was 1.32 percent.

BBR, pg. 911, 12/2/96; FDIC, FIL-99-96, 12/9/96.

Savings Association Insurance Fund (SAIF) and FICO Assessments Set

The FDIC lowered SAIF assessment rates to a range of 0 to 27 cents per $100 in assessable deposits for the first six months of 1997.  The new rates are identical to those previously approved for BIF members, and became effective October 1, 1996, for Sasser and Oakar institutions, and January 1 for all other SAIF-insured institutions.  The Board had previously established a risk-based schedule for SAIF assessment rates ranging from 4 to 31 cents per $100 of assessable deposits, and was permitted to adjust the schedule by as much as five cents without notice-and-comment rulemaking.

The FDIC Board also set FICO assessment rates for the 1997 first semiannual period at 6.48 basis points for SAIF members and 1.30 basis points for BIF members.  These rates are in addition to the insurance funds' assessments.

FDIC News Release, PR-95-96, 12/11/96.

Oakar Bank Reporting Requirements

The FDIC has adopted a final rule, effective January 1, 1997, limiting Oakar institutions to membership in their primary insurance fund only.  Oakar institutions belong to one FDIC insurance fund but hold deposits that are insured by the other FDIC insurance fund.  According to the new rule, BIF-member banks will continue to be BIF-members after acquiring SAIF-insured deposits in Oakar transactions.

BBR, pg. 911, 12/2/96.

Real-Estate Markets Continue to Improve

The outlook for the nation's real-estate markets continued to be favorable during the third quarter of 1996 according to the FDIC's October 1996 Survey of Real Estate Trends.  The quarterly survey asks field personnel from all federal bank and thrift regulatory agencies about developments during the prior three months in their local real-estate markets.  The national composite index, summarizing assessments of both commercial and residential real-estate markets, stood at 67 in October, down slightly from 68 in July.  Values above 50 indicate that more examiners and asset managers at federal bank and thrift regula tory agencies thought conditions were improving than declining.

Respondents to the survey were especially positive concerning trends in commercial markets.  The October commercial summary index rose to 72, the most positive assessment of this market in over two years.  Almost half of the respondents — 46 percent — reported improving conditions in the commercial market compared to 38 percent in the previous quarterly survey.  Additionally, 29 percent of the respondents reported an oversupply of commercial space — the lowest level since the survey began.  Eighty-four percent reported above-average or average commercial property sales.

The commercial real-estate survey results showed strong geographic differences.  While 68 percent of the respondents considered the commercial market in the West a little better or a lot better than three months before, 48 percent in the South, 39 percent in the Northeast, and 33 percent in the Midwest felt similarly.  Only 2 percent of all respondents considered the direction of the commercial market to be a little worse.

Residential markets, while continuing to be strong, did not register the improvements in these markets observed earlier. The summary index for residential markets fell to 63 in October from 69 registered in July.  Overall, 35 percent of the respondents to the October survey considered the general direction of the housing market better than three months before; in July, 45 percent of the respondents saw an improved housing market.

Again, the residential survey results showed wide geographic disparities.  The assessment for the West again was the most positive, with 55 percent of respondents reporting better housing conditions there over the quarter.  This compares to 35 percent of the respondents in the Northeast and South, and 24 percent in the Midwest reporting improvements.

The positive real-estate assessments reported from the West reflect to a large extent improved conditions in California. Almost two-thirds of the respondents reported improving commercial markets in California, and 70 percent reported a strengthened California residential market.

Survey of Real Estate Trends, July 1996 and October 1996.

Federal Reserve Board

FRB Adopts Final Reg M Rule

On September 18, the FRB adopted a final rule amending Regulation M, substantially changing the way auto-leasing firms disclose the cost of leasing a car.  The final rule requires that charges be presented in a more intelligible format, and for the first time, requires disclosure of the total amount due when a lease is signed.  According to the Consumer Bankers Association, leasing has increased 30 to 40 percent annually over recent years at some banks.  The new disclosure requirements go into effect on October l, 1997.

BBR, pg. 438-439, 9/23/96.

FRB Recommends Additional Day for Holding Deposits

On October 9, 1996, the FRB recommended to Congress that banks be allowed to hold funds deposited by check an additional day before requiring consumer access to the funds.  Current law allows banks to hold funds for two days, but most banks allow access to the funds before the two-day period due to competitive pressures. Check fraud costs the financial industry $600 million a year. According to the FRB study, an additional day-hold would catch 80 percent of all local returned checks before the funds were released.

BBR, pg. 623, 10/14/96.

Amendment to Loans to Insiders Regulation

In November 1996, the FRB amended its Regulation O, which imposes limits on loans to insiders and insiders of affiliates, and requires that any such insider loans not be on terms unavailable to those not affiliated with the bank or affiliate.  The amendment was in response to, and conforms with, the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which amended the preferential lending prohibition by allowing extension of credit to insiders as long as the credit was available to all employees of the lending bank, and insiders were not given preference over other employees.  The OTS has also incorporated the FRB amendment, and savings associations and their subsidiaries will be treated in the same manner as banks in this regard.

FR, Vol. 61, No. 218, pp. 57769-57770, 11/8/96; FR, Vol.61, No. 224, pg. 58782, 11/19/96; OTS Transmittal, No. 161, 11/26/96.

Rules Amended Expediting Bank Entry into Other Businesses

On October 23, the FRB issued interim rules expediting the application process for well-capitalized bank holding companies to enter new non-bank lines of business.  The new rule implements provisions of the Economic Growth and Regulatory Paperwork Reduction Act, signed by the President on September 30, which allowed bank holding companies to enter activities permitted under Regulation Y without first notifiying the FRB.

The new rule applies only to well-capitalized bank holding companies.  Under the new rule, the FRB defines well-capitalized bank holding companies as those which, on a consolidated basis: (1) maintain a total risk-based capital ratio of 10 percent or more; (2) maintain a Tier 1 risk-based capital ratio of 6 percent or more; (3) maintain either a Tier 1 leverage ratio of 4 percent or more, or have a composite 1 rating, or have implemented risk-based capital measures for market risk; and (4) are not subject to any written agreements to meet and maintain capital levels for any capital measure.

BBR, pg. 683, 10/28/96.

Preferred Stock to Count for Core Capital

The FRB announced on October 21, 1996, that bank holding companies may use certain cumulative preferred stock to meet Tier 1 capital requirements.  The preferred stock should be issued by special-purpose wholly-owned subsidiaries, who lend the proceeds of the offerings to the parent through long-term, subordinated notes.

BBR, pg. 685, 10/28/96.

External Audits for Poorly Managed Foreign Branches to Be Required

The FRB, in a November 12 guidance to bank examiners, is requiring all foreign bank branches, with mangement ratings of three or lower, to hire independent accountants to perform audits of the branches.  The auditors are to look for unreported losses; to verify the accuracy of reports filed with regulators; and to recommend improvements to internal controls and oversight.  This development follows the Daiwa bank scandal, in which a New York branch of this Japanese bank hid a $1.1 billion loss from regulators.

AB, 11/18/96.

Fees for Electronic Funds Transfers Reduced

Effective January 2, 1997, the FRB lowered the price for Fedwire funds transfers to 45 cents per transaction.  The FRB estimates that this reduction, coupled with one made in September, should save the industry over $18 million annually.  The FRB has also lowered fees on automated clearinghouse transactions.

AB, 11/6/96.

Other FRB Actions

Effective November 12, 1996, the FRB will exclude corporate and municipal bond interest of “easily-sold” securities from the cap on commercial underwriting revenue.  This change will permit certain Section 20 subsidiaries to earn more from underwriting activities.  Effective October 21, the FRB also revised the list of fees that banks must disclose under the Truth-in-Lending Act. The FRB also provided some lawsuit relief to banks by increasing the amount by which they could misstate finance charges and avoid liability.

At a meeting of the FRB on December 20, the FRB withdrew a proposal that would have encouraged banks to record the race and gender of consumer and small-business borrowers.  At the same meeting, the FRB raised the revenue limit on securities underwriting by commercial banks through their Section 20 subsidiaries from 10 percent to 25 percent.  It also adopted a rule protecting the confidentiality of fair-lending self-tests.

AB, pg. 3, 9/13/96; AB, 12/23/96; WSJ, 12/23/96.  

Office of the Comptroller of the Currency

Derivatives Activity Increases

The OCC reported that commercial bank derivatives activity increased dramatically in the second quarter of 1996, with the notional amount of bank derivatives rising $1.2 trillion to $19 trillion for the quarter.  Nine banks accounted for 94 percent of the total notional amount of derivatives; 507 banks held derivatives during the quarter, an increase of 42 over the previous quarter.  Interest-rate and foreign-exchange contracts accounted for 98 percent of the notional amount of the derivatives.  Approximately $8 trillion of the derivatives were futures and forward trades; swaps constituted almost $7 trillion; and over $4 trillion of the derivatives were options.

OCC News Release, NR 96-97, 9/13/96.

OCC Provides Incentives to Banks Entering Low-Income Areas

The OCC has waived branching or chartering fees for national banks entering low- and moderate-income areas that are unserved by other depository institutions.  These fees range from $700 for opening a branch to $17,400 for receiving an independent bank charter.  According to the OCC, 12 million U. S. households, or 12.5 percent of the population, do not have an account with a depository institution.  The OCC is also planning an educational forum to assist bankers in understanding the banking needs of this population.

AB, 10/1/96.

Insurance Sales

In November, the OCC gave permission to First Union Corp. and Mellon Bank to sell and market insurance anywhere, including from bank offices, as long as the insurance applications were processed, and the agent commissions paid, from a town with fewer than 5,000 persons.

AB, pg. 2, 11/14/96.

Expedited Process Allowing Bank Entry into Other Activities

The OCC issued a final rule on November 20, 1996, revising OCC Part 5 rules governing bank corporate activities.  The new rule creates an expedited approval process for well-managed and well-capitalized banks (banks with a CAMEL 1 or 2 rating, a Satisfactory CRA rating, and without enforcement orders against them) to enter into other bank-related businesses through their subsidiaries.  Banks may also apply for approval to engage in business activities through subsidiaries that are impermissible for the parent, but these requests will not receive expedited approval.  The new rule is expected to facilitate entry into securities and insurance underwriting, data processing, and information delivery by bank subsidiaries.  The rule took effect on December 31, 1996.

BBR, pp. 873-875, 11/25/96.

OCC Amends Rules on National Bank Trust Activities

Effective January 29, 1997, the OCC has eliminated several restrictions governing bank fiduciary activities.  The new rules removed many restrictions on collective investment funds.  They rescind an OCC provision barring individual trust accounts from constituting more than 10 percent of a collective investment fund; eliminate another provision barring banks from putting more than 10 percent of a fund into one investment; eliminate restrictions on treatment of a fiduciary's money before it is invested; and codify an earlier OCC interpretive ruling that national banks in a particular jurisdiction have the same powers as state-chartered fiduciaries.

AB, 12/31/96.

Office of Thrift Supervision

Lending and Investment Regulations Streamlined

The OTS issued a final rule, effective October 30, 1996, that updated, reorganized and streamlined its lending and investment regulations.  The final rule almost cut in half the number of lending and investment regulations — from 43 to 22 — and brings OTS regulations more in line with those of the other banking agencies.  In many instances, more general rules have replaced detailed rules to allow institutions greater flexibility.  For convenience, all lending-related regulations have been reorganized in new Part 560.  Other changes are:  the rule increases thrifts' commercial lending authority through service corporations; does away with limits on the amount of loans relative to the value of collateral and payback periods for manufactured housing; modifies requirements for the selection of indices to set interest rates on adjustable-rate mortgages; narrows disclosure requirements for adjustable-rate mortgages; modifies restrictions on federal savings institutions in regard to investment in state housing authorities and government obligations; and relaxes limits on leasing.

The Economic Growth and Regulatory Paperwork Reduction Act of 1996, passed by Congress on September 30, 1996 — the same day as the OTS new regulation — expands thrift lending powers in many instances beyond that provided in the final rule.  The OTS will issue guidance to thrifts on the impact of this new law.

OTS Transmittal, No. 158, 10/24/96;  FR, pp. 50951-50984, 9/30/96.

Expanded Lending and Investment Authority for Thrifts

The OTS published interim rules on November 27 expanding thrifts' ability to make credit-card, education, and small-business loans. Although the regulation is in effect immediately, the OTS invites comments for 60 days.

The rule changes implement provisions of the Economic Growth and Regulatory Paperwork Act of 1996 (EGRPRA).  EGRPRA permits thrifts to make credit-card and educational loans without any percentage of assets investment limit.  Additionally, it permits loans secured by business or agricultural real estate to be made in amounts up to 400 percent of capital, with additional secured and unsecured business and farm loans allowed in amounts of up to 20 percent of assets.  It restricts loans above 10 percent of assets to small-business loans.  The new law also amends the qualified thrift lender (QTL) test of the Home Owners' Loan Act to count small-business, credit-card, and educational loans as qualified thrift investments without restriction; other consumer loans can now count as qualifed thrift investments in amounts up to 20 percent of the thrifts' assets.  The legislation also gives thrifts the option of complying with the amended QTL test requirements or the Internal Revenue's domestic building-and-loan association compliance requirements.

BBR, pg. 929, 12/2/96; OTS Transmittal, Number 163, 12/2/96; FR, Vol. 61, pp. 60179-60185, 11/27/96.

Corporate Governance Rules Streamlined

The OTS revised its corporate governance rules, effective January 1, 1997.  The revisions, the first since 1983, reduced by 36 percent the number of charter and bylaw rules and policy statements on corporate governance.  Savings institutions may now notify the OTS after adopting charter and bylaw amendments that have been preapproved by the agency rather than filing an application and paying a fee.  The final rule permits federal stock savings associations, and in some cases federal mutual savings associations, to follow the corporate governance law of their home state, their holding company's home state, or Delaware General Corporation Law or the Model Business Corporation Act. Other revisions remove restrictions on the location of shareholder meetings; authorize the gathering of proxies by telephone or electronically; and remove requirements for formal stockholder meetings when unanimous written consent of shareholders exists.  The revisions do not require any institutions to change their charters.

OTS Transmittal, No. 164, 12/10/96; FR, Vol. 61, No. 233, pp. 64007-64021.

National Credit Union Administration

Multiple-Group Fields of Membership

A three-judge D. C. Circuit Court ruled on July 30 (First National Bank & Trust Co. v. National Credit Union Administration) that federal credit unions may only serve members of a single occupational group.  At year-end 1995, almost 2,000 of the approximate 7,300 federal credit unions had multiple-group fields of membership.  The NCUA has permitted multiple-occupational groups for federal credit unions since 1982.  

Following the Circuit Court ruling, the NCUA requested a delay to enforcement of a October 25 injunction banning federal credit unions from adding new groups from outside the single occupational common bond to existing fields of membership.  Also, on November 14, the NCUA adopted interim rules permitting occupation-based credit unions to serve an entire profession rather than just the employees of a single company, subject to certain distance restrictions.  The NCUA plan also would allow credit unions with members at several local companies to retain members by converting to community-based institutions, and expanded the community credit union charter to permit institutions to serve occupational groups, associational groups, and community groups in areas with populations of less than a million people.

The banking industry asked the court to block the NCUA membership policy on the grounds that the agency violated the Administrative Procedures Act by not publishing advanced notice of the November 14 meeting and by not providing advanced notice of the rule change.  On December 4, the U. S. District Court for D.C. set aside the NCUA interim field of membership policy and declared null and void all charter conversions and common bond redesignations approved by the NCUA under its new policy.  The Court also denied the NCUA's request for a delay of the October 25 injunction.  On December 24, the U. S. Court of Appeals granted a temporary stay on the injunction and allowed credit unions the right to serve all companies within their existing fields of membership, but prevented them from signing up new “non-core” members.

The National Association of Credit Unions on December 30 asked the Supreme Court to hear the case; the American Bankers Association has also filed a brief asking the Supreme Court to reject the case.

BBR, pg. 454, 9/23/96; AB, pg. 1, 11/15/96; BBR, pg. 895, 11/25/96; BBR, pp. 983-984, 12/9/96; NYT, 12/25/96; AB, 12/31/96.



The state of California enacted legislation, effective January 1, 1997, protecting banks from toxic waste cleanup liability under state and local law.  The new statute provides immunity from environmental clean-up costs to unsecured lenders and fiduciaries if they were not responsible for the contamination and did not manage the property before foreclosure.  The state statute expands recently passed federal protections, which protected only lenders with a security interest in the property.  California environmental laws are considered to be the toughest in the nation according to its state banking trade group.

AB, 11/4/96.


Banks in Delaware are eligible to receive a $400 tax credit for every new employee hired above a minimum of 50 beginning in 1997. In order to qualify for the credit, the banks must invest a minimum of $15,000 per new employee.  The credit may not exceed half of the bank's franchise tax.

AB, pg. 3, 11/15/96.


State regulators in Florida have proposed a new state savings bank charter that would allow either mutual or stock form of ownership.  The state currently offers charters for commercial banks and savings and loans; the state did away with mutual ownership in 1992.  The proposed state charter would allow thrifts to continue in business should the federal thrift charter be merged into a federal bank charter.  It might also be used by credit unions to convert to state savings banks should the courts ultimately disallow expansion outside a credit union's original common bond.  Thirty other states currently offer a state savings bank charter.

AB, 12/10/96.


The Michigan Financial Institutions Bureau reduced many of the fees it charges its financial institutions, beginning in October 1996.  Bank application fees were reduced to $6200 from $9000; consolidation application fees were cut to $1800 from $2200; and fees to convert to a state bank were decreased to $1300 from $2200.  It also abolished the requirement that banks publish the relocation of principal offices and new branches, and abolished the $1000 fee.

AB, 11/25/96.


President Signs Small-Business Tax Bill

On August 20, 1996, President Clinton signed the Small Business Jobs Protection Act, which contains some major provisions affecting depository institutions.  Of special importance, it repeals the Internal Revenue Code Section 593 bad-debt reserve recapture requirements for thrifts.  Under this new law, thrifts need only record as income bad-debt reserves set aside after 1987 rather than their entire bad-debt reserves.  This removes a major financial disincentive for thrifts converting to banks. Additionally, the new law allows for tax-free conversion of common trust funds to mutual funds; subject to certain restrictions, repeals the 50 percent interest exclusion on Employee Stock Ownership Plan loans made by financial institutions; creates “financial asset securitization investment trusts (FASITs), allowing for the securitization of debt obligations; and allows some financial institutions to be eligible for Subchapter S Treatment.

BBR, pg. 281, 8/26/96.

SAIF Capitalization Bill Enacted

On September 30, 1996, President Clinton signed legislation capitalizing the SAIF and warding off a default on FICO bonds. The legislation also approximately equalized the premiums that banks and savings and loans pay for insurance.  Legislation to capitalize the SAIF had been debated for two years. The new legislation requires the banking industry to assist in paying the $8 billion in interest on FICO bonds.  According to the legislation, the thrift industry is responsible for approximately 59 percent of the $780 million annual interest for the next three years, and the banking industry the remainder.  After three years, the two industries will share the cost on a pro rata basis.  Thrifts are also required to make a one-time payment of $4.7 billion to capitalize the SAIF.  The only exception to the special assessment is for banks that own thrift deposits (for example, Sasser and Oakar banks), whose special assessment has been reduced by 20 percent.

The Washington Post, 10/2/96; FDIC News, pg. 1, 11/96; AB, 10/2/96.

Commercial Banks' Earnings

Commercial bank earnings were $38.6 billion for the first nine months of 1996, a 4.8-percent increase from the same nine-month period a year before, according to preliminary data released by the FDIC.  

Approximately $13.2 billion in net earnings were reported for the third quarter of 1996.  This represented the third-highest quarterly net income ever reported, but is a 4.5-percent decline ($618 million) from the previous quarter, and a 4.8-percent decline ($666 million) from third-quarter earnings a year earlier.  However, almost all of the third-quarter earnings decline was due to the one-time SAIF assessment.  The commercial banks' share of the assessment was approximately $1 billion, with an after-tax net income impact of approximately $650 million.  

Third-quarter net interest income was a record $41.4 billion, a 5.2-percent increase over the third quarter of 1995.  More than half — 58 percent — of insured banks reported earnings gains for the 1996 third quarter, and almost three-quarters reported return on assets (ROA) in excess of one percent.  Third-quarter ROA for the industry was an annualized 1.19 percent.  Asset-quality indicators remained favorable overall, with noncurrent loans falling to the lowest level in the 15 years that they have been reported.  However, an increase in troubled loans to individuals, primarily credit-card loans, was reported.  At the end of the third quarter, 2.71 percent of credit-card loans were reported 30-89 days overdue; 1.83 percent were reported past 90 days overdue or in non-accrual status; and an annualized year-to-date net charge-off rate of 4.31 percent was reported.

Profitability at FDIC-insured savings institutions remained strong despite a reported net loss of $55 million for the third quarter of 1996.  This loss was largely due to the $3.5 billion special SAIF assessment levied on the industry.  Net earnings for the quarter would have been approximately $2.2 billion, compared to $2.6 billion in the previous quarter, absent the SAIF assessment.  Almost two-thirds of institutions reported losses for the quarter.  However, of the 340 savings institutions with no SAIF deposits, only 5 percent were unprofitable for the quarter.  Net earnings for the first three quarters of 1996 were $4.9 billion, a decrease of $1.1 billion from net earnings for the third quarter the previous year.

The SAIF became fully capitalized as of October 1, 1996.  A special assessment against all SAIF-assessable deposits raised $4.5 billion, which brought the SAIF reserve ratio to 1.27 percent of insured deposits.

The FDIC Quarterly Banking Profile, Second Quarter 1996 and Third Quarter 1996; FDIC News Release, PR-75-96, 9/11/96; PR-96-96, 12/13/96.

Delinquency Rates Improve in Third Quarter

According to an OCC survey of examiners at the 82 largest national banks, released on September 11, credit risk increased for the 12-month period ending May 1996, despite tightening of retail underwriting standards.  The survey reported that credit cards, middle-market commercial loans and indirect consumer loans were responsible for most of the increased risk during the period.

At the same time, the FDIC reported a sharp rise in charge-off rates, with levels rising from 1.40 percent of loans during the second quarter of 1994 to 2.24 percent of loans during the second quarter of this year.  The American Bankers Association (ABA) also reported a 13-basis point rise in late credit-card payments during the second quarter of 1996, raising the late-payment ratio to 3.66 percent, the highest level since 1974.  However, according to the ABA, this ratio fell to 3.48 percent during the third quarter of 1996, the first improvement in two years.

Meanwhile, the Mortgage Bankers Association reported that the third quarter of 1996 represented the third straight quarter of improvement in mortgage delinquency rates.  For the three months ended September 30, mortgage delinquencies fell to 4.16 percent on a seasonally adjusted basis from 4.35 percent the previous quarter.  Improvements in mortgage delinquencies occurred in all categories — 30-day, 60-day, and 90-day-or-more delinquencies.

AB, pg. 1, 9/12/96; BBR, pg. 439, 9/23/96; The Washington Post, 12/14/96; AB, 12/19/96.

Tax Ruling Affecting Banks

The U.S. Tax Court upheld the Internal Revenue Service (IRS) in a dispute over international tax laws, ruling that Riggs National Bank of Washington, DC, was not entitled to the tax write-offs it had taken to reduce taxes on profits from loans to Brazil. The Tax Court ruled that bank and Brazilian officials in an “elaborate legal fiction” came up with a plan to withhold taxes from the interest paid to the bank, thereby creating a U.S. tax write-off that the bank passed on to Brazil in the form of lower interest rates.  The decision is expected to cost 300 American banks hundreds of millions of dollars in federal taxes.

The Washington Post, 12/12/96.

Thrifts May Seek “Lost Profits”

The U. S. Court of Federal Claims ruled that thrifts may use the “lost-profits” theory to determine damages against the government for reneging on favorable goodwill accounting. Under the lost-profits theory, a plaintiff can sue for profits that would have been earned had there been no breach-of-contract.  In 1989, the Congress changed the period for goodwill amortization from 40 years to five years, forcing many thrifts into bankruptcy.  The suit of Glendale Federal Bank, the first of the more than 100 thrifts seeking redress, will begin on February 24.

AB, 12/20/96.

Merger of Federal Banking Regulators Suggested

In a recently issued report, the General Accounting Office found the bank oversight system in the United States to be duplicative and inefficient, and recommended collapsing the OTS, the OCC, and the supervisory and regulatory responsibilities of the FDIC into a new independent federal banking agency.  It recommended that the FRB maintain its independence, and also concluded that the FDIC retain its power to examine any bank.

AB, 11/27/96.

Smart Cards

The three major U. S. card companies — MasterCard, American Express, and Visa — continue to work on developing consumer-friendly “smart-cards.”  MasterCard announced that it had acquired 51 percent of Mondex International, a British maker of “smart cards.”  The Mondex card combines credit, debt and stored-value functions.  American Express has also announced an agreement with Banksys, a Belgian company, to test market its smart card.  Visa International has also developed a smart card.

WSJ, 12/19/96.

Credit-Card Cobranding

Sears Roebuck, which issues its own proprietary store card, has introduced a cobranded card with MasterCard International, and is testing it in several markets in the Midwest and Texas.   The issuer of the card is Sears National Bank of Phoenix.  People's Bank in Connecticut has also announced that it is issuing a cobranded VISA card with T.J. Maxx amd Marshalls.  L.L. Bean recently issued a cobranded Visa card with MBNA Bank of Delaware.

AB, pg. 1, 9/11/96.

Fidelity and Schwab Work With Banks’ Trusts and Mutual Funds

Fidelity Investments of Boston, MA, the mutual fund giant and number two discount broker in the United States, bought part of a bank trust-processing firm in May through which it plans to offer record-keeping services linking Fidelity funds and the Fidelity fund supermarket to bank trust departments.  Charles Schwab, the number one discount broker in the United States, has announced plans to serve as a fund-trading clearinghouse for bank brokerage firms and trust departments, permitting them to offer Schwab's fund supermarket to bank customers under their own names.

WSJ, pg. A5, 9/23/96.

NationsBank Offering Its Mutual Funds through Schwab and Fidelity

NationsBank Corp. of Charlotte, NC, has announced that it will offer seven of its 44 mutual funds through the Charles Schwab OneSource network.   The bank also offers its own fund supermarket, called Fund Solutions, and its funds are also available through Fidelity Investment's FundsNetwork.  After its acquisition of Boatmen's Bancshares of St. Louis is completed, NationsBank will be the fourth-largest bank manager of mutual funds.

AB, pg. 1, 9/11/96.

Home Banking Network

IBM and 15 major banks, representing more than half the retail banking population of the United States and Canada, formed a home banking network, Integrion Financial Network.  Integrion will offer bank-branded remote banking services through the Internet, on-line consumer networks, personal financial software, and telephone.  The network is expected to compete with systems currently operated by Microsoft and Intuit, which have been providing on-line banking software that connects to dozens of financial institutions.  Integrion will allow any bank to join its network, and says it is interested in signing up banks as either additional co-owners or customers.  Both owner-banks and customer-banks will be charged the same service rates.  On December 2 the FRB approved purchases of voting shares in Integrion for Norwest Corp. of Minneapolis and several foreign banks.

AB, pg. 1, 9/10/96, The Washington Post, 9/10/96; BBR, pg. 954, 12/9/96.

Foreign Bank Activities


Japanese bank regulators announced the closure of Hanwa Bank, the first closure of a Japanese bank in the postwar era.  Hanwa, a regional commercial bank, made substantial real-estate loans through two affiliates during the 1980s, and has reported $694 million in bad loans.  The Bank of Japan is reportedly extending more than $360 million in loans to repay depositors.

The Washington Post, 11/22/96.


The government of Mexico plans to begin to dispose of the estimated $40 billion in assets (book value) that it acquired in its bank-bailout effort.  The assets consist primarily of loans and real estate.  The government has created an agency called Asset Valuation and Sale (VVA).  The VVA is expected to begin the sales by holding two auctions early in 1997.

WSJ, 12/23/96.

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