DEUTSCHE BANK TRUST
COMPANY DELAWARE
April 30, 2004
By E-Mail to Comments@FDIC.gov
Mr. Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Re: RIN 3064-AC78; Transactions with Affiliates
Dear Mr. Feldman:
Deutsche Bank
Trust Company Delaware (“DB Delaware”),
a State nonmember bank subsidiary of Deutsche Bank AG, Frankfurt,
Germany (“Deutsche Bank”), is pleased to submit comments
to the Federal Deposit Insurance Corporation’s proposal to
add a new part to Title 12 of the Code of Federal Regulations regarding
restrictions on affiliate transactions under Sections 23A and 23B
of the Federal Reserve Act that are applicable to State nonmember
banks by Section 18(j)(1) of the Federal Deposit Insurance Act. DB
Delaware believes it is appropriate for the FDIC to adopt regulations
to clarify that insured State nonmember banks may take advantage
of the exemptions contained in the Federal Reserve Board’s
Regulation W, issued pursuant to Sections 23A and 23B. DB Delaware
further believes that it is appropriate for the FDIC to administer
the restrictions and limitations contained in Regulation W as to
insured State nonmember banks, to grant case-by-case exemptions from
those restrictions and limitations, and to make other determinations
under Regulation W as proposed.
The statutory
limitations on affiliate transactions are not the only provisions
applying
to all insured banks that appear in statutes
primarily governing one subset of U.S. commercial banks but that
require enforcement by various federal agencies. Many provisions
of the Federal Deposit Insurance Act are administered by the Comptroller
of the Currency (“OCC”) for national banks, and by the
Federal Reserve Board for State member banks; e.g., Section 8 (enforcement
authority), Section 7(j) (Change in Bank Control), Section 18(c)
(Bank Merger Act), and Section 19(r) (bank subsidiaries of bank holding
companies acting as agents for each other). The agencies adopt rules
under those statutes for their constituent institutions, examine
their constituent institutions for compliance with those statutes
and regulations, and enforce those statutes and regulations. The
FDIC is proposing to do nothing different here.
If Congress had intended that the Federal Reserve have sole regulatory
authority, it would have worded Section 18(j)(1)(A) accordingly.
The absence of any such language demonstrates that Congress had no
such intent. DB Delaware reads Section 18(j)(1)(A) as giving the
FDIC the same power to adopt regulations pursuant to Sections 23A
and 23B for nonmember banks that the Federal Reserve Board has with
respect to State member banks. We note, in this regard, that national
banks, all of which are member banks, have always been subject to
Sections 23A, and the OCC has issued its own interpretations of this
statute. No one has ever suggested that this was inappropriate.
DB Delaware
believes that the primary federal regulator of an institution should
make
the decision as to whether it is appropriate, in any
specific instance, to grant a requested exemption. The primary federal
regulator examines the institution and has direct contact with the
institution’s management. It is most familiar with the financial
and operational condition of the institution, and the capabilities
of the institution’s management. Most requests for exemptive
relief deal with issues of safety and soundness, not separation of
banking and commerce, and the FDIC would be much better positioned
to make a rational decision on such requests for State nonmember
banks.
It is appropriate, therefore, for the FDIC to direct State nonmember
banks to file requests for exemption with the FDIC, and discontinue
its past practice of allowing the Federal Reserve Board to act on
such requests. DB Delaware believes that the proposed rule is sufficiently
clear regarding proposed procedures, and the regulation need not
contain any further directives regarding information to be included
in a request.
The FDIC has asked for comment on the question of whether the regulation,
if adopted, should set out the full text of Regulation W, or just
adopt the proposed cross-reference. DB Delaware suggests that the
FDIC restate the entire text of Regulation W, rather than merely
cross-reference that text. This would ensure that the Federal Reserve
Board will coordinate with the FDIC before proposing future revisions
to Regulation W, in order to ensure that Sections 23A and 23B will
apply to member and nonmember banks in the same manner. This would
not be different than the processes used currently when Congress
dictates that the banking agencies adopt substantially similar regulations
under various statutes.
In this regard,
DB Delaware suggests that the FDIC consider one change from the
Federal Reserve’s Regulation W to eliminate
a change to Section 23A – regarding the valuation of investments
in securities issued by an affiliate -- resulting from the adoption
of Section 223.23 of Regulation W. This rule impacts primarily the
transfer to a bank of a financial subsidiary or subsidiary approved
under Section 24 of the Federal Deposit Insurance Act, and has added
unnecessary complication and burden with no corresponding benefit.
Prior to the adoption of Regulation W, Federal Reserve Board staff
advised banks to value a purchase of securities issued by an affiliate
at the purchase price paid by the bank for the securities. 67 Fed.
Reg. 76560, 76581 n.123 (Dec. 12, 2002). Section 223.23 of Regulation
W changed this by providing that such investments must be valued
at the greater of carrying value or the purchase price. The absurdity
of this rule can be demonstrated as follows.
Suppose that
BHC Company nominally capitalizes two new subsidiaries, A Corp.
and B Corp.,
to commence two new businesses. A year later,
believing that the businesses will likely be successful and wanting
to shift income to the bank, it contributes the shares of A Corp.
and B Corp. to its subsidiary bank (“Bank”) after getting
necessary approvals under Section 24 of the Federal Deposit Insurance
Act. Bank paid nothing for the securities, and, at the outset, carries
the investments at zero for Regulation W purposes. If, five years
later, A Corp. had profits of $10 million and B Corp earned nothing,
Bank would increase the carrying value of A Corp. to $10 million,
but the valuation of B Corp. would remain at zero. Bank is penalized
for the profitability of A Corp. by using up its overall cap on transactions
with all affiliates (20% of Bank’s capital and surplus). Section
223.23, accordingly, has the perverse effect of discouraging bank
holding companies from transferring profitable businesses to their
bank subsidiaries, and encouraging them to transfer unprofitable
businesses.
The Federal
Reserve Board justified this rule with the inexplicable assertion
that the approach “reflects the member bank’s
greater financial exposure to the affiliate and enhances safety and
soundness by reducing the bank’s ability to engage in additional
transactions with an affiliate as the bank’s exposure to that
affiliate increases.” In fact, the approach diminishes safety
and soundness by reducing the bank’s ability to engage in additional
transactions with a profitable affiliate, while leaving unchanged
the bank’s ability to engage in additional transactions with
an unprofitable affiliate.
* * *
We hope that
the FDIC finds our comments helpful. If you would like to discuss
any of
the matters addressed in this letter, please
do not hesitate to contact Michael Kadish (212-250-5081) of Deutsche
Bank’s Legal Department.
DEUTSCHE BANK TRUST
COMPANY DELAWARE
_____________________________
Edward A.Reznick
President
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