FDIC Federal Register Citations

October 21, 2002

VIA E-MAIL: comments@fdic.gov

Mr. Robert D. Feldman
Executive Secretary
Attn: Comments/OES
Federal Deposit Insurance Corporation
550 17th St NW
Washington, DC 20429-0002

RE: Insurance of State Banks Chartered as Limited Liability Companies
 

Dear Mr. Feldman:

The Independent Bankers Association of Texas (IBAT) strongly believes that state banks chartered as limited liability companies or comparable types of entities should be eligible for FDIC insurance.

IBAT is a trade association representing approximately 600 independent community banks domiciled in Texas. The association, in cooperation with the Texas Department of Banking, was instrumental in securing passage of amendments to the Texas Banking Code authorizing "limited banking associations" (LBA). This form of charter is comparable to the limited liability company (LLC). We believe that both meet the underlying requirements of a state bank for purposes of FDIC insurance.
 

The questions posed by the FDIC in its posting are responded to as follows:

Should the FDIC permit a state bank organized as an LLC to obtain federal deposit insurance?

Answer: Yes. The critical inquiry for the FDIC should be whether the states' banking laws offer a choice to incorporators in the state between the more traditional "corporate" form of ownership and the limited liability company form or, in the case of Texas, the LBA charter. The operative state law should provide the criteria for the bank charter. If these criteria meet underlying objectives of safety and soundness to the banking system and other objectives of the Federal Deposit Insurance Act, then the fact that the charter is an LLC or LBA should be irrelevant to a determination as to whether the entity is eligible for deposit insurance.

If so, should the FDIC interpret the term "incorporated" utilizing some, all, or none of the traditional four corporate attributes?

Answer: Not necessarily. In fact, IBAT would point out that the attributes identified in the proposal are not necessarily "traditional" for state bank charters. In fact, in Texas, banks do not obtain a corporate charter from the Secretary of State. They do not file articles of incorporation. Rather, they use articles of association and obtain their charter from the Department of Banking.
 

A good discussion of early law in Texas is found in Law of Banks and Banking in Texas by Ocie Speer, published in 1952 by the Thomas Law Book Company. In the first chapter, which discusses the nature and kinds of banks, Mr. Speer observes that state chartered banks are different from private banks. A private bank is an association or group of individuals. They pay no franchise tax because they have no
franchise or charter. A private bank was not insured by the FDIC either. By contrast, in Texas the LBA is subject to the state franchise tax and is chartered by the State of Texas. Looking from an historical perspective, the true distinction for whether a bank is "incorporated" under state law is whether it has obtained a charter from the Department of Banking.

Furthermore, at the time Mr. Speer wrote, state banks in Texas had a limited life of only 50 years. This was changed in recent times, and state chartered banks now have perpetual existence or continuation until dissolution as provided in § 33.208 of the Texas Finance Code. An LBA may dissolve at the expiration of a period fixed for its duration much as was provided in earlier Texas banking law. However, it may continue if remaining participants elect in writing to continue the business of the association. Just as limited life posed no public policy concern in the last century, it should be acceptable in the 21st.
IBAT would also point out that many, if not most, closely held banks, whether state chartered or national, frequently have shareholder agreements in place limiting transferability as between the shareholders, such as buy-sell agreements. Thus, a majority shareholder group may agree that they will first offer shares within the group before selling to an outsider. Provisions are very common also to handle death or divorce among controlling shareholders. Clearly, these limit transferability. However, banks with such arrangements among shareholders are still appropriately chartered banks for purposes of FDIC insurance. Artificially imposing a requirement drawn from the Tax Code definition of a corporation will achieve no policy objective with regard to the deposit fund.

It is rather surprising that the FDIC would suggest that a state-chartered entity must be a "corporation" or have the indicia of a corporation in order to qualify for insurance. Until very recently, almost all savings and loan associations were owned as mutual organizations, not corporations. Similarly, credit unions are mutual organizations rather than corporations. Yet, they are insured by the NCUA. Certainly, these mutuals have centralized management and limited liability for the depositors. Yet, they are clearly not traditional corporations.

If the FDIC should not utilize any of the four corporate attributes, how should it interpret the term "incorporated"?

Answer: The key here is whether the entity is "chartered" in accordance with state banking law. Certainly, the FDIC is free to impose other requirements for insurance that maintain the protection of
the fund and assure that the public interest is served. However, an artificial requirement of a corporate form of charter unnecessarily restricts the flexibility of states to act as crucibles of change.

The dual banking system has long served as a source of innovation and flexibility, providing greater creativity in the financial institution system of the United States. Tying the hands of state legislatures and state regulators with a requirement for certain corporate attributes artificially selected by IRS do not serve any public purpose. In fact, they limit and hamper innovation without any accompanying benefit.

While the request for comments on this proposed rule was specific in nature, it would appear that the FDIC should strongly consider the broader public policy implications in reaching a final decision on this issue. IBAT has long supported tax incentives for community banks to encourage not only entrepreneurial capital investment, but also to ensure the maintenance of a viable and healthy community banking sector. 

This important sector of the financial services industry has experienced substantial diminution of market share, and faces legislatively mandated challenges from both credit union and regional bank competitors.
Some reasonable tax structure modifications for community banks will help ensure an efficient flow of credit, especially to small business and agriculture borrowers, as well as an important choice for consumers.

IBAT strongly supports approving limited liability companies and LBAs for deposit insurance provided they meet other criteria as established by law and regulations. The peculiar requirements for corporations imposed by the tax laws are not necessary and should not be applied.

Thank you for this opportunity to comment.

Gary Johnson
President
Mercantile Bank Texas
4500 Mercantile Plaza Drive, Suite 100
P.O. Box 163049
Fort Worth, Texas 76161
817-831-2211
817-831-2218 fax