Decisions on Bank Applications
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Citibank (Delaware) New Castle, Delaware
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Engage as Principal Through Majority-Owned Subsidiaries in Annuities Underwriting Activities That May Not Be Permissible for a Subsidiary of a National Bank
Pursuant to the provisions of section 24 of the Federal Deposit Insurance ("FDI") Act, Citibank (Delaware), New Castle, Delaware (the "Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to continue to engage in fixed rate annuities underwriting activities indirectly through two wholly-owned subsidiaries, Citicorp Life Insurance Company and First Citicorp Life Insurance Company (the "Subsidiaries").
The activity of underwriting fixed rate annuities may not be a permissible activity for a national bank or a subsidiary of a national bank. State chartered, FDIC-insured banks may not engage as principal in an activity prohibited to nationally chartered banks unless they obtain consent from the FDIC. Consent may not be granted unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund. Delaware State law empowers state banks to form subsidiaries to act as insurer and transact the business of insurance, including the underwriting of fixed rate annuities.
Since 1990, the Bank has engaged, through the Subsidiaries, in annuities underwriting activities. The Subsidiaries also underwrite variable rate annuities, which is considered a securities activity for purposes of section 337.4 of the FDIC's Rules and Regulations ("section 337.4"). As such, the Subsidiaries must operate in accordance with the restrictions contained in section 337.4, which includes a requirement that none of the Bank's direct investment in the Subsidiaries will be counted towards its capital. The Subsidiaries also engage in insurance activities which are grandfathered for the purposes of section 24 of the FDI Act. The Subsidiaries intend to continue to underwrite and sell annuities through sales agents located in branch offices of the Bank's affiliates, as well as through direct mail and telemarketing solicitations.
Fixed rate annuity underwriting can be characterized as an activity involving investment risk and actuarial risk. The investment risk present in fixed rate annuity underwriting relates to the use to which a bank's subsidiary, as underwriter, places the funds it collects, and is similar to the investment risk present in traditional deposit taking activities in which a bank may "risk" a customer's funds by making loans or buying securities. The actuarial risk present in fixed rate annuity underwriting relates to the possibility that a bank's subsidiary, as underwriter, may have to pay out more than the book value of an annuity contract if an annuitant's remaining lifetime is underestimated. Such risks can be properly controlled by prudent risk management and use of conservative actuarial estimates. However, while such activity is not totally dissimilar to traditional deposit taking, there are the distinct differences identified above. Notably, one similarity to deposit taking is the many customers involved and the trust that these individuals place in the insurance company to repay invested funds. This aspect argues for the strictest of separation and disclosure, both of which can be achieved by requiring a "bona fide" subsidiary.
In determining if a significant risk to the deposit insurance fund exists in this specific proposal, the Board of Directors of the FDIC ("Board") evaluated the specifics of the Bank's application. In evaluating this application, the Board considered the type of activity proposed to determine if the activity is suitable for an insured depository institution. The proposed subsidiary structure and its management policies and practices were reviewed to determine if the Bank is adequately protected from potential liability. Capital adequacy was analyzed to ensure that the Bank first devotes sufficient capital to its more traditional banking activities. Capital adequacy was determined utilizing the Bank's "consolidated" and "bank-only" leverage and risk-based capital ratios, with all investments in the Subsidiaries, as well as all investments in the Bank's real estate investment subsidiaries, excluded from capital in the "bank-only" capital calculation (deduction of the Bank's real estate investments for capital adequacy purposes is required by a December 7, 1995 Order by the Board). Limitations on investment in the Subsidiaries were also evaluated to ensure that the Bank's risk exposure is not excessive. Having reviewed these areas, the Board is imposing conditions for prudential reasons due to the risks inherent in underwriting' fixed rate annuity contracts. The conditions imposed serve to protect the Bank as well as the deposit insurance fund.
The Board specifically notes that the conditions which are being imposed are very similar to those imposed under section 337.4 of the FDIC's Rules and Regulations relating to securities underwriting subsidiaries. Inasmuch as the Court of Appeals of the District of Columbia found the conditions established by section 337.4 to adequately protect the deposit insurance fund from the risks that can be associated with securities underwriting, the Board has determined that, in this case, imposing similar conditions on the underwriting of fixed rate annuities, which are a type of financial investment instrument, should adequately protect the deposit insurance fund from risk.
The Subsidiaries operate independently of the Bank, and meet the requirements of a "bona fide subsidiary" as that term is defined in section 337.4. Each of the Subsidiaries maintains separate recordkeeping, boards of directors, and operating management. The Bank's policies and practices relating to the Subsidiaries are regarded as satisfactory. Nonetheless, the Board is imposing the requirements of a "bona fide subsidiary" in this case. The Board believes that requiring that the Subsidiaries operate as "bona fide subsidiaries" best serves to delineate banking activities from, fixed rate annuity underwriting activities and that such a condition protects both the Bank and the Bank Insurance Fund from unnecessary risk.
As of December 31, 1995, the Bank was in compliance with applicable capital standards, being considered "well capitalized" for purposes of Prompt Corrective Action. In order to ensure the Bank's capital remains sufficient to support both traditional banking activities and fixed rate annuity underwriting activities, a capital condition is imposed. The Board will require that the Bank's capital, after deducting its aggregate investment in and extensions of credit to the Subsidiaries, as well as its investment in any real estate investment activity subsidiaries, equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations.
In addition, in order to promote the concept that annuities underwriting activities should be conducted in a separately and adequately capitalized subsidiary and to ensure that the appropriate deposit insurance fund is adequately compensated for, and sufficiently protected from, additional risk in the event that "bank-only" capital levels fall well below "well capitalized" levels, the Bank's capital category for purposes of Prompt Corrective Action will be determined, and its risk adjusted deposit insurance premium will be assessed, based on "bank-only" capital ratios, except that such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325 of the FDIC's Rules and Regulations.
As of December 31, 1995, the Bank's investment in the Subsidiaries represented a substantial portion of its Tier 1 capital; however, the Bank maintains capital levels sufficient to support such an-investment. An investment limitation was considered in this case in order to limit potential risk to the Bank and the deposit insurance fund. However, the Board has chosen in this instance to rely, in part, on the limits imposed by Delaware state law. In making this determination the Board recognizes that a substantial portion of the Bank's investment in the Subsidiary supports grandfathered insurance activities. In addition, a bank's investment in a securities subsidiary established pursuant to section 337.4 is not limited. The Board also recognizes the difficulty in separating the Bank's investment into allocations between grandfathered insurance activities, variable rate annuity underwriting activities, and fixed rate annuity underwriting activities. However, the Board will require that the Bank make no additional investment in the Subsidiaries, other than through any profits generated and retained by the Subsidiaries, without the written consent of the Regional Director of the FDIC's Division of Supervision. Consistent with section 362.2(q), "investment" shall include the total of any equity investments in the Subsidiaries by the Bank, any debt issued by the Subsidiaries that is held by the Bank, and any extensions of credit from the Bank to the Subsidiaries.
The Board recognizes that it is generally beneficial for a subsidiary to borrow from its parent bank. However, in case of affiliates, and in the case of a section 337.4 securities subsidiary such as in this case, the prudential limitations of the Federal Reserve Board's section 23A would generally limit such transactions. Given the Bank's substantial existing investment in the Subsidiaries relating to fixed rate annuity underwriting activities, as well as the potential that insured funds could be loaned to the Subsidiaries, the Board believes such restrictions are necessary to protect the Bank and the deposit insurance fund. As such, the Board is requiring that extensions of credit by the Bank to the Subsidiaries be made in accordance with the restrictions of section 23A of the Federal Reserve Act to the same extent as though the Subsidiaries were affiliates of the Bank as defined under section 23A. Such a restriction is consistent with the requirements of section 337.4(e)(6) of the FDIC's Rules and Regulations, which similarly limits the Bank's lending to the Subsidiaries due to the Subsidiaries' variable rate annuity underwriting activities.
For the reasons outlined above, including the imposition of conditions, the Board of Directors has concluded that the proposed indirect continuation oof fixed rate annuity underwriting activities does not pose a significant risk to the Bank Insurance Fund, provided certain conditions are observed, and therefore approval of the application, subject to the conditions in the Order, is warranted.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION