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FDIC Federal Register Citations


April 30, 2004

By E-Mail to

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.


Edward A.Reznick



Last Updated 05/10/2004

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