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4000 - Advisory Opinions

Whether a New York-chartered Bank is Allowed Under Sections 18(d)(1) and 44(d)(2) of the FDI Act to Establish Additional Branches in California

August 4, 2000


Robert C. Fick

In a letter dated June 7, 2000 you requested that the FDIC confirm the legal authority that is available to (the "Bank") under the Federal Deposit Insurance Act ("FDI Act") to establish additional branches in California.

The Bank is an insured, New York-chartered, nonmember bank, and it is an indirect, wholly-owned subsidiary of         . (the "Parent Bank"). On November 15, 1997 the Bank acquired the Parent Bank's two insured branches in California in an interstate merger transaction under section 44(a)(1) of the FDI Act, 12 U.S.C. § 1831u(a)(1).1 The Bank retained, and currently operates, the former insured branches as domestic branches of the Bank. The Bank would now like to establish additional branches in California. The Bank believes that two separate provisions of the FDI Act, section 18(d)(1), 12 U.S.C. § 1828(d)(1) and section 44(d)(2), 12 U.S.C. § 1831u(d)(2) permit it to establish additional branches in California and has requested that the FDIC confirm its conclusions.

The Bank's principal argument is that it should be able to rely on section 44(d)(2) as authority for establishing additional branches in California. Section 44(d)(2) provides:

Following the consummation of any interstate merger transaction, the resulting bank may establish, acquire, or operate additional branches at any location where any bank involved in the transaction could have established, acquired, or operated a branch under applicable Federal or State law if such bank had not been a party to the merger transaction.

The Bank argues that this section authorizes it to establish the additional branches because the Parent Bank was involved in the 1997 interstate merger transaction and the Parent Bank had the ability to establish additional (uninsured) branches in California.

I agree that the Bank may rely on Section 44(d)(2) as authority to establish additional branches in California in this case, but I believe that it is unnecessary to address the Bank's rationale. In FDIC Advisory Opinion 96--12 (May 13, 1996) we concluded that for purposes of the merger provisions of section 44 of the FDI Act the FDIC will consider the insured branch of a foreign bank as an insured bank, except where the foreign bank has more than one insured branch in a state that does not permit the sale of individual branches of a bank. In such states the FDIC requires the foreign bank to sell all of its insured branches in that state to the same acquiror. The primary basis for this conclusion was an attempt to give effect to all of the language and purposes of the Riegle Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle Neal")2 . As noted in that opinion, Riegle Neal provides for interstate banking and branching while being sensitive to states' rights and the need for competitive equality between foreign banks and domestic banks.

Similar to the circumstances addressed in FDIC Advisory Opinion 96--12, neither the statutory language of Riegle Neal nor its legislative history clearly explains how Congress intended to treat the acquisition of insured branches with respect to the additional branch authority. In the absence of such Congressional guidance we believe that it is reasonable to simply extend the rationale of FDIC Advisory Opinion 96--12 to address the additional branch authority issue. Specifically, for purposes of determining a resulting bank's authority to establish, acquire, or operate additional branches under section 44(d)(2) after acquiring an insured branch in an interstate merger transaction, we will treat a state-licensed insured branch as a "state bank" and a federally-licensed insured branch as a "national bank".3 Consequently, the resulting bank in an interstate merger transaction can establish, acquire, or operate additional branches in the state where the acquired state-licensed insured branch was located prior to the interstate merger transaction to the same extent that a state bank located in that state could have established, acquired, or operated additional branches under applicable Federal or state law.

While there may be other methods of resolving the ambiguity in section 44(d)(2) regarding insured branches, I believe that this interpretation is the best of the identified alternatives. First, this interpretation is consistent with, and a logical extension of, FDIC Advisory Opinion 96--12. Second, this interpretation is consistent with the various purposes of Riegle Neal. In particular, it preserves states' rights because it provides no greater branching rights with respect to an insured branch acquisition than what is available with respect to a regular bank or domestic branch acquisition. This interpretation also maintains competitive equality between foreign banks and domestic banks because it provides basically the same additional branching authority for acquisitions of insured branches of foreign banks as exists for acquisitions of domestic banks or domestic branches. Finally, this interpretation fosters interstate banking and branching which is one of the principal goals of Riegle Neal.

As applied to the Bank's situation, section 44(d)(2) authorizes the Bank to establish additional branches in California to the same extent that a state bank located in California could have under Federal or state law.4 Of course, section 44(d)(2) does not relieve the Bank of the obligation to apply to the FDIC for consent under section 18(d)(1) prior to establishing any additional branches.

The Bank's other argument concerns section 18(d)(1) of the FDI Act which requires a bank to obtain the FDIC's consent before establishing additional branches. The Bank reads section 18(d)(1) in conjunction with two other provisions in the FDI Act that were added by Riegle Neal as appearing to permit the Bank to establish additional branches in any state in which it already has a branch. Because I believe that the Bank may establish additional branches in California pursuant to section 44(d)(2), it is unnecessary to consider this alternative argument.

The opinions expressed herein represent the views of the Legal Division staff and, like all staff opinions, are not binding upon the FDIC or its Board of Directors. In addition, the opinions expressed herein are based upon the facts presented in your letter. Any change in the facts or circumstances may result in different conclusions.

Please let me know if you have any further questions regarding this issue.

1In that same transaction the Bank also acquired the Parent Bank's insured branch located in Illinois. Go back to Text

2Pub. L. No. 103--328, 108 Stat. 2339 (1994). Go back to Text

3If the state where the insured branch is located does not permit the acquisition of individual branches, all insured branches of a foreign bank located in the state would be treated collectively as a bank. Go back to Text

4Generally, California law permits banks to establish one or more intrastate branches in accordance with Cal. Fin. Code § 500 et seq. Go back to Text

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