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4000 - Advisory Opinions

Opinion Regarding Title VIII Implications on Correspondent Bank Relationships


August 22, 1979

Daniel W. Persinger, Pamela E. F. LeCren, Attorney

The following is in response to your request for an opinion regarding the application of proposed Part 349 of FDIC's regulations to *** (the "Bank's") plan to increase its capital accounts. Additionally, your letter raises the question of whether or not the proposed financing arrangements may present problems under 18 U.S.C. § 656 which provides criminal penalties for theft, embezzlement or misapplication of bank funds.

1. Application of Part 349

Proposed Part 349 implements Title VIII of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 which generally prohibits any two banks that maintain, or wish to establish, a correspondent relationship from making preferential extensions of credit to each other's directors, executive officers, or principal shareholders.1 A loan will not be considered to be preferential if (1) it is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons that are not covered by the regulation, and (2) it does not involve more than the normal risk of repayment or present other unfavorable features (see § 349.3(b)).

The relevant facts as outlined in your letter are as follows. The Bank is about to increase its capital accounts. In connection with that increase, the *** Corporation, which holds 92.3 percent of the stock of the Bank is going to obtain a loan of $2,400,000 from *** National Bank ***. The Bank and *** will establish a correspondent relationship contemporaneously with the extension of credit.2 At the time of the writing of your letter, no terms had been agreed to on the above loan other than that the loan would be secured by a second lien on the stock of the Bank and a first lien on the stock of *** Corporation.

The loan to *** Corporation by *** is likely to be subject to the restrictions of Part 349. *** is a principal shareholder of the Bank (see footnote 1) and a correspondent relationship will be created contemporaneously with the extension of credit. If the loan is preferential, the Bank would be subject to a fine of up to $1,000 per day for every day in which the violation of Part 349 continues (see § 349.3).

Based on the facts presented to us, we cannot conclusively say whether or not the loan to *** is preferential. We can say that, in our opinion, if the creation of the correspondent account relationship is an unwritten requirement for making the loan and the balance of the account is higher than would normally be necessary in light of the correspondent services rendered (or the funds, if interest bearing, do not return the same yield to the depositing bank as would be the case with correspondent accounts maintained at other banks), FDIC will consider the loan to have been made on preferential terms unless the lending bank can satisfactorily explain the apparent detriment to the depositing bank resulting from the maintenance of the correspondent account. Each extension of credit made by one of the Bank's correspondents to a director, executive officer, or principal shareholder of the Bank must be reviewed on its own merits. If *** has not made extensions of credit to others not connected with one of its correspondent banks on terms similar to the ones contained in the subject loan agreement in the past and would not do so in the future, the loan is clearly preferential.3

2. 18 U.S.C. § 656

It is entirely possible that the financing package being negotiated between *** and *** may result in a violation of 18 U.S.C. § 656. *** is making a loan to a principal shareholder of the Bank. The Bank is in turn establishing a correspondent account with *** but none of the funds transferred to *** will benefit the Bank. If the correspondent account relationship appears to be detrimental to the Bank as noted above, its maintenance might be considered a misapplication of bank funds within the meaning of 18 U.S.C. § 656. There are several steps the Bank could take to avoid this result. One would be to obtain a letter from *** to the effect that the correspondent account balances are not compensating balances and that the Bank is free to terminate the correspondent relationship at any time. Another would be to compare the "costs" associated with maintenance of the correspondent account with services to be furnished by ***. You should be advised, however, that any determination the FDIC would make with respect to the application of 18 U.S.C. § 656 is not binding. Title 18 of the United States Code is enforced by the U.S. Attorneys and it rests with them as to whether a given set of facts constitutes evidence that a crime has been committed.

1Section 349.2(g) defines "principal shareholder" to mean any person that directly or indirectly or acting through or in concert with others, owns, controls, or has the power to vote more than ten percent of the stock of a bank. Section 349.2(f) defines "person" to mean an individual or a company. Go back to Text

2 *** will, in conjunction with the same capital increase, make a loan to *** of $3,700,000 at an interest rate of prime plus one and one-half percent. That interest rate may or may not be preferential under Part 349 but is not prohibited by the regulation as no correspondent relationship exists between the two banks. Whether or not the loan is preferential would be relevant if a correspondent relationship were to be established in the future. Go back to Text

3 In this context it may be helpful to obtain quotations from other banks regarding the contemplated loan. You should also inquire with *** as to whether or not similar loans to companies with the same credit worthiness as *** have been made or would possibly be made in the future. Go back to Text

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