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4000 - Advisory Opinions

Can a Newly Organized State-Chartered Commercial or Savings Bank Become a SAIF Member Rather Than a BIF Member Under FIRREA


December 22, 1989

Alan J. Kaplan, Senior Counsel

This is in response to your letter of November 9, 1989 in which you ask whether a newly organized state-chartered commercial or savings bank may be a Savings Association Insurance Fund (SAIF) member, rather than a Bank Insurance Fund (BIF) member, if the newly chartered bank is a continuation of a SAIF member savings association.

This letter sets out the FDIC Legal Division's interpretation of the conversion provisions in section 5(d)(2)(G) of the Federal Deposit Insurance Act (FDIA) (as added by section 206(a)(7) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)), read in light of the provisions for designating SAIF or BIF fund membership in section 7(l) of the FDIA (as added by section 208(14) of FIRREA).

Section 5(d)(2)(G) of the FDIA provides that any savings association which is a SAIF member may convert its charter to a bank charter, notwithstanding the moratorium on insurance fund conversion transactions imposed by section 5(d)(2)(A)(ii) of the FDIA (as added by section 206(a)(7) of FIRREA), if the resulting bank remains a SAIF member. The term "convert" (as distinguished from the term "conversion transaction") is not defined in FIRREA or the FDIA, and the intent of section 5(d)(2)(G) is to permit charter changes provided fund conversions do not take place. Without specific limiting language in the statute, we do not read this provision as limiting charter conversions only to those where a direct conversion is authorized by state or federal law. As a result, it is our opinion that charter conversions permissible under section 5(d)(2)(G) of the FDIA may be accomplished indirectly, as well as directly. For instance, mergers, consolidations, or purchase and assumption transactions which are substantially equivalent to mergers (i.e., where substantially all of the selling institution's assets and liabilities are transferred, and the selling institution is in the process of winding down and will not continue to receive deposits or otherwise conduct the business of a depository institution) may be methods of accomplishing indirect charter conversions permissible under section 5(d)(2)(G). We wish to emphasize, however, that section 5(d)(2)(G) of the FDIA does not provide affirmative authorization for charter conversions; this must be found separately in the appropriate state or federal law.

If a savings association wishes to convert its charter to a bank charter and retain its SAIF membership as permitted by section 5(d)(2)(G) of the FDIA, but does so using a de novo bank to establish the new charter, the issue arises as to which fund shall be designated for the de novo bank's membership. There is clear evidence of Congressional intent for a bank with SAIF membership; section 5(d)(2)(G) of the FDIA and section 10(m) of the Home Owners' Loan Act (HOLA) (as amended by section 303(a) of FIRREA) both contemplate bank charters with SAIF membership. However, section 7(l) of the FDIA provides that any institution which "becomes an insured depository institution" and "does not become a [SAIF] member" shall be a BIF member. A de novo bank does not fit into the requirements of SAIF membership and, per section 7(l) of the FDIA, would ordinarily be designated a BIF member.

In a case such as this, however, where the de novo bank is used solely to effect a charter conversion permissible under section 5(d)(2)(G) of the FDIA, and the resulting bank is merely a continuation of a SAIF member, there is no institution "becoming" insured. Instead there is the continuation of a SAIF insured member under a different charter pursuant to the permissive grant of section 5(d)(2)(G) which permits such charter changes providing no fund change occurs.

Therefore, with regard to SAIF insurance fund membership for a de novo bank (state or national), it is our opinion that a de novo bank may be designated a SAIF member if (1) the de novo bank charter is one utilized solely to effect or facilitate a permissible charter conversion; and (2) the de novo bank does not operate until and unless the charter conversion which it is chartered to facilitate takes place. We wish to emphasize that there is no choice of SAIF or BIF membership under Section 7(l) of the FDIA for a de novo bank which is not engaging in a permissible charter conversion; such a bank would be a BIF member. Also, in all cases, there should be coordination with the appropriate FDIC regional office so that the FDIC can be aware of and make the necessary fund designation.

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