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4000 - Advisory Opinions


FDIC Approval of Delayed (Second-Tier) Conversion Transactions

FDIC-90-45

August 24, 1990

Douglas H. Jones, Senior Deputy General Counsel

This is in response to your letter of August 9, 1990, requesting our interpretation of section 5(d)(2)(C)(ii) 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)). In your letter you describe a transaction wherein a newly established savings association organized by a bank holding company would assume the deposit liabilities of a failed thrift, and then transfer the acquired deposits to affiliated banks. You ask if section 5(d)(2)(C)(ii) authorizes the FDIC to approve the "delayed" or second-tier conversion transactions.

I understand the facts to be as follows. *** proposes a two-step transaction whereby a de novo federally chartered savings association would acquire a savings association from the Resolution Trust Corporation (RTC) and, within six months from the date of closing of the RTC transaction, sell (by means of purchase and assumption transactions or merger) all of the branches it acquires to affiliated banks. It is contemplated that at the end of the six-month period, the de novo federally chartered association will be merged with an affiliated bank or, in the alternative, liquidated after the sale to affiliates of all of its operations. The savings association to be acquired from the RTC is a centralized, multi-state association. An immediate transfer to, or in the alternative, the direct acquisition of the branches by, the banks, cannot be accomplished due to state law prohibitions and operational difficulties caused by the fact that the savings association is a multi-state operation. Prior to *** submission of its bid to RTC, the bank and the specific savings association branch to be acquired by that bank will have been identified or matched (thrift branches will be transferred to banks located in each respective state). The bid to the RTC will disclose that *** will file, as soon as feasible following the initial acquisition of the savings association from the RTC, appropriate applications to consummate the spin-off of the acquired branches in each state. The specific details of the subsequent transfers will be disclosed in such applications.

As you are aware, section 5(d)(2)(A) of the FDIA, provides that no insured depository institution may participate in a conversion transaction without the prior approval of the FDIC. Generally speaking, a conversion transaction includes any transaction by which deposits are transferred from the Savings Association Insurance Fund (SAIF) to the Bank Insurance Fund (BIF), or vice versa. The FDIC may not approve conversion transactions until August 10, 1994, with certain limited exceptions. One of these exceptions appears at section 5(d)(2)(C)(ii) of the FDIA. This section authorizes the FDIC to approve a conversion transaction if the conversion occurs "in connection with" the acquisition of a SAIF member in default or in danger of default.

It is my opinion that, under the specific circumstances described above, the FDIC is authorized to approve the conversion transactions pursuant to section 5(d)(2)(C)(ii), provided the FDIC and RTC determine that the estimated financial benefits to SAIF or RTC equal or exceed the estimated loss of assessment income to SAIF over the remaining balance of the moratorium on conversion transactions. This conclusion is based upon the following factors: there is documented proof of the bidder's present intention to transfer the assets acquired from RTC; the bidder's intention is disclosed in general terms in the bid submitted to RTC; the parties to the subsequent transactions have been specifically identified prior to the submission of the bid to the RTC; the subsequent transactions have been specifically disclosed in applications to be filed in conjunction with the initial transaction with federal or state regulatory agencies; contemporaneous transfer is not possible due to unusual operational difficulties and legal restrictions; the conversion transactions will be accomplished in a reasonably short and determinable time; and the participating institutions are affiliated. When considered together, the above listed factors suggest that it can reasonably be said that the second-tier transactions occur in connection with the acquisition of a SAIF member in default. Moreover, such an interpretation achieves a proper balance between the stated purpose of the moratorium1 and FIRREA's fundamental objective of resolving failed savings associations in an expeditious manner.

Accordingly, the transactions you propose are permissible conversion transactions authorized by section 5(d)(2)(C)(ii) of the FDIA. This opinion should not be interpreted as a prior approval of the proposed conversion transactions. Approval of the proposed conversion transactions by the FDIC may only be granted upon actual application to the FDIC. However, the benefits test outlined in section 5(d)(2)(C)(ii) of the FDIA may be calculated by the FDIC and RTC as if the conversion transactions occurred contemporaneously with the acquisition of assets from RTC by the de novo federally chartered savings association. Consistent with Part 312 of the FDIC rules and regulations, the exit and entrance fees should be calculated as of the date the deposits are transferred from the SAIF member to the BIF member. This opinion is based upon the facts presented and any change in those facts could warrant a different conclusion.

1"This moratorium is necessary to insure that those institutions that have benefitted from having a savings and loan charter pay their fair share of the bailout and to provide for a stable and increased premium income to reduce the amount of taxpayer funds ultimately needed to resolve the crisis." H.R. Rep. No. 54, 101st Cong., 1st Sess., pt.1, at 411--12 (1989). Go back to Text


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