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4000 - Advisory Opinions

Whether Deposit Insurance of National Bank Will Continue Under FDI Act if Bank Converts to State Charter and Terminates Its Membership in the Federal Reserve System


April 3, 1992

Mark A. Mellon, Attorney

This is in response to your letter of March 13, 1992. Based on your letter, it is my understanding that you wish to ascertain whether the deposit insurance of a national bank will terminate pursuant to the Federal Deposit Insurance Act (the "FDIA") if that entity converts to a state charter and terminates its membership in the Federal Reserve System (the "FRS").

Section 4(c) of the FDIA (12 U.S.C. § 1814(c)) provides that any state-chartered depository institution which results from the conversion of any insured federally-chartered depository institution will continue as an insured depository institution. Since national banks are typically FRS members, section 4(c) appears to be in conflict with section 8(o) of the FDIA (12 U.S.C. § 1818(o)) which states that if an insured depository institution ceases to be a member of the FRS, its insured status shall be terminated. Section 8(o) states, however, that this requirement does not apply to those depository institutions that are provided for in section 4(b) of the FDIA (12 U.S.C. § 1814(b)).

A literal reading of section 8(o) leads to an illogical result. This is because section 4(b) is currently inapplicable to the issue of whether the deposit insurance of a depository institution should continue despite the loss of FRS membership. Prior to the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (the "FIRREA"), section 4(b) included the provision that deposit insurance will continue subsequent to the conversion of a depository institution from a federal to a state charter. Section 205 of the FIRREA moved this provision to a new subsection 4(c). The post-FIRREA section 4(b) of FDIA pertained to the granting of deposit insurance to a depository institution once it had been certified by the appropriate federal financial regulatory agency.1

The fact that section 8(o) refers to an irrelevant subsection indicates that Congress omitted to make a necessary technical amendment when it revised sub-section 4(b). Federal case-law states that although a statute should be interpreted to give effect to every provision, a provision which is the result of obvious mistake should not be given effect, particularly when it overrides common sense and evident statutory purpose. United States v. Babcock, 530 F.2d 1051 (D.C. Cir. 1976) (quoting United States v. Brown, 333 U.S. 18 (1948)). See Berg v. Shannon (In re Shannon), 670 F.2d 904 (10th Cir. 1982); New York State Higher Education Services Corp. v. Adamo (In re Adamo), 619 F.2d 216 (2d Cir. 1980), cert. denied, 449 U.S. 843 (1980).

Prior to FIRREA, there was an exception to the requirement that deposit insurance be terminated for institutions that cease to be FRS members. Deposit insurance would continue if loss of membership occurred in connection with a conversion from a federal to a state charter. The FIRREA in effect eliminated this exception by having sub-section 8(o) refer to a sub-section of the FDIA which is inapplicable, an illogical result in conflict with common sense which must have been a mistake of Congress. Since the judicial test set out in Babcock has been satisfied, my view is that section 8(o) of the FDIA may be interpreted to refer to sub-section 4(c) rather than sub-section 4(b). This interpretation will restore the exception for federal-to-state conversions that was eliminated as the result of an inadvertent error by Congress.

Therefore, if a national bank plans to convert to a state charter and, incident to that transaction, simultaneously files an application for withdrawal from the FRS, the transaction can be interpreted as coming within the exception provided for in section 4(c) of the FDIA and the deposit insurance of the converted institution should continue in effect. If, however, an application for withdrawal is filed after the date of conversion from a federal to a state charter, it seems clear that the deposit insurance of the institution would be terminated pursuant to section 8(o).

I hope that this answer is responsive to your query. Please do not hesitate to contact me if you should have any questions about this or any other matter.

1Section 4(b) has been amended again by section 115 of the FDIC Improvement Act of 1991; it now deals solely with the continuation of deposit insurance for an institution which becomes a member of the FRS or converts to a national bank. Go back to Text

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