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4000 - Advisory Opinions

Lending Limit on Loans to Holding or Controlling Affiliates


May 18, 1981

Margaret M. Olsen, Senior Attorney

This responds to your June 11, 1980 letter addressed to FDIC Examiner Walter Sargood regarding the apparent violations of section 18(j)(1) and (2) of the Federal Deposit Insurance Act ("FDI Act," 12 U.S.C. 1828(j)(1) and (2)) by *** which were cited in FDIC's Report of Examination. Your letter was recently forwarded to this office for reply.

With regard to the apparent violations of section 18(j)(1), the January 1980 Report of Examination notes that *** extended credit (by means of interest bearing deposits) to a holding or controlling affiliate, the *** in excess of 10% of its capital stock and surplus and without the required collateral security. You argue *** did not violate the provisions of section 18(j)(1) since *** is a foreign bank with an insured branch. Section 18(j)(1) contains a specific exemption for foreign banks having insured branches. You note that section 3(s) of the FDI Act (12 U.S.C. 1813(s)) defines "insured branch" as any branch of a foreign bank whose deposits are insured by the FDIC and that the International Banking Act ("IBA") defines "foreign banks" as including companies organized under the laws of Puerto Rico, 12 U.S.C. 3101(b)(7).

We disagree with your conclusion. The provisions of section 18(j)(1) apply to every nonmember insured bank to the same extent as if it were a member bank. *** is a state bank that is insured by the FDIC and that is not a member of the Federal Reserve System. It is therefore an insured state nonmember bank for the purposes of the FDI Act and, as such, subject to the provisions of section 18(j)(1). There is nothing in the legislative history of the IBA to indicate Congress intended that laws which apply to insured state nonmember banks were to become inapplicable to such banks merely because they were incorporated in Puerto Rico (and thus within the definition of a foreign bank). In our opinion, laws which apply to insured state nonmember banks continue to apply to insured state banks incorporated in Puerto Rico. Thus, we do not interpret the exception set out in section 18(j)(1) as applying to *** Further, we note that even if the exception were to apply to insured state chartered banks in Puerto Rico, *** would not be within this exception. As defined in the IBA, a branch of a foreign bank is one located in any State, with "State" being any State or the District of Columbia, 12 U.S.C. 3101(b)(3) and (10). *** has no branch in any State and thus is not a foreign bank having an insured branch.

With regard to the apparent violations of Section 18(j)(2), the Report of Examination notes that the extensions of credit to *** did not receive the prior approval of the board of directors. You argue that there was no violation because, again, *** is excepted under section 18(j)(1) as a foreign bank having an insured branch, Reg. O excludes extensions of credit made to a bank holding company from the lending limits, and Reg. O excludes from the definition of a member bank a foreign bank. As to your first argument, for the reasons explained above, we interpret section 18(j)(2) to apply to all insured state nonmember banks, including those incorporated in Puerto Rico. The exception in § 215.2(g) of Reg. O (12 C.F.R. § 215.2(g)) for foreign banks which have a branch in the United States is not applicable, in our opinion, to *** since it is an insured state nonmember bank, irrespective of whether it may also be a foreign bank for purposes of the IBA. Moreover, we do not agree with your analysis that the last sentence of section 18(j)(1) applies to the provisions of section 18(j)(2). As to the exception in § 215.4(c) of Reg. O (12 C.F.R. § 215.4(c)) which you cite, this only applies to the lending limitations on extensions of credit. The requirement for prior approval (Section 215.4(b)(1), 12 C.F.R. § 215.4(b)(1)) is a requirement separate from that of the lending limitation and has no exception for extensions of credit to holding companies. This point was specifically addressed in the preamble to Reg. O wherein it is stated: [A] member bank's loans to its parent bank holding company and to nonbank subsidiaries of that holding company remain subject to the prior approval and preferential lending restrictions of Section 22(h), (44 Fed. Reg. 12964). (Emphasis added.)

I trust this responds to your letter and explains why we believe section 18(j)(1) and (2) of the FDI Act apply to ***.

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