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4000 - Advisory Opinions
Opinion Regarding Title VIII Implications on
Correspondent Bank Relationships
FDIC-79-5
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
{{4-28-89 p.4022}}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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