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4000 - Advisory Opinions
A State-Chartered Savings Association Which Converted to a SAIF
Member State Bank Prior to Effective Date of 12 C.F.R. § 333.3 May,
Despite Capital Deficiency, Apply for Permission to Retain Its Equity
Investment in a Subsidiary That Conducts Impermissible Activities
FDIC-91-55
July 3, 1991
Pamela E.F. LeCren
This letter is in way of follow-up on the issues raised at our ***
meeting. As you will recall, the meeting was held at your request for
the purpose of discussing the impact of a recent amendment to Part 333
of the FDIC's regulations on your client *** ("[Bank]").
[Bank] is a SAIF member state chartered commercial bank that
converted from a savings association charter prior to the date the FDIC
first solicited comment on the proposed amendment to Part 333. The
final amendment as adopted reimposes on SAIF member state chartered
commercial banks certain of the activity, investment, and capital
requirements found in FIRREA that are applicable to savings
associations. The regulation applies to such institutions even if they
converted to commercial banks prior to the effective date of the
regulation (June 5, 1991).
You indicated at our meeting that [Bank] presently owns a
subsidiary that is engaged in insurance underwriting activities. The
subsidiary is engaged in an activity that would not be permissible for
a national bank or permissible for a service corporation of a federal
savings association. [Bank] has had the insurance subsidiary for four
or five years, i.e., the operation was ongoing before the
institution converted from a state chartered savings association. You
also indicated that [Bank] presently is in compliance with the FDIC's
capital requirements under Part 325 of the FDIC's regulations and that
the FDIC in a past examination report commented favorably on the bank's
insurance operation and its contribution to the bank's overall
condition.
Part 333 as amended in effect treats any SAIF member state bank for
the purposes of the FIRREA restrictions as though the institution is
still a state savings association. Under section 28 of the FDI Act as
added by FIRREA (12 U.S.C. 1831(e)) and implemented by section 303.13
of the FDIC's regulations (12 C.F.R. 303.13) a state savings
association may not, subject to the following exception, directly
engage in any activity, nor make any equity investment, that is not
permissible for a federally chartered savings association. A state
savings association, with the consent of the FDIC, may directly conduct
an activity impermissible for a federal savings association, and/or
acquire or retain an equity investment in a service corporation that
conducts an activity that is impermissible for a service corporation of
a federal savings association, provided that: (1) the institution meets
its fully phased-in capital requirements, and (2) the FDIC determines
that the equity investment does not pose a significant risk of loss to
the insurance fund. Under section 333.3(a) of the final rule, section
303.13(b) applies to all SAIF member state banks. (Section 303.13(b)
recites the above described requirement and establishes application
procedures). For the purposes of applying section 333.3, the relevant
capital level is that set by Part 325 of the FDIC's regulations and not
the fully phased-in capital requirements referenced in FIRREA. Section
333.3, however, does incorporate to a certain extent the capital
requirements applicable to savings associations. Under section 333.3(c)
a SAIF
{{8-16-91 p.4566}}member state bank in determining
whether it has met its capital requirement under Part 325 of the FDIC's
regulations is required to deduct from its capital its investment in,
and extensions of credit to, any subsidiary that engages in any
activity that is not permissible for a national bank. (Again there are
certain exceptions to the deduction rule none of which are relevant
here.)
SAIF member state banks that converted prior to June 5, 1991 that
are as of that date engaging in an activity that requires prior
consent, or which as of that date have an equity investment that
requires prior consent, will not be considered to be in violation of
the regulation provided that the institution files an application for
permission to retain the investment or permission to continue the
activity. The activity may be conducted and/or the equity investment
retained while the application is pending. If the application is
denied, the institution must cease the activity as soon as prudently
possible and/or the equity investment must be divested by July 1, 1994.
If an institution that converted prior to June 5, 1991 has an equity
investment in a subsidiary that is conducting activities that are not
permissible for a national bank and if deducting on June 5, 1991 the
total amount of the bank's investment in and extensions of credit to
such subsidiary will cause the bank to fail to meet its capital
requirement under Part 325, the institution must file a capital plan
with the appropriate FDIC regional office by July 5, 1991. There are no
specific requirements for the capital plan in terms of timing or
substance. While the institution is required under the regulation to
take the deduction when calculating its capital, it is our opinion that
the regulation does not require that the converted institution deduct
from its capital its investment in and extensions of credit to the
subsidiary in the precise manner set out in section 5(t)(5)(D) of the
Home Owners' Loan Act ("HOLA", 12 U.S.C. 1464(t)(5)(D)). Thus,
provided that the plan is acceptable to the regional office, the bank
may spread the deduction out over a longer period of time than
otherwise accorded savings associations under HOLA. If the plan is
satisfactory to the regional office, the bank operates in accordance
with the plan, and the circumstances under which the plan was drawn up
do not change, the bank should not be concerned with an enforcement
action by the regional office based upon capital.
In the case of your client, the insurance underwriting subsidiary
apparently is engaged in an activity that is not permissible for a
federal savings association. If the bank wishes to retain the
subsidiary, it must file an application with the Atlanta Regional
Office of the FDIC. The regulation also would appear to require that
the bank deduct from its capital the total amount of its investment in,
and extensions of credit to, the insurance subsidiary. If taking that
deduction on June 5 would result in the bank not meeting its capital
requirement under Part 325, that fact might be taken to preclude the
bank from being granted permission to retain the subsidiary. (As
indicated above, a precondition of a state savings association being
granted permission to retain an impermissible equity investment in a
service corporation is that the applicant meets its capital
requirement.) We do not, however, so read the regulation in the case of
an institution that converted prior to June 5, 1991. The regulation
allows for giving such institutions the additional latitude to retain
an investment while coming into capital
compliance. 1
Thus, despite any capital deficiency, [Bank] can apply for, and in
the agency's discretion obtain, permission to retain its investment.
As can be inferred from the above, the bank will need to file a
capital plan with the Atlanta Regional Office if, taking into
consideration the deduction of its investment in and extensions of
credit to its insurance subsidiary, the institution does not meet its
capital
{{8-16-91 p.4567}}requirement on June 5, 1991. Again, if
the FDIC determines that the continued operation of the insurance
subsidiary does not pose a significant risk to the insurance fund, the
bank may continue to retain and operate the subsidiary while it comes
into capital compliance.
Your client should keep in mind that any determination on the part
of the FDIC that there is no significant risk to the fund for an
institution to retain and operate a subsidiary that conducts activities
that are impermissible for a federal savings association is dependent
upon the facts and circumstances in existence at the time of approval.
The FDIC is not precluded from taking any appropriate regulatory action
in the event of changed circumstances. Likewise, if the capital
circumstances of an institution that converted prior to June 5 which is
being given the latitude to retain its equity investment in a
subsidiary while it comes into capital compliance alters for the worse,
the FDIC is not precluded from taking appropriate regulatory action.
I hope that the above clarifies how the adoption of section 333.3
may affect your client. If you have any further questions, please do
not hesitate to contact me.
1Institutions that convert after June 5, 1991 are not accorded
the same latitude. Such institutions will have made the decision to
convert with advance knowledge of the requirement under section 333.3
to deduct their investments in and extensions of credit to certain
subsidiaries. There is thus no justification to construe the regulation
so as to allow such institutions the additional flexibility of
retaining the investment while coming into capital compliance. Of
course, if such an institution meets its capital requirement (despite
the deduction) before divestiture is accomplished, the institution may
apply for permission to retain the investment based on the argument
that the retention of the investment does not pose a significant risk
of loss to the insurance fund. Go Back to Text
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