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4000 - Advisory Opinions
Application of Section 44 of the FDI Act to the merger of an
insured branch of a foreign bank with an affiliated U.S. subsidiary
FDIC--96--12
May 13, 1996
William F. Kroener, III, General Counsel
Thank you for your April 8, 1996 letter requesting an
interpretation of Section 44 of the Federal Deposit Insurance Act (FDI
Act) as added by section 102 of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, Pub.L.No. 103-328 (1994)
(Riegle-Neal). 1
According to your letter, you are seeking an interpretation that would
govern the merger of an insured branch of a foreign bank with an
affiliated U.S. subsidiary.
Summary of Section 44
Section 44 provides a structure for interstate mergers and only
applies to interstate mergers. Once a bank has established branches in
a host State through an interstate merger transaction, such bank may
establish and acquire additional branches at any location in the host
State where any bank involved in the interstate merger transaction
could have established or acquired branches under applicable Federal or
State law.
Section 44 permits the responsible Federal regulator to approve the
acquisition of a branch of an insured bank without the acquisition of
the entire bank only if the law of the State in which the branch is
located permits out-of-State banks to acquire a branch of a bank
without acquiring the entire bank. Nothing in Section 44 or its
legislative history discusses the impact of these provisions on insured
branches of foreign banks or gives any guidance as to how insured
branches of foreign banks should be treated.
Request
X requests that the FDIC interpret the statutory language of Section
44, so that insured branches of foreign banks may merge under the
provisions governing the merger of a stand-alone domestic bank with an
out-of-state bank, rather than the provisions governing the merger of a
single branch of a domestic bank with an out-of-state bank. For the
purposes of Section 44, X requests that the FDIC determine that an
insured branch of a foreign bank be considered an "insured bank"
using the general definitions contained in the FDI Act.
X articulates a compelling policy argument by advancing the view
that regulators should facilitate the merger of insured branches of a
foreign bank parent into its out-of-state U.S. bank subsidiaries. This
consolidation is consistent with the view that it is preferable for
foreign banks to operate through subsidiaries than through
branches. 2
Legal Analysis
X concedes that any interstate mergers of insured branches of
foreign banks must be subject to Section 44. The question that remains
is whether a merger of an insured branch of a foreign bank should be
handled under the subsections governing bank acquisition mergers or the
subsections governing branch acquisition mergers.
The terms used in Section 44 are: 1. "insured banks" and 2.
"branch of an insured bank." 3
In an effort to determine which subsection should govern the
acquisition of an insured branch, X suggests looking at the definitions
of "bank" and "insured bank" in the FDI Act.
Section 3(a)(1)(a) and (h) of the FDI Act
state: 4
{{2-29-00 p.4983}}
(a) Definitions of bank and related terms
(1) Bank The term "bank"--
(A) means any national bank, State bank, and District bank,
and any Federal branch and insured branch.
(h) Insured bank The term "insured bank"
means any bank (including a foreign bank having an insured branch) the
deposits of which are insured in accordance with the provisions of this
chapter; and the term "noninsured bank" means any bank the
deposits of which are not so insured.
I do not find that looking at these definitions compels the
conclusion that an insured branch of a foreign bank is itself an
insured bank for the purposes of Section 44. Therefore, I considered
the legislative history of Section 44 and these definitions as well as
numerous related definitions in the FDI Act, the International Banking
Act, the Bank Holding Company Act and in the FDIC's interpretative
regulations. Still, no conclusive answer emerged as to which of the two
subsections of Section 44 is appropriate to govern interstate mergers
of insured branches of foreign banks. I have found that the definitions
are not particularly helpful and the language of Section 44 itself, is
somewhat circular when trying to apply it to entities that were
probably not considered when this language was drafted.
In order to discern the appropriate interpretation of the language
of Section 44, it must be examined in the context of the Riegle-Neal
legislation. Riegle-Neal had two main purposes: (i) to facilitate the
transition to national interstate banking, and (ii) to provide
competitive equality for foreign banks. Most of Riegle-Neal is aimed at
achieving these two goals.
Riegle-Neal amended the statutes governing interstate banking, and
also amended the International Banking Act (IBA) in many significant
respects in order to conform the powers and duties imposed on foreign
banks operating in the United States to those granted to state and
national banks. Most of the Riegle-Neal amendments to the IBA expand
foreign banks' access to interstate banking. While permitting
acquisition transactions to occur, the legislative history indicates
that Congress was concerned about perceived competitive advantages
enjoyed by direct branches of foreign
banks. 5
In contrast, Riegle-Neal has no language dealing with the
consolidation of existing foreign bank entities or the acquisition of
an insured branch of a foreign bank by an unaffiliated entity. Section
44 attempts to provide for interstate banking through mergers while
being sensitive to states' rights to opt-out of branch banking and to
limit the acquisition of individual branches within their borders. The
language chosen by Congress in these merger provisions does not clearly
explain how insured branches of foreign banks are to be treated.
Given the ambiguity in Section 44 and the statutory definitions, it
is my view that Section 44 should be interpreted to give effect to all
of the language and purposes of Riegle-Neal when the FDIC acts on
interstate merger applications. Therefore, the FDIC will consider the
insured branch of a foreign bank as an insured bank for the purpose of
the merger provisions of Section 44 of the FDI Act, except where a
foreign bank has more than one insured branch in a state that does not
permit the sale of a single branch. In those states, the FDIC will
require that the foreign bank sell all of its insured branches in that
state to the same affiliated or unaffiliated acquiror.
This construction meets most of the goals of foreign banks with
insured branches and the concerns of the Institute without sacrificing
the competitive equality and the states' rights, which Riegle-Neal
sought to preserve.
Please feel free to contact me if you need any additional
information.
{{2-29-00 p.4984}}
112 U.S.C. § 1831u
(1994). Go Back to Text
2See Section 214 of the Federal Deposit Insurance
Improvement Act of 1991 (Foreign Bank Supervision Enhancement Act of
1991), Pub.L.No. 102--242 (1991). Go Back to Text
3Although X did not mention this definition, Section 44 defines
"branch" to mean "any domestic branch."
12 U.S.C. § 1831u(f)(4).
However, that definition does not dispose of the question under
consideration nor advance our analysis as the primary emphasis of that
definition appears to be to distinguish between branches located in the
U.S. and those located outside the U.S. Go Back to Text
412 U.S.C.
§ 1813(a)(1)(A) and
(h) (1994). Go Back to Text
5See 12 U.S.C.
§ 3104(a) (1994) and House Conference Report No. 103--651,
pp. 126--127, 1994 WL 405911 (August 2, 1994). Go Back to Text
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