[Federal Register: August 23, 1996 (Volume 61, Number 165)]
[Proposed Rules]
[Page 43486-43500]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
=======================================================================
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 362
RIN 3064-AA29
Activities and Investments of Insured State Banks
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The FDIC is proposing to amend its regulations governing the
activities and investments of insured state banks. In general, subject
to certain exceptions, insured state banks are prohibited from making
equity investments of a type and in an amount that are not permissible
for national banks or engaging as principal in activities of a type not
permissible for national banks. The regulation requires banks to file
with the FDIC their plan for the divestiture of any prohibited equity
investments, establishes procedures regarding notices to the FDIC
pertaining to excepted equity investments, delegates authority to act
on notices, applications and divestiture plans, requires that banks
provide certain information to the FDIC regarding existing insurance
underwriting activities that the law allowed banks to continue,
provides for application procedures to obtain consent to engage in
otherwise impermissible activities, and establishes a number of
exceptions to required consent. The proposed amendment substitutes a
notice for an application when banks meet specified requirements for
particular real estate, life insurance and annuity investment
activities. If the FDIC does not object to the notice during the notice
period, the bank may proceed with the planned investment activities.
DATES: Comments must be received by October 22, 1996.
ADDRESSES: Send comments to Jerry L. Langley, Executive Secretary,
Federal Deposit Insurance Corporation, 550 17th Street N.W.,
Washington, D.C. 20429. Comments may be hand delivered to room F-402,
1776 F Street N.W., Washington, D.C. on business days between 8:30 a.m.
and 5 p.m. Comments may be sent through facsimile to: (202) 898-3838 or
by the Internet to: comments@fdic.gov. Comments will be available for
inspection at the FDIC Public Information Center, room 100, 801 17th
Street, N.W., Washington, D.C. on business days between 9:00 a.m. and
4:30 p.m.
FOR FURTHER INFORMATION CONTACT: Shirley K. Basse, Review Examiner,
[[Page 43487]]
(202) 898-6815, Division of Supervision, FDIC, 550 17th Street, N.W.,
Washington, D.C. 20429; Pamela E.F. LeCren, Senior Counsel, (202) 898-
3730, Patrick J. McCarty, Counsel, (202) 898-8708 or Linda L. Stamp,
Counsel, (202) 898-7310, Legal Division, FDIC, 550 17th Street, N.W.,
Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in part 362 has been
approved by the Office of Management and Budget under control number
3064-0111 pursuant to section 3504(h) of the Paperwork Reduction Act
(44 U.S.C. 3501 et seq.). Comments on the collection of information
should be directed to the Office of Information and Regulatory Affairs,
Office of Management and Budget, Washington, D.C. 20503, Attention:
Desk officer for the Federal Deposit Insurance Corporation, with copies
of such comments to be sent to Steven F. Hanft, Office of the Executive
Secretary, room F-453, Federal Deposit Insurance Corporation, 550 17th
Street, NW, Washington, D.C. 20429. The collection of information in
this amended regulation is found in Sec. 362.4(c)(3)(vi) and
Sec. 362.4(c)(3)(vii) and takes the form of a 60 day advance notice to
be filed by an insured state bank that meets certain requirements and
intends to: (1) invest, indirectly through a majority-owned subsidiary,
in real estate investment activities; and/or (2) directly, or
indirectly through a majority-owned subsidiary, invest in insurance
products or annuity contracts. The information will allow the FDIC to
properly discharge its responsibilities under section 24 of the Federal
Deposit Insurance Corporation Act (12 U.S.C. 1831a). The information in
the notices will be used by the FDIC to ensure compliance with the law,
as part of the process of determining risk to the deposit insurance
funds.
Notice to Indirectly Engage as Principal in Real Estate Investment
Activities
Number of Respondents: 250.
Number of Responses Per Respondent: 1
Total Annual Responses: 250
Hours Per Response: 6
Total Annual Burden Hours: 1,500
Notice to Directly or Indirectly Acquire or Retain Life Insurance
Products or Annuity Contracts
Number of Respondents: 60.
Number of Responses Per Respondent: 1.
Total Annual Responses: 60.
Hours Per Response: 4.
Total Annual Burden Hours: 240.
Background
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) (Pub. L. 102-242, 105 Stat. 2236) was
signed into law. Section 303 of FDICIA added section 24 to the Federal
Deposit Insurance Act (FDI Act), ``Activities of Insured State Banks''
(12 U.S.C. 1831a). With certain exceptions, section 24 of the Federal
Deposit Insurance Act (FDI Act) limits the direct equity investments of
state chartered insured banks to equity investments of a type and in an
amount that are permissible for national banks. In addition, the
statute prohibits an insured state bank from directly, or indirectly
through a subsidiary, engaging as principal in any activity that is not
permissible for a national bank unless the bank meets its capital
requirements and the FDIC determines that the activity will not pose a
significant risk to the deposit insurance fund. Section 24 provides
that the FDIC may make such determinations by regulation or order. The
statute requires that equity investments that do not conform to the new
requirements must be divested no later than December 19, 1996 and
requires that banks file certain notices with the FDIC concerning
grandfathered investments.
Part 362 of the FDIC's regulations (12 CFR part 362) implements the
provisions of section 24 of the FDI Act. Among other things, part 362
sets out application procedures whereby insured state banks may seek
the FDIC's consent to engage in otherwise impermissible activities. The
FDIC may impose such conditions and restrictions on the approval of any
application as it deems necessary to prevent the conduct of the
activity from posing a significant risk to the deposit insurance fund.
Part 362 also provides for certain exceptions which allow adequately-
capitalized insured state banks to engage in named activities without
prior consent as the FDIC has determined that engaging in the
activities in question does not present a significant risk to the
insurance fund.
Between 1992 and April 30, 1996, the FDIC acted on 1156
applications, notices and divestiture plans under section 24 either by
action of the Board of Directors or by the Division of Supervision
pursuant to delegated authority. The majority of the filings were
notices and divestiture plans. The applications submitted for Board
action have for the most part involved indirect equity interests in
real estate (i.e. a majority-owned subsidiary holds or would hold the
real estate investment) and direct investments in life insurance
policies and annuities. The FDIC has evaluated these applications with
a view toward developing a proper balance between minimizing risk to
the deposit insurance funds and allowing state banks to engage in real
estate, insurance and annuity investment activities where otherwise
permitted under state law.
Of the applications, notices and divestiture plans filed under
section 24 and part 362, the Board acted on 34 applications to directly
or indirectly initiate or continue as principal an impermissible
activity, approving 31 applications. The Division of Supervision acted
on a total of 1122 applications and/or notices which consisted of the
following: 388 requests to directly or indirectly initiate or continue
as principal in an impermissible activity; 460 notices regarding
grandfathered investments in common or preferred stock or shares of an
investment company (which includes plans for divestitures of the excess
investments in the products); 272 divestiture plans regarding
impermissible equity investments and impermissible activities; and 2
requests to retain an equity investment in an insurance underwriting
department. Of these filings, 5 applications were denied either in
whole or in part.
Based on the agency's experience with the applications to date, the
FDIC proposes to amend part 362 to substitute a notice procedure for
prior approval by application in the case of real estate investment,
life insurance and annuity investment activities provided the banks
meet certain conditions and restrictions. Under the proposed amendment,
if the FDIC does not object to the notice within a maximum period of 90
days (60 days initial period plus 30 day optional extension), the bank
may proceed with its investment activity as planned. The agency's
experience to date with real estate, insurance and annuity investment
activities is discussed below along with a discussion of the risks
associated with these types of investment activities. A detailed
discussion of the proposed notice provisions follows.
Real Estate Investment Activities
The circumstances under which national banks may hold equity
investments in real estate are limited. If a particular real estate
investment is permissible for a national bank, a state bank only needs
to document that determination. If a particular real estate investment
is not permissible for a national bank and a state bank wants to
[[Page 43488]]
engage in real estate investment activities (or continue to hold the
real estate investment in the case of investments acquired before
enactment of section 24 of the FDI Act), the bank must file an
application with FDIC for consent. The FDIC may approve such
applications if the investment is made through a majority-owned
subsidiary, the institution is well capitalized and the FDIC determines
that the activity does not pose a significant risk to the deposit
insurance fund.
The FDIC approved 63 of 66 applications from December 1992 through
April 30, 1996 involving real estate investment activities. The FDIC
denied one application, approved one in part, and one bank withdrew its
application. The real estate investment applications generally have
fallen into three categories: (1) Requests for consent to hold real
estate at the subsidiary level while liquidating the property where the
bank expects that liquidation will be completed later than December 19,
1996; (2) requests for consent to continue to engage in real estate
investment activity in a subsidiary, where such activities were
initiated prior to enactment of section 24 of the FDI Act; and (3)
requests for consent to initiate for the first time real estate
investment activities through a majority-owned subsidiary.
The approved applications have involved investments which have
ranged from less than 1% to over 70% of the bank's Tier 1 capital. The
majority of the investments, however, involved investments of less than
10% of Tier 1 capital with only four applications involving investments
exceeding 25% of Tier 1 capital. The applications filed with the FDIC
have involved a range of real estate investments including holding
residential properties, commercial properties, raw land, the
development of both residential and commercial properties, and leasing
of previously improved property. The applications FDIC approved
included 21 residential properties, 29 commercial properties and 13
applications covering a mix of commercial and residential properties.
The assets of the institutions that submitted approved applications
ranged from $15 million to $6.7 billion. The institutions which have
been approved to continue or commence new real estate investment
activity primarily have had composite ratings of 1 or 2 ratings under
the Uniform Financial Institution Rating System (UFIRS). However, 2
institutions were rated 3 and 2 institutions were rated 4. The 4-rated
institutions submitted applications to continue an orderly divestiture
of real estate investments after December 19, 1996. Of the approved
applications, 6 were to conduct new real estate investment activities,
while 54 were submitted to continue holding existing real estate or to
hold existing real estate after December 19, 1996 in order to pursue an
orderly liquidation. The remaining 3 approved applications asked for
consent to continue existing holdings and conduct new real estate
activities. One application was partially approved and partially
denied. This application involved a bank that applied for consent to
continue direct real estate activities and consent to continue indirect
real estate investment activities through a subsidiary. The FDIC
approved the application to continue the real estate investment
activity through the subsidiary and denied the application for the bank
to engage directly in real estate investment activities.
In connection with the review of the above described applications,
the FDIC undertook to determine what risk, if any, real estate
investments pose to banks and ultimately to the deposit insurance
funds. After reviewing, among other things, whether and to what extent
real estate investments have played a role in the failure of
institutions, the FDIC determined that real estate investments can pose
significant risks, and that if such activities are to be permitted,
prudential constraints should be imposed to control the various risks
posed to both a financial institution and the deposit insurance fund.
The results of that review are summarized below.
Risks of Real Estate Investment Activities
Investments in real estate, at any stage of the development
process, or even completed properties, generally can be characterized
as risky in that there is a high degree of variability or uncertainty
of returns on invested funds. The cyclical downturn in the real estate
market in the late 1980s and early 1990s, and the impact of that
downturn on financial institutions, provides an illustration of the
market risk presented by real estate investment activities. In addition
to the high degree of variability, real estate investments possess many
risks that, while not entirely unique, are not readily comparable to
typical equity investments (e.g. common stock). Real estate markets
are, for the most part, localized; investments are normally not
securitized; financial information flow is often poor; and the market
is generally not very liquid.
Real estate investment activities can increase interest rate risk;
optimum investment periods are typically long-term; real estate is
relatively lacking in liquidity; and real estate is subject to
specialized risks such as environmental liability. The experience and
expertise of management is a critical factor, and there is much
anecdotal evidence to suggest that the lack of adequate management
creates a significant level of risk of loss.
Due to the higher risk evident in real estate investments relative
to more traditional banking activities, federally-chartered banks
traditionally have been prohibited from acquiring or holding real
estate solely for investment purposes. (Real estate investment
activities remain permissible activities for subsidiaries of federally-
chartered thrift institutions.) State-chartered banks also were allowed
to engage in real estate investment activities, if permitted by state
law, without application to the FDIC until FDICIA required state-
chartered banks and their subsidiaries to obtain permission from the
FDIC to engage in activities, including real estate investment
activities, that are otherwise not permissible for national banks or
subsidiaries of national banks.
The function of an equity investor is to bear the economic risks of
the venture. Economic risk is traditionally defined as the variability
of returns on an investment. If a single investor undertakes a project
alone, all the risk is borne by the investor. If investors participate
in an investment through a vehicle such as corporate stock ownership,
that stock grants its holders pro rata participation in control of that
corporation, and in its profits and losses. If that corporation is
liquidated, the investor has a residual interest in any unencumbered
assets.
An investor typically will have a required rate of return based on
the historical track record of a particular company and/or type of
investment project. Market participants face a general trade-off: The
riskier the project, the higher the required rate of return. A key
aspect of that trade-off is the notion that a riskier project will
entail a higher probability of significant losses for the investor.
Assessments of the degree of risk will depend on factors affecting
future returns such as cyclical economic developments, technological
advances, structural market changes, and the project's sensitivity to
financial market changes.
The actual return on an investment, however, will depend on
developments beyond the investor's control. If the actual return is
higher than the expected rate, the investor benefits. If the project
falls short of expected returns, the investor suffers. At the extreme,
an
[[Page 43489]]
investor can lose all or some of the original investment.
Investments in real estate ventures follow this pattern. In fact,
equity investments in commercial real estate have long been considered
fairly risky because of the uncertainties in the income stream they
generate. Both commercial and residential real estate markets in the
post- World War II period have been marked by large cyclical swings.
Two of those cyclical periods (the mid-1970s and the late 1980s through
early 1990s) involved massive overbuilding of commercial projects. That
overbuilding resulted in sharp declines in commercial property prices
and serious losses to many investors. The historical performance of the
industry clearly demonstrates considerable risk for investors.
If an investment is made solely using the funds of an investor, the
investor bears all the risk. However, if the project is partially
financed by debt, the risks are shared with the lender. Nonetheless,
the equity investor typically still bears the bulk of the variation in
the risk and rewards of an investment. As a rule, the lender is
compensated at an agreed amount (or formula in the case of a variable
rate loan). The lender is paid--both interest and principal--before the
equity investor/borrower receives any rewards or return of investment.
Thus, any downside outcome is borne first by the equity investor. In
properly underwritten loan arrangements the lender bears the economic
risk of significant losses only in the case of significant negative
outcomes. Since the legal priority of the debt holder is higher in a
liquidation or bankruptcy than that of the equity holder, the debt
holders are hurt if the investment entity has very limited resources.
Of course, the borrower/equity investor receives all of the up-side
potential returns from the investment.
While a leveraged investor has less of his/her own funds at stake,
the use of borrowed funds to finance an investment greatly magnifies
the variability of the returns to the equity investor. That is to say,
leverage increases the risks involved. For instance, a small decline in
income in an unleveraged investment may only mean less positive
returns; to the leveraged investor, it may mean out of pocket losses,
as debt service may have already absorbed any income generated by the
project. Conversely, a small increase in generated income may just
moderately increase the rate of return on an all equity investment but
have a major positive effect on the highly leveraged investor.
The fact that most commercial real estate investments are highly
leveraged also affects overall market volatility. For instance, high
interest rates will lower the expected rate of return for highly
leveraged investments which will, in turn, lower effective demand.
Thus, prices offered for commercial real estate during periods of high
interest rates typically are lowered. For example, to the extent that
there was a ``credit crunch'' for commercial real estate in the early
1990s and lenders were unwilling to extend credit, diminished effective
demand for a property could have resulted in the elimination of a broad
class of potential investors, rather than simply a lower price being
bid.
The economic viability of any investment in real estate ultimately
depends on the economic demand for the services it provides. Thus,
fluctuations in the economy in general are translated into
uncertainties in the underlying economics of most real estate
investments. National economic trends, regional developments, and even
local economic developments will affect the volatility of returns. A
traditional problem for real estate investors in that regard is that,
when the economy as a whole reaches capacity during an economic
expansion, they are one of the sectors seriously affected by the
resulting run-up in interest rates.
Much of the uncertainty associated with real estate investment,
however, comes from the nature of the production itself--how new supply
is brought to market. Investments in the construction of real estate
typically have a long gestation period; this long planning period is
especially characteristic of large commercial development projects.
Given the traditional cyclicality of the economy and financial markets,
the economic prospects for an investment can change radically during
that period, altering timing and terms of transactions.
Moreover, real estate investors also typically have trouble getting
full information on current market conditions. Unlike highly organized
markets where participants can easily obtain data on market
developments such as price and supply considerations, information in
the commercial real estate market is often difficult, or impossible, to
obtain. Also inherent in the investment process for commercial real
estate is the fact that the market is relatively illiquid--particularly
for very large projects. Thus, instead of having numerous frequent
transactions that incorporate the latest market information and ensure
that prices reflect true economic value, markets can be thin and the
timing of a sale or rental contract can affect the value of the
underlying investments.
In addition to the inherent illiquidity of commercial real estate
markets, transactions often are ``private deals'' in which the major
parameters of the investment are not available to the public in general
and, in particular, to rival developers. For instance, the costs of
construction are a private transaction between the developer and his
contractor. Likewise, gauging selling prices or rental income is
difficult since: (1) There are no statistical data on transaction
prices available as there are for single-family structures and (2) even
if there were data available, it would be impossible to account for the
many creative financing techniques involved in commercial sales and in
rental agreements (e.g., tenant improvements and rent discounting).
Because of imperfect market information and the length of the
production process, prices of existing structures are often
artificially bid up in market upswings. That is, short-term shortages
fuel speculative price increases. Speculative price increases (whether
it be for raw land, developed construction sites, or completed
buildings) typically encourage even more construction to take place,
leading to additional future overbuilding relative to underlying
demand.
In addition to the inherent cyclicality of real estate markets,
several underlying factors create additional uncertainties in the
investment process. Changes in tax laws will affect the profitability
of real estate investments. For example, tax changes were a major
consideration in the 1980s, but changes in depreciation allowances and
in tax rates have been commonplace in the post-World War II era.
Another uncertainty is the effect of other governmental actions,
especially in the area of regulations. A prime example is Federal
mandates requiring clean-up of existing environmental hazards that
imposed unexpected costs on investors at the time they were passed.
Similar uncertainties result from state and local laws that effect real
estate and how it can be developed. For instance, changes in
environmental restrictions of new construction can add unexpected costs
to a project or even bar its intended use. Similarly, a zoning change
can positively or negatively affect investment prospects unexpectedly.
All of these factors add to the uncertainty of returns and thereby
increase the risk of the investment.
Two other considerations often play into increasing risks in real
estate investment. First, the efficient execution of a real estate
investment usually
[[Page 43490]]
requires a ``hands on'' approach by an experienced manager. This level
of involvement is especially true of a construction project where
developers have to deal with a wide variety of problems ranging from
governmental approvals to sub-contractors and changing commodity
markets. For an investment in developed real estate, maintenance
problems, replacing lost tenants, and adjusting rents to retain tenants
all must be addressed in an environment of ever changing market
conditions.
Many equity investors solve these problems by ``hiring'' someone
else to manage the investment. The experience of the 1980s shows that
there are specific risks involved in separating ownership from
management. For instance, many tax-oriented investors in the early
1980s arguably knew little about the basic economics of the investments
they were undertaking. In a perfect world, ``passive'' investment would
work just as efficiently as direct, active investment. In reality,
investment outcomes are likely to be more uncertain for equity
investors when someone else is making decisions that affect the
ultimate return.
Finally, an issue that plays into long-run risks in real estate
investment is the fact that real estate markets--especially commercial
real estate markets--are affected by both national and local
developments. Even if knowledge were more widespread within local real
estate markets, it is difficult to track all the relevant parameters of
the investment decision geographically. Most commercial real estate
investments have both a local and national component because firms
demanding commercial floor space are typically geographically mobile.
For example, the developer of an industrial park would have to be
concerned about how existing and future developments located in close
proximity to the project might affect the returns on the investment.
However, operating income and the ability to attract and keep tenants
also can be affected by market conditions around the country.
A financial institution--like any other investor--faces substantial
risks when it takes an equity position in a real estate venture. If the
investment were a direct, all-equity venture, the institution would
bear all of the substantial economic risks in this highly-cyclical
industry. If the entity making the investment is highly leveraged, a
completely new set of financial risks are incurred. A poor investment
outcome can quickly wipe out the leveraged equity investment. Finally,
the risks also can easily be magnified if--because of the form of
investment or debt instrument--the equity investor is separated from
the day-to-day economic and financial decisions affecting the prospects
for the venture.
Conditions Imposed in Connection With Approvals of Real Estate
Applications
In view of the risks identified with real estate investment
activities, the statutory requirement that approval should not be
granted unless the FDIC determines that the activity does not pose a
significant risk to the fund, and the FDIC's loss experience relating
to institutions that failed either partly or principally because of
real estate investment activity, staff determined that a number of
prudential constraints may be necessary to control the risk to the
individual bank and to the deposit insurance fund before concluding
that real estate investment activities do not present a significant
risk to the fund.
To date the FDIC has evaluated a number of factors when acting on
applications for consent to engage in real estate investment
activities. Where appropriate, the FDIC has fashioned conditions
designed to address potential risks that have been identified in the
context of a given application. In evaluating an equity real estate
investment activity application the FDIC has usually considered the
type of proposed real estate investment activity to determine if the
activity is unsuitable for an insured depository institution. The FDIC
also has reviewed the proposed subsidiary structure and its management
policies and practices to determine if a bank is adequately protected
from litigation risk and analyzed capital adequacy to ensure that a
bank first devotes sufficient capital to its more traditional banking
activities. In conjunction with this evaluation, the FDIC has evaluated
capital adequacy with respect to a bank's ``consolidated'' and ``bank
only'' leverage and risk-based capital ratios. In doing so, the FDIC
excluded all investments in real estate investment subsidiaries from
capital in the ``bank only'' capital calculation. The FDIC has
evaluated limitations on investment in a subsidiary engaging in real
estate investment activities to assure that the maximum risk exposure
is nominal; evaluated policies relating to extensions of credit to
third parties for subsidiary-related transactions to determine if they
protect the bank from concentrations of risk; and reviewed policies on
engaging in transactions in which insiders are involved to determine if
they protect the bank from potential insider abuse. In addition, the
FDIC has reviewed policies relating to the conditioning of loans on the
purchase of real estate from the subsidiary and the extending of credit
by the bank to third parties for the purpose of acquiring real estate
from its subsidiary to determine if they prevent undesirable tying
relationships and to determine if they are adequate to ensure that
sound credit underwriting is maintained. Finally, the FDIC has reviewed
and evaluated management's particular expertise relative to the
activities in question.
In every instance in which the FDIC has approved an application to
conduct a real estate investment activity a number of conditions have
been imposed for prudential reasons due to the unpredictability of
returns and other risks which are inherent in real estate investment
activities as well as to mitigate potential insider conflicts of
interest and to reduce risk to the insurance fund. In short, the FDIC
has determined on a case-by-case basis that the conduct of certain real
estate investment activities by a majority-owned subsidiary of an
insured state bank will not present a significant risk to the deposit
insurance fund provided certain conditions are observed. The conditions
which have been imposed as well as the purpose intended to be achieved
by imposing the conditions are discussed below. Not every condition has
been imposed in connection with each approval. The conditions have been
imposed on a case-by-case basis in light of the particular facts.
Capital
Most of the approval orders have a condition concerning capital.
Often the statutory requirement to meet and maintain adequate capital
is restated. In some instances, banks applying to conduct real estate
investment activities that entail more inherent risk, such as
undertaking a development project, have been required to maintain
capital that equals or exceeds the level required for ``well
capitalized'' institutions as defined in Part 325 after deducting the
bank's investment in any subsidiaries engaged in real estate investment
activities. The capital deduction has not been imposed in most
approvals of applications when the bank is liquidating existing real
estate investments. Indirect real estate investment activities for
purposes of the orders typically has been defined to include equity
interests in the real estate subsidiary, debt obligations of the
subsidiary held by the bank, bank guarantees of debt obligations issued
by the subsidiary, and extensions of credit or commitments of credit to
any third party for the purpose of making a direct investment in the
subsidiary or making
[[Page 43491]]
an investment in any investment in which the subsidiary has an
interest. The purpose of requiring the bank to be well-capitalized on a
bank-only basis is to ensure the continued viability of the bank, if
the investment in the subsidiary were to be lost. Such a calculation
serves as an ``acid test'' of the worst-case impact a real estate
investment activity would have on an institution's capital position in
the event that an institution's entire real estate-related investment
were to be dissipated.
In instances in which the capital deduction has been imposed the
bank has been required to take the deduction for call report purposes
including for purposes of prompt corrective action and risk based
premiums, except that the deduction is not taken when determining
whether the bank is critically under-capitalized.
Transactions with Affiliates
Another condition that FDIC frequently has imposed requires that
transactions between a bank and its real estate subsidiary comply with
the restrictions that would apply under sections 23A and 23B of the
Federal Reserve Act (12 U.S.C. 371c and 371c-1) as between a bank and
its affiliate. Among other things, section 23A requires that a bank
limit its covered transactions with affiliates to no more than 10% of
the bank's capital for one affiliate and 20% of its capital for all
affiliates. For the purposes of 23A, capital and surplus is defined as
Tier 1 and Tier 2 capital included in an institution's risk-based
capital under the capital guidelines of the appropriate Federal banking
agency, based on the institution's most recent consolidated Report of
Condition and Income filed under 12 U.S.C. 1817(a)(3) and the balance
of an institution's allowance for loan and lease losses not included in
its Tier 2 capital for purposes of the calculation of risk-based
capital by the appropriate Federal banking agency. The effect of the
section 23A restrictions is to also prohibit the bank and its
subsidiary from purchasing low-quality assets from each other unless a
commitment was made to purchase the asset before its acquisition by the
affiliate, pursuant to an independent credit evaluation.
Section 23B generally requires that covered transactions between a
bank and its affiliate (including the purchase of services or assets
from an affiliate under contract) are entered into under terms that are
substantially the same, or at least as favorable to the bank as those
prevailing at the time for comparable transactions with or involving
other nonaffiliated companies. Section 23B also generally requires that
affiliates not purchase as fiduciary any securities or other assets
from any affiliate unless such purchase is permitted under the
instrument creating the fiduciary relationship, by court order or by
law. In addition, section 23B prohibits affiliates from publishing any
advertisement or entering into any agreement stating or suggesting that
the bank is in any way responsible for the obligations of its
affiliates.
FDIC has imposed the above restrictions to keep the transactions
between the bank and the real estate investment subsidiary at arm's
length and to limit the bank's investment in the subsidiary. In
instances in which an application has involved continuing investment in
a subsidiary that at the time of application exceeds these limits, the
FDIC has usually modified the limitation to allow the excess investment
while imposing the amount limits on future transactions. The FDIC often
has made an exception for the collateral and amount limitations imposed
on loans from the bank to facilitate the sale of the real estate
investments held by the subsidiary, provided that the loans are
consistent with safe and sound banking practices, do not present more
than the normal degree of risk of repayment, and the credit is extended
on terms and under circumstances, including credit standards, that are
substantially the same, or at least as favorable to the bank as those
prevailing at the time for comparable transactions.
Real Estate Subsidiary Structure and Operations
There are numerous benefits which flow from ensuring that a parent
and its subsidiary maintain a separate corporate existence. Such
separation insulates banks and the deposit insurance fund from undue
risk and potential liability stemming from litigation. To protect
against ``piercing the corporate veil'' between the subsidiary and
parent, thus mitigating litigation risks, the FDIC usually has required
that the bank conduct real estate investment activities in a majority-
owned subsidiary which is adequately capitalized; is physically
separate and distinct in its operations from the operations of the
bank; maintains separate accounting and other corporate records;
observes corporate formalities such as holding separate board of
directors' meetings; maintains a board of directors with one or more
independent, knowledgeable outside directors and management expertise
capable of conducting activities in a safe and sound manner; contracts
with the bank for any service on terms and conditions comparable to
those available to or from independent entities; and conducts business
pursuant to separate policies and procedures designed to inform
customers and prospective customers of the subsidiary that it is a
separate organization from the bank, including the placement of
specific language on any debt instrument or contract with a third party
disclosing that the bank itself is not responsible for payment or
performance. The FDIC has recognized that requiring total separation of
the management of the subsidiary from the bank's management could
enhance the corporate separateness of the subsidiary. However, in
keeping with the FDIC's review and analysis of the downside risks real
estate investments pose when separating ownership from management, the
Board typically has required only a minimum of one independent
director. In addition, FDIC has considered the presence of one or more
outside directors to be a helpful deterrent to potential insider abuse,
an enhancement to diversity and expertise and an opportunity to augment
decision-making with a counterbalancing perspective.
Investment Limits
In order to maintain proper diversification and to effectively
control the concentration of credit and investment risk, FDIC has
required banks to identify and aggregate loans made to third parties
for the purpose of investment in real estate held by the bank's
subsidiary with the bank's own real estate investment activities and
included that figure in the bank's investment in the real estate
subsidiary. Generally, the FDIC has limited the amount of real estate
investment activity to the amount contemplated in the business plan
submitted with the application and requires the bank to notify the FDIC
in the event of any significant change in facts or circumstances. This
condition is designed to limit the exposure from the real estate
investment activity and allow the FDIC to evaluate any additional real
estate investment activity when contemplated by the bank.
Lending to Third Parties
The FDIC has conditioned approvals of applications to conduct real
estate investment activity by including limits on the extension of
credit to third parties for a direct investment in a bank subsidiary
engaged in real estate investment activity to further limit the
exposure of the state bank to real estate investment.
[[Page 43492]]
Insiders
Limiting buying and selling by bank insiders also has been imposed
as a condition to the approval of applications to conduct real estate
investment activity. These conditions generally require that the bank's
subsidiary not be permitted to engage directly or indirectly with
insiders in transactions involving the subsidiary's real estate
investment activities without the prior written consent of the FDIC.
These restrictions are in addition to the constraints on lending to
insiders imposed by Regulation O (12 CFR 337.3). The bank is expected
to identify conflicts of interest and their resolution by the Board
should be documented.
Fiduciary and Trust Restrictions
In order to maintain safe and sound underwriting standards, to
reduce or preclude the potential for breaches of fiduciary duties, and
to protect the bank and the deposit insurance fund, FDIC has imposed
one or more of the following conditions: (1) That the bank not
condition any loan on the purchase or rental of real estate from any
subsidiary engaged in real estate investment activities; and (2) that
the bank not purchase real estate from the subsidiary in its capacity
as a trustee for any trust, unless expressly authorized by the trust
instrument, court order, or state law.
On occasion, FDIC has imposed a condition that any potential
conflict of interest be identified, appropriately resolved, if
possible, and approved by the bank's board of directors prior to the
consummation of any transaction. This condition is considered a
reasonable approach to avoiding the risk of loss from conflicts of
interest while providing the bank with flexibility in resolving any
such issue.
Life Insurance Investments
The Office of the Comptroller of the Currency (OCC) has established
certain general guidelines for national banks to use in determining
whether they may legally purchase a particular insurance product. These
guidelines are contained in an OCC Banking Circular (BC 249), issued
May 9, 1991. That circular indicates that the authority for national
banks to purchase and hold an interest in life insurance is found in 12
U.S.C. section 24 (seventh) which permits national banks to exercise
all such incidental powers as shall be necessary to carry on the
business of banking.1 The circular indicates that the OCC has
further delineated the scope of that authority through regulations,
interpretive rulings, and letters addressing the use of life insurance
for purposes incidental to banking. Although the circular leaves open
the possibility that there may be other uses of life insurance that are
``incidental to banking'' (the circular says the purposes ``include''
those described in the circular), the circular clearly indicates that
there is no authority under 12 U.S.C. 24 (seventh) for national banks
to purchase life insurance for their own account as an investment. If
an insured state bank wishes to purchase an insurance product that does
not meet the guidelines contained in BC 249, that purchase is
considered to be an activity that is not permissible for a national
bank within the meaning of part 362. The purchase by the state bank
would therefore not be permissible unless the bank meets its minimum
capital requirements and the FDIC determines that there is no
significant risk to the deposit insurance funds. Under current
regulations the bank must make application for consent to make or
retain the investment and the FDIC then makes a determination based on
the facts and circumstances of the particular case.
---------------------------------------------------------------------------
\1\ In one instance the circular cites to 12 U.S.C. section 24
(fifth) which authorizes national banks to elect or appoint
directors and to employ bank officials.
---------------------------------------------------------------------------
The BC 249 provides two tests for national banks to use in
determining whether they may legally purchase a particular insurance
product. Test A relates to key-person life insurance. Under Test A the
insurance coverage must closely approximate the risk of loss. Test B
relates to life insurance as an employee benefit and provides that,
based upon reasonable actuarial benefit and financial assumptions, the
present value of the projected cash flow from the policy (insurance
proceeds) must not substantially exceed the present value of the
projected cost of the associated compensation or benefit program
(employee benefits). Insurance as an estate planning benefit is
specifically recognized, but only as part of a reasonable compensation
agreement or benefit plan.
Insurance proceeds include projected death benefits, loans against
the policy before the death of the insured to fund retirement payments,
and any other withdrawals by the bank. The projected cost of employee
benefits includes the bank's actual cost associated with the insurance
policy (the periodic mortality charges, loads, surrender charges,
administrative charges and other fees that are expected to be assessed
against the policy's cash surrender value during the term of the
policy) plus the projected amount of any retirement or other deferred
benefit payments that are expected to be paid out to employees or their
beneficiaries.
It is well established that certain types of insurance products are
actually ``securities'' under the Federal securities laws. Certain life
insurance policies--common names include universal life or variable
life--are ``securities.'' Banks may have to hold these investments
through a subsidiary, rather than directly. If the life insurance
policy in question is considered to be a security, and it does not
qualify under either Test A or Test B of OCC BC 249, then the life
insurance policy must be held through a subsidiary of the bank as
required under section 24 and part 362.
Risks Associated With Life Insurance Investments
A bank holding a life insurance contract as an investment is
exposed to a variety of risks, most of which are similar in nature to
the types of risks banks are exposed to on both sides of the balance
sheet: credit risks, liquidity risks, and interest rate risks. In
addition, there is actuarial risk inherent in holding a life insurance
policy that exposes banks to different risks than are usual in the
banking industry. Unless the issuing company becomes insolvent, a life
insurance policy investment gives a bank the potential for low returns
over the life of the investment, rather than loss of principal.
Banks purchase various forms of life insurance contracts as either
key-person protection for the bank or as a compensation benefit for the
employee. In certain instances, the policies provide a benefit to
executive officers who are also majority stockholders in the form of an
estate planning tool. Many of these policies require large single
premiums or periodic premiums of a substantial amount. These premiums
may result in the build-up of significant cash surrender or investment
values that cannot be easily liquidated without adverse tax
consequences.
Since life insurance products represent an unsecured obligation of
the issuing company, there is some credit risk involved in these
products. As the companies are regulated by state insurance
commissioners without any federal regulatory oversight, there will be
some variation in the strictness of the regulatory regimes from state
to state. If a state insurance commissioner declares a firm to be
insolvent, the holders may receive payments from (1) other insurance
companies (the industry has, in some past events, supported the
policies of failed firms in order to promote investor confidence.); (2)
liquidation of the issuer's assets and sale of the firm; (3) lawsuits;
and/or (4)
[[Page 43493]]
state insurance funds. The existence, structure, and coverage provided
by these funds varies, however, they typically are not pre-funded and
may ultimately be unable to provide the required support.
Unlike other types of investments, no secondary market for
insurance products exists, making some liquidity risk inherent in these
investments. Cashing out the policy can be costly because of the tax
consequences. The illiquidity of the policies may be mitigated by two
factors: (1) Many policies have provisions that permit the holder of
the policy to borrow against the current cash value at a minimal
interest rate, and (2) a bank moving toward insolvency holding an
insurance policy will probably be able to offset other losses with the
taxable income that is realized by cashing out the policy.
The interest rate risks inherent in an insurance policy will vary
with each insurance contract. The build-up of cash value depends on the
performance of the underlying investment portfolio. Individual
portfolios often have different interest rate risk characteristics.
Insurance companies may write whole life policies with a single
interest rate applied to the cash buildup, making the interest rate
risk very high. Other policies may give the insurance company
flexibility in determining the applicable future interest rates. These
policies present actuarial risks because the maturity date of an
insurance policy held until the death benefit is paid is unknown at the
time the investor purchases the policy. Prior to the death of the
insured party, comparing the investment returns provided by such a
policy with alternative investments requires the calculation of an
actuarial estimate of the life expectancy of the insured party. Should
the insured die prior to his/her estimated life expectancy, the
beneficiary reaps an investment windfall. However, if the insured's
life exceeds the actuarially determined life expectancy, the ultimate
performance of the investment will suffer (relative to the returns that
would have been realized from alternative investments undertaken at the
time). Insurance companies control the variance of results by applying
actuarial principles to large populations of insured individuals. A
bank holding policies on a handful of former employees cannot control
the variability of the returns.
Various supervisory concerns can arise when banks invest in
insurance policies. These concerns include potential violations of laws
and regulations, a less than adequate rate of return, the illiquid
nature of the investment, the potential for substantial tax
obligations, and concentration of investment risk.
The FDIC scrutinizes bank purchases of life insurance for three
particular potential violations other than section 24. Where a bank
purchases split-dollar insurance to provide a fringe benefit to an
executive officer of a bank, the executive must either reimburse the
bank or report as additional taxable income the economic value of the
benefits (as determined by the IRS). Otherwise, a violation of Federal
Reserve Board Regulation O may occur (12 CFR part 215).
When a bank's holding company or other affiliate is a beneficiary
of a life insurance policy purchased by a bank, the holding company
must pay for its beneficial share of the premiums and periodic costs of
the policy in order to comply with sections 23A and 23B of the Federal
Reserve Act (12 U.S.C. 371c and 371c-1). If, net of such
reimbursements, the present value of projected insurance proceeds
substantially exceeds the present value of employee benefits, the
insurance arrangement will fail to meet the BC 249 standards.
For those insurance arrangements that will provide compensation or
other benefits to employees or their beneficiaries, the amount of such
expected benefits must be quantified and not exceed reasonable
compensation levels when combined with other forms of compensation
provided to those employees. Section 39 of the FDI Act prohibits
excessive compensation as an unsafe or unsound act.2
---------------------------------------------------------------------------
2 12 U.S.C. 1831p-1(c).
---------------------------------------------------------------------------
The propriety of investing large sums in a policy that, over time,
may provide a less than adequate rate of return is a consideration.
However, these assets should be viewed in the context of the bank's
overall asset and liability structure and not viewed in isolation to
determine if they pose a significant risk to the fund.
Supervisory concern may exist over the long-term, illiquid nature
of those insurance policies that cannot realistically be liquidated at
the option of the bank without incurring sizeable surrender charges and
adverse tax consequences. Liquidity should not be judged in isolation
from other assets of the bank. Liquidity concerns may be mitigated if
the bank has the ability to borrow against the policies without
incurring adverse tax consequences or surrender charges.
Banks generally do not pay federal income taxes on the increases in
the cash value of an insurance policy as long as the bank holds the
policy until the death of the insured. As a result, banks that intend
to hold the policy until the insured's death normally do not record any
deferred tax liability for accounting purposes. However, should the
bank surrender the policy prior to the insured's death, the bank would
incur taxable income if the cash value received exceeded the amount of
premium paid. The cash value build-up over time could result in sizable
income taxes should the policy be surrendered early.
Due to the liquidity, credit, and tax considerations, unduly large
concentrations in investments in life insurance policies could result
if a bank does not adopt prudent constraints on the amount of its
exposures.
Life Insurance Applications
As of June 4, 1996, the FDIC had acted upon 106 applications by
insured state banks for consent to continue to hold investments in life
insurance policies. 101 of these applications involved policies
acquired prior the effective date of the activities restrictions of
section 24 of the FDI Act (December 19, 1992). Four banks had policies
that were acquired after December 19, 1992, and one bank had a
combination of policies acquired before and after the effective date.
Of the 106 applications, almost two thirds (67) of the institutions
were operating with a UFIRS composite rating of 2. Thirty (30)
applications were from institutions that had composite ratings of 1,
seven with a rating of 3, and two had a UFIRS composite rating of 4.
None were 5 rated.
The insurance policies held by any one bank ranged from less than
1.0% of Tier 1 capital to 52% of Tier 1 capital. Over ninety percent
(88 of 106) of the banks held investments totaling less than 30% of
Tier 1 capital. However, 63 of the 106 applications involved an
aggregate investment that did not exceed 20% of Tier 1 capital with the
majority (45 of 63) of those investments representing less than 10% of
Tier 1 capital.
All of the applications were approved. The actions were taken
either by the FDIC Board of Directors or by the Director of the
Division of Supervision pursuant to delegated authority.
The FDIC required all of the banks receiving approval to adhere to
specific conditions deemed necessary to limit the risk to the banks and
thus the insurance fund. Among the conditions were: (1) that the bank
continue to meet applicable capital standards, (2) that the
[[Page 43494]]
bank shall notify the FDIC of any significant changes in the facts or
circumstances on which the approval was based, (3) that the bank may
not modify the terms or conditions of the policies (except for
redemption of same) without the prior written consent of the FDIC, (4)
that the bank may not acquire any additional life insurance policies
without prior written consent of the FDIC, (5) that the bank must
reduce the cash surrender value of the policies, (6) that the bank must
receive approval of its applicable state authority, (7) that the bank
may not pay additional annual premiums without consent of the FDIC, and
(8) that the timing and amounts of the holding company's proportionate
share of overall insurance costs will be made in a manner which will
preclude any violations of section 23A or 23B of the Federal Reserve
Act. Some or all of these conditions were imposed where the facts
warranted the imposition of the particular condition in order to
protect the deposit insurance fund from risk.
Annuity Contracts
Interpretative guidance issued by the OCC states that national
banks are not permitted to invest in annuities for their own account.
If an insured state bank wishes to purchase an annuity contract, the
purchase is considered an activity that is not permissible for a
national bank and section 24 of the FDI Act applies. The purchase by
the state bank would therefore not be permissible unless the bank meets
it minimum capital requirements and the FDIC determines that there is
no significant risk to the deposit insurance funds.
As noted above, certain types of life insurance policies and
annuity contracts are considered to be ``securities'' under the federal
securities laws. If the annuity contract in question is considered to
be a security, and this would apply to variable rate annuity contracts,
it must be held through a subsidiary of the bank as required under
section 24 and part 362. Fixed rate annuity contracts are considered to
be insurance products and may be held directly by the bank.
A bank holding annuity contracts in connection with a deferred
compensation plan is exposed to a variety of risks, most of which are
similar in nature to the types of risks banks are exposed when
investing in life insurance policies: credit risks, liquidity risks,
and interest rate risks.
Annuity contracts are similar to certificates of deposit in that
the investor places money with an institution, such as an insurance
company, in the expectation of the return of the investment plus
earnings at a specified later date or on a specified schedule. Some
annuities provide that the investor may select a lifetime payout, which
provides a fixed income until the death of the annuitant. However,
unlike a bank certificate of deposit, an annuity is uninsured, creating
credit risk. An investor is not subject to the risk of loss of
principal through market fluctuations, but the investor has credit risk
based on the solvency of the issuing entity.
The lack of a secondary market for annuities gives rise to
liquidity risk. Such investments are generally long term, subject to
varying early withdrawal penalties and early redemption may cause a
loss of tax deferral advantages.
Interest rate risk arises from fixed rate annuities, particularly
in light of the long term nature of these contracts. Most insurance
companies offer variable rate arrangements to mitigate interest rate
risk. However, the issuing company generally determines interest rates
on variable rate contracts and may not use a common index. For this
reason, future yields are uncertain and likely to be lower than other
available types of investments. However, interest rate floors may
mitigate this risk. We see the same interest rate structure in certain
types of life insurance policies wherein the return is dependent on an
interest payment calculated on the cash surrender value of the policy.
Various supervisory concerns similar to those associated with
investments in insurance policies arise when banks invest in annuity
contracts. They include potential violations of laws and regulations,
less than adequate rate of return, the illiquidity of the investments,
and concentration of investment risks. For those annuities that will
provide compensation or other benefits to employees or their
beneficiaries, the amount of such expected benefits must be quantified
and not exceed reasonable compensation levels when combined with other
forms of compensation provided to those employees. As stated earlier,
section 39 of the FDI Act prohibits excessive compensation as an unsafe
or unsound act.3
---------------------------------------------------------------------------
\3\ 12 U.S.C. 1831p-1(c).
---------------------------------------------------------------------------
A less than adequate rate of return is also a concern such that the
propriety of investing large sums in an annuity contract or numerous
contracts is also a consideration. However, as with insurance products,
annuity contracts should be viewed in the context of the bank's overall
asset and liability structure and not viewed in isolation in order to
determine if they pose a significant risk to the fund.
Because of the illiquid nature of long-term annuity contracts,
banks often find it difficult to liquidate the contracts without
incurring sizeable surrender charges. The illiquid nature of the
assets, however, should be viewed from an overall impact on the bank in
conjunction with other assets of the bank. Liquidity concerns may also
be mitigated if banks have the ability to borrow against the contracts
without incurring adverse surrender charges or adverse tax
consequences. Due to the liquidity and credit risks, unduly large
concentrations in investments in annuity contracts could result if a
bank does not adopt prudent constraints on the amount of its exposures.
Approved Annuity Applications
As of June 4, 1996, the FDIC has acted upon 2 annuity applications.
These actions, all approvals, were taken by the Board of Directors. The
actions were contingent upon conformance to specific conditions deemed
necessary to limit the risk to the bank. Those conditions addressed
concerns the FDIC Board of Directors had relative to these products.
Description of Proposed Exceptions
As stated earlier, the FDIC is proposing to amend part 362 to
provide a notice process for certain insured state banks proposing to
invest in or retain real estate or life insurance and annuity
contracts. Currently all insured state banks wishing to indirectly
retain or acquire impermissible real estate investments, or directly or
indirectly invest in nonconforming life insurance and annuity
contracts, must apply to the FDIC for approval under section 24 of the
FDIA and part 362. As detailed above, the FDIC Board has had a
significant amount of experience with both types of applications and
has concluded that it is possible for an insured state bank to engage
in such activities without posing a significant risk to the deposit
insurance fund. The FDIC recognizes that the application process can be
costly and time consuming for insured state banks. Based on the Board's
experience and the goal of relieving regulatory burden on insured state
banks, the FDIC is proposing to amend its regulations to permit certain
highly rated banks to engage in such activities under certain
circumstances without the need for an application. The proposed
exceptions would be added to the list of activities found in
Sec. 362.4(c)(3) which the FDIC has found do not present a significant
risk to the deposit insurance fund.
[[Page 43495]]
The FDIC proposes to permit certain highly rated insured state
banks to file notices 60 days prior to making an indirect investment in
real estate or a direct or indirect investment in life insurance or
annuity contracts. The procedures for filing, review and action on both
types of notices are the same, however, there are certain conditions
which insured state banks must meet in order to be eligible for the
notice processing. The conditions in the case of real estate
investments are more numerous and detailed than the conditions in the
case of life insurance and annuity contract investments. For instance,
banks wishing to invest in real estate must use a subsidiary organized
solely for such purpose whereas banks will be permitted to directly own
life insurance and annuity contracts. The conditions for bank
eligibility are discussed below. The amount and type of information
required in the notices to be filed with the FDIC regional offices
differs significantly depending upon whether the bank is proposing to
invest in real estate or life insurance and annuities.
Notice Procedure
Notices are to be filed with, reviewed by and acted upon by the
FDIC regional offices. Complete notices will normally be acted upon
within 60 days of filing. Notices which do not include all the required
information are not considered complete. The 60 day review period
begins when all required information has been received by the FDIC
regional offices. The FDIC regional offices will issue a letter to the
insured state bank confirming receipt of the notice and advising the
insured state bank of the date after which the bank may engage in the
activity if the FDIC has not objected. The notice will be reviewed for
the purpose of determining whether the bank is in fact eligible for the
exception as well as for the purposes of determining whether particular
facts and circumstances unique to the institution raise policy or legal
concerns warranting additional action on the part of the FDIC. If
safety or soundness issues are identified which do not rise to the
level of presenting a significant risk to the deposit insurance fund,
it is contemplated that the regional office will work with the bank
during the notice period to correct the problems which have been
identified.
FDIC Action on Notices
The FDIC regional offices can issue a letter of nonobjection before
the end of the 60 day notice period advising the bank that it may
proceed with the proposed investment or activity. The FDIC regional
offices could also issue to a bank a letter of objection before the end
of the 60 day review period. A letter of objection would mean that the
FDIC regional offices have determined that either the insured state
bank does not qualify for notice processing or that the activity raises
legal or policy concerns given the particular circumstances. If the
regional offices determine that the bank does not meet the eligibility
requirements or raises legal or policy concerns, the notice can be
converted at the bank's option into an application and be processed in
accordance with other provisions of part 362.
The FDIC regional offices can extend the 60 day review period for
an additional 30 days if it provides written notice of the extension to
the insured state bank before the 60 day review period has run. The
FDIC does not anticipate that extensions will occur frequently. FDIC
regional offices should review and act on notices as quickly as
possible, with the 60 day review period generally being seen as an
outside limit.
Should the FDIC regional offices fail to take written action by the
end of the 60 day period, or the 90 day period if a 30 day extension
has been taken, the FDIC shall be deemed to have issued a letter of
nonobjection. In such event the insured state bank may engage in the
activity on the terms and conditions as described in its notice,
subject to the continued obligation to comply with the conditions set
out in the exception. It is the FDIC's intent to normally respond to
notices rather than to simply allow the notice period to expire.
Issuance of a letter of nonobjection or permission to engage in the
activity after the notice period expires does not preclude the FDIC
from taking appropriate actions to address any safety and soundness
concerns regarding the operation of a bank, any of its subsidiaries, or
a particular investment in real estate or life insurance and annuities.
If an insured state bank's financial or managerial resources suffer an
adverse change, the FDIC retains its full authority to require the bank
to take whatever steps FDIC deems appropriate.
Treatment of Outstanding FDIC Orders
As noted above, a large number of insured state banks previously
applied for and received approval from the FDIC to invest in real
estate or life insurance and annuity contracts. The terms of the FDIC
orders approving such applications will remain in effect and not be
modified by the enactment of the proposal. To the extent those orders
differ from the notice provisions in the proposed regulation, insured
state banks may apply to the appropriate FDIC regional office for
relief (provided the bank meets the eligibility requirements) by
submitting a notice as required by the regulation and attaching a copy
of the FDIC order which they are seeking to have rescinded. The terms
of the FDIC order would remain in effect pending completion of the
notice process.
Pending Applications
If the proposal is adopted, insured state banks which have pending
real estate or life insurance and annuity investment applications and
which meet the conditions of eligibility in the proposed regulation may
``convert'' their applications to notices by submitting a letter to the
appropriate FDIC regional office requesting such treatment. The letter
requesting such treatment should show that the bank meets the
conditions of eligibility and contain such additional information as
may be necessary to complete the notice. The FDIC regional office will
either issue a letter to the insured state bank which states that the
application has been converted to a notice and advising the insured
state bank of the date after which the bank may engage in the activity
if the FDIC has not objected or issue a letter to the insured state
bank stating that the FDIC objects to the conversion request. In the
event of FDIC objection to the conversion request, the application will
continue to be processed in accordance with the other provisions of
part 362.
Continued Compliance with Eligibility Conditions
Banks which utilize the notice process to invest in real estate or
life insurance and annuity contracts must continue to meet the
conditions for eligibility set forth in the proposed regulation. Banks
which fall out of compliance with any one of the eligibility conditions
in the regulation are required to notify the FDIC regional office
within 10 business days. The FDIC regional office shall review the
notice and take such action as it deems necessary based on safety and
soundness concerns. The FDIC regional offices have a broad range of
authority with respect to the actions they can require the insured
state bank to take. For example, the FDIC regional office may require
the insured state bank to return to compliance within a specified
period of time, to submit an application pursuant to Sec. 362.4(d), to
submit a capital restoration plan, or in appropriate cases to divest
the investment.
[[Page 43496]]
Notice--Real Estate Investments
Section 362.4(c)(3)(vi)(A)--Conditions for Bank Eligibility
The notice process is available only to those insured banks which
propose to hold their real estate investments through a majority-owned
subsidiary. Structure is important with respect to real estate
investments. As noted above, the holding of real estate investments
through a subsidiary will provide some liability protection to the
bank, and ultimately the deposit insurance fund, should there be any
adverse litigation or hazardous environmental waste problems. In
addition, the subsidiary must be ``solely'' for the purpose of real
estate investments. Sole purpose subsidiaries will simplify reporting
and monitoring of the real estate investments. Insured state banks
which would like to operate mixed use subsidiaries for real estate
investments will be required to go through the normal part 362
application process.
There are nine conditions for banks that want to invest in real
estate using the notice process. The bank must have either a 1 or 2
UFIRS composite rating as assigned by the FDIC as of the most recent
rating period. The FDIC believes that only those banks which have
composite ratings of 1 or 2 are appropriate for the notice process.
These institutions have shown that they have the requisite financial
and managerial resources to run a financial institution without
presenting a significant risk to the deposit insurance fund. While
other lower rated financial institutions may have the requisite
financial and managerial resources and skills to undertake real estate
investments, the FDIC believes that those institutions should be
subject to the formal part 362 application process as opposed to the
streamlined notice process described herein.
The bank must be ``well capitalized'' as defined in part 325 of
this title after deducting the proposed real estate investment from
capital calculations. This eligibility condition reflects the FDIC's
belief that only those insured state banks with strong capital
positions should be investing in real estate. Bank capital is designed
to act as a cushion in the event of losses. As noted above, the
variability of returns on real estate investments is very wide. Banks
can not count on any return on their real estate investments, and may
in fact end up losing the entire investment. For this reason, the FDIC
believes the capital deduction reflects a more accurate assessment of
the bank's capital position.
As noted above, to be eligible for notice processing a bank must
use a subsidiary for the real estate investment. The real estate
subsidiary must meet several conditions. First, the subsidiary must
meet the definition of ``bona fide subsidiary'' as contained in
Sec. 362.2(d), except a majority of the subsidiary's officers and
directors may be directors or executive officers of the bank. However,
the subsidiary must have at least one director who is knowledgeable
with respect to real estate investment activities and is not an
employee, officer or director of the bank. This requirement is to
assure that the real estate subsidiary is in fact a separate and
distinct entity. As discussed above, this requirement should insulate
the bank and the deposit insurance fund from liabilities in excess of
the bank's investment.
The FDIC believes that banks that want to engage in real estate
investment should have subsidiaries with board members that will manage
using proven experience in real estate as such experience will greatly
increase the likelihood of successful investment. The independent board
member must be an individual who is not an employee, officer or
director of the bank and who is knowledgeable with respect to real
estate investment activities. An independent director should bring
valuable experience to the subsidiary's operations. Officers, directors
or employees of the bank's holding company or of an affiliate of the
bank are eligible to fill the independent director requirement.
The bank must have a written business plan for the real estate
investment which is acceptable to the FDIC. Banks that want to engage
in real estate investment should have a written business plan which is
detailed and well thought out. Such a plan is yet another indicator
that the financial institution has adequate managerial resources to
engage in the proposed activity.
All transactions between the bank and the subsidiary should conform
to the restrictions that would apply under sections 23A and 23B of the
Federal Reserve Act as between a bank and its affiliate. This
requirement is intended to make sure that adequate safeguards are in
place for the dealings between the bank and its subsidiary. The FDIC
invites comment on whether all the provisions of sections 23A should be
imposed or whether just certain restrictions are necessary. For
instance, should the regulation simply provide that the bank's
investment in the real estate subsidiary is limited to 10% of capital
and that there is an aggregate investment limit of 20% for all
subsidiaries rather than in effect subject transactions between the
bank and its real estate investment subsidiary to all of the
restrictions of section 23A of the Federal Reserve Act. If the FDIC
were to do so, it would be the Agency's intent to monitor transactions
between the bank and its subsidiary as part of the FDIC's regulatory
oversight of the bank and to address any concerns on a case-by-case
basis.
Finally, two restrictions are imposed which are designed to address
tying and insider abuse. First, with respect to tying, neither the bank
nor the subsidiary may engage in any transaction which requires a
customer of either to buy any product or use any service of either as a
condition of entering into the transaction. This restriction on tying
transactions is broader than the conditions in previous FDIC Board
Orders in that it would cover any product or service which either the
bank or the subsidiary offers. The FDIC requests comment on whether the
tying restriction is broader than necessary. Commenters who believe the
tying restriction should be limited to loans by the bank to customers
of the real estate subsidiary should explain why these loans are the
only problematic transactions.
The second restriction is neither the bank nor the subsidiary may
engage in any transaction with a bank insider (or a related interest)
which involves the real estate investment activities of the subsidiary
unless the FDIC regional office approves the transaction in advance.
This restriction does not apply, however, to extensions of credit which
are subject to Sec. 337.3 of this title. This exception carves out
those extensions of credit by a bank to its executive officers,
directors and principal shareholders, and their related interests,
which comply with Regulation O. 12 CFR 215, subpart A.
Section 362.4(c)(3)(vi)(B)--Contents of Notice
Insured state banks which meet the conditions for eligibility would
be required to file a notice with the appropriate FDIC regional office.
The amount of information required in the real estate investments is
greater than that required in the case of life insurance and annuity
investments. The regulation sets forth seven (7) specific information
requirements, which are:
(B)(1). A brief description of the real estate investment
activities. The notice should describe the proposed investment, e.g.,
purchase of raw land, interest in a shopping center or construction of
a small office building,
[[Page 43497]]
and identify where the real estate is located.
(B)(2). A copy of the real estate investment business plan. This
written document should discuss all aspects of the proposed business,
capitalization, cash flows, expenses, market variables, etc. Banks
without written business plans will not be permitted to file notices.
(B)(3). A description of the subsidiary's operations including
management's expertise. The FDIC believes that experienced real estate
management is very important to the success of a subsidiary engaged in
real estate activities. The notice shall contain a detailed discussion
of management's real estate experience in the particular type of real
estate investment contemplated. For instance, if the subsidiary is
going to engage in residential real estate development, the application
should discuss managements proven experience in residential real estate
development.
(B)(4). The amount of bank's aggregate investment in the subsidiary
stated as a percentage of Tier 1 Capital. The notice should state
clearly the amount of investment which a bank has in the real estate
subsidiary. This includes both direct (such as contributions of capital
and loans to the subsidiary) and indirect investments (such as
extensions of credit or commitments of credit to third parties who will
be making direct investments in the subsidiary). Further, a bank shall
also include in its calculation any extension of credit or commitment
of credit to a third party which will be making an investment in any
investment which the subsidiary has an interest. Banks should not
include in their calculation of investment any retained earnings or the
value of any assets which the subsidiary may hold. Notices should
quantify and separately identify the direct and indirect real estate
investments.
(B)(5). Bank's capital after deducting the investment in real
estate. The notice should state clearly what the bank's capital
position is after deducting the investment in real estate. The bank
should set forth its 3 capital categories as of the latest call report
in both dollars and percentages. The notice should also show on a pro
forma basis what the bank's Tier 1 Capital will be, on both a dollar
and percentage basis, after making the required deduction. Stating this
information clearly in the notice will assist the FDIC regional office
in reviewing and acting upon the bank's notice.
(B)(6). A copy of the board of director's resolution authorizing
the filing of the notice. The notice should state the bank's board of
directors has authorized the proposed investment in real estate,
including the formation of a majority-owned subsidiary solely for the
purpose of investing in real estate, and authorized the filing of the
notice with the FDIC. A copy of the Board resolution(s) should be
attached to the notice.
(B)(7). The relevant state law which authorizes the bank subsidiary
to conduct real estate investment activities. The notice should
identify the relevant state statute, regulation or guideline which
permits the bank's subsidiary to invest in real estate. If an
application or some other type of approval from the state banking
regulator is required, the state banking regulator's approval or
nonobjection should be referenced. A copy of such approval or
nonobjection letter should be attached to the notice. The FDIC can not
authorize insured state banks to invest in real estate unless they are
permitted to do so under existing state law. For this reason it is
important that banks identify the relevant state statutes, regulations
or other provisions of law which permit them to engage in such
activities. Again, such information will greatly assist the FDIC
regional offices in reviewing the notices as expeditiously as possible.
Notice--Life Insurance and Annuity Products
Section 362.4(c)(3)(vii)--Condition for Bank Eligibility
The bank eligibility conditions are somewhat less restrictive for
investing in life insurance and annuity products than for real estate
investments. For instance, insured state banks wishing to invest in
life insurance and annuities are generally not required to use a
subsidiary for such investments and there is no capital ``deduction''
for life insurance and annuity investments. The less restrictive
eligibility requirements are reflective of the FDIC's view that life
insurance and annuity investments are generally less risky investments
than real estate investments.
There are six conditions for banks wishing to invest in life
insurance or annuity contracts pursuant to a notice. The bank must be
well capitalized as defined in part 325. The bank's most recent UFIRS
rating as assigned by the FDIC must be a ``3'' or better. The bank must
have in place policies and procedures for monitoring the financial
health of the companies issuing or underwriting the life insurance or
annuity contracts.
There are two percentage of Tier 1 Capital investment limits for
annuities and life insurance policies. The bank's total aggregate
investment in annuity contracts and life insurance policies which are
impermissible for national banks (nonconforming) can not exceed 30% of
the bank's tier 1 capital. The bank's total aggregate investment in all
types of annuity contracts and life insurance policies can not exceed
50% of the bank's Tier 1 capital. (A)(4). The 50% limit would include
both the national bank permissible life insurance policies as well as
those which are not permissible for national banks to hold. Banks are
also required to diversify their annuity contract and life insurance
policy risks. In order to be eligible for the notice process, a bank's
total investment in conforming and nonconforming investments from
anyone issuer cannot exceed a maximum of 15% of the bank's Tier 1
capital.
Banks are also required to purchase annuities and life insurance
policies from highly rated issuers. Under the regulation, banks are not
eligible for the notice process if they have purchased annuity
contracts or life insurance policies from issuers that are not in the
top two categories of a nationally recognized rating service. There are
several national organizations which rate insurance companies: these
organizations include A.M. Best, Standard & Poors and Moody's.
As noted above, banks are not generally required to purchase or
hold life insurance policies or annuity contracts through a subsidiary.
Some life insurance policies and annuity contracts are ``securities''
for purposes of the Federal securities laws. All annuity contracts
which are considered to be ``securities'' must be held through a
subsidiary of the bank. Those life insurance policies which do not
qualify under OCC BC 249 and which are considered to be ``securities''
must also be held through a subsidiary of the bank. Holding such
securities through a subsidiary of the bank is required pursuant
section 24 and part 362.
Section 362.4(c)(3)(vii)(B)--Contents of Notice
Insured state banks which meet the six conditions for eligibility
noted above would be required to file a notice with the appropriate
FDIC regional office. The amount of information required in the life
insurance and annuity investment notices is less than that required in
the real estate investment notices. The regulation sets forth seven (7)
specific information requirements for
[[Page 43498]]
the life insurance and annuity investment notices. They are:
(B)(1). The aggregate amount of direct and indirect investment in
life insurance policies and annuity contracts stated as a percentage of
the bank's Tier 1 Capital. The notice should state clearly the number
of annuity contracts and life insurance policies which the bank owns
(or intends to acquire), either directly or through a subsidiary. The
notice should also state the dollar value of the annuity contracts and
life insurance policies and what percentage of the bank's tier one
capital that represents. Banks should not include in this provision any
life insurance policies which a national bank would be permitted to own
under either Test A or Test B of OCC Banking Circular 249.
(B)(2). The aggregate amount of direct and indirect investment in
all life insurance policies and annuity contracts as a percentage of
the bank's Tier 1 capital. This item includes conforming as well as
nonconforming investments in life insurance policies. The notice should
identify those life insurance policies which conform to either Test A
or Test B of BC 249 and the value of such life insurance policies.
(B)(3). The concentration of investment by issuer. The notice shall
clearly state the aggregate amount of bank investment in annuity
contracts and life insurance policies from any one issuer. The FDIC is
concerned about concentration of risk from one issuer, therefore banks
should aggregate life insurance policies and annuity contracts issued
by the same company.
Calculations shall be stated as a percentage of the bank's tier one
capital. All life insurance policies, even those which may be
permissible for a national bank under OCC BC 249, should be included in
the calculation.
(B)(4). The rating of the issuer(s) of the policies and annuity
contracts. The notice should state the most current rating of the
issuer by the nationally recognized rating services which rate the
issuer. The issuer must be in one of the top two rating categories of
the rating service. If the issuer is not in one of the top two rating
categories, the bank is not eligible for the notice process. If the
issuer is rated by more than one of the nationally recognized rating
services and the issuer is not in the top two rating categories of all
services the FDIC may object to the notice.
(B)(5). A description of the bank's monitoring procedures. The
notice shall identify and briefly describe the bank's procedures for
monitoring the financial health of the issuer. The notice shall, at a
minimum, identify the individual or committee responsible for
monitoring the financial status of the issuer and how frequently the
monitoring is done. If the procedures are in writing, they should be
attached to the notice.
(B)(6). The relevant state law which authorizes the bank investment
in life insurance policies or annuity contracts should be identified.
The notice should identify the relevant state statute, regulation or
guideline which permits insured state banks to invest in life insurance
policies or annuity contracts. If an application or some other type of
approval from the state banking regulator is required, the state
banking regulator's approval or nonobjection should be referenced. A
copy of such approval or nonobjection letter should be attached to the
notice. The FDIC can not authorize insured state banks to invest in
life insurance policies or annuity contracts unless they are permitted
to do so under existing state law. For this reason it is important that
banks identify the relevant state statutes, regulations or other
provisions of law which permit them to engage in such activities.
Again, such information will greatly assist the FDIC regional offices
in reviewing and acting on the notices as expeditiously as possible.
(B)(7). A copy of the board of director's resolution authorizing
the filing of the notice. The notice should state that the bank's board
of directors have authorized the proposed investment in life insurance
policies or annuity contracts and authorized the filing of the notice
with the FDIC. A copy of the Board resolution(s) should be attached to
the notice.
Regulatory Flexibility Analysis
The Board of Directors has concluded after reviewing the proposed
regulation that the regulation, if adopted, will not impose a
significant economic hardship on small institutions. This proposal
simplifies and streamlines the timing and information small entities
must file to engage in profit-making activities thereby reducing their
regulatory burden. By expediting processing and allowing small entities
to engage in profit-making activities more quickly, small entities may
avoid lost opportunity costs. The Board of Directors therefore hereby
certifies pursuant to section 605 of the Regulatory Flexibility Act (5
U.S.C. 605) that the proposal, if adopted, will not have a significant
economic impact on a substantial number of small entities within the
meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et. seq.).
List of Subjects in 12 CFR Part 362
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking, Insured
depository institutions, Investments, Reporting and recordkeeping
requirements.
For the reasons set forth above, the FDIC hereby proposes to amend
12 CFR part 362 as follows.
PART 362--ACTIVITIES AND INVESTMENTS OF INSURED STATE BANKS
1. The authority citation for part 362 continues to read as
follows:
Authority: 12 U.S.C. 1816, 1818, 1819[Tenth], 1831a.
2. Section 362.4 is amended by adding new paragraphs (c)(3)(vi) and
(c)(3)(vii) to read as follows:
Sec. 362.4 Activities of insured state banks and their subsidiaries.
* * * * *
(c) * * *
(3) * * *
(vi) Equity interests in real estate. (A) An insured state bank may
invest in and/or retain equity interests in real estate through a
majority-owned subsidiary organized solely for such purpose provided
that the bank has filed written notice as described in paragraph
(c)(3)(vi)(B) of this section at least 60 days prior to making the
initial investment, the FDIC has not objected to the investment prior
to the expiration of the 60-day notice period nor extended the notice
period an additional 30 days and objected to the investment prior to
the expiration of the extended notice period, and the following
conditions are, and continue to be, met:
(1) The bank is well-capitalized as defined in part 325 of this
chapter exclusive of the bank's investment in the subsidiary as well as
any extensions of credit or commitments of credit to any third party
for the purpose of making a direct investment in the subsidiary or
making an investment in any investment in which the subsidiary has an
interest;
(2) The bank makes the deduction in paragraph (c)(3)(vi)(A)(1) of
this section for purposes of determining capital as reported on the
bank's report of condition and assessment risk classification purposes
in part 327 of this chapter and prompt corrective action purposes under
part 325 of this chapter provided, however, that the deduction shall
not be used for the purposes of determining whether the bank is
``critically undercapitalized'' as defined under part 325 of this
chapter;
[[Page 43499]]
(3) The bank's most current composite rating assigned by the FDIC
under the Uniform Financial Institutions Rating System or such other
comparable rating system as may be adopted by the FDIC in the future is
1 or 2;
(4) The subsidiary meets the definition of ``bona fide subsidiary''
as contained in Sec. 362.2(d) except that the requirements of
Sec. 362.2(d)(6) and (d)(7) are waived provided that the subsidiary has
at least one director who is knowledgeable with respect to real estate
investment activities and is not an employee, officer or director of
the bank;
(5) The subsidiary is managed by persons who have expertise in the
real estate investment activities conducted by the subsidiary;
(6) The subsidiary has a written business plan regarding the real
estate investment activities;
(7) Transactions between the bank and the subsidiary comply with
the restrictions of sections 23A and 23B of the Federal Reserve Act (12
U.S.C. 371c and 371c-1) to the same extent as though the subsidiary
were an affiliate of the bank as the term affiliate is defined for the
purposes of section 23A and section 23B except that extensions of
credit made by the bank to finance sales of assets by the subsidiary to
third parties need not comply with the collateral requirements and
investment limitations of section 23A provided that such extensions of
credit are consistent with safe and sound banking practice, do not
involve more than the normal degree of risk of repayment, and are
extended on terms and under circumstances, including credit standards,
that are substantially the same, or at least as favorable to the bank,
as those prevailing at the time for comparable transactions;
(8) Neither the bank nor the subsidiary shall engage in any
transaction which requires a customer of either to buy any product or
use any service of either as a condition of entering into a
transaction; and
(9) Neither the bank nor the subsidiary engages in any transactions
(exclusive of those covered by Sec. 337.3 of this chapter) with
insiders of the bank as insider is defined in Federal Reserve Board
Regulation O (12 CFR 215.2(h)), which relate to the subsidiary's real
estate investment activities without the prior written consent of the
appropriate regional director for the Division of Supervision.
(B) Notice filed pursuant to paragraph (c)(3)(vi)(A) of this
section may be in letter form and should be filed with the regional
director for the Division of Supervision for the FDIC region in which
the bank's principal office is located. The regional office will send
written acknowledgment of receipt of a completed notice to the bank
which shall indicate the date after which the bank may initiate the
investment activities if the FDIC has neither objected to the notice
nor extended the notice period. The notice period will begin to run
from the date the acknowledgment is sent. If the notice period is
extended, the bank will be notified in writing and informed of the date
after which the bank may initiate the investment activities if the FDIC
does not object. Notices shall contain the following:
(1) A description of the real estate investment activities;
(2) A copy of the business plan concerning the real estate
investment activities;
(3) A description of the subsidiary's operations including a
discussion of management's expertise;
(4) The aggregate amount of the bank's investment in the subsidiary
as defined in Sec. 362.2(q), which does not include retained earnings,
and the bank's extensions of credit and commitments of credit to third
parties for the purpose of making a direct investment in the subsidiary
or making an investment in any investment in which the subsidiary has
an interest stated as a percentage of tier one capital;
(5) The bank's capital after adjustments are made for the
deductions described in paragraph (c)(3)(vi)(A)(1) of this section;
(6) A copy of the board of directors' resolution authorizing the
filing of the notice; and
(7) An identification of the relevant state statute, regulation or
other authority which authorizes the subsidiary to conduct real estate
investment activities.
(C) An insured state bank which falls out of compliance with any of
the eligibility conditions in paragraph (c)(3)(vi)(A) of this section
shall notify the FDIC regional office within 10 business days of
falling out of compliance. The FDIC regional office shall review the
notice and take such action as it deems necessary. Such actions may
include, but are not limited to, requiring the insured state bank to
file an application pursuant to paragraph (d) of this section,
requiring the submission of a capital restoration plan or requiring the
divestiture of such investment.
(vii) Life insurance policies and annuity contracts. (A) An insured
state bank may invest in and/or retain life insurance policies and
annuity contracts, either directly or indirectly through a majority-
owned subsidiary of the bank, provided that the bank has filed written
notice as described in paragraph (c)(3)(vii)(B) of this section at
least 60 days prior to making the initial investment, the FDIC has not
objected to the investment prior to the expiration of the 60-day notice
period nor extended the notice period an additional 30 days and
objected to the investment prior to the expiration of the extended
notice period, and the following conditions are, and continue to be,
met:
(1) The bank is well-capitalized as defined in part 325 of this
chapter;
(2) The bank's most current composite rating as assigned by the
FDIC under the Uniform Financial Institutions Rating System or such
other comparable rating system adopted by the FDIC in the future is at
least 3;
(3) The bank's total aggregate direct and indirect investment in
annuity contracts and life insurance policies which do not conform to
OCC Banking Circular 249 does not exceed 30% of the bank's tier one
capital;
(4) The bank's total aggregate direct and indirect investment in
all annuity contracts and life insurance policies (conforming and
nonconforming) is no greater than 50% of the bank's tier one capital
and the bank's total aggregate direct and indirect investment in all
annuity contracts and life insurance policies (conforming and
nonconforming) from the same issuer does not exceed 15% of the bank's
tier one capital;
(5) The issuer(s) of the life insurance policies and annuity
contracts (conforming and nonconforming) is (are) rated in the top two
rating categories by a nationally recognized rating service; and
(6) The bank's board of directors has procedures in place to
monitor the financial condition of the issuer(s) of the life insurance
policies and annuity contracts (conforming and nonconforming).
(B) Notice filed pursuant to paragraph (c)(3)(vii)(A) of this
section may be in letter form and should be filed with the regional
director for the Division of Supervision in the region in which the
bank's principal office is located. The regional office will send
written acknowledgment of receipt of a completed notice to the bank
which shall indicate the date after which the bank may initiate the
investment activities if the FDIC has neither objected to the notice
nor extended the notice period. The notice period will begin to run
from the date the acknowledgment is sent. If the notice period is
extended, the bank will be notified in writing and informed of the
[[Page 43500]]
date after which the bank may initiate the investment activities if the
FDIC does not object. Notices shall contain the following:
(1) The aggregate amount of direct and indirect investment in
annuity contracts and nonconforming life insurance policies stated as a
percentage of the bank's tier one capital;
(2) The aggregate amount of direct and indirect investment in all
annuity contracts and life insurance policies (conforming and
nonconforming) stated as a percentage of the bank's tier one capital;
(3) The aggregate amount of direct and indirect investment in all
annuity contracts and life insurance policies (conforming and
nonconforming) from any one issuer stated as a percentage of the bank's
tier one capital;
(4) The rating of the issuer(s) of the policies and annuity
contracts;
(5) A description of the bank's monitoring procedures;
(6) The state statute, regulations or other authority which
authorizes the bank to make the investment; and
(7) A copy of the board of directors' resolution authorizing the
filing of the notice.
(C) An insured state bank which falls out of compliance with any of
the eligibility conditions in paragraph (c)(3)(vii)(A) of this section
shall notify the FDIC regional office within 10 business days of
falling out of compliance. The FDIC regional office shall review the
notice and take such action as it deems necessary. Such actions may
include, but are not limited to, requiring the insured state bank to
file an application pursuant to paragraph (d) of this section,
requiring the submission of a capital restoration plan or requiring the
divestiture of such investment.
Sec. 362.6 [Amended]
3. Section 362.6 is amended by adding ``the authority to act on
notices filed pursuant to Sec. 362.4(c)(3)(vi) (A) and (C) and
Sec. 362.4(c)(3)(vii) (A) and (C); the authority to rescind orders
issued pursuant to Sec. 362.4 where it is determined that the
institution is eligible to engage in activities pursuant to an
exception contained in Sec. 362.4(c)(3);'' immediately after
``Sec. 362.3(d);''.
By Order of the Board of Directors.
Dated at Washington, D.C., this 13th day of August, 1996.
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 96-21475 Filed 8-22-96; 8:45 am]
BILLING CODE 6714-01-P