[Federal Register Volume 59, Number 76 (Wednesday, April 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9440]


[[Page Unknown]]

[Federal Register: April 20, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 348

RIN 3064-AB30

 

Management Official Interlocks

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Directors of the Federal Deposit Insurance 
Corporation (FDIC) proposes to amend the regulations that implement the 
Depository Institution Management Interlocks Act (Interlocks Act or 
Act) as part of a joint initiative by the federal depository 
institutions regulatory agencies. The Interlocks Act generally 
prohibits certain management official interlocks between unaffiliated 
depository institutions, depository holding companies, and their 
affiliates. This proposed amendment would create limited exemptions to 
the prohibition on management official interlocks between certain 
depository organizations located in the same community or relevant 
metropolitan statistical area (RMSA). These exemptions would permit 
management official interlocks between depository organizations that 
together control only a small percentage of the total deposits in the 
community or RMSA.

DATES: Written comments must be received on or before June 20, 1994.

ADDRESSES: All comments should be addressed to Robert E. Feldman, 
Acting Executive Secretary, Federal Deposit Insurance Corporation, 550 
17th Street, NW., Washington, DC 20429, or delivered to room F-400, 
1776 F Street, NW., Washington, DC, between the hours of 8:30 a.m. and 
5 p.m. on business days [FAX number (202) 898-3838]. Comments will be 
available for inspection and photocopying in the FDIC's reading room, 
room 7118, 550 17th Street, NW., Washington, DC 20429, between 9 a.m. 
and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist, 
Division of Supervision, (202) 898-6759; or Mark Mellon, Senior 
Attorney, Regulation and Legislation Section, Legal Division, (202) 
898-3854, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    The general purpose of the Interlocks Act (12 U.S.C. 3201 et seq.) 
is to foster competition among depository institutions, depository 
holding companies and their affiliates by prohibiting certain 
management interlocks that contribute to anticompetitive practices. The 
primary concern is that interlocking management may enable certain 
depository institutions to control the flow and availability of credit 
in the markets in which they operate.
    The Act prohibits, among other things, a management official of a 
depository institution or a depository holding company (a depository 
organization1) from serving as a management official of an 
unaffiliated depository organization if an office of one of the 
depository institutions (or any depository institution affiliate 
thereof) is located in the same city, town, or village or a contiguous 
or adjacent city, town or village (community)\2\ or RMSA3 as an 
office of the other institution (or any depository institution 
affiliate thereof). The prohibitions apply if both organizations are 
depository institutions and each has an office in the same RMSA; if 
offices of depository institution affiliates of both organizations are 
located in the same RMSA; or if one organization is a depository 
institution that has an office in the same RMSA as a depository 
institution affiliate of the other organization. The RMSA restriction, 
however, does not apply to depository institutions with less than $20 
million in assets. Section 203 of the Interlocks Act (12 U.S.C. 3202). 
Congress included RMSAs as appropriate regions within which to restrict 
management interlocks because RMSAs are ``economic trade areas and 
reflect the area in which financial institutions compete''. S. Rep. No. 
323, 95th Cong., 1st Sess. 14 (1977).
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    \1\``Depository organization'' is defined to mean a depository 
institution or a depository holding company. See 12 CFR 348.2(g).
    \2\``Community'' is defined to mean a city, town, or village, or 
contiguous or adjacent cities, towns, or villages. 12 CFR 348.2(c).
    \3\An RMSA includes a primary metropolitan statistical area, a 
metropolitan statistical area, or a consolidated metropolitan 
statistical area that is not comprised of designated primary 
metropolitan statistical areas as defined by the Office of 
Management and Budget. 12 CFR 348.2(n).
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    In the Interlocks Act, Congress authorized the Federal depository 
institution regulatory agencies (the Board of Governors of the Federal 
Reserve System, the FDIC, the National Credit Union Administration, the 
Office of the Comptroller of the Currency, and the Office of Thrift 
Supervision, hereinafter the ``Agencies'') to implement rules and 
regulations to carry out the Act, including rules or regulations that 
permit service by a management official that would otherwise be 
prohibited by the Act. Section 209 of the Interlocks Act (12 U.S.C. 
3207). The legislative history of the Act indicates that the Agencies 
may exercise this rulemaking authority to exempt management official 
interlocks that might be otherwise prohibited by the statute if the 
Agencies establish that the exception has a pro-competitive effect. 
H.R. Rep. No. 1383, 95th Cong., 2d Sess. 15 (1978).
    Pursuant to this rulemaking authority, the Agencies have previously 
established exemptions for institutions located in low- and moderate-
income areas, minority and women's organizations, newly-chartered 
institutions, and institutions facing conditions endangering their 
safety and soundness. See, e.g., 12 CFR 348.4(b). These exemptions are 
available on a temporary basis upon a demonstration that the exempted 
management official interlock is necessary to provide management or 
operating expertise to the requesting institution.
    The FDIC now seeks comment on a proposal to establish additional 
exemptions from the prohibitions of the Act. These exemptions would be 
available to depository organizations that between them control a small 
percentage of deposits in a community or RMSA. The exemptions would be 
available without the prior approval of the FDIC. Each of the Agencies 
is proposing identical deposit share exemptions although each agency is 
publishing its proposal separately.

II. The Proposal

    The Interlocks Act prevents two or more competing institutions from 
having an adverse impact on competition in the products and services 
they offer through common management officials. Where depository 
institutions dominate a large portion of the market, these risks are 
real. But when a particular market is served by many institutions, the 
risks diminish that depository institutions with interlocking 
management can adversely affect the products and services available in 
their markets.
    The FDIC believes that the combined share of the deposits of two 
institutions provides a meaningful assessment of the capacity of the 
two institutions to control credit and related services in their 
market. This proposal represents the opinion of the FDIC that two 
depository institutions with a small proportion of the market they 
serve are not capable of exerting sufficient market influence to 
materially restrict the terms and availability of credit in their 
market. For institutions located in a RMSA, the RMSA constitutes the 
relevant market.
    The Interlocks Act and regulations provide that the relevant market 
for organizations which are not located in a RMSA and organizations 
with total assets of less than $20 million that are located within a 
RMSA, is the city, town, or village and contiguous and adjacent areas 
in which the organizations are located. The FDIC believes that 
providing a similar small market share exemption for these community-
based organizations also is appropriate.
    This exemption for community-based organizations is available on 
the same basis as the exemption for organizations whose relevant market 
is the RMSA. A community-based organization which is interested in the 
small market share exemption may obtain the information on deposit 
share data for its community from the appropriate regional office of 
the FDIC. If the small market share deposit share test is met, the 
institution may engage in the interlock without prior FDIC approval.

III. The Small Market Share Exemption

    The proposal would amend the management interlocks regulations to 
permit two depository organizations that serve the same RMSA to share 
management officials in circumstances where neither organization 
controls a significant portion of the deposits in that market. 
Specifically, the amended rule would permit two competing depository 
organizations, each with assets in excess of $20 million, to share 
management officials if the organizations together control no more than 
20 percent of the deposits in the RMSA. The exemption also requires 
that the organizations control no more than 20 percent of the deposits 
in other RMSAs where they may compete directly through offices or 
through affiliated depository institutions.
    The proposal treats management interlocks between institutions with 
assets of less than $20 million that are located within an RMSA and all 
depository institutions located outside of an RMSA in a similar manner. 
Specifically, the amendment exempts any management interlock between 
two depository organizations located in a community, as defined by the 
regulation, if their combined share of the total deposits in the 
community is no more than 20 percent.
    Similarly, the organizations must not together control more than 20 
percent of the deposits in any community in which they or their 
depository institution affiliates are both located.
    To illustrate by example, if an RMSA has an assumed total deposit 
base of $1 billion, a depository institution which is located within 
that RMSA may engage in a management interlock with another institution 
if the organizations control no more than $200 million of deposits 
between them in that RMSA. If a community has an assumed total deposit 
base of $100 million, a depository institution which is located in that 
community may engage in a management interlock with another institution 
if the organizations control no more than $20 million of deposits 
between them in that community. When an interlock is sought for 
institutions that have offices in more than one RMSA or community, the 
same calculation must be made for each area in which both institutions 
have offices.
    These exemptions would only be available if management interlocks 
between the two organizations are not otherwise prohibited by the Act. 
For example, the exemption would not be available if the interlock 
would be prohibited by the major assets provision of the Act (12 U.S.C. 
3203).4
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    \4\Section 204 of the Act provides that a depository institution 
or a depository holding company with assets in excess of $1 billion 
(or any affiliate thereof) may not enter into a management interlock 
with a depository institution or a depository holding company with 
assets in excess of $500 million (or any affiliate thereof).
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    Under the proposal, depository organizations would only have to 
request appropriate deposit share data from the FDIC and then determine 
whether they are entitled to the exemption in reliance upon this 
information.5 The process would involve neither an application nor 
an approval from the FDIC but the burden of determining the 
applicability of the exemption falls upon the depository organizations 
that seek it. The exemption is intended to be self-implementing. 
Management is responsible for compliance with the terms of the 
exemption and maintaining sufficient supporting documentation.
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    \5\For the purpose of ascertaining whether depository 
organizations qualify for the exception, deposit information 
regarding specific communities and RMSAs will be available at the 
appropriate regional office of the Division of Supervision of the 
FDIC.
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    The availability of the exemption for depository institutions will 
be determined in reliance upon the data which is provided by depository 
organizations to their primary federal depository institutions 
regulatory agency in the Summary of Deposits (the summary). The summary 
is filed as an addendum to the Report of Condition and Income due on 
June 30 of each year which every insured depository institution must 
file with the federal regulatory agency which is its primary 
supervisor. As the summary breaks total deposits out by branch, the 
FDIC has the necessary information to determine deposit share by RMSA 
and community.6
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    \6\The summary does not include the deposits held by federally-
chartered credit unions, which are insured by the National Credit 
Union Share Insurance Fund, and state-chartered credit unions. 
Typically, these credit union deposits comprise only a small part of 
the total deposits in a relevant market. If included, the deposit 
figures for a particular market would be slightly increased. As 
such, the data will not include the credit union deposits, but will 
still serve as a reliable approximation of the total deposits in the 
relevant market.
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    The most recently available deposit share data will be used by the 
FDIC to allow organizations to determine whether they are entitled to 
the small market share interlock. Thus, in any one year, the FDIC will 
use the deposit share data which has been compiled for the previous 
year until such point as the new deposit share data from the June 30 
summary for that year has been collected and analyzed. The FDIC will 
then use the new data until the process of collection and analysis is 
repeated for the following year.
    While deposit share data can be pre-sorted and made readily 
available by RMSA, the deposit share data cannot be pre-sorted by 
community. For example, two depository organizations seeking to rely on 
the small market share exemption must first determine the total 
deposits in their community. To do this, the depository institutions 
must request deposit share data from the FDIC with sufficient 
specificity to delineate the community defined by the Interlocks Act 
that both the interlocking institutions will serve. Only then can they 
determine the portion of deposits that the institutions would be deemed 
to control in their relevant market if they engage in the interlock.
    Institutions which determine that they are entitled to the small 
market share interlock in reliance on the summary filed on June 30 of a 
particular year will continue to enjoy that status until such time as 
the deposit share data from the June 30 summary for the following year 
is collected and analyzed by the FDIC. The institutions must then 
determine whether the required level of deposits has been exceeded. If 
at that point the level of deposits controlled exceeds 20 percent of 
deposits in the community or RMSA as measured in the new summary, the 
depository organizations have up to 15 months to correct the prohibited 
interlock. Institutions will be required to retain records supporting 
the applicability of the exemption.
    The FDIC is interested in receiving comment on the effect of this 
proposal on the geographic markets covered by the Interlocks Act. The 
FDIC has attempted to determine the potential consequences of the 
proposal for RMSA markets by examining summary data for two very large 
RMSAs, two RMSAs of moderate size, and two smaller RMSAs. The FDIC has 
not attempted to assess the effect of the rule on communities because 
of the unique delineation of each community.
    Depository organizations in each of the 6 RMSAs were ranked by 
their proportional shares of total deposits in the market. The 
institutions in the 6 RMSAs may also compete with each other through 
offices in other markets. The data was not analyzed, however, for 
proportional shares of total deposits in other RMSAs or communities 
where depository organizations which operate in the 6 RMSAs may also 
compete against one another. Moreover, since the data was taken from 
the summary for June 30, 1992, the data does not reflect recent 
consolidations in the markets.
    Our preliminary analysis indicates that the exception would be 
available to the great majority of depository organizations operating 
in markets where the majority have a limited share of the market. In 
particular, this exemption would allow smaller institutions in RMSAs to 
interlock with each other. Smaller depository organizations would not 
be able to interlock with larger depository organizations, however, 
when the latter dominate the market. It is unlikely that the larger 
institutions in the 6 markets would be able to interlock with each 
other because of their large share of deposits within their market or 
because of Interlocks Act provisions such as the major assets test (see 
footnote 4).
    The purpose of the proposed small market share exemption is to 
provide an opportunity to a number of smaller institutions to share 
management talent and improve their ability to compete with larger 
institutions in their markets. The FDIC's ability to measure the actual 
effect of the proposed exemption in the RMSAs is limited (a prompt 
determination of the effect of the exemption in communities is not 
possible because of the difficulty in delineating communities). For 
these reasons, the FDIC seeks comment on whether the availability of 
the exemption would have a detrimental effect on competition in the 
affected markets.
    The Board of Directors of the FDIC believes that this proposal will 
have a pro-competitive effect. Since the deposit base of the exempted 
interlocking institutions is small, the risk of anticompetitive control 
over the market is remote. To provide to these particular institutions 
this limited relief from the management interlocks restrictions 
enlarges the pool of experienced management talent upon which they may 
draw and enhances their operational effectiveness. The result will be 
better managed, more competitive, and healthier depository 
institutions.

IV. Request for Comment

    In addition to the foregoing, the Board of Directors of the FDIC 
specifically requests comment on the following:
    1. Whether 20 percent or less of the deposits of a community or 
RMSA is an appropriate threshold for the exemption or whether a 
different level is more appropriate.
    2. Should the community and RMSA exemptions rely on the same or a 
different threshold level.
    3. Whether and how the proposed procedure to employ the deposit 
data collected by the FDIC in connection with the summary will easily 
and effectively permit depository organizations to determine whether 
they qualify for the small market share exemption.
    4. Whether the exemption for community-based institutions will be 
easy to use, or whether these institutions might be better served by 
another approach to the exemption.
    5. Whether the exemption would enable depository organizations to 
subvert the purposes of the Interlocks Act by establishing multiple 
interlocks involving several individuals. For example, the FDIC is 
concerned that each of several directors of one depository organization 
could serve as a director of a different unaffiliated depository 
organization, facilitating diminished competition among the several 
depository organizations. The FDIC seeks comment on whether this 
concern is justified, and, if so, whether it is exacerbated by the fact 
that the threshold limit for the exemption is set at 20 percent of the 
deposits in the RMSA or community, rather than a smaller percentage.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), the FDIC hereby certifies that the proposed rule will 
not have a significant impact on a substantial number of small 
entities.
    The FDIC has reached this conclusion because the effect of the 
rule, if it is ultimately promulgated in its current form, will be to 
reduce the compliance requirements that are imposed upon small entities 
rather than to increase them. The proposed rule imposes no reporting 
requirements upon small entities since it will not be necessary to 
apply for the exemption and the necessary data to determine eligibility 
for the exemption will be available from the FDIC. The proposed rule 
will therefore have no economic impact on small entities. Moreover, 
small entities which would be entitled under the exemption to engage in 
an otherwise prohibited activity would have greater freedom of action 
as a result of the proposed rule rather than less. This is because the 
proposed rule seeks to create a regulatory exemption to a statutory 
prohibition on management interlocks between organizations.

VI. Paperwork Reduction Act

    The collection of information contained in this proposed rule has 
been submitted to the Office of Management and Budget (OMB) for review 
and approval pursuant to the Paperwork Reduction Act of 1980 (44 U.S.C. 
3501 et seq.). Comments regarding the accuracy of the burden estimate, 
and suggestions for reducing the burden, should be addressed to the 
Office of Management and Budget, Paperwork Reduction Project (3064-
XXXX), Washington, DC 20503, with copies of such comments sent to 
Steven F. Hanft, Assistant Executive Secretary (Administration), room 
F-400, FDIC, 550 17th St. NW., Washington, DC 20429.
    The collection of information in this proposed rule is found in 
section 348.4(d), and takes the form of records maintained by 
depository organizations which are sufficient to support their 
determination that the interlocking relationships which they have 
established are exempt under this section. Such depository 
organizations must also maintain records which demonstrate that they 
have subsequently reconfirmed such determinations on an annual basis. 
The information will be used to provide state and federal examiners of 
depository institutions with documentation which will allow them to 
ascertain whether depository organizations are eligible for the 
exemption.
    The estimated annual recordkeeping burden for the collection of 
information requirement in this proposed rule is summarized as follows:

Number of Recordkeepers
70
Annual Hours per Recordkeeper
3
Total Recordkeeping Hours
210

List of Subjects in 12 CFR Part 348

    Antitrust, Banks, Banking, Holding companies.

    For the reasons set forth in the preamble, pursuant to its 
authority under section 209 of the Depository Institution Management 
Interlocks Act (12 U.S.C. 3207), the Board of Directors of the FDIC 
proposes to amend part 348 of title 12, chapter III, subchapter B of 
the Code of Federal Regulations as follows:

PART 348--MANAGEMENT OFFICIAL INTERLOCKS

    1. The authority citation for part 348 continues to read as 
follows:

    Authority: 12 U.S.C. 3207, 12 U.S.C. 1823(k).

    2. In Sec. 348.2, paragraphs (e) through (o) are redesignated as 
paragraphs (f) through (p) and new paragraph (e) is added to read as 
follows:


Sec. 348.2  Definitions.

* * * * *
    (e) Deposit has the same meaning as provided under section 3(l) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(l)).
* * * * *
    3. Section 348.4 is amended by adding new paragraph (d) to read as 
follows:


Sec. 348.4  Permitted interlocking relationships.

* * * * *
    (d) Small market share exemption. (1) Depository organizations 
controlling no more than 20 percent of the deposits in a community or 
relevant metropolitan statistical area. A management official may serve 
two unaffiliated depository organizations in a capacity which would 
otherwise be prohibited by Sec. 348.3 (a) or (b) provided that the 
following conditions are met:
    (i) The interlock is not prohibited by Sec. 348.3(c); and
    (ii) The two depository organizations hold in the aggregate no more 
than 20 percent of the deposits, as reported annually in the Summary of 
Deposits, in each relevant metropolitan statistical area or community 
in which the depository organizations have offices or in which 
depository affiliates of both depository organizations are located.
    (2) Confirmation and records. Depository organizations must 
maintain records sufficient to support their determination that the 
interlocking relationship is exempt under this section and must 
reconfirm that determination on an annual basis.
    (3) Termination. An interlock permitted by this exemption may 
continue as long as the conditions of this section are satisfied. Any 
increase in the aggregated deposit holdings of the depository 
organizations, as reported annually in the Summary of Deposits, that 
causes the interlock to become prohibited will be treated as a change 
in circumstances under Sec. 348.6.

    By order of the Board of Directors.

    Dated at Washington, DC, this 22nd day of February, 1994.

Federal Deposit Insurance Corporation
Patti C. Fox,
Acting Deputy Executive Secretary.
[FR Doc. 94-9440 Filed 4-19-94; 8:45 am]
BILLING CODE 6714-01-P