[Federal Register Volume 59, Number 157 (Tuesday, August 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19953]


[[Page Unknown]]

[Federal Register: August 16, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 337

RIN 3064-AB50

 

Unsafe and Unsound Banking Practices

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Directors of the Federal Deposit Insurance 
Corporation proposes to amend its regulations to except loans which are 
fully secured by certain types of collateral from the general limit on 
``other purpose'' loans to executive officers of insured nonmember 
banks. The proposed amendment parallels recent changes by the Board of 
Governors of the Federal Reserve System to that agency's regulations on 
insider loans.

DATES: Written comments must be received on or before October 17, 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 
5:00 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 
9:00 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Mark Mellon, Senior Attorney, 
Regulation and Legislation Section, Legal Division, (202) 898-3854, or 
Michael D. Jenkins, Examination Specialist, Division of Supervision, 
(202) 898-6896, Federal Deposit Insurance Corporation, 550 17th Street, 
NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 22(g) of the Federal Reserve Act (the FRA) (12 U.S.C. 375a) 
prohibits member banks from making extensions of credit to their 
executive officers except to the extent authorized by that section. 
Section 22(h) of the FRA (12 U.S.C. 375b) prohibits member banks from 
making extensions of credit to their executive officers, directors, 
principal shareholders, or to a related interest (any company or 
political or campaign committee that is controlled by an executive 
officer, director, or principal shareholder), except to the extent 
authorized by that section. Section 18(j)(2) of the Federal Deposit 
Insurance Act (the FDI Act) (12 U.S.C. 1828(j)(2)) provides that both 
sections 22(g) and 22(h) of the FRA are applicable to insured nonmember 
banks in the same manner and to the same extent as though they were 
member banks.
    The FDIC regulation which implements sections 22(g) and 22(h) for 
insured nonmember banks is 12 CFR 337.3. Section 337.3(a) currently 
provides that insured nonmember banks are subject to the restrictions 
contained in Subpart A of 12 CFR Part 215, Regulation O (Regulation O), 
the regulations promulgated by the Board of Governors of the Federal 
Reserve System (the FRS) to implement sections 22(g) and 22(h) for 
member banks, to the same extent and to the same manner as though they 
were member banks, with the exception of Secs. 215.5(b), 215.5(c)(3) 
and 215.11.
    Section 22(g)(2) of the FRA provides that a loan secured by a first 
lien on a residence of an executive officer may be made in any amount. 
Section 22(g)(3) of the FRA provides that loans to finance the 
educations of executive officers' children may be made in any amount. 
These requirements are implemented respectively by 12 CFR 215.5(c) (1) 
and (2). Such loans do, however, count toward the general individual 
and aggregate lending limits applicable to executive officers, 
directors, principal shareholders, and their related interests under 12 
CFR 215.4 of Regulation O. See 12 CFR 215.5(d)(2).
    Section 22(g)(4) of the FRA provides that extensions of credit to 
an executive officer not otherwise specifically authorized by section 
22(g) may be made ``in an amount prescribed in a regulation of the 
member bank's appropriate Federal banking agency''. Pursuant to its 
authority under section 22(g)(4), the Board of Directors of the FDIC 
has set the lending limit on extensions of credit by insured nonmember 
banks to executive officers for any other purpose not specified in 
Sec. 215.5(c)(1) and (2) of Regulation O at the higher of 2.5 percent 
of the bank's capital and unimpaired surplus but in no event more than 
$100,000. See 12 CFR 337.3(c)(2). The Board of Directors of the FDIC 
now proposes to except loans which are fully collateralized by certain 
categories of highly stable and liquid collateral from being counted 
toward the ``other purpose'' general lending limit.

II. The Proposal

    The Board of Directors of the FDIC proposes to create an exception 
to the lending limit for other purpose loans to executive officers for 
those loans which are fully secured by:
    (a) A perfected security interest in bonds, notes, certificates of 
indebtedness, or Treasury bills of the United States or in other such 
obligations fully guaranteed as to principal and interest by the United 
States;
    (b) Unconditional takeout commitments or guarantees of any 
department, agency, bureau, board, commission or establishment of the 
United States or any corporation wholly owned directly or indirectly by 
the United States; or
    (c) A perfected security interest in a segregated deposit account 
in the lending bank.
    If the proposed exception is adopted, a loan to an executive 
officer of an insured nonmember bank which has been secured by any of 
the types of collateral listed above may be made in any amount and will 
not be subject to the limit for other purpose loans set forth in 12 CFR 
337.3(c)(2). This exception will be in addition to the statutory 
exceptions to the other purpose lending limit for home mortgage loans 
and education loans.
    It is the opinion of the Board of Directors of the FDIC that the 
creation of such an exception to the general lending limit on loans to 
executive officers of insured nonmember banks is consistent with safe 
and sound banking practices. This is because the Board of Directors 
believes that extensions of credit which have been collateralized in 
the manner described above pose a minimal risk of loss to a bank. The 
Board of Directors of the FDIC is also of the opinion that the proposed 
exception would not lend itself to abuse because the collateralized 
loans to executive directors would still continue to be subject to the 
requirement that the loan not be on more favorable terms than those 
afforded other borrowers (section 22(g)(1) of the FRA) and would still 
be subject to the prohibitions against preferential lending in section 
22(h) of the FRA.
    The proposed changes parallel changes recently made by the Board of 
Governors of the FRS to its regulations. See 59 FR 8831 (1994).1 
The Board of Directors is proposing to adopt the same exception to the 
limit for other purpose loans to executive officers that the Board of 
Governors of the FRS promulgated for member banks in order to put 
insured state nonmember banks on an equal footing with state member 
banks, thus avoiding disparity of treatment among banks based upon 
their membership, or lack of membership, in the Federal Reserve System.
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    \1\Along with the new exception to the general lending limit on 
loans to executive officers, the Board of Governors of the FRS made 
a number of other substantive, technical and conforming changes to 
12 CFR Part 215, Regulation O. These changes were effective on 
February 18, 1994. See 59 FR at 8831. These changes became 
applicable to insured nonmember banks on February 18, 1994, without 
any need for action on the part of the FDIC because insured 
nonmember banks are subject to the regulations of the FRS which 
implement section 22(g) and 22(h) of the FRA, with the exception of 
the provisions which implement section 22(g)(4). For a comprehensive 
discussion of these changes, see 59 FR at 8831-8837.
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    As noted before, it is the responsibility of each federal banking 
agency under section 22(g)(4) to specify the limit on other purpose 
loans to executive officers of the depository institutions which are 
subject to a particular banking agency's supervision. The FDIC 
specifies the limit on other purpose loans to executive officers of 
insured nonmember banks in 12 CFR 337.3(c)(2). Prior to the most recent 
amendments to Regulation O, Sec. 215.5(c)(3) specified the limit on 
other purpose loans to executive officers by member banks. 12 CFR 
215.5(c)(3) was amended by the Board of Governors of the FRS to provide 
that a loan may be made by a member bank to one of its executive 
officers in any amount if it has been secured by certain types of 
collateral. The Board of Governors of the FRS concurrently redesignated 
the provision which sets forth the limit for other purpose loans by 
member banks to their executive officers as 12 CFR 215.5(c)(4). 59 FR 
at 8840-8841. In light of these regulatory changes by the FRS, the 
Board of Directors of the FDIC proposes to amend Sec. 337.3 to cross-
reference Sec. 215.5(c)(4), along with Sec. 215.5(c)(3), as one of the 
provisions of Regulation O which are inapplicable to insured nonmember 
banks.

III. Requests for Comment

    The Board of Directors specifically requests comment from all 
interested parties as to whether it is appropriate for the FDIC to 
establish an exception to the limit on other purpose loans to executive 
officers of insured nonmember banks for loans that have been 
collateralized in the manner described above.
    The Board of Directors also specifically requests comment from all 
interested parties as to whether the amendments which the FDIC proposes 
are the most appropriate means to create an exception to the limit on 
other purpose loans to executive officers of insured nonmember banks. 
If a commenter should feel that there is a better alternative to the 
proposed amendments, the Board of Directors of the FDIC requests that 
the alternative be specifically described.

IV. 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 economic impact on a substantial number of small 
entities. If adopted, the rule will not impose burdens on depository 
institutions of any size and will not have the type of economic impact 
addressed by the Regulatory Flexibility Act.
    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 regulatory requirements that are imposed upon small 
depository institutions rather than to increase them. Small depository 
institutions will have greater freedom of action to extend credit to 
executive officers as a result of the proposed rule rather than less.

V. Paperwork Reduction Act

    No collections of information pursuant to section 3504(h) of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in the 
proposed rule. Consequently, no information has been submitted to the 
Office of Management and Budget for review.

List of Subjects in 12 CFR Part 337

    Banks, banking, Reporting and recordkeeping requirements, 
Securities.

    In consideration of the foregoing, the Board of Directors proposes 
to amend part 337 of chapter III of title 12 of the Code of Federal 
Regulations as follows:

PART 337--[AMENDED]

    1. The authority citation for Part 337 continues to read as 
follows:

    Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b), 
1819, 1821(f), 1828(j)(2), 1831f, 1831f-1.

    2. Section 337.3 is amended by revising paragraphs (a) and (c)(2) 
to read as follows:


Sec. 337.3  Limits on extensions of credit to executive officers, 
directors, and principal shareholders of insured nonmember banks.

    (a) With the exception of 12 CFR 215.5(b), 215.5(c)(3), 
215.5(c)(4), and 215.11, insured nonmember banks are subject to the 
restrictions contained in subpart A of Federal Reserve Board Regulation 
O (12 CFR part 215, subpart A) to the same extent and to the same 
manner as though they were member banks.
* * * * *
    (c) * * *
    (2) An insured nonmember bank is authorized to extend credit to any 
executive officer of the bank for any other purpose not specified in 
Sec. 215.5(c) (1) and (2) of Federal Reserve Board Regulation O (12 CFR 
215.5(c) (1) and (2)) if the aggregate amount of such other extensions 
of credit does not exceed at any one time the higher of 2.5 percent of 
the bank's capital and unimpaired surplus or $25,000 but in no event 
more than $100,000, provided, however, that no such extension of credit 
shall be subject to this limit if the extension of credit is secured 
by:
    (i) A perfected security interest in bonds, notes, certificates of 
indebtedness, or Treasury bills of the United States or in other such 
obligations fully guaranteed as to principal and interest by the United 
States;
    (ii) Unconditional takeout commitments or guarantees of any 
department, agency, bureau, board, commission or establishment of the 
United States or any corporation wholly owned directly or indirectly by 
the United States; or
    (iii) A perfected security interest in a segregated deposit account 
in the lending bank.
* * * * *
    By order of the Board of Directors.

    Dated at Washington, DC, this 9th day of August, 1994.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-19953 Filed 8-15-94; 8:45 am]
BILLING CODE 6714-01-P