[Federal Register Volume 61, Number 150 (Friday, August 2, 1996)]
[Rules and Regulations]
[Pages 40311-40313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19525]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 931
[No. 96-48]
Modification of Definition of Deposits in Banks or Trust
Companies
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
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SUMMARY: The Board of Directors of the Federal Housing Finance Board
(Finance Board) has adopted a final rule to modify the definition of
``deposits in banks or trust companies'' in the Finance Board's
regulations. The final rule will: Make clear that the term ``banks''
includes savings associations; and expressly include federal funds
transactions as eligible to fulfill the liquidity requirement imposed
on the Federal Home Loan Banks (FHLBanks) by section 11(g) of the
Federal Home Loan Bank Act (Bank Act).
EFFECTIVE DATE: September 3, 1996.
FOR FURTHER INFORMATION CONTACT: Janice A. Kaye, Attorney-Advisor,
Office of General Counsel, (202) 408-2505, Federal Housing Finance
Board, 1777 F Street, NW., Washington, DC 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
Under section 11(e)(1) of the Bank Act, the FHLBanks have the power
to accept deposits from their members, other FHLBanks, or
instrumentalities of the United States. See 12 U.S.C. 1431(e)(1). To
ensure that each FHLBank has sufficient liquid assets to meet deposit
withdrawal demands, section 11(g) of the Bank Act imposes a liquidity
requirement. See id. section 1431(g). The liquidity requirement
provides that each FHLBank must invest, upon such terms and conditions
as the Board of Directors of the Finance Board may prescribe, an amount
equal to the current deposits the FHLBank holds in specified types of
assets. Id. Among the specified assets are ``deposits in banks or trust
companies.'' Id. section 1431(g)(2).
The phrase ``deposits in banks or trust companies'' appeared in,
and has not been changed since enactment of, the Bank Act in 1932. See
ch. 522, sec. 11, 47 Stat. 733 (July 22, 1932). The legislative history
of section 11(g) of the Bank Act does not discuss use of the phrase,
but suggests only that the purpose of the liquidity requirement is to
ensure that the FHLBanks have sufficient liquid assets to meet their
advance and deposit withdrawal demands. See Bank Act: Hearings on S.
2959 Before a Subcomm. of the Senate Comm. on Banking and Currency, 72d
Cong., 1st Sess. 36 (Jan. 14, 1932) (statement of John O'Brien,
Assistant Legislative Counsel). Although the legislative history of
section 11(g) is limited, a legal opinion issued several years after
enactment of the Bank Act by the General Counsel of the Federal Home
Loan Bank Board (Bank Board), the Finance Board's predecessor agency,
stated that ``Congress, in using the phrase `deposits in banks or trust
companies' * * * intended to refer to those financial institutions
which accept deposits in their regular course of business.'' \1\ The
Bank Board General Counsel based his determination on the plain meaning
of the term ``banks'' at that time. Id. at 2-3. To decide if a
financial institution is a ``bank'' for purposes of section 11(g)(2),
``the principal test or criterion * * * is whether the financial
institution accepts deposits as one of the primary purposes for which
it was created.'' Id. at 2. Since savings associations did not accept
deposits at that time,\2\ the Bank Board General Counsel concluded that
``savings associations did not fall within the strict meaning of
`banks.' '' Bank Board General Counsel opinion at 3.
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\1\ See Bank Board General Counsel opinion 015 (Dec. 7, 1936) at
1-2. The Bank Board General Counsel concluded that ``Congress * * *
intended to limit the trust companies authorized to receive
[FHLBank] deposits to those which actually receive deposits as part
of their regular course of business.'' Id. at 4.
\2\ See e.g., Home Owners' Loan Act of 1933 (HOLA), ch. 64, sec.
5(b), 48 Stat. 132 (June 13, 1993) (savings and loan associations
``shall raise their capital only in the form of payments on such
shares as are authorized in their charger * * * no deposits shall be
accepted''); Horace Russell, Savings and Loan Associations 166-67,
n.21 (1956) (``savings and loan associations * * * issue savings
accounts, sometimes called share accounts and sometimes share
savings accounts * * * by federal law, the use of the word `deposit'
by savings and loan associations is prohibited''); Indep Bankers
Ass'n of Am. v. Clarke, 917 F.2d 1126, 1128 (8th Cir. 1990)
(``traditionally, of course, and originally, savings and loan
associations * * * did not accept demand deposits'').
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In 1978, the Bank Board defined by regulation the phrase ``deposits
in banks or trust companies'' to include a deposit in another FHLBank,
a demand account with a Federal Reserve Bank, or a deposit in a
depository designated by a FHLBank's board of directors that is a
member of the Federal Reserve System (FRS) or the Federal Deposit
Insurance Corporation (FDIC). See 43 FR 46835, 46836 (Oct. 11, 1978),
codified at 12 CFR 521.5 (superseded). When the Bank Board adopted this
definition, deposits in federal and some state savings associations
were insured by the former Federal Savings and Loan Insurance
Corporation (FSLIC), and deposits in banks (and some savings banks)
were insured by the FDIC. The Bank Board's regulation provided that
only deposits in FDIC-insured institutions were eligible investments
for purposes of the ``deposits in banks or trust companies'' provision
of section 11(g) of the Bank Act. Since, generally speaking, only banks
were members of (or, more precisely, insured by) the FDIC, deposits in
FSLIC-insured savings associations could not be counted toward the
liquidity requirement under the regulation. When Congress abolished the
Bank Board and FSLIC in 1989, see Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, sec.
401, 103 Stat. 183 (Aug. 9, 1989), the Finance Board transferred the
definition of ``deposits in banks or trust companies,'' without any
change in substantive or technical matters, to Sec. 931.5 of its
regulations. See 54 FR 36757 (Aug. 28, 1989), codified at 12 CFR 931.5.
On September 22, 1993, the Board of Directors of the Finance Board
approved for publication a proposed rule to modify the definition of
``deposits in banks or trust companies'' in Sec. 931.5 of its
regulations. The notice of proposed rulemaking (Notice) was published
in the Federal Register on September 29, 1993, with a 60-day public
comment period that closed on November 29, 1993. See 58 FR 50867 (Sept.
29, 1993). The Notice proposed to make two changes to the definition of
``deposits in banks or trust companies.'' First, it
[[Page 40312]]
proposed to replace the reference to depositories that are FRS or FDIC
members with a reference to banks, as defined in section 3 of the
Federal Deposit Insurance Act (FDI Act), see 12 U.S.C. 1813(a), and
trust companies that are members of the FRS or insured by the FDIC. The
intent of this modification was to make clear that deposits in savings
associations would continue to be ineligible investments for purposes
of section 11(g) of the Bank Act. Second, the Notice proposed to expand
the definition to specifically include as deposits the sale of federal
funds.
II. Analysis of the Final Rule
A. Meaning of the Term ``Banks''
In the Notice, the Board of Directors of the Finance Board proposed
to limit the meaning of ``banks'' to those institutions included in the
technical definition of the term ``banks'' under the FDI Act. Under
that definition, the term ``banks'' does not include savings
associations. See id. section 1813 (a), (b). As a result of reviewing
the comments received by the Finance Board, one from a FHLBank and the
other from an industry trade association, and the factors discussed
below, the Board of Directors of the Finance Board has determined that
deposits in savings associations should be eligible investments for
purposes of the liquidity requirement in section 11(g) of the Bank Act.
The Board of Directors of the Finance Board has modified the proposed
rule to make clear that the term ``banks'' will include savings
associations for purposes of section 11(g)(2) of the Bank Act. The
public comments support this interpretation.
Neither the legislative history of the Bank Act nor the Bank Board
in adopting its regulatory definition, articulated any policy reasons
to support the exclusion of deposits in FSLIC-insured savings
associations. See supra section I. One commenter suggested that the
rationale for the exclusion of savings associations might have been to
avoid any conflict of interest that might arise as a result of placing
deposits in FHLBank member institutions. If this was the concern when
Congress enacted the Bank Act in 1932, or when the Bank Board
promulgated its regulatory definition in 1978, it was obviated in 1989,
when banks for the first time became eligible as FHLBank members. See
FIRREA, sec. 704(a), codified at 12 U.S.C. 1424(a)(1). The commenter
urged the Finance Board to treat bank and savings association FHLBank
members equally.
The other commenter offered that the reason for disparate treatment
of banks and savings associations might have been to ensure that
FHLBank liquidity deposits be transacted only with ``low-risk''
counterparties, implying that FDIC-insured deposits were less risky
than FSLIC-insured savings accounts. Because Congress dissolved FSLIC
in 1989 and transferred responsibility for administering the insurance
funds for both savings associations and banks to the FDIC, see FIRREA,
sections 401(a)(1), 205, the commenter argued that, if there ever were
such differences, there are now no material differences in overall
credit risk between deposits in FDIC-insured banks and deposits in
FDIC-insured savings associations. The commenter pointed out also that
sound financial management and the dictates of the Finance Board's
Financial Management Policy, see Board of Directors Res. 93-133 (Dec.
15, 1993), Board of Directors Dec. Mem. 94-DM-48 (Nov. 10, 1994),
require the FHLBanks to select only the most creditworthy
counterparties.
-Permitting the FHLBanks to count deposits in savings associations
towards the statutory liquidity requirement also is sound as a matter
of statutory construction. Congress enacted the Bank Act a year before
it created the FDIC. See ch. 89, sec. 8, 48 Stat. 168 (June 16, 1933).
Thus, the technical definition of the term ``bank'' provided for
purposes of deposit insurance coverage could not have been the
contemplated meaning of the word as used in section 11(g)(2) of the
Bank Act. See supra section I. It appears that Congress' intent in
using the phrase ``deposits in banks or trust companies'' was to permit
the FHLBanks to make deposits only in financial institutions that
accepted deposits in the ordinary course of their business. Id.
Clearly, the plain meaning of the term ``bank'' at the time Congress
enacted the Bank Act was a financial institution that accepts deposits.
Id. This also is the ordinary dictionary definition of the term
``bank'' today.\3\
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\3\ ``A bank is an institution * * * whose business it is to
receive money on deposit * * *.'' 131 Black's Law Dictionary (5th
ed. 1979). The word ``bank'' means ``an institution for receiving,
lending, exchanging, and safeguarding money.'' 106 The Random House
College Dictionary (rev. ed. 1980) (emphasis added).
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-Although there continue to be differences between banks and
savings associations, even the courts have acknowledged that ``the
clear, bright-line distinctions between commercial banks and savings
and loans have, over the years, gradually become blurred.'' Indep.
Bankers, 917 F.2d at 1128. Indeed, for purposes of other statutes, the
term ``banks'' has been defined to include savings associations, and
vice versa. For example, under HOLA, the Office of Thrift Supervision
considers certain types of banks to be savings associations for
purposes of the qualified thrift lender test. See 12 U.S.C.
1467a(1)(A), (l); 12 CFR 583.21. Further, under the Internal Revenue
Code, the meaning of the term ``bank'' includes savings associations
for purposes of assessing taxes on certain situations common to both
types of financial institutions. See 26 U.S.C. 581; Horace Russell,
Savings and Loan Associations 307 (2d ed. 1960) (`` `black,' therefore,
is `white' ''). And, for purposes of the McFadden Act, 12 U.S.C. 36,
which authorizes national banks to establish branches only to the
extent that state banks within the same state may branch under state
law, the Comptroller of the Currency has determined that savings
associations are state banks. Several courts have upheld as reasonable
the Comptroller of the Currency's determination.
-For all of the above reasons, including the fact that savings
associations now have statutory authority to accept deposits,\4\ it is
reasonable for the Board of Directors of the Finance Board to conclude
that deposits in savings associations should be eligible investments
for purposes of section 11(g) of the Bank Act.
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\4\ In 1968, Congress amended section 5(b) of HOLA. See Pub. L.
90-448, Title XVII, sec. 1716(a), 82 Stat. 608 (Aug. 1, 1968); supra
n.2. The amendment eliminated provisions that permitted savings
associations to raise their capital only in the form of payments on
shares and prohibited acceptance of deposits, and inserted
provisions permitting savings associations to raise capital in the
form of savings deposits, shares, or other accounts. Id., codified
at 12 U.S.C. 1464.
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B. Federal Funds Transactions
The Board of Directors of the Finance Board has adopted the
provisions of the Notice that concern federal funds transactions as
proposed. The Board of Directors of the Finance Board has decided that
federal funds transactions, which are highly liquid investments
essentially equivalent to deposits, constitute investments that are
``deposits'' within the meaning of section 11(g)(2) of the Bank Act.
Therefore, the final rule amends Sec. 931.5 to include expressly the
sale of federal funds to banks and trust companies as a deposit the
FHLBanks may use to fulfill the liquidity requirement in section 11(g)
of the Bank Act. Since the Board of Directors of the Finance Board has
concluded that the term ``banks'' includes savings associations,
savings associations, as well as banks and trust companies, are
eligible counterparties
[[Page 40313]]
for federal funds transactions. The public comments received by the
Finance Board support this interpretation.
For purposes of the final rule, a sale of federal funds means
either a conventional federal funds transaction or a correspondent-
respondent federal funds transaction. A conventional sale of federal
funds involves the unsecured sale of funds held by a FHLBank in an
account maintained at its district Federal Reserve Bank to a bank in
need of additional funds to meet its statutory reserve requirement.\5\
A correspondent-respondent federal funds sale involves the sale of
unsecured funds directly from a FHLBank (the respondent) to a
correspondent bank in need of funds to meet its statutory reserve
requirement.
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\5\ Section 19(b)(2)(A) of the Federal Reserve Act requires each
depository institution to maintain reserves against its transaction
accounts, as the FRS Board of Governors may prescribe, for the
purpose of implementing monetary policy. See 12 U.S.C. 461(b)(2)(A).
These reserves are commonly referred to as ``federal funds.'' A
depository institution meets the reserve requirement by maintaining
accounts at its direct Federal Reserve Bank or by holding cash in
its vaults. A depository institution may sell excess reserves to
another depository institution in need of additional funds to meet
its reserve requirement.
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III. Regulatory Flexibility Act
Under the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq.,
the FHLBanks are not ``small entities.'' Id. section 601(6). Since this
final rule applies only to the FHLBanks, it does not impose any
additional regulatory requirements on small entities. Thus, in
accordance with section 605(b) of the RFA, Id. section 605(b), the
Board of Directors of the Finance Board hereby certifies that this
final rule will not have a significant economic impact on a substantial
number of small entities.
List of Subjects in 12 CFR Part 931
Banks, banking, Federal home loan banks.
Accordingly, the Board of Directors of the Federal Housing Finance
Board hereby amends chapter IX, title 12, part 931, Code of Federal
Regulations, as follows:
PART 931--DEFINITIONS
1. The authority citation for part 931 is revised to read as
follows:
Authority: 12 U.S.C. 1422a, 1422b, 1427, and 1431(g).
2. Section 931.5 is revised to read as follows:
Sec. 931.5 Deposits in banks or trust companies.
Include:
(a) A deposit in another Bank;
(b) A demand account in a Federal Reserve Bank; and
(c) A deposit in, or a sale of federal funds to:
(1) An insured depository institution, as defined in section
2(12)(A) of the Act (12 U.S.C. 1422(12)(A)), that is designated by the
Bank's board of directors; or
(2) A trust company that is a member of the Federal Reserve System
or insured by the Federal Deposit Insurance Corporation, and is
designated by the Bank's board of directors.
Dated: July 3, 1996.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 96-19525 Filed 8-1-96; 8:45 am]
BILLING CODE 6725-01-U