[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