Full text of Federal Reserve Bank of New York Circulars : 10262. Amendments to Regulation Y

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEDERAL RESERVE BANK
OF MEW YORK

[

Circular No. 1 0 2 6 2 "I
October 12, 1988

AMENDMENTS TO REGULATION Y
Limitations on Grandfathered Nonbank Banks

To A ll Depository Institutions and Bank Holding Companies
in the Second Federal Reserve District, and Others Concerned:

Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has issued amendments to Regulation Y (Bank Holding Companies
and Change in Bank Control) to implement the limitations placed on grandfathered nonbank banks by
the Competitive Equality Banking Act of 1987 (CEBA).
CEBA redefined the term “bank” in the Bank Holding Company Act to include any bank whose
deposits are insured by the Federal Deposit Insurance Corporation (FDIC) and to prohibit the formation
of new FDIC-insured nonbank banks.
CEBA also contains a grandfather provision that permits a nonbanking company that controlled
a nonbank bank on March 5, 1987 to retain the nonbank bank and not be treated as a bank holding
company if the company and its subsidiary nonbank bank observe certain limitations.
These limitations generally restrict the ability of nonbank banks to commence new activities or
to engage in new cross-marketing activities with affiliates after March 5, 1987; to permit overdrafts
by, or incur overdrafts on behalf of, affiliates at a Reserve Bank; and to expand their assets by more
than 7 percent annually during any 12-month period after August 10, 1988.
Specific details concerning limitations on growth, treatment of overdrafts, definition of activities,
and curbs on cross-marketing are contained in the Board’s notice.

Enclosed — for all depository institutions, bank holding companies, and those who maintain
sets of the Board’s regulations — is the complete text of the amendments to Regulation Y, which
has been reprinted from the Federal Register of September 28; copies will be furnished to others
upon request directed to the Circulars Division of this Bank (Tel. No. 212-720-5215 or 5216).
Questions regarding Regulation Y may be directed to our Domestic Banking Applications
Division (Tel. No. 212-720-5861).
E.

G e r a l d C o r r ig a n ,

President.

Board off Governors of the Federal Reserve System

B A N K H O L D IN G COM PANIES AND C H A N G E IN B A N K C O N T R O L
AMENDMENTS TO REGULATION Y
(Effective September 28, 1988)

FEDERAL RESERVE SYSTEM
12CFR Part 225

10,1988, or permitting overdrafts by
affiliates or incurring overdrafts on
behalf of affiliates at a Federal Reserve
Bank. 12 U.S.C. 1843(f) (2) and (3).
[Regulation Y; Doeket M®. R-0637]
To implement these limitations, the
rules and interpretation: (1) discuss how
LomsSati@6is Monbanlk @aok®
the term “activity” will be applied; (2)
clarify the scope of the cross-marketing
A©EW<gv: Board of Governors of the
limitation; (3) describe how compliance
Federal Reserve System.
with the 7 percent annual asset growth
ACTION: F inal rule.
rate will be determined; and (4) define
the restrictions on overdrafts.
SUMMARY: The Board has adopted rules
This rule also amends the definition of
and an interpretative ruling to
“bank” in Regulation Y to reflect the
implement provisions of the Competitive changes in that definition made by
Equality Banking Act of 1987 (“CEBA”) CEBA.
(Pub. L. No. 100-86), relating to so-called
EFFECTIVE PATS: This regulation is
nonbank banks. CEBA amended the
definition of "bank” in the Bank Holding effective September 28,1988, except for
§ 225.52 which will be effective January
Company Act (the "BHC Act” or the
1,1989, and § 225.145, which will be
“Act”) to include certain banking
effective October 28,1988.
institutions that had previously been
outside that definition (so called
FOIH! FURTHER INFORMATION CONTACT:
“nonbank banks”). CEBA also contained For information regarding §§ 225.2,
a grandfather provision that permitted
225.51 and 225.145, contact J. Virgil
nonbanking companies that controlled
Mattingly, Deputy General Counsel
nonbank banks as of March 5,1987, to
(202/452-3430), Robert D. Frierson,
retain control of the institution and not
Senior Attorney (202/452-3711), or
be treated as a bank holding company
Thomas M. Corsi, Attorney (202/452—
for purposes of the BHC Act if the
3275); for information regarding section
company and its subsidiary nonbank
225.52, contact Oliver I. Ireland,
bank observe certain restrictions. These Associate General Counsel (202/452limitations generally restrict nonbank
3625); or Elaine M. Boutilier, Senior
banks from commencing new activities
Attorney (202/452-2418), Legal Division,
or certain cross-marketing programs
Board of Governors of the Federal
with affiliates after March 5,1987,
Reserve System; or for the hearing
increasing their assets at an annual rate impaired only: Telecommunications
of more than 7 percent during any 12Device for the Deaf, Earnestine Hill or
month period commencing after August Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION: CEBA

amended the Bank Holding CompanyAct of 1956 (“BHC Act”) by expanding
the definition of “bank” to include any
bank the deposits of which are insured
by the Federal Deposit Insurance
Corporation (“FBIC") as well as any
other institution that accepts demand
deposits or accounts with third party
payment capabilities and that is
engaged in the business of making
commercial loans. This new definition
covers certain institutions that had not
previously been covered by the BHC Act
(“nonbank banks”) and prevents
banking and nonbanking companies
from forming new nonbank banks.
CEBA also contains a grandfather
provision that permits a nonbanking
company that controlled a nonbank
bank on March 5,1987, to retain the
nonbank bank and not be treated as a
bank holding company if the company
and its subsidiary nonbank bank
observe certain limitations designed to
prevent unfair competition with banks
owned by bank holding companies and
to reduce risks posed to the payments
system by nonbank banks. With certainlimited exceptions, the grandfathered
parent company may not after March 5,
1987, acquire control of an additional
bank or thrift institution or more than 5
percent of its assets or shares. The
grandfathered nonbank bank may not-—
(1) Engage in any activity after March
5,1987, unless it was lawfully engaged
in that activity as of March 5,1987;

(2) Offer or market products or

For this Regulation to be complete, retain:
1) Regulation Y pamphlet, effective February 3, 1984.
2) Amendments effective November 3, 1986, November7, 1986, December 15,
1986, and June 16, 1987 (inclu d ed in slip sh e e t d a te d J u ly 1987).
3) This slip sheet.
[Enc. Cir. No. 10262]
PRINTED IN NEW YORK, FROM FED ERAL R E G IS T E R , VOL. 53, NO. 188, pp. 37733-37751

services of an affiliate that are not
permissible for bank holding companies
under the BHC Act or permit its
products or services to be offered or
marketed by an affiliate engaged in
activities not permissible for bank
holding companies under the BHC Act,
unless the specific cross-marketing
activity was conducted as of March 5,
1987, and then only in the same manner
as conducted as of that date;
(3) Permit an overdraft (including an
interday overdraft) by an affiliate, or
incur an overdraft in its account at a
Federal Reserve Bank on behalf of an
affiliate; and
(4) Increase its assets at an annual
rate of more than 7 percent during any
12-month period beginning after August
10, 1988.1
On June 3,1988 (53 FR 21,462, June 8,
1988), the Board issued for comment
proposed rules to implement these
provisions of CEBA. In response to this
request for comment, the Board received
92 public comments from interested
individuals and organizations.
Approximately 52 percent of these
commenters (48) favored adoption of the
regulations as proposed or with slight
modifications. Forty-two of the
commenters opposed the proposed
regulations and suggested that they be
substantially changed before being
adopted as final rules.
During the regulatory comment period,
the Board received several requests for
a hearing. In response to these requests,
the Board conducted a full-day informal
hearing on July 29,1988, to permit
interested parties an additional
opportunity to express their views on
the proposal. The comments on the
proposal received during the comment
period and the informal hearing are
summarized below.
The comments generally centered on
the proper interpretation of the
Congressional purposes in enacting
CEBA and the appropriate degree of
restrictiveness in the implementation of
CEBA’s limitations.
Commenters in favor of the proposed
rule, principally from banking
organizations and their trade groups,
argue that the CEBA limitations should
be adopted as written and that the
impact of the rules on nonbank banks
should not be ameliorated by
administrative action. In their view, it
was the overwhelming, if not uniform,
view of Congress that nonbank banks
present a serious potential for damage
to the nation’s banking system and that
5 12 U.S.C. 1843'f] (2) and (3).

the CEBA limitations were intended to
restrict the operations of nonbank banks
in order to prevent to the extent possible
these adverse effects, even at the risk of
making nonbank banks less competitive
or viable. For example, the chairman of
the Senate Banking Committee stated
that in establishing the CEBA
restrictions, Congress rejected the
testimony of nonbank banks that these
limitations would impair competition,
impede desirable innovation, jeopardize
bank safety and soundness and increase
risk to the FDIC. These commenters
contend, based upon the statutory
findings in CEBA, that the proposed rule
properly implements the legislative
intent to hold nonbank banks in place
until Congress can formulate a
permanent policy.
Comments unfavorable to the
proposed rule, predominantly from the
affected nonbank banks, interpret CEBA
and its legislative history as reflecting ©
balancing approach intended to permit
nonbank banks to be competitive. They
contend that, although Congress chose
to constrain grandfathered nonbank
banks in significant and unprecedented
ways, the limitations were not intended
to be implemented in such a maimer a©
to prevent nonbank banks from
continuing to compete in the
marketplace. These commenters
maintain that the actual balance
achieved by CEBA cannot be fully
appreciated unless the language of the
statute is considered in light of its
legislative history, including
particularly, statements by the chairman
of the Senate Banking Committee during
the Senate’s consideration of CEBA.
As explained in the interpretive
ruling, the Board resolved this issue with
respect to particular provisions of the
CEBA limitations with reference to the
terms of the statute and the stated intent
of the statute to minimize the potential
for conflicts of interest, unsound
banking practices, unfair competition,
partiality in the credit-granting process
and other adverse effects that would be
associated with the grandfathered
affiliations of federally insured nonbank
banks and companies engaged in
activities forbidden to regulated bank
holding companies. Based on the
statutory findings, the Board has not
accepted the view of the unfavorable
commenters that the nonbank bank
restrictions must be applied to permit
nonbank banks to maintain their unique
competitive position.
The principal issuesTaised by the
comments and at the public hearing
regarding the proposed rules and the

2

Board’s resolution of these issues are
discussed in the following sections as
well as in the interpretative ruling:
1. A ctivity Limitation: CEBA provides
that a nonbank bank may not—
engage in any activity in which such bank
w as not lawfully engaged as of March 5,1987
* 4 * 12 U.S.C. 1843lf)(3)(B)(i).

The proposed rule defined the term
"activity’*as applying to discrete lines
of banking or nonbanking business and,
consistent with legislative history of the
provision, pointed out that this
definition did not envision a product-by­
product approach. To implement this
definition, the proposed rule focused on
five major categories of activities:
deposit taking, lending, trust services,
payment and clearing services, and
nonbanking activities. Within these
categories, examples of separate
activities were set forth for purposes of
applying the grandfather limitation. For
example, deposit-taking activities were
separated into demand deposits, non­
demand checkable deposits, and time or
savings deposits; and lending was
divided into commercial lending and
types of consumer lending (credit card,
mortgage banking and other consumer
loans).
Favorable comments considered these
differentiations to be consistent with the
express language in the statute and
representative of recognized lines of
banking or non banking activity,
although some commenters urged the
Board to narrow certain of the activities.
Commenters unfavorable to the
proposal characterized the approach as
being overly narrow and contradictory
of legislative intent not to define activity
on a product-by-product or customer-bycustomer basis. In their view, Congress
only intended to prevent grandfathered
entities from becoming full-service
banks or altering their basic character.
As an alternative, these comments
generally proposed to delete the
subcategories within each major
category of banking activity except
where further differentiation was
necessary to prevent a nonbank bank
from becoming a full-service commercial
bank. Thus, the commenters would favor
the following categories based on socalled “core” banking activities: (1)
deposits (differentiating between
demand deposits and other deposits], (2)
lending (differentiating between
commercial loans and other types of
lending), (3) trust services (including
products and services incidental
thereto], and (4) nonbanking (or noncore banking) activities permissible for

the bank under state law, such as travel
agency, real estate development or
general insurance brokerage. Some of
these commenters would also include
clearing and payment services, as a
separate activity, while others regarded
this activity as incidental to offering
transaction accounts.
For the reasons stated in the
interpretive ruli.ng, the Board believes
the term activity should be interpreted
and applied with reference to prior
Board and judicial precedent regarding
this term as it appears in section 4 of the
BHC Act, except in instances where
CEBA requires modification of this
analysis, as in the case of deposit-taking
and lending activities. This approach is
implemented through the following
revised major categories of activities:
deposit taking, lending, trust services
and other activities consistent with
recognized activities under section 4 of
the BHC Act.2
Deposit-taking would include three
activities: demand-deposit taking, non­
demand deposits that the depositor may
withdraw by check or similar means for
payment to third parties, and other time
and savings deposit-taking activity.
Thus, an institution that did not offer
demand or other transaction accounts
on March 5,1987, could not begin to
offer these services after March 5. As
explained in the interpretation,
consistent with the Board’s decisions
under the activity provisions of section
4, lending would include the following
activities: commercial lending, consumer
mortgage lending, consumer credit card
lending and other consumer lending.3
Some commenters stated that deposit­
taking activity should be broken down
only to reflect the distinction in the
"bank” definition before CEBA between
demand deposits and other deposits and
that the Board should not treat non­
demand transaction accounts as a
separate activity. They rely on the fact
that in Board of Governors v. Dimension
Financial Corp.,4 the Supreme Court
held that NOW accounts may not be
treated as a “deposit that the depositor
has a legal right to withdraw on
2 Paym ent and clearing services, w hich w ere
considered as a sep a ra te category of activity under
the original proposal, have been deleted as a
sep a ra te activity and will be considered under the
general principles set out in the interpretation
regarding other activities.
3 The B oard's decisions under section 4 have not
generally differentiated betw een types of
com m ercial lending. A ccordingly, the Board
believes that com m ercial lending should be view ed
as a single activity under the CEBA lim itation.
4 474 U.S. 361 (1986).

demand” under the pre-CEBA bank
definition. As explained in the
interpretive ruling, the treatment of
transaction accounts as a separate
activity from non-transaction account
deposit-taking is consistent with the
structure of the BHC Act, Board
decisions regarding the term activity m
section 4, and banking practice.
In this regard, the Board notes that .the
Dimension decision did not overturn the
Board’s decision that the taking of NOW
accounts was a separate activity under
section 4 of the Act. The decision ruled
only that a NOW account was not "a
deposit that the depositor has a legal
right to withdraw on demand" in the
pre-CEBA bank definition in the BHC
Act. Indeed, in CEBA, Congress
amended the bank definition in the BHC
Act to treat the taking of transaction
accounts as separate and distinct from
the taking of non-transaction deposits,
thus recognizing that transaction
deposits have characteristics such that
they should be viewed in the same
manner as demand depsoits for
purposes of the bank definition and not
as traditional non-checkable savings or
time deposits. This distinction between
these types of deposits was carried over
into the credit-card, trust company and
certain other exceptions from the Act's
definition of bank. The Board believes
these amendments support the view that
transaction accounts are a separate
activity in the case of a nonbank bank
that did not offer such a service as of
March 5,1987.
The Board has also considered the
views of certain commenters that the
reference in the proposed rules to
section 225.25(b) of the Board’s
Regulation Y as a guide for defining
activities other than lending or deposit
services is inappropriate in that these
provisions identify activities that the
Board considers to be closely related to
banking. These commenters contend
that CEBA’s activity restrictions, on the
other hand, are applicable to core
banking services and not activities
closely related thereto. They also state
that many of the activities identified in
Regulation Y are incidental elements to
core banking functions and should not
be considered separate activities under
CEBA. Moreover, the nonbanking
activities list contains, for these
commenters, duplication and overlap.
Other commenters, including nonbank
banks, stated that use of this regulation
as a reference point for activities under
CEBA was appropriate.
As noted in the interpretive rule, if

3

Congress had intended the activity
limitation in CEBA to distinguish only
between demand deposit and
commercial lending activity, Congress
would have used the restriction it used
in another section of CEBA dealing with
nonbank banks owned by bank holding
companies, which has this result. See 12
U.S.C. 1843(g). In accordance with the
ordinary meaning of the term, the
placement of the CEBA activity
limitation in a section of the Act dealing
with the activities of banking
organizations, and the legislative history
of the provisions, the Board believes the
view of the term set out in the
interpretive ruling is appropriate.
The Board believes that the
commenters are mistaken in their view
that reference to the activity limitation
of section 4 is not appropriate in the
case of activities conducted by banking
companies. The Board’s decisions and
regulations under section 4 authorize
deposit-taking, lending and associated
banking fuactioag for companies that do
not qualify as banks, but, like the
nonbank banks, are federally insured,
operate under bank thrift or other
depository institution charters, and
exercise many of the powers of banks.
See e.g. US. Trust Corporation, 70
Federal Reserve Bulletin 371 (1984);
Citizens Fidelity Corporation. 70
Federal Reserve Bulletin 231 (1984);
Citicorp/Fidelity Federal Savings fr
Loan Association, 68 Federal Reserve
Bulletin 856 (1982). Finally, the Board
also notes that the courts have set out
standards by which one activity would
be viewed as incidental t® another
under section 4. National Courier Ass'n
v. Board of Governors, 516 F.2d 1229
(1975).
(a) Meaning of "EngagedIn". Under
the proposed rule, a nonbank bank must
demonstrate that it had a program in
place to provide a particular product or
service associated with the
grandfathered activity to a customer and
that it was in fact offering the product or
service to the customer as of March 5,
1987. Comments in favor of this proposal
stated that it carried out the
Congressional intent of placing
limitations on the activities of
grandfathered entities by requiring an
established program rather than a
program in its planning stages.
Unfavorable comments to the proposal
stated that the rule should permit more
flexibility in its concept of program and
offered various approaches that were
less formal than the standard proposed.
Several commenters expressed concern

over the proposed rule’s provision that
an isolated transaction may not be
sufficient to demonstrate that a
grandfathered entity was engaged in a
particular activity as of the grandfather
date. In their view, this statement
suggests that the Board is imposing a
quantitative test.

products or services unless they would
be permissible for bank holding
companies, or permitting the bank’s
products or services to be offered or
marketed by an affiliate engaged in
impermissible nonbanking activities.
This prohibition is subject to a
grandfather provision for crossmarketing activities engaged in as of the
The Board believes that the rule as
March 5 grandfather date, but only in
proposed requires the appropriate
degree of formalization in the marketing the same manner as conducted as of
that date. Unlike the activity limitation,
activities of a grandfathered entity to
which applies to separate lines of
carry out the legislative intent that an
activity must be ‘‘engaged in” in order to business, the language of the statute
qualify for grandfathered treatment. The specifies that the cross-marketing
Board also notes that this interpretation limitations apply to products or services.
At the outset, it is important to note
is consistent with the meaning given the
term ‘‘engaged in” in other provisions of that the cross-marketing restriction does
not limit in any manner the direct
section 4 of the BHC Act. The isolated
transaction example stated in the rule is marketing activities of nonbank banks.
Moreover, the restriction does not
not a quantitative test because the rule
prevent a nonbank bank from marketing
expressly states that it would be
any product or service of an affiliate
insufficient unless evidence was
that bank holding companies may offer
presented indicating the existence of a
or from permitting the bank’s products
program associated with the
and services to be offered or marketed
transaction.
by affiliates engaged in activities
(b) Meaning of “As Of”. The rule as
permissible for bank holding
proposed stated that the grandfather
companies.5
date “as of March 5,1987” as used
(a)
Products or Services. The
throughout section 4(f)(3) should refer to
interpretation published for comment
activities engaged in on March 5,1987,
did not attempt to define “product or
or a reasonably short period of time
service,” but rather illustrated the
preceding this date not exceeding 13
application of the grandfather provision
months. This period of time is expressly with an example that a securities
confirmed by the legislative history
company that marketed automobile
during colloquy in the Senate debates.
loans from an affiliated nonbank bank
Proponents commented that this
on the grandfather date could not begin
approach was consistent with the
to offer checking accounts without loss
legislative history. Certain opponents,
of the privilege. The draft interpretation
on the other hand, commented that this
also made clear that an institution could
period was too short and should be
change the terms and conditions of the
generally more comprehensive in scope product, referring to the statement of the
to include, for example, promotional
chairman of the Senate Banking
activities or activities that had received Committee during the debates on CEBA
regulatory approval.
that a nonbank bank offering a threeIn this instance, the Board finds that
year certificate of deposit through an
the legislative history provides the
affiliate could thereafter market a onenecessary clarification on the
year certificate of a different amount
appropriate scope of the grandfather
and interest rate. 133 Cong. Rec. S3959
date and that the proposed rule
(daily ed. March 26,1987).

accurately reflects the Congressional
intent of the provision.
The interpretation has been clarified,
however, to provide that a nonbank
bank may not commence an activity that
it had terminated within this period. For
example, a nonbank bank that had
terminated commercial lending to avoid
bank status within 13 months of March
5,1987, could not recommence that
activity after March 5,1987.
2. Cross-Marketing Limitation:

CEBA’s second limitation prohibits
grandfathered nonbank banks from
offering or marketing an affiliate’s

Proponents of the proposed rule have
stated that the express statutory focus
of the cross-marketing limitations on
specific products and services supports
a narrow view of the limitation’s scope.
These commenters also argue that this
approach is entirely consistent with the
stated Congressional intent of the
5 Thus, for example, a nonbank bank may offer
permissible credit-related insurance products of an
affiliated insurance company. Similarly, the bank
may offer any of its products and services through
an affiliate engaged only in permissible activities,
for example, through an affiliated consumer finance
or mortgage banking company.

4

provision to prevent unfair competition
with banks controlled by bank holding
companies that may not offer such
services and with the legislative history
in which the broader approach for
activities discussed above is contrasted
with the more restrictive product-by­
product approach.6
Opponents have countered that a
narrow approach to the definition of
product and service would be
inconsistent with legisjative intent and
would limit innovation and competition.
In their view, Congress intended product
or service to be defined in functional
terms and to be permitted to be changed
in its character and design in response
to market and technological
innovations.7 Under this approach,
incidental aspects of products may be
changed and enhancements may be
developed. Finally, some comments
suggested that the limitation should not
apply to joint-maiketing activities such
as utilizing customer lists or back-office
facilities that do not involve any public
identification of the affiliate relationship
in conducting the activities. The Board
was also requested to provide for
grandfathered treatment under the
cross-marketing provisions if a
grandfathered affiliate is reincorporated
or otherwise subject to a corporate
restructuring.8
B During the Senate debate on CEBA, Chairman
Proxmire stated:
The w ord 'activity' is not defined in the bill,
how ever. I w ant to confirm that the m eaning stated
in the report is w hat is intended and that no effort
to m easure activity unduly narrow ly on a productby-product. custom er-by-custom er basis is intended,
so that if a nonbank bank w ere engaged in offering
any type of loans on M arch 5, it may offer that sam e
type of loan thereafter. 133 Cong. Rec. S4054-5
(daily ed. M arch 27.1987).
7 These commenters rely on Chairman Proxmire's
confirmation during the Senate debate on CEBA of
Senator Dodd's understanding that under the cross­
marketing restriction:

A grandfathered nonbank bank that was
cross-marketing a specific product or
service could at any time in the future
cross-market a product or service which
had been developed to reflect general
changes in the grandfathered service’s or
product’s character and design generated
by competition, market innovation or
technology. 133 Cong. Rec. S3957 (daily ed.
March 26, 1987).
8 In this regard, the Board notes that the
legislative history indicates that the grandfather
exception to the cross-m arketing restriction applies
"only to a specific com pany that w as engaged in the
activity as of M arch 5,1987. An affiliate that w as
not engaged in a given joint-m arketing activity as of
M arch 5. 1987, may not com m ence that activity even
if it w as being conducted by another affiliate as of
M arch 5, 1987." S. Rep. No. 100-19, 100th Cong.. 1st
Suss. 34-35 (1987).

into a new product. In the Board’s view,
however, this approach would not
permit the evolution of credit card
lending discussed in the commenter’s
example above because unsecured
lending by credit card or otherwise is
clearly a different product or service
from that of secured lending. Indeed,
several nonbank banks commenting on
the proposal, whose activities would be
directly affected by the proposal, stated
in their comments that secured and
unsecured consumer lending constitute
distinct products for purposes of the
cross-marketing restriction.

means of offering or marketing the
product or service must remain the
same. Because a determination with
respect to a particular cross-marketing
effort under this standard would
necessarily depend on the particular
facts and circumstances in a given case,
the revised interpretation indicates that
the scope of the restriction would be
applied based on a case-by-case basis
consistent with the guiding principles set
out in the interpretation.
3. Eligibility for Grandfathered
Nonbank Bank Status: The proposed
rule stated that institutions that had not
commenced operations on August 10,
(b)
Cross-Marketing “Only in the
1987,
could not qualify for grandfather
Same Manner". With respect to GEBA’s
privileges under CEBA. One affected
limitation that grandfathered products
company urged the Board to recognize
or services may be offered or marketed
grandfathered status if the company had
‘‘only in the same manner,” the
received preliminary approval from its
proposed interpretation stated that the
chartering authority and had established
method of offering or marketing the
a plan for operation. For the reasons
product or service must remain the
same. The interpretation illustrated this stated in the rule, the Board has decided
limitation by indicating that an affiliate to adopt the interpretation as proposed.
4. Enforcement: The proposed rule
not using direct mailings as a marketing
technique for the particular product may noted that under section 4(f) of CEBA, a
company that controls a nonbank bank
not commence this activity after the
would lose its grandfathered status if it
grandfather date.
or a subsidiary nonbank bank acquires
Proponents of the rule state that the
control of an additional bank or thrift,
limitation on cross-marketing to the
same manner in which it was conducted acquires more than 5 percent of voting
on the grandfather date must be applied shares of a bank or thrift (subject to
certain exceptions), or violates the other
as written in order to minimize the
CEBA limitations. Section 4(f)(4) of
potential for unfair competitive
CEBA provides for the penalty of
advantage. They contend that defining
divestiture within 180 days of the loss of
the term to include broad categories of
grandfather exemptions through failure
marketing techniques would read the
to comply with the CEBA limitations.
limitation out of the statute.
Commenters argued that imposition of
Opponents of the rule, however,
divestiture
as the only sanction under
disagreed with the Board's approach.
these circumstances was unwarranted
Some commenters stated that it was
under the Act and its legislative history.
inappropriate to consider the media or
According
to these comments, both of
medium used to cross-market in
these sources indicate that the Board
applying the limitations. Other
has a range of administrative
commenters suggested that, in light of
enforcement options to deal with CEBA
the constitutional protections accorded
violations. Some commenters urged the
commercial free speech, marketing
Board to clarify that divestiture would
methods should be broken down into
broad categories, and if companies were be reserved only for willful, material,
recurring or wanton violations. Others
using any market method within a
particular category as of the grandfather requested the Board to apply this
penalty only prospectively and provide
date, then all of the methods in that
prompt CEBA interpretations to
category would be available under the
limitation. Although different categories requesters.
By its terms, the statute provides for
were suggested, the most commonly
loss of grandfather rights for violations
suggested categories were: (a) mass
media, (b| direct mail or direct response of the CEBA limitations, and, in this
regard, the Conference Report states
marketing, and (c) personal or face-tothat nonbank banks that violate the
face solicitation. Some commenters
favored even broader categories: (a)
overdrafts provisions of CEBA "lose
The interpretation permits general
their grandfathered status”. H.R. Rep.
changes in the character of a product or mass marketing and (b) direct
marketing.
No. 100-261 at 127-128. The Conference
service as the result of market or
technological innovation to the extent
As noted, the proposed interpretation Report, however, also indicates that the
Conferees expected the Board to use its
that these modifications do not
did not define the term “in the same
transform the grandfathered product
cease and desist or other supervisory
manner" other than to indicate that the

The Board believes that the cross­
marketing limitation in CEBA by
referencing particular products and
services is by its terms more restrictive
in scope than the activity limitation. In
this regard, the Board notes that all or
nearly all of the commenters agree that
an affiliate marketing one type of loan
from a nonbank bank before the
grandfather date would not be entitled
to offer or market any other type of loan.
The commenters, however, disagree
over the precise degree of specificity
required by CEBA’s use of the term ,
product or service. Some commenters
have maintained that this formulation
requires a narrow definition which, for
example, distinguishes between
automobile loans and boat loans. Other
commenters have argued in favor of a
general functional approach that would
permit a product to evolve from one type
of consumer lending to another type of
consumer loan in response to market
changes.
One commenter cited as an example
of a change that would justify expansion
of grandfathered cross-marketing the
fact that after the changes in tax laws in
1986, many lines of credit offered by
banks that were accessible by credit
card or other means began to be secured
by a home mortgage, so that the interest
paid by the borrower is deductible for
income tax purposes. This commenter
stated that if a nonbank bank was cross­
marketing credit cards on the
grandfather date, it should consequently
now be allowed to cross-market
consumer home equity lines of credit.
As set forth more fully in the
interpretive rule, the Board believes that
the term product or service must be
interpreted in light of its accepted
ordinary commercial usage and the
Congressional purpose underlying the
limitation to minimize the potential for
unfair competition and other adverse
effects. To provide guidance as to the
manner in which the limitation will be
applied, the interpretation provides
examples of the types of products and
services covered by the cross-marketing
restrictions in the areas of deposit­
taking and lending. In other areas, the
rule provides that the determination as
to what constitutes a product or service
will have to be made on a case-by-case
basis consistent with the general
principles set out in the interpretation.

5

authority as appropriate. Id. at 125.
The Board has deleted reference to
the divestiture provision of CEBA as
Board rules do not normally contain
provisions relating to enforcement. The
Board’s responsibility under CEBA
would be to enforce the statute and
implementing rules in each case, taking
into account the terms of the statute, its
legislative history, and the particular
facts and circumstances of the case.
Taking these factors into account, the
Board would use its prosecutorial
discretion to determine the appropriate
enforcement action.

The Board is prepared to provide
prompt guidance in individual cases
regarding the scope or application of the
CEBA limitations.
5.
Seven Percent Growth Rate
Limitation: Under CEBA, a nonbank
bank’s asset growth is limited to an
annual rate of 7 percent during any 12month period beginning after August 10,
1988. Two principal issues are raised by
this provision: the method for
determining the base against which the
7 percent growth limit is to be applied
during the initial 12-month period and
the period over which the calculation
will be made. In its proposed rule, the
Board noted that under CEBA, the 7
percent growth limitation would not be
applicable for one year following the
date of enactment of CEBA.
Accordingly, the proposed rule indicated
that nonbank banks could, at their
option, choose to use the actual amount
of assets reported on their books on
August 10,1988, as the initial base or the
average total assets reported on the call
report for the quarter ending September
30,1988. The latter option was provided
in order to eliminate the need for
additional reporting by permitting use of
the quarterly report of condition for the
bank.
The proposed rule stated that the
growth limit would be applied on a
rolling twelve-month basis, commencing
initially on August 10,1988, and
thereafter at the start of each quarterly
call report period [i.e. September 1,1988,
January 1,1989, April 1,1989, July 1,
1989, and so on). The rule proposed

further noted compliance would be
determined using the institution’s
average assets over the 12-month period
in accordance with the directive in the
CEBA Conference Report.9
9
The Conference Report states that the Board
should "in determining compliance with the 7
percent growth rate, (to) utilize a procedure that
computes the grandfathered institution’s growth
rate on an average basis.” H.R. Rep. No. 100-281 at
125.

Under this approach, compliance with
the 7 percent growth limit would be
measured for the first 12-month period
by comparing the average assets for the
third quarter of 1989 as reported on
Schedule RC-K of the Report of
Condition 10 with either the assets.on
August 10,1988, or the average assets
for the third quarter of 1988, at the
nonbank bank’s option. Thereafter,
growth would be measured by
comparing the average assets for each
quarter with the average assets for the
previous quarter.
The alternate method of calculating
the initial base figure by using the
average assets for the third quarter of
1988 was not opposed, provided the
final rule would continue to permit a
nonbank bank to use its actual assets on
the bank’s books on August 10,1988.
Commenters opposed to the proposedrule stated that the proposed rolling 12month method of measuring compliance
was in conflict with the statutory
language and the legislative intent that
growth be measured on an annual
average basis. They also argued that
this method of measuring compliance
could lock then into quarterly business
patterns of growth and reduction that
might be inconsistent with their nonrihl
growth patterns or cause them to make
unsound business decisions solely to
comply with this needlessly restrictive
method of measuring growth. This
approach would also inhibit successful
marketing, compaigns and restrict
opportunities in the market place.
Finally, the comments from certain of
the commenting nonbank banks urged
the Board to avoid the “use it or lose it”
result under the proposed rule’s method
of using each year’s actual average
annual assets as the base for measuring
the following year’s growth. To avoid
this result, they proposed an annual
asset cap that would be projected
forward for each grandfathered nonbank
bank from the bank’s base figure, at 7
percent, compounded annually. Thus, an
institution that failed to achieve a 7
percent growth rate in one year could
make up for this in the following year by
increasing its growth rate by a
corresponding amount above 7 percent.

advocated by the nonbank banks, which
would allow growth in excess of 7
percent, would by its terms violate
CEBA’s limitation on asset growth
during any 12-month period to no more
than 7 percent.
(a)
Initial Base for Growth Limit. The
revised rule retains both of the methods
specified in the proposed rule for
calculation of the initial base.
The Board has also provided a third
option. A nonbank bank may, in its
discretion, elect to use at its initial base
its total assets over the four quarters
ending September 30,1988, as reported
on Schedule RC-K of its report of
condition. This option would avoid the
problem of having to annualize growth
during the first year and may be a
desirable alternative for nonbank banks
that experienced even or no growth
during the year after August 10,1987.
A nonbank must advise the Board by
October 15,1988 of the method it has
chosen to calculate its base figure for
the initial 12-month compliance period.
If the nonbank bank elects to use its
actual assets on August 10,1988, as its
initial base, in must report that figure to
the Board by October 15,1988, along
with its average assets for the third
quarter of 1988 prepared in accordance
with the rales in Schedule RC-K of the
Report of Condition. While not required,
a nonbank bank electing to use the
August 10,1988 figure, may provide the
Board with its assets at the end of the
third quarter or any additional
information it believes may be of
assistance to the Board in reviewing the
August 10 figure in light of the concerns
over “window dressing” transactions
discussed below.

The revised rale addresses concerns
raised that an institution could effect
"window-dressing” transactions on
August 10,1988, by engaging in
extraordinary short-term transactions to
inflate artificially its assets. The revised
rale notes that if the Board determines
that a reporting nonbank bank’s assets
The comments in favor of the rule
have been inflated on August 10,1988,
supported the Board’s approach,
without reference to the customary
indicating that the alternate approach
business activity of the institution, the
Board would disallow the window­
10 Banking institutions with $100 million in assets dressing-transactions or require that the
cr more must file with their reports of condition
initial date for the first 12-month period
their average assets over the quarter calculated’
be adjusted to a date following August
either on a daily basis or u w eekly basis [/.e., an
10,1988. The Board believes these rules
average of the W ednesday of each w eek of the
quarter). Institutions with less than $100 million
are consistent with the terms of the
may report using an average of the four month-end
figures.

6

statute 11 and the Board’s authority to
act to prevent evasions of the BHC Act.
Comments from certain nonbank banks
stated that such window-dressing
transactions could be disallowed in
determining the initial base.
(b)
Frequency of Measurement of
Growth Limit. After considering the
public comments, the Board has decided
to revise the rule to permit nonbank
banks to measure compliance with the
growth limitation once a year at the end
of the third quarter of each year. Thus,
compliance with the growth rate would
be deternained for 12 month periods
beginning on October 1 of each year and
ending on September 30 of the following
year. The initial 12-month period would
begin on October 1,1988 and end of
September 30,1989.
After the first 12-month period,
compliance for all nonbank banks will
be determined by measuring the average
assets over the four quarters during the
year (e.g., the fourth quarter of 1989 and
the first three quarters of 1990] with the
average assets for the proceeding four
quarters [e.g., the fourth quarter 1988
and the first three quarters of 1989). This
approach would pose the least
administrative burden while
maintaining consistency with the intent
of the statute to limit the overall asset
growth of nonbank banks. Moreover,
this approach avoids locking the
nonbank banks into the same patterns
of growth during the year.
Compliance with the growth limit for
the initial 12-month period commencing
October 1,1988, will be determined by
comparing the average total assets (as
reported on Schedule RC-K) for the four
quarters ending with the third quarter of
1989 with the initial based figure chosen
by the nonbank bank.
—Annualization Required for Initial
12-Month Period. Because the nonbank

bank’s average assets over the initial
year will be compared to its average
assets over the immediately preceding
quarter, or its assets on a single day in
that quarter (August 10,1988), the simple
rate of asset growth between these
periods will differ from the annual rate
of asset growth as limited by the

11 The statute provides that the growth rate be
applied during any 12-month period beginning after
August 10,1988. Thus, the Board need not start the
first annual period on August 10,1988, particularly
where the record show s that the nonbank bank has
manipulated its assets on the dated unrelated to its
ligitimate business activities.

annualizing ratio. In the previous
example, the simple growth rate
permissible during the initial period
would be about 4^5 percent and assets
could average no more than $104.47
million over the first compliance period
under this option.
Nonbank banks selecting the average
assets over the third quarter of 1988 as
the base figure for the initial 12-month
period would apply an annualizing ratio
of 1.601 (365 days divided by 228 days
from August 15,1988 to March 31,1989).
The nonbank bank’s average assets over
the first 12-month period could not
exceed the average total assets for the
third quarter of 1988 by more than 7
percent divided by this annualizing
ratio. In the previous example, the
simple growth rate permissible during
the initial period would be about 4.4
percent and assets could average no
more than $104.37 million over the first
compliance period.
Nonbank banks electing to use the
average total assets for the four
calendar quarters ending with the third
quarter of 1988 as the initial base period
would not be required to annualize
because like-periods, one year apart, are
being compared. As noted,
annualization for all 12-month periods
after the initial period (ending
September 30,1989) is also not
necessary because like periods, one
year apart, are being compared.
—Compliance on a Quarterly Basis.
The Board has also decided, to permit a
nonbank bank, at its option, to measure
12
Because compliance during all subsequent 12compliance with the>7 percent annual
month periods will be determined by comparing
growth rate limitation under the rolling
comparable periods {i.e. average assets over a year
to average assets over the preceding year), no
quarterly approach originally proposed.
an n u alizatio n is required for those periods.
A nonbank bank deciding to elect this
“ Calculating annual growth rates requires three method must advise the Board of this
decision by October 15,1988.
pieces of information: the value of the item w hose
growth is being measured for the initial or base
Finally, escrow deposit accounts are
period; the same information for the final period:
treated as deposits for purposes of the
and the length of time betw een these periods. The
annual rate of growth then may be calculated as
call report [see Schedule RC-E) and the
follows:
Board does not believe it appropriate to
G = lF~h* im * 365
exclude such deposits from the asset
I
L
base. The Board is also constrained by
Where: G is the annual rate of growth, not
the terms of the statute from permitting
compounded. F is the value of the quantity w hose
growth is being measured as of the final period. 1 is
a nonbank bank to grow at an annual
the value of the quantity whose growth is being
rate greater than 7 percent during a 12measured as of the initial period. L is the length of
month period, because during some
time between the initial and final periods,
preceding period, the nonbank bank
expressed in days.
The first part of this formula,
failed to achieve a 7 percent growth
I
rate. Accordingly, the Board has decided
109, expresses the percent change in the series as a
not to adopt the view of certain
simple growth rate. The second term, 365/L,
converts the simple growth rate to an annual rate of commenters that the Board should
growth, not compounded.
permit a nonbank bank to establish an
“ The midpoint of the third quarter of 1988 is
asset cap based on 7 percent of the
August 15,1988 and the midpoint of the four
nonbank
bank’s assets on August 10,
calendar quarters ending with the third quarter of
1988, projected forward.
1989 is March 31, 1989.

statute.12 A 7 percent simple growth
rate over this period would convert to
an annual rate of growth of over 10
percent. For example, a nonbank bank
with assets in the amount of $100 million
on August 10,1988, and which had
average assets of $107 million over the
four quarters ending with the third
quarter of 1989, would grow at a simple
rate of 7 percent. At an annual rate,
however, this growth would be 10.97
percent.
Adjusting the simple growth rate for
this initial period is accomplished by
using a factor that converts a simple
growth rate into an annual growth
rate.13 This factor is calculated as the
ratio of 365 days, the number of days in
a year, to the number of days between
the midpoint of the base period and the
midpoint of the first compliance period,
i.e., the four quarters ending with the
third quarter of 1989.14 The ratio is
therefore based on comparable
measurements [i.e., the midpoint of the
third quarter of 1988 with the midpoint
of the first 12-month period following
the end of this quarter).
•For a nonbank bank electing to use its
assets on August 10,1988 as its base
figure for the initial 12-month
compliance period, the annualizing ratio
is 1.597 (365 days divided by 233 days
from August 10,1988 to March 31,1989).
The nonbank‘bank’s average assets over
the first 12-month period could not
exceed its assets on August 10,1988 by
more than 7 percent divided by this

7

0.
Overdrafts: The fourth limitation onFederal Reserve Banks, and that such an
overdraft could result in the loss of the
nonbank banks prohibits a nonbank
bank from permitting an overdraft by an bank’s grandfathered status.
affiliate and from incurring an overdraft
CEBA and its legislative history
in its account with a Federal Reserve
indicate that Congress was concerned
Bank on behalf of an affiliate.
about overdrafts by nonbank banks'
affiliates because of the risks they
CEBA states that a eonbank bank:
present to uninsured depositors and
shall not * * * after the date of the
creditors of the bank, as well as the
enactment of [CEBAJ, permit any overdraft
Federal Reserve and the FD1C, because
(including an intraday overdraft), or incur
any such overdraft in such bank’s account at a nonbank bank would be unable to
a Federal Reserve bank, on behalf of an
make an independent evaluation of the
affiliate, other than an overdraft [due to an
creditworthiness of an affiliate making
inadvertent accounting or computer error or a payments through the nonbank bank.1
516
secured overdraft on behalf of an affiliate
Congress
also
restricted
overdrafts
by
that is a primary dealer). 12 U.S.C.
the nonbank bank in its account with
1843(f](3)(B)(in).
the Reserve Bank even though the
The language of this statute dearly
affiliate’s account at the nonbank bank
prohibits overdrafts by affiliates on the had not been overdrawn. This latter
books of eonbank banks.15. The statute restriction was included, in part, for
also prohibits overdrafts by the nonbank ease of monitoring.
bank in its account at its Federal
To implement the statutory language
Reserve Bank on behalf of an affiliate.
prohibiting overdrafts on behalf of
The language “on behalf of an affiliate” affiliates by nonbank banks at Federal
is unclear. To read this language to
Reserve Banks, the proposed rule
preclude only those overdrafts at a
provided that an overdraft by a nonbank
Federal Reserve Bank where the affiliate bank in the nonbank bank’s account at a
has also overdrawn its account at the
Federal Reserve Bank would be deemed
nonbank bank would render the
to be on bahalf of an affiliate whenever:
language unnecessary, because the
(1) a nonbank bank holds an account for
overdraft by the affiliate is already
an affiliate from which third party
specifically prohibited. As the rules of
payments can be made; and (2) the
statutory construction generally disfavor aggregate balance of all of am affiliate’s
interpretations that render statutory
accounts with the nonbank bank is less,
language meaningless, it is appropriate at the time the nonbank bank incurred
to resort to extrinsic aids, such as the
an overdraft in its account at a Federal
legislative history, in order to interpret
Reserve Bank, than the aggregate
this language. The Conference Report to balance of all of the affiliate’s accounts
CEBA states:
maintained by the nonbank bank at the
opening of business on the day on which
Overdrafts in an affiliate's accounts at a
the nonbank bank incurred the
nonbank bank are difficult to police,
particularly in times of financial difficulty of overdraft
'Thirty-five comments discussed this
the affiliate, when the potential for overdrafts
resulting in losses is highest. Accordingly, the definition of when a nonbank bank
overdraft restrictions provide that nonbank
overdraft at its Reserve Bank was “on
banks lose their grandfathered status if they
behalf of an affiliate”. Eight of the
incur overdrafts at Federal Reserve banks.
comments stated that all overdrafts by a,
Federal Reserve banks are in a position to
nonbank bank should be prohibited. Of '
monitor such overdrafts on a real time basis. the remaining twenty-seven comments,
H.R. Rep. 100-261, pp. 127-128.
twenty-one were opposed to the
definition, and six supported the
This report indicates that Congress
definition.
contemplated that the Federal Reserve
Those comments opposed to this
would monitor overdrafts by the
section objected to the presumption that
nonbank banks in their accounts at
a drawdown by an affiliate at any time
on the day a nonbank bank had an
15 This overdraft prohibition does not prevent
nonbank b an k s from making loans to affiliates
overdraft caused the overdraft. They
con sisten t w ith o th er law s, e.g., sections 23A a n d
requested that a clearer causal
23B of the Federal R eserve Act, ap p licab le bank
connection be made. Although soma©
lending limits, an d CEBA's restricts®® a® new
activities. A n onbank bank that w a s not making
comments suggested that the statute
com m ercial loans prior to M arch 5,1987, w ould
merely intended to prohibit overdrafts
violate the new activity restrictions of CEBA by
making loans to affiliates after that d ate. W here a
debit is p osted lo a n a c c o u n t overdraw s the
account, and is not covered by a loan at that time, it
is an overdraft.

10 S s s . MLR. Rep. N o . 1(10- 261, lOJKtj Corag.. 1st
Sess. 127-12©; com m ents of C hairm an ProHmire
(floor m anager). 133 Coag. Rec. S3fl£tt {daily edL
March 25,1987).

by affiliates in their accounts with
nonbank banks, this is clearly not the
case because such interpretation would
make the reference to overdrafts “on
behalf of an affiliate” superfluous. To
implement this language, yet clarify the
causal connection, the revised rule
defines an overdraft “on behalf of an
affiliate” to occur when the posting of
an affiliate’s transaction to the nonbank
bank’s account at a Reserve Bank
creates or increases the nonbank bank’s
overdraft at its Reserve Bank. The
affiliate would not necessarily have t®
overdraw an account with the nonbank
bank for an overdraft at the Reserve
Bank to be deemed to be on its behalf;
rather, the transaction would have to
put the nonbank bank into an overdraft
position at its Federal Reserve Bank or
increase the amount of an already
existing overdraft by a nonbank bank in
its account with the Federal Reserve
Bank.
The Board recognises that a decrease
in an affiliate's account at its nonbank
bank may cause a subsequent overdraft
in the nonbank bank’s account at its
Federal Reserve Bank. Therefor®, if a
nonbank bank shows a consistent
pattern of incurring overdrafts at its
Federal Reserve Bank, after allowing an
affiliate to draw down its account, the
Board may view the pattern as evidence
that the nonbank bank is evading the
provisions of the Bank Holding
Company Act.
To facilitate administration of this
rule, under the proposal, nonbank banks
were to be required to report to their
Reserve Bank accounts held for
affiliates from which third party
payments could be made. All six
comments received on this section
opposed it as too burdensome and
unnecessary. By dropping the reporting
requirement, the Board will have to
monitor overdrafts of all nonbank
banks, instead of just those-..with
transaction accounts for affiliate.
Nevertheless, the Board believes that
the overdraft restrictions can be
implemented without this requirement,
and has deleted the reporting
requirement from the final regulation.
In addition to the CEBA overdraft
restrictions, the Board considered
imposing a zero “cap” for purposes of
the Board’s general risk reduction
program on all nonbank banks that offer
to their affiliates accounts with third
party payment capabilities. Eighteen
comments were- received on this issue,
and fourteen of those comments were
opposed to i t Cosnmenters objected to

this proposal as discriminatory and
unjustified. The Board has therefore
determined that the zero cap should not
be imposed at this time, but the question
may be studied further under the
ongoing large dollar risk reduction
program.
Nevertheless, each Reserve Bank will
pay particular attention to noebank
banks when monitoring the depository
institutions in its District, but no specific
procedures have been adopted for
monitoring noab&nk banks. Any
nonbank bank that becomes a
“problem” institution (as defined by a
Federal Reserve Bank) will be
monitored most closely.
—Posting. Posting is the procedure
whereby the debit or credit adjustments
resulting from payments transactions
are made to the appropriate account. In
order for nonbank banks to avoid
overdrafts at Reserve Banks, they must
know when entries will be posted to
their accounts. Similarly, posting rules
are necessary to determine whether an
overdraft has occurred at a nonbank
bank. Without posting rules, nonbank
banks could evade the purpose of the
statute by posting entries at such times
of the day as to mask overdrafts.
Accordingly, the Board proposed posting
rules for the accounts of nonbank banks
at Federal Reserve Banks and affiliates’
accounts at nonbank banks.
Sixteen comments discussed these
proposed posting rules, with three in
favor and 13 opposed. Those opposed
considered them to be burdensome and
unnecessary. The Board, however,
believes that uniform posting rules are
necessary to ensure equal treatment of
all nonbank banks and their affiliates,
because the posting procedures
currently in place are not uniform
throughout the industry. These rules
only apply for the purposes of measuring
overdrafts under CEBA and nonbank
banks may continue to use other posting
procedures for other purposes. These
rules do not apply to depository
institutions that are not nonbank banks
covered by CEBA and are in addition to
rules applicable to depository
institutions’ accounts at Federal Reserve
Banks under the Board’s general risk
reduction policy.

overdraft restrictions. The ex post
monitor posting rules were developed
for a voluntary program which does not
involve the serious divestiture (or loss of
exemption, in the case of industrial
banks) consequences that can result
from an overdraft under CEBA. The
Board is continuing to review the ex
post monitor in light of this and other
issues, and the Board wishes to note
that changes may be made to the CEBA
posting rules in conjunction with any
future modification of the ex post
monitor posting rules.
— Posting b y Federal R eserve Banks.

Reserve Banks will post funds and bookentry securities transfers as they are
made. For check, ACH, and noncash
transactions, net settlement entries, and
nonelectronic transactions, all credits
will be posted as of the opening of
business and all debits at the close of
business.
With regard to discount window
loans, the Board proposed to post
credits for discount window loans as of
the close of business on the day the loan
is made, and to post debits for
repayment of loans as of the close of
business at the maturity of the loan.
Commenters suggested that credit for
discount window loans should be posted
at the time of day the loan was actually
made. In general, a discount window
loan will be posted as of the close of
business. However, it is within a Federal
Reserve Bank’s discretion to grant a
discount window loan that is requested
during the day to cover intraday
transactions. Therefore, under the final
rule where it is expressly agreed to by
the Federal Reserve Bank at the time of
the loan is made, a discount window
loan may be posted prior to the close of
business.
In addition to the posting rules,
Reserve Banks will pay particular
attention to depository transfer checks
and ACH cash concentration debits
used by affiliates of nonbank banks.
These transactions are likely to present
risks that are not addressed by the
proposed posting rules. For example,
where an affiliate of a nonbank bank
deposits depository transfer checks with
a nonbank bank in order to transfer
funds to its account at the nonbank
bank from its account at another
This procedure differs from the
depository institution, it is likely that the
posting rules used by the Board’s ex
check will be returned in the event of
post monitoring system under the risk
reduction program. Although the ex post failure of the affiliate. Failure of the
affiliate, in turn, may precipitate failure
monitor method used in the risk
reduction program is familiar to
of the nonbank bank. The returned
depository institutions, the Board
check will come to the Federal Reserve
believes that it is inappropriate to apply after the day when the credits for these
its posting rules to nonbank banks for
transactions are posted to a nonbank
the purposes of applying the CEBA
bank’s account, and therefore the risks

9

presented by these returns are not
addressed by posting rules.
Consequently, where appropriate to
protect against risk of return of these
transactions, nonbank banks may be
required to establish a special clearing
balance at their Reserve Bank to be
maintained at all times at a sufficient
level to protect against these risks.
— Posting b y G randfathered Banks.

Because depository institutions’ rights
with respect to their customers differ
from the rights that a Reserve Bank has
with respect to transactions that it
processes, particularly in the area of
check and ACH transactions, the
posting rules do not require nonbank
banks to post all transactions for CEBA
monitoring purposes at the same time
that the transactions are posted by
Reserve Banks. The regulation permits
nonbank banks to post checks and ACH
transfers at any time during the day of
the transaction—i.e., settlement day for
ACH transactions or the day of
presentment or credit to the nonbank
banks for check transactions—so long
as debits are posted no later than the
time that the nonbank bank’s account at
the Reserve Bank is debited for the
transaction for purposes of CEBA
overdraft monitoring, and credits are
posted no earlier than the time when the
credit for the transaction is posted to the
nonbank bank’s account for purposes of
CEBA overdraft monitoring.
Some commenters opposed the
posting provisions, stating that they
would be burdensome and unnecessary.
One commenter suggested that any bona
fid e posting system should be
acceptable unless it discriminated
against nonaffiliates. The Board,
however, continues to believe that
posting rules are necessary to ensure
equal treatment of all nonbank banks
and their affiliates, because the posting
procedures currently in place are not
uniform throughout the industry.
A modification to the regulation has
been made to accomodate the
provisions of another title of CEBA—the
Expedited Funds Availability Act—and
state funds availability laws. These
laws require that, in certain cases, funds
from check deposits must be made
available for withdrawal by the
depositor prior to collection (posting).
Therefore, in those situations where
state or federal law requires a nonbank
bank to make funds available to its
affiliate prior to the “normal” posting
time for such check deposits set by the
proposed regulation, the nonbank bank
may post the transaction to its affiliate’s
account as of the time availability must
be provided under the Expedited Funds

Availability Act or state law.
Another question raised by the
comments was whether affiliates’
accounts at a nonbank bank may be
aggregated for determination of whether
an affiliate had incurred an overdraft at
the nonbank bank. Aggregation of the
accounts of separate affiliates is not
permitted by the regulation, but a
nonbank bank that has a legal right to
offset one affiliate’s account against
another could post transactions that
would overdraft an individual affiliate’s
account to another affiliate’s account. A
nonbank bank may aggregate the
separate accounts of an individual
affiliate for the purpose of determining
whether that affiliate has incurred an
overdraft.
Nonbank banks may keep two sets of
books for posting: one for affiliates for
CEBA purposes and another for other
purposes. No posting to an affiliate’s
account is necessary for CEBA purpose
if a nonbank bank returns a check or an
ACH debit transfer in accordance with
applicable law.
One concern of the commenters on the
posting issue was the receipt of timely
account information from the Federal
Reserve Bank. As set out more fully
below, nonbank banks currently have
access to sufficient information to
monitor their account balances, in
addition, in mid-1989, the Federal
Reserve Banks expect to offer a service
allowing institutions to check their
actual balance in their reserve account
on a real-time basis.
—Exemptions. CEBA provides two
exemptions from the restriction on
overdrafts. One exemption is for
overdrafts on behalf of an affiliate that
is a primary dealer, where the overdraft
is fully secured;17 and the other
exemption is for inadvertent computer
or inadvertent accounting errors that are
beyond the control of both the
grandfathered nonbank bank and the
affiliate.
—Primary Dealers. CEBA defines a
primary dealer as one that is recognized
as a primary dealer by the Federal
Reserve Bank of New York. Currently,
there are 42 such primary dealers, but
only eight are affiliated with nonbank
banks. Some of these eight primary
dealers do not currently clear bookentry securities transfers through their
nonbank banks.
The overdraft prohibition in CEBA
does not prohibit primary dealers from
incurring overdrafts at affiliated
nonbank banks and the affiliated
17 This exemption does not apply to industrial
banks.

nonbank banks from incurring
overdrafts at their Federal Reserve Bank
on behalf of the primary dealer affiliate,
provided that these overdrafts are fully
secured, "as required by the Board, by
bonds, notes, or other obligations which
are direct obligations of the United
States or on which the principal and
interest are fully guaranteed by the
United States or by securities and
obligations eligible for settlement on the
Federal Reserve Book, entry system.”18
The proposed regulation defined “fully
secured" as secured by a perfected
security interest in specific, identified
obligations listed in the statute with a
market value that, in the Reserve Bank’s
judgment, is sufficiently in excess of the
amount of the overdraft to provide a
margin of protection against a volatile
market or the chance that the securities
would need to be liquidated quickly.
Eleven comments were received on
the Board's proposed implementation of
the primary dealer exception. Only one
comment supported the proposal. The
remaining comments expressed concern
about the discretion given to the
Reserve Bank to determine what
constitutes "fully secured”. In general,
the commenters expressed the belief
that any “haircuts’’ on collateral should
be set the same as for collateral posted
by other depository institutions. The
Board believes that generally haircuts
should be based on the quality of the
collateral offered rather than the
institution offering the collateral.
Haircuts for discount window lending
have historically been the province off
the Federal Reserve Banks, and the
Board believes that it is inappropriate to
specify haircuts by regulation absent a
compelling reason. Nevertheless, the
Board believes that Federal Reserve
Banks should be encouraged to adopt
comparable collateral valuation
procedures for book entry securities for
nonbank banks and other depository
institutions.
One primary dealer was particularly
concerned about the interaction of the
definition of overdrafts "on behalf of an
affiliate” and the collateralization
Requirement for primary dealer
overdrafts. This commenter believed
that due to the drafting of the proposal,
a primary dealer faced the possibility
that nonaffiltete securities overdrafts .
would be deemed to be on its behalf arid
consequently requiring collateralization.
An overdraft i8 oh benatf o8 e primary dealer
affiliate only to the extent that the primary dealer
has drawn down its accounts; the overdraft does
not include any drawdown or overdraft on the
b'x Vs of the nonbank bank by a nonaffiliate of the
nonbank bank.

10

The regulation has been revised to
clarify that it does not require
collateralization of overdrafts by
customers other than affiliates.
The Board proposed establishing a
cap or ceiling on the level of securitiesrelated overdrafts to be permitted by
any one nonbank bank. Such a cap was
to be set through self-evaluation
procedures similar to those used in the
risk reduction program, and nonbank
banks exceeding the cap would be
counseled or subject to other action by
their Federal Reserve Bank, in
accordance with the Board’s risk
reduction policy. Only two comments
were received on this question—one in
favor and one opposed. After further
consideration, the Board has determined
that a cap should not be imposed in
conjunction with the CEBA overdraft
regulation.
—Inadvertent Errors. CEBA also
exempts from the overdraft restrictions
those overdrafts resulting from
inadvertent computer or inadvertent
accounting errors that are beyond the
control of both the nonbank bank and
the affiliate. An inadvertent accounting
error is an error involving the
recordation of entries to an account of a
nonbank bank or affiliate resulting in an
overdraft that was not reasonably
foreseeable or preventable by the
nonbank bank or the affiliate. A
misposting of an entry by a Reserve
Bank would not result in an overdraft in
a nonbank bank’s account because no
extension of credit had been made.
Similarly, a misposting of an entry by a
nonbank bank to an affiliate’s account
would not result in an overdraft.
An inadvertent computer error is an
error resulting from a computer
malfunction or from computer
processing of adjustments in an account
that results in an overdraft that was not
reasonably foreseeable or preventable.
Such errors would include problems
where a nonbank bank or affiliate could
not avoid book-entry securities
overdrafts from inbound securities
transfers, because it could not originate
off-setting outbound transfers of
securities or where a nonbank bank
received a book-entry securities
transaction sent to it in error. On the
other hand, if a Federal Reserve Bank's
computer should go down so as to
prevent a Fedwire funds transfer from
being sent to the nonbank bank, any
overdraft due to outband Fedwire funds
transfers would be*within the control of
the nonbank bank, because the nonbank
bank could have waited until it had
sufficient funds in its account to cover

the outbound transfer.
Sixteen commenters argued that this
definition of inadvertent error should be
broadened to include overdrafts where
the nonbank bank executes a
transaction on behalf of an affiliate that
results in a debit to its account, and
incurs an overdraft because an
anticipated transaction that would have
created an offsetting credit to its
account is delayed because of Federal
Reserve Bank computer problems. The
Board believes that it would be
inappropriate to broaden the definitions
of inadvertent error to this extent.
Nonbank banks should be responsible
for controlling their own accounts.
Although some nonbank bank
commenters argued that they had a
responsibility to make some transfers to
prevent the customer’s default on an
obligation, customer account
agreements between banks and their
customers generally permit banks to
delay customer transactions where
necessary.
The posting rules and the Federal
Reserve’s advice services enable a
nonbank bank to monitor its account
balance. Under the posting rules,
generally the only debits that are posted
intraday result from funds and securities
transfers. Credits for other transactions
are posted in the morning and debits at
the end of the day. A nonbank bank can
get its opening balance each day from
its Federal Reserve Bank at the time
Fedwire opens for business in its
district. The nonbank bank will know
the amount of any ACH credits for
which it has previously received
advices, all its cash letters sent for
collection, and the amount of any ACH
debits that it originated and can add
these credits to its opening balance. A
Federal Reserve bank gives an
automatic advice to on-line institutions
of each funds or securities transfer when
it is posted to the reserve account.
Those institutions that are not on-line
can have a standing request for a
telephone advice for each such transfer.
Therefore, the nonbank bank can adjust
its balance throughout the day to reflect
funds and securities transfers. And
when the cash letter and ACH tape are
presented to the nonbank bank, it can
make the debit adjustments to its
account as of the close of business.
Thus, the nonbank bank should be able
to closely monitor its balance with the
Federal Reserve Bank according to the
regulation’s posting rules.
Finally, if the inadvertent error
provision is expanded to cover Federal
Reserve Bank computer outages, it

would be difficult to justify not
expanding it to cover outages at other
banks. Staff believes that such a
definition would lead to extremely
complex inquiries into individual
overdrafts and should be rejected.
Nevertheless, staff recommends that the
definition of an inadvertent error be
expanded to include overdrafts due to
the receipt of book entry securities
transfers that are promptly returned as
erroneous transfers.
7. Definition of Bank: The proposed
rules amended the definition of bank in
Regulation Y to reflect the changes to
the bank definition in the BHC Act made
by CEBA. They also added the
definition of “affiliate” from CEBA and
a definition of nonbank bank. The Board
received no comment on the bank and
affiliate definitions and is adopting them
as proposed. The Board is adopting the
nonbank bank definition to describe
those institutions that were covered by
the CEBA amendments.
Conclusion: Except for the limitation
on overdrafts (§ 225.52) which is
effective in 90 days, these amendments
to Regulation Y are effective
immediately. The amendments to
section 225.2 merely set forth the
definition of “bank”, “nonbank bank”,
and “affiliate” that are provided in
CEBA. The new section 225.51 defines
the limitation on the asset growth of
nonbank banks established by CEBA.
The Board finds good cause to make
these amendments effective
immediately. The amendments to the
section on definitions conform the
regulation to the change in the statute.
As a result of the enactment of CEBA,
these definitions are already effective.
The addition of section 225.51 is
effective immediately because CEBA
requires that grandfathered nonbank
banks limit their annual asset growth for
12 -month periods after August 10,1988.
This new section sets forth the means
by which the Board will measure this
growth. Because the statutory annual
growth rate requirement is already in
effect, the Board finds that there is good
cause to make the regulation
implementing that requirement effective
immediately to allow nonbank banks to
plan their business activities so as to
conform to the method the Board will
use to measure compliance with the
limitation.
Paperwork Reduction Act Notice
The Board finds good cause for
instituting a new collection of
information without providing an
opportunity for public comment. The

11

new collection of information is a one­
time occurrence. To comply with the
statutory requirements of CEBA,
nonbank banks must report the base
asset figure against which the 7 percent
limitation on growth will be measured.*The rules provide that the nonbank
banks with three options for determining
their initial base figure. The nonbank
bank must advise the Board by October
15.1988 of the method elected. Should a
nonbank bank elect to use the August
10.1988 base date, it must file a report of
that asset figure by October 15,1988,
along with its average assets for the
third quarter of 1988. (Should a nonbank
bank elect to use the third calendar
quarter 1988 data or the average assets
for the four quarters ending September
30,1988, the information is already
collected in Schedule RC-K of its Report
of Condition.)
A nonbank bank electing to measure
compliance with the growth rate on a
rolling quarterly basis as permitted by
the Board’s rules, must report that
election to the Board also by October 15,
1988.
The new collection of information
must be instituted quickly and public
participation in the approval process
would substantially interfere with the
Board’s ability to perform its statutory
obligation of enforcing the 7 percent
growth limitation set forth in CEBA.
The information to be collected from
nonbank banks is contained in a new
information collection, the “Report by
Nonbank Banks of Total Assets on
August 10,1988” (form FR 3050; OMB
No. 7100-0236). This information
collection consists of a free-form
voluntary report of the method chosen
by the nonbank banks to calculate their
initial base figure and the total assets of
these institutions on August 10,1988, if
this method for calculating the annual
base is elected along with the
institution’s average assets for the third
quarter of 1988. This report was
approved by the Board under delegated
authority from the Office of
Management and Budget (“OMB”) at the
same time the Board approved this final
rule. The Board estimates that the
disclosure requirement will result in a
one-time reporting burden of 28 hours.
Final Regulatory Flexibility Act
Analysis
Of the items required to be obtained
in a final regulatory flexibility analysis
by 5 U.S.C. § 604(a), the first (a
statement of the need for and objectives
of the rule) and the second (a summary
of the issues raised by the commenters,

the Board's assessment of the issues,
and the changes made to the proposed
rule in response to the comments) are
contained elsewhere in this preamble.
The third item required for a final
regulatory flexibility analysis is a
description of the significant
alternatives to the rule consistent with
the objectives of applicable statutes and
designed to minimize any significant
economic effect of the rule on small
entities considered by the Board, and
why these were rejected.
The Board proposed that all
requirements of the amended rules be
applicable to all nonbank banks and
industrial banks subject to the rules
regardless of size. The small entities
most likely to be affected by this
rulemaking are the industrial banks that
are subject to the limitations on
overdrafts. No comments were received
requesting exemption of industrial
banks due to their small size. According
to Board records on overdrafts under the
current risk reduction policy, very few
industrial banks reporting to the Board
have incurred overdraft since the
enactment of CEBA. Thus, it does not.
appear that a substantial number of
industrial banks will be affected by the
rule.
No comments were received stating
that the new rules impose burdens
specifically on small banks. Some
comments stated that certain
requirements, such as the posting rules,
were burdensome and should not be
required, but rather, that the Board
should accept any bona fide posting
system that did not discriminate against
nonaffiliated depositors. As stated
elsewhere in this preamble, the Board
considered this comment but determined
that uniform posting rules are necessary
to ensure equal treatment of all
industrial banks, nonbank banks and
their affiliates, because the posting
procedures currently in place are not
standardized throughout the industry.
Other than the overdraft rules for
which the posting rules were set, the
limitations established by these rules
apply only to nonbank banks. There are
approximately 55 of these institutions,
and less than half are small entities. The
Board considered exempting small
banks from the rule’s requirements, but
CEBA does not provide an exempiton
according to the size of the nonbank
bank.
List of Subjects in 12 CFR Part 225
Banks, banking, Federal Reserve
System, Holding companies, Reporting

and recordkeeping requirements,
Securities.
For the reasons set out in this notice,
and pursuant to the Board’s authority
under section 5(b) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1844),
the Board amends 12 CFR Part 225 as
follows:
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL

added immediately following Subpart E
to read as follows:

Subpart F—Limitations on Wonlbank Bank©
225.51 Seven percent growth limit for
nonbank banks.
225.52 Limitation on overdrafts.

Subpart ^ L im ita tio n s ©ns Nonbank
Banks
§ 225.511

Seven percent grow th 5imit for

nonbank banks.

(a) Period for determining
compliance. A nonbank bank’s annual
rate of asset growth for purposes of
Authority: 12 U.S.C. 1817(j)(13), 1818,
paragraph (b) of this section shall be
1843(c)(8), 1844(b), 3106, 3108, 3907 and 3909.
determined for twelve-month periods
2 . In § 225.2 paragraphs (a) through (f) that begin on October 1 of each year and
end on September 30 of the following
and (g) through (1) are redesignated as
year, unless the bank elects to use the
paragraphs (b) through (g) and (i)
alternative method described in
through (n) respectively; new
paragraph (c) of this section. The initial
paragraphs (a) and (h) are added; and
12 -month period shall commence on
newly redesignated paragraph (b) is
October 1,1988, and expire on
revised to read as follows:
September 30,1989, unless the Board
§ 225.2 Definitions.
establishes a different period pursuant
*
*
*
*
*
to paragraph (d) of this section.
(b) Computing annual rate of asset
(a) "Affiliate” means any company
growth.— (1 ) Initial 12-month period. For
that controls, is controlled by, or is
the initial 12 -month period beginning on
under common control with, a bank or
October 1,1988, the average of the
nonbank bank.
nonbank bank’s Total Assets as
(b) (1 ) "Bank” means:
reported on Schedule RC-K of its Report
(1) An insured bank as defined in
of Condition for the four quarters during
section 3(h) of the Federal Deposit
this period may not increase by more
Insurance Act (12 U.S.C. 1813(h)); or
(ii)
An institution organized under thethan 7 percent of the nonbank bank’s
initial base. The nonbank bank may
law of the United States which both:
determine its initial base under any of
(A) Accepts demand deposits or
the following methods:
deposits that the depositor may
(1) Its Total Assets as reported on
withdraw by check or similar means for Schedule RC-K of its Report of
payment to third parties or others; and
Condition for the quarter ending
(B) Is engaged in the business of
September 30,1988, divided by 1.601; or
making commercial loans.
(ii) Its total assets on August 10,1988,
(2 ) “Bank” does not include those
divided by 1.567, unless the Board
institutions qualifying under the
determines pursuant to paragraph (d)
exceptions listed in section 2 (c)(2 ) of the that such amount may not be used; or
BHC Act (12 U.S.C. 1841(c)(2)).
(iii) The average of its Total Assets as
* * * * *
reported on Schedule RC-K of its Report
(h)
“Nonbank bank” means any
of Condition for the fourth quarter of
institution that:
1987 and the first three quarters of 1988.
(1 ) Became a bank as a result of
(2 ) Succeeding 12-month periods. For
enactment of the Competitive Equality
each 12 -month period after the initial
Amendments of 1987 (Pub. L. No. 100 period, the average of the nonbank
86 ), on the date of such enactment
bank’s Total Assets as reported on
(August 10,1987); and
Schedule RC-K of its Report of
(2 ) Was not controlled by a bank
Condition for the four quarters during
holding company on the day before the that period may not increase by more
enactment of the Competitive Equality
than 7 percent of the average of its Total
Amendments of 1987 (August 9,1987).
Assets as reported on Schedule RC-K of
* * * * *
its Report of Condition for the four
quarters in the preceding 12 -month
3. The heading "Appendices to
Subparts A through E” is revised to read period.
(c) Alternative method to compute
“Appendices to Subparts.” Subpart F,
annual rate of asset growth.—(1)
consisting of §§ 225.51 and 225.52, is
1. The authority citation for Part 225
continues to read as follows:

12

K of its Report of Condition for that
Quarterly measurement permitted. In
quarter.
lieu of the methods for measuring
compliance with the asset growth rate
§ 225.52 Limitation on overdrafts.
described in paragraph (b) of this
(a) Definitions. For purposes of this
section, a nonbank bank may elect to
section—
have its compliance with the growth
(1) “Account" means a reserve
rate determined in the following
manner: its Total Assets as reported on account, clearing account, or deposit
account as defined in the Board’s
Schedule RC-K of its Report of
Condition for each quarter ending after Regulation D (12 CFR 204.2(a)(l)(i)), that
is maintained at a Federal Reserve Bank
August 10,1989, may not increase by
or nonbank bank.
more than 7 percent of its Total Assets
(2 ) "Cash item” means (i) a check
as reported on Schedule RC-K of its
Report of Condition for the same quarter other than a check classified as a
noncash item; or (ii) any other item
of the previous year.
payable on demand and collectible at
(2 ) Initial quarter. In measuring
par that the Federal Reserve Bank of the
compliance with the growth rate under
district in which the item is payable is
paragraph (c)(1 ) of this section for the
third quarter of 1989, the nonbank bank willing to accept as a cash item.
(3) "Discount window loan” means
may elect to use its assets on August 10 ,
any
credit extended by a Federal
1988, as the base rather than the Total
Reserve Bank to a nonbank bank or
Assets for the third quarter of 1988 as
reported on Schedule RC-K of its Report industrial bank pursuant to the
provisions of the Board’s Regulation A
of Condition.
(12 CFR Part 201 ).
(3) Notice required. A nonbank bank
(4) “Industrial bank” means an
electing to compute its asset growth
institution as defined in section
pursuant to this paragraph shall notify
2 (c)(2 )(H) of the BHC Act (12 U.S.C.
the Board by Ocober 15,1988, of this
1841(c)(2)(H)).
election. The nonbank bank may not
(5) “Noncash item” means an item
thereafter alter its election.
handled by a Reserve Bank as a
(d) Determination of total assets on
noncash item under the Reserve Bank’s
August 10, 1988. If the Board determines “Collection of Noncash Items Operating
that a nonbank bank has engaged in
Circular” (e.g., a maturing bankers’
transactions that have artificially
acceptance or a maturing security, or a
inflated its total assets on August 10,
demand item, such as a check, with
1988, and that are unrelated to its
special instructions or an item that has
normal business activities, the Board
not been preprinted or post-encoded).
may require that—
(6 ) “Other nonelectronic transactions”
(1 ) The nonbank exclude such
include all other transactions not
amounts in calculating its total assets on included as funds transfers, book-entry
August 10,1988, for purposes of
securities transfers, cash items, noncash
paragraph (b)(l)(ii); or
items, automated clearing house
(2 ) The initial 12 -month period for
transactions, net settlement entries, and
determining compliance with the 7
discount window loans [e.g., original
percent growth rate shall commence on issue of securities or redemption of
a date later than August 10,1988, and
securities).
the institution’s total assets on that later
(7) An “overdraft” in an account
date shall be used instead of the bank’s occurs whenever the Federal Reserve
total assets on August 10,1988, for
Bank, nonbank bank, or industrial bank
purposes of measuring compliance with holding an account posts a transaction
the 7 percent growth rate under
to the account of the nonbank bank,
paragraph (b)(1 ).
industrial bank, or affiliate that exceeds
(e) Required reports. (1 ) A nonbank
the aggregate balance of the accounts of
bank shall file with the Board by
the nonbank bank, industrial bank, or
October 15,1988, a statement indicating affiliate, as determined by the posting
the method it has elected to compute its rules set forth in paragraphs (d) and (e)
initial base for purposes of paragraph
of this section and continues until the
(b)(1 ). of this section.
aggregate balance of the account is zero
(2)
A nonbank bank electing to use itsor greater.
actual total assets on August 10,1988, as
(8 ) “Transfer item" means an item as
its initial base for purposes of paragraph defined in Subpart B of Regulation J (12
(b)(1 ) of this section, shall report that
CFR 210.25 et seq).
figure to the Board by October 15,1988,
(b) Restriction on overdrafts.—(1 )
and the nonbank bank’s Total Assets for Affiliates. Neither a nonbank bank nor
the third calendar quarter of 1988 as
an industrial bank shall permit any
required to be reported on Schedule RC- affiliate to incur any overdraft in its

13

account with the nonbank bank or
industrial bank.
(2 ) Nonbank banks or industrial
banks, (i) No nonbank bank or industrial
bank shall incur any overdraft in its
account at a Federal Reserve Bank on
behalf of an affiliate.
(ii)
An overdraft by a nonbank bank
or industrial bank in its account at a
Federal Reserve Bank shall be deemed
to be on behalf of an affiliate whenever:
(A) A nonbank bank or industrial
bank holds an account for an affiliate
from which third-party payments can be
made; and
(B) When the posting of an affiliate’s
transaction to the nonbank bank’s or
industrial bank’s account at a Reserve
Bank creates an overdraft in its account
at a Federal Reserve Bank or increases
the amount of an existing overdraft in its
account at a Federal Reserve Bank.
(c)
Permissible overdrafts. The
following are permissible overdrafts not
subject to paragraph (b) of this section:
(1 ) Inadvertent error. An overdraft in
its account by a nonbank bank or its
affiliate, or an industrial bank or its
affiliate, that results from an inadvertent
computer error or inadvertent
accounting error, that was not
reasonably forseeable or could not have
been prevented through the
maintenance of procedures reasonably
adopted by the nonbank bank or
affiliate to avoid such overdraft: and
(2) Fully secured primary dealer
affiliate overdrafts, (i) An overdraft
incurred by an affiliate of a nonbank
bank, which affiliate is recognized as a
primary dealer by the Federal Reserve
Bank of New York, in the affiliate’s
account at the nonbank bank, or an
overdraft incurred by a nonbank bank
on behalf of its primary dealer affiliate
in the nonbank bank’s account at a
Federal Reserve Bank; provided: the
overdraft is fully secured by bonds,
notes, or other obligations which are
direct obligations of the United States or
on which the principal and interest are
fully guaranteed by the United States or
by securities and obligations eligible for
settlement on the Federal Reserve bookentry system.
(ii) An overdraft by a nonbank bank
in its account at a Federal Reserve Bank
that is on behalf of a primary dealer
affiliate is fully secured when that
portion of its overdraft at the Federal
Reserve Bank that corresponds to the
transaction posted for an affiliate that
caused or increased the nonbank bank’s
overdraft is fully secured in accordance
with paragraph (c)(2 )(iii) of this section.
(iii) An overdraft is fully secured
under paragraph (c)(2 )(i) when the

settlement entries, and all other
nonbank bank can demonstrate that the or industrial bank as of the opening of
business on settlement day. Total
nonelectronic transactions shall be
overdraft is secured, at all times, by a
aggregate debits for these transactions
posted to an affiliate's account on the
perfected security interest in specific,
and entries shall be posted to the
day of the transaction [i.e., settlement
identified obligations described in
account of a nonbank bank or industrial day for ACH transactions or the day of
paragraph (c)(2 )(i) with a market value
credit for check transactions), but no
bank as of the close of business on
that, in the judgment of the Reserve
settlement day.
earlier than the Federal Reserve Bank’s
Bank holding the nonbank bank’s
(e)
Posting by nonbank banks and opening of business on that day. Credit
account, is sufficiently in excess of the
industrial banks. For purposes of
for cash items that are required by
amount of the overdraft to provide a
margin of protection in a volatile market determining the balance of an affiliate's federal or state statute or regulation to
be made available to the depositor for
or in the event the securities need to be account under this section, payments
and transfers through an affiliate’s
withdrawal prior to the posting time set
liquidated quickly.
(d)
Posting by Federal Reserve Banks.account at a nonbank bank or industrial forth in the preceding paragraph shall be
posted as of the required availability
For purposes of determining the balance bank shall be posted as follows:
(1 ) Funds transfers, (i) Fedwire
time.
of an account under this section,
transfer items shall be posted:
(ii)
Debits. Debits for cash items,
payments and transfers by nonbank
(A) To the transferor affiliate’s
noncash items, ACH transfers, net
banks and industrial banks processed
account no later than the time the
settlement entries, and all other
by the Federal Reserve Banks shall be
transfer is actually made by the
nonelectronic transactions shall be
considered posted to their accounts at
transferor’s Federal Reserve Bank; and posted to an affiliate’s account on the
Federal Reserve Banks as follows:
(B) To the transferee affiliate's
day of the transaction (e.g., settlement
(1 )
Funds transfers. Transfer items account no earlier than the time the
day for ACH transactions or the day of
shall be posted:
transferee’s Reserve Bank sends the
presentment for check transactions), but
(1) To the transferor’s account at the
transfer item, or sends or telephones the no later than the Federal Reserve Bank’s
time the transfer is actually made by the advice of credit for the item to the
close of business on that day. If a check
transferor’s Federal Reserve Bank; and transferee, whichever occurs first.
drawn on an affiliate’s account or an
(ii)
To the transferee’s account at the (ii)
For funds transfers not sent or ACH debit transfer received by an
time the transferee’s Reserve Bank
received through Federal Reserve Banks, affiliate is returned timely by the
sends the transfer item or sends or
debits shall be posted to the transferor nonbank bank or industrial bank in
telephones the advice of credit for the
affiliate’s account not later than the time accordance with applicable law and
item to the transferee, whichever occurs the nonbank bank or industrial bank
agreements, no entry need to be posted
first.
becomes obligated on the transfer.
to the affiliate’s account for such item.
(2) Book-entry securities transfers
Credits shall not be posted to the
4.
Section 225.145 is added to read as
against payment. A book-entry
transferee affiliate’s account before the follows:
securities transfer against payment shall nonbank bank or industrial bank has
be posted: (i) to the transferor’s account received actually and finally collected
§ 225.145 Limitations established by the
at the time the entry is made by the
Competitive Equality Banking Act off 1987
funds for the transfer.
transferor’s Reserve Bank; and (ii) to the
on the activities and growth off nonbank
(2 ) Book-entry securities transfers
banks.
transferee’s account at the time the
against payment, (i) A book-entry
entry is made by the transferee’s
(a) Introduction. Effective August 10 ,
sec u ritie s tra n sfe r ag a in st p a y m e n t sh all
Reserve Bank.
1987, the Competitive Equality Banking
be posted:
(3) Discount window loans. Credit for
Act of 1987 (“CEBA”) redefined the term
(A) To the transferor affiliate’s
a discount window loan shall be posted account not earlier than the time the
"bank” in the Bank Holding Company
to the account of a nonbank bank or
Act ("BHC Act” or "Act”) to include any
entry is made by the transferor’s
industrial bank at the close of business Reserve Bank; and
bank the deposits of which are insured
on the day that it is made or such earlier
by the Federal Deposit Insurance
(B) To the transferee affiliate's
time as may be specifically agreed to by account not later than the time the entry Corporation as well as any other
the Federal Reserve Bank and the
institution that accepts demand or
is made by the transferee’s Reserve
nonbank bank under the terms of the
checkable deposit accounts and is
Bank.
loan. Debit for repayment of a discount
(ii)
For book-entry securities transfersengaged in the business of making
window loan shall be posted to the
against payment that are not sent or
commercial loans. 12 U.S.C. 1841(c).
account of the nonbank bank or
received through Federal Reserve Banks, CEBA also contained a grandfather
industrial bank as of the close of
entries shall be posted:
provision for certain companies affected
business on the day of maturity of the
(A) To the buyer-affiliate’s account
by this redefinition. CEBA amended
loan or such earlier time as may be
not later than the time the nonbank
section 4 of the BHC Act to permit a
bank or industrial bank becomes
agreed to by the Federal Reserve Bank
company that on March 5,1987,
obligated on the transfer; and
and the nonbank bank or required by
controlled a nonbank bank (an
(B) To the seller-affiliate’s account not institution that became a bank as a
the Federal Reserve Bank under the
before the nonbank bank or industrial
result of enactment of CEBA) and that
terips of the loan.
bank has received actually and finally
was not a bank holding company on
(4) Other transactions. Total
August 9,1987, to retain its nonbank
aggregate credits for automated clearing collected funds for the transfer.
(3) Other transactions.—(i) Credits.
bank and not be treated as a bank
house transfers, cash items, noncash
holding company for purposes of the
items, net settlement entries, and other Except as otherwise provided in this
paragraph, credits for cash items,
BHC Act if the company and its
nonelectronic transactions shall be
subsidiary nonbank bank observe
posted to the account of a nonbank bank noncash items, ACH transfers, net

14

certain limitations imposed by CEBA. 1 accompanying CEBA states that the
Certain of these limitations are codified restrictions CEBA places on nonbank
banks “will help prevent existing
in section 4(f)(3) of the BHC Act and
nonbank banks from changing their
generally restrict nonbank banks from
basic character * * * while Congress
commencing new activities or certain
cross-marketing activities with affiliates considers proposals for comprehensive
legislation; from drastically eroding the
after March 5,1987, increasing their
separation of banking and commerce;
assets at an annual rate exceeding 7
percent during any 12 month period after and from increasing the potential for
August 10,1988, or permitting overdrafts unfair competition, conflicts of interest,
undue concentration of resources, and
for affiliates or incurring overdrafts on
behalf of affiliates at a Federal Reserve other adverse effects." S. Rep. No. 100 Bank. 12 U.S.C. 1843(f)(3).2 The Board’s 19,100th Cong., 1 st Sess. 12 (1987). See
views regarding the meaning and scope also H. Rep. No. 100-261,100th Cong.,
1 st Sess. 124 (1987) (the “Conference
of these limitations are set forth below
Report").
and in provisions of the Board’s
(2 ) Thus, Congress explicitly
Regulation Y (12 CFR 225.51 and 52).
recognized in the statute itself that
(b)
Congressional findings. (1 ) At the nonbanking companies controlling
outset, the Board notes that the scope
grandfathered nonbank banks, which
and application of the Act’s limitations
include the many of the nation’s largest
on nonbank banks must be guided by
commercial and financial organizations,
the Congressional findings set out in
were being accorded a significant
section 4(f)(3) of the BHC Act. Congress competitive advantage that could not be
was aware that these nonbank banks
matched by bank holding companies
had been acquired by companies that
because of the general prohibition
engage in a wide range of nonbanking
against nonbanking activities in section
activities, such as retailing and general
4 of the BHC Act. Congress recognized
securities activities that are forbidden to that this inequality in regulatory
bank holding companies under section 4 approach could inflict serious
of the BHC Act. In section 4(f)(3),
competitive harm on regulated bank
Congress found that nonbank banks
holding companies as the grandfathered
controlled by grandfathered nonbanking entities sought to exploit potential
companies may, because of their
synergies between banking and
relationships with affiliates, be involved commercial products and services. See
in conflicts of interest, concentration of
Conference Report at 125-126. The basic
resources, or other effects adverse to
and stated purpose of the restrictions on
grandfathered nonbank banks is to
bank safety and soundness. Congress
minimize these potential anticompetitive
also found that nonbank banks may be
effects.
able to compete unfairly against banks
(3) The Board believes that the
controlled by bank holding companies
specific CEBA limitations should be
by combining banking services with
implemented in light of these
financial services not permissible for
Congressional findings and the
bank holding companies. Section 4(f)(3)
legislative intent reflected in the plain
states that the purpose of the nonbank
bank limitations is to minimize any such meaning of the terms used in the statute.
potential adverse effects or inequities by In those instances when the language of
the statute did not provide clear
restricting the activities of nonbank
banks until further Congressional action guidance, legislative materials and the
Congressional intent manifested in the
in the area of bank powers could be
undertaken. Similarly, the Senate Report overall statutory structure were
considered. The Board also notes that
prior precedent requires that
1 12 U.S.C. 1843(f)- Such a company is treated as a
grandfather exceptions in the BHC Act,
bank holding company, however, for purposes of the
such as the nonbank bank limitations
anti-tying provisions in section 106 of the BHC Act
Amendments of 1970 (12 U.S.C. 1971 e ts e q .) and the
and particularly the exceptions thereto,
insider lending limitations of secton 22(h) of the
are to be interpreted narrowly in order
Federal Reserve Act (12 U.S.C. 375b). The company
to ensure the proper implementation of
is also subject to certain examination and
Congressional intent.3
enforcement provisions to assure compliance with
CEBA.
2 CEBA also prohibits, with certain limited
exceptions, a company controlling a grandfathered
nonbank bank from acquiring control of an
additional bank or thrift institution or acquiring,
directly or indirectly after March 5.1987. more than
5 percent of the assets or shares of a bank or thrift
institution. 12 U.S.C. 1843(f)(2).

(c)
Activity limitation .—(1 ) Scope of
“activity", (i) The first limitation
established under section 4(f)(3)
provides that a nonbank bank shall not
“engage in any activity in which such
bank was not lawfully engaged as of
March 5,1987.” The term “activity” as
used in this provision of CEBA is not
defined. The structure and placement of
the CEBA activity restriction within
section 4 of the BHC Act and its
legislative history do, however, provide
direction as to certain transactions that
Congress intended to treat as separate
activities, thereby providing guidance as
to the meaning Congress intended to
ascribe to the term generally. First, it is
clear that the term “activity” was not
meant to refer to banking as a single
activity. To the contrary, the term must
be viewed as distinguishing between
deposit taking and lending activities and
treating demand deposit-taking as a
separate activity from general deposit­
taking and commercial lending as
separate from the general lending
category.
(ii) Under the activity limitation, a
nonbank bank may engage only in
activities in which it was “lawfully
engaged” as of March 5,1987. As of that
date, a nonbank bank could not have
been engaged in both demand deposit­
taking and commercial lending activity
without placing it and its parent holding
company in violation of the BHC Act.
Thus, under the activity limitations, a
nonbank bank could not after March 5,
1987, commence the demand deposit­
taking or commercial lending activity
that it did not conduct as of March 5,
1987. The debates and Senate and
Conference Reports on CEBA confirm
that Congress intended the activity
limitation to prevent a grandfathered
nonbank bank from converting itself
into a full-service bank by both offering
demand deposits and engaging in the
business of making commercial loans.45
Thus, these types of transactions
provide a clear guide as to the type of
banking transactions that would
constitute activities under CEBA and the
degree of specificity intended by
Congress in interpreting that term.
(iii) It is also clear that the activity
limitation was not intended simply to
prevent a nonbank bank from both

4
Conference Report at 124-25: S. Rep. No. 100-19
at 12. 32: H. Rep. No. 99-175. 99th Cong., 1st Sess. 3
(1985) (“the activities limitation is to prevent an
institution engaged in a limited range of functions
3
E.g.. M a r y la n d N a tio n a l C o rporation . 73 Federal
from expanding into new areas and becoming, in
Reserve Bulletin 310, 313-314 (1987). Cf., S p o k a n e & essence, a full-service bank”); 133 Cong. Rec. S4054
In la n d E m pire R a ilr o a d Co. v. U n ite d S ta tes . 241
(daily ed. March 27,1987); (Comments of Senator
U.S. 344, 350 (1915).
Proxmire).

15

activity limitation, the report recognized
activities, not to discrete products and
a distinction between demand deposits
services.
(vi)
Accordingly, consistent with the and accounts with transaction
capability and those without transaction
terms and purposes of the legislation
capability;
and the Congressional intent to
minimize unfair competition and the
With respect to deposits, the Committee
other adverse effects set out in the
recognizes that it is legitimate for an
CEBA findings, the Board concludes that institution- currently involved m offering
the term "activity" as used in section
demand deposits or other third party
4(f)(3) means any line of banking or
transaction accounts to make use of new
technologies that are m the process of
nonbanking business. This definition
replacing the existing check-based, paper
does not, however, envision a productpayment system. Again, however, the
by-product approach to the activity
Committee does not believe that technology
limitation. The Board believes it would
be helpful to describe the application of should be used as a lever for an institution
that was only incidentally involved in the
the activity limitations ia the context oil
payment system to transform itself into a
the following major categories, of
significant offeror of transaction acc©a©8
activities: deposit-taking, lending, trust,
capability.8
and other activities engaged in by(iv) Finally, this distinctions between
banks.
demand and nondemand checkable
(2 )
Deposit-taking activities, (i) With accounts and accounts not subject to
respect to deposit-taking, the Board
withdrawal by check was specifically
believes that the activity limitation in
recognized by Congress in the
section 4(f)(3) generally refers to three
redefinition of the term “bank” in CEBA
types of activity: demand deposit-taking; to include am ins titration that takes
non-demand deposit-taking with a third demand deposits or “deposits that the
party payment capability; and time and
depositor may withdraw by check or
savings deposit-taking without third
other means for payment to third parties
party payment powers. As previously
or others” as well as in varioras
discussed, it is clear from the terms and exemptions fmm that definition for trust
intent of CEBA that the activity
companies, credit card banks, and
limitation would prevent, and was
certain industrial banks .7
designed to prevent nonbank banks that
(v) Thus, an institution that as of
prior to the enactment of CEBA had
March 5,1987, offered only time and
refrained from accepting demand
savings accounts that were not
deposits in order to avoid coverage as a withdrawable by check for payment to
“bank” under the BHC Act, from, starting third parties could not thereafter begin
to take these deposits after enactment of offering accounts with transactions
CEBA and thus becoming ffaM-service
capability, for example, NOW accounts
banks. Accordingly, CEBA requires that or other types of transaction accounts.
the taking of demand deposits be
(3} Lending. As noted, the CEBA
treated as a separate activity.
activity limitation does not treat lending
fii) The Board also considers
as a single activity; it dearly
nondemand deposits withdrawable by
distinguishes between comm®retail and
check or other similar means for
other types of lending. This distinction is
payment to third parties or others to
also reflected in the definition of “bank”
constitute a separate line off business for in the BHC Act in effect both prior to
purposes of applying the activity
and after enactment off CEBA as well as
limitation. In this regard, the Board has
in various <of the exceptions from this
previously recognized that this line of
definition. In addition, commercial *
businesss constitutes a permissible but
lending is a specialized form of lending
separate activity under section 4 off the
involving different techniques and
BHC Act. Furthermore, the offering of
analysis from other types of lending.
accounts with transaction capability
Based upon these factors, the Board
requires different expertise and systems would view commercial lending as a
than non-transaction deposit-taking and separate and distinct activity for
purposes off the activity limitation ira
represented a distinct new activity that
The Board’s decisions
traditionally separated banks from thrift section
under section 4 off the BHC Act have not
and similar institutions.
(iii)
Support for this view may also begenerally differentiated between types
of commercial lending, and thus the
found in the House Banking Committee
report on proposed legislation prior to
CEBA that contained a similar
8 H. Rap. No. 8S-175. 99th> Qmg^ le t S e ss. U
prohibition on new activities for
(198515
Conference Report at 124-125; S. Rep. No. 1007 See 12 U.S.C. 1841(c)(2) (D). (F). (H), oifcd ill.
nonbank banks. In discussing the
19 at 32.

accepting demand deposits and making
commercial loans; it has a broader
scope and purpose. If Congress had
meant the term to refer to just these two
activities, it would have used the
restriction it used in another section of
CEBA dealing with nonbank banks
owned by bank holding companies
which has this result, i.e., the nonbank
bank could not engage in any activity
that would have caused it to become a
bank under the prior bank definition in
the Act. See 12 U.S.C. 1843(g)(1)(A).
Indeed, an earlier version of CEBA
under consideration by the Senate
Banking Committee contained such a
provision for nonbank banks owned by
commercial holding companies, which
was deleted in favor of the broader
activity limitation actually enacted.
Committee Print No. 1 , (Feb. 17,1987). In
this regard, both the Senate Report and
Conference Report refer to demand
deposit-taking and commercial lending
as examples of activities that could be
affected by the activity limitation, not as
the sole activities to be limited by the
provision.5*
(iv) Finally, additional guidance as to
the meaning of the term “activity” is
provided by the statutory context in
which the term appears. The activity
limitation is contained in section 4 of the
BHC Act, which regulates the
investments and activities of bank
holding companies and their nonbank
subsidiaries. The Board believes it
reasonable to conclude that by placing
the CEBA activity limitation in section 4
of the BHC Act, Congress meant that
Board and judicial-decisions regarding
the meaning of the term “activity” in
that section be looked to for guidance.
This is particularly appropriate given
the fact that grandfathered nonbank
banks, whether owned by bank holding
companies or unregulated holding
companies, were treated as nonbank
companies and not banks before
enactment of CEBA.
(v) This interpretation of the term
activity draws support from comments
by Senator Proxmire during the Senate’s
consideration of the provision that the
term was not intended to apply “on a
product-by-product, customer-by­
customer basis.” 133 Cong. Rec. S4054-5
(daily ed. March 27,1987). This is the
same manner in which the Board has
interpreted the term activity in the
nonbanking provision of section 4 as
referring to generic categories of

16

Board weald v ie w commercial teadmg
as a single activity for purposes of
CEBA. TfeuSv a Bombamk bank that made
commercial loans as of March 5* 1287,
could make amy type of commercial loan
thereafter.
(i) Commercial lending. For purposes
of the activity limitation, a commercial
loan is d e fie d in accordance with the
Supreme Court's decision in Board of
Governors v. Dimension Financial
Corporation, 474 U.£L 3S1 (1986), as a
direct loam to a business cmtomer for
the pmrpose of providing fcmds for that
customer’s business. In this regard, the
Board notes that whether a particular
transaction is a commercial loan must
be determined not from the face of the
instrument, but from the application of
the definition of commercial loan in the
Dimension dedsiom to that transaction.
Thus, certain transactions of the type
fflsemtioned in the Board’s railing at issue
in Dimension and m the Senate and
Conference Reports in the CEBA
legislation! 6 would be commercial loans
if they meat the test for commercial
loans established in Dimension. Under
this test, a commercial loan would not
include, for example, an open-market
investment in a commercial entity that
does not involve a borrower-lender
relationship or negotiation of credit
terms, such as a money market
transaction.
(ii) Other lending. Based upon the
guidance in the Act as to the degree of
specificity required rn applying the
activity limitation with respect to
lending, the Board believes that, in
addition to commercial fending, there
are three other types of fending
activities: consumer mortgage lending,
consumer credit card lending, and other
consumer lending. Mortgage fending and
credit card fending are recognized,
discrete lines of banking and business
activity, involving techniques and
processes that are different from and
more specrafizecMhan those required for
general consumer lending. For example,
these activities are, in many cases,
conducted by specialized institutions,
such as mortgage companies and credit
card institutions, or through separate
organizational structures within an
institution, particularly in the case of
mortgage fending. Additionally, the
Board’s decisions under section 4 of the
Act have recognized mortgage banking
and credit card lending as separate
activities for bank holding companies.
The Board’s Regulation Y reflects this
151S. Rep. No. 103-19 at 31; C o n fe e a c e Repair! af
123.

specialization, noting as examples of
permissible lending activity: consumer
finance, credit card and mortgage
lending. 12 CFR 225.25(b)(1). Finally,
CEBA itself recognizes the specialized
nature of credit card lending by
exempting an institution specializing in
that activity from the bank definition.
For purpose of the activity limitation, a
consumer mortgage loan will mean any
loan to an individual that is secured by
real estate and that is not a commercial
loan. A credit card loan would be any
loan made to an individual by means of
a credit card that is not a commercial
loan.
(41 Trust activities. Under section 4 of
the Act, the Board has historically
treated trust activities as a single
activity and has not differentiated the
function on the basis of whether the
customer was an individual or a
business. See 12 CFR 225.25(b)(3).
Similarly, the trust company exemption
from the bank definition in CEBA makes
no distinction between various types of
trust activities. Accordingly, the Board
would view trust activities as a separate
activity without additional
differentiation for purposes of the
activity limitation in section 4(f)(3).
(5)
Other activities. With respect to
activities other than the various
traditional deposit-taking, lending or
trust activities, the Board believes it
appropriate, for the reasons discussed
above, to apply the activity limitation in
section 4(f)(3) as the term “activity"
generally applies in other provisions of
section 4 of the BHC Act. Thus, a
grandfathered nonbank bank could not,
for example, commence after March 5,
1987, any of the following activities
(unless it was engaged in such an
activity as of that date): discount
securities brokerage, full-service
securities brokerage investment
advisory services, underwriting or
dealing in government securities as
permissible for member banks, foreign
exchange transaction services, real or
personal property leasing, courier
services, data processing for third
parties, insurance agency activities,9
real estate development, real estate
brokerage, real estate syndication,
insurance underwriting, management
consulting, futures commission
merchant, or activities of the general
9 In this area, section 4 of the Act does not treat
all insurance agency activities as a single activity.
Thus, for example, the Act treats the sale of creditrelated life, accident and health insurance as a
separate activity from general insurance agency
activities. See 12 n S.C. 1843(c)(8).

17

type listed in § 225.25(b) of Regulation Y.
(6 ) Meaning of “engagedin". In order
to be “engaged in" an activity, a
nonbank bank must demonstrate that it
had a program in place to provide a
particular product or service included
within the grandfathered activity to a
customer and that it was in fact offering
the product or service to customers as of
March 5,1987. Thus, a nonbank bank is
not engaged in an activity as of March 5,
1987, if the product or service in
question was in a planning state as of
that date and had not been offered or
delivered to a customer. Consistent with
prior Board interpretations of the term
activity in the grandfather provisions of
section 4, the Board does not believe
that a company may be engaged in an
activity on the basis of a single isolated
transaction that was not part of a
program to offer the particular product
or to conduct in the activity on an
ongoing basis. For example, a nonbank
bank that held an interest in a single
real estate project would not thereby be
engaged in real estate development for
purposes of this provision, unless
evidence was presented indicating the
interest was held under a program to
commence a real estate development
business.
(7) Meaning of “as of". The Board
believes that the grandfather date “as of
March 5,1987” as used throughout
section 4(f)(3) should refer to activities
engaged in on March 5,1987, or a
reasonably short period preceding this
date not exceeding 13 months. 133 Cong.
Rec. S3957 (daily ed. March 26,1987).
(Remarks of Senators Dodd and
Proxmire). Activities that the institution
had terminated prior to March 5,1988,
however, would not be considered to
have been conducted or engaged in "as
o f’ March 5. For example, if within 13
months of March 5,1987, the nonbank
bank had terminated its commercial
lending activity in order to avoid the
“bank” definition in the Act, the
nonbank bank could not recommence
that activity after enactment of CEBA.
(d)
Cross-marketing limitation.—(1 ) In
general. Section 4(f)(3) also limits cross­
marketing activities by nonbank banks
and their affiliates. Under this provision,
a nonbank bank may not offer or market
a product or setvice of an affiliate
unless the product or service may be
offered by bank holding companies
generally under section 4(c)(8) of the
BHC Act. In addition, a nonbank bank
may not permit any of its products or
services to be offered or marketed by or
through a nonbank affiliate unless the

affiliate engages only in activities
permissible for a bank holding company
under section 4(c)(8). These limitations
are subject to an exception for products
or services that were being so offered or
marketed as of March 5,1987, but only
in the 3ame manner in which they were
being offered or marketed as of that
date.
(2 ) Examples of impermissible cross­
marketing. The Conference Report
illustrates the application of this
limitation to the following two covered
transactions: (i) products and services of
an affiliate that bank holding companies
may not offer under the BHC Act, and
(ii) products and services of the
nonbank bank. In the first case, the
restrictions would prohibit, for example,
a company from marketing life
insurance or automotive supplies
through its affiliate nonbank bank
because these products are not generally
permissible under the BHC Act.
Conference Report at 126. In the second
case, a nonbank bank may not permit its
products or services to be offered or
marketed through a life insurance
affiliate or automobile parts retailer
because these affiliates engage in
activities prohibited under the BHC Act.
Id.
(3) Permissible cross-marketing. On
the other hand, a nonbank bank could
offer to its customers consumer loans
from an affiliated mortgage banking or
consumer finance company. These
affiliates could likewise offer their
customers the nonbank bank’s products
or services provided the affiliates
engaged only in activities permitted for
bank holding companies under the
closely-related-to-banking standard of
section 4(c)(8) of the BHC Act. If the
affiliate is engaged in both permissible
and impermissible activities within the
meaning of section 4(c)(8) of the BHC
Act, however, the affiliate could not
offer or market the nonbank bank’s
products or services.
(4) Product approach to cross­
marketing restriction, (i) Unlike the
activity restrictions, the cross-marketing
restrictions of CEBA apply by their
terms to individual products and
services. Thus, an affiliate of a nonbank
bank that was engaged in activities that
are not permissible for bank holding
companies and that was marketing a
particular product or service of a
nonbank bank on the grandfather date
could continue to market that product
and, as discussed below, could change
the terms and conditions of the loan.
The nonbank affiliate could not,
however, begin to offer or market

another product or service of the
nonbank bank.
(ii) The Board believes that the term
“product or service” must be interpreted
in light of its accepted ordinary
commercial usage. In some instances,
commercial usage has identified a group
of products so closely related that they
constitute a product line (e.g.,
certificates of deposit) and differences
in versions of the product (e.g., a oneyear certificate of deposit) simply
represent a difference in the terms of the
product. 10 This approach is consistent
with the treatment in CEBA’s legislative
history of certificates of deposit as a
product line rather than each particular
type of CD as a separate product. 11
(iii) In the area of consumer lending,
the Board believes the following provide
examples of different consumer loan
products: mortgage loans to finance the
purchase of the borrower’s residence,
unsecured consumer loans, consumer
installment loans secured by the
personal property to be purchased [e.g.
automobile, boat or home appliance
loans), o f second mortgage loans. 12
Under this interpretation, a nonbank
bank that offered automobile loans
through a nonbank affiliate on the
grandfather date could market boat
loans, appliance loans or any type of
secured consumer installment loan
through that affiliate. It could not
however, market unsecured consumer
loans, home mortgage loans or other
types of consumer loans.
(iv) In other areas, the Board believes
that the determination as to what
constitutes a product or service should
be made on a case-by-case basis
consistent with the principles that the
terms “product or service” must be
interpreted in accordance with their
■0 American Bankers Association, B an kin g
i erm in o lo g y (1981).

11 During the Senate debates on CEBA, Senator
Proxmire in response to a statement from Senator
Cranston that the joint-marketing restrictions do not
lock into place the specific terms or conditions of
the particular grandfathered product or service,
stated:
That is correct. For example, if a nonbank bank
w as jointly marketing on March 5,1987, a 3 year,
$5,000 certificate of deposit, this bill Would not
prohibit offering in the same manner a 1 year, $2,000
certificate of deposit with a different interest rate.
133 Cong. Rec. S3959 (daily ed. March 28,1987).
12 In this regard, the Supreme Court in U f itte d
S ta te s v. P h ila d e lp h ia N atronsti Bemk, stated tfeafi

"the principal banking products are of counts
various types of credit, for example: unsecured
personal and business loans, mortgage loans, loans
secured by securities or accounts receivable,
automobile installment and consumer goads,
installment loans, tuition financing, bank credit
cards, revolving credit funds." 374 U.S. 321. 328
(1963).

18

ordinary commercial usage and must be
narrower in scope than the definition of
activity. Essentially, the concept applied
in this analysis is one of permitting the
continuation of the specific product
marketing activity that was undertaken
as of March 5,1987. Thus, for example,
while insurance underwriting may
constitute a separate activity under
CEBA, a nonbank bank could not
market a life insurance policy issued by
the affiliate if on the grandfather date it
had only marketed homeowners’
policies issued by the affiliate.
(5) Change in terms and conditions
permitted, (i) The cross-marketing
restrictions would not limit the ability of
the institution to change the specific
terms and conditions of a particular
grandfathered product or service. The
Conference Report indicates a
legislative intent not to lock into place
the specific terms or conditions of a
grandfathered product or service.
Conference Report at 126. For example,
a nonbank bank marketing a three-year,
$5,000 certificate of deposit through an
affiliate under the exemption could offer
a one-year $2,000 certificate of deposit
with a different interest rate after the
grandfather date. See footnote 11 above.
Modifications that alter the type of
prmfcct, however, are not permitted.
Thus, a moffibanfe bash that marketed
through affiliates on March 5 ,1S0J7, only
certificates of deposit could not
commence marketing MMDA's or MOW
accounts after the grandfather date.
(ii)
General changes in the character
of the product or service as the result of
market or technological innovation are
similarly permitted to the extent that
they do not transform a grandfathered
product into a new product. Thus, an
unsecured line of credit could not be
modified to include a lien on the
borrower’s residence without becoming
a new product
(6 ) Meaning o f "offer or m a r k e t In
the Board’s opinion, the terms “offer or
market” in the cross-marketing
restrictions refer to the presentation to a
customer of an institution’s products or
service thorough aay type of program,
including telemarketing, advertising
brochures, direct mailing, personal
solicitation, customer referrals, or jointmarketing agreements or presentations.
An institution must have offered or
actually marketed the product or service
on March 5 or shortly before that date
(as discussed above) to qualify for the
grandfather privilege. Thus, if the cross­
marketing program was in the planning
stage on Match 5,1987, the program
would not quality for grandfather

of a particular product or service may
treatment under CEBA.
(7)
Limitations on cross-marketing tobest be accomplished by applying the
limitation to the particular facts in each
“in the same manner” fi) The crosscase consistent with the staled purpose
marketing restriction in section 4(f)(3)
of this provision of CEBA and the
contains a grandfather provistoss that
permits products or sendees that would general principle that grandfather
restrictions and exceptions to general
otherwise be prohibited from being
offered or marketed under the provision prohibitions must be narrowly construed
to continue to be offered or marketed by in order to prevent the exception from
nullifying the rale. Essentially, as in the
a particular entity if the products of
scops of the term ‘'product or service”
services were being so offered or
marketed as of March 5, 1987, but “only the guiding principle of Congressional
in the same manner m which they were intent with respect to this te m is to
permit only the continuation of the
being offered or marketed as of that
sepcific types of cross-marketing
date.” Thus, to qualify for the
activity that were undertaken as of
grandfather provision, the manner of
March 5,1987.
offering or marketing the otherwise
(8 )
Eligibility for cross-marketing
prohibited product or service mast
remain the same as on the grandfather grandfather exemption. The Conference
date.
Report also clarifies that entitlement to
an exemption to continue to crosspi} In interpreting this provision, the
Board notes that Congress designed th® market products and services otherwise
prohibited by the statute applies only to
joint-marketing restrictions to prevent
the specific company that was engaged
the significant risk to the public posed
in the activity as of March 5,1987.
by the conduct of such activities by
insured banks affiliated with companies Conference Report* at 126. Thus, an
engaged in general commerce, to ensure affiliate that was not engaged in cross­
objectivity in the' credit-grant tog process marketing products or services as of the
and to “minimize the unfa If competitive grandfather date may not commence
advantage that grandfathered
these activities under the exemption
commercial companies owmng nonbank even if such activities were being
banks might otherwise engage over
conducted by another affiliate. Id.: see
regulated bank holding companies and
also S. Rep. No. 100-19 at 33-34.
our competing commercial companies
(e)
Eligibility for grandfathered
nonbank bank status. In reviewing the
that have m&subsidiary bank.'*
reports required by CEBA, the Board
Preference Report at 125—126. The
notes that a number of institutions that
Board be-Beves- that determinations
regarding the mareree? of cross-marketing had not commenced business operations

19

on August 10,1987, the date of
enactment of CEBA, claimed
grandfather privileges under section
4(F)(3) of CEBA. To qualify for
grandfather privileges under section
4(f)(3), the institution must have
"bec[ojme a bank as a result of the
enactment of (CEBA)” and must have
been controlled by a nonbanking
company on March 5,1987. 12 U.S.C.
1843(f)(1)(A). An institution that did not
have FBIC insurance on August 10, 1987,
and that did not accept demand deposits
or transaction accounts or engage in the
business of commercial fending on that
date, would not have become a ''bank**
as a result of enactment of CEBA. Thus,
institutions that had not commenced
operations on August 10,1987, could not
qualify for grandfather privileges under
section 4(f)(3) of CEBA. This view is
supported by the activity limitations of
section 4(f)(3), which, as noted, limit the
activities of grandfathered nonbank
banks to those in which they were
lawfully engaged as of March 5, 1987. A
nonbank bank that had not commenced
conducting business activities on March
5,1887: could not after enactment of
CEBA engage in any activities under
this provision.
Board of Governors of the Federal Reserve
System, September 21,1988.
William W. Wiles,

Secretary of the Board.
[FR Doc. 8S-21983 Filed 9-27-88; 8:45 amj
SJLUItfS ©002