Full text of Federal Reserve Bank of New York Circulars : 6997. Interpretation of Regulation Y

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FEDERAL RESERVE BANK
OF NEW YORK

I”Circular No. 6997 ~j
[^September 6, 1972J

INTERPRETATION OF REGULATION Y
Insurance Agency Activities

To All Bank Holding Companies, and Others Concerned,
in the Second Federal Reserve District:

Following is the text of a statement issued today by the Board of Governors of the Federal
Reserve System:
The Board o f Governors o f the Federal Reserve System today issued the attached interpretation relating to
the nature of insurance agency activities that are closely related to banking and in which bank holding
companies may engage under the provisions of the Board’s Regulation Y.

Printed below is the text of the interpretation; additional copies will be furnished upon request.
ALFRED HAYES,
President.

[Reg. Y]
12 CFR PART 225—BANK HOLDING COMPANIES
Nonbanking Activities of Bank Holding Companies
§225.128 Insurance Agency Activities
(a) Effective September 1, 1971, the Board of
Governors amended section 225.4(a) o f Regulation Y to
add specified insurance agency activities to the list of
activities the Board has determined to be so closely
related to banking or managing or controlling banks as
to be a proper incident thereto. In the course of
administering this regulation, a number o f questions
have arisen concerning the scope and terms o f the
Board’s regulation. The Board’s views on some o f these
questions are set forth below.
(b) Section 225.4(a)(9Xi): Insurance “ for the holding
company and its subsidiaries.” The Board regards the
sale o f group insurance for the protection of employees
of the holding company as insurance for the holding
company and its subsidiaries.




(c)
Section 225.4(a)(9XiiXa): Insurance “ directly re­
lated to an extension of credit by a bank or a bankrelated firm.”
(1)
This provision is designed to permit the sale by a
bank holding company system, of insurance that
supports the lending transactions of a bank or bankrelated firm in the holding company system. The Board
regards the sale of insurance as directly related to an
extension of credit by a bank or bank-related firm
where (i) the insurance assures repayment o f an
extension of credit by the holding company system in
the event o f death or disability o f the borrower (for
example, credit life and credit accident and health
insurance); or (ii) the insurance protects collateral in
which the bank or bank-related firm has a security

(Over)

insurance in connection with bank-related services
interest as a result o f its extension of credit; or (iii) the
(rendered by a member of the holding company system)
insurance is other insurance which is sold to individual
other than an extension of credit. Among the types of
borrowers in conjunction with or as part o f an insurance
insurance the Board regards as directly related to such
package (as a matter of general practice) with insurance
services are: (i) insurance against loss of securities held
protecting the collateral in which a bank or bankfor safekeeping; (ii) insurance for valuables in a safe
related firm has a security interest as a result o f its
deposit box; (iii) life insurance equal to the difference
extension of credit. Examples that fall within (iii) above
between the maturity value of a deposit plan for
are: (a) liability insurance sold in conjunction with
periodic deposits over a specified term and the balance
insurance relating to physical damage of an automobile
in the account at the time of the depositor’s death; (iv)
when the purchase o f such automobile is financed by a
in connection with mortgage loan servicing that is
bank or bank-related firm; and (b) a homeowner’s
provided by a bank or bank-related firm, insurance on
insurance policy with respect to a residence mortgaged
the mortgaged property and/or insurance on the
to a bank or bank-related firm.
mortgagor to the extent of the outstanding balance of
(2) Other types o f insurance may be directly related
the credit extension, provided that the mortgagee is a
to an extension of credit. A bank holding company
beneficiary under such types of insurance policies; and
applying to engage in the sale of such other types should
(v) insurance directly related to the provision of trust
furnish information showing that such insurance is so
services if the sale o f such insurance is permitted by the
directly related.
trust instruments and under State law.
(3) A renewal of insurance, after the credit extension
(e)
Section 225.4(a)(9XiiXc):
Insurance that “ is
has been repaid, is regarded as closely related to
otherwise sold as a matter o f convenience to the pur­
banking only to the extent such renewal is permissible
chaser, so long as the premium income from sales within
under section 225.4(aX9)(ii)(c) o f Regulation Y.
. . . subdivision (iiXc) does not constitute a significant
(4) The Board generally regards insurance pro­
portion o f the aggregate insurance premium income of
tecting collateral where the security interest of a bank or
the holding company from insurance sold pursuant to . .
bank-related firm was obtained by purchase rather than
subdivision (ii).”
by a direct extension o f credit by the holding company
(1) This provision is designed to permit the sale of
system as not being directly related to an extension of
insurance as a matter o f convenience to the purchaser.
credit by a bank or bank-related firm. However, if such
It is not designed to permit entry into the general
security interests are purchased on a continuing basis
insurance agency business.
from a firm or an individual and the interval between
(2) The term“ premium income” means gross com­
the creation of the security interest and its subsequent
mission income.
purchase is minimal, the Board may regard such
(3) The Board generally will regard premium in­
purchase as an extension of credit. Full details o f the
come attributable to “ convenience” sales as not con­
transactions should be provided to support a holding
stituting a “ significant portion” if the income attributa­
company’s contention that such insurance sales are
ble to “ convenience” sales is less than 5 per cent of the
directly related to an extension o f credit.
(d)
Section 225.4(aX9)(ii)(b): Insurance “ directly re­ aggregate insurance premium income of the holding
company system from insurance sold pursuant to
lated to the provision of other financial services by a
section 225.4(a)(9Xii).
bank or bank-related firm.” This provision is designed
(Interprets and applies 12 U.S.C. 1843(cX8).)
to permit the sale by a bank holding company system of