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FEDERAL RESERVE BAWK
OF NEW YORK
[
Circular No. 9 7 9 0
January 22, 1985
]
BANK H O LD IN G COM PANIES
Request for C om m ent on Proposal to Allow
C ertain Relationships Between B ank Holding Com panies and
Their “ N onbank B an k " Subsidiaries
To All Bank Holding Companies, and Others Concerned,
in the Second Federal Reserve District:
F o llo w in g is the tex t o f a statem ent issued by the B oard o f G o v ern o rs o f the
F ed eral R eserv e System :
The Federal Reserve Board has requested comment on a proposal that would lift
some restrictions on the operation of “ nonbank bank” affiliates of bank holding
companies. Comment is requested by February 14.
The Board has received requests to permit the following types of activities by
nonbank banks: loan and deposit account data processing, including the preparation
of customer account statements; check clearing; account maintenance and review
services; payroll and expense processing services; financial controls and accounting
services; audit, compliance, and general legal support services; management infor
mation services; personnel services; purchasing services; facilities support services;
certain trust services; and establishment of officer and director interlocks.
P rin ted on th e fo llo w in g pages is th e text o f the B o a rd ’s p ro p o sa l, w h ich has
b een re p rin te d fro m the
Federal Register o f January 15. C om m ents th ereo n should
be su b m itted b y F eb ru ary 14, 1985, and m ay be sent to o u r D o m estic B anking
A p p licatio n s D ep artm en t.
E. G e r a l d C o r r i g a n ,
President.
FEDERAL RESERVE SYSTEM
12 CFR Fart 225
{D@eGs®a No. PI-0536]
R@gulaii@ra Y; Permissible
TrarB©ae£o@rag Between Bank Holding
Companies and Their IMonbanIk Bank
Subsidiaries
A©em©y: Board of Governors of the
Federal Reserve System (FRB).
AeT8@ra: Solicitation of public comments.
SUMMARY: The Federal Reserve Board is
soliciting comment on whether the
Board should permit bank holding
companies that own nonbank banks
(institutions that are chartered as banks
but which either do not accept demand
deposits or do not make commercial
loans) to engage in certain transactions
or establish or continue certain
arrangements with their nonbank bank
subsidiaries. Specifically, such
transactions or arrangements would
include:
1. The provision of certain internal
administrative services to a nonbank
bank subsidiary;
2. Continuation of trust service and
investment arrangements that existed
between a bank holding company and
its trust company subsidiary prior to the
trust company’s conversion to a
nonbank bank; and
3. Officer and director interlocks.
date : All comments should be received
by the Board by February 14,1985.
address : All comments, which should
refer to Docket No. R-0536, should be
mailed to William W. Wiles, Secretary,
Board of Governors of the Federal
Reserve System, Washington, D.C.
20551, or delivered to Room B-2223, 20th
& Consititution Avenue, NW.,
Washington, D.C., between 8:45 a.m. and
5:15 p.m. weekdays. Comments may be
inspected in Room B-1122 between 8:45
a.m. and 5:15 p.m. weekdays.
F©R FURTHER INFORMATiON CONTACT:
J.
Virgil Mattingly, Associate General
Counsel (202/452-3430), Carl Howard,
Senior Counsel (202/452-3786), or
Melanie L. Fein, Senior Attorney (202/
452-3594), Legal Division.
SUPPLiRflEMTARV INFORMATION: On
March 23,1984, the Board approved the
application by U.S. Trust Corporation to
convert its state chartered Florida trust
company into a nationally chartered
“nonbank bank” that would accept
demand deposits and make consumer,
but not commercial, loans as defined by
the Board. U.S. Trust Corporation, 70
Federal Reserve Bulletin 371 (1984). In
its order approving the U.S. Trust
application, the Board stated that it was
constrained to approve the application
based on the literal definition of the
term “bank” in the Bank Holding
Company Act. The Board expressed its
concern that the use of these limited
purpose banks to avoid the objectives of
the Bank Holding Company Act is
inconsistent with the intention of
Congress and that the proliferation of
similar transactions would seriously
undermine the policies of the-Bank
Holding Company Act. The Board found
that use of this device presents the
potential for a significant, haphazard,
and possibly dangerous alteration of the
nation’s banking structure without
Congressional action on the underlying
policy issues. In view of these concerns,
the Board approved the application
subject to the following conditions:
(1) Applicant would not operate the
nonbank bank’s demand deposit taking
activities in tandem with any Other
subsidiary or other financial institutions;
(2) Applicant would not link in any
way the demand deposit and
commercial lending services that define
a bank under the Act; and
(3) The nonbank bank would not
engage in any transactions with
affiliates, other than the payment of
dividends to Applicant or the infusion of
capital by Applicant into the nonbank
bank, without the Board’s approval.
These conditions were established to
ensure that a nonbank bank would be
independent of its affiliates and that its
banking activities would not be
integrated with those of its affiliates
such that the institution would be a
“bank" under the Act. These conditions
were intended to prevent evasion of the
basic policy of the Act to separate
banking and commerce and to maintain
cohipliance with the Act’s limitations on
interstate banking. Thus, the framework
was intended to establish a set of
requirements applicable to the
acquisition and operation of nonbank
banks by both banking and nonbanking
organizations that would assure that
these institutions would remain
independent and not integrated into the
parent’s operations in such a manner-as
to effect a combination of banking and
commerce or otherwise prohibited
interstate deposit taking and
2
commercial lending.
Following the Board’s approval of the
U.S. Trust application, a number of bank
holding companies applied to acquire
similar nonbank banks. The Board has
approved several of these applications
to date, subject to the same conditions it
established in its U.S. Trust order.*1
Several of the bank holding
companies that have received Board
approval to acquire nonbank banks, as
well as a number of bank holding
companies with applications to acquire
nonbank banks pending before the
Board, have requested the Board’s
approval for certain limited transactions
or arrangements between their nonbank
bank subsidiaries and other affiliates.
These requests have been made
pursuant to the third U.S. Trust
condition, which prohibits transactions
with affilfates but contemplates that the
Board would consider requests for
exceptions to this prohibition. The types
of proposed transactions and
arrangements for which approval is
requested include the provision by a
parent bank holding company to its
nonbank bank subsidiary of internal
data processing and bookkeeping
support services, check clearing
services, and certain trust services, and
the establishment of management
interlocks.
Internal administrative support
services. The internal administrative
support services that bank holding
companies have requested to provide to
their nonbank bank affiliates include:
Loan and deposit account data
processing, including the preparation of
customer account statement’s check
clearing; account maintenance and
review services; payroll and expense
processing services; financial controls
and accounting services; audit,
compliance, and general legal support
services; management information
services; credit policy services; loan
document preparation services;
personnel services; purchasing services;
and facilities support services.
The bank holding companies have
stated that a complete ban on these
internal transactions with their nonbank
bank affiliates would create practical
difficulties and entail substantial
1Bankers Trust N ew York Corporation, 71
Federal Reserve Bulletin 51 (1985): Bank o f Boston
Corporation, 71 Federal Reserve Bulletin 55 (1985):
Suburban Bancorporation, 71 Federal Reserve
Bulletin 61 (1985) First National State
Bancorporation. (Order of December 19,1984).
additional cost in the operation of
nonbank banks; and that the parent is
merely providing traditional support
services to its subsidiary consistent with
the Bank Holding Company Act, which
specifically contemplates that bank
holding companies may provide such
services to their subsidiaries. 12 U.S.C.
1843(c)(1)(C).
The Board staff has advised the Board
that, in staffs opinion, an absolute
prohibition on the provision of services
by the parent to its nonbank bank would
not appear necessary to carry out the
purposes of the U.S. Trust conditions.
The provision by a parent or its
affiliates to a nonbank bank of such
internal administrative services does not
impair the prohibition on linking
demand deposits and commercial loans,
particularly since it does not involve
contact of the affiliate with customers of
the nonbank bank. Nor, in staff s
opinion, does the provision of these
services result in an integration of the
banking activities of the nonbank bank
with those of its other affiliates in a
manner that would cause the nonbank
bank to fall within the present definition
of “bank” in the Bank Holding Company
Act. In the situation of the parent
providing limited administrative
services to the subsidiary nonbank
bank, the staff has pointed out that the
parent is not using the nonbank bank to
further its other business activities, and
the parent and its affiliates are not
customers of the nonbank bank; nor do
they use the nonbank bank to obtain
access to banking products or services.
The Board is requesting public
comment on whether the provision of
the internal administrative support
services requested should be allowed
and whether the provision of such
administrative services would lead to a
commingling of banking and commerce
when a nonbanking company provides
such support services to its nonbank
bank subsidiary.
Trust Company Agreements and
Arrangements. Several bank holding
companies also have urged that they be
permitted to continue trust service and
investment agreements or arrangements
with their nonbank banks where the
nonbank bank was originally a limited
purpose trust company. Such
agreements and arrangements generally
allow an affiliate to prepare account
statements and tax returns, keep
custody of securities, maintain records,
collect income and other monies due
and collectable from securities, credit
and disburse income as. directed by the
nonbank bank, execute investment
orders, redeem maturing securities, and
make recommendations to the nonbank
bank relating to investments and
proxies and render other advice. In
addition, such arrangements would
allow customers of the nonbank bank to
continue to invest in common trust funds
maintained by affiliated banks.
In all cases, these trust and
investment service agreements predated
the conversion of a limited purpose trust
company to a nonbank bank and are
permissible under the Board’s
Regulation Y authorizing bank holding
companies to provide trust and
investment services.
The Board is requesting comment on
whether such preexisting trust and
investment service arrangements should
be allowed.
Common Officers and Directors. The
question of whether a nonbank bank
may share common officers and
directors with affiliates also has been
raised by several bank holding
companies. Such interlocking
management relationships raise issues
of consistency with the U.S. Trust
conditions.
3
The Board is soliciting comments on
whether some limitations on common
officers and directors are necessary in
order to avoid integrated operations
involving demand deposits and
commercial loans or, in the case of
nonbanking concerns, commingling of
banking and commerce. In particular,
the Board requests comments on
whether such issues should be resolved
on a case by case basis subject to
general guidelines for management
interrelationships. The Board requests
comment on whether such guidelines
should require that a majority of a
nonbank bank’s directors could not be
officers, directors, or employees of the
parent holding company or any other
subsidiary of that company, and, with
respect to officers, that no officer of a
nonbank bank could be an officer,
director or employee of any affiliate
engaged in a demand deposit or
commercial lending activity prohibited
to the nonbank banks.
The Board believes that a public
comment period on these issues would
be appropriate in view of the public
interest in nonbank bank and their
operations generally. The Conference of
State Bank Supervisors has requested
that the Board provide a public comment
period. In addition, the Independent
Bankers Association of America has
requested an opportunity to submit its
views on this matter to the Board.
List of Subjects in 12 CFR Part 225
Banks, banking.
By Order of the Board of Governors of the
Federal Reserve System, January 11, 1985.
William W. Wiles,
Secretary o f the Board.
(FR Doc. 85-1263 Filed 1-14-85; 8:45 am)
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