97-21

March 28, 1997

Re: Reorganization of U.S. Operations

Dear Mr. __________:

This relates to the letters of January 28 and March 11, 1997 from your firm, and follows my telephone conversations of March 27 and 28, 1997, with ________. Those communications dealt generally with the proposal of Bank (“Bank”) to reorganize certain of its operations in the United States.

We understand the circumstances to be as follows:

Bank is a bank organized under the laws of _______. It operates two FDIC-insured branch offices in California (the “California Branches”). Bank also owns all of the issued and outstanding capital stock of Bank ________ (the “New York Bank”), a state bank organized under the laws of the State of New York. The New York Bank proposes to acquire the California Branches and operate them as branches of the New York Bank (the “Proposal”).

We have reviewed the opinion of General Counsel for the FDIC dated May 13, 1996, which concludes that for purposes of Section 44 of the Federal Deposit Insurance Act, the acquisition by an out-of-state bank of all of the insured branches of a foreign bank in a host state constitutes acquisition of a whole insured bank rather than acquisition of a branch of a bank. If there is no material challenge to that opinion, we will not oppose an application to the FDIC for approval of the Proposal on the ground that the Proposal fails to qualify as a merger transaction between insured banks with different home states involving the acquisition of a whole bank, provided that any such application is filed after May 31, 1997.

If you have any questions, please feel free to contact me at (415) 263-8512.

Very truly yours,

CONRAD W. HEWITT
Superintendent of Banks

By

THOMAS M. LOUGHRAN
Senior Counsel

TML:arc

FDIC

May 13, 1996

Dear Mr. __________:

Thank you for your April 8, 1996 letter requesting an interpretation of Section 44 of the Federal Deposit Insurance Act (FDI Act) as added by section 102 of the Riegle-Neal interstate Banking and Branching Efficiency Act of 1994, Pub.L.No. 103-328 (1994) (Riegle-Neal).n1 According to your letter, you are seeking an interpretation that would govern the merger of an insured branch of a foreign bank with an affiliated U.S. subsidiary.

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n1 See 12 U.S.C. § 1831u (1994).

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Summary of Section 44

Section 44 provides a Structure for interstate mergers and only applies to interstate mergers. Once a bank has established branches in a host State through an interstate merger transaction, such bank may establish and acquire additional branches at any location in the host State where any bank involved in the interstate merger transaction could have established or acquired branches under applicable Federal or State law.

Section 44 permits the responsible Federal regulator to approve the acquisition of a brunch of an insured bank without the acquisition of the entire bank only if the law of the State in which the branch is located permits out-of-State banks to acquire a branch of a bank without acquiring the entire bank. Nothing in Section 44 or its legislative history discusses the impact of these provisions on insured branches of foreign banks or gives any guidance as to how insured branches of foreign banks should be treated.

Request

The Institute requests that the FDIC interpret the statutory language of Section 44, so that insured branches of foreign banks may merge under the provisions governing the merger of a stand-alone domestic bank with an out-of-state bank, rather than the provisions governing the merger of a single branch of a domestic bank with an out-of-state bank. For the purposes of Section 44, the Institute requests that the FDIC determine that an insured branch of a foreign bank be considered an “insured bank” using the general definitions contained in the FDI Act.

The Institute articulates a compelling policy argument by advancing the view that regulators should facilitate the merger of insured branches, of a foreign bank parent into its out-of-state U.S. bank subsidiaries. This consolidation is consistent with the view that it is preferable for foreign banks to operate through subsidiaries than through branches.n2

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n2 See Section 214 of the Federal Deposit Insurance Improvement Act of 1991 (foreign bank Supervision Enhancement Act of 1991), Pub.L.No. 102-242 (1991).

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Legal Analysis

The Institute concedes that any interstate mergers of insured branches of foreign banks must be subject to Section 44. The question that remains is whether a merger of an insured branch of a foreign bank should be handled under the subsections governing bank acquisition mergers or the subsections governing branch acquisition mergers.

The terms used in Section 44 are: 1. “insured banks” and 2. “branch of an insured bank.”n3 In an effort to determine which subsection should govern the acquisition of an insured branch, the institute suggests looking at the definitions of “bank” and “insured bank” in the FDI Act.

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n3 Although the Institute did not mention this definition, Section 44 defines “branch” to mean “any domestic branch.” 12 U.S.C. § 1831u(f)(4). However, that definition does not dispose of the question under consideration nor advance our analysis as the primary emphasis of that definition appears to be to distinguish between branches located in the U.S. and those located outside the U.S.

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Section 3 (a)(1)(a) and (h) of the FDI Act state:n4

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n4 12 U.S.C. § 1813(a)(1)(A) and (h) (1994).

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(a) Definitions of bank and related terms.

(1) Bank The term “bank”–

(A) means any national bank, State bank, and District bank, and any Federal branch and insured branch.

(h) Insured bank. The term “insured bank” means any bank (including a foreign bank having an insured branch) the deposits of which are insured in accordance with the Provisions of this chapter; and the term “noninsured bank” means any bank the deposits of which are not so insured.

I do not find that looking at these definitions compels the conclusion that an insured branch of a foreign bank is itself an insured bank for the purposes of Section 44. Therefore, I considered the legislative history of Section 44 and these definitions as well as numerous related definitions in the FDI Act, the International Banking Act, the Bank Holding Company Act and in the FDIC’s interpretative regulations. Still, no conclusive answer emerged as to which of the two subsections of Section 44 is appropriate to govern interstate mergers of insured branches of foreign banks. I have found that the definitions are not particularly helpful and the language of Section 44 itself, is somewhat circular when trying to apply it to entities that were probably not considered when this language was drafted.

In order to discern the appropriate interpretation of the language of Section 44, it must be examined in the context of the Riegle-Neal legislation Riegle-Neal had two main purposes: (i) to facilitate the transition to national interstate banking, and (ii) to provide competitive equality for foreign banks. most of Riegle-Neal is aimed at achieving these two goals.

Riegle-Neal amended the statutes governing interstate banking, and also amended the International Banking Act (IBA) in many significant respects in order to conform the powers and duties imposed on foreign banks operating in the United States to those granted to state and national banks. Most of the, Riegle-Neal amendments to the IBA expand foreign banks’ access to interstate banking. While permitting acquisition transactions to occur, the legislative history indicates that Congress was concerned about perceived competitive advantages enjoyed by direct branches of foreign banks.n5

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n5 See 12 U.S.C. § 3104(a) (1994) and House Conference Report No. 103- § 51 pp126-127, 1994 WL 405911 (August 2, 1994).

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In contrast, Riegle-Neal has no language dealing with the consolidation of existing foreign bank entities or the acquisition of an insured branch of a foreign bank by an unaffiliated entity. Section 44 attempts to provide for interstate banking through mergers while being sensitive to states’ rights to opt-out of branch banking and to limit the acquisition of individual branches within their borders. The language chosen by Congress in these merger provisions does not clearly explain how insured branches of foreign banks are to be treated.

Given the ambiguity in Section 44 and the statutory definitions, it is my view that Section 44 should, be interpreted to give effect to all of the language and purposes of Riegle-Neal when the FDIC acts on interstate merger applications. Therefore, the FDIC will consider the insured branch of a foreign bank as an insured bank for the purpose of the merger provisions of Section 44 of the FDI Act, except where a foreign bank has more than one insured branch in a state that does not permit the sale of a single branch. In those states, the FDIC will require that the foreign bank sell all of its insured branches in that state to the same affiliated or unaffiliated acquiror.

This construction meets most of the goals of foreign banks with insured branches and the concerns of the Institute without sacrificing the competitive equality and the states rights, which Riegle-Neal sought to preserve.

Please feel free to contact me if you need any additional information.

Very truly yours,

William F. Kroener, III
General Counsel