• FDIC Proposes a Regulation W Counterpart for State Non-Member Banks
  • March 22, 2004
  • Law Firm: Winston & Strawn LLP - Chicago Office
  • On March 17, 2004, the Federal Deposit Insurance Corporation ("FDIC") proposed a new Part 324 to its regulations that would apply the provisions of sections 23A and 23B of the Federal Reserve Act and Regulation W to state non-member banks as required under section 18(j) of the Federal Deposit Insurance Act ("FDIA"). Part 324 would provide that state non-member banks are subject to the provisions of Regulation W, 12 C.F.R. Part 223, and all of its terms and conditions. However, state non-member banks would be subject to the interpretations and the exemptive process of the FDIC rather than the Federal Reserve Board ("FRB") for issues involving sections 23A and 23B. In addition, the FDIC would grant regulatory exemptions from treatment as "affiliates" to certain subsidiaries of state non-member banks that were approved by the FDIC under section 24 of the FDIA and Part 362 of FDIC regulations. The comment period closes on May 3, 2004.

    The principal substantive effect of the FDIC proposal would be to exempt from the restrictions of Regulation W transactions of a bank with subsidiaries that are treated as "affiliates." Under Regulation W, certain subsidiaries, including financial subsidiaries, and subsidiaries of state banks that engage in activities that are not permissible for national banks to conduct directly are considered to be "affiliates." See 12 C.F.R. ยง 223.3(p). Transactions of the parent bank with those subsidiaries are subject to Regulation W. Generally, transactions of a bank with its subsidiary that is not an "affiliate" are not subject to Regulation W. The FDIC had commented on proposed Regulation W that the subsidiaries that are now proposed to be exempted under Part 324 should not be treated as "affiliates" under Regulation W. The FRB declined to adopt the FDIC's suggestion during the final implementation of Regulation W.1

    The FDIC's proposal would generally apply to bank subsidiaries engaged in equity investment and real estate activities. If a subsidiary relationship established before March 17, 2004 was not considered by the FDIC to be subject to sections 23A and 23B prior to December 12, 2002 but is subject to sections 23A and 23B after that date, the subsidiary would not be treated as an "affiliate" for purposes of Part 324. Under the exemption to be granted by the FDIC, a bank's investment in the subsidiary and its other covered transactions, if any, would not count towards the quantitative amount limitations that would otherwise apply and outstanding transactions with a subsidiary would not need to be brought into compliance with Regulation W. In addition, future transactions between the bank and the subsidiary would not be subject to the restrictions of Regulation W. The exemption would also apply to subsidiaries established under section 24 of the FDIA prior to March 17, 2004 that were established after filing a notice under Part 362 or established under a provision of Part 362 that permits state non-member banks to establish certain subsidiaries without filing a notice or making an application to the FDIC. The exemption would also cover subsidiaries established prior to March 17, 2004 under a statutory exception in section 24 and restated in Part 362.

    Proposed Part 324 provides that the FDIC, as the federal supervisor of insured state non-member banks, is the appropriate party to whom insured state non-member banks must look for guidance in interpreting the requirements of sections 23A and 23B as they apply to insured state non-member banks through section 18(j) of the FDIA. Under the proposal, the FDIC would be the agency that exercises discretion in applying the restrictions and limitations found in Regulation W in those instances in which Regulation W provides for relief, calls for determinations, or provides for the exercise of discretion by the FRB.

    1The exemption would also apply to subsidiaries established under section 24 of the FDIA prior to March 17, 2004 that were established after filing a notice under Part 362 or established under a provision of Part 362 that permits state non-member banks to establish certain subsidiaries without filing a notice or making an application to the FDIC. The exemption would also cover subsidiaries established prior to March 17, 2004 under a statutory exception in section 24 and restated in Part 362.