THE HISTORY OF BANKING REGULATION IN AMERICA. A. The role of banks in early America [2] 1. Medium of payment [2] a. Money is at the center of banking. Banking involves at least the traditional sense, the transfer and storage of money, as well as the lending of that medium of exchange. b. What is money? - a medium of exchange or method of payment. Taken a lot of forms - coins, barter, paper money. c. "Legal tender"  a specific type of money developed in Europe. It is a particular form of money or currency that a government has decreed must be accepted in payment of government or private debts. i. Called fiat money. This assures the govt. a central role in controlling the money supply. d. In Colonial America, there was no legal tender, no govt. issued currency. Barter, foreign coins, and bills of credit were used. i. Bills of credit - paper money issued by the colonies. They were unsecured obligations. The colony didn't have sufficient revenue backing. The colonies often over issued these bills, and it led to a decline in the value of the currency which led to price inflation. So there was no stable currency Colonial America. ii. Non-backed currency and massive inflation continued throughout the revolution. e. So after the Revolution was won, founders put in the Constitution that states were prohibiting from coining money or issuing bills of credit. Art. I § 10  no State "shall coin money; emit bills of credit; [or] make anything but gold or silver coin a tender in payment of debts ... " f. Craig v. Missouri [6] - upheld that certificates issued by MO were "bills of credit" and therefore prohibited by Constitution. 2. Lending money [8] a. Knights Templar earliest international banks b. Goldsmiths - first lending/checking accounts. c. These early bankers/lenders were unpopular because of the high rates of interest they charged. B. The Creation of Banks in America [9] 1. The Bank of the United States and early state chartered banks [9] a. After Revolution  State banks began supplying money in America. They issued their own bills and notes. These became the currency of the states. b. Hamilton, who later became the first Secretary of the Treasury, was a strong advocate of a central bank. He was influenced by Adam Smith. i. Hamilton convinced GW to create a central bank. Jefferson was opposed to this – he was a strict constructionist, and thought the Constitution did not expressly authorize central bank. Hamilton thought it was an implied power in the Constitution. Washington agreed with Hamilton. c. So the first Bank of the United States was created. i. It was a private corp. ii. Soon, state chartered banks started popping up. iii. The first Bank's Charter ran out. Jefferson was President at this time, and did not re-charter. So 1st Bank went away in 1811. d. Still no federal notes and state notes were primary source of exchange. Their value fluctuated widely. e. War of 1812 created need for central bank. 2. The Second Bank of the United States [10] a. SO the 2nd Bank of the United States was created during Madison's term. b. States did not react favorably towards this institution, and 6 states tried to tax branches of the 2nd Bank located within their borders. c. McCulloch v. Maryland [11] i. First issue: Whether or not Congress had power to charter a national bank.


1) Marshall said it was an implied power. Fed govt. is a govt. of limited powers, but supreme w/ in those powers. Even though Congress was given enumerated powers, and the Constitution doesn't expressly say that Congress can charter a bank, Congress can do so under their implied powers in the Necessary and Proper clause. 2) What are enumerated powers? Power to tax, power to raise revenue. If govt. has power to do this, it must have the means to collect and distribute the tax. Very expansive view. Marshall was a Federalist. ii. Second issue: Can states tax the national bank? 1) No. A tax on national bank is incompatible with Congress' power. The power to tax is the power to destroy. The state could tax it out of existence. iii. Effects of McCulloch. 1) TN law is pre-empted. Fees for cashing checks not at your bank. 2) CA -ATM fees. Using your card at another bank's ATM. You get charged a fee. San Fran tried to outlaw those fees charged to non-customers. Law shot down - banks can charge fee. 3) Predatory lending laws - loans to low income people w/ some equity in their house. Lenders pray on these people and get them to re-finance and pay large fees until all the equity is sucked out of their house. Some states, including NC, passed laws regulating these predatory lenders. National banks do not have to comply w/ these laws unless the national bank is incorporated in that state. 3. The Fight Over the Second Bank of the U.S. [14] a. So the 2 Bank of the US survived after McCulloch. b. A financial panic in 1819 was blamed on the 2nd Bank. It came up for re-chartering in 1832, but President Andrew Jackson vetoed a bill to re-charter. So the 2nd Bank went away and Jackson ordered all govt. funds to be pulled out and put into state banks that were politically aligned with Jackson. c. As a result, the number of state banks doubled. d. Some states tried to impose regulations to deal with the ever increasing number of state banks. NY was a leader. Early regulations included reserve requirements, an early form of deposit insurance, making banks report financial positions, NY set up a bank supervisory authority, etc. C. The Civil War era [15] 1. Bank currency [15] a. By 1860 (Civil War), there was no federal currency. America's principal currency was bank notes issued by some 1600 state banks. The bank note currency was easily counterfeited, not uniform, and its values fluctuated greatly. b. Marine Bank v. Fulton [16]: 1. Money collected by one bank for another, placed by the collecting bank with the bulk of its ordinary banking funds, and credited to the transmitting bank in account, becomes the money of the former. Hence, any depreciation in the specific bank bills received by the collecting bank, which may happen between the date of the collecting banks' receiving them and the other banks' drawing for the amount collected, falls upon the former. 2. Shinplasters and the Stamp Payments Act [17] a. Another problem with state bank note Currency  shinplasters. b. Shinplasters were small denomination notes issued by banks that did not have reserves adequate to back their issues. Because the notes were small, they were accepted without questioning the condition of the issuing bank. c. So in 1862, to get this worthless currency out of our system, Congress prohibited shinplasters through the enactment of the Stamp Payments Act. d. Van Auken *18+: Notes payable in goods are not “money” 3. Greenbacks as legal tender [19]: a. Congress created greenbacks in 1862 to fund the Civil War. A greenback was a note issued by the government that derived its name from the color of the back of the note. Congress made


greenbacks legal tender, even though they couldn't be redeemed in specie (for gold or silver). Greenback values fluctuated greatly. b. Legal Tender Cases [19]: The SC considered the legality of greenbacks in the "legal tender" cases. SC upheld the greenbacks (Congress has an implied power to create greenbacks, derived from Congress' express power to coin money and regulate the value thereof). 4. The National Currency Act and the National Bank Act [22] a. National Currency Act  Adopted in 1863 to create a uniform system of national banks and a uniform currency. National Banks could create money - called National Bank Notes - by depositing bonds at the U.S. Treasury. These notes were used until the Fed was created in 1900s. b. National Bank Act  Replaced the NCA. Adopted in 1864 and sets out much of the modern regulation of national banks. It's goal was similarly to create a uniform system of national banks and a uniform currency. i. The NBA put requirements and restrictions on nationally charted banks. ii. OCC was charged with administering NBA and regulating national banks. c. To ensure a system of national banks and to drive state banks out of existence, the NBA imposed a tax of 2% on the notes issued by state banks to get state money out of the system. Tax raised to 10%. i. This tax was upheld in Veazie Bank v. Fenno [25] ii. But the tax did not drive state banks out of existence. States created checking accounts, a profitable product, which allowed state banks to survive. iii. So a result of the NBA - dual banking system (i.e., a system of federally and state charted banks co-existing) rather than a unified federal banking system. A dual banking system leads to a very complicated and redundant regulatory system. 5. Clearing houses and central banks [28] a. Philler v. Patterson [29]: This agreement among 38 national banks to make their daily settlements at a fixed time and place each day, in the place of a separate settlement by each bank with every other made over the counter. All at the same place where the representatives of the several banks meet, and where all balances are struck and settled daily between the banks composing the association. The banks agreed that they would deposit in the hands of certain persons, to be selected by them, and to be called the ‘clearing-house committee,’ a sum of money, or its equivalent in good securities, at a fixed ratio upon their capital stock, to be used for payment of balances against them. D. The Birth of the Federal Reserve System [30] 1. Introduction. a. Trust companies were popular business organizations used to avoid bank regulation. Knickerbocker Trust Co. failed in 1907 and created the financial panic of 1907. The treasury had no way of acting as a central banker and dealing with the panic. SO the private sector had to save itself. J.P. Morgan took action to stop the panic banks had suspended making payments. b. The Monetary Commission was created by Congress to investigate the causes of the Panic of 1907 and prevent it from happening again. It was chaired by Senator Aldrich. c. Aldrich met with a bunch of millionaires in Jeckyll Island, GA. He then proposed legislation to create a decentralized banking system that would be owned by private bankers to provide liquidity in times of stress. d. Resuled in Federal Reserve Act of 1913. It created the Federal Reserve System. e. Federal Reserve System. i. Decentralized system comprised of Board and member banks. Member banks are owned by their member banks. ii. SO after this Act, national bank regulation split between the Treasury Dept. (Comptroller of the Currency) and the Federal Reserve System. iii. The Fed was charged to: 1) Check Clearing (Clearing House Function) [32]


1) Securities credit -loans from banks to brokers to carry stock. i. Glass-Steagall Act . Congress adopted Banking Act of 1933. d. Banks pay premiums based on amt of deposits. The Federal Reserve Act sought to have its regional banks establish a more elastic currency. banks formed affiliates to act as securities dealers. then sells stock to the public. U.Federal Reserve Notes [33] i. 1) Insures bank deposits up to certain levels ($250K/depositor now). Banking Act of 1935. ii. Banks are the ones insured.S. power and other vendors to bank accounts. These investment banking affiliates suffered large losses when the market crashed in 1929.limited the amt of loans banks can lend to brokers or brokers can lend to individual investors (up to 50% of the value of the stock you are buying). Parallel system –NACHA – handles debits by phone. American Bank & Trust Co.Name given to a collection of parts of the Banking Act of 1933. ii. [39] 2. Gave the Fed power to regulate securities credit and brokers. Raichle v. ii. 20% of banks failed due to bank runs. 3. So to avoid this restriction. Banks and brokers were lending too much money to leverage purchase of securities. Could use the tools we talked about last week. Banks re-opened. Stock Market Crash in 1929 lead to bank failures.S. ii.Process of clearing checks b/t banks that receive the checks and banks that pay the checks. Created the Federal Deposit Insurance Corporation (FDIC). FDR did not like deposit insurance b/c of moral hazard problem. Creation of Federal Deposit Insurance [38] a. It changed banking industry in US ii. The new currency was called Federal Reserve Notes that we use today.S. Underwriter uses its capital to buy stock at initial auction. either in coin or in paper. Federal Reserve Bank of NY [35]: Fed has power to control monetary policy. Adopted to strengthen the banking system and to allow the resumption on banking in the U. i. U. Glass-Steagall Act Restrictions on Securities Activities [42] a. iii. iii. 1902  Comptroller of the Currency ruled that a national bank could not act as an investment bank in underwriting securities. Banks' underwriting activities led to conflicts of interests b/t banking arm and I. v. Federal Reserve of Atlanta [32]: The Fed has power to operate a clearing house 2) Create Currency . [33]: Congress is authorize to establish a national currency. FDR declared a bank holiday and closed banks. ii. E. and to make that currency lawful money for all purposes as regards the national government or private individuals. The Federal Reserve Act also rescinded the power of national banks to issue their own notes. Underwriting is the function of issuing stock to public. b. Strengthening the Federal Reserve System [40] a. New Deal legislation [38]: 1. Omit Hewitt v. 3) Administer U. Gave the Fed more power over regional banks. iii. Milam v. c. Made the Board of Governors the responsibility of administering the Federal Reserve System (ending the dispute b/t the Board in Washington and the NY Federal Reserve Bank. 4 . i.banking arm.S. iii. Made the FDIC a permanent government agency. iii. b. Regulation U . i. Monetary Policy [34] i.

allowed national banks to expand into cities to the same extent that state chartered banks could. First National Bank of Logan v. Congress adopted the McFadden Act in 1927 . 1) Commercial banks could no longer invest in or underwrite securities. So no more division b/t commercial banking and investment banking. ii. Limitations on Geographic Expansion [44]: 1. b.stop competition b/t banks to pay higher rates which could lead banks to taking riskier and riskier investments to pay the high interest rates. Louis v. but affiliated through common ownership. G. Many states used to require this.banks tried to find loopholes to get back into investment banking. Non-unit banking allowed banks to diversify risk (allowed banks to go to different geographical areas that had different industries). First National Bank in St. These restrictions were sometimes evaded by using Chain Banking . NC did not have any such restrictions.breaking up of great banking houses such as J. Unit Banking . Regulation of Bank Holding Companies [49] 1. that Graham Leach Bliley was enacted which repealed GlassSteagall. Note: The McFadden Act only authorized national banks to branch "within a state" to the same extent as a state bank. Purposes of the BHCA: i. Purpose . a. Must have competitive equality in their activities. 1980s and 1990s: restrictions on branch banking went away. you can get around this restriction with NOW accts. c.bank holding companies. b. The Fed implemented these statutory restrictions in Reg. Glass-Steagall separated commercial banking from investment banking. c. Activities Closely Related to Banking [49] a. a.banks owned by common owners. 3) Result . 2. Q.State law requiring unit banking upheld.P. To preclude banks from expanding geographically in contravention to the existing restrictions on bank branching. The Banking Act of 1933 (i. so far as branch banking was concerned. Missouri [44]. Congress intended to create "competitive equality" b/t state banks and national banks. To limit the ability of banks to affiliate through common ownership with commercial enterprises not related to banking.Designed to address the public's perception that the securities activities of banks led to the stock market crash. ii. That's why banking industry grew here. Led to the Bank Holding Company Act of 1956 (BI-ICA). [46] ..one office. 3. Glass-Steagall Act) prohibited banks from paying interest on checking accts. Glass-Steagall Act Restrictions on Interest Rates [44] a. 5 . BHCs could also own other types of businesses.e. though. The BHCA authorized the Fed to allow bank holding companies to acquire or retain ownership only in companies whose activities were "so closely related to banking or managing or controlling banks as to be a proper incident thereto. 1 Response to unit banking laws . The Douglas Amendment and Geographic Expansion by Bank Holding-Companies [51] i. So if a state had a law that said state banks could establish "inside" branches within the municipality of their main banking facilities. 4. 4) 80s and 90s . 2) Investment banks could not take deposits and make loans. Y to define such activities. So now we have nationwide banking now. 4. a national bank located in that state could do the same. So many loop holes were created. a.SC upheld competitive equality. By adopting the McFadden Act. 2. Note: The BHCA effectively brought bank holding companies under the regulatory authority of the Fed. But they could deal in securities. b. National banks could not branch outside their home state." Fed adopted Reg. However. These restrictions went away in the 80s. Morgan. F. All separate entities. Walker Bank & Trust Co. b. d. and limited the amount of interest that could be paid on other accts. The Fed still has a restriction on paying interest on checking accts.

a. Many people put money into money market funds. geographic barriers began to fall as the Douglas Amendment was chipped away. b. Inflationary pressures [52] 1. and this led to interstate banking on a regional basis. This lead to disintermediation (the process of bank depositors' withdrawing their funds from accounts with low interest rates to put them into investments that pay higher returns)  depositors withdrew funds from banks and S&Ls and invested in other investments not subject to Reg. But in 1999. Because the BHCA limited the activities of a company who owned a bank to activities that were "closely related to banking". a. FDIC does not cover money market funds. however. Interstate branching was still heavily restricted. such as T-Bills. a. c. Graham-Leach-Bliley Act a. Congress then adopted the Competitive Equality Banking Act of 1987 (CEBA) to curb the use of nonbank banks by defining the term "bank". if you acquired these types of assets. but not both. But. which were limited under Reg Q. Act. Rely on developing other financial services. This put pressure on bank interest rates.. Money market funds are mutual funds that invest in short term instruments. I. "Banking companies" could avoid the application of the BHCA.Inflation. b." So bank holding companies began expanding by buying banks in other states pursuant to these compacts. Also. 2. A BHC could only engage in inter-state banking if the state law where bank was located said that banks could have branches in other states. Nonbank banks also avoided the Douglas Amendment's restrictions on interstate banking. c. Glass-Steagall required separation. It was illegal. 1960s and 1970s . 3. 2.) d. SO now a BHC could consolidate banks in different states under one charter. 6 . Repealed the Douglas Amendment and allowed BHCs to acquire banks in any state (so regional compacts not needed anymore). Q caps. b. J. if our banks can buy your banks. c. such as securities. 3. The Fed. Geographic Barriers Fall [54] 1. Number of banks declined sharply as a result of M&A. the common ownership of banks and other commercial enterprises was precluded. GlassSteagall at the time prohibited it. Continuing competitive pressures.e. In the 80s and 90s. if the "bank" accepted deposits. These compacts basically said "Your banks can buy our banks. b. or made loans. Banks had a hard time attracting enough deposits to meet their loan demand.The Douglas Amendment. You could have one entity branching throughout all the states. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. but they have little or no risk of default because they are primarily invested in government securities. Regional reciprocal interstate banking compacts were adopted by groups of states to encourage interstate banking within a defined region. Entities that did this are called "nonbank banks". Travelers owned Smith Barney (a brokerage/investment banker). under Bank Holding Co. part of the BHCA of 1956. you had 3-5 years to divest the securities assets. This restriction has since been eroded and will be discussed later. Fed was losing control over monetary policy. Congress repealed Reg Q and no more restrictions on bank interest rates. that pay interest at market rates. Commercial banks do less and less traditional bank functions. permitted interstate branching after 7/l/1997. if the "bank" failed to meet the definition of bank  i. effectively precluded a bank holding company from owning banks in more than 1 state. (Banks began consolidating. H. Financial assets owned by insured depository institutions continues to decline sharply. b. merger. Pressures on the Bank Holding Company Act [51] a. Consolidation culminated in CitiCorp and Travelers Insurance Co. The Changing Roles of Banks and BHCs [55] 1. followed by adopting Regulation Y to amend the test to determine what it means to be a bank.

GLBA-signed in to law in by Clinton 1999. other than functionally regulated affiliates (i. so FHCs can. 2) A financial sub cannot engage in:  Underwriting insurance or issuing annuities. K. 1) Example . f. CFTC. i. Financial subsidiaries  1) A financial sub can engage in any activity that either:  Is permissible for the bank itself.. affiliations b/t depository institutions and companies engaged in activities that are not financial in nature.e. Expanded the permissible activities of a subsidiary of a national bank. Repeals Glass-Steagall Act's separation of commercial and investment banking.e. 3) As a result. a financial sub can engage in activities such as:  Underwriting or dealing in securities. or  Is "incident" to a financial activity..000". GLBA just gave national banks the power to have financial subs. activities that are part or incidental to the business of banking.  Selling insurance outside a "place of 5. Post September 11 [61] 1.  Real estate development or investing.  Is listed as "financial in nature" under GLBA. USA Patriot Act include anti-money laundering and anti-terrorist financing provisions. i. GLBA does NOT permit affiliations b/t banking and commerce affiliations (i.e. 2) Note: National banks could always have operating subs.  Engaging in real estate lease financing and real estate brokerage. ii. i. required greater lender disclosure L.  Has been determined by the Treasury to be "financial in nature" (and the Fed has not disagreed).Financial Holding Company.real estate brokerage. Confers on the Fed the power to supervise BHCs. Financial Crisis and Dodd-Frank [61] 7 . subject to state laws. but its financial in nature. iv.  Providing management consulting services. so this merger was OK and the same entity could keep commercial and investment banking assets. As a result. while BHCs can only engage in activities that are "closely related to banking" or incidental thereto. not the type of entity. or distributing a mutual fund. and securities firms all under the umbrella of a FHC. or  Merchant banking.. and affiliates.adopted which repealed Glass Steagall. The Gramm-Leach-Bliley Act and Financial Holding Companies [57] a.  Organizing. ii. affiliates regulated by the SEC. iii. e. or state insurance authorities. Expanded powers of banks dramatically. g. Repeals BHCAs separation of insurance and banking businesses. sponsoring. A BHC can elect to become a FHC. c. FHCs can engage in activity that is "financial in nature" or incidental thereto. GLBA effectively permits affiliation b/t BHCs.  Operating a travel agency. FHCs. The regulator of all entity is determined by the function of the entity. insurance companies. v. b. Introduced functional regulation. A national bank can have operating subsidiaries and financial subsidiaries. BHCs can't do this. Created new financial entity . ii. i. d. Operating subsidiaries  1) Can only engage in businesses that the national bank itself could engage in. 2. The Fed has authority over both BHCs and FHCs. Allows state banks to own financial subs to.

Two broad categories of financial intermediaries: a. Reasons for major banking regulation. Concerns about mixing banking and commerce. In response to major financial calamity. Dual chartering and regulatory arbitrage. Entry into the banking industry is limited. i. Limited entry. Principal source of funds is deposits. e. Two characteristics that distinguish banks from other financial institutions: financial intermediation and transaction accounts. i. CDOs [61 . ii. Gave Fed power over non-bank financial companies d. Created the Financial Stability Oversight Council b.. ii. Themes of banking regulation. Bank regulators are concerned with minimizing bank risk and reducing the effect of bank failures. In response to regulatory avoidance efforts (i. i. Dodd-Frank Act [65] a. Created Bureau of Consumer Financial Protection M. ii. Depository institutions. Financial intermediation. Bear Stearns 4. Vested orderly liquidation authority in the FSOC and FDIC c. 8 . Geographic expansion was curtailed due to the limited monopoly afforded banks by limits to entry. Many regulations help minimize losses caused to the federal deposit system in the event of a bank failure. Geographic expansion has eroded though. AIG 8. [67] 1. spurred financial innovation and complex securitization. b. i. Restrictions on geographic expansion. thrifts. Lehman 6. II. Not all charter applications are granted. THE BUSINESS OF BANKING. Themes inherent in banking legislation and regulation. i. TARP 9. g. Freddie and Fannie 5. created easy credit and cheap money. f. Banks.1. but can also lead to a race to the bottom. c. i. 2. Safety and soundness regulation. d. Fed Funds rate reduced from 6. a. to close loopholes created by creative lawyers). A. Banks are creatures of limited powers. b. This can lead to healthy competition by the regulators to provide effective oversight. Gave more power to Fed in Emergency lending situations e. 1.e.5% in 2000 to 1% in 2003. Banks can freely switch b/t a national and federal charter. Financial intermediation  process of pooling funds from people who have excess funds and making them available to people who need them.63] 3. a. The result is regulatory arbitrage where the most favored regulator and most favored rules may be selected by the regulated entity. Merrill 7. 2. Grandfather provisions. built on demand for real estate 2. principal use of funds is to make loans. and credit unions. Concerns about concentrations of economic power.

Merchant bankers make direct investments in other companies. Principal source of funds is from other than deposits (insurance premiums.s. c. Need expertise. 12 CFR § 204. 1. Reserves – portion of the bank's total transaction accounts. Note: Because banks have transaction accounts. b. D. But no bank will ever ask for this. A NOW account is really a savings account. Hard to loan small amounts of money out. the institution may demand 7 days notice to withdraw funds.funds repaid to customer on demand. Monetary policy is money supply – Fed. 5. As a matter of law. we used to have run on banks. etc. 3. The lower interest rates are spread tends to be higher. Now all depository institutions offer transaction accounts 2. i. d. 4. ii. Money Market Deposit Accounts (MMDA). ii. Less transactional costs  So higher return for lender. a. pension funds. Banks get around this by calling "checking accounts" NOW Accounts (Negotiable Order of Withdrawal). Now usually about 4%. Example: Merchant Banks. No transaction feature such as check writing privileges. Monetary policy is the fiscal policy of the federal government administered through the Federal Reserve.iii. a. Originally this was a unique feature of banks/depository institutions  They have checking accounts and savings accounts that provide primary source of funds. Checking accounts are also known as demand deposit accounts (DDA) . Insurance co. Allows limited transactions . No limit on the amount of transactions per month. 6. b. Reserves can be cash on hand in the vault or on deposit at the Federal Reserve. ii. Before reserve requirements and insurance. Or more broadly as transaction accounts -allow the customer to transact business by using a check to pay a 3rd party. Reg.difference b/t what they pay on their money and what they earn on their money (spread b/t interest rates paid and interest rates charged). c. banks must have cash on hand. Checking accounts. iii. People were afraid they could not get their cash. Banks have a right to demand a 7 day notice to give funds over for a savings account. B. a. There is a federal law that prohibits paying interest on checking accounts. b. Savings accounts.s. lower cost of funds for borrower. finance co. Transaction accounts. Not a transaction account. Riskier than depositing in a bank b. No bank runs anymore because Fed created the FDIC. Opposite of financial intermediation  direct investment. a. 9 . Does this. b. Fiscal policy is taxing and spending and budgeting . NOW Accounts. Fed.) 3. a.Congress and Executive do this. Non-depository institutions. just personal NOW accounts. About 10% now. Federal Reserve requires minimum reserves. not a savings account. pension contributions.2(d)(1). Monetary policy. No business NOW accounts. Where does the rest of the non-reserved money go? Loaned out. Why use these? Traditionally they pay a little higher interest than NOW Accounts. There is a difference b/t fiscal policy and monetary policy. can set the reserve requirement b/t 8% and 14% of the banks transaction accounts. C.usually up to 3 checks and 6 transfers per month. a. Need large amounts of money. They make money on the spread . Disadvantages of direct investment i. a. 12 USCA § 461(b)(2). Advantages: i.

c. They are subject to oversight from Congress. iv. Bank has $450 left over. financial holding companies. The Fed is composed of 12 regional Federal Reserve banks and 25 Branch banks. FRB has 7 members. Bank loans out $450 to B. ii. The 12 Federal Reserve Banks are private corporations whose stock is owned by the member commercial banks. e. the Fed is the primary regulator of bank holding cos. i. Purpose – to administer monetary policy of the nation. iii. d. FRB members appointed by the President and confirmed by Senate. This created a problem. Three tools are used by the FRB to implement monetary policy through banks: reserve requirements. which is the entity empowered with the authority and tools to establish and implement our country's monetary policy. This shows how big of an effect reserve requirements have on the money supply and monetary policy. c. Bank has $405 left over. b. Distributes and issues currency and coin. open market operations. solve for A in this equation: R x A = D. i. Abiding by higher reserve requirements was costly for member banks. Dodd-Frank shifted consumer protection regulations to the Bureau of Consumer Protection. Historical function . Our banking system is called a Fractional Reserve System or Fractional Reserve Banking. Supervises member banks and bank holding companies. What does the Fed do?? i. The Chairman and Vice-Chairman are designated by the President and confirmed by the Senate for 4 year terms.500 can be created. only Federal Reserve member banks had to abide by reserve requirement. 10% reserve requirement. Prior to 1980. The Federal Reserve System ("Fed") was created by Congress in 1913. B deposits $450 in her bank. 2. Reserves allow banks to create money. What if the reserve requirement was increased to 20%? Then only $2. where R is the reserve ratio. savings and loan holding companies. iv. a. Operates as the banker to the US Treasury Dept. To how much money a deposit will create in a fractional reserve system. After Dodd-Frank. ii. The Fed administers monetary policy through its banks. The Federal Reserve banks and their Branches are part government. state banks can if they want to (optional)). and systematically important non-bank holding companies. i. A decrease in reserve requirements leads to an increase in money supply. a.1. b. v. and the discount rate. vi. All profits from the banks are paid to the US Treasury after paying the expenses of the banks.000 in the money supply. Not a part of any particular branch. A deposits $500 at bank. $500 can create $5. The Federal Reserve System is governed by the Federal Reserve Board of Governors ("FRB"). Most checks get processed through the Fed. d. (Note: All national banks are required to be members. An increase reserve requirements leads to a decrease money supply. 1) Dodd-Frank created a vice chairman for supervision and regulation of depository holding companies and other financial firms. part private entities. so bank puts $50 on reserve (either as cash in their vault or as non-interest bearing deposits at the Fed). iii.Maintains reserves of member commercial banks and financial institutions. Reserve Requirements. and D is the initial deposit. i. ii. Put too many burdens on member banks and caused many banks to leave the Federal Reserve System. Serve 14 year terms. With a 10% fractional reserve system. Bank has to keep $45. 10 . Operates nationwide check payment system. Structure of the Federal Reserve System. iii.

continuous adjustment. e. c. The Discount Rate and Federal Funds Rate. The rate tile Fed charges on these loans is the Discount Rate. Repurchase agreements/Matched sale-repurchase transactions. (The MCA did not require all banks to be members. 4. Open market operations are conducted by the Federal Open Market Committee (FOMC). a.required all depository institutions. Changes in reserve requirements are also used for their announcement effect . When the seller deposits the check at his bank. v.. It decreases the reserve account or the buyer’s bank has less money to lend out. e. The Fed honors the check by increasing the reserve account of the seller's bank at the Federal Reserve Bank. but uses govt.ii. Involve the buying and selling of government securities by the Fed. Since the seller’s bank does not need to keep excess reserves. they are rarely used and used only to supplement the effects of open market operations and discount policy. 2) These temporary transactions are used much more frequently. the president of the Fed Bank of New York is a permanent member of the committee and 4 other representatives of the Federal Reserve Banks who are elected annually by the boards of directors of the Federal Reserve Banks. Outright purchases/sales.) 1) First Bank and Trust Co. b. adjustments to reserve requirements are not well suited to the day-to-day implementation of monetary policy. Board of Governors of Fed Reserve  Held the MCA constitutional. f. Monetary Control Act of 1980 . The FOMC is composed of the 7 members of the FRB. Fed buys security from a dealer. it is issuing a check on its self. active market. 3. Open market transactions are conducted on a daily basis. (Note: presidents and VPs of Federal reserve banks are elected by the board of governors of each bank. securities are traded in a broad. it injects money into system.i. How reserve requirements are actually used by the Fed. whether members or not. to emphasize a particular direction of policy and to influence the public's perception of the thrust of monetary policy. but hold their office subject to the approval of the 7 members of the FRB). 3) Repurchase agreements . When changes to reserve ratios have been used. 1) Used when supply of reserves will need long-term. iv. Banks (see below) sell assets (commercial paper) to the Fed on a temporary basis (the Fed will credit the bank's reserve account for the amount the discounted amount of the commercial paper). Open Market Operations.. d. i. Open market operations are the most effective and flexible thing Fed can do in the short run.e. Tighter credit. iii. g. to abide by reserve requirements. i.Basically. The 4 representatives must be either presidents or vice presidents of their Federal Reserve Bank. 1) Used when there is only a temporary need for adjustments in reserves. 11 . Because changing reserve ratios screws up the bank's financial planning. just required all bank to abide by the Fed's reserve requirements. Just the opposite happens when the Fed sells securities. it can lend this money out. ii. ii. Matched sale-repurchase transactions are the opposite. ii. dealer agrees to repurchase at a specific date and price. iii. Looser credit. If Fed is selling. Basically. These buying/selling transactions are settled by member banks. it decreases the amount of money in the system. the bank presents the check to the Fed for payment. a. The Fed can conduct open market operations in one of two ways: i. securities b/c govt. they are typically offset by other monetary policy tools such as open market operations. The Fed can theoretically use buy and sell any type of asset. The Fed increases or decreases the reserve account of the member banks. So if the Fed is buying. Because changes in reserve requirements can have such a dramatic effect on money supply. when the Fed buys.

Deposits are short term in nature.D. 4. only member banks could use the discount window. of the Treasury. any bank holding reserves subject to the Fed's reserve requirements has access to tile discount window. 3. b. Net interest margin (or net interest income). 1. 3. Increasingly important part of income is fees charged by banks. State banks get there charter from the Banking Commissioner of their state. Loans are usually the largest asset. operating expenses) / income. b. Banks can temporarily borrow from other member banks. The lower the better. Before the MCA of 1980. 5. 12 . The largest 1% of banks in the US control 2/3rds of all banking assets. F. banks lose money. G. real estate. 1. c. ROE: income/equity capital (typically 15%) 5. Average rate earned on loans less average interest rate paid on deposits. It facilitates the balance sheet adjustments of individual banks that face temporary. Fed intervention to prevent systemic risk. It compliments open market operations in managing the reserves market day to day and in implementing longer-term policy goals. the capital they have. The Fed can step in during a financial crisis and provide liquidity to financial institutions to keep them afloat. a. Efficient banks are around 35-40%. The Fed's lending at the discount window serves 2 key functions: i. Liabilities include deposits . Now. Financial ratios in evaluating a bank: a. c. Time deposits. Long Term Capital Management. a. a. i. b. S&L crisis in 1980s shows the instability inherent in this business model. ROA: income/total assets (typically 1%) b.demand. and they let some failures occur. State banks outnumber national banks. d. usually around 60-70% . Balance sheet. i. E. investment securities. more stable sources of income. loans. MM and NOW. Income statement. b. The rate charged on these loans is the Federal Funds rate. like during inflation. but national banks control 55% of all banking assets. Banks may not operate without a government charter. i. Assets include cash. c. ii. banks earn most of their income on interest charges on loans. The OCC is an agency within the Dept. The number of banks has declined in recent years (cut in half since 1976) due to M&A. Higher the better. 1. So banks continually try to find other. Banks are usually highly leveraged . unforeseen changes in their asset-liability structure. National banks get their charter from the Office of the Comptroller of the Currency (OCC).have a lot of liabilities vs. 3. The use of funds is often long term and fixed. Traditionally. Non-interest expenses (salaries. The basic business of banking is profitable when the bank's cost of funds (interest paid on deposits) is less than it earns on those funds (interest charged on loans). usually around 4%. Systemic risks are risks to the entire banking system or entire financial system i. Creates the risk that the Fed is attempting to avoid. How does Fed deal with this? They don't always step in. Dodd-Frank Characteristics of banks. Banks will take on bigger risks if they know Fed will bail them out. Overhead efficiency ratio. 2. This creates moral hazard. Over 90% of all bank assets are under the control of holding companies. They also use vigorous investigations after financial disasters. and the interest rate paid on them is variable (fluctuates with market rate). 2. 2. So when interest rates are rising. 4.Hunt brothers. Examples . The Fed prevents systemic risk by intervening and acting as a lender of last resort during bank or other economic hazards.

Challenges to the traditional business of banks. 1. saved Citigroup and Bank of America (see pages 885-6 for more on AIG’s role in credit default swaps). [illegible]. SEC.financial intermediation and provider of transaction accounts . The fed steped in to provide credit and liquidity wherever it was needed. 4. OCC. Morgan Stanley and Godman Sachs converted to bank holding companies to qualify for government bailout. Customers will suffer to from decreased competition. Assistance to an individual company must now be part of a broad based program providing liquidity to the financial system. Large borrowers can also securitize their assets instead of borrowing from a bank. The traditional functions of banks . In similar fashion. Since long-term rates are typically higher than short term rates. Also. Big borrowers can now go directly to the capital markets and borrow funds by using the commercial paper market (promissory notes with maturity within 270 days or less). 2 investment firms. Disasterdly.). hedge funds. This all changed when the Fed raised short term rates seventeen times between June 2004 and June 2006. Subprime loans utilized money raised by a lending offering short term rate CDO’s. The failure of Lehman Brothers resulted in a run on money market funds when the Reserve Primary announced it would “break the bank. J. etc. revolving credit. What are the effects of changing roles on banks? a.26 trillian. Through various programs the Fed assisted money market funds. and an independent member appointed by President expert in insurance. In 2003. Wachovia was brought down by its purchase of “Golden West” with its “pick a payment” loans and bought by Wells Fargo. the FDIC can only provide assistance to banks as part of a broad based program which limits [illegible] to solvent institutions. The money so raised was loaned at longterm rates to subprime borrowers. 6. investment bankers purchased $230 billion in subprime mortgage backed securities. National Credit Union Administration. New housing starts dropped to a 50 year low. FDIC.P. primary government securities dealer Frannie Mae. corporate issuers of commercial paper. 1.1 trillion in mortgage backed securities. and mortgage backed seurites could no longer be marketed and sold. 3. American Express). This all hit Wall Street hard. Knowledge that gave banks an edge (expertise in evaluating potential borrowers – knowledge that depositors don't have) has diminished with new and increased availability of technology. Meryl Lynch had to be rescued by Bank of America. Assistance is provided in the form of a guaranty of obligations of solvent depository institutions.one of biggest lender is a non-bank (GE Capital). Fed Housing Finance Agency. Brokerage firms will often have a cash management accounts (pays rate of interest and works as capital account). There are more places to lend money . The maximum amount of such a guaranty program is set by the President and approved by congress. Council is to monitor and identify risks to the financial stability of the US. The “next financial crisis” is supposed to be protected by the Financial Stability Oversight Council” which his chaired by the Secretary of the Treasury. Credit facilities were made available to commercial firms which could not market their commercial paper. lenders made money on the spread. TARP was created to inject capital into banks. CFTC. 2008. Banks no longer have a monopoly in providing transaction accounts. In 2007 credit markets froze. Pushing banks toward riskier businesses (more unsecured loans. The rate increases raised the payments required of subprime borrowers. The Fed can now examine these “nonbank financial companies” and establish risk standards for them 13 . I.H. The council identifies companies as “nonbank financial companies” that are subject to regulation with the Fed and regulation by the *illegible+. banks. 2. which then had to be assisted. As a result the fed holds over $1. Morgan Chase to acquire Bear Stearns. FDIC increased deposit insurance to $250k.has become less important. Emergency loans can be made but must be fully assured. The government allowed Lehman Brothers to fail. Congress responded to the financial crisis with the Dodd-Frank Act. b. Maybe lending at greater risk. 2008 to December 17. c. Housing prices collapsed with foreclosures. FSOC members are heads of the Fed. From September 3.” It stopped after the government stepped in and said it would guarantee [illegible]. Aid to individual companies as the Fed provided in the Great Recession is restricted by Dodd-Frank. and Federal Home Loan Banks. Non-banks issuing credit cards (MBNA. Bank of America bought Countrywide which had made “stated income” or liars loans. The treasury must approve lending programs. saved AIG from massive credit default swap exposure. Freddie Mac. the fed’s assets (loans primarily) increased from $907 billion to $2. The Fed provided targeted credit assistance which allowed J. S&Ls often provide transaction accounts 5.

created by National Bank Act of 1864 ii. Bank Powers (192) a. BANK REGULATION TODAY. moral character and capacity of incorporators 2. National Bank Act (12 USC § 24) (Seventh): 1) National Banking Association shall have power . Federal Financial Institutions Examination Council i. Banks are creatures of limited power  they can only engage in activities authorized by its chartering authority i. bank must apply to FDIC for deposit insurance iii. FSOC can order the liquidation of large ($50billion +) financial companies that pose a systemic risk. Receiving deposits c. promotes uniformity in supervision ii. Reserve System (majority of state banks): state regulator + FDIC d. a. Loaning money e. FDIC will be the receiver in such cases. primary regulator = OCC c. all such incidental powers as shall be necessary to carry on the business of banking" Then this section goes on to list certain powers. . this includes state-chartered banks as well B. only state charters were available until 1864 (National Bank Act) ii. Background (185) i. National banks (187) i. bank must also apply for deposit insurance iii. bank must apply for state charter 1) Farmers Deposit Bank v. A. Regulatory structure: 1. Issuing and circulating notes 14 .or order them to divest some of their holdings. may only supply deposit insurance to a depository institution engaged in the business of receiving deposits (186) ii. Public convenience and advantage ii. primary regulator (184-185) = 1) Member of Fed Reserve System: state regulator + Fed 2) Non-Member of Fed. Reasonable assurance of success 3. II. Discounting and negotiating promissory notes b. State Banks (188) i. In a worst-case scenario. composed of: 1) Comptroller of the Currency 2) Chairman of the FDIC 3) Fed governor 4) Director of the Bureau of Consumer Financial Protection (created by the Dodd-Frank Act) 5) Director of the National Credit Union Administration 6) Chairperson of the State Liaison Committee e. Banks can be state-chartered or nationally-chartered ("dual banking system") (185) a."to exercise . FDIC i. sets uniform principles for fed examination of financial institutions. Financial standing. Buying and selling currency d. . state-chartered banks are still subject to federal regulation b. Dep't of Banking and Securities (188)  State req'ts 1.

Lowers cost to banks of providing product or service 15 . so the Comptroller reasonably determined that acting as an agent in the sale of annuities was "necessary" (meaning convenient or useful) to the "business of banking. which tried to limit state banks to those activities allowed for national banks. v. iii. NationsBank of North Carolina v. and are not exclusive. Camp (pg 192) i." ii." e. convenience. Variable Annuity Life Insurance Co." including but not limited to (VALIC decision) the powers specifically enumerated in § 24. that the powers specifically listed are merely examples. the administration's decision is given "controlling weight. holding: Yes. all such incidental powers as shall be necessary to carry on the business of banking. 1)3 factors helpful in determining if activity falls within 'business of banking' 1. "if it is convenient or useful in connection with the performance of one of the bank's established activities. d. 3) a national bank's activity is "necessary to carry on the business of banking" within the NBA. 2) If the statute is ambiguous or silent as to the issue presented. analysis: 1) NBA § 24 grants banks "incidental powers . or options for bank customers ii. . Whether activity benefits bank customers or is convenient or useful to banks i. a national bank may operate as an agent in the sale of annuities. federal charter was which charter allowed the most powers for banks. then you ask "whether the agency's answer is based on a permissible construction of the statute. it is illegal under the NBA for a national bank to operate a full-scale travel agency. The test for determining whether an activity falls within the "business of banking" i. it does not have to be "indispensible" to the business of banking. second issue: deference to the decision of the Comptroller (Chevron analysis): 1) first step: determine whether the "intent of Congress is clear as to the precise question at issue. 2) National banks are permitted to serve as agents for their customers in several respects. In other words. Annuities are investment products. The Comptroller found. "Incidental" = activities that are "necessary" to the "business of banking.b. analysis: 1) the National Bank Act permits banks to "exercise . (pg. This was significantly reduced with Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991." and gives specific examples. issue: NationsBank sought permission to allow its brokerage subsidiary to act as an agent in the sale of annuities. ." 4) Court of Appeals holds that while banks have often obtained transportation tickets for customers as a convenience." If so." If so. holding: No. including investment products. The "business of banking" language is an independent grant of authority not limited to the listed examples. necessary to carry on the business of banking. 197) i. and the Supreme Court agreed." iv. ii. Arnold Tours Inc. Increases service. iii. the NBA (12 USC § 24) should be construed broadly 1) "Necessary" = activities that are "convenient or useful in connection with the performance of one of the bank's established activities. Used to be that major factor in choosing state charter vs. issue: can national banks engage in the travel agency business? ii. . . then the question is answered. that is not comparable to the operation of a complete travel agency for profit. Whether activity in question is functionally equivalent to or a logical outgrowth of a recognized bank power 2." 2) the "necessary" language in the NBA does not require a sine qua none standard. Responds to new customer needs or demands iii. c.

FL had an anti-affiliation statute that prohibited an insurance agent from affiliating with a financial institution v. Nelson i. but express powers . GLBA codifies this decision so no question a bank can do this b. injunction can stay as far as it prohibits the Attorney General from issuing subpoenas (visitorial power)  BUT. injunction is wrong in that it prevents Attorney Gen from bringing judicial enforcement actions (enforcement) 16 . OCC's regulation is NOT a permissible interpretation of the statute. old part of NBA that allows national banks to own and operate insurance agencies in small towns (concept was that these markets were under served in the insurance area) iii. McCarren  federal statute can't preempt state insurance law unless it specifically states its intention to do so  federal law has to specifically relate to the business of insurance to fall into the exception in this statute xii.  the National Bank Act only preempts the visitorial powers  OCC's regulation says state may not enforce its valid non-preempted laws against national banks . this is a federal law that preserves to the states the regulation of insurance x. Whether activity presents risks of a type similar to those already assumed by banks i. 206) a. Barnett Bank in FL had a national bank in a small town bought an insurance agency iv. OCC issued final rule stating that it had the exclusive power to enforce "a national bank's compliance with state law that would govern the content or the conditions for conduct of a national bank's Federally-authorized banking business. not really a incidental powers case.A.iv. however. Preemption of OCC's Visitorial Powers (213) i. or allows the bank to avoid economic waste.this is wrong (second step of the Chevron analysis. bank intended to sell insurance in that town and the sell it statewide viii. C. no insurance regulator on national level xi. visitorial powers are different from the power to enforce the law. and so is not entitled to deference)  So. v. The Clearing House Association (pg. Barnett bank counters that state law is preempted by 12 USC 92 vii. 214)  Attorney Gen for the State of NY requested banks provide certain information about their lending practices to determine if they had violated state's fair lending laws  Issue: Is OCC's regulation saying it preempts state law enforcement a valid interpretation of the National Bank Act?  OCC's regulation says state officials can't exercise visitorial powers with respect to national banks  Supreme Court's analysis:  'visitorial powers' is ambiguous (first step of Chevron analysis)  But. Barnett Bank of Marrion County N. Big concern. Enhances banks safety and soudness 3. National Bank Act's Preemption of State Law (pg. agents no longer recognized by FL vi. courts will want to make sure bank not taking on too many risks 2) 3 types of "incidental activities"  Facilitates operations of the bank as a business enterprise  Enhances the efficiency and quality of the content/delivery of banking services or products  Optimizes the use or value of the bank's facilities and competencies. In 2004. FL retorts that McCarter-Ferguson preempts 12 USC 92 ix. Court held that based upon plain reading. so when bank bought agency.starts with 12 USC 92 ii."  Cuomo v. 12 USC 92 did fall in the business of insurance and thus federal law preempts state law and the federal law is not blocked by McCarren xiii.

and therefore is a citizen of. Dissent  Says the statute is ambiguous. Bank Service Corporation 1) Bank Service Corporation Act 2) provides services including: 17 . b. may not accept deposits c. Wachovia Bank v. a. FDICIA of 1991. NC has different take on powers provision  "In addition to those powers conferred by law upon private corporations. state banks can do anything a national bank can do  BROAD powers iii. (223) a. Page 681 of Supplement has the banking laws of NY. national and state banks are permitted to own the stock of subsidiary corps. Chapter 53 of NCGS has NC banking laws. subsidiaries are NOT chartered banks. there was this race to the bottom 1) states tried to compete with national banks so they authorized state banks to do things that national banks couldn't do and might not have been safe to do.. but may bring action to enforce any state law that applies to national banks and that has not been preempted c. Powers of state banks are those granted by state statutes. Diversity Jurisdiction (pg 218) i. every state in which it maintains a branch office  Supreme Court  § 1348 deems national banks to be citizens of the state in which they are "located"  determines that a bank is "located" in the state where it has its principal office (just like corporations)  otherwise. no incidental powers language in NC despite it being one of the most liberal banking states. Trying to have most expansive state charter to attract banks to charter there. Powers of State banks.. banks have the powers to . 2) Under FDICIA  state banks limited in powers as principal to those given to national banks  created parity in terms of state and national banks 3) State banks acting as an agent covered by state law. and OCC's interpretation is reasonable and entitled to deference (Chevron analysis)  Holding: State atty general may not issue subpoena to request info from national bank. 3 types of subsidiaries: i. " 1) NC lawyers focused on the private corporations language to push bank powers in line with private corporations. However. D. 4) SEE 12 USC 1831a ii. held that a bank is located in. Prior to this act. 2) Moot point b/c this private corporation language probably expands NC bank powers beyond the business of banking/incidental two-step test. b. i. national banks would essentially be denied access to the federal courts because they could never obtain diversity jurisdiction. Page 703 has NY powers provision that is very similar to 12 USC 24(seventh) ii. This led states to also level playing field in other direction  wild card statutes  in addition to X powers. Neither NC or NY have these wildcard provisions even though they are the biggest banking states E. Schmidt  Wachovia has its principal office in NC  Citizens of SC sued Wachovia in SC state court  Wachovia filed a petition in Federal district court in SC seeking to compel arbitration  the Court of Appeals determined there was no diversity jurisdiction. i. so agency activities of state banks is not restricted by FDICIA. Bank subsidiaries.

Therefore. annuity issuance hh. statements. 1. and bank holding companies b. check and deposit sorting and posting  computation and posting of interest and other credits and charges  preparation and mailing of checks. activities permissible for the subsidiaries of bank holding companies gg."  overrules Watters iii. accounting. to the same extent that the State consumer financial law applies to any person. nonpublic banks with assets < $500 million  exempted from Sarbanes-Oxley Act and special banking law provisions  but.  OVERRULED by Dodd-Frank Act. notices. pursuant to the NBA. Control if defined in statute  SEE 12 USC 1841(a)(1) 18 . merchant banking F. Wachovia Bank (224)  Holding: the OCC supervises national banks and their operating subsidiaries. BHC  commercial corporation that controls a bank ii. Operating Subsidiary 1) Watters v. statistical. or other entity subject to such State law. because the OCC has the exclusive power to supervise national banks and their operating subsidiaries. Third way to do things beyond banking  holding company structure i. corporation. Corporate Governance (231) a. insurance agency activities  May not engage in: ff. Sarbanes-Oxley Act applies to publicly-traded banks. Looking at ways to expand beyond normal bank powers  we have seen incidental powers and subsidiaries so far b. savings associations. FDIC believes these banks should also adhere to practices similar/identical to those in the SarbanesOxley Act. and similar items  any other clerical. 2) Dodd-Frank Act  Provides that "a state consumer financial law shall apply to a subsidiary or affiliate of a national bank . Financial Subsidiary 1) created by the GLBA of 1999 2) may engage in "activities that are financial in nature" or "incidental" to a financial activity.  May engage in: ff. nonpublic banks with assets > $500 million must comply with banking laws and regulations c. treating them as a single economic enterprise. bookkeeping. insurance underwriting gg. activities permissible for a bank holding company to conduct abroad hh. d.  also requires that public companies hold nonbinding votes to approve the compensation of key executives -----------------------------------------------------SECTION 2------------------------------------------------G. securities activities ii. . Bank Holding Companies. a. the operating subsidiaries of national banks are NOT subject to state supervision. Holding company regulation. Dodd-Frank Act  adds additional corporate governance provisions  SEC is required to promulgate rules requiring public companies to disclose in their annual proxy statements why they have different persons/the same person serving in the role of the CEO and the chairman of the board. or similar functions ii.

unlike BHC and Reg Y  unnamed activities. or real estate investment. iii. Financial subsidiaries can't conduct activities complimentary to a financial activity 1) There are specific limitations put on financial subs . but created controversy seems like finder function of bringing together buyers + sellers cc. list can be expanded (Reg Y frozen) 1) FHC can apply for a determination to see if an activity is financial in nature 2) application has to be made to Fed and Treasury 3) acting as a finder has been determined to be financial in nature by Fed (page 222-223)  finder  includes running call center.. Fed proposed this. i. a.. i.like they can't do insurance underwriting. Differences between subsidiaries of FHC and a financial subsidiary of a bank. move in Congress to pass law to tell fed that can't approve real estate brokerage as financial in nature 4) small chart handed out listing activities and what entity can do it  REFERENCE MATERIAL c. iii. Financial Holding Companies. 19 . . d. C. SEE 12 USC(k)(4) 1) like underwriting securities. have to be well-capitalized. .. not limited to closely related to banking ii. statute does provide a list of examples. New type created by GLBA that allows BHCs to become FHC and engage in broader range of activities b.. insurance. holding company can own one or more banks or any other company the business of which is so closely related to banking as to be a proper incident thereto (test) Reg Y  lists all permissible activities that can be done in BHC structure according to Fed. website. Under GLBA  list of permissible powers of BHC's frozen in time  So Reg Y is all possible powers for BHC's that are so closely related to banking . Now can do things that are financial in nature or incidental to such financial activity or complimentary to a financial activity i. Additional Regulation for Systematically Significant Companies (p. . issue annuities. and merchant banking. and CRA of satisfactory or above iv. bb. 246) 4. or merchant banking. well-managed. 2.c.  What about FHC buying Ebay  sounds like finder activity   finder  bringing parties together what about real estate brokerage aa. Dodd-Frank Act provides that “large. Prior to GLBA. BHC’s could apply to Fed for approval of additional activities ii. but this is changing now because BHC’s are changing to FHC’s Fed is primary regulator of BHC’s and their non-bank subsidiaries  even if bank is national or state nonmember Under BHC structure. interconnected bank holding companies” should be subject to enhanced supervision and prudential standards. cc. e. 90% of banking assets in US are owned by BHC’s. Fed is primary regulator of FHCs v. . To form a FHC.

d. despite different regulators look at the different functions undertaken by the entity b. and AIG are subjected to heightened supervision so that the Fed could forestall a crisis. 7. GLBA realized there would be new products  Hybrid products . under Dodd-Frank the Fed gains oversight over systemically significant nonbank financial companies that formerly escaped Fed purview since they were not bank holding companies. examination. other types of functionally regulated subsidiaries of banks regulated by SEC 1) broker-dealers (buy and sell stock) 2) investment advisers 3) investment companies (mutual fund . and short-term debt limits. other functional areas like insurance (regulated by states) and commodities dealers (CFTC will continue to regulate this area) GLBA recognized the need to still have comprehensive regulation of banking companies i.company the business of which is to own securities) v.can regulate the same things consistently 3) expertise . the company has 180 days to register with the Fed. securities sales  under functional regulation it would be regulated by SEC regardless of the entity (broker. that all financial activities of the company be placed under the immediate holding company.. reporting. 8. These companies are now subject to Fed registration. . c. c. 9. it would still be treated as a systemically significant nonbank financial company that would still be subject to Fed oversight and the heightened supervision and prudential stds. c. c. Lehman Bros. and that the intermediate holding company be subject to the BHCA.each entity face same regulation for same activity 2) consistency . Dodd-Frank has a “Hotel California” provision in § 117 c. Functional regulation. Intent is to ensure that entities like Bear Stearns.find regulator with most expertise and put them in charge iv. Once designated by the FSOC as a nonbank financial company.5. GLBA wants one regulators to still see the big picture of an entity. Nonbank financial companies will not be subject to the general prohibition of the BHC prohibiting participation in nonfinancial activities. 20 .. Requires a supermajority vote that must include the affirmative vote of the Treasury Secretary d. The new FSOC is charged with designating these nonbank financial companies. In this category if bank assets exceed $50 billion However. Fed is required to implement “prudential standards” for these systemically significant bank holding companies and nonbank financial institutions. c. a. But Fed may require that the nonbank financial company form an intermediate holding company. bank. and enforcement. 3. Company must be “predominately engaged” in financial activities (85% of its revenues or assets attributable to financial in nature activities) e. rationale 1) fairness . enhanced disclosures. Fed is given the discretion to impose additional heightened stds related to contingent capital. something that came out of GLBA  as opposed to entity regulation i.also regulated by SEC if they spin out of securities function vi. If the institution sold its bank subsidiary or converted it to an entity not considered a bank under the BHCA. Most significantly. Functional regulation  idea is that certain types of business should be regulated by what kind of business is being done as opposed to the type of entity doing activity ii. ) iii. 6.

didn't do away with bank regulators  like OCC. FED still has regulator control over BHC's and FHC's as umbrella regulator iii. Dodd-Frank imposed a moratorium on FDIC applications for deposit insurance filed after 11/23/2009. they might go out and take on more risk because they have this backing (unwise investments in commercial businesses could increase bank failures) iii. can't own majority interests (thus becoming a subsidiary) f. some innovations don't fit into a single functional category 4. Interaffiliate relations. not the target of the investment being financial i.ii. SEE 12 USCA1843(n)(7)  to qualify for grandfather provision must be "predominantly engaged in financial activities" Does the distinction financial and non-financial still make sense? i. Gramm says he doubts that it will ii. still a large number of business's grandfathered  so there are some commercial companies that become FHC's and retain their commercial businesses for some time. and state regulators c. is there a reason to keep this distinction between commercial and non-commercial activities? i. prohibited by statute from doing this ii. d. Aggregation of power and wealth  banks have a lot of power in their balance sheets and lending power g. c. safety and soundness issue  feel that bank owners will let commercial subsidiary slide on credit standards and make loan to affiliated business that they wouldn't normally make (bank more likely to lose money on this) ii. and these companies don't have to be financial in nature under GLBA  FHC's and financial subsidiaries are allowed to invest commercial companies idea is that the act of investing and managing the investment in financial in nature. or trust bank by a commercial firm that derives less than 15% of its consolidated revenue from financing activities. e. b. there are limitations on how much banks can invest ii. FDIC. 21 . GLBA expanded scope of holding company activities from those closely related to banking to those that are financial in nature Non-financial activities (commercial activities) are generally not permissible for FHC's i. credit card bank. Problems with this dual purpose regulation of functional and entity regulation i. turf battles cause this overlapping regulation ii. Commercial activities. FDIC  because banks have this insurance. for an industrial loan company. a. 5. nothing more than banks or subsidiary of banks owning pieces (equity) of commercial businesses ii. unclear if prohibition on commercial activity will remain in future one inroad was opened up in GLBA  merchant banking i.

ii. and prohibits an institution from purchasing low-quality assets from its affiliates. “Covered transactions” were expanded to include securities lending or borrowing transactions with affiliates. extensions of credit to the affiliate. These sections also limit the ability of an institution to transfer to its affiliates the subsidy arising from the institution's access to the Federal safety net. Conflicts of interest. 1) Chemical bank loaned money to Washington and had non-public info about Washington later TW asked for a loan from Chemical to purchase Washington 2) Washington sued saying Chemical had a duty to protect Washington 3) district court applied a per se rule  Chemical could not use this information against customer 4) the appeals court reversed saying could not have a per se rule  Largely decided on policy grounds – as a matter of public policy. 23b  more recent. and eliminates the exception from the quantitative limits of 23A previously given to transactions b/w a bank and a financial sub of a bank. guarantees issued on behalf of the affiliate. In the Dodd-Frank Act. Affiliate transactions. 3) Extensions of credit be appropriately secured by a statutorily defined amount of collateral. not going to prevent banks from dealing with competitors of their customers 22 . 2) Statute requires all covered transactions between the institution and its affiliate to be on terms and conditions that are consistent with safe and sound banking practices. Congress amended 23A and 23B to limit the Fed’s unilateral authority to grant exemptions from the affiliate transaction restrictions. v. Tw Corp. Sections 23a and 23b of the Federal Reserve Act are intended to limit the risks to an insured depository institution from transactions with is affiliates. ii. and other transactions that expose the institution to the affiliates investment risk. 23a and 23b are implemented by a new Regulation  Reg. requires affiliate transactions to be on an arm's lengths basis and have market comparable terms  at least as favorable to the institution as those prevailing at the time for comparable transactions with unaffiliated companies. all derivatives transactions with affiliates an expansion from just credit derivatives transactions. 23a achieves these goals in three ways 1) Limits the aggregate amount of an insured depository institution's covered transactions with any single affiliate to no more than 10% of the institution's capital and surplus. ii. Fed is required to act with the FDIC and the primary regulator of the bank in issuing exemptions. use within the company of non-public information  potential for conflicts increase as banks and their holding companies expand in size and engage in an increasingly broad c.  applies to credit transactions between banks and affiliates  anything that uses bank credit for the benefit of subs  Covered transactions  purchases of assets from affiliate. iv. i. v. i.a. W b. These rules reflect the special place of banks in economy. Washington Steel Corp. iii. i.

implicit court held that enough had been alleged to make out a case for anti-tying laws 4) also held standard to be applied was not as strict as under other anti-trust laws  don’t have to prove anti-competitive effect or market power  just have to show it was conditioned and he would have had a better chance getting credit. 1) this is a case where a tying argument was tried unsuccessfully 2) Mid had a revolving line of credit with the bank that was secured by trading assets (receivables and inventory) 3) part of the agreement. can tie traditional products together  like loans and deposits. safe deposit. bank required a lock box  post office box in borrowers name and only bank has access to it 4) argument failed because the lock box and block account are not services that anyone would buy separately  only exist in secured lending relationships 5) have to have to separate products that are sold to public individually vi. credit card. Fed’s pending interpretation of prohibited ties as to borrowers: 1) Insurance products 2) Underwriting 3) Sale of unrelated real estate v.can do this package deal (can tie all sorts of things together now . Tying statute 106 of BHC – 12 USC 1971 & 1975 on page 589 of supplement 1) it applies to banks  limits banks tying of products by bank or an affiliate of bank 2) tying rules do not prevent a non-bank from tying 3) what a bank can’t do it might be able to do it in another entity in BHC structure 23 ..and fall under traditional bank services rubric) iii. vii. 1) bottom line is that you had two affiliated banks through common ownership 2) P wanted loan from one of two. package of products (trust services. Mid-Atlantic. where lending made against checks.might limit amount of credit in the economy – just go out and get all banks on your side and no one could come after you because they couldn’t get credit 5) as a matter of policy. . Tying has to do with conditioning one service on another (I will give you this if you will take something else from me) 1) in banking  Saying to a borrower I will make you a loan if you let me underwrite your next securities offering  2) perceived to be anti-competitive and generally part of anti-trust laws 3) they don't say you can never tie bank product to another product ii. i. no problem with loan dept using information to make loan to TW 6) exception is they felt only areas that had fiduciary duties (like trust) couldn't use info d. ) . bank said ok if they used contractor who was indebted to other bank  this would help contractor pay back loan to second bank who really needed this 3) no explicit condition in agreement that it had to happen this way. Section 106 of Bank Holding Company Act of 1970 prohibits so called tying arrangements  SEE 12 USCA 1972 & 1975 iv. account.bank says you get a better rate on this if you take all this together . Dibidale. Anti-tying..

Disclosure of financial information to credit reporting agencies was regulated by the Fair Credit Reporting Act of 1970 (FCRA) SEE 12 USCA 1681-1681(f). ii. Example of how there is an exception in RFPA where financial regulators have access to personal financial information in their supervisory role ii. "Nothing in RFPA prohibits examination by or disclosure to any supervisory agency of monetary functions with respect to a financial institution. a. i. financial institution are entitled to disclose Non-public personal info 24 . Has to be for legitimate law enforcement inquiry ii. employment decisions. Financial institution has to give notice to the customer of the request Adams. employers. It applies to financial institutions  any institution engaged in financial activities 1) brokers. . Credit agencies  companies that gather credit info from financial institutions and provide this info to banks. insurances agents." SEE 12 USC 3413(b) Lopez. 1. i.also have to give customer notice so they have opportunity to object. i. i.. insurance agencies. This ability is limited 1) Only can supply information for permissible purposes (loan decisions. The Act prohibits financial institutions from releasing customer financial information to government authorities until the government complies with certain procedures.adverse credit info drops off after time you have right to get report for a fee and if you see mistake the credit bureau has to investigate (you can also put your own explanation that will go with report) b.. The Right to Financial Privacy Act (RFPA) (SEE 12 USCA 3401) – limited the power of the federal government to obtain access to individual records. i. First Union made disclosures to government based upon verbal instructions to do so. … 1) they are big clearinghouses of information of your past credit history 2) your bank is permitted to provide this info to credit bureaus with or without your consent 3) reason for this is this is considered a valuable service  safety and soundness of credit in economy. . Privacy.. In general under Title V . 2) FCRA has protections for customers   info is obsolete after certain amount of time (bankruptcies over 10 years can't be shown) . b. Disclosure to private parties. ii. Have to have more than just verbal instructions . 2. a. 2) are law firms included? FTC says yes.4) A CUSTOMER CAN TIE PRODUCTS TOGETHER – bank can’t C.. ). ABA says no iii. Disclosure to the government. c. Title V pertains to disclosure of personal financial info to affiliates and non-affiliates ii. Disclosure of financial information to a financial institution's affiliates and non-affiliates is regulated by Title V of the GLBA SEE 15 USCA 6801-6827.

a. a. the Internet. Technology. 1. Three reasons Vice Chairman of Fed sees banks investing in tech: i. Risk management and information management systems and techniques 2. stand alone Net bank has not been a great success i. TransUnion  IMPORTANT CASE 1) Trans is a credit bureau attacking privacy provisions of GLBA 2) Attacked FTC Jurisdiction on grounds the Credit Unions weren’t FI. and e-commerce..  Also. Opportunities to serve their current customers and attract new ones by offering new products and services iii. Found that they still need brick and mortar type facilities. even if different than what traditional 25 . derived from public info is excluded 5) some financial institutions have decided not to share NPI with no outsiders  logistically it takes a ton of time and money to deal with these notices iv. GLBA requires financial institutions to: 1) have a privacy policy 2) have to disclose this policy each time a customer obtains a service (at the outset of relationship) and annually have to send it to them thereafter 3) give right to opt out v. attacked definition of personal information.(NPPI) with affiliates  this includes personally identifiable financial info (PIFI) 1) PIFI is a subset of NPPI 2) The reason they can share PIFI and NPPI is to encourage cross-selling 3) not permitted to share NPI with non-affiliates unless you give customers chance to opt out    have to notify customer that your policy is to share PIFI with non-affiliates unless you say you don't want them to some states went further and said we want opt-in states can go further than feds. but have to be consistent 4) Still many loopholes  Financial institutions can share public information with non-affiliates and affiliates  Problem is with aggregation . Technology. Internet banking. challenged the coverage of credit headers (saying not Financial info).SECTION 4 -------------------------------------------------A.just because it is public doesn't mean that when aggregated together it could be a privacy concern. … 3) they have lost across the board 4) why is credit bureau so upset?  their customers are banks  the real reason is the use and reuse restrictions  one way they make money is credit bureaus is by charging fees  but big way is aggregation  aggregate info from sources and come up with lists of target customers and then sell to marketing companies  GLBA’s limit on aggregation is what troubles credit bureaus ------------------------------------------------. challenged restrictions on reuse. It lowers operating costs ii.

banks need. ii. also raises issues of where bank is located for regulation and CRA b. what has happened is that brick and mortar banks have added on e-banking features to traditional bank products i. has been an add on feature and not a replacement feature tor traditional banks ii. hasn't replaced brick and mortar banks yet c. risks of internet websites i. potential liability/consumer violations for inaccurate/incomplete information on websites ii. security risks if the website is not properly protected iii. potential liability for spreading viruses and other malicious code to computers communicating with the institution's websites iv. negative public perception if online services are disrupted v. authentication of customers who use internet banking, losses from fraud if customers are not verified accurately vi. liability for unauthorized transactions. 3. E-commerce. a. other electronic issues i. e-money - how do you pay for things over the web when you don't want to use credit card - still developing ii. body of law on e-signatures  UETA - Uniform Electronic Transactions Act b. risks of e-commerce i. transaction/operations risks: risks from fraud, processing errors, system disruptions, etc. ii. credit risks: due to the increased risk of fraud in loan transactions when processed electronically, a financial institution's credit risk could be increased if loans are approved electronically. iii. liquidity, interest rate, and price/market risks: funding and investment-related risks could increase. Institutions can market their products and services globally. Internet deposits may attract customers who focus exclusively on rates. iv. compliance/legal risks: rules and laws governing e-banking are still evolving. v. reputation risk: decision to offer e-banking services significantly increases its level of reputation risk. V. BANK ASSETS. (*CHAPTER 5 OF HORN BOOK) A. Non-loan assets. 1. Real estate. a. Although loans make up largest category of assets in any bank, the largest non-loan category of assets is usually real estate b. National banks are permitted under 12 USC 29 to own real estate for limited purposes i. for own premises i. the amount a bank may have invested in its premises may not exceed the amount of the bank's capital stock ii. if banks can only hold these kinds of property, how do banks have these huge buildings like skyscrapers? iii. primary reason to own this premise is for bank premises and can be landlords under the idea that they will eventually expand into these other spaces ii. property from foreclosures i. DPC property  debts previously contracted ii. also called OREO  other real estate owned iii. can own it for up to two years while trying to sell it plus they can apply to OCC for an additional 3 years  this so banks can get reasonable price 2. Investments.





In addition to loans and real estate, banks can hold certain types of securities subject to some limitations. 3 types can be held: i. type I - most common, US government bonds or general obligation bonds of states and cities (very low risk of default) i. under 12 USC 24 can be held without limit ii. general obligation  backed by full-faith and credit of governmental unit (backed by taxing power) ii. type II - revenue bonds by states i. not backed by taxing power ii. can own an amount up to 10% of capital and unimpaired surplus for any one issuer iii. type III - revenue bonds by municipalities and corporate bonds i. not backed by taxing power ii. can own an amount up to 10% of capital and unimpaired surplus for any one issuer iii. have to be investment grade by one of national rating agencies such as Moody’s or Standard and Poors. Marx v. Centran Corp. i. P bought 200 shares of D. D’s had a plan to borrow money while interest rate declines for taking leverage and taking this money to buy long term fixed rate obligations i. they were betting interest rates were going to decline ii. they were buying government obligations now, when rates went down these fixed rate securities would pay more than the market and would increase in value iii. interest rates went up and they eventually had to liquidate portfolio, lost $50 million ii. court said he did have a cause of action for violation of 12 USC 24 iii. but concluded that the bank did not violate 12 USC 24, its investments were within the limits of the statute as further defined by OCC regulations. iv. scheme was wild, but most of these securities were government securities which are type I and can be held without limit - so P lost even though bank acted stupidly v. note: D bought excess reserves of other banks and repos. REVIEW QUESTIONS AND NOTES PPG 298 & 299 U.S. v. Iguchi i. Iguchi made a lot of bad deals, tried to conceal losses by selling unauthorized securities. Confessed to parent company (Daiwa), who told him to keep falsifying info. Iguchi then confessed to U.S. law enforcement. Iguchi was fined $2 million, although the record stated that he didn’t have the money to pay. Can an indigent D be fined an amount that he doesn’t have the money to pay? i. Volcker Rule (as set forth in Dodd-Frank § 619). a) Restricts banking entities from proprietary trading. Exemptions (aka “permitted activities”): i. Transactions in U.S. government obligations, GSE (e.g. Fannie Mae, Freddie Mac) obligations, obligations of states/political subdivisions ii. Securities connected with underwriting or market-making activities consistent with customers’ near term demand iii. Risk-mitigating hedging activities connected with the banking entity’s holdings iv. Securities held on behalf of customers. b) Bans relationships (esp. controlling influences) with hedge funds & private equity funds. Exemptions: i. Banking entities can make de minimis investments as long as all investments is less than 3% of the entity’s Tier 1 capital. ii. Banking entities can sponsor a p/e or hedge fund and serve as a general partner subject to certain limitations and the entity has equity interest less than the de minimis amount.


Funds can only be offered to the banking entity’s customers. Can invest in Small Business Investment Companies that are “designed primarily to promote the public welfare.” ii. Sentencing court may impose a fine based on the realistic possible future earnings, esp. where the crime is high-profile and he could generate income from books/movies. B. General regulation of loans. 1. Lending limits. a. Bank laws limit the amount of credit that can be extended to a single borrower. For national banks, these limits can be found in 12 USC 84 and 12 CFR pt 32 i. The point is to make banks diversify their credit risks  have to loan to numerous individuals and somewhat diversify ii. This diversification is limited in the sense that they don't have to diversify across industries - just by borrowers. b. 12 USC 84  cannot loan more than 15% of capital and surplus to any one individual i. just have to look at the balance sheet to come up with this number ii. this is base rule, but there are exceptions to this: i. can loan additional 10% if secured by readily marketable collateral (things that are easy to liquidate) ii. another exception  if loan fully secured by type I securities not included in 15% c. In addition to 15% limit, certain loans have to be aggregated together to count against limit i. if different borrowers engaged in common enterprise, all loans have to be aggregated together to count against 15% limit ii. can't get around lending limit by splitting up loans d. a number of states (36) have higher lending limits than under federal law i. NC limit is identical to federal law ii. section in this N.C. statute that allows Board of Directors to adopt resolution to apply to commissioner to get higher limit by up to 10% for 120 days iii. states do this for regulatory arbitrage  make their charters more attractive than national charters e. why are these limits important? i. directors of national banks have personal liability for loans which exceed limits. ii. this gets directors' attention f. EXAMPLE  assume that bank has 10 million dollars of capital and surplus i. normal legal lending limit for this bank is 1.5 million ii. if bank makes a loan to a borrower for 1 million (and its unsecured) it is ok iii. if it makes a $2 million loan that is secured by real estate - over limit i. real estate is NOT READILY MARKETABLE COLLATERAL iv. 2 mill loan and 500k of readily marketable collateral - within that additional 10% exception v. 3 mill loan with 1.5 million in readily marketable securities - violates top limit of 25% (the readily marketable collateral exception (10% over 15% is all secured by RMC) vi. 3 loans of 750k each to A, B and C, but all going to same business = 2.25 million total. i. not ok because as a whole it is more than 15% limit ii. this falls within aggregation rules of 12 USC 84 iii. Note there are exceptions to lending limits. See 12 USC 84 (c), p. 29 of Statutes Supplement. g. Del Junco – a/k/a what happens to directors who refuse to follow OCC requests for indemnification. i. Idea that regulators enforce lending limits strictly ii. Issue: was there substantial evidence to support a finding that the $125k loan to the Treasurer was “used for the benefit of the corporation”? iii. Court found that yes, the proceeds of the account were used to benefit iv. Court was not going to fashion remedies to protect directors from liability, but going to fashion remedies that protect bank and its SH's. First loan (unsecured) had to be paid off first.

iii. iv.


12 USC 375 (B) and Reg O was violated iii. FDIC found that on an aggregate basis Fuente controlled entities received loans in excess of applicable limits. requires terms to be same as given to non-execs and have to be disclosed to Board (not subject to approval though). this was Fuente’s appeal of FDIC order removing him as a director of First International Bank (“FIB”) and forbidding him from voting shares of a bank or serving on the board of directors of any federally regulated bank for life. Dodd-Frank § 165(e). terms cannot be preferential. Systemically significant BHCs and nonbank financial companies can only expose up to 25% of their capital stock & surplus to any unaffiliated company. but are subject to certain regulations. iii. Examples: Chairman. § 375b (covers broader group) i. c. and principal SH's (own more than 10% of any class of voting stock) ii. and treasurer c. a) Fuentes was an “insider” under Reg O by virtue of being director of FIB b) Reg O defines insider to include an executive officer. other than as director. covers only loans to executives ii.2. Defines credit exposure to include all purchases or investments in securities issued by a company. ii. FDIC i. Has to be such a loan as the bank would be authorized to make to another borrower ii. covers loans made to executive officers. ii. Dodd-Frank § 610 i. FDIC “found” Fuentes “controlled” all borrowers. ii. Insiders  executives. i. Director abstains from voting to approve loan to them.. Securities lending transactions v. secretary. Procedurally. 3. Securities borrowing transactions. director or principal shareholder and includes a “related interest” of any of the foregoing. employees and corporations as “borrowers” from FIB. b. president. iv. cashier. 29 . if to a director. Insider loans. Adds credit exposure from the following to the list of loans subject to national bank lending limits: i. Loans to insiders of the bank are permitted. De La Fuente v.13. Derivatives ii. § 375a i. . i. Rationale: we don't want banks become piggy banks for insiders iii. cited in case under Reg “O”. officers. credit risk has to be normal for lender. Dodd-Frank a. Repurchase agreements iii. Will not become effective until 3 years after 7/21/2010 enactment of D-F. Loans to insiders must not exceed the amount of the bank’s unimpaired capital and surplus d.1 . Reverse repurchase agreements iv. Executive Officer  defined as any person who participates or has the authority to participate in major policymaking functions. Loans have to be on substantially same terms as given to other borrowers iii. directors. trusts. a. ii. Fuente used family members. State banks can only transact derivatives if the chartering state’s lending limit law shows a consideration of derivatives credit exposures. principal SH's. these limitations are found in 12 USCA § 375a and b and are implemented by Reg O b. Title I i... iv. have to be approved in advance by Board. Dodd-Frank § 611 i. 12 CFR § 215. VPs.

a. At 10% ownership. P's were successful for a while in arguing that bank breached good faith when it cut off line of credit when bank thought risk too high b. Loan Loss Reserves  income statement item that reduces income i. rebuttable presumption of control exists e. a. Freddie Mac terminated ABM as approved seller. the ruling had the effect of drying up credit to real estate lending due to threat of clean up costs viii.as long as not involved in management of company v. Fleet Factors i. Fleet lending to company that contaminated property ii. company went bankrupt . ii. do banks that have lent against contaminated property are liable to clean them up b. number that can be manipulated thereby changing net income i. fleet's appeal was based on provision of CERCLA that was designed to protect secured lenders from this . iii.Fleet came in as secured lender and sold everything iii. banks still wary of environmental issues because it can still affect value of collateral dramatically and that is why banks still do ESA's despite case being overruled 6. P's would use this to say bank had violated a number of duties (including good faith) ii. removes the ability of P's to use good faith .take away discretion 5. issue in case boiled down to whether Fleet was involved in management of facility so that it was deemed an operator and not exempt vi. Lender liability.Own 25% or more shares of a corp. Congress negated the management participation theory of liability that came out of this case c. got SJ against owners but tougher against bank iii. If under reported past due mortgages. Has power to exercise a controlling influence over management or policies of a corp. US v. Issue: who is liable to clean it up? ii. Rubric under which bank liability falls i. ESA  environmental sight assessment i. ABM raised 5th Amendment. Environmental lender liability. in recent years P have had less success because banks have not done things that look bad in hindsight and they spell things out better in terms of rights and remedies for the bank i. 4. vii. court says bank can be held liable if involvement with the management of the facility is sufficiently broad to support the inference that it could affect hazardous waste disposal decisions if it so chose. (Freddie Mac) ABM failed to properly report mortgage delinquencies as required by Freddie Mac Seller and Servicer’s Guide. you subtract LLR from net interest income to get you to non-interest income ii. Basically this would kill ABM as a going concern or business. EPA comes in later and finds a ton of contamination i. Supreme Court. then took appeal to U. American Bankers Mortgage (ABM) US Federal Home Loan Mortgage Corp. Accounting for loan loss reserves. EPA cleans up and then sues owners and bank ii. amount that goes in for a period is up to management of bank i. 30 . special kind of lender liability that comes about by the lender taking contaminated property as collateral for its loans i. ABM then sued and lost. due process clause (this applies only to the federal government Ct. removed discretion in contracts and replaced it with specific events that trigger certain rights and remedies for the bank ii. court nailed fleet with liability iv. ABM appealed decision to Freddie Mac which denied appeal in April 1992. held Freddie Mac was not a government agency even though it was chartered to pursue gov’t objectives. banks do this now to avoid getting involved in contaminated site (like Fleet) ii. a.S.

. Term loans  typically made for longer period i. also a balance sheet item i. payable interest only and principle at maturity a) pay interest monthly on what used during month b) at date of maturity borrower repays outstanding principle c) LIBOR and prime rate are types of rates that revolvers are often tied to d) secured or unsecured (collateral or not)  often secured by trading assets of company (inventory and accounts receivable) e) lines of credit that are secured by trading assets are often called "Asset based lines of credit" iv. Fair Value Accounting i. but bank management can still use some judgment as to amount of these reserves iii. if you get money on loan accounted for in account. short term  less than year ii. term loans are used to finance hard assets like real estate. a. and re-borrowed. repaid. machinery. especially in an illiquid market. as in times of financial crisis) 7. amount of line is set. Fair value is noted in the footnotes of the financial statements iii. Loan participations and syndicated loans. FASB exposure draft proposes maintaining loan loss allowance accounts with changes flowing through to earnings. amount in LLR goes up b. Difficult to determine at times. depending on market. Regulators want LLR tied to experience with troublesome loans i. “market-to-market” accounting a. the amount comes out of LLR v. Fair Value Accounting.. firms are sometimes forced to determine “exit price” if they were to be sold in the current market (which has its own difficulties. C.. but under that you can go up and down ii. subject to loan loss reserve amount. iii. Revolving Credit (revolvers)  line of credit that can be drawn down by borrower. GAAP sets outside limit but management discretion within these limits c. and so on . current accumulated LLR over time ii. Two main types of commercial loans that banks make: i. set LLR based upon GAAP ii. Compare revolvers and term loans to consumer loans i. amortizing  paying some interest and some principle on these ii. Commercial lending concerns. consumer analog to term loan is a home mortgage loan a) why? payable over fixed time and payments of both principle and interest and used to finance a hard asset ii. 31 .. Current accounting rules report loans expected to hold to maturity at their amortized cost. when a loan loss is actually experienced. Aka “mark-to-market” ii. Fair value is recourded in Other Compensation Income (OCI). b. i.basically management can use this as cookie jar to get income by decreasing it or lowering income by increasing iii. more frequently than revolvers have fixed interest rates iii. consumer analog to a commercial line of credit? ii. typically used to finance a companies working capital (capital used in day to day operations accounts receivable is one piece of working capital) iii. 1. SEC doesn't like these accounts to be manipulated  they want disclosure ii. goes up and down by what happens to ALL on income statement iv.. joint rule issued by all regulators: i. bank regulators would rather see big LLR's in case of loan losses iii.

while still selling participations. these are for really big loans. purchaser represented in this document that it made its own credit decision when it bought the participation.each lender is a member of the syndicate and a party to the loan documents. lead bank retains the servicing of the loan when it sells off participations and gets to collect fees on these services offered ii. Facts  D had line of credit with Integrated. circuit court affirms a) Reves test  held that if the note in question bore a family resemblance to a nonsecurity then not covered by securities law b) 4 part Reves test: aa. motivations that would prompt a reasonable buyer and seller to enter into the transaction  court found motivations to be the promotion of commercial purposes rather than the investment in a business enterprise bb. Loan participations  the loan is negotiated between the borrower and the lead lender. The lead lender subsequently sells a percentage of the loan that has already been made to one or more participants. Loan syndications . i. Banco Espanol – example of participant trying to create a securities law violation i. Issue  one definition of security is a note or certificate of participation of a note .failure to disclose ii.to the borrower and to the lead lender ii.can do this through loan participations and syndications i.typically syndicated deals are very large borrowings and a few large banks a) the companies borrowing that much money are dealing with a small number of banks that can meet these needs b) so these banks get into pattern and they have template documents they all use c) the larger the loan the more likely to be unsecured  so creditworthy they can get a bunch of money on an unsecured basis iv. trial court through them out because not security but merely buying participations in commercial loans iv. Integrated went into bankruptcies and investors sued on the theory that there had been a securities violation . D sold these loans to institutional investors who signed master participation agreement which set forth the terms of participation. Lead bank only name on loan documents iii. the plan of distribution of the instrument 32 . pursuant to participation agreement and certificates lead bank sells off pieces iv. Loan participant is considered to have a double-risk exposure . bigger than participations ii. small banks are more likely to manage its lending limits than big banks a) smaller bank may have a lower limit to manage but a big customer who needs a lot of money  so they have to sell off to diversify risk or get down under limit ii. if booking loan and simultaneously sell off participations can get around lending limit because you never have more than legal limit of exposure because selling down at the same time iii. i. a) credit card or home equity line of credit (typically these don't require payment of principle) large commercial loans  banks want to lay off some risk of these loans .is this loan participation a form of note that is subject to securities laws like disclosure? iii. The borrower has a direct contractual relationship with each member of the lending syndicate. D cut off Integrated when they got in trouble. syndications  big banks . question on 324 #2  small banks or large banks going to participate in loan participations? i. banks get together at the front end and all are on documents iii.b.

association to purchase these mortgages  became Fannie Mae 1) partly owned by government and private 2) purpose of Fannie Mae was to buy insured home loans and pump money into home loan market iii. buyers wouldn't buy loan based on underlying credit alone. does this in two ways: aa. a. Va and FHA loans. FHA created national mort. Banks and thrifts addressed this risk by selling these loans in the secondary market or securitizing them c. Fannie Mae issues MBS in exchange for pools of mortgages from lenders .the lenders can in turn use that money to make more mortgages to home buyers bb. risk is especially bad in mortgage lending because most loans are fixed rate and long term (30 years) ii. Secondary loan market. Fannie Mae pays cash for mortgages and hold these in a portfolio . contract specifically prohibited the resale of the loan participations without written permission . exempt from SEC registration. they are widely viewed as having an implicit government guarantee d.. existence of another regulatory scheme (or some other factor) significantly reduces the risk of the instrument  court hung its had on 4th part that OCC regulated these and was not treating it as security decides more like loans than securities 2. Talking about loans where simple paradigm is bank loans money to borrower i. to include: 33 . dd. Back in depression FHA stepped in and began to insure loans made by private lenders to make these loans more marketable i. conventional nonguaranteed loans.)  function of Ginnie is not to buy mortgages but to guarantee MBS  serves role as guarantor of MBS issued by approved institutions 2) Fannie is a public company (3rd largest financial co in world)  Fannie buys mortgages and not limited to those loans of special government programs  purchases loans on multi-family homes. they needed reassurance ii. Banks and thrifts are vulnerable to interest rate risk due to mismatch between short term floating rates all deposits (liability) as opposed to long term fixed rate loans (asset) i.. Dodd-Frank § 1074 requires Treasury to submit a report to the Senate Banking Committee and House Financial Services Committee on options for ending the government conservatorship of Fannie Mae & Freddie Mac while minimizing costs to taxpayers.prevented sale to general public the reasonable expectations of the investing public  sophisticated buyers who knew these were loan participations and not investments in a business dd. 1968 divided into two companies  Ginnie Mae and Fannie Mae 1) Ginnie is owned by government (w/I Dept of Housing and Urban Develop.  Fannie Mae also securitizes mortgages by issuing MBS  seeks to ensure that money for mortgages is available to home buyers. line of credit at Treasury. not subject to state and local taxes  because they have these characteristics. secondary loan market gets more complicated 1) secondary market  market for loans that have already been made 2) loans are assets to banks and assets can be sold 3) oldest market and largest secondary market is the one for mortgage loans b. second mortgages. .this provides lenders with a more liquid asset they can buy or sell (traded on Wall Street)  Both are considered GSE's  special type of entity -federally chartered. cc.

Freddie Mac was formed i. Securitization. Any other measures deemed appropriate by the Secretary of the Treasury. put the pool of loans into trust and this trust issues certificates bought by public 1) interests are called MBS 2) secured in payment of these assets 3) like bonds.i.formula driven credit scoring and credit monitoring are now used but these loans are problematic because they are not as homogeneous as mortgage or retail portfolios b. i. Freddie and Fannie are able to raise money at lower rates than competing financial institutions (b/c their debt is less risky because of the implicit federal guarantee) 3. increasing secondary market liquidity. Mortgage-backed securities. Dissolving Fannie & Freddie into smaller companies v. i. Incorporation of functions into Federal agencies iv. Also provide flexibility because their payment streams can be structured to meet investors' particular needs 3) Borrowers  increasing availability of credit on terms that lenders may not have provided had they kept the loans on their balance sheet v. debt securities that have interest rate on them and they are secured by the loans in the pool . businesses began to collateralize non-mortgage assets like auto loans. e. in 1970. Freddie Mac pumps money back into primary market . doesn't have to be guaranteed by FHA or VA iii. package the loans into pools and issue securities backed by these loans iii. Growth in securitization 1) First. Both Freddie Mac and Fannie Mae are regulated by the Office of Federal Housing Enterprise Oversight (OFHEO) within the Dept of Housing and Urban Development i. Gradual termination of such entities ii. 2) Next moved into bank credit card . which are issued by Ginnie May approved financial institutions 1) because of guarantee. As GSE's.showed that if the yields were high enough. loan pools could support asset sales with higher expected losses and administrative costs than in the mortgage markets 3) Future area of growth will be in commercial loan securitizations . investors are assured timely payment of principle and interest that is due 34 . a. Ginnie Mae guarantees securities backed by pools of mortgages called MBS.gives banks money back so they can lend again f. buy conventional mortgages from federally insured financial institutions and packages them into securities that can be sold to investors ii. In general. same theory  through its securitization process. Privatization of such entities iii. both Freddie and Fannie securitize their loans ii. and generally more protection by way of collateral overages and/or guarantees. Benefits of Securitization 1) Originators  improves return on capital by converting an on-balance sheet lending business into an off-balance sheet income stream that is less capital intensive (Banks) 2) Investors  securitized assets offer a combination of attractive yields.and Freddie and Fannie guarantee payment of the interest rate even if mortgages aren't paid back 4) so Freddie and Fannie subject to the interest rate risk  falling rate  everyone in pool refinances and that loan goes out of pool and these MBS have fixed guaranteed rate for long term  so Freddie and Fannie have to step up  SEE Page two of handout on securitization iv.

The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. the credit rating of the SPE will allow it to borrow funds from the investing public at a lower rate than Bank A would get on its own. called tranches. Collateralized mortgage obligations. say Bank A wants to raise $100 million of lending activities over the next 9 months. auto loans. but here are two: aa. It has a number of options. Results in substantial savings. 2) Payments occur monthly and are called "modified pass-through payments"  money is passed from the borrower through to the investors  It is modified because if the amount collected from the borrowers is less than the amount due. The SPE then issues securities and through this structure (bankruptcy remoteness) and use of large pool of loans (statistical analysis). Ginnie Mae will make the payment to the investor (backed by FFC of US government) ii.c. structured so that there are several classes of bondholders with varying maturities. Collateralized mortgage obligation (CMO)  a security backed by a pool of pass-through rates. a. idea with bankruptcy remote is that if originator fails (bank) want pool of contracts far enough away that they can't be brought back to originator in bankruptcy 3) bank will put assets in this SPE and this entity will issue securities to public and from these the bank is paid for the assets 4) trust is set up is to issue the certificates 5) bank often times retains the servicing rights to the loans: fee generating device 6) now moving to do this for other people (beyond bank's own assets like credit cards.. The separation of originator from receivables through securitization. Because securitization is a way to recover your capital after you make a loan – it is a thing banks want to do as well  not limited to GSE’s 1) banks wanted to get involved and have assets that lend themselves to securitization  what they don’t have is a government agency securing payment. 2) so banks have had to develop ways to accomplish the marketability of these things what they came up with is this:  take pool of assets that has large # of loans in it so that is has predictable characteristics  take that pool and put it in a trust or limited purpose company that is not technically owned by the bank (IMPORTANT)  has to be bankruptcy remote entity (also called SPE's) aa. allows bank to obtain this $100 million from the SPE in exchange for a pool of loans. company that owns asset stream that can't be pulled back to the bank in bankruptcy  have to separate risk of SPE from the bank/originator bb. It can issue bonds worth $100 million at say 10% to public investors bb. . ) structure of these get more complicated (chart in handout) 7) As a result of this securitization with regard to credit rating  better than what the originator would have gotten  this happens through isolation of assets and securitizing them  these rating translate into interest savings  For example. often worth billions of dollars 2) Each pool of home mortgages generates two streams of income:  First stream is the aggregate of all interest payments made on the underlying mortgages 35 . i. another way mortgages are securitized  not buying an interest in pool but they are derivatives ii. 1) CMO issuer begins with a large pool of home mortgages. the issuer modifies the pass-through to add on an amount from its corporate funds to make the payment complete  If the issuer fails to make the payment..

if not sale then you have retained interest that comes on BS v. lower cost of funds than through bank loans and debt issuance . Greater availability of credit to a broader cross-section of the population 3. An increase in the average riskiness of consumer loan portfolios. General purpose credit cards 36 . get stuck with value of retained interest iv.. bank may.. Second stream is the aggregate of all principle payments made on the underlying mortgages 3) These income streams are divided into numerous CMO "tranches" which are sold to investors 4) To determine what portion of the two income streams are received by an investor. flexible and economical forms of funding for institutions that need money. you lose control of assets when you sell these What is the point of all this? i. iii. CMO's can be risky in unstable interest rate environments v. This puts more money into primary mortgage market that allows for more loans at lower cost to borrowers. Negatives of the consumer lending revolution a. Higher debt loads b.d. in order to get rating it needs. even allows banks to make loans to lower income borrowers that they normally wouldn't make if they had to keep loan on its balance sheet  I. Can be very expensive way to do this in terms of transactions costs  so complex ii. Congress and state legislatures have adopted a number of laws to protect consumers from overreaching. the expected maturity of the support tranche CMO increases Other asset-backed securities. 4. 2. i. f. Most important  get capital back and get assets off of the balance sheets (has to do with capital requirements to support assets you have – getting them off BS lowers capital requirement)  if you can treat transfer of assets as a sale for accounting purposes . lots of types of assets you can securitize: 1) auto loans 2) auto leases 3) credit cards 4) Sallie Mae provides secondary market for student loans Special concerns related to securitizations by banks. each tranche has two unique formulae:  one that determines the tranche's interest rate  one that determines the tranche's repayment priority aa. this determines when the tranche will receive principle payments made on the underlying mortgage 5) CMOs were particularly hard hit for a number of reasons  Rise in rates extends average maturity of all CMO's  Called "extension risk"  when interest rates rise. Deregulation b. e. If not treated as true sale. Consumer Lending Revolution – Overview 1. i. Positives of the consumer lending revolution a. affords company access to capital markets and to institutional investors iv. Five significant trends the FDIC believes led to the revolution a. CONSUMER LENDING A. have to put up some kind of credit enhancement and this has cost associated with it iii. alternative to borrowing ii.

Omaha Bank was located in Nebraska and can therefore charge the higher Nebraska rate to Minnesota customers. BCFP can regulate nonbank entities that market similar products the same way it regulates their bank competitors. b.c. ii. Securitization B. and intended for them to be able to charge more if by the laws of the state more may be charged by natural persons. Reasoning – borrowers need protection from lenders.C. National Banks a. Pricing according to risk. (12 U. a. The Act has been subject to much interpretation c. Some states do not limit the rate of interest that may be charged on a loan i. Market competition is not enough protection 2. except so far as it fixes a maximum rate in all cases where state banks are not allowed a greater rate. Section 85 allows national banks to charge rates of the state where it is located. State laws offering greater protection to consumers than BCFP rules are NOT preempted. Holding i. the Farm Credit Administration. Nebraska law allowed interest rates of 18% and Minnesota law allowed 12% iii. Some states do limit the rate of interest that may be charged on a loan i. Reasoning – regulation is not needed in a market based economy d. BCFP will regulate the offering and provision of consumer financial products or services under the federal consumer financial laws c. Tiffany v. Holding  Congress intended for national banks to charge such interest as state banks may charge.S. when the rate is higher than allowed by the state of the bank’s non-resident customers? c. i. so the issue here turns on whether Omaha Bank is located in Nebraska. the CFTC. and some automobile dealers e. The impact of the Dodd-Frank Act on the Revolution 1. The Act created a Bureau of Consumer Financial Protection (“BCFP”) a. General Rule – a national bank may charge the rate of interest allowed in the state where it is located. iii. not a restraining one. Marquette National Bank of Minneapolis v. Reasoning  The Act is an enabling statute. § 85). National Bank of Missouri i. and e. such as entities regulated by the SEC. 3. Issue  If MO law limits interest to 10% to all persons. then what interest can a national bank charge under the National Banking Act. in addition to disclosure of interest rates. except state banks can only charge 8%. Issue  Does Section 85 of the Act allow a national bank based in one state to charge its out-of-state credit card customers an interest rate on unpaid balances allowed by its home state. Modern usage equates usury with the charging of excessive interest as that has been defined by state regulation c. Most rulemaking authority of the federal laws discussed in this chapter is transferred to the BCFP d. C. In general a. Headed by an independent director appointed by the President and confirmed by the Senate. Usury regulation relates to the amount of interest a lender may charge a borrower b. Omaha Bank was issuing credit cards to customers in Minnesota. And it will oversee enforcement of laws requiring nondiscriminatory access to credit for individuals and communities i. Credit scoring d. b. b. First of Omaha Service Corp. ii. 37 . The Dodd-Frank Act exempts a number of entities from the BCFP’s authority. Usury 1. Facts i.

Citibank (South Dakota) a. Benion bought a satellite dish from Superior Satellite. Holding  the Comptroller of the Currency’s definition of “interest. Petitioner was a resident of California that held a credit card by a national bank (Citibank) located in South Dakota. Open-End vs. E. Issue 1) Were the disclosures made to the users.A. Prior to the Dodd-Frank Act these TILA regulations were collectively referred to as “Regulation Z” but now Dodd-Frank transfers TILA rulemaking authority to the BCFP. Note  this case was decided BEFORE Smiley and under a comparable provision to Section 85 that applies to state banks b. and if so then the competing Massachusetts law would be preempted and the Discover Card provision would be acceptable? d. concerning the cost of credit in violation of the TILA? 2) If the credit card was “closed-end” instead of “open-end” then there would be a violation iii. Benion v. i. but not nationwide c. but not by California law. and Mrs. The Discover Card charged a default fee that was allowed in Delaware. The late fees on petitioner’s card was permitted by South Dakota law. ii. Background a. Smiley v. making available a line of credit. Issue  does the Marquette holding apply to late-payment fees that are lawful in the bank’s home state but prohibited in a state where a cardholder resides? d. Holding  “interest” includes late fees and therefore state law is preempted and the Discover Card fee’s are allowed. c.  Dish price = $3000  Programming = $1000/year 2) Benion’s issued an EchoStar credit card with a limit of $4500 3) The first use of the card must be for the dish 4) Interest rate on an unpaid balance was 19%. or lack thereof. “interest” includes compensation for extending credit. 2. Dayton. b. Closed-End Credit a. Holding 1) the defendant complied with the letter of the law but regulatory changes are needed to close this loophole ii. Truth in Lending Act (“TILA”) 1. which was disclosed 5) The total finance charge roughly equaled the dollar amount of the interest that the credit card holder would incur if the debt were paid off at the minimum rate permitted. Issue  does “default fees” or “late fees” fall under the definition of “interest” under 12 USCA Sec. Commonwealth of Massachusetts a. Greenwood is a Delaware bank that is insured by the FDIC iii.” which included late fees is controlling and therefore the bank may charge South Dakota’s late fees to a California resident i. 1831d.Policy requires this interpretation because the Act was meant to increase competition between state and national banks. Bank One. Greenwood Trust v. N. Greenwood offers an open end credit card (the Discover Card) to customers nationwide. 4. or any breach of condition by the borrower D. (This was NOT disclosed) 6) Became a class action suit ii. Facts i. State Banks – Usury Laws 1. an authorized EchoStar dealer. Facts 1) Mr. 38 . Purpose of TILA is to require creditors to disclose to consumers the true cost of credit b.

3. 3) This is an abuse of the open-end credit provision of the TILA and should be curbed by amending the regulations to specify a minimum ratio of subsequent purchases to original purchases. when no specific costs are stated. b. BUT. And.2) the defendants were trying to evade the TILA requirements by conditioning the first use of the card on the purchase of the big-ticket item and then limiting subsequent purchases to products related to the initial purchase. Prohibits double cycle billing i. Exception = if the cardholder fails to make a minimum payment within 60 days after the due date f. Act now requires card issuers to provide early disclosure of rates and other costs to potential card holders c. The express intent of the Congress in enacting the TILA was to protect the consumer or cardholder against charges for unauthorized use of his CC. Prohibited from increasing the APR in the first year of the account. American Express Co. Extension of TILA c. and to limit his liability for such unauthorized use to 39 . Holding 1) AMEX did not extend a “consumer credit” in this transaction because “consumer credit” only applies to credit extended to a “natural person” and the company in question with the AMEX card is not a “natural person” 2) Therefore AMEX does not have to comply with the TILA billing error provision. Credit card issuers are required to apply the amounts in excess of the minimum payment to the highest interest rate balances d. creditors must now provide advance notice of any significant term changes 15 days prior to the changes taking effect. Late payment deadlines must be shown in a clear manner h. the law does not require any other cost information d. Retroactive interest rate increases are prohibited except in certain conditions i. Koerner i. Law was enacted to amend TILA in 1989 to protect consumers who previously were not receiving full disclosure of the credit terms on their cards until after they had received a credit card accessing the account b. Previously disclosures were hard to comprehend and poorly organized and prevented consumers from understanding the disclosures b. CARD Act prohibits universal default clauses e. except for promotional rates g. Issue 1) What is the proper procedure for the correction of billing errors when both a corporation and an individual officer are liable for the debt? 2) Does the TILA provision concerning the creditors procedure for responding to billing errors apply to this situation? 3) Was a “consumer credit” line extended here which would make the TILA provision apply? ii. Fair Credit Billing Act a. 4. First National City Bank i. Credit Card Accountability. TILA now requires more disclosures when creditors aggressively market their products e. v. Responsibility. Facts 1) Dispute was over $55 2) AMEX never responded to the company’s request to correct a billing error iii. Fair Credit and Charge Disclosure Act a. and Disclosure Act of 2009 (“CARD”) a. Over-the-limit fees are prohibited unless the cardholder opts in 5. Purpose is to protect consumers from hidden and excessive fees i.

Issue: Appellant challenged the regulations issued by the Board of Governors and the Federal Reserve System that implemented the amendments to the Truth in Lending Act concerning openend home equity loans. The index fluctuates with the changes in the interest rate but the margin stays constant at the level set in the HEL contract.. Home Equity Loan Consumer Protection Act (HELC). HELC was a set of amendments to TILA concerning open-end home equity loans. v. 15 USCA § 1635(a). The court believed appellee Board should be afforded the opportunity to explain its position on the issue. a. Inc. ii. the current interest rate iii. They increased in popularity in 1986 when tax reforms made interest deductions on personal loans unavailable except with respect to residential housing indebtedness. The right to rescind the consumer credit contract does not extend to a credit transaction financing the purchase of a home. See Page 380 for list (including debt <$30. the agreements must provide for a ceiling which the APR can’t exceed regardless of the rise in the index. TILA affords a homeowner an absolute right to rescind nay transaction – such as HEL – where the home is taken as. 15 USCA § 1635(d). iv.S. c. Consumers Union of the U. reversed in part. The district court found in favor of appellees. a. D accepted card. ownership of other accounts with the bank. If the TILA disclosures were not properly made this right can extend up to 3 years. interest and other charges with the account  all but loan principle b. iii. HELs differ from traditional mortgage loans that are closed ended  where the borrower takes out the entire sum at the outset and then makes interest and principle payments on that fixed amount over the life of the loan. ii. b. The interest on the amounts advanced under an HEL is known as the APR and is the sum of two elements ii. The appellate court affirmed a majority of the lower court's opinion but remanded the issue of appellee Board's decision to exercise its exception power.a maximum of $50. see 12 USC § 3806 7. 40 . or other attributes. Federal Reserve Board: i. if the use was unauthorized. Damages. i. and remanded for further proceedings when court found it needed to afford Federal Reserve Board great deference in interpreting Truth in Lending Act but remanded issue of Board's use of its exception authority to contravene directly the terms of the authorizing statute. the lender loses its lien on the property which deprives lender of right to foreclose for nonpayment and the lender is required to return all finance. v. Outcome: Appellate court affirmed in part. After rescission. Index  which can be one of several available proxies for the bank’s cost of funds. 15 USCA § 1643  the burden of proof is on the card issuer to show that the use was authorized or. To guarantee the consumer against unlimited rises in the APR. Structure of HELs i. Appellant's dispute centered on the flexibility that banks would have in tailoring loans to particular customers whose high credit rating. no liability for cardholder. Appellee Board asserted that the exception power was appropriately exercised when it required lenders to tell consumers that the percentage rate was offered at a discount and was not the actual rate. ii. Margin  fixed percentage generally designed to cover the bank’s expenses and allow for a profit on the loan. Open-end home equity loans (HELs) are a line of credit secured by their residence. If card issuer fails to comply with certain conditions precedent as set forth in 15 USCA § 1637. ii. iii. unauthorized use happened before card issuer notified. Rights and remedies. Rescission. then the burden of proof is on the card issuer to show that the conditions of liability for the unauthorized use of a credit card have been met. i. that is. …) 6. enabled them to receive more favorable terms.

and therefore did not rely on them.192. When the dish was delivered. 1) GTFC Alabama v. and that plaintiff failed to present evidence to establish a causal link between the bank's noncompliance and her damages.S. The controversy arose from a 1995 amendment which added § 1640(a)(2)(A)(iii) containing higher minimum and maximum awards for closed-end mortgages.i. v. Randolph: Petitioner financing companies' petition for writ of certiorari to the United States Court of Appeals for the Eleventh Circuit was granted in a case involving a trial court order compelling arbitration and dismissing respondent purchaser's claims challenging the parties' financing agreement for the purchase of a mobile home. pursuant to the Federal Arbitration Act violates the TILA. the invoice reflected a higher monthly bill than the newspaper ad had reflected. For actual damages. Nigh 1) Summary: Plaintiff consumer attempted to purchase a truck from defendant dealer.C. and was awarded $ 24. but that the arbitration provision was unenforceable due to iv. 15 USCA § 1640(a)(1) and 15 USCA § 1640(a)(2) TILA provides a ceiling on statutory damages in a class action arising out of TILA to prevent big awards for technical violations  while allowing actual damages to insure people are fully compensated. The United States Court of Appeals for the Fourth Circuit affirmed the award holding that his recovery under 15 U.The lower court had concluded that the trial court's order compelling arbitration between respondent purchaser and petitioner financing companies and dismissing respondent's claims was appealable under 9 U. § 1640(a)(2)(A)(i) was not capped by § 1640(a)(2)(A)(ii).80.. real-property-secured loan at an amount substantially lower than the recovery available when a violation occurred in the context of a personal-property-secured loan or an open-end. ii.S. real-property-secured loan. Koons Buick Pontiac GMC.S. i. Greentree  Two cases that deal with the issue of whether an arbitration agreement in a consumer credit contract. iii. The credit card came with a disclosure statement. which may be assessed in addition to any actual damages. therefore. and (3) it would have been strange for Congress to cap recovery in connection with a closed-end.C. and the credit card had an additional balance. 41 . 1) TILA empowers the Federal Trade Commission as its overall enforcement agency 2) TILA imposes criminal liability on persons who willfully and knowingly violate the statute. plaintiff bought a satellite dish system that was to be financed by defendant bank through a credit card agreement.S. § 1601 et seq. "under this subparagraph" in § 1640(a)(2)(A)(ii) applied to all of § 1640(a)(2)(A). and the word "clause" was generally used for a subdivision preceded by a lower case Roman numeral. The Fourth Circuit's holding created a split with the Seventh Circuit which had previously held that the cap on recovery in § 1640(a)(2)(A)(ii) did apply to awards under § 1640(a)(2)(A)(i). § 16 of the Federal Arbitration Act (FAA). TILA provides three remedies for violations of its provisions. It found that plaintiff conceded that she did not read defendant's disclosure statements at the time of receipt.S. 3) TILA creates a private cause of action for statutory damages. Arbitration.S. The circuit court held that detrimental reliance is an element of a TILA claim for actual damages. The dealer filed a petition for a writ of certiorari. He sued for a violation of the Truth in Lending Act (TILA). 15 U. Beneficial Corp  Summary: Prompted by a newspaper ad. (2) there was scant indication that Congress meant to alter the meaning of clause (i) when it added clause (iii) to provide increased recovery for real property loan TILA violations. consumer must demonstrate detrimental reliance in order to be eligible for actual damages  have to be aware of violation and rely on it. c. but plaintiff alleged defendant failed to provide a disclosure statement that complied with the requirements of the law under the Truth in Lending Act (TILA). Inc. Turner 1) Turner v.C. The Court agreed with the Seventh Circuit because: (1) the word "subparagraph" was generally used to refer to a subdivision preceded by a capital letter.

but the appellate court had not passed on it. holding the arbitration agreement was unenforceable. Accordingly. § 16(a)(3) in that it plainly disposed of the entire case on the merits and left no part pending before the trial court. iv. the appellate court considered plaintiff's position and found that plaintiff could not carry her burden of showing that either Congress intended to create a non-waivable right to bring TILA claims in the form of a class action. The appellate court reversed. marital status. SC holds that no showing that Congress intended to create a non-waivable right to bring TILA claims in the form of class actions or that arbitration is inherently inconsistent with the TILA enforcement scheme. However. Markham 42 . ii. Nothing in the text of the TILA or its legislative history would have rendered the arbitration clause unenforceable. age.C. national origin. vi. having made the bargain to arbitrate. But SC holds that there is a difference between availability of class action tool to vindicate a statutory right and possession a blanket right to that tool under any circumstance. What this does is it tells you why you were turned down  Can’t be one of these reasons 2. Reg B implements  requires an adverse action notice to be given when credit is declined b. Equal Credit Opportunity Act (ECOA). SC held in another case that all statutory claims may not be appropriate for arbitrations. In reversing the appellate court's holding. or exercise of rights under the Consumer Credit Protection Act. the risk that she would have been saddled with prohibitive costs in enforcing her statutory rights was too speculative to justify invalidating the arbitration agreement. 1. the appellate court affirmed the district court's judgment. The United States District Court for the Middle District of Alabama ordered the parties to proceed to arbitration. F. race. The court concluded that the trial court's decision ordering arbitration and dismissing respondent's claims for relief was appealable because it was a final decision under 9 U. color. 3) The BCFP cannot restrict a consumer from entering into a voluntary arbitration agreement after a dispute has arisen. iii. Dodd-Frank sec 1028 1) Bureau of Consumer Financial Protection [BCFP] was directed to conduct a study on the use of mandatory pre-dipute arbitration in the connection with offering or providing a consumer financial service. ECOA (15 USCA § 1691-91f) prohibits discrimination in extending credit on the basis of sex.S. only if Congress specifically precluded arbitration in TILA can P get out of bargained for arbitration agreement.S. The question had been properly raised in the district court. the party should be held to it unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue. Accordingly. The court rejected the independent/embedded proceeding distinction for purposes of determining whether a decision was final within the meaning of § 16(a)(3). the Supreme Court explicitly declined to reach plaintiff's argument that the arbitration agreement was unenforceable on the alternative ground that the agreement precluded plaintiff from bringing her TILA claims as a class action. Thus. 2) After conducting the study the BCFP may prohibit or restrict pre-dispute arbitration agreements that are connected with the providing of consumer financial products or services. GTFC Alabama: Plaintiff filed a putative class action against defendants for alleged Truth in Lending Act (TILA) and Equal Credit Opportunity Act violations.  Prohibited Basis’s – can’t discriminate on a prohibited basis a. religion. v. or that arbitration was inherently inconsistent with the TILA enforcement scheme. The United States Supreme Court reversed and remanded to the appellate court. the lower court erred in determining that the arbitration was unenforceable because the record did not contain sufficient information related to respondent's costs if the matter was arbitrated.potentially prohibitive costs. 2) Randolph v. public assistance income. SC notes that TILA specifically mentions class actions as right of P. Thus.

offering checkwriting privileges). The applicant argued that there was sufficient evidence of racial discrimination to withstand summary judgment.12(b)(1)(i).000. Amended the ECOA to require that creditors determine in an application for credit from a small business.000. Dodd-Frank sec 1071: a. typically held by business customers who are precluded from opening interest-bearing transaction accounts. Court held that D treated P’s differently – that is. This info is submitted to the BCFP and may.R. Definition of security in the Act is quite broad – includes “the many types of instruments that in our commercial world would fall with the ordinary concept of a security” Definition of security in the Act provides that an instrument which seems to fall within the broad sweep of the Act is not to be considered a security if context otherwise requires. a.a. Core deposits [430] are stable deposits that are unlikely to leave the bank for a higher interest rate elsewhere. Supreme Court held that CD is different from a debt obligation (a security) because CD’s are subject to extensive federal regulation and deposit insurance – thus unnecessary. Marine Bank v. against defendants. under federal civil rights laws. Demand deposits are non-interest bearing transaction accounts (i. including her expert appraiser's report valuing her home at $ 62. which appraised her home at $ 79.7% of American households do not have bank accounts. 3. Deposits [465] A. Citibank Federal Savings Bank: Plaintiff loan applicant filed a racial discrimination action in the United States District Court for the Northern District of Illinois.14(c). Weaver [467]: Issue: Is a CD a “security” and thus subject to the antifraud provisions of the Securities and Exchange Act of 1934. a black woman. 4. be publicly disclosed.000 loan from the bank. bank and individual employees. whether it is women or minority owned. 12 C.000. Issue: Whether the D’s failure to aggregate the income of joint non-married applicants was a violation of ECOA? b. The applicant obtained a $ 45.F. but was turned down because her home was only appraised at $ 45.F. in the aggregate. The district court granted summary judgment for the bank and its employees. § 202. Under savings account – also MMDA – limited transactional ability b. b. 4. CD’s are only redeemable at maturity when principle and interest are paid to customer.000. Discriminatory Account Policies: Truth in Savings Act [469]: 43 . Banks have been forced to increase their reliance on wholesale funding sources – with higher interest rates that core deposits. but the bank still refused to extend the loan. secured by her home.e. The fact that the bank's appraisal was lower than another appraisal did not create an inference of discrimination. The applicant. proportionally minorities are less likely to have bank accounts 3. Latimore v. the inadvertent failure to comply was not a violation. which is precisely the sort of discrimination prohibited by 15 USCA § 1691(a) on its face. sought a $ 51. Certificates of Deposit *467+: CD’s evidence the deposit of funds in the bank for X period and Y interest rate. refused to aggregate incomes – solely because of their marital status. Lifeline or Basic Accounts [466]: 2009 FDIC survey said 7. Interest bearing transaction accounts available to individual customer are called NOW (negotiable order of withdrawal) accounts. The applicant appealed. CHAPTER SEVEN: Bank Liabilities and Capital I. The court disagreed.R. Types of Deposit Accounts [465] a. She satisfied the bank's standards for creditworthiness. Although the bank was required to retain the notes from the appraisal under 12 C. finding that the McDonnell Douglas burden-shifting analysis did not apply because the applicant's prima facie case lacked any comparison between the treatment of blacks and the treatment of whites. § 202.000 loan at a higher interest rate with another institution. The applicant provided the bank with another recent appraisal of her home at $ 82. They are declining for most banks due in part to customers shifting funds from bank products to higher-yielding investments offered by others. 2.

Holding: San Francisco’s ordinance is struck down 5. the deterrent effect on customer behavior. Crocker National Bank [471]: CA court found that banks imposition of $6 fee for insufficient funds check could constitute price unconscionability. checks written against insufficient funds…). the OCC’s regulation at 12 C. Ninth Circuit ruled that San Francisco’s law is preempted by Home Owners’ Loan Act and the Office of Thrift Supervision regulations which already set limitations on banks ability to collect fees for provision of electronic services a. § 7. 2. and the maintenance of the safety and soundness of the institution. Overdraft fees are interest under Bank Act definition of interest – but that only applies when there is an extension of credit. In setting reasonable non-interest charges and fees. State laws that obstruct. Nationsbank [472]: Issue: whether Overdraft fees from a check drawn on insufficient fees constitutes interest: arguing fees were disguised interest charges. the enhancement of the bank’s competitive position in accourdance with its marketing strategy. Deposit Account Fees and ATM Fees [471]: Banks increasingly rely on deposit related fees as additional sources of income. a.R. c. Section allows banks to profit from these fees as well.R. Looked back at Smiley case and late charges on credit card. 44 . Check 21 [487]: The Check Clearing for the 21st Century Act (Check 21) removes the requirement that banks process and route original checks and permits banks to transfer electronic images of checks. or condition a national bank’s ability to fully exercise its Federally authorized deposit-taking powers are not applicable to national banks. Although the record is unclear on this point.4007(b)(1). deterrence of misuse by customers. Court finds these fees are non-interest and the Bank properly used these factors. Garcia-Harding v. but if they cannot accept a digital image of a check they are required to accept an Image Replacement Document (IRD). Bank ended up settling with all such customers at a multi-million dollar price tag. § 7. which is also referred to as a “substitute check” and is a paper print out of the document’s image. Video Trax v. Biggest source of fee revenue: overdraft charges. Here the fees arise from the terms of the deposit agreement and this is covered by 12 CFR § 7.4002 says a bank can charge non-interest fees if they consider factors like cost incurred by bank. b. Regulation of Deposit Accounts [471]: 1. Check 21 also facilitates remote deposit capture in which a user scans checks it receives and transmits the scanned images to its bank for a digital deposit.4002 requires a bank to consider the costs (including its profit margin) in providing the service. impair. average around $30. 3. Perdue v. 12 C.4002. the Court assumes for purposes of this Memorandum and Order that Bank Midwest's disclosures under Regulation DD provide that Bank Midwest does not require a minimum deposit to open an account.S. OCC again preempting. and Regulation DD promulgated thereunder. Court there said a late fee was an extension of credit and therefore interest. depository institutions are required to disclose minimum balance requirements to open an account. contained in the Federal Deposit Insurance Corporation Improvement Act of 1991. depository institutions must provide certain disclosures to consumers so that they may make meaningful comparisons among depository institutions and informed decisions about accounts at those depository institutions. Banks impose maintenance fees on certain types of accounts and assess fees on extraordinary events (like stop check. 12 U. Check: is a contract in writing by which the drawer contracts with the payee that the bank will pay the payee therein the amount designated on presentation 4. San Francisco [478]: San Francisco tried to enact a city ordinance prohibiting fees for non-depositor ATM withdrawals. B.. Banks are not required to transmit or receive electronic images of checks. Argument: no reasonable connection between cost to bank and fee charged. BofA v. § 4301 et seq.C.F. Bank Midwest [469]: Pursuant to the Truth in Savings Act of 1991. § 7. Among other things. safety and soundness.a.F.

The advantages of remote deposit capture are obvious for the user. A risk, however, is that the user or the bank presents multiple images of the same check for payment. 6. Deposit Interest Rate Regulation [487]: a. After stock market crash in 1929, Congress attempted to quell what it viewed as potentially ruinous competition among banks based on interest rates paid to customers. Congress forbade the payment of interest on demand deposits and placed a ceiling on the rate of interest that could be paid on savings accounts. When inflation exceeded these interest rate ceilings – disintermediation occurred. Customers withdrew their money from banks and put then in places not subject to these ceilings, like MMMF. Congress removed these ceilings in 1980, allowed payment of interest on NOW accounts (not for business customers though). b. CF Industries v. IRS [488]: Cash management services to corporations are big business for banks; Point of this case is an example of cash management see 488 C. Deposit Insurance [490] 1. In General: Federal deposit insurance was enacted in the Banking Act of 1933 to prevent bank panics. Any system of insurance creates moral hazard: taking excessive risks because the loss will not be borne directly by the risk taker, but by the insuring entity. Federal deposit insurance also reduces monitoring of bank by depositors because they are covered by insurance. Allows banks to obtain funds by offering a risk-free rate of return, even as the bank engages in risky behavior. Insurance schemes address moral hazard through risk-adjusted premiums: which were finally introduced for banks federal deposit insurance in 1991. Because most failed banks are bought by other banks, those who have excess of 100k limit usually end up getting repaid. 2. Amount of Coverage [491]: Federal deposit insurance is required for national banks and state member banks. State nonmember banks are not required but all elect to do so. The Emergency Economic Stabilization Act (EESA) that passed on October 3, 2008 temporarily raised Federal Deposit Insurance to $250,000. Then Dodd-Frank made the $250,000 limit permanent in § 335. 3. FDIC Reserves [492]: Prior to 2006, the FDIC was required to maintain a reserve equal to 1.25% of all insured deposits. Dodd-Frank increased the minimum reserve ratio from 1.15% to 1.35% of estimated deposits or comparable asset-based assessment amount. § 334. 4. Deposit Insurance Assessments [494]: The FDIC reserve fund is replenished by deposit insurance premiums referred to as “assessments.” Prior to 1991, banks paid a flat rate of 12 cents per $100 of deposit for deposit insurance. For a twenty year period before the FDI Reform Act of 2006, almost 95% of banks did not pay any deposit insurance assessment because the FDIC held a reserve amount equaled to the required 1.25% of all insured deposits. Dodd-Frank requires the FDIC to amend its regulations to redefine the assessment based upon which it calculates the required deposit insurance premiums from insure deposits to an institution’s average consolidated total assets less its average tangible equity. This change will most likely mean that larger institutions that rely more heavily on non-deposit funding sources rather than smaller institutions will bear a proportionally greater charge for FDIC insurance since the assessment is based on assets rather than deposits. 5. Who is Covered [495]: Deposit insurance is currently provided up to $250,000 per depositor at an institution. Federal Deposit Insurance coverage per person is unlimited. One person who has deposits in excess of $250k can place them at different institutions and will be totally insured. IF the depositor doesn’t do this and has multiple accounts at one institution, the are aggregated for purposes of deposit insurance. Joint accounts: each holder receives up to 250k in deposit insurance. Deposit insurance only applies to deposits: not other products like mutual funds or brokerage balances through a bank affiliate. 6. FDIC Guarantees [496]: Dodd-Frank specifically authorized the FDIC, after consultation with the Fed, to “create a widely available program to guarantee the obligations of solvent insured depository institutions” or their solvent holding companies “during times of severe economic distress” § 1105.



D. Brokered Deposits [496] 1. Brokered deposits come to a bank from a deposit broker who is seeking to split a customer’s deposits among institutions to obtain full FDIC coverage and to earn highest interest rates possible. 2. Called “hot money” because not stable source of funds. Likely to be withdrawn if higher interest rate elsewhere. 3. Gary Plastic Packaging Corp. v. Merrill Lynch [497]: Issue: whether a CD sales program run by Merrill is within the compass of Federal securities laws; Analysis: Marine Bank held that a conventional CD purchased from an issuing bank is not a security under the antifraud provisions of the federal securities laws. Unlike Marine Bank, Merrill is alleged to have characterized the CD created and sold through the CD program as a wholly different from an ordinary certificate of deposit.; Holding: Merrill’s CDs had no protection other than the securities laws 4. FAIC Securities v. U.S. [500]: Deposit brokers assist two types of investors in placing deposits: 1) Large institutional customers to deposit millions of dollars of funds, in CD’s, none of which, in any single financial institution, exceeds the value of 100k—called deposit splitting; and 2) Participating CDs: broker solicits money from small individual investors and then broker purchases a CD. Allows broker to place small investors money in far away bank with higher interest rates. Banks have to be well-capitalized to accept deposits from deposit brokers. E. Set-Off [503]: 1. General rule: when a depositor is indebted to a bank and the debts are mutual (debt and deposits in same name), the bank may apply the deposit to the payment of the debt due by the depositor, provided there is no express agreement to the contrary. Majority rule is that this is at the option of the bank. Mutuality of obligations is the key to set-off rights (bankers’ liens) 2. Minority rule: that if bank holds note, on which there are endorsers or sureties or other parties not primarily liable, bank is obligated to use the depositors funds for the protection of these parties. Some go further and say if bank doesn’t surety is released. 3. Farmers Natl v. Jones [503]: Banks should be given ability to chose to set-off or not – due to customer relationship; Banks have common law right to set-off; Doesn’t apply to trust accounts, IRA accounts, … Social Security Administration had law passed to say F. Escheat Laws [505]: State escheat laws provide that bank deposits, dividends, interest, and securities that remained unclaimed for a certain period of time and after reasonable efforts to find the owner, escheat to the state rather than remain in the hands of the intermediary 1. Delaware v. New York [505]: Supreme Court rejects using principle place of business (although this is state where most of benefits given to customers) as state where money escheats to. Supreme Court holds the money escheats to the state where the financial intermediary is incorporated. Non-Deposit Liabilities [508] A. Federal Funds Bought *508+: Federal funds bought are recorded as liabilities on the bank’s balance sheet representing the bank’s borrowing from another bank’s excess reserves at the bank’s regional federal reserve bank B. Repos [508]: 1. SEC v. Miller [508]: A Repo is a short-term transaction involving a sale with an agreement to repurchase government securities between two financial institutions and carried about by the Fed; Is essentially a short-term collateralized loan; each agreement may also be viewed as comprising two distinguishable transactions, which, although agreed upon simultaneously, are performed at different times: (1) the borrower agrees to sell, and the lender agrees to buy, upon immediate payment and delivery, specified securities at a specified price; and (2) the borrower agrees to buy and the lender agrees to sell, with payment and delivery at a specified future date or, if the agreement is “open,” on demand the same securities for the same price plus interest on the price


a. Why not straight loans? threefold: (1) certain regulations of the Federal Reserve Bank (the “Fed”), which treat repos differently from ordinary loans; (2) a desire to circumvent the U.C.C. requirements and other legal obstacles to using ordinary collateralized loans; and (3) market convention; Why short term? Since reserve deficits and surpluses can often be brief, most member banks prefer to borrow or lend reserves for relatively short periods, usually overnight, which is possible since such loans are effected over the federal wire. 2. Manufacturers Hanover Trust v. Drysdale Securities [514]: Important difference between government securities transactions in (1) the “securities” or “cash” market, in which securities are straight-forwardly purchased and sold at market prices, and (2) the “repo market,” in which government securities are purchased and sold pursuant to repo or reverse repo transactions. In the securities market, the price of a government security, such as a United States Treasury note, includes the market price of a particular issue and the accrued “coupon interest” on the security (i.e., the value of government payments due on the security at the time of the sale). In the repo market, the accrued coupon interest is paid only on the repurchase (or resale) transaction; the initial “loan” of the security is made at a price that includes only the market value of the security. Before the security is repurchased, its price will be “marked to market” periodically to reflect changed value. 3. Orticelli Note on Bear Stearns [516]: Bear's financing structure. As an investment bank, Bear relied on short-term (usually overnight) loans called repurchase agreements (“repos”) to finance its daily activities and liquidity demands. Repos are secured by collateral (including MBS) that the borrowing institution promises to buy back at a specified date and at a specified price, “which typically includes interest at an agreed upon rate.” In essence, because repos were vital to Bear's daily operations, they left Bear at the mercy of lender sentiment. Thus, when the subprime mortgage crisis unfolded, lenders grew more fearful of entering into collateralized loans with Bear given the firm's large exposure to mortgage products. Instead, lenders hoarded their liquidity, uncertain about the health of their own balance sheets and those of their counterparties. “And it was the *eventual+ refusal of Bear's repo lenders to extend overnight loans that confirmed that Bear had a liquidity crisis [in mid-March 2008+.” 4. Note [517]: In this market, a firm holding a security can make money on it (without parting with it for good) by pledging it as collateral for a loan. Due to market convention, the loans are styled as back-to-back purchase and sale agreements, typically for a term of one day that gets rolled over into a longer effective term. The deal liquifies the security by letting the cash borrower convert the security to cash for the term of the loan, thereby enhancing the borrower's own funding liquidity. Especially for investment banks with large securities portfolios, the repo market is one of their most important ways of funding their activities day to day because repo (and reverse repo deals that are the mirror image of the transaction) let the firm reduce the carrying costs of their securities portfolios. 5. Note [518] Dodd-Frank Act on Repos: DFA limits credit exposure for systemically significant financial companies to any unaffiliated company to 25% of capital stock and surplus (or any lower amount set by the Fed). Credit exposure includes repurchase agreements; securities borrowing or lending; guarantees, acceptances, or letters of credit. DFA § 165. C. Bankers’ Acceptances *518+: A bankers’ acceptance is a negotiable instrument issued in the form of a draft, which is simply an order to pay a stated amount of money to the holder of the draft on a specific date; can be “sight” draft payable on presentation or “time” draft payable after a specific number of days 1. U.S. v. Dougherty [519]: A bankers acceptance is a negotiable instrument, governed by 12 U.S.C. § 372 and applicable regulations and rulings of the Federal Reserve Board, which define and interpret the “eligibility” of the financing instrument (Anderson 10). An “eligible” bankers acceptance is one which the Federal Reserve has authority to purchase (Anderson 10). Eligible bankers' acceptances ordinarily, and for purposes of this case, are used to finance shipments of


for that of the account party. impossibility. 613. “*t+he simple result *of a letter of credit+ is that the issuer substitutes its credit. The proceeds of the shipment then are to be used to liquidate the transaction. and then must look to the account party for reimbursement. The shipment must be consummated in 180 days or less. who can collect monies under the letter of credit by presenting drafts and making proper demand on the issuer. credit cards. goods between foreign countries (Anderson 12–13). electronic money A. a loan relationship with the account party arises. An authorized officer then places on the face of the instrument an eligibility clause. Letters of Credit [521]: A bank service which functions as a guarantee of payment. war or insurrection. even though the insolvency of the account party renders reimbursement impossible and notwithstanding supervening illegality.. Credit and Debit Cards [528] 1. the issuer must honor a proper demand even though the beneficiary has breached the underlying contract. 31. Philadelphia Gear Corp [521]: A standby letter of credit backed by a contingent promissory note does not give rise to an insured deposit. T. VISA [528]: As in the case of the check. correlating with the completion of the shipment. It involves: (1) cardholders who use bank credit cards to purchase goods and services. however. pursuant to a prearranged agreement permitting the bank to be reimbursed by the account party on whose behalf the bank issued the LOC. More commonly. and the authorized officer signs or initials the item. The market maintains a high interest in the instrument because it is a secure. 2. This principle of independence is universally viewed as essential to the proper functioning of a letter of credit and to its particular value. FDIC v. and such interpretation is consistent with Congress' purpose in creating federal deposit insurance to protect the assets and “hard earnings” that businesses and individuals have entrusted to banks. (2) merchants who accept bank credit cards in exchange 48 . stored value or smart cards. American Bank and Trust *524+: “*A+ letter of credit involves three parties: (1) an issuer (generally a bank) who agrees to pay conforming drafts presented under the letter of credit. (Anderson 25. debit cards. Second.” First.e. If a bank is called upon to pay a letter of credit. with the bank paying the holder in the face amount upon maturity (Anderson 44–49). the bank sells acceptances at a discount on the secondary market. This has been the FDIC's longstanding interpretation. Significantly. Payment Methods [528]: Demand deposits and NOW accounts.) The bank may choose to hold the acceptance until maturity. the bank credit card system is principally a four-party payment arrangement. National Bancard v. no-risk investment due to the bank's absolute obligation to pay upon maturity. without expectation of resorting to collateral or other security. its certainty of payment. Centrifugal Casting Machine v. The typical transaction involves an exporter who proves in some manner to the bank that he has a given amount of product which will be shipped to a foreign country. He must have goods or a firm contract at least equal to the amount of financing. the issuer's obligation to pay on a letter of credit is completely independent from the underlying commercial transaction between the beneficiary and the account party. preferred by the beneficiary. describing the international transaction in goods which is represented by the acceptance. The bank stamps the word “accepted” on the draft. The bank may then agree to finance for whatever period of time the shipment will require by taking the exporter's promise to pay in the form of a written draft. Note: LOCs are off-balance sheet items until the LOC is paid and a debt obligation is created for repayment by the customer. (2) a bank customer or ‘account party’ who orders the letter of credit and dictates its terms. The document will provide for a given sum to be due on a given date. at which time the customer pays the bank. i. 1. and (3) a beneficiary to whom the letter of credit is issued.III.” The issuing bank thus pays the beneficiary out of its own funds. regardless of the customer's ability to pay the proceeds from the transaction D.

Bank cards (also referred to as “open-loop” cards) provide access to money at a depository institution. which usually has three sub-tracks holding 226 bytes total. in comparison to a mag-stripe card. Within a day. A debit card is an access device which enables a cardholder. When a cardholder uses the card. (3) financial institutions (issuer banks) which issue cards to. which implants a miniature microchip into the card. and (2) bank products. it is a gift card. and contract with. and (4) financial institutions (merchant banks) which contract with merchants to accept the bank credit card and thereafter manage the bank credit card accounts of these merchant clients. The first is the magnetic stripe. A bank card provides access to money at a depository institution that can be access through point 49 . Fees must be reasonable and proportional in relation to the actual costs incurred by the issuer. Wal-Mart causing this. the one-card has found its greatest success in academia. or “prepaid products.” may be divided into two broad categories: (1) Merchant products. In the United States. Holley Note *536+: A “one-card” is a multifunction identification card issued by an institution designed to combine that institution's various card-related functions onto a single plastic card. In the absence of money at a depository institution. the funds are moved from the cardholder's account to the retailer's account. 2. A “smart card” is a traditional plastic card containing an imbedded ultra-thin microchip. the card-issuing institution does not necessarily verify that there are sufficient funds or put a hold on those funds. among other things. and the funds take approximately one to seven days to be moved to the retailer's account.for goods and services. A merchant card (also referred to as a “closed-loop” card) enables the cardholder to collect goods or services from a specific merchant or cluster of merchants. cardholders. the cardholder signs a slip authorizing the purchase (rather than entering a PIN). and the discount fee is based largely on the interchange fee. the cardholder enters his or her “personal identification number” (“PIN”) into a PIN pad and then. no insured “deposit” will exist under section 3(l) of the FDI Act. Approximately sixty-percent of United States checking account customers possess debit cards based on mag-stripe technology. The chip on a smart card typically holds one thousand bytes of data.” In an on-line debit card transaction. the merchant is not paid through a depository institution. In contrast. B. the signature debit transaction fees would be reduced by one third and a $3billion settlement fund. Many smart cards often feature a magstripe in addition to the smart chip. Section 1075 of Dodd-Frank amended the Electronic Funds Transfer Act to direct the Fed to adopt rules defining permissible interchange fees. There are two types of university one-card systems currently in use. the card-issuing institution verifies that there are sufficient funds in the cardholder's account and electronically puts a hold on the funds needed for the transaction. FDIC Opinion on Stored Value Cards [538+: Stored value products. POS debit card transactions can either be “on-line” or “off-line. *see [530] for description of card transaction 2.” The interchange fee is set by Visa and MasterCard. MasterCard and VISA settled the litigation including terms that “honor all cards” would no longer be required. Smart Cards or Stored Value Cards [536]: 1. during the retail transaction. On the contrary. In re VISA/MasterCard Antitrust Litigation [532]: When a cardholder makes a purchase with his or her Visa or MasterCard payment card at a merchant's store.” technology found on the back of all credit and debit cards. The second type of university one-card system is based on “smart chip” technology. or “magstripe. the merchant has been prepaid through the sale of the card. to withdraw cash from his or her bank account at an automated teller machine and to make purchases at a point of sale (“POS”) which are debited against the cardholder's bank account. in an off-line debit purchase. the acquiring institution reimburses the merchant the purchase price less a “discount fee” and the acquiring institution pays the card-issuing institution an “interchange fee.

S. Evolution of Bank Capital Requirements 1. which provides in part: (a)(1) Each appropriate Federal banking agency shall cause banking institutions to achieve and maintain adequate capital by establishing minimum levels of capital for such banking institutions and by using such other methods as the appropriate Federal banking agency deems appropriate.C. C. Bank of Coushatta [550]: Congressional answer to Bellaire. Bank Capital [545]: Regulatory capital requirements impose a limit on the amount of debt a bank may have on its balance sheet by mandating that certain minimum capital levels be maintained. and limits their liability where a breach of security in an electronic funds transfer results in losses. OCC *546+: Unsafe and unsound banking practices “encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder. Electronic payments among institutions in the Federal Reserve System are allowed by the Depository Institution Deregulation and Monetary Control Act of 1980.. (2) Each appropriate Federal banking agency shall have the authority to establish such minimum level of capital for a banking institution as the appropriate Federal banking agency.S..” The *Senate Banking and Finance] Committee's amendment explicitly makes failure to maintain established capital levels an “unsafe and unsound practice.C.” 12 U. 1. Regulation J. Most of these methods are set forth in 12 U. The FDIC is keenly interested in a bank’s capital cushion because if the bank fails the FDIC must pay the depositors and then try to recoup cash from the bank’s assets. A bank’s capital serves as a cushion out of which any losses are taken. That section provides that “any person who fails to comply with any provision of *the Act+ with respect to any consumer. Eisenberg v. Bank cards are treated as federally insured deposits to the extend that the funds have been placed at an insured depository institution. Bisbey v. Thus. Electronic Transfers [539]: the Electronic Funds Transfer Act of 1978 requires customers to be provided with documentation of electronic fund transfers. unambiguous statutory directive to the regulators to strengthen banks' capital positions. except for an error resolved in accordance with section 908. section 915 of the Act.” OCC opinions on safe and sound banking practices are subject to review. failure to maintain the requisite capital “may be deemed by the appropriate Federal banking agency.. Stored value cards are not deposits. however. FDIC v. A. 12 U. § 1818. under the plain terms of the Act. is liable to such consumer” for actual damages or for a symbolic award. including section 908. authority for a directive is found in the International Lending Supervision Act of 1983 (ILSA). § 3907. Wachovia [541]: Bank Non-customer brought negligence claims against Wachovia for bank’s part in fraud perpetrated by bank’s customer. to constitute an unsafe and unsound practice. the agency may issue a directive Purposes: Section 3907 was enacted to provide “a stronger.. If a bank fails to maintain the required capital. in its discretion. (Emphasis added. civil liability attaches to all failures of compliance with respect to any provision of the Act. FNB Bellaire v.) Moreover.. The FDIC's authority to issue capital directives is one of its regulatory tools for dealing with troubled banks.IV. in its discretion.” The amendment requires regulators to demand that institutions below the required capital levels submit and 50 . of sale terminals or ATMs..C. Subpart B preempts all state law claims as to conduct involving Fedwire funds transfers. 2. deems to be necessary or appropriate in light of the particular circumstances of the banking institution. § 3907(b)(1) (emphasis added). b. DC National [540]: Private right of action under EFTA of 1984.S. Inadequate Capital as an Unsafe and Unsound Practice [546] a.

Not fully adopted by the United States a. labeled “Troubled Asset Relief Program” (TARP).adhere to an acceptable plan to achieve prescribed levels. Tier 2 capital consists of a limited amount of the allowance for loan and lease losses. Capital Ratios and the Basel Accord [551]: the Bank of International Settlements through its Basel Committee set an international framework for bank capital standards. Institutions accepting preferred stock investments by the United States also are required to pay quarterly dividends to the United States of five percent per year for the first five years of the investment and nine percent per year thereafter.” 2. In response to this court's decision in First Nat'l Bank of Bellaire. The new Obama administration announced on February 10. intermediate term preferred stock. the Financial Stability Plan . a. banks. Two main improvements: i) put assets into four different risk categories and ii) required certain off-balance sheet activities be included in capital adequacy calculations. non-voting stock in banks under what is now called the Capital Purchase Program (CPP). ii. longterm preferred stock with an original term of 20 years or more. Tier 2 capital includes the allowance for loan losses. and unrealized gains (losses) on other assets 3. and any other investments in subsidiaries that the Federal Reserve determines should be deducted from tier 1 capital. Fed Board of Govs Manual on Capital Adequacy [553]: The risk-based capital measure focuses primarily on the credit risk associated with the nature of banking organizations’ on. Congress was concerned that Bellaire “clouded the authority of the bank regulatory agencies to exercise their independent discretion in establishing and requiring the maintenance of appropriate levels of capital. 2008. were quickly diverted by then-Treasury Secretary Henry Paulson from buying troubled mortgage-related assets held by banks to purchasing preferred. mandatory convertible securities and other hybrid capital instruments.1988 4. Tier 1 capital represents the highest form of capital. cumulative perpetual preferred stock and subordinated debt. Basel I . interest-only strips. disallowed deferred tax assets. it’s the backbone of capital ratios required for U. certain other intangible assets. Contemplates two different capital ratios — Tier 1 capital to riskadjusted assets of at least 4% and a total capital ratio of at least 8%. perpetual preferred stock that does not qualify as tier 1 capital. unrealized holding gains on qualifying equity securities. The $700 billion in funds authorized by Congress in EESA to assist in the financial crisis clean-up. supervisory review. TARP [556]: While the Basel II Accord was being debated the financial crisis occurred and TARP requirements replaced Basel. namely permanent equity and is generally defined as the sum of core capital elements less any amounts of goodwill. Basel II .that would fund additional bank stock purchases under a new program called the Capital Assistance Program (CAP). Tier 1 ratio = 4% b. enacted on October 3.its new name for TARP .and off-balance-sheet exposures and on the type and quality of their capital. 51 . The statute did require that certain executive compensation arrangements for CPP recipients would be limited. i. 2009. and limited amounts of term subordinated debt. Congress' initial legislative response to the financial crisis was the Emergency Economic Stabilization Act of 2008 (EESA).2004 [554]: Based on three pillars—minimum regulatory capital charge. a. and market discipline. nonfinancial equity investments. Total Capital Ratio = 8% 5. Tier 1 capital includes stockholders’ equity. investments in financial subsidiaries that do not qualify within capital.S. preferred stock and retained earnings.

STT. to reduce the likelihood of bank runs and panics 52 . or Tarp 2. BKNY. Basel III [562]: i. New rule says: if merchant capital investment less than 15% of Tier 1.b. 2009. GS. MS. Based on safety and soundness a. Collins Amendment requires BHCs to be subject to the same capital requirements as their FDIC insured subsidiaries—effect is to reduce BHC holding hybrid securities like trust-preferred securities. Small bank exemption? B. 8% charge 2. This gives subordinated debt holders strong incentives to monitor the financial solvency of the bank. Safety and soundness consist of five components: i. “Financial Stability Plan” calls for a “stress test” of the nineteen financial institutions whose assets exceed $100 billion. JPM. AMEX. Trust preferred securities [563] i. a. with commitments of additional capital to those of the large institutions identified as needing additional capital under the stress test scenarios. Some recommend that big banks hold some capital in subordinated debt. Fed: Mandatory Subordinated Debt [566] VIII. A. The Obama Administration's Treasury Secretary Timothy Geithner announced on February 10. Fed must stress-test all systemically significant institutions under a range of scenarios a. Bank supervision 1. Believed to be much more straight-forward. Interest rate charged to bank would seem to be a good proxy for market’s judgment regarding the riskiness of this institution’s practices. GLBA authorized this for financial holding companies but initially wanted 50% capital charge. ABCP program assets that are consolidated onto the bank’s balance sheet under GAAP may no longer be excluded from the bank’s risk-based assets 3. a. and BBT were allowed to repay their TARP loans 6. 2009. Repayment: on June 9. Stress tests [559]: 5 banks required capital injections. d. Merchant Banking *565+: bank’s ability to hold equity in companies that are not publicly traded. seemed to restore market confidence e. AND FAILED BANK RESOLUTION. the outline of the administration's plans for the use of the second tranche of TARP funds authorized in the EESA. Minimum Total Capital . Securitizations [565]: Banks sponsoring asset backed commercial paper programs are allowed to exclude those ABCP program assets consolidated from the sponsoring institutions risk weighted asset base for determining capital. SUPERVISION. Financial Crisis and Basel III [561]: Change of focus from Basel II to Basel III—turned from reducing capital requirements for large complex banks based on their ability to model internally to requiring more and higher quality capital a. These institutions account for approximately two-thirds of all bank holding company assets. Federal deposit insurance. Special Issues [565]: 1. Subordinated Debt [566]: borrowings by the bank – debt bank (issuer/borrower) owes to one creditor (purchaser) that is contractually subordinated to the claims of other creditors. Fed required to limit the leverage of systemically important financial companies to 15 to 1. Dodd-Frank Act [562]: Created FSOC. FSOC to make capital recommendations to the Fed. Fed is directed to required countercyclical capital requirements so that the amount of capital required to be maintained by a company increases in times of economic expansion and decreases in times of economic contraction. Tier 1 . FHC’s complained this would discourage activity because too costly.8% with 2. c.5% added in periods of growth 7. ENFORCEMENT.increased from 4% to 6% ii.

Regulatory monitoring. 53 . Four major purposes of bank examination a. and severely adverse scenarios a. Gives examiners understanding of the nature. created by Dodd-Frank. for baseline. Protecting the financial integrity of the deposit insurance fund d. e. CAMELS Rating System 1. well-managed banks may only get examined once every 18 months. Savings institutions = OTS (Office of Thrift Supervision) examines…now the OCC e. recommendations and instructions 2. have no fraudulent activities. to reduce the costs of bank deposits and weaken banks’ incentives to invest in risky assets iii. Banks are required to submit quarterly financial date to their regulator. and ultimate cause of a bank’s problems. Bank holding companies = Fed…Fed also has regulatory authority over BHC’s nonbanking subsidiaries 5. and highest supervisory concern) c. Bureau of Financial Consumer 6. with 1 being the highest rating and 5 being lowest (indicating weak performance. and thus provides a factual foundation to soundly base corrective measures. has broad enforcement powers over non-depository subsidiaries of depository holding companies B. Bureau of Consumer Financial Protection. Assigned composite and component ratings are disclosed to the institution’s board of directors and senior management ii. 12 USCA §161(a)&(c) [national banks]. relative seriousness. For companies under 10b in assets. National banks = OCC examines b. and have competent management iv. have sufficient capital given their risk. Portfolio restrictions to prohibit investment in risky assets 2. Capital requirements to provide incentives for banks not to take excessive risk v. Periodic on-site examination provides the best means of determining the bank’s compliance with laws and regulations c. 1817(a)&(c) [state banks] 3. inadequate risk management. Gave the Fed umbrella supervision over FHCs c. however 4.g. State member banks = FDIC and state regulatory authority alternate c. Uniform Financial Institutions Rating System (UFIRS) a. to ensure that banks do not invest in excessively risky assets. Each composite is scored from 1 to 5. FUNCTIONAL REGULATION authority b. Dodd-Frank gave Fed additional regulatory power over nonbanking/non-depository subsidiaries of FHC 7. Each financial institution is assigned a “composite” rating based on an evaluation of six essential components of financial operation b. Composite rating is NOT derived by computing an arithmetic average of the component ratings…each component rating is based on qualitative analysis of factors and their relationship with other components…some components may be given more weight than others depending on the situation at the institution d. Maintenance of public confidence in the integrity of the banking system and in individual banks b. Dodd-Frank requires banks with assets over 10m to get annual internal stress testing. Banks usually get an on-site examination once a year…some small. adverse. State non-member banks = Fed and state regulatory authority alternate (as long as FDIC has certified the state authority as providing good exams) d. GLBA a.Deposit interest ceilings.

Composite 1 – financial companies in this group are sound in every respect and generally have components rated 1 or 2…any weaknesses are minor and can be handled in a routine manner within the company f. concentration risk. Balance sheet composition. monitor. and control such risks…evaluation based partially on the effects of credit. and risks associated with nontraditional activities v. and control risks of an institution’s activities and to ensure the institution’s safe. monitor. measure. no component ratings worse than a 3…only moderate weaknesses are present and are well within the institution’s capabilities and willingness to correct (most well-maintained banks get this rating) g. markets. as well as past experience in managing growth viii. issuer. CAMELS components (these are the components that examiners evaluate in developing their composite ratings) a. including the nature and amt of intangible assets. as well as off-balance sheet activity…also reflects ability of management to identify. Capital Adequacy – expected to maintain capital commensurate with the nature and extent of risks to the institutions and ability of management to identify. the magnitude of deficiencies generally will not cause a component to be rated more severely than a 4…management may lack the ability/willingness to correct weaknesses within appropriate timeframes h. Composite 2 – financial institutions in this group are fundamentally sound…generally. and risk profile…greatest supervisory concern…volume and severity of problems are beyond management’s ability/willingness to correct 3. and other assets. and other risks…capital adequacy is rated based upon: i. including support provided by a parent holding company b. Quality and strength of earnings. and reasonableness of dividends vii. Composite 3 – financial institutions in this group exhibit some degree of supervisory concern in one or more of the component areas…they exhibit a combination of weaknesses that may range from moderate to severe…however.e. and control credit risk…evaluation of asset quality should consider the adequacy of the allowance for loan and lease losses and weigh the exposure to counterparty. sound. Access to capital markets and other sources of capital. complexity. other real estate owned. or borrower default under actual or implied contractual agreements c. Nature. Risk exposure represented by off-balance sheet activities vi. Ability of management to address emerging needs for additional capital iii. to identify. and volume of problem assets. Management – reflects the capability of board of directors and management. monitor. measure. Asset quality – reflects the quantity of existing and potential credit risk associated with the loan and investment portfolios. measure. Composite 5 – financial institutions in this group exhibit extremely unsafe and unsound practices or conditions…exhibit a critically deficient performance and often contain inadequate risk management practices relative to the institution’s size. Composite 4 – financial institutions in this group generally exhibit unsafe and unsound practices or conditions…there are serious financial or managerial deficiencies that result in unsatisfactory performance…problems range from severe to critically deficient…weakness are not being satisfactorily addressed or resolved by management i. Level and quality of capital and overall financial condition of the institution ii. trend. market risk. Prospects and plans for growth. and efficient operation in compliance with applicable laws and regulations…directors need not be involved in day- 54 . and the adequacy of allowances for loan and lease losses and other valuation reserves iv. in their respective roles.

or by high levels of market risk that may unduly expose an institution’s earnings to volatility in interest rates…quality of earnings may also be diminished by undue reliance on extraordinary gains. nonrecurring events. Also done to evaluate strength of insurance coverage 5. liquidity 55 . but they must provide clear guidance regarding acceptable risk exposure levels and ensure that appropriate policies are in place…senior management is responsible for developing and implementing policies that reflect the board’s goals and risk limits d. Sensitivity to market risk – reflects the degree to which changes in interest rates. improperly executed or ill-advised business strategies. Other subsidiaries c. and limits iii. nature and complexity of activities. liquidity shouldn’t be maintained at a high cost. Earnings – reflects not only the quantity and trend of earnings. Parent d. or through undue reliance on funding sources that may not be available in times of financial stress f. institutional size. but NOT SHARED WITH INSURANCE COMPANIES C. CAMELS ratings may be shared with management and directors. Earnings e. Earnings iv. or favorable tax effects…future earnings may be adversely affected by an inability to forecast or control funding and operating expenses. Liquidity – reflects current level and prospective sources of liquidity compared to funding needs. Risk monitoring and management information systems iv. or equity prices can adversely affect a company’s earnings or economic capital…consideration given to management’s ability to identify and control market risk. but also factors affecting the sustainability or quality of earnings…excessive or inadequately managed credit risk may result in loan losses and require additions to the allowance for loan and lease losses. commodity prices. Asset quality iii. Risk management i. or poorly managed exposure to other risks e. and adequacy of its capital and earnings in relation to its level of market risk exposure 4. Capital 3. Financial condition i. Capital ii. BOPEC system did NOT emphasize risk management 4. Old Fed components for rating BHC (BOPEC system): a. and risk profile…funds management practices should ensure that an institution can maintain a level of liquidity sufficient to meet its financial obligations in a timely manner and fulfill community banking needs…should reflect institution’s abilities to manage unplanned changes in funding sources or ability to quickly liquidate assets with minimal loss…also. Holding company regulation/rating system 1. Bank subsidiaries b. New Fed components rating system of BHC (RFI/C(D) system): a. as well as the adequacy of funds management practices relative to the institution’s size.to-day operations. Internal controls b. Policies. foreign exchange rates. procedures. complexity. Fed ratings tend to emphasize RISK MANAGEMENT in supervision of any BHC 2. Board and senior management oversight ii.

Extended bank regulator's jurix to individual. and "others participating in the affairs of the institution. leverage. agents. Regulator's effort to persuade the bank to undertake more rigorous practices ii. Potential impact of parent company and nondepository subsidiaries on subsidiary depository institutions d. Systemically Significant Financial Institutions a. FDIC was given back up enforcement authority over all federally involved depository institutions (FDIC has yet to use this authority) iv. 1966 – Financial Institutions Supervisory Act (FISA) i. appraisers. entering conservatorship/appointing a conservator to run the institution.) b. Each BHC is assigned a composite rating (C) based on the above factors…each subcomponent rating is assigned based on the 1-5 numeric scale 6. 1989 – S&L crisis – Financial Institutions Reform. officers. AIG) AND large. etc. and they must prepare bank resolution plans (aka “living wills”). Gave federal regulators the authority to issue cease and desist orders and modified the regulator's removal powers…extended power to cover national and state banks c. Allows actions to be brought against institution AND affiliated parties – accountants. Consolidated enforcement authority previously found in FDIA iii. 1978 – Financial Institutions Regulatory and Interest rate Control Act (FIRA) i. directors. officers. ii. interconnected depository institution holding companies with consolidated assets in excess of 50b b. internal stress tests twice a year e. 1974 – Fed received similar authority over BHCs d. Fed gets supervisory authority over these companies now under Dodd-Frank…now requires higher prudential standards for capital. etc…expands powers to outsiders 56 . Financial Stability Oversight Council is charged with identifying systemically significant financial institutions. Dodd-Frank establishes office of Complex Financial Institutions (CFI) to provide continuous review of SSFI and BHC with more than 100b in assets…also gives FDIC expanded examination authority over systemically significant financial institutions regarding orderly liquidation of such institution D. Before 1966. regulators had 2 powers: i. Fed regulators could also use civil money penalties (CMPs) e. Authorized the Resolution Trust Corporation – receiver of a failed banks ii. Moral suasion ("jawboning") 1. History of enforcement activities a. lawyers. which will provide a roadmap for a rapid and orderly resolution of the company in case it fails d.c. Ending existence of bank (revoking charter. SSFI also have to conduct their own. SSFI now subjected to annual stress testing. ending FDIC coverage. Dodd-Frank explicitly states that the Fed’s exams of depository holding companies and their subsidiaries should inform the Fed about risks to the stability of the national financial system 7. and Enforcement Act of 1989 (FIRREA) i. employees. receivership. The "death penalty" 1.g." Just people within the institution. Enforcement powers 1. Depository institution (mirrors the primary regulator’s assessment of the subsidiary depository institutions) 5. liquidity c. which includes both nonbank financial companies (e. Recovery.

Consent Order 1. Formal enforcement mechanisms i. criminal investigations and proceedings by DOJ. Temporary Cease and Desist Order 1. attorney. Informal supervisory and enforcement actions i. Provided authority for attachment and injunctive relief g. Also. In the 2000s. increased enforcement activity by the SEC. and agents. Examination Report ii. take action to correct the adverse conditions of such activity. joint venture partner. 57 . put a ceiling on their potential liability. An order by the regulatory agency to cease and desist 3. controlling shareholders. Cease and Desist Order 1. and to move forward with reputations intact j. 1992 – Annunzio-Wylie Money Laundering Act of 1992 i. or draft a memo of understanding (MOU) c. or require written commitments from bank's management to address identified problems. but it is imposed on an involuntary basis after issuance of a Notice of Charges. a hearing before an administrative law judge. and a final decision and order issued by the agency 2. Violations of consent orders can result in civil money penalties (CMP) against directors and other affiliated parties iii. Separate grounds for removal of officers and directors involved in money laundering i. Interim order issued by agency used to compel immediate action pending resolution of cease and desist order f. May require offender to cease and desist from the identified activity. but can also including ANY shareholder. Purpose was to lessen the overall loss suffered by the FDIC by allowing regulators to address capital deficiencies prior to technical insolvency…banks w/ inadequate capital had to complete a capital restoration plan h. appraiser. consultant. officers. Same legal effect as a consent order. Types of enforcement actions a. Reviewable by US court of appeals 3. or accountant who knowingly or recklessly violates the law/breaches fiduciary duty/engages in unsafe and unsound practices that are likely to cause more than minimal loss to the insured depository institution b. banks have been increasingly willing to settle regulatory actions to provide certainty. FIRREA extends liability to directors. Regulatory scheme based on "prompt corrective action"…can use PCA when capitalization gets down to a low level…can force bank to take action to increase capitalization ii.1990 – Comprehensive Thrift and Bank Fraud Act (part of Comprehensive Crime Control Act) i. Banks board enters into this order on behalf of the bank 4. 1991 – FDIC Improvement Act (FDICIA) i. adopt specific resolutions. Most small community banks in NC operate under CO 2. or indemnify or guarantee the institution against loss if the offender was unjustly enriched by the improper activity iv. make restitution. Can either outline steps banks should take. and actions by state attorneys general 2. Regulator's report of examination should identify any problem areas to put the bank's directors on notice as to potential corrective actions ii.

Effect realized from the specific act must be that the institution has suffered/is likely to suffer loss or damage. Strengthened under FIRREA…three different tier penalties 2. (2) effect. ix. Agreement between bank and agency similar to consent order 2.v. Violation may result in CMP against directors and other affiliated parties 3. the agency may require the bank to correct any deficiencies Capital Directive 1. An order issued without a hearing before an administrative law judge 2. The specific act MUST be a violation of law/regulation (including a cease and desist order. If a bank fails to meet required safety and soundness standards. agency may send it a notice…if bank doesn’t submit an adequate plan or implement an approved plan. or breaching fiduciary duty…act must be part of a pattern of misconduct that has caused/is likely to cause more than minimal damage to institution. the interests of the depositors have been prejudiced. Tier 1 – up to 5k per day for violation of any law/regulation. Only made if a three-part test is satisfied: (1) specific act. Rarely used since most banks with capital problems have already been dealt with through other enforcement mechanisms Civil Money Penalty 1. Unlike consent orders. prevent offender from voting for directors. a condition/agreement with the agency. unsafe or unsound practice. vii. Mandatory restrictions are effective upon the bank’s receipt of notice certifying which capital category it falls under Safety and Soundness Order 1. or an act/omission that constitutes a breach of fidelity) 3. agency order. or agreement 3. x. Tier 2 – up to 25k per day for commission of Tier 1 violation. and (3) intent 2. or prohibit offender from serving as an institutionaffiliated party Formal Written Agreement 1. Removal and Prohibition Orders might include an industry ban on participating in the affairs of any depository institution…may also prohibit solicitation or vote of any proxies. Vehicle through which discretionary actions are imposed on the bank 3. or the offender received some financial gain/benefit from the improper act 4. recklessly engaging in an unsafe/unsound practice. Intent requires either personal dishonesty or willful/continuing disregard for the safety and soundness of the institution 5. Prompt Corrective Action scheme 2. FWAs are not enforceable through federal courts PCA Directive 1. Directive sets a capital level for a bank and may require certain actions relating to the bank’s capital 3. viii. resulting in pecuniary gain to the officer 58 . Removal and Prohibition Order 1. Insured banks are subject to mandatory and discretionary actions. vi. depending on their capital category under the scheme 4.

Divestiture of Assets 1. Paying excessive dividends 2. Hearing before administrative law judge (ALJ) who is familiar with bank enforcement matters 5. the Fed may require company to sell or transfer assets or off-balance sheet items to unaffiliated entities xii. Court synthesizes various rules and says that “unsafe and unsound” means an imprudent act that poses an abnormal risk to the financial stability of the banking institution vii. 30 days after hearing. the possible consequences of which could be abnormal risk or loss or damage to an institution or its shareholders or the insurance agencies vi. following alleged unsafe and unsound practices ii. If Fed finds that a systemically significant financial institution poses a grave threat to nation’s financial stability. Disregarding borrower’s ability to repay 3. not based on substantial evidence. of appeals within 30 days of agency’s decision 9. “Unsafe and unsound” is a flexible concept. Agency head makes a final decision w/in 90 days of when the record is complete…agency head can accept reject or modify the ALJ's recommendation 8. conclusions of law. and proposed orders 6. ALJ must file a record of the proceedings as well as his recommendation to agency head 7. Matter of Seidman (1994) i.4. Another company officer then obstructed OTS investigation by soliciting false testimony from an employee iv. which may include any action/omission which is contrary to generally accepted standards of prudent operation. parties submit to ALJ proposed findings of fact. Extremely rare d. Parties can file an appeal with a federal ct. Limited discovery 4. Statute 1818(e) does not define “unsafe and unsound” v. Examples include: 1. not in accordance with law. Careless control of expenses 59 . an abuse of discretion. Appeals ct. Petition for review of cease and desist order from the OTS. Defendant responds w/in 20 days 3. Petitioner promised to give out a loan in conflict with the company’s policy of prohibiting purchase money loans on the security of real property in which a company officer had an interest iii. or the decision is in excess of the agency head's authority e. Tier 3 – up to 1m per day for commission of Tier 2 violation. can only overturn the agency head's decision only if it is capricious. Conduct of the administrative process i. Agency files Notice of Charges or Intent to Remove 2. Withdrawal of Federal Insurance 1. causing substantial loss to a depository institution or substantial gain to offender xi. Process of seeking enforcement against a depository institution is governed by the Administrative Procedures Act…sequence of events is as follows: 1. but with a knowing or reckless state of mind.

Court says that petitioner did act imprudently by committing itself to the loan. petitioner couldn’t be sure that the company was actually able to make the loan…however. Merely “imprudent” action that does not create abnormal risk 3. Orderly Liquidation Authority is available to those willing to fund it. Complexity of a large institution’s structure and operations also makes resolution difficult i. Large institutions can also be difficult to resolve because they have fewer potential acquirers and may have franchises whose value dissipates quickly following failure c. Unsafe and unsound does NOT necessarily include: 1. US bankruptcy problem is ineffective for dealing with large financial institutions e. credit. lines of credit. 8. Dodd-Frank provides such a framework to nonbank financial firms. FDIC act provides a sound framework to resolve banks.Excessive advertising Inadequate liquidity Poor state of loan portfolio Insufficient capital and reserves Transfer of assets to troubled subsidiaries (since it would disregard the parent’s separate status and would amount to a wasting of parent’s assets and violate duties to shareholders) 9. but did not satisfy the culpability elements required of a removal and prohibition order E. These firms operate through a web of trading. FDIC Financial Crisis Inquiry Commission a. Large financial services organizations can create systemic risk simply by virtue of their extensive counterparty exposures…these exposures may not be readily apparent prior to failure b. Contingent. imprudence alone is insufficient for unsafe and unsound. and liquidity relationships in exchanges. Breach of contract that shakes public confidence in institution 2. Large financial firms are highly interconnected and operate through financial commitments and operational dependencies both within the conglomerate structure and through connections with other firms ii. clearing houses. with the FDIC as receiver 2. and other market infrastructure elements iii. Two vital components of this framework: 4. 60 . and to systemically significant financial companies with assets exceeding 50b 3. but there apparently was no such similar framework for the liquidation of holding companies and their nonbank subsidiaries f. remote harms that could ultimately result in “minor financial loss” ix. 6. Dodd-Frank requires systemically significant nonbank financial companies identified by the FSOC to prepare an “orderly liquidation” plan without any possibility for reorganization. securities settlement structures. custodians. Orderly Liquidation Authority for Systemically Significant Financial Companies 1. because at the time the commitment was made. 5. Obstructing an OTS investigation viii. Officer’s obstruction of investigation was unsafe and unsound. 7. which can prevent disorderly collapse and can insulate taxpayers from any future bailouts g. These firms operate across national borders and conduct business around the clock d. and petitioner attempted to get out of the commitment when he realized it was risky x.

Granted agencies the authority to issue capital directives to depository institutions w/ declining capital positions b. 1983 – International Lending Supervision Act (ILSA) i. Bank shareholders are not entitled to any pre-closure notice c. iv. No request for assistance will be granted unless FDIC determines "the financial impact on executive management. insolvent banks and savings institutions are resolved by the FDIC (credit unions are resolved under the NCUA) 2. 61 . but a comparable system imposes early remediation requirements on such institutions 4. Undercapitalized 4. Capital zones: 1. Minimum action required is that the institution develop a recapitalization plan 2. Agency may also restrict the institution's activities and require a management improvement (i. a receiver may be appointed even though the bank still has positive capital and is not technically insolvent.. Bank agencies may bring more severe measures to bear on a bank whose capital is falling from well capitalized to critically undercapitalized iii. savings institutions. Very rare 3. PCA does NOT apply to the systemically significant financial institutions subject to the Fed’s heightened prudential standards after Dodd-Frank. Failed Bank Resolution 1. Actions under the PCA regime: 1. Critically undercapitalized ii. These components enhance market discipline i.g. liabilities exceed assets) i. Bank is insolvent based on balance sheet (e. directors. agency can dismiss and replace management and Board members) 3.e. Open Bank Assistance a. Adequately capitalized 3. and credit unions cannot file for protection under federal bankruptcy code…instead. Well capitalized 2. FDIC may offer financial assistance (open bank assistance) to a bank before it becomes insolvent b. shareholders and subordinated debt holders is comparable to what would have occurred if the bank had actually closed” c. Closure of Bank a.Supervisory and regulatory powers giving the FDIC and other regulators information and cooperation from the largest financial firms essential to future liquidation/orderly dissolution ii. Decision to close a bank is made by the bank’s primary regulator b. Dodd-Frank requires periodic reporting of detailed information and submission plan for rapid and orderly resolution in event of financial distress or failure F. If leverage ratio (BV assets/BV capital) is less than 2%. Grounds for closure: i. Significantly undercapitalized 5. 1991 – FDICIA provided a new regime for dealing with deteriorating capital positions by instituting enforcement based on prompt corrective action (PCA) i. Prompt Corrective Action a. Banks. Critical legal powers for an effective liquidation process modeled after the FDIC’s framework for banks h.

FDIC will only protect insured depositors…however. Liquidation of the institution 1. and possibly to third/counterparties depending on the severity of the bank’s insolvency Example from 2009 i.6b. 62 . These losses reflected significant expected losses on option ARMs which Wachovia had acquired in its purchase of a federal thrift holding company. non-deposit creditors. if the FDIC. Bank insolvency is borne by shareholders and FDIC. Risk of loss is on uninsured depositors. purchasers of insolvent banks have not assumed the liabilities of non-deposit creditors. company posted losses of 9. Purchase and assumption transaction with another institution purchasing the failed bank’s assets and assuming its liabilities 1. and the Treasury all agree that a bank's failure poses a serious systemic risk. creditor concerns about the health of Wachovia mounted (since it was the largest ARM holder).5. Creditors asserting unpaid judgments against bank d.8b. Generally. Recently. and the company’s stock prices slumped and credit default swap spreads on its debt surged ii. Assistance provided by the gov’t to return the bank to solvency.g. and the FDIC if liquidation cannot recoup FDIC for the amts paid to the insured depositors. Wachovia financial holding company had 95% of its assets (nearly 800b) in its commercial bank and two insured thrift subsidiaries…had been profitable for more than a decade ii. 75% of insolvent banks have been resolved by a purchase and assumption transaction b. Bank’s capital position is at 2% or below. but was deemed the least expensive resolution FDICIA passed in 1991 which provided the “too big to fail” exception to the “least cost” method for troubled bank resolution. Risk of loss is on FDIC and bank shareholders iii. the Fed. 8. 9. subject to approval by Treasury in consultation with the President Wachovia – Alvarez Testimony before the Financial Crisis Inquiry Commission i. even though it is not technically insolvent iv. and entered into a loss-share agreement with FDIC over a portion of those assets…the arrangement ultimately cost the FDIC 2. uninsured depositors. in the first half of 2008. 6. as well as losses from the decline in value of commercial real estate mortgages originated and held by Wachovia iv. cannot meet obligations as they become due) iii. non-deposit creditors. When FDIC had to seize and sell WaMu (the second largest holder of option ARMs). Methods for resolution: i. Charter provision for voluntary dissolution v. etc. but have assumed deposit liabilities c. Approx. ii. 7. the FDIC is permitted to protect uninsured depositors and creditors Bank insolvency risks: Challenges to limited liability in the BHC structure a. reflecting writedowns on securities and high provisions for loan losses iii. Then. in cases where the bank is deemed “too big to fail” and is subject to the systemic risk exception c. FDIC is receiver or conservator of a failed bank Resolution Methods for when Bank actually Fails a. Bank is insolvent based on liquidity (e. Resolution must be “least costly to the deposit insurance fund of all possible methods for meeting the FDIC’s obligations” b. BB&T purchased 22 out of 25b worth of insolvent Colonial Bank of Alabama’s assets.

4. Regulation Y (aka Reg Y) which provides that a “bank holding company shall serve as a source of financial and managerial strength to its subsidiary banks. as did wholesale funds providers. Recovery.v. Assures that the assets of a healthy institution within the same structure will be available to the FDIC to offset the cost of resolving the failed institution. which could “break the buck” in money market mutual funds and place further stress on funding markets Other concerns about shaking up household and general consumer confidence in banks led FDIC to reconsider liquidating Wachovia Thus. 2. So basically brother/sister banks. i. The Federal Deposit Insurance Corporation Improvement ACT (FDICIA) was enacted in late 1991.risk shifting. Wachovia depositors accelerated the withdrawal of funds from their accounts. FDIC entertained bids from Wells Fargo and Citigroup…at first. and Enforcement Act (FIRREA). and Source of Strength. vi.” ii. Cross-guarantees. Purpose . Cross-guarantees: 1. the systemic risk doctrine suggested that a Wachovia failure or liquidation would lead investors to doubt the financial strength of other organizations in similar situations (since Wachovia was originally assumed to have been well capitalized) Creditors would also be concerned about direct exposures of other firms to Wachovia liquidation. Depository institutions are "commonly controlled" if they are controlled by the same holding company and treated as branches of the same bank. Wells Fargo’s bid required a greater amt of FDIC assistance than Citigroup’s did. In 1989 as part of the Financial Institutions Reform. 3. Congress added to the Federal Deposit Insurance Act a “cross-guarantee” provision. 63 . ix. vii.  This was basically an attempt to codify the Fed's "source of strength" regulation. Controlling Company Guarantee Provision: 1. x. viii. One proposal set forth in the FDICIA was the extension of the cross-guarantee provision to bank holding companies (BHCs). A guarantor bank's cross-guarantee liability is subordinate to all other liabilities of the bank except for liabilities owed to affiliated institutions. which diminished the company’s liquidity Citigroup and Wells Fargo both investigated into purchasing Wachovia. but the Fed facilitated negotiations to keep legal quarrels from further undermining consumer confidence in the safety of the financial system 10. the Controlling Company Guarantee Provision. xii. but FDIC at that point assumed that any assistance required for a purchase of Wachovia by either company would be more costly than it would be simply to liquidate Wachovia However. so FDIC began working out its deal with Citigroup Then Wells Fargo realized that a tax benefit would allow it to acquire Wachovia without any FDIC assistance…thus FDIC handed the deal over to Wells Fargo Citigroup believed this violated their exclusive dealings with Wachovia. which provides that commonly controlled depository institutions must pay to the FDIC the amount of loss that that the FDIC suffers or expects to suffer as the result of the insolvency of the depository institution. xi.

iii. If the controlling co. 64 . the FDIC's claim on the guarantee will be given priority over other unsecured creditors of the controlling co. 5% of the institution's assets at the time it became undercapitalized. Congress provided for a limited guarantee by the BHC parent. however. Walde2  During the 1980s savings & loan crisis. banking agencies. or 2. the amount need to bring the institution into compliance with all capital standards as of the time the institution fails to comply with its restoration plan. The issue remains. Creditors and priorities: There are special rules under bank insolvency law for dealing with the claims of creditors of an insolvent institution. RTC has the same powers as the FDIC in these situations. Scholer and the OTS: Did Anyone Go Too Far?1 argues that the reason Lincoln Savings was not closed earlier when it should have been.  First. and attorneys). The regulation’s validity remains unresolved despite Supreme Court review of the case in which the question was raised. Liability of Institution-affiliated Parties (incl. but because of the ineptitude and political corruption of bank regulators. was not b/c of Kaye. A. Kaye. or both. 615. 1 2 Casebook p. So the FDIC could get reimbursement from the controlling company or a sister bank. (RTC) as part of FIRREA. Under this statute. Purpose of the controlling company guarantee is to induce a parent company to decide promptly whether to recapitalize the institution or sell it. Resolution Trust Corp. as to whether the source of strength regulation exceeds the Federal Reserve Board’s statutory authority. the 12. Congress created the Resolution Trust Corp. The most notorious use of enforcement authority against an institutionaffiliated party occurred in connection with the failure of Charles Keating’s Lincoln Savings and Loan Assn and the subsequent order brought by the OTS against Lincoln’s law firm. Instead. C. it must submit a capital restoration plan (see above). But Congress did not extend the cross-guarantee provision to BHCs. i. For instance. If a bank is undercapitalized. 11. 612 Casebook p. Scholer. Scholer was just a scapegoat to improve the image of OTS. i. D. Kaye Scholer. in 1992. These rules often differ from rules under the Bankruptcy Code. the Director of the Office of Thrift Supervision may appoint the RTC as conservator of failed savings and loans institutions (S&Ls). some of these differences are as follows (from Peter Swire Bank Insolvency Law Now That It Matters Again). v. enters bankruptcy. officers. B. In comparison with traditional bankruptcy trustees.2. directors. liability is limited to the lesser of: 1. Note – the FDIC can use both a cross-guarantees along with a controlling company guarantees. A controlling co. 13. i.  Kaye. A condition of the FDIC’s approval of the plan is that its controlling company guarantee that the undercapitalized institution will comply with the plan until the institution is adequately capitalized for 4 consecutive quarters. Actions by Conservator or Receiver to Recover Losses from Officers or Directors.

not SHs. Directors liable for defective internal controls. But then the bank failures in the 1980s caused courts to greatly curtail the BJR. Special Standards of Professional Negligence Actions brought by Conservators or Receivers.  In this case. In this role. taking into account the restrictions of statutes and the usages of business (Briggs v.  The RTC cannot subpoena personal financial information from officers or directors for the purpose of assessing the costeffectiveness of prospective litigation. In its subpoena on Walde. 3 Casebook p. failures to perfect security.  The court held that Congress did not intend RTC to have such an intrusive grant of authority. As a result. A Political Economy of the Business Judgment Rule in Banking: Implications for Corporate Law: Implication for Corporate Law3  Previous duty of care standard for bank directors was the care which ordinarily prudent and diligent men would exercise under similar circumstances. i. To accomplish this. SO the authority for defining the BJR has moved from state courts to federal courts. 14.  In addition. seek a court order attaching assets. for the first time ever courts held financial inst. 65 . 619. RTC served a subpoena duces tecum on William Walde. assert claims against an S&L's officers and directors. etc. 1891).  Federal agencies are the main people suing bank Boards. so federal courts are now the main forum for bank director liability cases. the RTC launched an investigation to determine whether Walde and other former Trustbank officials might be liable to the RTC as a result of the operation of their company. defective internal controls. So courts grafted the business judgment rule (BJR) onto bank directors' duty. and courts started second-guessing business judgments with the aid of hindsight. the duty of care has reduced Board discretion to approve bank loans.  Rules from this case:  Any personal financial information subpoenaed from officers and directors must be relevant to the issue of liability.  However.  The RTC cannot subpoena personal financial information from officers or directors if the RTC does not have an articulable suspicion to believe that the officer or director is liable to the S&L.  Now bank directors face regular negligence liability for inadequately secured loans. over reliance on risky collateral. RTC is to preserve and conserve the assets and property of failed institutions. At issue was RTC’s statutory authority to subpoena personal financialy data not directly related to the management of Trustbank. this was basically too high of a standard. and issue administrative subpoenas duces tecum. RTC called for the production of any documents relation to the operations or management of Trustbank as well as extensive personal financial information. it is empowered to avoid fraudulent asset transfers. Federal regulators can regulate in federal court. Spaulding. the founder of Trustbank Savings. When Trustbank was declared insolvent.

4 Casebook p. federal courts are now the main forum for bank director liability cases. as long as the state standard is stricter than that of the federal statute. FDIC (cited in Atherton): holds that state common law. rather than shareholders. and not federal law. Examining the Increase in Federal Regulatory Requirements and Penalties: Is Banking Facing Another Troubled Decade?4  Criminal sanctions available for use against bank officers and directors have increased significantly since the 1980s. • Atherton v.  Amended RICO. defraud. Thus. The federal statute sets a ground floor.  The Money Laundering Control Act of 1986: Increased fines and prison sentences for money laundering activities. in banking law. so now all RICO fines and penalties are available to prosecutors investigating bank officers and directors for fraud. depositors. and for lax administration of loans and other investments.  FIRREA 1989:  Increased fines and prison sentences for violations of Title 18. So state common law trumps any “federal common law.  The move toward federalization has also been fueled by the fact that federal bank agencies (such as the FDIC). will be applied to determine the tort liability of attorneys who provided services to a failed bank. inevitably.” 15. and violations will result from mistake.  Increased fines and prison sentences for violation of an agency order. Since federal regulators can regulate in federal court.  Increase fines and prison sentences for knowing violations of statutes with intent to deceive. loans will go unpaid. Thus. The most important recent holdings in this regard penalize directors for eschewing or ignoring loan underwriting standards. and errors in business judgment. as long as the state common law has a stricter standard.  Congress increased the statute of limitations to 10 years for violations of Title 18.  The Crime Control Act of 1990: • Increased prison terms further. Even with the most diligence.  This is significant due to the unique nature of banking and the regulatory burden is enormous. Criminal Sanctions. are now most likely to sue bank directors for negligence. the common-law duty of care has significantly reduced board discretion to approve bank loans. 624.  O’Melveny & Meyers v. or impeding the functions of these bodies. and state court receivers. • Requires courts to order criminal forfeiture of property traced to money received from banking violations. FDIC: Held sate common law should be applied to determine the legal standard of care that should apply to bank officers and directors. 66 . the authority for defining the scope of BJR has moved from state courts to federal courts. i. or personally profit. • Prohibits knowingly concealing assets from insurance or regulatory bodies acting as a receiver or conservator. So state common law trumps a federal statute. • Prohibits engaging in a continued financial crimes enterprise. oversight. for not analyzing borrower credit profiles.

 Ruled that Congress did not intend for FIRREA to overrule the D’Oench doctrine. Geographic Expansion. c. the crime. The D’Oench doctrine is a firmly established piece of federal common law. §36 permits a national bank to branch in its home state to the extent state banks are 5 Casebook p. Congress enacted the McFadden Act in 1 927 which allowed national banks to establish charters anywhere within the state it was located if state law granted a state bank the authority to establish a branch in that location. here we have thousands of separately incorporated banks. A. Southeast Bank. LTD. no single big one like Atlanta. • Creates a system for special rewards for information relating to certain financial institution offenses. the D'Oench case established the equitable doctrine that prevents a person doing business with a bank from benefiting from any secret undocumented loan not discoverable by bank regulators. therefore not valid.A. etc. In other countries. Most restrictions on bank location have been removed since the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.• Prohibits obstructing the examination of a financial institution.  Since the 1980s. section 1823 (e) of Title 12. 629. a strict statutory version of the D’Oench doctrine. V. The FDIC. McFadden Act  limits general business of a national bank to its HQ and any branches permitted under §36. 16. fraud. The history of in-state branching prior to Riegle-Neal. NBA provided no authority for national banks to branch. but historical limitations help explain our current banking markets. Increased mergers recently have led to some consolidation of the banking industry. Bank Insolvency Law Now That It Matters Again:5  This ‘superpower’ comes from 3 interrelated sources of law:  First. other states allowed state-wide branching). a. the “federal record holder in due course” doctrine has developed judicially to allow agencies to win in related cases even where D’Oench and section 1823(e) may not apply. AND ANTITRUST. GA b. N. penalty. primarily because there were multiple cities. If the borrower raises the defense that the loan agreement was not documented. while other states allowed state charted banks to establish branches to differing degrees (some states limited branches to certain geographic areas. Claims by Debtors i. often brings an action against a borrower based on nonpayment of a loan. iii. Motorcycle of Jacksonville.  Finally. 1. etc. Imprisonment. VI. MERGERS. fine. determined in light of the characteristics of the D. and its impact on the victim and society. as receiver. Some states prohibited branching (sometimes called unit banking). NC allowed state-wide branching. 67 . the FDIC can defeat this defense with their "D'Oench superpower.  Second." ii. those convicted of federal crimes are sentenced under the US Sentencing Guidelines. So to prevent national banks from converting to state charters to be able to branch. banking is dominated by a few large institutions.  The rationale is based on a policy of protecting the FDIC from misrepresentations. GEOGRAPHIC EXPANSION. creates a specialized statute of frauds that defeats all claims or defenses against bank except for those based on contemporary approval by the bank’s board of directors. d.

under the Monetary Control Act of 1980 and the Garn-St Germain Act of 1982 thrift institutions were authorized to exercise bank-like powers and many national banks were able to use this opportunity to expand. Branch is defined to include any branch bank.” However. OTS's reasons for adopting this rule: i. interstate branching available only in limited circumstances: i. The operation of a discount brokerage service is not a core banking function. Therefore.no investment advice. or checks paid. So now everyone can branch state-wide. Policy of competitive equality only applies to core banking functions. i. just execute orders) at home office and other sites. Office of Thrift Supervision 1992  OTS permitted federal thrifts to exercise interstate branching powers. and banks couldn't branch until 1994.allowed to under that state's law. ii. Many courts did not interpret the McFadden Act's definition of "state bank" to include state charted thrift institutions b/c they did not offer checking accounts and commercial loans and thus were not considered “state banks. 2) This was a form of branching that violated the McFadden Act. additional office. ii. (1987) 1) National bank wanted to start discount brokerages (low cost broker . Thrifts are under different rules. Ct. all states finally allowed state-wide branching for regular state banks as well. b. The history of interstate branching prior to Riegle-Neal a. Some state chartered banks were still limited though. or money lent. 2. Ks were irrelevant. 1) 12 USC § 30(b) permitted a bank to change the location of its main office to any location not more than 30 miles from the city where the main office was located. focused on the fact that operating this service gave national banks an advantage over state banks. iii. Policy of competitive equality should be upheld. and still keep the current main office as a branch. or any branch place of business at which deposits are received. discount brokerage offices are not branches. therefore. In-state branching finally opened fully. Therefore. Are discount brokerage offices branches under § 36? 2) D argued 12 USC § 81: SAID DISCOUNT BROKERAGE MUST BE IN THE TERM “GENERAL BUSINESS OF EACH NATIONAL BANK” CONTAINED IN 12 USC § 81 3) SC said no. f. Contract (K) b/t bank and customer that moneys did not become deposits or bank property until delivered to the bank. Comptroller's office approved. It has authority to do so. Ct noted prior to 1927 banks sold securities on an interstate basis. McFadden Act only contemplated in-state branching. not limited to the branching restrictions in § 36. 30-mile main office location change. Congressional policy of competitive equality with its deference to state standards is not open to modification by the Comptroller of the Currency. So national banks pretty much couldn't branch except obscure 30-mile rule (see below). Conference of State Bank Supervisors v. So Thrifts could branch in 1992. national banks could branch statewide too under McFadden Act. Some states legislatively allowed an out-of-state bank to establish a branch in-state if the other state granted reciprocity. First National Bank in Plant City v. branch agency. So what is "branch banking under McFadden Act? i. Securities Industry Ass 'n. Clarke v. Most states allowed state charted thrift institutions to branch state-wide. and were thus at a competitive disadvantage. Interstate branching of federal savings associations will enhance safety and soundness by facilitating geographical diversity in both the operation and loan portfolios of insured 68 . ii. 1) Bank operated an armored car service and picked up customer deposits at remote locations to deliver them to the bank. e. SO bank's with a main office w/in 30 miles of a state line could branch interstate. Few states had these provisions. Prior to 1994. so little practical effect. Dickinson.

v. So tried to use the Douglas Amendment to create regional compacts. ii. Amendment to § 36 of NBA says that ATMs are not branches. Rule will allow federal savings associations to reduce operating costs by increasing efficiency and developing economies of scale.institutions. Defines "BHC" as a firm that owns a bank or BHC. iv. ATMs were therefore permitted in Iowa even without a bank HQed there and they were also not subject to Iowa’s advertising restrictions. First happened in northeast. Each state adopted a law that said they would allow a BHC in another state in the region to acquire bank in that state if acquiring state had a reciprocal law. 69 . So D was using state EFT law. modem technology such as ATMs permitted many banking functions to take place on an interstate basis.  IOWA EFT Act had an in-state office requirement for the establishment of ATMs. In 1996 Congress amended statute to say ATMs were not branches. 2) BHCA regulates the acquisition of state and national banks by BHCs. not state branching law to try to exclude these out-of-state ATMs. Iowa limited advertising on ATMs. c. Big money center banks didn't like that they were being excluded from these compacts.  Dissent argues that while it has been decided that ATMs are NOT branches and not subject to geographical restrictions. The rule will not have any impact on small entities for purposes of the Regulatory Flexibility Act. v. and national banks can set up ATMs in states besides their home state. Interstate banking in the holding co. So only Iowa banks could have ATMs. (S&L’s were in financial trouble. context. BHCs in New England wanted to acquire some other banks in New England outside of their home state. b. Douglas Amendment says BHCs can own banks in other states to the extent law of the state permits it. Increase financial stability will decrease risk to SAIF (insurance I presume). 1) Defines "bank" as an institution that accepts deposits and makes commercial loans. Regional Reciprocal Compact  there were banks in different regions who realized they couldn't grow big enough to compete with big banks in cities. Interstate branching will stimulate and increase healthy competition. The history of interstate banking prior to Riegle-Neal. 3. vii. v. such as consolidating personnel and operations functions. ii. They thought there would be a big relaxation of branching restrictions one day and big banks would take over the country. Also. Fed.  As originally enacted. Increase in competition will improve customer service. i. Therefore. they should still be subject to the advertising restrictions if the state banks are b/c this would give national banks and advantage and is at odds with the principle of competitive equality. they do all regular functions of banks. Northeast Bancorp Inc.A. ATMs are exempt from geographical branching requirements.(Citicorp) c. the BHCA prohibited interstate bank acquisitions. 1) Utah national bank wanted to set up ATMs in Iowa. Guttau. i. BHCA. Originally ATMs were treated as branches. ATMs ≠ Bank Branching. ii. Bank One Utah N. but says that national branches are subject to state law. Even though interstate branches were limited as described above (brick-and-mortar interstate bank branching). vi.  Therefore Iowa state law is pre-empted. OTS hoped appeal of interstate branch would cause strong S&L’s to buy the weak) iii. the question is whether ATMs are a “branch” and subject to Iowa’s restrictions?  National Bank Act gives national banks the authority to exercise all incidental powers necessary to carry on business of banking. Makes sense. i. a.

(it was replaced with a provision allowing acquisition of out of state bank w/o regard to state law restriction) a. Such partial bans comply with the Douglas Act. Effects of Northeast Bancorp. One of the effects of the regional limitations contained in many states' laws was to permit regional BHCs to grow large enough to be able to compete with banks in NY. iv.. ii. So BHCs are allowed to acquire banks outside of their home state w/out regard to other state's laws (laws prohibiting acquisitions by out of state banks or laws creating regional reciprocal interstate banking compacts). You are allowed to have degrees of interstate banking. Many BHCs took advantage of their new power to purchase banks in other states and created regional reciprocal compacts in other regions. B. IL. ii. The regional banks were able to grow by this point. not a concentrated one. Benefits: i. c. Promotes customer convenience. is the Douglas Amendment constitutional. i. and Conn. Did this in 2 ways . Riegle-Neal repealed the Douglas Amendment to the NBA. The Riegle-Neal and Beyond 1. this brings federal law up to speed with state laws. Given that holding. CA. or do partial ban lifting statutes burden interstate commerce by discriminating? 1) It's constitutional under the Commerce Clause. iv. iii. Holding: States are not required to lift the ban on interstate acquisitions on an all or nothing basis. enacted statutes to lift the ban on a regional and reciprocal basis. ii. Permitted an interstate bank merger so long as the resulting bank continued to be “adequately managed upon the consummation of the merger. Intro . Americans have become more mobile and technology and communications have improved.” i. Encourages competition. Why? i.” b. the Compact Clause and the Equal Protection Clause. But it didn't matter.The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 a. Promotes a safer and sounder banking system. States loosened geographic constraints by regional compacts. Dodd-Frank increased the post-merger condition following an interstate bank merger to “well capitalized and well managed. Removed the remaining state control over interstate branching that was permitted in the Riegle-Neal Act:  70 . 1) Policy rationale -promote pluralistic banking system. i. b. Classic indictia of prohibited contract not present: no effect to increase political power of states to encroach on Federal power. Removed remaining barriers to interstate branching and banking. 2. Is it a violation of the compact clause? No.  State's started enacting various laws to lift the ban on interstate acquisitions. v. d. They are allowed to enact statutes that just partially lift the ban like Mass. The Act struck down federal restrictions on interstate banking and branching. and are the types of statutes contemplated by the Act. Banks can structure themselves to be more efficient by eliminating duplicative functions and expenses.The Douglas Amendment said a bank or BHC could acquire another bank or BHC in another state only if the laws of the target bank 's state permitted it. iii. As a result. and Conn. Many states. like Mass. the regional compacts were repealed.repeal of Douglas amendment and branching (see below). Repeal of the Douglas Amendment. and TX. ii.

f. b.1) A national bank or state insured bank is permitted to branch in a new state so long as the law of the state in which the new branch is located would permit establishment of the branch if the bank attempting to branch were a state bank chartered in that state. Interstate branching. This authority was subject to state opt-in laws. Citigroup. Riegle-Neal prevents an out of state bank from establishing a branch just to pull deposits out of the community and loan those funds somewhere else (the out of state bank's home state for example. 1. ii. ii. BHCs with "adequately capitalized and adequately managed" bank subs can merge their existing banks in different states and operate the interstate offices as branches. d. Method #2. Where is a bank located for diversity jurix?  R-N says a bank is located in the state of its HQs. ii. Application for a de novo branch or acquisition of an existing bank branch. a. a. Methods: 71 . Financial giants that emerged  Bank of America. 1) Purpose  to make sure the branch adequately meets the needs of the community it serves. b. Wells Fargo. c. Regulators will review the branch bank's loan portfolio  if the ration of in state loans to in state deposits is less than half of the state average. Permitted state banks to exercise the powers granted by their home state at interstate branches in host states. c. Required outside banks to come in and be there for like 5 years before it started buying banks. subject to some state control in the form of state "opt-in" or "opt-out". i. Dodd-Frank changes this to: “well capitalized and well managed” ii. Tremendous consolidation of banks in America. d. C. Host state laws only apply to the interstate branches of out of state state banks to the same extent that host state laws apply to interstate branches established by out of state national banks. Riegle-Neal Clarification Act of 1997. i.000 banks. But there are still about 9. The number of banks was been cut in half b/t 1980 and 2000. so. Method # 1. Riegle-Neal authorizes two methods of inter-state branching. 1) Purpose  ensure national banks did not have an advantage over state banks in establishing an interstate branch. JP Morgan Chase. Most states have since repealed their "age laws". But these "state age laws" will only be honored up to a max age for the target bank of five years. iii. i. 2. Intro. i. bank subject to sanctions. a. Banks can still pass a law prohibiting the acquisition of one of its banks by an out of state bank if the target bank is a new (or de novo) bank. So still room for more acquisitions. 3. Bank Mergers and Acquisitions. Only 2 states exercised this option  TX prohibited interstate branching until 9/1999 and MT until 10/2001. Many states merged their banks into 1 or 2 bank subs (usually keeping 1 sub in a state w/out credit limits from which to issue CCs). e. as of now . Form of combination (based on corporate law). This authority was subject to state opt-out laws. but only to the extent that national banks or the host state's state banks could exercise the same powers. 1) This allowed states to protect their in-state banks from being gobbled up. Limitation on interstate banking/branching  The ban on interstate branching for deposit production. it is no longer an issue.

Political issues. loans. Due diligence investigations. 3. 1) Usually just swap stock . Lay offs . Purchase method  recognize GW and amortize. computer systems. liabilities for contracts. iii. ii. but good to get. important assets. as well as intangible factors such as access to new markets. b. 5 into 3) f. e. iii. Don't need these. check clearing functions. i. 1) Some agreements include "walkaway provisions'" that allows either party to cancel the transaction if difference in the 2 banks' stock prices is too disparate that the deal is no longer economically viable. ii. i.Merger. etc. ii. Location of HQs. Very rare to see a hostile takeover in the banking business. First Union and Sun Trust fought over it. i. b. Valuation. Business issues. Post -merger issues. Tender offer. followed by a definitive merger agreement. including employment contracts. Form a new holding company to purchase 2 existing banks and operate separately or merge as one bank. v. Accounting issues. iv. i. Funding the acquisition. Pooling of interests or Purchase method? ii. Regulatory approval must be received.Purchase of assets. I-bankers use objective measures such as PE ratio. i. Could negatively effect income statement going forward. Which name to keep. BHCs usually use triangular mergers. a. Exchange of stock or cash purchase? If cash. Reverse or forward triangular merger. iii. vi. i. Purchase a bank through a purchase and assumption transaction. Not many of these with banks b/c BHCs are doing the merging. c. Stock price fluctuations while you are waiting for SH and regulatory approval. Max amortization period was 40 years. what will be the source of funds and how will it effect the acquirer’s financial position? ii. iv. ii. Two BHCs merge and operate separately or as one. d. Pre-merger issues. Mergers raise regulatory concerns .e. 3) Sub Shell survives  reverse. 72 . Tax issues. Inspect books. to save $$$. Duplicate branches may need to be closed or consolidated (i.tax free exchanges. Securities laws must be complied with. 1) Done for tax reasons and dissenters' rights reasons. Dual CEO’s don’t work. Which CEO and Board will lead the new entity? ii. BHC could just go buy banks directly and have a multi-bank HC structure iv. iii. ROE. How to combine record keeping. They issue "fairness opinions" on the fairness of the proposed purchase price. and EBITA. 2) Target survives  forward. I-bankers determine value. iii. Proxy materials must be prepared.SH approval and proxy solicitation under state corp laws. i. Most bank tender offers go uncontested. assumption of liabilities (deposits) vii. When Wachovia sold. Initial agreement will be memorialized in a "letter of intent".

savings association  OTS. BHCA also requires the Fed to approve any combination involving a BHC. 2. (5) Bank Holding Act also requires the Fed’s prior written approval of any combination involving a bank holding company (i) Approval standards are based on analysis of competition and the convenience and needs of the community (comparable to those under the BMA) (6) Approval standards under BMA and BHCA: (a) The effect of the combination on competition (antitrust analysis).OCC. if state member  Fed. Dodd Frank adds Consideration of the risk to the stability of the US banking or US financial system. Change in Bank Control Act  When another group of people want to gain control of a bank.OTS. f. If state bank involved. Consideration of financial and managerial resources. 4. Low threshold (5 or 10% change in control). Can be significant: AOL/Time Warner deal not successfulresulted in $56 billion charge> earnings in2002. a. Consideration of the convenience and needs of the community to be served. The responsible agency is determined based on the surviving bank. (iv) savings association . state authority (if state bank). It just stays on acquiror's books. Bank Merger Act. (ii) if state member . state authority (if state bank). i. (i) If national . Low threshold (5 or 10% change in control). iv. or consolidation “would result in greater or more concentrated risks to the stability of the US banking or financial system” (4) If state bank involved in the combination. Approval standards under BMA and BHCA: i. and Fed (if BHC) (2) Bank Merger Act. the state banking regulator must also approve the transaction. 1. a. (a) Requires the prior written approval by the responsible bank regulatory agency. If national  OCC. New FASB rule  eliminates pooling method. d. but must be evaluated every year and charge against income if it's impaired. The responsible agency is determined based on the surviving bank. The effect of the combination on competition (antitrust analysis).FDIC.Fed. iii. and Fed (if BHC) b. Not allowed anymore. Pooling of interests  no goodwill. ii. state nonmember  FDIC.  Intro. C. but also eliminates the requirement that goodwill has to be amortized. (c) Consideration of the convenience and needs of the community to be served. Section 3: Bank Mergers and Acquisitions. Regulatory approvals. merger. (iii) state nonmember . e. (p667) 73 . state regulator must approve. c. (3) Dodd-Frank Act adds a further requirement that the responsible agency consider the “risk to the stability of the US banking or Financial system (a) The Fed must consider the extent to which the acquisition. (7) Change in Bank Control Act (a) When another group of people want to gain control of a bank. Section 4: Antitrust Review. just combine balance sheets. 3 different regulatory schemes  BMA. Regulatory Approvals (p666) (1) 3 different regulatory schemes: (a) BMA. (b) Consideration of financial and managerial resources. Requires the prior written approval by the responsible bank regulatory agency.iii.

the affected bank can seek judicial review.S. (4) When doing an antitrust review. (5) Hart-Scott-Rodino Antitrust Improvements Act of 1976. but that asset sales of nonbank entities may go forward w/o any approval or consent. (ii) The United States charged appellees with violations of the Sherman Act. § 18. (v) The Court determined that appellees' business justifications for the merger were unwarranted.S.S. the merger is stayed for 30 days pending a second review by DOJ.C. the regulator and the DOJ must consider the section of the country (geographic market) and the line of commerce (product market) in which competition is likely to be foreclosed by the competition. That good bank might dominate. (6) GLBA extended application of Hart-Scott-Rodino to acquisitions of nonbank companies by financial holding companies and other transactions that do not require the prior approval of bank regulators (7) Dodd-Frank still requires exclusive Hart-Scott-Rodino review for acquisitions of nonbank entities by financial holding companies w/ assets of less than $10 billion (i) BUT Dodd-Frank also requires that acquisitions of companies that engage in financial in nature activities with more than $10 billion in assets be subjected to premerger approval by the Fed. § 18. If DOJ denies.” *this is basically § 7 of Clayton Act+ (i) Exception. (p668) (a) Geographic market – area where merger partners are located.S.S.C. (c) Antitrust review involves an analysis to determine the extent to which competition in either of those markets will be substantially lessened by the combination. 15 U. So regulators have a lot of flexibility? 1. (c) Relevant product market 74 . (b) Facts: (i) The proposed merger by appellee banks was enjoined because the proposed merger was unlawful under § 7 of the Clayton Act. agency can approve a transaction that lessens competition if the anti-competitive effects of the combination are outweighed by public interest in having the combination better meet the convenience and needs of the community to be served. 15 U. (iii) The Court held that § 7 of the Clayton Act. (p669) (a) Merger of 3 large Philly banks denied. (1) US v.S. Philadelphia National Bank. (3) If regulator denies approval. § 1. Premerger notice for these large acquisitions must include an evaluation of competitive concerns as well as an evaluation of systemic risk as required by Dodd-Frank (8) Dodd-Frank provides that non-bank merger transactions initiated by the FDIC are subject to Hart-ScottRodino review. (2) If regulator approves. (b) Product market – line of business in which those partners are engaged. and review will be de novo. (a) DOJ has 30 days. Definition of the relevant market. (a) Requires notification to DOJ and FCC. but its better than have just the crappy current banks that are there. You might have a poorly banked community that really needs a good bank. and the Clayton Act. mirroring the Hart-Scott Rodino Act’s exemption from review for transfers to or from a federal agency a. (iv) The proposed merger was unlawful because the effect of the merger was to substantially lessen competition in the line of commerce in a section of the country.C. affected bank can seek judicial review.S. as well as Hart-Scott-Rodino review a.(1) The standards for a bank regulator’s antitrust review under BMA and BHCA are identical to the antitrust provisions in the Sherman Act and the Clayton Act: (a) A regulator may not approve a combination “whose effect in any section of the country may be substantially to lessen competition. § 18.C. was applicable to bank mergers and that the specific exemption for acquiring corporations that were not subject to the Federal Trade Commission's jurisdiction excluded from coverage only asset acquisitions by such corporations when not accomplished by merger.S. because it had the effect of substantially lessening competition in the relevant market. 15 U. 15 U.

The Court also held that the district court erred when it ruled that the relevant geographic market was the state as a whole. 6. The Court remanded the case for reconsideration. The Court held that the relevant geographic market of the acquired bank was the localized area in which that bank was in significant. Regulators find a way to make it happen. The Court held that the district court was mistaken in including both savings and commercial banks in the same product market. particularly banking services to commercial enterprises. Petitioner United States brought a civil antitrust action challenging. 2.S. The Court held that the district court erred in its definition of product and geographic markets when it sought to determine the legality of the geographic market extension merger by the two commercial banks. not commercial banking and other savings and credit institutions.Just look at possible anti-competitive effects on commercial banking. The Court held that commercial banking was a distinct line of commerce because commercial banks offered products and services that savings banks did not. (4) **** Very few merges get enjoined. Fed. (i) Facts: 1. 4. Banks only did business in that small area. Relevant product market may be expanded to include other savings and credit institutions if these institutions start offering same services as regular banks. (c) FDIC—includes thrifts in the product market. They do that through convenience and needs analysis. (e) DOJ—separates consumer (retail) market from business (wholesale) market. (1) County National Bancorporation v. 8. under § 7 of the Clayton Act. (3) What is included in relevant product market now? (p676) (a) thrift institutions are usually included now because power of thrifts have increased since the 80s (b) OCC—includes all “depository institutions” in the product market. 15 U. Also applies 2% commercial loan to asset ratio test. The district court dismissed petitioner's complaint. direct competition with other banks.C. the consolidation of two nationally chartered commercial banks operating in adjoining regions of the state. The United States Supreme Court vacated the judgment. 5. Commercial banks provide a unique cluster of services that sets them apart from other institutions. Take into account local nature of the demand for most bank services. So commercial banking is the relevant product market. (i) 75 . Conn. (d) Fed—normally includes only 50% of the thrift institution deposits in product market. § 18. Commercial banking is a distinctive line of commerce. Concentrate on the area in which the seller operates. 7. (2) US v. National Bank. If ratio is less than 2%. Just look at the cluster of products and services offered by commercial banking institutions. and to which the purchaser can predictably turn for alternatives. 3. the bank or thrift is not included in the product market. (p676) (a) Facts: (i) Petitioner-CNB applied to respondent for approval of application to acquire an unaffiliated bank holding company (bank). (p673) (a) Followed Philadelphia National Bank. (ii) Product market is just commercial banking market.***** b. not S&Ls.S. 1. Convenience and needs of the community. (iii) Geographic market is just small section of Conn. (d) Relevant geographic market (i) must be drawn narrowly to encompass the area where the effect of the merger on competition will be direct and immediate.

subprime lending quadrupled (d) But banks were still worried about the high credit risk of subprime lending (i) 1995—Clinton administration amended CRA.S.C. a non-operating company formed to carry out the merger. but that the application of a standard stricter than the antitrust standards was too rigid an evaluation of the transaction to effectuate Congress' banking policies. (c) RULE: First. Market concentration. (e) Regulators are much more flexible now than they were 20 years ago (2) Jerry w. 1. (iv) The appellate court held that the convenience and needs of the community. (p684) (1) Concentration happens when mergers occur. must determine the anticompetitive effects of a merger (i) Ie apply HHI.S.(ii) Petitioner-CNB proposed to accomplish the acquisition through the merger of the bank into petitioner's subsidiary. 1. (a) The more concentrated a market is. (2). (3) In 1984. § 1842(c). (iii) Respondent denied petitioner's application. Market share figures reflect the extent to which the market is concentrated. the more likely it is that one participant could successfully exercise market power. allowing CRA based subprime loans to be securitized (ii) This led to mortgage backed securities (iii) The warehousing operations (selling MBS) became a part of an unregulated “shadow banking” system c. and more concentration means less competition. (b) Barriers to entry. The more concentrated the market. as the term was used in § 3(c) of the Bank Holding Company Act. Some mergers that violate the antitrust laws are nevertheless in the public interest and strict application of the antitrust laws is inappropriate. did not include consideration of any anticompetitive effect that a proposed bank holding company transaction might have. Markham—Regulating Credit Default Swaps in the Wake of the Subprime Crisis (p681) (a) Community Reinvestment Act of 1977 required bank to make subprime loans to minorities in their service area as a condition for receiving regulatory approval for bank mergers 1. DOJ developed the Herfindahl-Hirschman Index (HHI) to set merger guidelines (a) HHI measures market concentration (i) Step 1: Determine the market share of each firm in the market. (v) Respondent was limited to consideration of the antitrust standards contained in §§ 3(c)(1). 12 U. Did not do much b/c bank merger activity was slow in the 70s (b) Clinton administration sought to increase homeownership by increasing availability of subprime mortgages (i) Led to an 80% increase in number of subprime mortgages (c) Banks had largely stayed out of subprime lending until gov’t pushed them into it (i) From 1994 to 2000. the merger should be approved. 76 . (b) Fed denied approval of a merger under BHCA. the more likely it is that one participant or a small group of participants could successfully exercise market power (2) Tests/factors to help determine whether a bank merger will lessen competition: (a) Market share figures (of merger parties and other participants in the relevant market). (iv) Result: the pre-merger HHI. Approximate Market Share = the % of deposits held by each bank in the relative geographic market (ii) Step 2: square the market share (iii) Step 3: Add them up. If this says “no go” then move on to the next step and see if the exception applies (d) Then apply the convenience and needs exception – (i) If the anticompetitive effects are clearly outweighed by the public interest b/c the merger will likely further the convenience and needs of the community.

You can be creative like NationsBank and say you must look to the future (FL was expanding) not just current HHI. A merger that fails to pass the HHI market screen may nonetheless be approved b/c other information indicates that the proposal would not have a significant adverse effect on competition. HOWEVER. an interagency agreement between banking regulators and DOJ issued in 1995 is still valid and that document still finds a market to be highly concentrated if its HHI exceeds 1800 and CAN SCRUTINIZE the merger if it increased the HHI in the market by 200 points. 7. 2. 3. Initial screening of structural effects a. (5) HHI is not static. 9. Look at this first and apply the HHI. If the target bank is a weak competitor. the increase in HHI doesn’t matter that much. Economic conditions in the market and the need for exit a. AND (ii) post-merger HHI is over 2500 points. 77 . End result was there was a lot less divestiture of branches (6) Can also look at the following factors to determine whether a merger is okay—these are factors considered in evaluating competitive effects of proposed horizontal bank mergers and acquisitions. If competition from other depository institutions is great. (iii) However. Like rural markets. Same as above. Competition from other financial institutions in the market a. the significance of the structural index is diminished. (a) In 1995 there is a shift in how regulators look at S&Ls (i) In BB&T and Southern National that regulators bought it 1. Or you can go to mitigating factors below. (b) DOJ will challenge a bank merger if: (i) the HHI increased more than 200 basis points. Potential competition a. If post merger HHI is very high. lends more weight towards approval. 6. Can argue that merger should be approved anyway. If target is going to fail. 8. (see p685-687 for an in depth description of each factor and how it is applied) 1. Structural considerations are given less weight if the economic conditions in a market are deteriorating. the guidelines do provide that DOJ CAN challenge a merger if HHI increases 50 basis points AND HHI is over 1800 (4) FTC uses HHI too…FTC and DOJ revised HHI threshold in 2010 (a) FTC and HHI will challenge mergers if: (i) HHI increased over 200 points. Competitive viability of the firm to be acquired a. Only go on to other factors if structural effects suggest an adverse effect on competition. (b) 2500/200 is SUBSTANTIALLY more favorable to merger participants than the prior DOJ standard of 2000/50 1. Post-merger level and trends in market competition a. Only attach weight to this factor if there are limited barriers to entry into the relevant market. this lends weight towards approval. Competition from out-of-market financial institutions a. Financial weakness of the firm to be acquired a. Market shares of leading firms 10. Thrift institutional competition 4. AND (ii) the overall post-merger HHI is over 1800 (these are slightly lower figures than the DOJ uses for other industries besides banking). 5.(v) Step 4: Do the same thing post-merger and compare the post-merger HHI to the pre-merger HHI.

controlling 5% of total banking assets 2. Mitigating Factors. thereby acquiring Barnett’s subsidiary banks. increased importance should be placed on a number of factors where the proposal involved a combination that exceeds the DOJ guidelines in a large number of local markets b. controlling 1% of total banking assets in the US (iv) Result of merger 1. ii. The resulting market share of the acquirer and the pro forma HHIs in these markets. a bank holding company under the Bank Holding Company Act (BHC Act). NB also requested approval to acquire Barnett’s nonbanking subsidiaries…thereby engaging NB in nonbanking activities (ii) NB Facts 1.(p687) (i) NationsBank. NB would also control 18.11.6% of total deposits in FL 3. or a combination. NB would also control 29. 129. controlling 5. The strength of additional positive and negative factors that may affect competition for financial services in each market d. NB would become 3rd largest commercial bank. (3 Ways to fix potentially anti-competitive merger) (p690) (1) Bank mergers that do not meet the HHI Merger Guidelines can gain Fed approval by using divestitures. requested Fed approval to merge w/ Barnett. c. and other agencies to help identify cases in which a more detailed competitive analysis is appropriate to assure that the proposal would have a significantly adverse effect on competition in any relevant market (vii) Fed said this was a difficult case that highlights some of the complexities of analyzing the competitive effects of mergers that affect a large number of local markets a.9% of total banking assets 2. Bull. Barnett Bank and Community Bank a. Other factors unique to the market (b) EVERY proposed merger is subjected to an initial screening in which structural effects are examined. The strength and nature of competitors that remain in the market. Res. mitigating factors. For purposes of BHC Act. HHI levels are only guidelines used by the Fed. (1997)…. 78 . NB/Barnett proposal would combine 2 bank orgs that compete in a large number of banking markets in FL…they are among the largest providers of banking services in these markets and have a significant competitive effect in many market. iii. 23rd largest commercial bank in US. the Fed believes that it is important to give increased attention to: i. Fed took into particular account that Florida and the markets affected by this transaction are among the fastest growing and most attractive locations for entry by banking organizations in the US (vi) The Fed and the courts have consistently recognized that the appropriate Product Market for evaluating the competitive effect of bank M & A is the cluster of products and services offered by banking institutions 1. The size of the change in market concentration as measured by the HII in highly concentrated market. Economies of scale in small mergers 12. (9) Federal Reserve Board of Governors Order Approving the Merger of Bank Holding Companies. and iv. NB engages in a number of permissible nonbanking activities (iii) Barnett facts 1.4% of total deposits in GA (v) Riegle-Neal Act allows Fed to approve application by a bank holding company to acquire control of a bank located in a state other than the home state of that bank IF certain conditions are met. (i) Any or all of the remaining eleven factors are considered ONLY in instances where the structural effects of the merger suggest that the effect on competition may be substantially adverse. DOJ. NB is 5th largest commercial bank in US. In these cases. home state of NB is NC and Barnett has ops in FL and GA b. a. 84 Fed. Fed’s experience in handling these cases suggests that in future cases.

savings. (3) Dodd-Frank amended the Bank Merger Act to provide that an interstate bank merger may not be approved if after consummation the resulting insured depository institution (including all insured depository affiliates) would control more than 10% of the total deposits of all insured depository institutions in the U. Implemented by Reg L (i) Policy reasons why you don’t want interlocks? 1. (2) Riegle-Neal prohibits acquisitions that would cause the acquiring bank to control more than 30% of total in-state deposits or 10% of all deposits nation wide.5 billion. just really lower rates (3) Mitigating factors: (a) Number of competitors in the market. Director Interlocks. “financial companies” are defined to include insured depositories. Or you can keep your competitor from being competitive with you.5 billion (large banks) from serving as a management official of any non-affiliated depository institution having assets in excess of 1. Deposit Caps and Liability Concentration Limits. If want deposits. e. (p695) (1) Same people sitting on Boards of different companies. Personal gain. and the systemically significant nonbank financial companies that are supervised by the Fed 1. (b) Ie sell branches.S. It’s anticompetitive if you know what your competition is doing. Can still sit on different Boards of your affiliates. (i) Look at number. US. (b) Depository Institution Management Interlocks Act prohibits management officials of a depository institution with total assets over 2. moral hazard.(2) Divestiture (a) can lower the HHI. (4) Dodd-Frank also addressed excessive concentration for financial companies by imposing a 10% limit on the consolidated liabilities of the resulting entity. thrift associations in the market. and size of competitors in the market. Conflicts of interest. 2. efficiency and competitiveness of US Financial Firms. (d) Number of credit unions. depository institution holding companies. (p698) (a) That legislative action was taken after the enactment of the Depository Institution Management Interlocks Act (DIMI Act) which prohibited management officials (including an employee or officer w/ management functions or a director) of a depository institution with total assets in excess of $2. (p693) (1) Another potential obstacle for bank mergers – deposit caps. (a) For this purpose. Consolidated liabilities are defined as the risk-weighted assets minus regulatory capital 2. nature. 79 . and the cost and availability of credit f. (c) The amount the post-merger HHI exceeded Merger Guidelines. The FSOC must prepare a study regarding how this concentration limit will affect financial stability. (a) Court holds that 4th paragraph of section 8 of Clayton act does not bar directors of banks from also serving as a director of a competitor insurance company. (i) Bank of America runs into it 1. (2) BankAmerica v. (b) Market’s attractiveness for entry.5 billion from serving as a management official of any nonaffiliated depository institution having assets in excess of $1.5 billion (b) The systemically significant nonbank financial companies that are overseen by the Fed following Dodd-Frank will be treated as bank holding companies and subject to the restrictions of the DIMI Act. (3) Congress later amended the Clayton Act and dropped the provisions in Section 8 that are referred to in the BankAmerica case and which were specifically addressed to bank interlocks.

which it is not 3. SC law said out of state corps could not act as trustee in SC. owned NCNB. National banks . Banks as trustees. State banks . Trust powers implemented by the OCC. South Carolina State Board of Bank Control. b. Is state law constitutional? Yes. It changed it trust regs to permit national banks to conduct multi-state trust operations in any state where the state allows its own banks to conduct trust operations. American Trust Co. Many banks operate trust departments. Many states also give non-banks trust powers. other banks. The national bank just has to give notice to OCC if they intend to do this.. the statute provides that the Fed may not exercise its authority under that Act to permit a management official of a systemically significant nonbank financial company overseen by the Fed from also serving as the management official of nay bank holding company with consolidated assets exceeding $50 billion or with any other nonaffiliated systemically significant nonbank financial company overseen by the fed. a. ability to operate a Trust being one so long as not contradictory of state law. (c) The SEC finalized rules to provide greater independence for boards of funds that rely on certain exemptions to permit transactions that would otherwise be conflicts on interest between the fund and its management company X.) to operate trust departments. a NC BHC. Neither one can operate trust services in SC. 5. v.look to state law. NCNB Corp. SCOTUS said banks are permitted to exercise trust powers under state laws. Common trust funds. Per Mcculloch and Osborn. These regs reverse the ATC case. The SC ban of foreign testamentary trustees applies equally to both state and national banks located in NC. (4) Section 32 of the Glass-Steagall Act prohibited interlocking directors between banks and brokerage firms (p699) (a) That provision was repealed by the Gramm-Leach-Bliley Act (p699) (b) Restrictions in the Investment Company Act of 1940 continue to limit the number of bank directors on the boards of affiliated investment companies because they are viewed as “interested” directors. a SC corp. TRUST AND OTHER ACTIVITIES.. a. 2. So it passes commerce clause test. b..get their trust powers from state law. 4. Congress has power to organize bank and give them public and private functions. NCNB had a trust department w/ a lot of SC customers.(c) Further. State cannot impose any restriction on national bank that it does not also impose on its own state banks. First national Bank of Bay City v. 80 . c. which says national bank can operate a trust department in States where state law allows bank competitors (trust co's. So state can only limit the trust activities of national banks to the same extent that they limit the trust activities of their own state banks. b. 1. Challenge to national bank trust powers on constitutional grounds. Fellows. SC changed its laws again and said a SC corp. etc. a national bank. OCC has pre-emptive power. So its like the branching laws . that is controlled by an out of state corp. c. formed American Trust Co. and Congress acted constitutionally in giving national banks trust powers. 2001 .get trust powers from 12 USCA §92(a) (Fed Reserve Act of 1913).OCC did not like this decision. can't act as a trustee within the state. A. a. So NCNB Corp.

to the South Sea Bubble. a. to prove that a trustee acted prudently and in good faith with respect to an individual 81 . and manage funds entrusted to him as men of prudence. conduct himself faithfully.trustee could be individually fins for 1 bad investment even though whole portfolio increased). d. SIPC insures mutual funds. notice by publication was not adequate.prudent man. In re Bank of NY. b. 3. c. ii. Trustees of common trust fun must adhere to limitations in trust instrument. a B must abide by trust instrument and can't liquidate or control investments like a mutual fund investor can. Neither the trustee or beneficiary have ownership over any particular property in the common fund. 2. iii. The statute also called for a judicial accounting every so often. etc. except: i. by the constituent trusts. See cases below. discretion. v. This led some states to adopt "legal lists" that specified which securities were prudent investments for trustees. So 3 basic standards of care . Invest funds as a whole. losses. B. based on original contribution. restrictions relaxed. ii. Central Hanover Bank & Trust. gains. Trustees can only invest in certain things: a.Harvard College v. Guardian ad litem (inspected trust fund to see how trustee performed) challenged some individual investment decisions made by Bank of NY's trust department in a common trust fund.A trustee must exercise sound discretion.). Fiduciary standards. iv. i. Common trust funds are insured by FDIC. high growth. Also. All income. Benefits to bank b/c economies of scale. Note: A common or collective investment trust fund is like a mutual fund. With a trust fund. – look at individually (this is a very tough standard . Case said proper notice of the judgments in these accounting actions had to be mailed to the trust beneficiaries. Like a mutual fund. Takeaway from case: good description of how common trust funds work. c. Courts were split as to whether investments in common stock or other equity investments met this prudent man standard. Mullane v. legal list. r separate companies). b. Legal lists continued to expand to include common stock and common trust funds. Amory . After WWII. iv. NY statute allowed common trust funds trusts into one fund for investment administration. "Prudent Man" rule . large cap. An investment pool of assets that come from different trust accounts. shares in common trust fund are not liquid (must get a distribution from the trustee). and modern portfolio theory (see below). Trust accounts will own interest of trust funds instead of owning stocks and bonds. 1. bank regulators oversee collective investment trusts (common trust funds are not separate entities separate from bank). Mutual fund shares are liquid. expenses. b. Mutual funds are more targeted (long term. iii. are shared on a pro rata basis. new restrictions by courts in England limited investments to government securities. etc.a. e. 22 states enacted the Model Prudent Man Investment Act which allowed investments in common stock. and intelligence would manage their own affairs.

Must look at each investment individually. so no investing in mutual funds. so you should diversify and invest passively to match the market. employ in their own like affairs. State laws said the trustee cannot pay any fees. a money manger should not be judged on the basis of individual investments. But still. Martin.A. established companies. The purchase of 17 out of 24 equity funds was imprudent. Court upheld the findings of the trial court. long term investment. So overall increase in portfolio did not insulate trustee. c.there is enough info and activity to cause prices to reflect their actual value. sell etc.” (Prudent man standard defined) 4. First AL Bank of Montgomery N. ii. 17 out of 24 stocks did not perform well. Note: NY changed its laws after this case and said it was OK for a trustee to pay mutual fund fees out of the common trust funds. d. b. Battle of the experts. but on the performance of the portfolio as a whole. ii. v. trustee not liable here b/c he acted in good faith here and made prudent decisions. The trustee still has discretion to pick mutual fund. but the court didn't buy it. The sale of 5 of the remaining 7 was held to be imprudent. investing in a mutual fund does not assign these management responsibilities. Here there was no evidence of attention and consideration with regard to each investment decision. etc. i. iii. a. out the common fund for management. commissions. Therefore. So now its OK for trustees to invest in mutual funds. No. Note: Modern portfolio theory poses new challenges for trustees. However. a. d. Common law and state banking laws require trustees to maintain management control of common trust fund investments. investments were made contrary to bank policy/standards: i. The bank here tried to argue that a mutual fund fee is like the internal management costs of a regular company. Can a trustee of a common trust fund invest in mutual funds? b. Also. i. They violated fiduciary duty and prudent man rule. Trustee acted in good faith and did not fail to exercise “such diligence and such prudence in the care and management of the fund as in general prudent men of discretion and intelligence in such matters. Court countered that trust was essentially paying for same service twice (trustee fee coupled with mutual fund fee). iv. not investing.investment(s) within the portfolio. Matter of Onbank & Trust Co. the reason a trustee of a common trust fund cannot invest in mutual funds is b/c of the mutual fund fees. but court differentiates between investing and speculating. but cannot speculate where intent of trust is safe. Modem portfolio theory says market is an efficient market . You can't use hindsight to challenge mere error in investment judgment if trustee acts in good faith as a prudent man. 82 . bank failed to follow its own guidelines. REITs lost half of their value. not overall portfolio performance. A mutual fund fee satisfies this. What value does fiduciary bring then? Why pay him fees if he just buys index funds and passively invest? d. P complaining about investments that bank trust division made. Trustee must exercise only sound discretion. 5. In both cases. However. Bank was speculating. The theory says that you can't beat the market as a whole. These previous cases we looked at all judged individual investments. c.

This violated the state's prudent man rule. Secretary of Labor implements regulations under ERISA. Employment Retirement Income Security Act of 1974 (ERISA). In addition to following ERISA fiduciary guidelines. OCC. Some state's prudent man rule imposes on trustees a duty to diversify. Sentinel secured its debt with certain securities. etc. The OCC has proposed a new rule to adopt uniform standards of care for trust departments of banks. a. not the common law of trust standard of looking at individual investments. Services = settlement. Sentinel solely managed investments. US Dept. of Treas. investment managers also have a duty to invest according to the documents and instruments governing the plan. Diversification Risk d. Grede v. 1. as long as plan provisions are consistent with ERISA. Laborer National Pensions Fund v. In order to transfer securities. 83 . Central National Bank of Mattoon v. 2. holding customer’s assets in safekeeping 3. small company in the business of buying small banks. Fund sued ANB for breach of fiduciary duty under ERISA for investing in interest-only mortgagebacked securities ("interest only strips") (IOs). and 3) self-dealing and 4) it was thinly traded . but IL's statute here didn't. D. Bank of New York Mellon a. not because Eagle was not a blue-chip stock (why market adjusts the price of a risky stock so it's the same investment as a more secure stock . but in particular one transaction: D put 20% of its common trust fund assets into Eagle Bancorp. Regulations say a fiduciary must act as a prudent man based on the modern portfolio theory. and reporting or marketable securities and cash. not a test of fund performance. Insolvency Risk iii. Court identifies three types of risk i. Imposes fiduciary duties. based on the common law of trusts.5. 4. Sentinel had to issue a desegregation instruction. Northern Trust Quantitative Advisors a. but because 1) it severely limited the funds diversity.so quality of company doesn't matter b/c quality is built into the price). on the fund's managers. a thinly traded. It's a test of prudence. a. Pension funds controlled by ERISA. Petition to set aside the OCC’s revocation of trust authority is denied. e. But the lack of price/value investigation. such as securing loans. b. c. safekeeping. d. i. 2) it was not worth the $11/sh that the P paid for it. 3. and the thinly traded stock was enough to violate the prudent man rule. Extended a line of credit to Sentinel. Custodial Services 1. The bank’s failure to take reasonable steps to determine whether $11 was a fair price and because the bank was engaged in self-dealing  purchase was imprudent 6. Market Risk ii. Pension fund management. and structure the investment and must use independent judgment. b. Currency Services: Comptroller’s Handbook a. OCC revoked P's trust powers because of many improper practices. Intended to protect customer assets from the claims of general creditors in the event of bankruptcy of the regulated entity and to prevent futures commission merchants from using customer funds for their own purposes. Bank trust depts. evaluate. its income came only from management fees. Enacted to regulate employee benefit plans and protect the funds invested in such plans. trustees. Segregation of funds is required. c. E. often manage pension funds.so trustee must use proper methods to investigate. Not a trust activity or a fiduciary activity. but it is related 2.so efficient market theory does not work. Imposes the prudent man standard . the self dealing. Sentinel used BNY’s custodial services and lending services. Discusses efficient market theory. that P's president and director had a significant financial interest in.

An IO is a right to receive a portion of the interest generated from payments on mortgage loans. c. therefore bailor bank must exercise ordinary care to safeguard the property that had been turned over and return property to bailor upon request. c. Conduct: A fiduciary must act “with the care. The statute does not violate the 14th Amend. One of 2 big wire transfer system in the US. Bank used reasonable care and was not negligent. is a bailment relationship. SO what kind of responsibilities does that impose? See Morgan case. The bailor bank is not an insurer. Electronic (wire) transfers of funds. F. 6. Banks lease or rent these. (1925) Supreme Court of NC a. Why? Probate process and account for all assets. held that investing in IOs did not breach fiduciary duties. or the Deposit Co's K with its renters. It is a bailment for mutual benefit.seal and inventory boxes after death. and that determination is controlling. In addition . doesn't matter. Usually 2 keys. typically a bailment relationship regardless of what K says. 1. IOs are a good hedge. Even then. prudence. b. Citizens Bank of Spring Hope. 1 with the bank. Stead. Ct. however. Fedwire system. b/c no bailment relationship and the law forces them to control property that is not theirs and not in their possession. SO is this L/T? No. This was the Deposit Co's business and these are the duties/risks they have assumed. IL SC said the relationship is a bailment relationship. at the time they engaged in the challenged transactions. and box can't be opened without both. Nothing could be removed from the boxes except after notice to officers designated by the state (clerk of court will come in and inventory the box). 3. the Deposit Co's charter. Safe deposit boxes. Purpose: providing benefits to participants and their beneficiairies and defraying reasonable expenses of administering the plan ii. so does the yield on IOs. 7. When interest rates decrease. but no one uses these any more. What is relationship b/t bank and customer? K is usually called a lease. b. v. The relationship b/t a bank lessor and customer lessee of a safe deposit box is that of bailor/bailee. Issues regarding liability when they are robbed or when owner dies. 84 . is to retain enough assets to pay the renter's state taxes. a. Morgan v. G. When interest rates increase. Banks are heavily involved in custodial and transfer activities for securities though. State claims the relationship b/t renter and Deposit Co. skill. mortgage-backed securities decline as interest rates increase. This includes boxes to which the renter held jointly with others (this is a common provision.taxes . Test: Whether the individual trustees. the Deposit Co.. But stocks are now held in book entry form. you are turning over possession of goods for bank to hold. However. 2. 4. The safe deposit box was robbed. b. Conversely. so no liability to bank. and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. iii. They provide security you don't have in your home. IL law seals safe deposit boxes of renters for 10 days after the renter dies. NC has a similar law . the relationship b/t renter and Deposit Co. i. You are not leasing space. Not landlord/tenant. Deposit Co. Other one is CHIPS. therefore. Fund Transfer Services. Stole bonds. d.account for all assets so taxes can properly be assessed). 1 with the customer. National Safe Deposit Co. employed the appropriate methods to investigate the merits of the investment and to structure the investment. (not safety deposit boxes) 1.real-time payment system that is operated by the Fed for banks that have reserve or clearing accounts with a regional Fed Reserve Bank. so this has not hurt their business. 2. people refinance and therefore the yield in IOs decreases. Boxes used to be used to hold street name securities. said this violates their 14th Amend. Must use modern portfolio theory and look at portfolio as a whole (not individual investments). Protects assets. so use of safe deposit boxes has declined. 5.

Person who needs credit. Northern Trust Int'l Banking Corp.Iraqi assets frozen in US. 8. Serve as a payment function. Philly Gear Corp. b. 4. Fed bankruptcy law modified so you can net obligations arising from wire transfers. Problems  when 1 party goes broke or insolvent. a.3. Serves as a payment vehicle. Documentary letter of credit (aka Direct pay letters of credit)  intended to be drawn by B. Two types: a. This excludes consumer transfers which are covered by federal EFT. then goes insolvent. Beneficiary . LCs governed by Art.governs wholesale wire transfers. Banca Commerciale Italiano NY v. So banks will require the LC to be adhered to exactly before it will pay one. 5.. Doesn't matter what is going on with the underlying transaction. v. Letters of Credit. Lays out terms of transaction. 4A  Fund Transfers . is not an insured deposit. 7. a. Independence principle  Letter is independent obligation from underlying transaction. Standby letter of credit  serves a guarantee function. a loan relationship arises immediately with the party who arranged for the bank to issue the letter of credit. 6.person who gets benefit of letter c. Sender became insolvent. Letter of credit substitutes credit of bank for credit of an obligor. or something else to prove delivery was made and payment is owed. b. Its very efficient way of transferring large amts of money. 3.messaging system that facilitates transactions and communications. said the funds paid under LC are not Iraqi assets but funds of the bank that paid it. Issuer . Centerfugal Casting Machine Co. Account party . B must also present a draft (this is vehicle for drawing). 4. not exact language of statute. and a seller presents a letter of credit. 5 of UCC. American Bank & Trust Co. I think this is the same thing as a documentary letter of credit. Look at policy. FDIC V. H. etc. Distinguish commercial letter of credit  seller obtains payment from bank directly. Ct. A letter of credit. Letter of credit is a 3 party relationship.bank. 1. c. Used a lot. This is how money is transferred in commercial transactions. does not go to purchaser first. Look to letter for specifics.person whose account gets credited with the letter. 85 . Money gets sent and you can't get it back b/c they are in bankruptcy. Art. National banks not allowed to issue guarantees. from above. Letter of credit/standby letter of credit/guaranty letter of credit  Instruments issued by banks that act very much like a guarantee of payment. If a bank is called upon to pay upon a letter of credit. 8. just the net amount.Society for Worldwide Interbank Financial Telecom . So the letter must be complied with exactly. LoC will require the B to present proof of default. 7. a. See independence principle. even if it is coupled with w/ a promissory note from buyer. a. Buyer goes to his bank and gets a letter of credit issued for the benefit of seller. Look to letter for specifics. 5. Not intended to be drawn as a payment vehicle unless there is a default. B must also present a draft (this is vehicle for drawing). 6. Also emphasized independence principle. b. LoC will require B to show a bill of lading. SWIFT . Also governed by guidelines established by International Chamber of Commerce. b. Case turned on the fact that bank sending funds had agreed to release the receiving bank. but can issue letters of credit 2. So if Bank issues letter. FDIC won't pay it and seller is screwed. 1st Gulf war . You can net obligations and don't have to send your bankrupt party the full amount of the K price. etc.

NY legislation prohibited insurance cos from investing in stock or underwriting securities. Insurance company reserves were adversely impacted. Holding . The Committee’s work did not lead to any Federal legislation regulating insurance companies. 86 . Insurance industry grew rapidly after Civil War. Concerns over concentration of wealth and power. The insurance business works on the law of averages and spreading risks. life.-Calculating life expectancy.d. expected loss rates. a. so cts won't interfere with a K provision that makes time of the essence. D had a life insurance policy. b. here to revive policy . Decision in part based on fairness to insurance company. Agents sell insurance. ii. State regulation of the insurance business. NY Life Insurance Co. 1929 crash  insurance cos were not devastated by the crash or depression (couldn't invest in securities). not on premiums + investments. You can use insurance to guard against any number of risks  health. Also. they were not subject to the pervasive regulation that was enacted during this period. Relief – allow D to recover equitable value of previous premiums 2. property. Insurance cos required by state law to hold certain amount of reserves. iii. Again. This led to the Armstrong Committee in NY. K said the policy would be forfeited if premium payments were late. etc. but they are not. assuming risk associated w/ insurance. it would be unfair to insurance co. This brought them in close connection to commercial and investment banks. then died. i. XIII INSURANCE.no. Underwriting  actual business of issuing policies. receiving premiums. Should they be contingent liabilities? I don't know. Not involved in the risk side of the business. investing. D stopped paying premiums during Civil War. Insurance cos amassed large reserves of capital. LCs are off-balance sheet items. b. this messes with the insurance co's risk averaging calculations. Spreading risk of loss over a large enough pool of people so loss experience is less than premium income + investment income. 9. sell policies. As a result of the prohibition on owning stock. A. etc. c. a. Usually 1%. Agency  strictly sales piece of the business. Premiums priced based on timely payments. Only people who died would seek to revive Ks and collect on the policies. ii. and now he wants the policy revived. v. Regulation of Insurance . etc. The business of insurance. etc. People were very critical of the insurance industry. Statham. The risk side of the business. and they disclaimed any responsibility for the crash. d. which concluded that the insurance industry should be kept separate from the securities and banking industries. and this concentration skewed and leveraged corporate balance sheets by encouraging debt over equity. READ THIS STUFF IN THE BOOK. Amounts are usually disclosed in a footnote though a. 1) FDR's Temporary National Economic Committee (TNEC) found that insurance co's assets were highly concentrated in industrial bonds (b/c of restrictions on equity ownership). 10. Banks charge fees for these too. Introduction to insurance.Background and history. Time is of the essence w/ insurance Ks. estimates. insurance cos could not affiliate w/ banks iii. 1. Agents make money from transactional commissions. Early history. i. Agent can be independent or captive. Distinction: i. ii.people who came back from the war alive would not seek to revive insurance Ks (they would just go out and get cheaper ones).

See p. Still operate today – insure 1M people and w/ over $50B in insurance dollars. So insurance industry created the variable annuity K. was appalled at the high premiums and low policy values of the life insurance industry. Three states adopted SBLI systems . iii. 1. to own a single thrift provided the thrift was a "qualified thrift lender" (QTL). a. Insurance cos still subject to Sherman Act/Clayton Act to the extent not regulated by state law. Operation of a limited purpose entity  a trust co is not considered a "bank" under the BHCA if it functions solely in a trust or fiduciary capacity. State insurance regulators pushed for “McCarron-Ferguson Act” to protect their turf.NY. iii. as part of the Armstrong investigation. until retirement. and insurance regulation was left exclusively to the states. including an insurance co. i. b. His plan for a Savings Bank Life Insurance (SBLI) system was enacted in 1907. iii. Purchaser makes a series of payments to insurance co. ii. This threw insurance cos back into the finance activities that the Armstrong Committee had forbidden. SC declared the variable annuity a security. B. so subject to SEC regulation. 87 . c. Virginia (1869) 7 SC held that issuing an insurance policy “is not a transaction of commerce” and is “governed by local law. States should regulate insurance. ii.) 1) So from 1869-1944. Southeastern Underwriters (1944)  SC held that insurance cos are engaged in interstate commerce and are therefore subject to federal antitrust laws. S&L Holding Company Act (parallel to BHCA)  unitary thrift exception . Brandeis.allowed a company. A QTL has 65% assets devoted to housing or consumer lending ii. 3. (Note: case was about an agent trying to get out of a fine for selling insurance in a state where the agent was not licenced. Fixed annuity  Paid the same amount to annuitant each year for life. people started investing in securities and mutual funds instead of traditional fixed annuity life insurance Ks. Annual payment based on annuitant's life expectancy and assumed rate of return on the annuity's purchase price. not both)  This loophole closed in 1987. but inflation could change this. Bank Insurance Activities Prior to GLB. i.Insurance is essential and affects the public welfare. Paul v. So Congress enacted the McCarran-Ferguson Act  regulation of insurance is generally a matter for the states. and MA. Upon retirement. a. Insurance cos also tried to get into the business of banking through loopholes in federal statutes. Prevented the insured from outliving his assets. Investment type product that competes with securities. 1) This was seen as a threat to the states' power to tax and regulate insurance. 1) Congressional intent  give support to the existing and future state systems for regulating and taxing the insurance industry. ii. Funds are invested. Insurance expands its borders. Introduction. iv. therefore it is generally recognized that insurance should be regulated. b. Operation of a "nonbank bank" (a bank that either accepted deposits OR made commercial loans. After WWII. US v. iv. Amt of payments based on annuitant's life expectancy and the amount of funds accumulated and increases/decreases from the investment of those funds.” So a state law regulating insurance does not violate the Commerce Clause. but some nonbank banks grandfathered in. CT. v. i. banks sought entry into insurance business to get the fees and underwriting commissions. Problem  value of fixed payment could be severely undercut by inflation. i. As insurance cos tried to get into the bank business. i. iii. not federal government. purchaser receives a stream of payments for life. Congress didn't think it had the power to regulate insurance. 910.

More frequent contact w/ customers. iii. Declining sales. Issue  does § 92 impose any geographic limits? iv. iv. ii. i. of Insurance Agents. Many people thought the original intent of §92 was to give small town banks another source of income. §92  see above. Comptroller made a ruling that national banks could sell insurance under their incidental powers. national banks had NO power to sell insurance. vi.7100  the branch of a national bank located in a community w/ a population of less than 5. So we need about $5 trillion more in life insurance in this country. Independent Insurance Agents of America v. starting your own business. so §92 is just a limited grant of power. §92 would mean nothing. not the courts. Small town exception. Banks use database marketing. Aftermath of Ludwig . Ludwig. ii. business loan creates need for employee protection. v. c. About 104M Americans are w/out life insurance. Saxon v. 88 . NBA  1) §24(7)  grants national banks all incidental powers necessary to carry on the business of banking. No. Expensive distribution system  2/3 of traditional life insurance co's expenses are for distribution. Bank sold insurance in Georgia. c. Banks can earn a larger margin on insurance by using more effective and lower cost distribution strategies. etc. it’s for Congress to fix. b. Banks are at the point of customer needs origination  financial transactions create insurable interests. Banks should sell insurance to fill this void b/c of the advantages they have over traditional insurance agencies: i. Insurance cos must compete with securities and other investment vehicles available to consumers. segmented customer base. Before passage of §92. Comptroller claimed national banks got power to sell insurance from §24(7) incidental powers. iv. i. Customer affinity for and proximity to banks. Mortgage loan requires need for homeowner' insurance. If this is a bad interpretation. e. The logic of this position is compelling.states try to fight back. and access to broader range of customers. Insurance industry sued. etc. This is a reasonable interpretation of statute. iii. Access to life insurance is critical to society. Same thing with marriages. ii. Declines in agent recruitment and retention. d. 2.allow people in small towns to be better served by local banks rather than large out of town insurance cos that did not go into small towns. 12 CFR §7. i. target markets. Declining sales productivity  Annual policies sold/agent is declining. a. So a bank or branch located in a small town can sell insurance to existing or potential customers ANYWHERE. 5th Cir said no. so lots of sales to be made. not to give large banks the ability to sell insurance nationwide. iv. i. 2) §92  national banks located in a community w/ a population of less than 5 thousand people can act as an insurance agent (not underwriters) to the extent that State allows state banks to act as insurance agents. Georgia Assoc. getting a student loan. customer files. It's a very inefficient system.000 ("small town") can sell insurance even if the bank's principal office is located in a larger community. Otherwise. not confined to the small town. ii. National banks.Problems with traditional life insurance system  Traditional insurance system relies on agents. iii.  Purpose . iii. §92 1imits that power. compared to 37M who are without health insurance. Banks are better able to coordinate their marketing efforts  traditional agents have to do their own marketing.

so they are not around anymore. cc. Advertising mailings can originate from inside or outside the small town. 3) Permissible activities for banks under §92:  First. ii. 1) Bank offered Retirement CDs to customers in IL. Upon maturity. American Deposit Corp. aa. OCC eventually approved underwriting of title insurance and credit life insurance. 919-920) 1) FL had an anti-affiliation law that said banks cannot be affiliated w/ insurance cos. The brokerage of variable annuities by national banks is an incidental power. §92 regulates insurance as well and therefore pre-empts state law. and receives the remainder in periodic payments for the rest of his life . the location must be responsible for collecting premiums. selects a maturity date (usually retirement).. Can use telemarketing and cybermarketing. Federal law pre-empts state legislation like this. dd. (The whole case is not in the casebook. annuities are insurance products for purposes of the McCarran-Ferguson Act so their sale is subject to state insurance regulation. Interest collects tax free. 1) Letter broadly construed the "located and doing business in" a place of > 5. agents must be managed from the location. NationsBank of NC v. iii. 1996  OCC advisory letter saying state laws that treat national banks who sell insurance differently than other insurance agencies would be "problematic". paying commissions. aa. i. 2) IL tried to stop bank from selling these b/c state said the Retirement CD was insurance and the bank never got licensed to sell insurance.000 should be permitted the same marketing range and be able to use the same marketing tools and facilities that are other insurance agencies in the state are allowed to use. municipal bond insurance. 4) Basically. processing applications. Sales and solicitations can occur outside the small town. iii. Nelson  SC ruled that state legislation could not restrict national banks from selling insurance. Annuities are financial products. delivering policies. v. 3) McCarran-Ferguson Act  state laws enacted for the purpose of regulating the business of insurance do not yield to conflicting federal statutes unless the federal statute specifically provides otherwise. and mortgage reinsurance. whether it originates from inside or outside the small town.  Note: IRS started taxing these. depositor gets a lump sum up to 2/3 total balance. ee. your estate gets lump sum payment of the balance.  Purchaser deposits money. ii. More expansion. Schacht (US 1996)  However. (US 1996)  SC held banks could sell fixed and variable rate annuities. the agency located in the small town must be "bona fide". I. Variable Life Insurance Co. Even though states have power to regulate insurance. credit life insurance. a national bank insurance agency located in a place w/ less than 5.  If so. Barnett Bank of Marion v. not insurance products. and the practices of banks and insurance cos in 1916 when §92 was enacted. agency can market the same way non-bank agencies market.d. 2) Based on the language of §92. 89 . the location must the location for licensing purposes. legislative history. as well as agency for the sale of insurance. If you die early. 2) SC struck this down. bb.e. it is mentioned on p. keeping business records.000 people language of §92 very broadly (OCC had implicit power from Congress to do this b/c statute did not define it). if a non bank insurance co can do it.basically a lifetime annuity. a bank affiliated insurance co can do it. Personnel of bank branches outside the small town can make referrals. Bank may use a 3rd party to help them with all this marketing.

issuer bets that policy holder will live shorter than expected. Independent Insurance Agents of America Inc. selling crop insurance is not within "business of banking" or incidental thereto. Basically. 3) In the end. v.  But Retirement CD is not a variable annuity. if farmer's yield falls below the insured level. –a turf battle case. Also. but it never happened. not variable). Its one the seventh largest retail insurance brokerages in the US.  Risks are similar to those already born by banks under NBA §92. Citicorp v. W/ insurance policy. 1) OCC issued a letter ruling that said national banks may offer multiple peril crop insurance and hail/fire insurance. banks pays.  Crop insurance benefits banks b/c it protects them against risk. and state law wins and it can regulate the sale of Retirement CDs. well managed bank and you can sell insurance. McCarran-Ferguson Act applies. insurance co will pay bank). but protect state regulation against inadvertent federal intrusion (i. issuer bets that policy holder will live longer than expected. Is insurance sub subject to Fed. through a federal statute that describes an affected activity in broad general terms. Just go qualify as a financial sub of a well capitalized. Citicorp had DE state bank sub that had an insurance sub. So it's the "business of insurance" for purpose of McCarran-Ferguson Act. 1999  GLBA  allows financial subs of "well capitalized and well managed" national banks to engage in a wide variety of insurance activities as both agent and broker. a. there would be no need for §92 or GLBA provision above. W/ an annuity. Independent Bankers Assn.. Both have mortality risk. No systemic failures from offering insurance ever occurred. OCC's rationales for saying crop insurance was within the "business of banking" or at least incidental thereto (NBA §24):  Crop insurance similar to credit life insurance (if loan defaults. of America v. The Fed ordered Citibank of Delaware to terminate insurance activities conducted through its operating subsidiary. Example of state bank engaging in insurance. DE and SD led the way. but it's a different product (fixed. so issuer doesn't have to pay the full amount of the annuity. It spreads risk.Purpose  NOT to insulate state insurance regulation from all federal law. b. Fed. The spreading and underwriting of a policy holder's risk is an indispensable characteristic of insurance. not the customer. Family Guardian Life Insurance Company.e. If §24 was that broad. BB&T in Winston. State banks. 5) Issue #2  is the Bank Act specifically related to the business of insurance?  No. and is basically a form of security for consumer loans vi. an annuity is just the flip side of a regular insurance policy. this holding might not mean much. 4) Issue # 1  is Retirement CD the "business of insurance"?  Yes. v.? NO  90 .  Basically.  SC held variable annuities are not insurance though. 3. this is the type of general insurance that was prohibited by Saxton. Hawke. (mentioned only)  Product that names bank as B. c. Heimann  national banks can offer credit life insurance. iv.one of the most successful marriages of banking and insurance. 6) Different result than VALIC. i. It just says §24 does not give power to banks to generally sell insurance. continuing to pay premiums above the amt the issuer is bound to pay upon the issuer's death.  Therefore. 2) Ct says no. Many states allowed their state-chartered banks to provide insurance services. NC has liberal laws letting banks engage in insurance business. FDIC tried to propose rules to limit state bank insurance activity.

Exceptions: i. a. etc are all activities that are financial in nature. More activities could be permitted to the state bank acting as agent if permitted by state law and the state bank was well capitalized and no risk to the safety and soundness the federal deposit insurance fund. BHCA  §3 says BHCs must get Fed approval to acquire a bank. Grandfather provisions for activities authorized before 1982. ii. A FHC may engage in activities that are: i. b. 2. Citibank/Travelers merger . Non-banking subsidiary of a Bank Holding Company.Fed can't regulate the sub. 1. Exception for small BHC w/ assets of less than $50M. State as insurance underwriter -limited to those activities permitted for national banks. but the activities its subsidiary banks engage in is up to the authority who granted the subsidiary’s charter . or activities closely related to banking. BHCA §4 says BHC must engage in banking or closely related to banking activities. d. a.only limited to what the bank's state allowed either by state statute or state banking regs. ii. BHC permissible activities frozen as of right before GLBA. Insurance activities permitted under GLBA include underwriting. In general. The Gramm-Leach-Bliley Act. f. The Board's "generation skipping" approach is not logical. b. Fed regulates BHCs. from selling insurance. Anti-competitive review from earlier chapter. Small town exception (like NBA §94). GLBA creates idea of activities financial in nature as the test for permissible activities of a FHC. §4 says 1) BHC may not own a non-bank and 2) BHC can only engage in banking activities. BHC subs were engaging in all sorts of insurance activities. 1982  Garn-St. BHCs could undertake activities "closely related to banking" through their non-banking subs. State bank as principal . c. GLBA specifically say insuring against loss. Put pressure on Congress to repeal restrictions on underwriting activities. BHCs can't do this. e. d. or 91 . No. f. iv.ii. C. Fed  BHCA does not preclude bank subs of a bank holding co. a. Some enacted "wild card" statutes to allow state bank to engage in all activities permissible for national banks. Massachusetts did not allow any state chartered banks to engage in any insurance activity. iii.limited to those activities permissible for national banks.approved on the condition that the new Citigroup divest itself of the Travelers insurance underwriting unit b/c of the restrictions on BHCs from engaging in insurance underwriting. GLBA significantly expanded the ability of banks to engage in insurance activities. so 1991. State bank as agent . Issue  But does BHCA extend the regulatory authority of the Fed to the sub of a bank holding company's sub? v. e. banks could only underwrite credit and title insurance in some instances. Insurance Agents of America Inc. Prohibited underwriting by state banks except to the extent national banks allowed. iii. 4. iii. Only regulator of bank sub is the regulator that regulates that bank. States continued to expand state banks' powers to engage in insurance agency activities. So a FHC is authorized to conduct insurance activities. FHC is an entity that can engage in things that BHCs cannot. Citi knew it had 2 years plus up to 3 one-year extensions to keep business and get legislation in place. i.FIDICIA. v. Congress didn't like this holding. Fed can't reach down into the BHC structure and regulate subs. Before this. Germain Act  it is not "closely related to banking" for a BHC to provide insurance. They tried to regulate subsidiarys of banks which were owned by BHC’s vi. Financial in nature or incidental to such activity. Between 1995 and 1998 states allowing banks to operate insurance agencies increased from 22 to 40. Non-banking subsidiary of a holding company. Prior to 1982. Most BHCs have converted to FHCs to take advantage of this.

Agency? Yes. ii. or incidental thereto (like FHCs). Title insurance sales  national bank can only do this if state bank can. Do we need this anymore? No b/c financial sub of a national bank is not subject to 5. But FHC non-bank sub can underwrite. if a state authorizes title insurance sales for state banks. and do not represent a substantial risk to the safety and soundness of the depository institution or the financial system. a financial sub of a national bank can sell title insurance. i. even though FHC subs are allowed to. GLBA forbids the sale of title insurance by a national bank unless authorized by state law for statechartered banks.ii. Financial subs of national banks can engage in activities that are financial in nature. So FHC can underwrite. and can conduct insurance agency activities everywhere. it is unclear whether state banks may do so. those activities may continue after GLBA. e. i. qualify as a FHC and operate underwriting business in a sub of the FHC. However. 4. Grandfather provisions too. Financial sub of a FHC  Underwrite? Yes. State banks and state bank subsidiaries. c. Can only do it through a non bank financial sub. So neither national banks or state banks can underwrite. This was a compromise b/t Fed and OCC. FIDICIA has exceptions. SO if BHC wants to underwrite insurance. RE investment and development. ii. Financial sub of a bank  same. but the FHC's bank sub cannot. Therefore. 3. FIDICIA only limits a state bank's insurance activities as principal. §92 of NBA not repealed by GLBA. 92 . Federal Deposit Insurance Corporation Improvement Act (FIDICIA) says that state banks cannot engage in insurance underwriting except to the extent national banks can. a. Want to protect soundness of banks. h. Credit Disability. c. i. b. d. So just put your insurance business in a financial sub. however. Therefore. Again this doesn't apply to financial subs of national banks. 12 USCA §1843(k)(1)  insurance activities are "financial in nature". b. GBLA prevents national banks from issuing annuities. Bank  Agency? Yes. as to when a state bank may engage in insurance underwriting even if a national bank cannot. d. the GLBA restrictions on insurance underwriting restrictions activities for national banks also effects state banks. i. a. g. i. National banks and national bank subsidiaries. Underwrite? No (except credit) f. and merchant banking. Agency activities  state banks still allowed to do this to the extent allowed by state law. annuity issuance. b. But again.000 limitation. Financial subs not subject to small town limitation. Poor underwriting could cause a bank or bank sub to fail. OCC permits underwriting credit-related insurance products – Credit Life. GLBA still prohibits underwriting of title insurance or annuity Ks even if previously approved by OCC. National banks may therefore sell title insurance to the same extent that state banks can. so just transfer this activity to your sub to get around rule. neither a national bank nor its sub may underwrite insurance unless underwriting was permitted by an Office of the Comptroller of the Currency (OCC) ruling as of 1/1/1999. ii. Under GLBA. So national banks may still conduct insurance agency activities in small towns. However GLBA says financial subs of national banks are NOT permitted to engage in insurance underwriting. A state bank may own a subsidiary that engages in activities comparable to those permitted by GLBA for a national bank's financial subs (as long as permitted by state law as well). e. ii. Complimentary to financial activity. c.

or cross-marketing activity. 1) Prohibits a state from restricting any affiliation b/t BHC subsidiaries that is authorized by the GLBA. 3) Then apply for NARAB membership. 93 . GLBA also includes several consumer protection requirements that apply to insurance activities of all insured depository institutions. c. d. GLBA continues the McCarran-Ferguson Act's requirement that insurance be regulated at the state level. if 29 states enact fully uniform or reciprocal licensing statutes w/ 5 years. get licensed in your own state. National Associations of Registered Agents and Brokers (NARAB).states cannot "prevent or interfere" with the ability of a depository institution or affiliate to engage in any insurance sales. etc. (See safe harbors pp. 1) Voluntary licensing clearinghouse for brokers and agents seeking licensing in states where they are not residents.5. In addition to safe harbors above. If they discriminate. a. GLBA also reduces the burdens of multi-state licensing. solicitation.  Discriminates against a depository institution engaged in insurance activities as opposed to and other persons engaged in insurance activities. However. i. Enough states have adopted this. 4) NARAB acts as a clearing house for getting the agent/broker his licenses in other states.a state cannot treat a bank engaging insurance differently than non-banks engaging in insurance companies. i. Informs bank customers that insurance products of banks are not FDIC insured. 4) 13 safe harbor provisions permit a state to impose restrictions that are substantially the same but no more burdensome than the safe harbor provisions. National Association of Insurance Commissioners (NAIC) establishes conditions for NARAB membership. McCarran -Ferguson Act remains good law. State regulation of insurance. B/c of these safe harbors and the fact that litigation might arise from these. but can't discriminate against banks. State can always provide more consumer protection. GLBA also establishes new expedited dispute resolution process for disputes b/t state insurance commissioner and federal banking regulators (including issues of whether something is pre-empted). These federal minimum consumer protection provisions do not limit state insurance regulatory authority in anyway. this preemption does not apply to the consumer protection safe harbor provisions below.  Prevents a depository institution from exercising its powers under GLBA  Conflicts with the purposes of GLBA. 939) i. NARAB will not come into existence. SO states can regulate insurance. and a state can opt out of the federal minimum standard by saying that the state standard should apply in lieu of the federal standard. 3) So apply Barnett pre-emption standards . 2) First. Prohibit a state from regulating insurance activities authorized by GLBA in a manner that. prevents banks from tying insurance products. Parties can go to Federal Cir Ct and get a determination w/ in 60 days and parties have a right to appeal to SC. Any state law that falls within a safe harbor cannot be pre-empted.  This applies to both national and state banks.937-938) These are areas were states can regulate and their regulations cannot be pre-empted by federal law under Barnett. GLBA will pre-empt the state law. States do not want NARAB b/c it's a threat to their state-regulated insurance regulatory system. All insurance activities will be "functionally regulated" by the states regardless of the nature of the entity engaging in the activity. Directed bank regulators to come up with customer protections for sales of insurance by banks. (See the minimum federal consumer protection p. 2) Nondiscrimination preemption standards . so NARAB will not come into existence. b. ii. Exception  GLBA § 104 preemption standards.  However.

Before GLBA. Dodd-Frank created new Federal Insurance Office (FIO) in treasury Dept. unless the federal law "specifically relates to the business of insurance". 7. 2) Ps are not relying on any state insurance law here. Wants them regulated by a new Treasury Dept agency . American Bankers Insurance Assoc. Banks have been able to cross sell insurance products without having to acquire the whole insurance agency. What was the most famous class action securities firm that got nailed for having “paid plantiffs”? D. instead of undertaking joint ownership. not underwriters. 1) Variable insurance policies are not insurance products (SEC has consistently regulated them as securities). Purpose of GLBA was to allow the combination of the banking and financial industry. Ps want to litigate in state court. b. Banks can get better returns in other businesses. Also VSI and forced place CPI insurance suits. National banks using §92 power need to get licensed now (functional regulation). Sales Practice Litigation. And case.the Office of the National Insurance Commissioner. and McCarran-Ferguson Act only deals with preventing inadvertent federal pre-emption of state insurance laws. Holding: McCarran-Ferguson Act does not bar application of SLUSA here b/c the Fabe factors are not met. Faced with imminent failure of AIG. So cases will be heard in federal court.the Fabe Factors:  whether federal statute specifically relates to the business of insurance. Claimed Congress wanted all insurance regulation left to states. Made an emergency loan of 85 Billion ii. a.iii. ii. After Dodd Frank. Also subject to Orderly Liquidation Authority 2. AIG suffered further losses from its securities lending operation. 8.BB&T Insurance. Rationales  profits are not there. Federal law . Fed exercised its authority under Sec. thus subject to Fed. b. 9. i. Ps held variable life policies. d. Oversight and regulation. 6. Following GLBA. Ps only allege common law torts of fraud. Except for Citigroup. a. AIG’s Financial Products Subsidiary was leading underwriter of credit default swaps ii. etc. Industry b. Many banks are expanding into insurance business by acquiring agencies. v. wants a federal charter option for insurance cos.Securities Litigation Uniform Standards Act of 1998 (SLUSA)  makes federal courts the exclusive forum for class actions involving "covered securities". iv. Many insurance cos have entered into strategic alliances with banks to cross-sell their products. 1) 3 factors determine whether a federal statute preempts state insurance law . 13(3) i. the Financial Stability Oversight Council ( FSOC) may designate non-financial institutions as systematically significant. AIG guaranteed the CDS underwritten by its sub. However. In re Lutheran Brotherhood Variable Insurance Products Co. Identifies issues that could pose systematic risk(ACT 502) 94 . Total gov’t assistance reached 182 billion c. very few FHCs have combined insurance underwriting and banking. they didn't have to.  whether a proposed reading of the federal statute would supercede state law. The Dodd Frank Act 1. so should be in state court. iii. iii. P policy holders sued D insurers. GLBA stated McCarran-Ferguson Act was still good law and states still bear the primary responsibility of regulating insurance  no federal law will be read to preempt a state insurance law. Monitors aspects of ins. AIG casualty of financial crisis a. Was not financial holding Company so not regulated by Fed i.  whether the state law was enacted for the purpose of regulating the business of insurance. e.

Excludes health care ins. but substantive state insurance regulation is otherwise preserved. May preempt state laws that discriminate against foreign insurance companies. Crop ins. iii. Some long term care ins. i. 95 .c. ii.

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