QUESTION: May a national bank or state-chartered bank pledge bank assets as security for deposits?
ANSWER: Yes for public funds, but generally not for private deposits, except banks are authorized to issue a “guaranty bond” which provides coverage for deposits which are in excess of the amounts insured by the Federal Deposit Insurance Corporation and state-chartered banks may apply to the FDIC for authority to collateralize private deposits with Federal Home Loan Bank letters of credit.
NOTE: The Office of Thrift Supervision has previously determinedby OTS Office of General Counsel Opinion that federal thrifts may pledge their assets to secure private deposits and thus state chartered thrifts in Nebraska under our “wild-card” provisions would appear to have similar authority granting them the ability to utilize guaranty bonds and Federal Home Loan Bank letters of credit to secure private deposits.
I. NATIONAL BANKS
Section 7.7410 Pledge of bank assets as security for deposits. National banks lack the power to pledge their assets to secure private deposits. However, Federal statutes permit national banks to pledge assets as security for public money (12 U.S.C. 90); certain Indian moneys (25 U.S.C. 156, 162 and 162a); insolvent national bank funds (12 U.S.C. 192); Government of Puerto Rico funds (48 U.S.C. 780); proceeds of sale of U.S. obligations (31 U.S.C. 771); funds deposited or held in trust awaiting investment (12 U.S.C. 92a); and bankruptcy funds deposited under the provisions of 11 U.S.C. 101.
Private Deposits – .74 a national bank has no authority to give security for private deposits, and the receiver may recover securities pledged to secure such deposits, or he may recover their proceeds, since an unlawful preference of the private depositor would otherwise result. – Texas & Pacific Ry. Co. v. Pottorff (1934), 54 S.Ct. 416 (railway company deposit).
II. STATE-CHARTERED BANKS
Neb.Rev.Stat. § 8-133 states, in part, that:
(2) Any officer, director, principal stockholder, or employee of a bank or any other person who directly or indirectly, and either personally or for the bank, pledges any assets of the bank, except as provided in this section or otherwise by law, for making or retaining a deposit in the bank is guilty of a Class IV felony. Any depositor who accepts any such pledge of assets is guilty of a Class IV felony. Deposits made in violation of this section are not entitled to priority of payment from the assets of the bank…..
(6) Nothing in this section shall prohibit a bank or any officer, director, stockholder, or employee thereof from providing to a depositor a guaranty bond which provides coverage for the deposits of the depositor which are in excess of the amounts insured by the Federal Deposit Insurance Corporation.
(7) Nothing in this section shall prohibit a bank or any officer, director, stockholder, or employee thereof from providing to a depositor a guaranty bond or an irrevocable, nontransferable, unconditional standby letter of credit issued by the Federal Home Loan Bank of Topeka which provides coverage for the deposits of the depositor which are in excess of the amounts insured by the Federal Deposit Insurance Corporation.
The Nebraska Supreme Court has ruled that the pledge of assets by a bank to secure or retain deposit is inducement to the depositor to make such deposit, and both the bank official and depositor are subject to criminal prosecution. See, Bliss v. Pathfinder Irrigation District, 122 Neb. 203, 240 N.W. 291. As referenced above, Neb.Rev.Stat. § 8-133 authorizes the use of Federal Home Loan Bank of Topeka letters of credit as security for private deposits.
Federal law and FDIC regulations require state chartered banks that desire to collateralize private deposits with Federal Home Loan Bank letters of credit to make application to the FDIC for approval. In this regard, the provisions of 12 U.S.C.Section 1831(a), 12 C.F.R. Section 362.1(a) and 12 C.F.R. Section 303, Subpart G prevent a state bank from engaging in any type of activity that is not permissible for a national bank unless (a) the FDIC determines that the activity would pose no significant risk to the Deposit Insurance Fund and (b) the state bank is, and continues to be, in compliance with applicable capital standards prescribed by the appropriate Federal Banking agency. Since national banks are not authorized to pledge their assets to secure private deposits, state banks may not utilize Federal Home Loan Bank letters of credit to secure private deposits without first securing FDIC approval.
12 C.F.R. Section 303, Subpart G and H of the FDIC rules and regulations set forth the procedures for complying with the notice and application requirements set forth in part 362 Subparts A – E, governing the activities and investments of insured state banks.