I. INTRODUCTION
The NBA fields many questions regarding the type of activities in which banks may conduct business. The follow is a breakdown of permissible non-bank activities for state and national banks and bank holding companies.
II. NEBRASKA STATUTORY AUTHORITY: NEB.REV.STAT. § 8-101(5)
A Nebraska state-chartered bank is defined by Neb.Rev.Stat. § 8-101(5) to mean “any such banking institution as shall be in addition to exercise of other powers, following the practice of repaying deposits upon check, draft, or order and of making loans.”
III. NEBRASKA DEPARTMENT OF BANKING: STATEMENT OF POLICY # 1
A. General
In Statement of Policy # 1, the Department of Banking has interpreted § 8-101(5) to allow state banks, in addition to the normal banking powers of making and servicing loans and receiving deposits, the power to offer all financial services and products of a full service financial intermediary and all incidental powers thereof. The policy statement recites that the environment in which financial intermediaries operate is often in a state of flux and, accordingly, the products and services offered by financial intermediaries change with the environment in which they operate. The “other powers” section of § 8-101(5) envisions such a changing environment and gives Nebraska state banks the power to offer all financial services and products in the environment in which they operate, unless prohibited by federal law. The powers of a state bank in Nebraska are not as limited as those powers of a national bank operating under 12 U.S.C. 24 or a bank holding company operating under Regulation Y of the Federal Reserve Board.
B. Conditions
Statement of Policy # 1 provides that in offering such services and products, a state bank must obtain the necessary licenses, if any, and cannot condition a loan from the bank on the purchase of any such service or product by its customer. If a bank employee conditions such a loan upon the purchase of a service or product, the employee may be subject to criminal prosecution and removal from employment with the bank. If a bank employee offers such services or products personally, instead of for the bank, then the employee may not use the bank’s name and the employee’s offices must be in quarters separate from the bank.
C. Specific Products & Services
Statement of Policy # 1 lists the products and services that a state chartered bank may offer to its customers. The list is not designated to be all inclusive and a bank desiring to offer additional services may request approval from the Department of Banking.
1. Act as agent for any fire, life, casualty, or other insurance company in any community. See, § 44-392.
2. Originate loans or business by employees or agents of a state chartered bank at locations other than the main office or a detached facility of the bank. Such activity is not violative of branch banking provisions of § 8-157 if the loans are approved and made at the main office or a detached facility of the bank. The origination of loans consists of only the following activities:
No other types of bank activities may be performed at the loan production office (e.g., loan production office employees or agents may not possess or carry bank notes, deposit agreements, or signature agreements, nor may they disburse note proceeds or accept deposits).
3. Pursuant to request, act as finder and bring together a buyer and seller, where the bank’s activity is limited to the introduction and takes no further part in negotiations. For this service, the bank may accept a fee.
4. Assist the bank’s customers in preparing tax returns either gratuitously or for a reasonable fee.
5. Disperse to employees of its customers, payroll funds deposited with it by such customers. Disbursement may be made by direct payment to any employees or crediting accounts standing in the employee’s name at the disbursing bank.
6. Act as investment or financial advisor to the extent of:
7. Lease property to its customers pursuant to the rules and regulations of the Department of Banking and Finance.
8. Provide data processing to the extent of:
9. Provide courier services for:
10. Provide management consulting advice to non-affiliated bank and non-bank deposit institutions, including commercial banks, savings and loans, savings banks, credit unions, and industrial loan and investment companies. The following are limitations to this activity. Neither the bank nor its affiliates must own or control directly or indirectly any equity securities of the client institution. No management official of the bank or its affiliates may serve as a management official of the client institution except where such interlocking relationships are permitted as an exception under 12 C.F.R. 212.4(b). The advice must be rendered on an explicit fee basis without regard to correspondent balances maintained by the client institution at any depository institution affiliated with the bank itself. Disclosures must be made to each potential client institution of:
11. Perform real estate advisory services, appraisal of real estate, real estate sales, and real estate management.
12. Operate a full service travel agency.
13. Operate a securities brokerage, through a broker-dealer licensed with the appropriate state and federal regulatory authorities, if the securities activities are limited to the buying and selling of securities solely as agent for the account of customers and do not include the underwriting of securities, except obligations issued by the United States government or general obligations of the state or political subdivision thereof.
14. Act as a loan broker for which the bank may accept a fee from the lender or borrower upon consummation of a loan.
15. Establish a depository drop box or boxes.
IV. NEBRASKA“WILD CARD” POWERS: § 8-1,140
Neb.Rev.Stat. § 8-1,140 allows state-chartered banks to exercise all rights, powers, privileges, benefits and immunities enjoyed by national banks and as applicable to them. The “wild card” extends to bank subsidiaries, including the ability of state-chartered banks to exercise the powers and activities allowed for financial subsidiaries of nationally chartered banks. A full discussion of the Nebraska bank “wild card” provisions is found in “‘Wild Card’ Powers for State-Chartered Banks and Savings & Loans” NBA Compliance Handbook, Volume I, Bank Structure tab.
V. FDIC RULE – FS ACTIVITIES BY STATE-CHARTERED BANKS
The FDIC issued a rule to implement § 121 of GLB, which provides that an insured state bank may control or hold an interest in a subsidiary that engages as principal in activities that would be permissible for a national bank to conduct only through a FS subject to certain conditions.
GLB permits a FS to engage in specified, newly authorized activities that are financial in nature and in activities that are incidental to financial activities, if the bank and the subsidiary meet certain requirements and comply with stated safeguards. A FS also may combine these FS activities with activities that are permissible for national banks to engage in directly.
The conditions which must be satisfied by a state bank seeking to engage as principal in a FS activity are as follows:
1. Each insured depository institution affiliate of the state bank must be well capitalized, and the state bank must be well capitalized after deducting the bank's investment, including retained earnings, in all subsidiaries engaged in FS activities as principal.
2. The state bank must disclose the capital deduction and the separate assets and liabilities of the subsidiary in any published financial statement.
3. The state bank must comply with financial and operational safeguards that require operational safeguards to separate the bank from the risks of the subsidiary.
4. The state bank must comply with FRB rules on transactions with affiliates.
Prior to the adoption of GLB, a state bank seeking to engage as principal in a FS activity when the activities were impermissible for a national bank were reviewed by the FDIC under § 24 of the Federal Deposit Insurance Act as implemented in Part 362 of FDIC Rules and Regulations. Section 24 provides that a state bank subsidiary may not engage as principal in activities which are not permissible for a subsidiary of a national bank, unless the state bank meets its applicable capital requirements and the FDIC determines that the activity does not pose a significant risk to the appropriate deposit insurance fund.
Certain activities that the FDIC addressed under Part 362, Subpart A (e.g., general securities underwriting), are now authorized for a FS of a national bank. This means that such activities will no longer be analyzed under Part 362, Subpart A. In cases where federal law specifically prohibits FSs from engaging in certain activities as principal (e.g., real estate development or investment), these activities will continue to be dealt with under § 24 and Part 362 Subpart A. In addition, a subsidiary of an insured state non-member bank may not commence any FS activity as principal if the state bank or any of the state bank’s insured depository institution affiliates has received at its most recent examination a CRA rating of less than “Satisfactory.”
Prior to conducting activities as principal through a subsidiary, if those activities must be conducted by a national bank and a FS, the state non-member bank must file notice with the FDIC 30 days prior to commencing such activities. If the FDIC does not object, the bank’s subsidiary may commence the activity. This 30-day advance notice is designed to allow the FDIC time to review the activity and consider whether safety and soundness considerations make it prudent that additional conditions be placed on the conduct of the activity.
A. Restrictions on FS Activities of Insured State Non-Member Bank Subsidiaries
The FDIC has found that the conduct of a FS activity as principal and a subsidiary of an insured state non-member bank may have adverse effects on the safety and soundness of the insured state non-member bank. In order to make a determination whether their adverse effects on the safety and soundness of an insured state non-member bank engaging in such activities through a subsidiary and whether additional prudential safeguards are necessary, the FDIC has determined that it must make a prior review of the activities. As a result, an insured state non-member bank may not establish, acquire or hold a subsidiary that engages in FS activities as principal or commence any such new activity unless: (1) the insured state non-member bank submits the required notice and the FDIC processes the notice without objection. FDIC consent will only be given if it is determined that the activity poses no adverse effects on the safety and soundness of the insured state non-member bank. Any approvals granted may be made subject to any conditions or restrictions found by the FDIC to be necessary to protect the deposit insurance funds from risk, prevent unsafe or unsound banking practices, and/or ensure that the activity is consistent with the purposes of Federal Deposit Insurance and other applicable law; (2) the state non-member bank and the subsidiary comply with §§ 23A and 23B of the Federal Reserve Act, as if the subsidiary were a FS within the meaning of § 23A(e)(1); (3) all institutions affiliates of the insured state non-member bank are well-capitalized and the insured state non-member bank complies with the capital deduction requirement, discloses the capital separation in any published financial statements and does not consolidate the subsidiary’s assets and liabilities with those of the insured state bank and any published financial statements and (4) the insured state non-member bank and the subsidiary meet the financial and operational safeguards applicable to a FS of a national bank conducting the same activities. The insured state non-member bank must, at the time of filing notice and so long as the insured state non-member bank's subsidiary is engaged in FS activities, comply with the foregoing requirements.
An insured state non-member bank may not commence any new FS activity through a subsidiary as principal or directly or indirectly establish or acquire control of a company engaged in any such activity if the bank or any of its insured depository institution affiliates received a CRA rating of less than “satisfactory record of meeting community credit needs” on its most recent CRA examination prior to when the bank files the required notice.
B. Notices Required
Any notices required in connection with the conduct of FS activities by insured state non-member bank must consist of a complete letter notice or letter application including the following information: (1) a brief description of the activity and the manner in which it will be conducted; (2) the amount of the bank’s existing or proposed direct or indirect investment in the activity as well as calculations sufficient to indicate compliance with any specific capital ratio or investment percentage limitation detailed in Part 363, Subparts A, B or E; (3) a copy of the bank’s business plan regarding the conduct of the activity; (4) a citation to the state statutory or regulatory authority for the conduct of the activity; (5) a copy of the order or other document from the appropriate regulatory authority granting approval for the bank to conduct the activity if such approval is necessary and has already been granted; (6) a brief description of the bank’s policy and practice with regard to any anticipated involvement in the activity by a director, executive officer or principal shareholder of the bank or any related interest of such a person; and (7) a description of the bank’s expertise in the activity. If an insured state bank has filed an application or notice with another federal or state regulatory authority which contains all of the information required above, the insured state bank may submit a copy to the FDIC in lieu of a separate filing.
The rule does not cover activities conducted other than “as principal”, defined as activities conducted as agent for a customer, conducted in a brokerage, custodial, advisory or administrative capacity, or conducted as trustee or in any substantially similar capacity, e.g., the rule does not cover: acting solely as agent for the sale of insurance, securities, real estate or travel services; acting as trustee, providing personal financial planning advice or safekeeping services.
VI. FRB REGULATION H: STATE MEMBER BANK INVESTMENTS, FSs & CONDUCT OF FINANCIAL ACTIVITIES ALLOWED BY GLB
The FRB adopted amendments to Regulation H governing investments by state member banks in FSs as permitted by GLB. GLB greatly expanded the list of activities that may be conducted by qualifying bank holding companies and by banks. State member banks are permitted to conduct some, but not all, of the activities that are permitted at the holding company level. Generally, a state member bank must conduct the activities through a separately incorporated subsidiary. GLB establishes the principal that qualifying bank holding companies, referred to as “financial holding companies” (FHCs) and subsidiaries of qualifying banks, referred to as “financial subsidiaries” (FSs) are permitted to conduct activities that are financial in nature. Activities that are “financial in nature” are listed in § 225.86 of FRB Regulation Y.
GLB permits qualifying state member banks to control, or hold an interest in a FS. A FS may engage in activities that have been determined to be financial in nature or incidental to financial activities under the GLB, including general insurance agency activities in any location and travel agency activities. In addition, a FS may engage in underwriting, dealing in and making a market in all types of securities--activities previously prohibited for subsidiaries of state member banks by the Glass-Steagall Act. A FS also may conduct any activity that the state member bank is permitted to conduct directly.
GLB prohibits FSs from engaging in certain types of activities. As a general matter, a FS may not engage as principal in underwriting insurance, providing or issuing annuities, real estate development or real estate investment, and merchant banking and insurance company investment activities.
A FS is defined as any company controlled by one or more insured depository institutions, but does not include:
The regulation sets forth the criteria that state member banks must meet to own or control a FS, the activities that FSs may and may not engage in, and the procedures that will be applied to state member banks that own or control a FS and that fail to continue to meet GLB’s eligibility requirements. In addition, the interim rule establishes a streamlined notice procedure for state member banks to receive FRB approval to acquire a FS or engage in a newly authorized financial activity through an existing FS.
The authority for a state member bank to own or control a FS is in addition to the existing authority of state member banks to establish so-called operations subsidiaries that engage in activities that the parent bank may conduct directly and that are conducted on the same terms and conditions that govern the conduct of these activities by the bank.
A. Requirements to Invest in or Control FS
A state member bank may control, or hold an interest in, a FS only if certain criteria are met. First, the state member bank and each of its depository institution affiliates must be well capitalized and well managed. An institution is well capitalized if it meets or exceeds the capital levels designated as “well capitalized” by the institution’s appropriate federal banking agency under Section 38 of the Federal Deposit Insurance Act. Well managed is defined by reference to the achievement of specific examination ratings. Second, the aggregate consolidated total assets of the bank’s FSs may not exceed the lesser of forty-five percent of the bank’s consolidated total assets or $50 billion. Third, if the state member bank is one of the largest one hundred insured banks, the bank must have at least one issue of outstanding eligible debt that is currently rated in one of the three highest investment grade rating categories by a nationally recognized statistical rating organization. Eligible debt refers to unsecured debt that has an initial maturity of more than three hundred sixty days. The debt must be issued and outstanding, may not be supported by any form of credit enhancement, and may not be held in whole or in any significant part by affiliates or insiders of the bank or by any other person acting on behalf of or with funds from the bank or an affiliate. The debt rating and alternative criteria do not apply to a bank if its FSs do not engage in any newly authorized financial activity as principal. Finally, the state member bank must obtain the Federal Reserve's approval to acquire control of, or an interest in, the FS using the streamlined notice procedures set forth below and must obtain any necessary approvals from its state supervisory authority.
B. Permissible Activities
A FS of a state member bank may conduct only three types of activities:
The regulation prohibits a FS of a state member bank from engaging as principal in insurance underwriting (except to the extent permitted under state law and the GLB), providing or issuing annuities, real estate investment or development (except to the extent expressly authorized by applicable state and federal law), and merchant banking and insurance company investment activities permitted for financial holding companies under the Bank Holding Company Act.
C. Restrictions Applicable to State Member Banks with FSs
The regulation requires that a state member bank that owns or controls a FS comply with a number of prudential safeguards.
Capital Deduction - For purposes of determining its compliance with all applicable regulatory capital standards, the state member bank must deduct its aggregate outstanding equity investment, including retained earnings, in all FSs from its total assets and tangible equity and deduct such amount from its total risk-based capital, and “de-consolidate” the assets and liabilities of the FS from those of the bank. The capital deduction must be made equally from Tier 1 and Tier 2 capital. Any published financial statement of a state member bank that controls or holds and interest in a FS must, in addition to providing information prepared in accordance with generally accepted accounting principles, separately present financial information for the bank reflecting the capital deduction and adjustments noted above.
Safeguards for the Bank - The state member bank must establish procedures for identifying and managing financial and operational risks within the state member bank and the FS that adequately protect the state member bank from such risks; and establish reasonable policies and procedures to preserve the separate corporate identity and limited liability of the state member bank and the FSs of the state member bank.
Application of §§ 23A and 23B of the Federal Reserve Act - For purposes of § 23A and 23B of the Federal Reserve Act:
o A FS of a state member bank is deemed an affiliate, and not a subsidiary, of the bank;
o The restrictions contained in § 23A(a)(1)(A) do not apply with respect to covered transactions between the bank and any individual FS of the bank;
o The bank's investment in a FS does not include retained earnings of the FS;
o Any purchase of, or investment in, the securities of a FS by an affiliate of the bank will be considered to be a purchase of, or investment in, such securities by the bank; and
o Any extension of credit by an affiliate of the bank to a FS of the bank will be considered to be an extension of credit by the bank to the FS if the FRB determines that such treatment is necessary or appropriate to prevent evasions of the Federal Reserve Act and GLB.
Application of Anti-Tying Prohibitions - A FS of a state member bank shall be deemed a subsidiary of a bank holding company and not a subsidiary of the bank for purposes of the anti-tying prohibitions of § 106 of the Bank Holding Company Act.
D. Failure to Comply with Requirements
If the FRB determines that a state member bank or any of its depository institution affiliates fail to continue to be well capitalized and well managed or comply with the applicable asset limitations or the safeguards, the FRB will notify the state member bank in writing and identify the areas of noncompliance. A state member bank must promptly notify the FRB if the bank becomes aware that any depository institution affiliate of the bank has ceased to be well capitalized and well managed. Within 45 days after receiving a notice from the FRB, the state member bank must execute an agreement acceptable to the FRB to comply with all applicable capital, management, asset and safeguard requirements and any relevant depository institution affiliate of the state member bank must execute an agreement acceptable to its appropriate federal banking agency to comply with all applicable capital and management requirements. Until the FRB determines that the areas of noncompliance are corrected:
The FRB may also require a state member bank to divest control of any FS if the areas of noncompliance are not corrected within 180 days of receipt of the notice or such additional period of time as the FRB may permit.
E. Failure of State Member Bank or Affiliates to Maintain “Satisfactory” CRA Rating
If state member bank, or any of its insured depository institution affiliates, has received less than a “satisfactory” rating in meeting community credit needs in its most recent examination under the Community Reinvestment Act (CRA): (1) the state member bank may not, directly or indirectly, acquire control of any FS; and (2) any FS controlled by the state member bank may not commence any additional activity or acquire control, including all or substantially all of the assets of any company. This prohibition does not apply to any activity, or to the acquisition or control of any company that is engaged only in activities, that the state member bank is permitted to conduct directly and that are conducted on the same terms and conditions that govern the conduct of the activity by the state member bank.
The limitations imposed on the establishment of FSs and expansion of existing FSs shall continue in effect until such time as the state member bank and each insured depository institution affiliate of the state member bank has achieved at least a “Satisfactory” rating in meeting community credit needs in its most recent examination under the CRA.
F. Approvals Required for FSs
A state member bank may not acquire control of, or an interest in, a FS unless it files a notice (in letter form, with enclosures) with the appropriate reserve bank. The notice required must:
Insurance Activities - If a notice filed under this section relates to the initial affiliation of the bank with a company engaged in insurance activities, the notice must describe the type of insurance activity that the company is engaged in or plans to conduct and identify each state where the company holds an insurance license and the state insurance regulatory authority that issued the license. Notice is filed with the appropriate Federal Reserve Bank, will be deemed approved on the 15th day after receipt of a complete notice by the appropriate Federal Reserve Bank, unless prior to that date the Board of the appropriate Federal Reserve Bank notifies the bank that the notice is approved, that the notice will require additional review or that the bank does not meet the requirements of this regulation.
The regulation establishes the alternative criteria and provides that a bank meets the criteria if it has a current long-term issuer credit rating from a nationally recognized statistical rating organization that is within the three highest investment grade rating categories used by the organization.