I. STATE-CHARTERED BANKS AND NEBRASKA LAW
Neb.Rev.Stat. § 8-148 is the Nebraska state law covering loans by banks secured by its own capital stock and the prohibition on such loans, purchase of or use as collateral by banks and the specific exceptions to the general prohibition. With certain exceptions, a bank is prohibited from making any loan on the shares of its own capital stock or the capital stock of its holding company or from purchasing or acquiring the shares of any corporation unless such acquisition is necessary to prevent loss upon a debt previously contracted in good faith. When such stock is purchased or acquired pursuant to the provisions of § 8-148, the stock is required to be sold or disposed of at public or private sale within 6 months from the time of its purchase or acquisition, unless a longer holding period is authorized upon receiving written approval from the director of the Nebraska Department of Banking and Finance.
Section 8-148 states:
(1) Except as provided in subsection (2) or (3) of this section, a bank shall not make any loan or discount on the security of the shares of its own capital stock or the capital stock of its holding company, if any, by the purchaser or holder of any such shares, or purchase any securities convertible into stock or, except as provided in this Section and Sections 8-148.01, 8-148.02, 8-148.04, 8-148.06, 8-149, and 21-2109, the shares of any corporation, unless such security or purchase is necessary to prevent loss upon a debt previously contracted in good faith. Such stock so purchased or acquired shall, within six months after the time of its purchase unless written approval of a longer holding period is obtained from the director, be sold or disposed of at public or private sale, or in default thereof, a receiver may be appointed to close up the business of the bank, except that such stock, if shares of another bank or a bank holding company, shall be sold or disposed of as required by the director. In no case shall the amount of stock so held at any one time exceed ten percent of the paid-up capital of such bank. (2) Any bank may subscribe to, invest, purchase, and own shares of investment companies registered under the Investment Company Act of 1940 when the investment companies’ assets consist of and are limited to obligations that are eligible for investment by the bank. The department may adopt and promulgate rules and regulations governing the amounts, terms, and conditions of such subscriptions, investments, purchases, and ownership. (3) Any bank may subscribe to, invest, purchase, and own Student Loan Marketing Association stock, Government National Mortgage Association stock, Federal National Mortgage Association stock, Federal Agricultural Mortgage Corporation stock, Federal Home Loan Mortgage Corporation stock, or stock issued by any authorized agency of the United States Government, including any corporation or enterprise wholly owned directly or indirectly by the United States, or with the authority to borrow directly from the United States treasury, which the department has approved by rule and regulation or order. The department may further adopt and promulgate rules and regulations governing the amounts, terms, and conditions of such subscriptions, investments, purchases, and ownerships, except that a bank shall not obligate more than five percent of its capital, surplus, undivided profits, and unencumbered reserves for such stock.
The Nebraska Supreme Court held, in Cooper v. Bane, 110 Neb. 83, 196 N.W. 119 (1923) that except to prevent loss upon a debt previously contracted in good faith, a state bank is without power, directly or through agent, to buy or hold capital stock of another bank.
It should be noted that § 23A of the Federal Reserve Act (12 U.S.C. § 371c), applies to state-chartered nonmember banks that are regulated by the FDIC as well as to state-chartered savings associations that are regulated by the OCC. See the discussion below in regard to the application of § 23A to cases involving loans secured by a bank’s holding company stock and what may or may not constitute a “covered transaction.”
II. NATIONAL BANKS AND FEDERAL LAW
Under federal law (12 U.S.C. § 83), a national bank is prohibited in making a loan secured by the bank’s own stock. There is a limited exception to this prohibition. Section 83 states:
(a) General prohibition
No national bank shall make any loan or discount on the security of the shares of its own capital stock.
(b) Exclusion
For purposes of this section, a national bank shall not be deemed to be making a loan or discount on the security of the shares of its own capital stock if it acquires the stock to prevent loss upon a debt previously contracted for in good faith.
In the case of loans secured by a bank’s holding company stock, attention should be paid to § 23A of the Federal Reserve Act (12 U.S.C. § 371c), which provides that a loan to an affiliate company of a bank may not secured by securities of an affiliate of the bank, however the statute further provides that a loan to a person or company that is not an affiliate of a bank may be secured by securities of the affiliate. In the latter case, the loan is considered a “covered transaction” under § 23A.
In regard to “covered transactions,” there are both restrictions and collateral requirements to consider. For example, Appendix A, § 1 of 12 C.F.R. 31 in an OCC interpretation that states that a loan secured by stock of an affiliate is not a covered transaction if the loan is otherwise fully secured under § 371c by other collateral and the loan proceeds are not used to purchase the stock of the affiliate used as collateral or the loan proceeds are not otherwise transferred to or are for the benefit of an affiliate.
Note: Regulation W is the implementing regulation of § 23A.
Note also: Section 23A also applies to state-chartered nonmember banks that are regulated by the FDIC as well as to state-chartered savings associations that are regulated by the OCC.