Modification of Definition of Deposits in Banks or Trust Companies

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 931

[No. 96-48]

Modification of Definition of Deposits in Banks or Trust

Companies

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board of Directors of the Federal Housing Finance Board

(Finance Board) has adopted a final rule to modify the definition of

``deposits in banks or trust companies'' in the Finance Board's

regulations. The final rule will: Make clear that the term ``banks''

includes savings associations; and expressly include federal funds

transactions as eligible to fulfill the liquidity requirement imposed

on the Federal Home Loan Banks (FHLBanks) by section 11(g) of the

Federal Home Loan Bank Act (Bank Act).

EFFECTIVE DATE: September 3, 1996.

FOR FURTHER INFORMATION CONTACT: Janice A. Kaye, Attorney-Advisor,

Office of General Counsel, (202) 408-2505, Federal Housing Finance

Board, 1777 F Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Under section 11(e)(1) of the Bank Act, the FHLBanks have the power

to accept deposits from their members, other FHLBanks, or

instrumentalities of the United States. See 12 U.S.C. 1431(e)(1). To

ensure that each FHLBank has sufficient liquid assets to meet deposit

withdrawal demands, section 11(g) of the Bank Act imposes a liquidity

requirement. See id. section 1431(g). The liquidity requirement

provides that each FHLBank must invest, upon such terms and conditions

as the Board of Directors of the Finance Board may prescribe, an amount

equal to the current deposits the FHLBank holds in specified types of

assets. Id. Among the specified assets are ``deposits in banks or trust

companies.'' Id. section 1431(g)(2).

The phrase ``deposits in banks or trust companies'' appeared in,

and has not been changed since enactment of, the Bank Act in 1932. See

ch. 522, sec. 11, 47 Stat. 733 (July 22, 1932). The legislative history

of section 11(g) of the Bank Act does not discuss use of the phrase,

but suggests only that the purpose of the liquidity requirement is to

ensure that the FHLBanks have sufficient liquid assets to meet their

advance and deposit withdrawal demands. See Bank Act: Hearings on S.

2959 Before a Subcomm. of the Senate Comm. on Banking and Currency, 72d

Cong., 1st Sess. 36 (Jan. 14, 1932) (statement of John O'Brien,

Assistant Legislative Counsel). Although the legislative history of

section 11(g) is limited, a legal opinion issued several years after

enactment of the Bank Act by the General Counsel of the Federal Home

Loan Bank Board (Bank Board), the Finance Board's predecessor agency,

stated that ``Congress, in using the phrase `deposits in banks or trust

companies' * * * intended to refer to those financial institutions

which accept deposits in their regular course of business.'' \1\ The

Bank Board General Counsel based his determination on the plain meaning

of the term ``banks'' at that time. Id. at 2-3. To decide if a

financial institution is a ``bank'' for purposes of section 11(g)(2),

``the principal test or criterion * * * is whether the financial

institution accepts deposits as one of the primary purposes for which

it was created.'' Id. at 2. Since savings associations did not accept

deposits at that time,\2\ the Bank Board General Counsel concluded that

``savings associations did not fall within the strict meaning of

`banks.' '' Bank Board General Counsel opinion at 3.

---------------------------------------------------------------------------

\1\ See Bank Board General Counsel opinion 015 (Dec. 7, 1936) at

1-2. The Bank Board General Counsel concluded that ``Congress * * *

intended to limit the trust companies authorized to receive

[FHLBank] deposits to those which actually receive deposits as part

of their regular course of business.'' Id. at 4.

\2\ See e.g., Home Owners' Loan Act of 1933 (HOLA), ch. 64, sec.

5(b), 48 Stat. 132 (June 13, 1993) (savings and loan associations

``shall raise their capital only in the form of payments on such

shares as are authorized in their charger * * * no deposits shall be

accepted''); Horace Russell, Savings and Loan Associations 166-67,

n.21 (1956) (``savings and loan associations * * * issue savings

accounts, sometimes called share accounts and sometimes share

savings accounts * * * by federal law, the use of the word `deposit'

by savings and loan associations is prohibited''); Indep Bankers

Ass'n of Am. v. Clarke, 917 F.2d 1126, 1128 (8th Cir. 1990)

(``traditionally, of course, and originally, savings and loan

associations * * * did not accept demand deposits'').

---------------------------------------------------------------------------

In 1978, the Bank Board defined by regulation the phrase ``deposits

in banks or trust companies'' to include a deposit in another FHLBank,

a demand account with a Federal Reserve Bank, or a deposit in a

depository designated by a FHLBank's board of directors that is a

member of the Federal Reserve System (FRS) or the Federal Deposit

Insurance Corporation (FDIC). See 43 FR 46835, 46836 (Oct. 11, 1978),

codified at 12 CFR 521.5 (superseded). When the Bank Board adopted this

definition, deposits in federal and some state savings associations

were insured by the former Federal Savings and Loan Insurance

Corporation (FSLIC), and deposits in banks (and some savings banks)

were insured by the FDIC. The Bank Board's regulation provided that

only deposits in FDIC-insured institutions were eligible investments

for purposes of the ``deposits in banks or trust companies'' provision

of section 11(g) of the Bank Act. Since, generally speaking, only banks

were members of (or, more precisely, insured by) the FDIC, deposits in

FSLIC-insured savings associations could not be counted toward the

liquidity requirement under the regulation. When Congress abolished the

Bank Board and FSLIC in 1989, see Financial Institutions Reform,

Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, sec.

401, 103 Stat. 183 (Aug. 9, 1989), the Finance Board transferred the

definition of ``deposits in banks or trust companies,'' without any

change in substantive or technical matters, to Sec. 931.5 of its

regulations. See 54 FR 36757 (Aug. 28, 1989), codified at 12 CFR 931.5.

On September 22, 1993, the Board of Directors of the Finance Board

approved for publication a proposed rule to modify the definition of

``deposits in banks or trust companies'' in Sec. 931.5 of its

regulations. The notice of proposed rulemaking (Notice) was published

in the Federal Register on September 29, 1993, with a 60-day public

comment period that closed on November 29, 1993. See 58 FR 50867 (Sept.

29, 1993). The Notice proposed to make two changes to the definition of

``deposits in banks or trust companies.'' First, it

[[Page 40312]]

proposed to replace the reference to depositories that are FRS or FDIC

members with a reference to banks, as defined in section 3 of the

Federal Deposit Insurance Act (FDI Act), see 12 U.S.C. 1813(a), and

trust companies that are members of the FRS or insured by the FDIC. The

intent of this modification was to make clear that deposits in savings

associations would continue to be ineligible investments for purposes

of section 11(g) of the Bank Act. Second, the Notice proposed to expand

the definition to specifically include as deposits the sale of federal

funds.

II. Analysis of the Final Rule

A. Meaning of the Term ``Banks''

In the Notice, the Board of Directors of the Finance Board proposed

to limit the meaning of ``banks'' to those institutions included in the

technical definition of the term ``banks'' under the FDI Act. Under

that definition, the term ``banks'' does not include savings

associations. See id. section 1813 (a), (b). As a result of reviewing

the comments received by the Finance Board, one from a FHLBank and the

other from an industry trade association, and the factors discussed

below, the Board of Directors of the Finance Board has determined that

deposits in savings associations should be eligible investments for

purposes of the liquidity requirement in section 11(g) of the Bank Act.

The Board of Directors of the Finance Board has modified the proposed

rule to make clear that the term ``banks'' will include savings

associations for purposes of section 11(g)(2) of the Bank Act. The

public comments support this interpretation.

Neither the legislative history of the Bank Act nor the Bank Board

in adopting its regulatory definition, articulated any policy reasons

to support the exclusion of deposits in FSLIC-insured savings

associations. See supra section I. One commenter suggested that the

rationale for the exclusion of savings associations might have been to

avoid any conflict of interest that might arise as a result of placing

deposits in FHLBank member institutions. If this was the concern when

Congress enacted the Bank Act in 1932, or when the Bank Board

promulgated its regulatory definition in 1978, it was obviated in 1989,

when banks for the first time became eligible as FHLBank members. See

FIRREA, sec. 704(a), codified at 12 U.S.C. 1424(a)(1). The commenter

urged the Finance Board to treat bank and savings association FHLBank

members equally.

The other commenter offered that the reason for disparate treatment

of banks and savings associations might have been to ensure that

FHLBank liquidity deposits be transacted only with ``low-risk''

counterparties, implying that FDIC-insured deposits were less risky

than FSLIC-insured savings accounts. Because Congress dissolved FSLIC

in 1989 and transferred responsibility for administering the insurance

funds for both savings associations and banks to the FDIC, see FIRREA,

sections 401(a)(1), 205, the commenter argued that, if there ever were

such differences, there are now no material differences in overall

credit risk between deposits in FDIC-insured banks and deposits in

FDIC-insured savings associations. The commenter pointed out also that

sound financial management and the dictates of the Finance Board's

Financial Management Policy, see Board of Directors Res. 93-133 (Dec.

15, 1993), Board of Directors Dec. Mem. 94-DM-48 (Nov. 10, 1994),

require the FHLBanks to select only the most creditworthy

counterparties.

-Permitting the FHLBanks to count deposits in savings associations

towards the statutory liquidity requirement also is sound as a matter

of statutory construction. Congress enacted the Bank Act a year before

it created the FDIC. See ch. 89, sec. 8, 48 Stat. 168 (June 16, 1933).

Thus, the technical definition of the term ``bank'' provided for

purposes of deposit insurance coverage could not have been the

contemplated meaning of the word as used in section 11(g)(2) of the

Bank Act. See supra section I. It appears that Congress' intent in

using the phrase ``deposits in banks or trust companies'' was to permit

the FHLBanks to make deposits only in financial institutions that

accepted deposits in the ordinary course of their business. Id.

Clearly, the plain meaning of the term ``bank'' at the time Congress

enacted the Bank Act was a financial institution that accepts deposits.

Id. This also is the ordinary dictionary definition of the term

``bank'' today.\3\

---------------------------------------------------------------------------

\3\ ``A bank is an institution * * * whose business it is to

receive money on deposit * * *.'' 131 Black's Law Dictionary (5th

ed. 1979). The word ``bank'' means ``an institution for receiving,

lending, exchanging, and safeguarding money.'' 106 The Random House

College Dictionary (rev. ed. 1980) (emphasis added).

---------------------------------------------------------------------------

-Although there continue to be differences between banks and

savings associations, even the courts have acknowledged that ``the

clear, bright-line distinctions between commercial banks and savings

and loans have, over the years, gradually become blurred.'' Indep.

Bankers, 917 F.2d at 1128. Indeed, for purposes of other statutes, the

term ``banks'' has been defined to include savings associations, and

vice versa. For example, under HOLA, the Office of Thrift Supervision

considers certain types of banks to be savings associations for

purposes of the qualified thrift lender test. See 12 U.S.C.

1467a(1)(A), (l); 12 CFR 583.21. Further, under the Internal Revenue

Code, the meaning of the term ``bank'' includes savings associations

for purposes of assessing taxes on certain situations common to both

types of financial institutions. See 26 U.S.C. 581; Horace Russell,

Savings and Loan Associations 307 (2d ed. 1960) (`` `black,' therefore,

is `white' ''). And, for purposes of the McFadden Act, 12 U.S.C. 36,

which authorizes national banks to establish branches only to the

extent that state banks within the same state may branch under state

law, the Comptroller of the Currency has determined that savings

associations are state banks. Several courts have upheld as reasonable

the Comptroller of the Currency's determination.

-For all of the above reasons, including the fact that savings

associations now have statutory authority to accept deposits,\4\ it is

reasonable for the Board of Directors of the Finance Board to conclude

that deposits in savings associations should be eligible investments

for purposes of section 11(g) of the Bank Act.

---------------------------------------------------------------------------

\4\ In 1968, Congress amended section 5(b) of HOLA. See Pub. L.

90-448, Title XVII, sec. 1716(a), 82 Stat. 608 (Aug. 1, 1968); supra

n.2. The amendment eliminated provisions that permitted savings

associations to raise their capital only in the form of payments on

shares and prohibited acceptance of deposits, and inserted

provisions permitting savings associations to raise capital in the

form of savings deposits, shares, or other accounts. Id., codified

at 12 U.S.C. 1464.

---------------------------------------------------------------------------

B. Federal Funds Transactions

The Board of Directors of the Finance Board has adopted the

provisions of the Notice that concern federal funds transactions as

proposed. The Board of Directors of the Finance Board has decided that

federal funds transactions, which are highly liquid investments

essentially equivalent to deposits, constitute investments that are

``deposits'' within the meaning of section 11(g)(2) of the Bank Act.

Therefore, the final rule amends Sec. 931.5 to include expressly the

sale of federal funds to banks and trust companies as a deposit the

FHLBanks may use to fulfill the liquidity requirement in section 11(g)

of the Bank Act. Since the Board of Directors of the Finance Board has

concluded that the term ``banks'' includes savings associations,

savings associations, as well as banks and trust companies, are

eligible counterparties

[[Page 40313]]

for federal funds transactions. The public comments received by the

Finance Board support this interpretation.

For purposes of the final rule, a sale of federal funds means

either a conventional federal funds transaction or a correspondent-

respondent federal funds transaction. A conventional sale of federal

funds involves the unsecured sale of funds held by a FHLBank in an

account maintained at its district Federal Reserve Bank to a bank in

need of additional funds to meet its statutory reserve requirement.\5\

A correspondent-respondent federal funds sale involves the sale of

unsecured funds directly from a FHLBank (the respondent) to a

correspondent bank in need of funds to meet its statutory reserve

requirement.

---------------------------------------------------------------------------

\5\ Section 19(b)(2)(A) of the Federal Reserve Act requires each

depository institution to maintain reserves against its transaction

accounts, as the FRS Board of Governors may prescribe, for the

purpose of implementing monetary policy. See 12 U.S.C. 461(b)(2)(A).

These reserves are commonly referred to as ``federal funds.'' A

depository institution meets the reserve requirement by maintaining

accounts at its direct Federal Reserve Bank or by holding cash in

its vaults. A depository institution may sell excess reserves to

another depository institution in need of additional funds to meet

its reserve requirement.

---------------------------------------------------------------------------

III. Regulatory Flexibility Act

Under the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq.,

the FHLBanks are not ``small entities.'' Id. section 601(6). Since this

final rule applies only to the FHLBanks, it does not impose any

additional regulatory requirements on small entities. Thus, in

accordance with section 605(b) of the RFA, Id. section 605(b), the

Board of Directors of the Finance Board hereby certifies that this

final rule will not have a significant economic impact on a substantial

number of small entities.

List of Subjects in 12 CFR Part 931

Banks, banking, Federal home loan banks.

Accordingly, the Board of Directors of the Federal Housing Finance

Board hereby amends chapter IX, title 12, part 931, Code of Federal

Regulations, as follows:

PART 931--DEFINITIONS

1. The authority citation for part 931 is revised to read as

follows:

Authority: 12 U.S.C. 1422a, 1422b, 1427, and 1431(g).

2. Section 931.5 is revised to read as follows:

Sec. 931.5 Deposits in banks or trust companies.

Include:

(a) A deposit in another Bank;

(b) A demand account in a Federal Reserve Bank; and

(c) A deposit in, or a sale of federal funds to:

(1) An insured depository institution, as defined in section

2(12)(A) of the Act (12 U.S.C. 1422(12)(A)), that is designated by the

Bank's board of directors; or

(2) A trust company that is a member of the Federal Reserve System

or insured by the Federal Deposit Insurance Corporation, and is

designated by the Bank's board of directors.

Dated: July 3, 1996.

By the Board of Directors of the Federal Housing Finance Board.

Bruce A. Morrison,

Chairperson.

[FR Doc. 96-19525 Filed 8-1-96; 8:45 am]

BILLING CODE 6725-01-U