Applications for Deposit Insurance

SUMMARY: As part of the FDIC's systematic review of its regulations and

written policies under section 303(a) of the Riegle Community

Development and Regulatory Improvement Act of 1994, the FDIC is

revising its Statement of Policy on ``Applications for Deposit

Insurance.'' These revisions include changes to the FDIC's policies

regarding initial capitalization when a de novo bank is organized by

certain well managed and well capitalized holding companies. Policies

regarding stock benefit plans are amended and regional directors are

given more discretion to act under delegated authority. Changes are

also made to provide guidance for proposed depository institutions

which would be owned by domestic governmental units, to eliminate

outdated information, and to reflect current polices and practices that

have not previously been incorporated into the Statement of Policy.

EFFECTIVE DATE: October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Christie A. Sciacca, Associate

Director, Division of Bank Supervision, (202) 898-3671; Jesse G.

Snyder, Assistant Director, Division of Supervision, (202) 898-6915;

Mark S. Schmidt, Associate Director, Division of Supervision, (202)

898-6918; John M. Lane, Assistant Director, Division of Supervision,

(202) 898-6771; Marc J. Goldstrom, Counsel, Regulation and Legislation

Section, Legal Division, (202) 898-8807; or Mark Mellon, Counsel,

Regulation and Legislation Section, Legal Division, (202) 898-3854,

FDIC, 550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION: This Statement of Policy is a revision of

the FDIC's Statement of Policy Regarding Applications for Deposit

Insurance adopted on April 13, 1992 (57 FR 12822) (the ``1992 Statement

of Policy''). Section 303(a) of the Riegle Community Development and

Regulatory Improvement Act of 1994 (CDRIA) (12 U.S.C. 4803(a)) requires

the FDIC to streamline and modify its regulations and written policies

in order to improve efficiency, reduce unnecessary costs, and eliminate

unwarranted constraints on credit availability. Section 303(a) also

requires the FDIC to remove inconsistencies and outmoded and

duplicative requirements from its regulations and written policies.

Pursuant to this statute, the FDIC published a proposed Statement of

Policy on ``Applications for Deposit Insurance'' in the Federal

Register on October 9, 1997 (62 FR 52869). The proposed Statement of

Policy was published in conjunction with a notice of proposed

rulemaking in the Federal Register on October 9, 1997 (62 FR 52810)

which would amend 12 CFR part 303 (and other FDIC regulations),

including subpart B, concerning the procedures for an applicant to

follow in applying for deposit insurance. In connection with the

publication of this Statement of Policy, the FDIC has published a final

rule amending part 303 (and other FDIC regulations) elsewhere in

today's Federal Register.

Eleven commenters submitted comments in response to the proposal.

The FDIC has carefully considered these comments. The comments are

summarized below in the discussion of significant changes to the

Statement of Policy.

Initial Offering of Stock

The proposed Statement of Policy provided that all stock of a

particular class in the initial offering should be sold at the same

price and have the same voting rights. Insiders are generally not

permitted to acquire a separate class of stock with greater voting

rights. Moreover, insiders should not be offered stock at a price more

favorable than the price for other subscribers.

One commenter objected to these provisions on the basis that

potential investors are adequately protected by the disclosure

provisions of the federal securities laws and the ``fairness''

provisions of state securities laws. Moreover, the commenter argued

that such unnecessary restrictions discourage investment in new

depository institutions.

The FDIC continues to believe that these restrictions are

appropriate. Price disparities or greater voting rights provide

insiders with a means to gain control disproportionate to their

investments. Furthermore, allowing insiders to purchase stock at a

discount provides an immediate appreciation of the insiders'

investments resulting from the mere establishment of the depository

institution without regard to the institution's financial success and

without greater risk to the insider than that borne by other investors.

Such arrangements may encourage the formation of depository

institutions for speculative purposes. The Statement of Policy

specifically discusses the use of options as a means of compensating

insiders for money placed at risk during the organization phase, as

compensation for services rendered, and as a reward for contributions

to the success of the enterprise. Such arrangements differ

significantly from ``cheap stock'' in that an individual will benefit

from options granted with a strike price of fair market value at the

time of issuance only if the institution is financially successful.

Therefore, these provisions have been adopted as proposed.

Wholly Owned Subsidiary of a Holding Company

The 1992 Statement of Policy required an initial capitalization in

an amount that is sufficient to provide at least an 8% Tier 1 leverage

capital to total assets ratio at the end of the third year of

operation. The proposed Statement of Policy provided that, in certain

circumstances, the amount of the initial capital injection for a de

novo institution may be reduced to a minimum of $2 million or an amount

that is sufficient to provide an 8% Tier 1 leverage capital ratio at

the end of the first year of operation, or sufficient to meet any

minimum standards established by the chartering authority, whichever is

greater. This option would be available when the proposed depository

institution is to be formed as a wholly owned subsidiary of a holding

company which meets the standards established for an ``eligible holding

company,'' as set forth in Sec. 303.22 of the FDIC's regulations. The

holding company would also be required to provide a written commitment

to maintain the proposed depository institution's Tier 1 leverage

capital ratio at no less than 8% throughout the first three years of

operation. This revision would allow a well-managed holding company to

provide less initial capital than would have been required under the

former standard. This change is considered appropriate in recognition

of the FDIC's ability to reasonably quantify the financial capacity of

the parent organization, and to allow the holding company to more

efficiently allocate the resources of the entire organization. This

amendment will permit the appropriate FDIC regional director (DOS) to

act on proposals that contain these provisions when the other factors

necessary for delegated authority have been met.

One commenter suggested that the required capital level for a de

novo institution be well capitalized, rather than an 8% Tier 1 leverage

capital ratio, with the agency retaining authority to require a higher

amount. The FDIC believes that a de novo institution requires a higher

level of capitalization during its formative years than does a

[[Page 44753]]

mature institution with an established record of sound performance.

Accordingly, the FDIC has not adopted the commenter's suggestion and

these provisions have been adopted as proposed.

Operating Insured Offices

In certain instances, the proposal allowed the applicant to request

that the benchmark for evaluating the adequacy of capital be such that

the proposed depository institution would be classified as well

capitalized, as defined by its primary federal regulator. This option

would be available when the proposal involves the formation of a

depository institution through the acquisition of an existing insured

operating office (or offices). Criteria established for this lower

initial capital benchmark are that the acquisition involves

substantially all of the assets and liabilities of the operating

insured office, that the applicant provides reasonable evidence that

the de novo institution's operations will be stabilized at inception,

and that the proponent for the applicant is either an eligible holding

company or an established banking group. The proposed Statement of

Policy used an identified chain banking group as an example of one type

of ``established banking group.'' The term also is intended to cover a

group of individuals who have served as directors or officers of an

operating insured depository institution. For either a chain banking

group or a group of individuals to be considered an established group,

the association must be in existence for at least three years. This

provision had been added in recognition that deposit insurance for a

depository institution being established from operating offices does

not present the same risks to the insurance funds as does the

chartering of a true de novo institution. This provision sought to

remove capital requirement inequities that may have existed under prior

procedures with respect to certain corporate reorganization activities.

This amendment would also permit the appropriate FDIC regional director

(DOS) to act on proposals that contain these provisions when the other

factors necessary for delegated authority have been met. Two commenters

stated that they did not object to this provision and it has been

adopted without change from the proposal.

Stock Financing by Directors, Officers, and 10% Shareholders

The proposal revised guidelines for borrowing limitations by

directors, officers, and 10% shareholders to finance their purchases of

stock in the proposed institution. The 1992 Statement of Policy

provided that direct or indirect borrowings by an individual insider of

more than 75% of the purchase price of the stock subscribed, or more

than 50% of the purchase price of the aggregate stock subscribed by

directors, officers, and 10% shareholders as a group, is presumed to be

excessive. The 1992 Statement of Policy has been amended by deleting

the statement that borrowing arrangements in excess of the referenced

percentage limits will ordinarily be presumed to be excessive; however,

borrowing arrangements would still be carefully reviewed. The burden of

providing appropriate information supporting borrowing arrangements

will remain with the affected insiders. This amendment would permit the

appropriate FDIC regional director (DOS) to evaluate all insider

borrowing arrangements on their own merits, without having a set limit

for those that will be considered excessive or otherwise inappropriate.

This amendment also would permit the appropriate FDIC regional director

(DOS) to act on the proposal when insider borrowing arrangements are

not detrimental to the institution if the other factors necessary for

delegated authority have also been met.

Similarly, borrowings by a holding company to capitalize a proposed

depository institution would be evaluated in the context of the holding

company's consolidated operations, rather than basing such evaluation

on a 50% limit of the total initial capital of the proposed depository

institution. The borrowing arrangement would need to meet any leverage

guidelines established by the holding company's primary federal

regulator and be reasonable. This amendment will permit the appropriate

FDIC regional director (DOS) to act on a proposal that involves holding

company debt financing of more than 50% when the other factors

necessary for delegated authority have been met. Three commenters

specifically endorsed this portion of the proposal and the FDIC adopts

these provisions as proposed.

Stock Benefit Plans

The proposed Statement of Policy recognized that it is becoming

increasingly common for organizers of de novo depository institutions

to propose stock benefit plans. Such plans often include not only

active officers, but also directors and, in some cases, incorporators

or organizers (collectively, ``incorporators''). The proposed Statement

of Policy provided for participation of active officers, outside

directors, and incorporators in stock benefit plans.

The proposal provided that stock benefit plans must be fully

disclosed to all potential subscribers and a description of any such

plans must be included in an application for deposit insurance. Stock

benefit plans should encourage the continued involvement of the

participants and serve as an incentive for the successful operation of

the institution. The proposed Statement of Policy further indicated

that stock benefit plans should contain no feature that would encourage

speculative or high risk activities, or serve as an obstacle to or

otherwise impede the sale of additional stock to the public.

Guidelines were included in the proposed Statement of Policy as

standards to be used in evaluating the appropriateness of stock benefit

plans. These guidelines were intended to provide the applicant with

basic guidance and to promote consistency within the FDIC itself. Some

concepts were retained from the 1992 Statement of Policy, such as a

maximum 10-year limit on options. The FDIC's practice of requiring that

the exercise price be established at no less than fair market value at

the time of the grant was explicitly stated. New concepts were added

which emphasize that the plan should encourage the continued

involvement of the proposed management. A vesting period covering the

first three years of operation would be appropriate to assure continued

involvement. A three-year vesting period was selected based on the

FDIC's experience that a three-year period provides reasonable

assurance that the business plan will have been fully implemented and

stabilized operations achieved. An additional requirement was that a

stock benefit plan provide for an exercise or forfeiture clause which

may be invoked by the depository institution's primary federal

regulator in the event the capital falls below minimum requirements.

This was considered necessary to ensure that the dilutive effects of

outstanding stock options will not make it unduly difficult for

institutions in need of additional capital to increase capitalization

in a timely manner.

The proposed Statement of Policy indicated that the FDIC will

separately review stock benefit plans established to compensate

incorporators who have placed personal funds at risk to finance the

organization of the institution or who have provided professional

services in conjunction with the organization. Since these plans were

envisioned as compensating

[[Page 44754]]

incorporators for services already rendered, vesting or restrictions on

transferability were not required.

The proposed Statement of Policy also provided that stock

appreciation rights and similar plans that involve a cash payment based

directly on the market value of the depository institution's stock are

specifically identified as objectionable. These types of plans can

result in an expense which would reduce the depository institution's

capital. Such compensation plans cannot be quantified in relation to

the capital adequacy factor and could be detrimental to the overall

capital of a depository institution, particularly in its formative

years. The proposed Statement of Policy also provided that stock

benefit plans offered by de novo holding companies in conjunction of a

new depository institution will be reviewed in the same manner as if

the plan were being established by the proposed depository institution.

The FDIC received five comments in response to the stock benefit

plan provisions of the Statement of Policy. The comments were generally

supportive of the changes. However, three commenters raised specific

concerns.

Stock appreciation rights and similar plans that involve a cash

payment based directly on the market value of the depository

institution's stock were deemed to be unacceptable. Two of the

commenters questioned this prohibition. The FDIC continues to believe

that these types of plans tend to reduce the depository institution's

capital in contrast to option plans which infuse capital into the

institution. This is particularly objectionable in the formative years

of a new depository institution when there is often a need to preserve

capital during a period of rapid growth and operating losses. One

commenter suggested that there could be a requirement to reinvest all

cash received in new stock. The FDIC believes this would be the

functional equivalent of a grant of stock and has not adopted the

suggestion or changed the proposal with respect to this issue.

One commenter questioned the FDIC's authority to impose the

criteria concerning stock benefit plans upon a proposed de novo holding

company. The FDIC believes it has such authority under section 6 of the

Act, 12 U.S.C. 1816, which authorizes the FDIC to consider the general

character and fitness of the management of the depository institution.

Good management will not commit the depository institution, directly or

indirectly, to excessive compensation of insiders. Many de novo

institutions are organized as subsidiaries of holding companies whose

only substantive function is to own the stock of the proposed

institution. Without the ability to set standards for stock benefit

plans sponsored by de novo holding companies, the FDIC's requirements

concerning stock benefit plans could easily be avoided by organizing a

holding company. The FDIC has adopted this aspect of the proposal

without change.

The proposed Statement of Policy did not place limits on the volume

of options or warrants that could be issued to directors, officers or

incorporators. The Statement of Policy contemplated the FDIC reviewing

the volume of options or warrants granted on a case-by-case basis. The

FDIC received no comments on this matter. However, since the

publication of the proposed Statement of Policy, the FDIC has received

a number of applications for deposit insurance contemplating stock

benefit plans in which the volume of options granted to organizers went

well beyond what the FDIC believed was reasonable. In light of this

recent experience, the FDIC now believes that guidance should be

provided regarding how the FDIC will determine if the volume of options

or warrants granted is acceptable.

The FDIC has now adopted the following standards in the Statement

of Policy for evaluating the volume of options or warrants to be

granted:

Stock benefit plans granted to active officers and

directors will be reviewed as part of the total compensation package.

The Statement of Policy does not place definite limits on stock benefit

plans for such individuals.

In reviewing stock benefit plans granted to incorporators,

FDIC will review the individual's financial commitment, time,

expertise, and continuing involvement in the management of the proposed

financial institution. Plans to compensate incorporators that provide

for more than one option or warrant for each share subscribed will

generally be considered excessive. It is further expected that

incorporators granted options or warrants at or near this level will

actively participate in the management of the depository institution as

an executive officer or director. On a case-by-case basis, the FDIC may

not object to additional options being granted to an incorporator who

will also be a senior executive officer.

In those limited situations where individuals who

substantially contribute to the organization of a new depository

institution do not intend to serve as an active officer or director

after the institution opens for business, the FDIC will generally not

object to such individuals receiving stock options or warrants under

certain circumstances. Specifically, organizers who agree to accept

shares of bank stock as payment for funds placed at risk during the

organization phase or in payment for professional services rendered may

receive options or warrants of up to an equal number of shares

received. When continuing service is not contemplated, the FDIC will

not require vesting or restrictions on transferability, but will review

the duration of the rights, exercise price, and exercise or forfeiture

clauses.

It is believed that these standards allow incorporators of de novo

institutions flexibility to design reasonable compensation programs to

reward those who have placed money at risk and to incent directors and

officers to promote the best interests of the institution, consistent

with safe and sound banking practices.

Applicants Owned by Domestic Governmental Units

The FDIC specifically solicited comment in the proposal on whether

deposit insurance should be conferred upon certain applicants that are

owned or controlled by public entities, specifically domestic

governmental units. The FDIC stated in the proposal that it was

concerned that due to their ownership by a governmental unit, such

depository institutions presented unique supervisory concerns that do

not exist with privately owned depository institutions. The FDIC noted

its uncertainty about such an institution's ability to operate

independently of the political process, the institution's ability and

willingness to raise capital in the equity markets, management

stability and business purpose. The FDIC stated that in light of these

concerns, the agency would review an application for deposit insurance

filed by a domestic governmental unit very closely and that the FDIC

was unlikely to resolve favorably all of the statutory factors which

must be considered under the FDIC's implementing statute.1

See 62 FR at 52871 (October 9, 1997).

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\1\ A distinction was made, however, for banks owned by foreign

governments and their subdivisions and banks owned and controlled by

Native American tribes or bands. Banks that are owned by foreign

governments and their subdivisions are entitled to ``national

treatment.'' (See International Banking Act of 1978, 12 U.S.C. 3101

et seq.). National treatment requires that all foreign depository

institutions, whether publicly- or privately-owned, receive

consistent treatment with domestic entities when operating in the

United States. This includes eligibility for deposit insurance which

is often a condition of either a state or federal charter. Native

American tribes or bands that own or control depository institutions

can also be distinguished from a conventional governmental unit that

seeks to open or acquire a depository institution. This is because

under federal law, Native American tribes and bands function as both

governmental and economic, for-profit entities. The Indian

Reorganization Act of 1934 (the IRA) (25 U.S.C. 461 et seq.)

authorizes not only the creation of tribal governments (see section

16 of the IRA, 12 U.S.C. 476), but also provides for the creation of

tribal business corporations pursuant to section 17 of the IRA (25

U.S.C. 477). At the same time, however, a tribal government

organized under section 16 of the IRA is not precluded from engaging

in business activities. See S. Unique Ltd. v. Gila River Pima-

Maricopa Indian Community, 138 Ariz. 384, 674 P.2d 1376 (Ct. App.

1984). These legal and policy considerations unique to these two

categories of insurance applicants outweigh any concerns that the

FDIC may have regarding the ownership of such depository

institutions by governmental entities.

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[[Page 44755]]

The FDIC received seven comments in response. Three were from

organizations (both public and private) that provide low- and moderate-

income housing in various areas of the country; two were from banking

trade associations; one was from the trade association for local

housing finance agencies; and one was from a member of the U.S. House

of Representatives. Five commenters were opposed to the addition of

language to the statement of policy concerning deposit insurance

applications from a domestic governmental unit. The two other

commenters agreed that the FDIC has legitimate concerns about providing

deposit insurance to depository institutions owned by governmental

units, but argued that it would still be best to have one application

procedure for all applicants.

One of the most common criticisms of the positions taken in the

preamble to the proposal is that it amounts to ``effective preclusion

of ownership and operation of a depository institution by a public

entity.'' The commenters further argued that a bank owned by a

governmental unit seeking deposit insurance from the FDIC presents the

same issues as any other applicant for deposit insurance. They noted

that the criteria for the review of a deposit insurance application are

specified by the FDIC's implementing statute and that the FDIC may not

exceed those criteria or apply them differently to an applicant owned

by a governmental unit.

Two commenters agreed with the FDIC that applications from

depository institutions owned by public entities pose special concerns

and should be carefully scrutinized. They recommended that notices of

such applications be published in the Federal Register to ensure that a

broad audience has the opportunity to comment on these applications.

In response to the comments on the positions taken in the preamble

to the proposal, the FDIC emphasizes that it has no intention of

exceeding the enumerated statutory criteria for evaluation of a deposit

insurance application, nor does the agency propose to apply different

standards among deposit insurance applicants. However, the FDIC notes

that because of their ultimate control by the political process, such

institutions could raise special concerns relating to management

stability, their business purpose, and their ability and willingness to

raise capital (particularly in the form of true equity rather than

governmental transfers). On the other hand, such institutions may be

particularly likely to meet the convenience and needs of their local

community, particularly if the local community is currently un- or

under-served by depository institutions. In view of such considerations

and the policy issues they embody, the FDIC will closely evaluate such

applications to ensure that the required statutory factors are met.

With respect to the recommendation from commenters that notices of

deposit insurance applications from institutions which would be owned

by governmental entities be published in the Federal Register for

comment, the FDIC notes that all applications which are subject to the

requirements of the CRA (this includes deposit insurance applications)

will be listed on the FDIC's Internet home page. In addition, the FDIC

is considering whether to specifically solicit comment on such matters

as insurance applications from institutions which would be owned by

governmental entities, either on the Internet or by publication in the

Federal Register.

Other Changes

Other changes from the 1992 Statement of Policy included in the

proposal are as follows:

In conjunction with the FDIC's recent rescission of its

Statement of Policy regarding Applications, Legal Fees, and Other

Expenses (62 FR 15479, April 1, 1997), the proposal included comments

relative to fees incident to an application.

The proposed Statement of Policy replaced the requirement

that ``no dividends are to be paid until all initial losses have been

recaptured . . .'' with ``during the first three years of operation,

cash dividends shall be paid only from net operating income (after tax)

. . .'' The proposed Statement of Policy also retained the requirement

that no dividends be paid until an appropriate allowance for loan and

lease losses has been established and overall capital is adequate. This

amendment was designed to provide reasonable accommodation to possible

Subchapter S corporation applicants.

The 1992 Statement of Policy was revised to authorize the

appropriate FDIC regional director (DOS) to waive submission of

financial information for proposed officers and directors when the

proposed depository institution is being formed as a wholly owned

subsidiary of a holding company. This was proposed in recognition that,

when the proposed depository institution is being formed as a wholly

owned subsidiary of a holding company, personal financial information

may not be meaningful.

The 1992 Statement of Policy was also amended by deleting

the statement that the chief executive officer is expected to be a

qualified and experienced lending officer. It is expected that a

qualified lending officer will be provided for in the management

structure; however, the chief executive officer need not be that

person.

The proposal deleted the requirement that a majority of

the proposed directors will reside within, or have significant business

interests within 100 miles of the proposed depository institution.

While the FDIC encourages local involvement in proposed depository

institutions, a specific residency requirement was not considered

necessary.

The 1992 Statement of Policy was also revised to require

that the applicant commit the depository institution to obtain an audit

by an independent public accountant annually for only a three-year

period, rather than the first five years.

No commenters objected to these provisions and they have been

adopted as proposed.

An additional minor change, not included in the proposal, has been

added to the Statement of Policy. Under the discussion of the statutory

factor ``Consistency of Corporate Powers with the Purposes of the Act''

a statement has been added which indicates that generally the FDIC will

presume that a proposed national bank's or federal savings

association's corporate powers are consistent with the purposes of the

Act. The 1992 Statement of Policy and the proposal only addressed this

statutory factor as it applied to insured state banks and state savings

associations. The added provisions clarify the FDIC's position with

respect to national banks and federal savings associations.

This Statement of Policy is applicable only to applications for

deposit

[[Page 44756]]

insurance, and it is not intended to establish policy for other

applications or actions undertaken by established operating insured

depository institutions.

The Board of Directors of the FDIC has adopted the following

Statement of Policy on Applications for Deposit Insurance:

FDIC Statement of Policy on Applications for Deposit Insurance

Introduction

The Board of Directors of the FDIC is charged by statute with the

responsibility of acting on applications for federal deposit insurance

by all depository institutions 1 including any national

bank, district bank, state bank, federal savings association, state

savings association, savings bank, or trust company. In addition, the

Board of Directors also will act on applications for federal deposit

insurance by an industrial bank (or similar depository institution

which the Board of Directors finds to be operating substantially in the

same manner as an industrial bank), or any other depository institution

which is engaged in the business of receiving deposits, other than

trust funds.

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\1\ Certain exceptions to the statutory requirement that deposit

insurance for all depository institutions be acted on by the FDIC

are identified in section 5 of the Act, 12 U.S.C 1815. For example,

federally-chartered interim institutions are deemed to be insured

depository institutions upon the issuance of the institution's

charter by the appropriate federal agency. Under section 5(a)(2) a

federally-chartered interim institution is a federally-chartered

depository institution that will not open for business. An

application for federal deposit insurance generally is not required

for such an institution even if the federal interim institution is

the surviving charter of a merger with another insured depository

institution. See 12 CFR 303.62(b)(2) and the FDIC's Statement of

Policy on Bank Merger Transactions (section 4.2). Additionally, any

depository institution whose insured status is continued pursuant to

section 4 of the Federal Deposit Insurance Act is not required to

apply to continue its insured status. 12 U.S.C. 1815, 1814.

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An insured depository institution which wishes to continue its

insured status after withdrawing from the Federal Reserve System, or

when converting from a mutual to a stock form of ownership by the

chartering of an interim savings association under the provisions of

section 10(o) of the Home Owners Loan Act, also must file an

application with the FDIC for deposit insurance.

Procedures

Forms and instructions for applying for deposit insurance may be

obtained from any regional office of the FDIC Division of Supervision

(DOS). Completed applications should be filed with the appropriate

regional office as that term is defined in Sec. 303.2(g) of the FDIC's

rules and regulations. Organizers and incorporators (collectively,

``incorporators'') of proposed new depository institutions should file

their applications with the FDIC and the appropriate chartering

authority at the same time. Information provided to the chartering

authority that is also needed as part of the deposit insurance

application may be provided to the FDIC by appending a copy of the

information to the FDIC application. Use of the FDIC application form

is optional; however, the material submitted to the FDIC must contain

all information requested in the FDIC application form, unless the FDIC

otherwise indicates. In addition, all incorporators must sign and

submit the signature page of the FDIC's deposit insurance application

form, even if the application itself is not being used. It is strongly

recommended that a representative(s) of the organizing group meet with

the chartering authority and the FDIC prior to filing an application to

reach an understanding of the information requirements of each agency.

This practice typically facilitates processing and eliminate

unnecessary delays. Information requirements may not be as extensive

for applications sponsored by existing holding companies or other well

established banking groups. The FDIC may take final action prior to

final action by other regulatory authorities in cases in which the FDIC

has determined that there is no material disagreement on the action to

be taken.

The procedures governing the administrative processing of an

application for deposit insurance are contained in part 303, subpart B,

of the FDIC's rules and regulations (12 CFR part 303). Processing of an

application will not commence until the application is deemed

substantially complete. An incomplete application may be returned to

the applicant. The applicant must satisfy all terms of a conditional

approval prior to deposit insurance becoming effective.

These policies apply to all proposed de novo depository

institutions and operating institutions applying for deposit insurance,

with the exception of applications submitted for the sole purpose of

acquiring assets and assuming liabilities of an insured institution in

default. Policies are modified in those situations to reflect the

urgent nature of the transaction. Guidance for those situations is

contained in a separate section of this Policy Statement.

Subpart B of part 303 contains special filing and processing

procedures for a state member bank which seeks to continue its insured

status upon termination of membership in the Federal Reserve System and

for interim institutions chartered to facilitate mergers.

Proposed Depository Institutions

In considering applications for deposit insurance for a proposed

depository institution, the FDIC must evaluate each application in

relation to the factors prescribed in section 6 of the Federal Deposit

Insurance Act (hereafter the Act) (12 U.S.C. 1816). Those factors are:

The financial history and condition of the depository

institution;

The adequacy of its capital structure;

Its future earnings prospects;

The general character and fitness of its management;

The risk presented by such depository institution to the

deposit insurance fund;

The convenience and needs of the community to be served by

the depository institution; and

Whether its corporate powers are consistent with the

purposes of the Act.

In general, the applicant will receive deposit insurance if all of

these statutory factors plus the considerations required by the

National Historic Preservation Act and the National Environmental

Policy Act of 1969 are resolved favorably. Additional guidance

regarding the National Historic Preservation Act and the National

Environmental Policy Act may be found in the respective FDIC Statements

of Policy for each of these statutes.

If the proposal contemplates the simultaneous establishment of a

holding company, the application should disclose and discuss the

proposed activities of the parent holding company, as well as those of

the proposed depository institution.

Where the proposed depository institution will be a subsidiary of

an existing bank or thrift holding company, the FDIC will consider the

financial and managerial resources of the parent organization in

assessing the overall proposal and in evaluating the statutory factors

prescribed in section 6 of the Act. In such circumstances, the

application for deposit insurance should contain a copy of any

information submitted to the holding company's primary federal

regulator. Subpart B of part 303 of the FDIC's regulations (12 CFR

303.20-303.27) discusses certain expedited procedures that may be

available to eligible depository institutions or eligible holding

[[Page 44757]]

companies (as those terms are defined in the regulation).

The FDIC may conduct examinations and/or investigations to develop

essential information with respect to deposit insurance applications.

The appropriate regional director (DOS) will determine the need to

conduct an investigation and its scope. Every effort will be made to

coordinate any FDIC investigation with any investigations conducted by

other regulators.

The FDIC has formulated guidelines for evaluating deposit insurance

applications which are designed to ease administration, prevent

arbitrary judgment, and assure uniform and fair treatment of all

applicants. A discussion of these guidelines follows.

Statutory Factors

1. Financial History and Condition

Proposed and newly organized depository institutions have no

financial history to serve as a basis for determining qualifications

for deposit insurance. Thus, the primary areas of consideration under

this statutory factor are the ability of proponents to provide

financial support to the new institution, investment in fixed assets,

including lease obligations, and insider transactions. Lease

transactions shall be reported in accordance with Financial Accounting

Standards Board Statement 13 (Accounting for Leases). Applicants are

expected to provide procedures, security devices, and safeguards at

least equivalent to the minimums specified in the Bank Protection Act

of 1968 (12 U.S.C. 1881-1884).

(a) Investment in fixed assets and leases--The applicant's

aggregate direct and indirect fixed asset investment, including lease

obligations, must be reasonable in relation to its projected earnings

capacity, capital, and other pertinent matters of consideration.

Applicants are cautioned against purchasing any fixed assets or

entering into any noncancelable construction contracts, leases, or

other binding arrangements related to the proposal unless and until the

FDIC approves the application.

(b) Insider transactions--Any financial arrangement or transaction

involving the applicant and an insider(s) should be documented by the

applicant to demonstrate that: (1) the proposed transaction with

insiders is made on substantially the same terms as those prevailing at

the time for comparable transactions with non-insiders, and does not

involve more than normal risk or present other unfavorable features to

the applicant depository institution; and (2) the proposed transaction

must be approved in advance by a majority of the depository

institution's incorporators. In addition, full disclosure of any

arrangements with an insider must be made to all proposed directors and

prospective shareholders. An insider means a person who is proposed to

be a director, officer, or incorporator of an applicant; a shareholder

who directly or indirectly controls 10% or more of a class of the

applicant's outstanding voting stock; or the associates or interests of

any such person.

2. Adequacy of the Capital Structure

Normally, the initial capital of a proposed depository institution

should be sufficient to provide a Tier 1 capital to assets leverage

ratio (as defined in the appropriate capital regulation of the

institution's primary federal regulator) of not less than 8.0%

throughout the first three years of operation. In addition, the

depository institution must maintain an adequate allowance for loan and

lease losses.

The adequacy of the capital structure of a newly organized

depository institution is closely related to its deposit volume, fixed

asset investment and the anticipated future growth in liabilities.

Deposit projections made by the applicant must, therefore, be fully

supported and documented. Projections should be based on established

growth patterns in the specific market, and initial capitalization

should be provided accordingly. Special purpose depository institutions

(such as credit card banks) should provide projections based on the

type of business to be conducted and the potential for growth of that

business. Initial capital should normally be in excess of $2 million

net of any pre-opening expenses that will be charged to the

institution's capital after it commences business.

(a) Initial offering of stock--All stock of a particular class in

the initial offering should be sold at the same price, and have the

same voting rights. Proposals which allow the insiders to acquire a

separate class of stock with greater voting rights are generally

unacceptable. Insiders should not be offered stock at a price more

favorable than the price for other subscribers. Price disparities

provide insiders with a means to gain control disproportionate to their

investments.

When securities are sold to the public, the disclosure of all

material facts is essential. The FDIC's Statement of Policy regarding

use of Offering Circulars in connection with Public Distribution of

Bank Securities (61 FR 46808, September 5, 1996) provides additional

guidance. A copy of the offering circular prepared by the applicant,

the stock solicitation material and the subscription agreement should

be submitted to the FDIC when they become available.

(b) Wholly owned subsidiary of a holding company--If the applicant

is being established as a wholly owned subsidiary of an eligible

holding company (as defined in part 303, subpart B), the FDIC will

consider the financial resources of the parent organization as a factor

in assessing the adequacy of the proposed initial capital injection. In

such cases, the appropriate regional director (DOS) may find favorably

with respect to the adequacy of capital factor, when the initial

capital injection is sufficient to provide for a Tier 1 leverage

capital ratio of at least 8% at the end of the first year of operation,

based on a realistic business plan, or the initial capital injection

meets the $2 million minimum capital standard set forth in this

Statement of Policy, or any minimum standards established by the

chartering authority, whichever is greater. The holding company shall

also provide a written commitment to maintain the proposed

institution's Tier 1 leverage capital ratio at no less than 8 %

throughout the first three years of operation.

(c) Operating insured offices--If the proposal involves the

acquisition of an insured operating office or offices, the applicant

may request that the benchmark for evaluating the adequacy of capital

be an amount necessary for the newly chartered institution to be

classified as well capitalized, as defined by its primary federal

regulator. In such cases, the appropriate regional director (DOS) may

find favorably with respect to the capital factor based on a favorable

finding with respect to the following:

There is a realistic three-year business plan which

evidences stabilized operations at inception;

The proposal involves substantially all assets and

deposits attributable to the respective insured operating office(s);

and

The proponent is either an eligible holding company (as

defined in part 303, subpart B) or is a banking group that has, as

determined by the FDIC, demonstrated its ability to successfully manage

an insured depository institution. (A qualified banking group should

have an established association of at least three years. A chain

banking group which is recognized as such by the FDIC is one type of

banking group that is contemplated in this paragraph.)

(d) Stock financing by proposed officers, directors, and 10%

shareholders--Financing arrangements by proposed officers, directors,

and 10%

[[Page 44758]]

shareholders of their investments in stock of the proposed depository

institution will also be carefully reviewed. Such financing will be

considered acceptable only if the party financing the stock can

demonstrate the ability to service the debt without reliance on

dividends or other forms of compensation from the applicant. When stock

financing arrangements of proposed officers, directors, and 10%

shareholders are anticipated, information should be submitted with the

application demonstrating that adequate alternative independent sources

of debt servicing are available. Direct or indirect financing by

proposed officers, directors, and 10% shareholders of more than 75% of

the purchase price of the stock subscribed by any individual, or more

than 50% of the purchase price of the aggregate stock subscribed by the

proposed officers, directors, and 10% shareholders as a group, will

require supporting justification in the application regarding the

reason that the financing arrangements should be considered acceptable.

If the proposed financing arrangements are not considered appropriate,

the FDIC may find unfavorably on the adequacy of the capital structure.

When the proposed depository institution is being established as a

subsidiary of an existing holding company, the funding source being

utilized by the holding company for its capital contribution will be

evaluated in the context of the holding company's consolidated

operations. In such cases, the holding company's proposed leverage must

be in accordance with the guidelines of its primary federal regulator.

Loans made to purchase the stock of the proposed institution are

not to be refinanced by the newly established institution. Deposits or

other funds of the institution at correspondent banks are not to be

used as compensating balances for loans to insiders. During the first

three years of operation, cash dividends shall be paid only from net

operating income, and shall not be paid until an appropriate allowance

for loan and lease losses has been established and overall capital is

adequate.

3. Future Earnings Prospects

Before approving an application for deposit insurance, the FDIC

must have reasonable assurance that the new institution can be operated

profitably. Therefore, the incorporators will need to demonstrate

through realistic and supportable estimates that, within a reasonable

period (normally three years), the earnings of the applicant will be

sufficient to provide an adequate profit.

The applicant must also maintain its books and records in

accordance with the principles of accrual accounting.

4. General Character and Fitness of the Management

To satisfy this factor, the evidence must support a management

rating which, in an operating institution, would be equivalent to a

rating of 2 or better under the Uniform Financial Institution Rating

System.2 Since in most instances the management of a

proposed depository institution will not have an operating record, the

individual directors and officers will be evaluated largely on the

basis of the following:

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\2\ A 2 rating under the Uniform Financial Institution System is

generally indicative of a satisfactory record of performance in

light of the institution's particular circumstances.

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Financial institution and other business experience;

Duties and responsibilities in the proposed depository

institution;

Personal and professional financial responsibility;

Reputation for honesty and integrity; and

Familiarity with the economy, financial needs, and general

character of the community in which the depository institution will

operate.

All proposed depository institutions shall provide at least a five

member board of directors. The identity and qualifications of the

proposed full-time chief executive officer should be made known to the

FDIC as soon as possible, preferably when the application is filed with

the appropriate FDIC regional director (DOS). Prior to the opening of

the institution, proponents must advise the FDIC in writing of any

change in the directorate, senior active management, or a change in the

ownership of stock which would result in a shareholder owning 10% or

more of the total shares of either the depository institution or its

holding company.

(a) Fees and expenses--The commitment to pay or payment of

unreasonable or excessive fees and other expenses incident to an

application will reflect adversely upon the management of the applicant

institution. Fees and other organizational expenses incurred or

committed to should be fully supported.

Expenses for professional or other services rendered by insiders

will receive special review for any indication of self-dealing to the

detriment of the institution and its other shareholders. As a matter of

practice, the FDIC expects full disclosure to all directors and

shareholders of any arrangement with an insider.

In no case will a deposit insurance application be approved where

the payment of a fee, in whole or in part, is contingent upon any act

or forbearance by the FDIC or by any other federal or state agency or

official.

(b) Stock benefit plans--Stock benefit plans, including stock

options, stock warrants, and other similar stock based compensation

plans will be reviewed by the FDIC and must be fully disclosed to all

potential subscribers. Participants in stock benefit plans may include

incorporators, directors, and officers. A description of any such plans

proposed must be included in the application submitted to the

appropriate regional director (DOS). The structure of stock benefit

plans should encourage the continued involvement of the participants

and serve as an incentive for the successful operation of the

institution. Stock benefit plans should contain no feature that would

encourage speculative or high risk activities or serve as an obstacle

to or otherwise impede the sale of additional stock to the general

public.

Listed below are factors that the FDIC will consider in reviewing

stock benefit plans:

The duration of rights granted should be limited, and in

no event should the exercise period exceed ten years;

Rights granted should encourage the recipient to remain

involved in the proposed depository institution. For example, a vesting

period of approximately equal percentages each year over the initial

three years of operation is a type of provision that would be

appropriate to ensure continued involvement. This requirement may be

waived for participants awarded only a nominal number of shares;

Rights granted should not be transferable by the

participant;

The exercise price of stock rights shall not be less than

the fair market value of the stock at the time that the rights are

granted;

Rights under the plan must be exercised or expire within a

reasonable time after termination as an active officer, employee or

director; and

Stock benefit plans should contain a provision allowing

the institution's primary federal regulator to direct the institution

to require plan participants to exercise or forfeit their stock rights

if the institution's capital falls below the minimum requirements, as

determined by its state or primary federal regulator.

Stock benefit plans provided to directors and officers will be

reviewed

[[Page 44759]]

as a part of the total compensation package offered to such

individuals.

The FDIC will closely review stock benefit plans established to

compensate incorporators. In reviewing such plans, the FDIC will

consider the individual's time, expertise, financial commitment, and

continuing involvement in the management of the proposed institution.

The FDIC will also consider the amount and basis of any cash payments

which will be made to the incorporator for services rendered or as a

return on funds placed at risk. Plans to compensate incorporators that

provide for more than one option or warrant for each share subscribed

will generally be considered excessive. It is further expected that

incorporators granted options or warrants at or near this level will

actively participate in the management of the depository institution as

an executive officer or director. On a case-by-case basis, the FDIC may

not object to additional options being granted to an incorporator who

will also be a senior executive officer.

The FDIC recognizes that there will be limited instances where

individuals who substantially contribute to the organization of a new

depository institution do not intend to serve as an active officer or

director after the institution opens for business. The FDIC generally

will not object to awarding warrants or options to incorporators who

agree to accept shares of stock in lieu of cash payment for funds

placed at risk or for professional services rendered. In such

instances, the FDIC defines funds placed at risk to include ``seed

money'' actually paid into the organizational fund and the value of

professional services rendered as the market value of legal, accounting

and other professional services rendered. Generally, warrants or

options for organizers who will not participate in the management of

the institution will be considered excessive if the amount of options

or warrants to be granted exceeds the number of shares of stock

received in repayment for funds placed at risk and/or for professional

services rendered. The granting of options to incorporators who

guarantee loans to finance an institution's organization generally

would not be objectionable, but options granted should be limited so

that the market value of the stock subject to option does not exceed

the amount of the loan guarantees (although guarantees exceeding the

amount drawn or expected to be drawn will not be considered). When

continuing service is not contemplated, the FDIC will not require

vesting or restrictions on transferability, but will review the

duration of the rights, exercise price, and exercise or forfeiture

clauses in the same manner as discussed above.

In evaluating benefit and compensation plans for insiders, the FDIC

will look to the substance of the proposal. Those proposals that are

determined to be substantially stock based plans will be evaluated

based on the foregoing stock benefit plan criteria. Stock appreciation

rights and similar plans that include a cash payment to the recipient

based directly on the market value of the depository institution's

stock are unacceptable.

If the proposal involves the formation of a de novo holding company

and a stock benefit plan is being proposed at the holding company

level, that stock benefit plan will be reviewed by the FDIC in the same

manner as a plan involving stock issued by the proposed depository

institution.

In some instances, the exercise of rights granted by a stock

benefit plan will trigger the requirements of the Change in Bank

Control Act of 1978, section 7(j) of the FDI Act (12 U.S.C. 1817(j)).

The approval of an Application for Deposit Insurance which includes a

description of stock benefit plans does not satisfy the prior notice

requirements of the Change in Bank Control Act, if the exercise of

rights would trigger the prior notice requirement.

(c) Background and biographical information--Proposed directors,

officers, and 10% shareholders must file financial and biographical

information in connection with the deposit insurance application. The

FDIC may request a report from the Federal Bureau of Investigation or

other investigatory agencies on these individuals. Fingerprinting of

individuals may be required. Background checks and fingerprinting may

be waived by the appropriate FDIC regional director (DOS) for

individuals who are currently associated with, or have had a recent

past association with, an insured depository institution. When the

proposed depository institution is being established as a wholly owned

subsidiary of an eligible holding company, the appropriate FDIC

regional director (DOS) may waive financial information for those

persons who are being proposed as directors or officers of the

applicant. Background checks conducted by other federal financial

institution regulators in connection with charter applications are

generally adequate for the FDIC if the other regulators agree to notify

the FDIC of instances in which further investigation is warranted.

In the event any present or prospective director, officer,

employee, controlling stockholder, or agent of the applicant has been

convicted of any criminal offense involving dishonesty, breach of

trust, or money laundering, or has agreed to enter into a pretrial

diversion or similar program in connection with a prosecution of such

offense, the applicant must obtain the FDIC's written consent under

section 19 of the Act (12 U.S.C. 1829), before any such person may

serve in one or more of those capacities. Guidelines regarding section

19 applications may be obtained from the appropriate FDIC regional

office (DOS).

Proponents should be aware of the prohibitions against interlocking

management officials which are applicable to depository institutions

and depository institution holding companies and which are contained in

the Depository Institution Management Interlocks Act (12 U.S.C. 3201).

(d) Fidelity insurance, policies, and audit coverage--An insured

depository institution should maintain sufficient fidelity bond

coverage on its active officers and employees to conform with generally

accepted industry practices. Primary coverage of no less than $1

million is ordinarily expected. Approval of the application may be

conditioned upon acquisition of adequate fidelity coverage prior to

opening for business.

Applicants are expected to develop appropriate written investment,

loan, funds management and liquidity policies. Establishment of an

acceptable audit program is required for proposed depository

institutions. Applicants for deposit insurance coverage are expected to

commit the depository institution to obtain an audit by an independent

public accountant annually for at least the first three years of

operation. The FDIC may determine,3 on a case-by-case basis,

that a separate audit is unnecessary where the applicant is owned by a

holding company and the proposed depository institution will undergo an

audit performed by an independent public accountant as part of an audit

of the consolidated financial statements of its parent company.

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\3\ ln a situation in which the FDIC is not to be the primary

federal regulator, these determinations will be made in consultation

with the primary federal regulator.

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5. Risk Presented to the Bank Insurance Fund or Savings Association

Insurance Fund

In order to resolve this factor favorably, the FDIC must be assured

that the proposed institution does not present an undue risk to the

Bank Insurance Fund or the Savings Association Insurance Fund. As a

[[Page 44760]]

general matter, the FDIC interprets this factor very broadly. In making

its determination, the FDIC will rely on any information available to

it, including, but not limited to the applicant's business plan. The

FDIC expects that an applicant will submit a business plan commensurate

with the capabilities of its management and the financial commitment of

the incorporators.4 Submission of an unsound business plan

will unfavorably impact the finding concerning this factor. An

applicant's business plan should demonstrate the following:

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\4\ Any significant deviation from the business plan within the

first three years of operation must be reported by the insured

depository institution to the primary federal regulator before

consummation of the change.

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Adequate policies, procedures, and management expertise to

operate the proposed depository institution in a safe and sound manner;

Ability to achieve a reasonable market share;

Reasonable earnings prospects;

Ability to attract and maintain adequate capital; and

Responsiveness to community needs.

Operating plans that rely on high risk lending, a special purpose

market, or significant funding from sources other than core deposits,

or that otherwise diverge from conventional bank related financial

services will require specific documentation as to the suitability of

the proposed activities for an insured institution. Similarly,

additional documentation of plans is required where markets to be

entered are intensely competitive or economic conditions are marginal.

6. Convenience and Needs of the Community to be Served

The essential considerations in evaluating this factor are the

deposit and credit needs of the community to be served, the nature and

extent of the opportunity available to the applicant in that location,

and the willingness and ability of the applicant to serve those

financial needs.

The applicant must clearly define the community it intends to serve

and provide information on that community, including economic and

demographic data and a description of the competitive environment. The

applicant should also define the services to be offered in relation to

the needs of the community. The proposed depository institution's

Community Reinvestment Act documentation, including any applicable

public file information, prepared in accordance with the requirements

of the institution's primary federal regulator, is an important part of

the FDIC's evaluation of the convenience and needs of the community to

be served.

7. Consistency of Corporate Powers with the Purposes of the Act

(a) National banks and Federal savings associations--Generally the

FDIC will presume that a proposed national bank's or federal savings

association's corporate powers are consistent with the purposes of the

Act.

(b) Insured state banks and state savings associations--Pursuant to

section 24 of the Act (12 U.S.C. 1831a), no insured state bank may

engage as principal in any type of activity that is not permissible for

a national bank, unless the FDIC has determined that the activity would

pose no significant risk to the appropriate deposit insurance fund and

the state bank is, and continues to be, in compliance with applicable

capital standards prescribed by its primary federal regulator.

Similarly, section 28 of the Act (12 U.S.C. 1831e) provides that a

state chartered savings association may not engage in any type of

activity that is not permissible for a federal savings association,

unless the FDIC has determined that the activity would pose no

significant risk to the affected deposit insurance fund and the savings

association is, and continues to be, in compliance with the capital

standards for the association. Applicants shall agree in the

application not to engage in any prohibited activities after deposit

insurance has been granted.

State nonmember banks may not exercise trust powers without the

prior written approval of the FDIC.

Operating Noninsured Institutions

This section discusses the evaluation of applications for deposit

insurance submitted by operating noninsured institutions. The FDIC's

criteria for evaluating applications submitted by operating

institutions are generally the same as those for proposed depository

institutions.

The FDIC must consider the seven factors found in section 6 of the

Act, which are discussed above.

The condition of an applicant institution will be determined from

all available information and will generally include an on-site

examination as part of the investigation process. Results of the

examination should reflect an institution that is fundamentally sound,

although some modest weaknesses may exist. The nature and severity of

deficiencies found should not be material, and the institution must be

stable and able to withstand business fluctuations.

Capital ratios will be calculated using financial statements

prepared in accordance with the ``Instructions-Consolidated Reports of

Condition and Income'' or ``Thrift Financial Reports'' in use for

insured institutions at the time. An applicant's capital adequacy will

be measured in relation to the capital ratios established in the

capital regulations of the institution's primary federal regulator.

Based on an analysis of the type and quality of the institution's

assets, the kind of powers exercised, the institution's funding

sources, or other factors, an initial capital level higher than the

minimum levels prescribed may be required. The analysis will include

consideration of such matters as whether the applicant is relatively

new,5 has embarked upon a substantive change in powers

exercised, or has experienced erratic growth patterns in recent years.

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\5\ This Statement of Policy provides that the initial capital

for a proposed depository institution should be sufficient to

provide a leverage ratio of Tier I capital to total estimated assets

of at least 8% throughout the first three years of operation. This

standard shall also be applied to a recently organized institution

applying for deposit insurance.

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As part of the application investigation process, the FDIC will

discuss with the applicant its future operating intentions. If any

change in its kind or level of activity is expected following, or as a

result of, the approval by the FDIC of deposit insurance, the applicant

may be requested to submit a plan for maintaining adequate capital in

the future.

Unless waived in writing by the FDIC, an applicant shall have a

full scope audit conducted by an independent public accountant prior to

submitting an application and shall submit a copy of the auditor's

report as part of the application.

Section 24 of the Act (12 U.S.C. 1831a) limits the powers of

insured state banks, and section 28 of the Act (12 U.S.C. 1831e) limits

the powers of state chartered savings associations. If the institution

is exercising any powers not authorized under the applicable statute,

the application should contain an agreement and plan for eliminating

the activity as soon as possible, or a separate application should be

submitted seeking the FDIC's consent to continue the activity.

Deposit Insurance Applications From Proposed Publicly Owned

Depository Institutions

An application for deposit insurance for a proposed depository

institution

[[Page 44761]]

which would be owned or controlled by a domestic governmental entity

(such as, for example, a state, county or a municipality) will be

reviewed very closely.6 The FDIC is of the opinion that due

to their public ownership, such depository institutions present unique

supervisory concerns that do not exist with privately owned depository

institutions. For example, because of their ultimate control by the

political process, such institutions could raise special concerns

relating to management stability, their business purpose, and their

ability and willingness to raise capital (particularly in the form of

true equity rather than governmental transfers). On the other hand,

such institutions may be particularly likely to meet the convenience

and needs of their local community, particularly if the local community

is currently un- or under-served by depository institutions. In view of

such considerations and the policy issues they embody, the FDIC will

closely evaluate such applications to ensure that the required

statutory factors are met.

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\6\ Banks that are owned by foreign governments and their

subdivisions and banks that are owned or controlled by Native

American tribes or bands are distinguished from conventional

governmental units and will continue to be reviewed in the same

manner as in the past. Banks that are owned by foreign governments

and their subdivisions are entitled to ``national treatment.'' (See

International Banking Act of 1978, 12 U.S.C. 3101 et seq.). National

treatment requires that all foreign depository institutions, whether

publicly- or privately-owned, receive consistent treatment with

domestic entities when operating in the United States. This includes

eligibility for deposit insurance which is often a condition of

either a state or federal charter. Native American tribes or bands

that own or control depository institutions can also be

distinguished from a conventional governmental unit that seeks to

open or acquire a depository institution. This is because under

federal law, Native American tribes and bands function as both

governmental and economic, for-profit entities. The Indian

Reorganization Act of 1934 (the IRA) (25 U.S.C. 461 et seq.)

authorizes not only the creation of tribal governments (see section

16 of the IRA, 12 U.S.C. 476), but also provides for the creation of

tribal business corporations pursuant to section 17 of the IRA (25

U.S.C. 477). At the same time, however, a tribal government

organized under section 16 of the IRA is not precluded from engaging

in business activities. See S. Unique Ltd. v. Gila River Pima-

Maricopa Indian Community, 138 Ariz. 384, 674 P.2d 1376 (Ct. App.

1984). These legal and policy considerations unique to these two

categories of insurance applicants outweigh any concerns that the

FDIC may have regarding the ownership of such depository

institutions by governmental entities.

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Proposed Depository Institutions Formed for the Sole Purpose of

Acquiring Assets and Assuming Liabilities of an Insured Institution

in Default

Because of the urgent nature of this type of transaction, the

procedures described above for insuring proposed depository

institutions are modified when the institution is being formed for the

sole purpose of acquiring assets and assuming liabilities of an

institution in default. Such institutions are approved based on the

statutory factors contained in section 6 of the Act; however, the

procedures for resolving these factors are modified significantly.

The evaluation of the statutory factor ``financial history and

condition'' will be based to a great extent on the quality of assets

purchased and the types of liabilities assumed in the transaction.

The minimum capital requirement for these transactions is such that

the acquiring depository institution would be ``adequately

capitalized,'' as defined in the capital regulations of its primary

federal regulator, which should be augmented by an adequate allowance

for loan and lease losses. It is emphasized that this is a minimum

standard, and a higher capital level may be required. The initial

capital requirements may be based on a realistic projection of the

estimated retained deposits. However, the proposed depository

institution will be required to provide a written commitment to achieve

the minimum capital position shortly after consummation if the volume

of deposits is underestimated.

Proponents should contact the appropriate FDIC regional office

(DOS) as soon as possible if they are interested in acquiring assets

and/or assuming liabilities of an institution in default. Due to the

time constraints involved with this type of transaction, information

submissions and applications will be abbreviated. Generally, a letter

request accompanied by copies of applications filed with other federal

or state regulatory authorities will be sufficient. Other information

will be requested only as needed by the appropriate FDIC official.

Relationships With Other Federal Regulators

Nothing in these guidelines is intended to relieve the applicant of

any requirements imposed by a depository institution's primary federal

regulator. Any differences in requirements of the FDIC and the

institution's primary federal regulator will be resolved during the

investigation process.

By order of the Board of Directors.

Dated at Washington, D.C., this 7th day of July, 1998.

Federal Deposit Insurance Corporation.

James LaPierre,

Deputy Executive Secretary.

[FR Doc. 98-21488 Filed 8-19-98; 8:45 am]

BILLING CODE 6714-01-P