Letter states that arrangement in which Bank A's customers may deliver deposits to Bank B via independent messenger service for credit to their accounts in Bank A, and make withdrawals in same manner, is a correspondent service, not branching. (08/05/97)

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #796

September 1997

August 18, 1997

12 U.S.C. 36J3 &36J2

12 U.S.C. 24(7)18

[ ]

[ ]

[ ]

[ ]

Dear [ ]:

This is in response to your letter of June 25, 1997, in which you requested confirmation that a

proposed arrangement between a national bank that you represent (“the Bank”) and a bank in

another state (“the Correspondent Bank”) involves correspondent services and would not raise

branching concerns. For the reasons discussed below, I agree with this conclusion.

Factual Background

According to your letter and subsequent telephone conversations, the Bank is located in

[ State1 ] but has several business customers with operations in [ State2 ]. From time to

time, those customers have a need for cash, or have a surplus of cash which they would like to

have returned to their [ State1 ] accounts. Although the customers maintain their deposit

relationships directly with the Bank in [ State1 ], it is too expensive for the Bank and its

customers to arrange for cash shipments by armored carrier between the Bank’s cash vault and

the customers’ [ State2 ] locations. The customers, for cash management and other

reasons, also do not want to establish separate deposit arrangements in [ State2 ] simply to

meet their cash vault needs.

To solve this problem, the Bank would like to establish a correspondent account at an

unaffiliated bank in [ State2 ] and arrange for that institution to provide cash vault services

for the Bank’s customers in that state through the correspondent account. You envision that the

arrangement would work as follows:

For customers with excess cash:

1. A customer with excess cash would deliver the cash by courier to the

cash vault of the Correspondent Bank in [ State2 ].

unt at an

unaffiliated bank in [ State2 ] and arrange for that institution to provide cash vault services

for the Bank’s customers in that state through the correspondent account. You envision that the

arrangement would work as follows:

For customers with excess cash:

1. A customer with excess cash would deliver the cash by courier to the

cash vault of the Correspondent Bank in [ State2 ].

- 2 -

2. The customer would use the Bank’s touch-tone banking system to

report the transaction to the Bank.

3. The deposit would be provisionally credited by the Bank at that time,

subject to verification that funds have been credited to the Bank’s

correspondent account at the Correspondent Bank.

4. The Correspondent Bank would process and verify the cash deposit,

credit the Bank’s correspondent account, and notify the Bank of any

exceptions.

For customers in need of cash:

1. The customer would notify the Bank (usually electronically) of its

need for cash.

2. Upon its receipt of the notice, the Bank would notify the

Correspondent Bank to charge the Bank’s correspondent account,

prepare the cash for pickup, and make the cash available to a courier for

delivery to the customer.

3. The Bank would charge the customer’s account in [ State1 ] for the

amount delivered to the courier.

4. The withdrawal would be considered to be made at that time, subject

to verification that the Bank’s correspondent account at the

Correspondent Bank has been debited.

In each side of this arrangement, the courier would be a “third-party messenger service,” as

that term is used in the OCC’s Interpretive Ruling § 7.1012, 12 C.F.R. § 7.1012. All

couriers would be hired directly by customers to act as their agents, although the Bank may

reimburse customers for the costs of the messenger service. Customers would bear the risk of

loss in transit

k has been debited.

In each side of this arrangement, the courier would be a “third-party messenger service,” as

that term is used in the OCC’s Interpretive Ruling § 7.1012, 12 C.F.R. § 7.1012. All

couriers would be hired directly by customers to act as their agents, although the Bank may

reimburse customers for the costs of the messenger service. Customers would bear the risk of

loss in transit.

You noted that, although it would be possible to wire funds between the Bank and the

Correspondent Bank instead of crediting or charging the Bank’s correspondent account at the

Correspondent Bank, this would result in significantly higher costs, would be much more

complex, and would be prone to error. You believe that banks often enter into agreements

with larger institutions to provide cash vault services, and this arrangement should not cause

the Correspondent Bank to be a branch of the Bank. However, since you did not discover any

OCC interpretations directly on point, you have requested our views.

- 3 -

It appears that the Bank will consider deposits to be made at the time it credits customers’

1

accounts on its books. The courts have held that, while banks and their depositors are free to contractually

agree on any terms they choose for the handling of deposits, a deposit is deemed to be “received” for

branching purposes when a customer delivers a sum of money to a bank-established facility for credit to

his or her account. First Nat’l Bank in Plant City v. Dickinson, 396 U.S. 122, 136-37 (1969); Independent

Bankers Ass’n of America v. Smith, 534 F.2d 921, 940 (D.C. Cir.), cert. denied, 429 U.S. 862 (1976).

Presumably the same rule would apply to non-established facilities, therefore it could be argued that

deposits will be received by the Bank for purposes of 12 U.S.C. § 36 either when they are received by

the Correspondent Bank, or at the time the Bank’s correspondent account is credited.

Legal Analysis

For a banking facility to be a “branch” within the meaning of 12 U.S.C

429 U.S. 862 (1976).

Presumably the same rule would apply to non-established facilities, therefore it could be argued that

deposits will be received by the Bank for purposes of 12 U.S.C. § 36 either when they are received by

the Correspondent Bank, or at the time the Bank’s correspondent account is credited.

Legal Analysis

For a banking facility to be a “branch” within the meaning of 12 U.S.C. § 36, three

requirements must be satisfied:

1. The facility must perform at least one of the core banking functions of

receiving deposits, paying checks, or lending money, listed in 12 U.S.C. § 36.

2. The facility must be “established,” i.e., owned or rented, by the bank.

3. The convenience of the location of the office or facility to the public must

give the bank a competitive advantage in obtaining customers.

If any of these factors is lacking, the facility is not a branch. See generally, Interpretive Letter

No. 634, [1993-1994 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,518 (July 23,

1993), and cases cited therein. I find that the Correspondent Bank will not be a branch of the

Bank because, even though deposits may arguably be received there, the other two

1

requirements will not be satisfied.

The Correspondent Bank will be an independent institution not owned by or affiliated with the

Bank. Although the Correspondent Bank will be compensated by the Bank for its services, the

mere payment of fees or charges for the use of a facility by a bank’s customers does not make

the facility one that is “rented” for purposes of branching. Independent Bankers Association of

New York v. Marine Midland Bank, 757 F.2d 453, 463 (2d Cir. 1985), cert. denied, 476 U.S.

1186 (1986). Since it will be neither owned nor rented, the Correspondent Bank will not be

“established” by the Bank.

The Correspondent Bank’s location will not provide the Bank with a competitive advantage

because the Bank will not be competing for customers at the Correspondent Bank’s location

sociation of

New York v. Marine Midland Bank, 757 F.2d 453, 463 (2d Cir. 1985), cert. denied, 476 U.S.

1186 (1986). Since it will be neither owned nor rented, the Correspondent Bank will not be

“established” by the Bank.

The Correspondent Bank’s location will not provide the Bank with a competitive advantage

because the Bank will not be competing for customers at the Correspondent Bank’s location.

This service will be offered only to existing customers of the Bank, and the Correspondent

Bank will not open new accounts for the Bank or engage in any other activity designed to

attract new business for the Bank.

- 4 -

Even if the Correspondent Bank’s main office is used, so that the Correspondent Bank’s own

2

customers have access to the facility, there will be no public access to the Correspondent Bank for the

Bank’s customers. Their only contact with the Correspondent Bank will be via the courier. A facility does

not offer public access if it does not serve customers in person and the only access is by means of a

messenger service. Interpretive Letter No. 639, supra. As far as the Bank’s customers are concerned, the

Correspondent Bank’s facility will be merely a nonbranch back office. An independent courier service as

described in the OCC’s interpretive ruling is not itself a branch, and may deliver deposit items to both

branch and nonbranch facilities. See generally Interpretive Ruling 7.1012(c), 12 C.F.R. § 7.1012(c).

Moreover, an indispensable aspect of the competitive advantage test is public access, because

if customers do not make use of a banking facility in person, its location is irrelevant and

provides no competitive advantage. Interpretive Letter No. 634, supra. At this time, the

specific facility to be used is undetermined. However, you note that it will be whatever the

Correspondent Bank uses as its main cash vault, which normally is either a bank’s main office

or a nonpublic facility

ause

if customers do not make use of a banking facility in person, its location is irrelevant and

provides no competitive advantage. Interpretive Letter No. 634, supra. At this time, the

specific facility to be used is undetermined. However, you note that it will be whatever the

Correspondent Bank uses as its main cash vault, which normally is either a bank’s main office

or a nonpublic facility.

If it is the latter, there will be no public access, and the arrangement you propose will be

essentially the same as the one discussed in Interpretive Letter No. 639, [1993-1994 Transfer

Binder] Fed. Banking L. Rep. (CCH) ¶ 83,526 (January 14, 1994). There, deposits were

delivered by an independent courier to a nonpublic facility of a third party contractor hired by

the bank. The contractor processed the deposits and then forwarded them to the Federal

Reserve Bank. The OCC concluded that the contractor’s facility was not a branch because it

was not established by the bank and had no public access. Here, the Correspondent Bank will

function in exactly the same way. It will simply be a third party contractor hired by the Bank

to process deposits that it receives from a messenger service.2

Rather than branching, the arrangement between the Bank and the Correspondent Bank is

properly characterized as a correspondent service. Correspondent banking is a “system of

interbank relationships in which a bank sells services to other financial institutions. The

institution providing the services is the correspondent bank or upstream correspondent. The

institution buying the services is the respondent bank or downstream correspondent.” Charles

J. Woelfel, The Fitzroy Dearborn Encyclopedia of Banking & Finance 258 (10th ed. 1994).

Correspondent banking enables banks to obtain, through other banks, services that they cannot

economically perform themselves

nstitution providing the services is the correspondent bank or upstream correspondent. The

institution buying the services is the respondent bank or downstream correspondent.” Charles

J. Woelfel, The Fitzroy Dearborn Encyclopedia of Banking & Finance 258 (10th ed. 1994).

Correspondent banking enables banks to obtain, through other banks, services that they cannot

economically perform themselves. The Supreme Court has noted that correspondent banking

goes back to colonial times and today includes a wide range of services that is “varied,

extensive, and constantly expanding.” United States v. Citizens & Southern National Bank,

422 U.S. 86, 115 (1975). It is recognized that one of the services a correspondent bank may

provide is acting as a depository for liquid balances of the respondent bank. Donald P. Jacobs

et al., Financial Institutions 133 (5th ed. 1972).

The OCC has long recognized that correspondent services include deposit-related services. In

fact, as long ago as 1966, the OCC approved an arrangement that was virtually the same as

what you propose:

- 5 -

Facility banking between affiliate institutions has since been authorized by statute. 12 U.S.C. §

3

1828(r).

Bank B has customers in Bank A’s service area. Bank B opens a correspondent

account in Bank A. Bank B’s customers deposit their funds in Bank A to the

account of Bank B. From time to time Bank B draws down its account in Bank

A and deposits these funds to the accounts of its customers who had deposited

the funds in Bank A . . . .

The transaction you describe is not an uncommon practice for correspondent

banks . . . . It provides for the convenient movement of funds from one bank

to another and is recognized as a service of correspondent banking.

Transactions such as these are not prohibited by Federal statute or regulation nor

do they constitute unauthorized branch banking . . . .

Letter of Robert L. Schwind, Regional Counsel, Sixth National Bank Region, January 10,

1966 (unpublished)

espondent

banks . . . . It provides for the convenient movement of funds from one bank

to another and is recognized as a service of correspondent banking.

Transactions such as these are not prohibited by Federal statute or regulation nor

do they constitute unauthorized branch banking . . . .

Letter of Robert L. Schwind, Regional Counsel, Sixth National Bank Region, January 10,

1966 (unpublished).

The arrangement you describe also closely resembles the correspondent service known as

“facility” or “agent” banking. In facility banking, customers of one depository institution may

perform deposit, withdrawal, and certain other transactions in person at another institution.

We have concluded that this is a correspondent service, and the agent or correspondent bank is

not a branch of the customer’s bank. Interpretive Letter No. 610, [1992-1993 Transfer

Binder] Fed. Banking L. Rep. (CCH) ¶ 83,448 (October 8, 1992). The only apparent

3

difference between facility banking and your proposal is that the Bank’s customers will not

visit the Correspondent Bank in person.

I therefore conclude that the proposed arrangement between the Bank and the Correspondent

Bank will be a correspondent service and will not constitute branch banking. This conclusion

is based on the facts contained in your letter and subsequent telephone conversations. A

material change in the facts could lead to a different conclusion.

I trust that this has been responsive to your inquiry. If you have further questions, please

contact me at (202) 874-5300.

Sincerely,

- 6 -

/s/

Christopher C. Manthey

Senior Attorney

Bank Activities and Structure Division