Letter concludes that a national bank may establish an operating subsidiary to serve as a captive insurance company for the purpose of underwriting insurance coverages on the operating risks of the parent bank and its affiliates. (10/20/98)

12 U.S.C. §§ 21, 24(Seventh).

1

12 U.S.C. § 24(Seventh).

2

12 U.S.C. § 29(First). See also 12 C.F.R. § 7.1000.

3

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #845

October 20, 1998

November 1998

12 U.S.C. 24(7)

Ms. Karol K. Sparks

Krieg DeVault Alexander & Capehart

One Indiana Square

Suite 2800

Indianapolis, Indiana 46204-2017

Dear Ms. Sparks:

This responds to your request that the Office of the Comptroller of the Currency (“OCC”)

confirm that a national bank may establish an operating subsidiary (“Subsidiary”) to serve as a

captive insurance company for the purpose of providing insurance coverages on the business

risks of the parent bank and its bank affiliates. Your request is on behalf of Old National Bank

in Evansville, Indiana (“Bank”), a subsidiary of Old National Bancorp., Inc. (“ONBI”).

Based on the information and representations provided, and for the reasons discussed below,

we agree with your conclusion that the proposed activities would be permissible under the

National Bank Act.

I.

BACKGROUND

A.

Operating a Bank as a Business Enterprise

National banks are authorized to be formed to carry on the business of banking, and once

1

formed are not only empowered to conduct that business but to exercise all such “incidental

powers” as are needed to enable them to conduct the banking business. For example, as part

2

of the “business of banking” a national bank is specifically permitted to acquire and hold

property “necessary for its accommodation in the transaction of its business.” National banks

3

ess of banking, and once

1

formed are not only empowered to conduct that business but to exercise all such “incidental

powers” as are needed to enable them to conduct the banking business. For example, as part

2

of the “business of banking” a national bank is specifically permitted to acquire and hold

property “necessary for its accommodation in the transaction of its business.” National banks

3

- 2 -

12 U.S.C. § 24(Third).

4

12 U.S.C. § 24(Fourth).

5

12 U.S.C. § 24(Fifth).

6

Id.

7

See Comptroller’s Handbook, Large Bank Supervision (July 1998); see also Comptroller’s Handbook, Bank

8

Supervision Process (April 1996).

See Comptroller’s Handbook, Large Bank Supervision, supra, at 74; Comptroller’s Handbook, Bank

9

Supervision Process, supra, at 20.

are also authorized to make contracts, sue and be sued as fully as natural persons, and elect

4

5

or appoint directors. The board of directors of the bank may appoint presidents, vice

6

presidents, cashiers, and other officers; define their duties; require bonds of them, and dismiss

these officers at will and appoint others to fill their places.

7

B.

The Risks Associated with Operating a Bank as a Business Enterprise

In connection with operating the “business” of a bank, e.g., owning property, bringing and

defending against suits related to the bank’s business, and hiring and managing employees, a

national bank assumes certain risks associated with its business. Similar to any other business

organization, the bank must manage these risks. The OCC assesses banking risk relative to its

impact on capital and earnings, and has defined nine categories of risk for bank supervision

purposes. These categories of risk are: credit, interest rate, liquidity, price, foreign exchange,

transaction, compliance, strategic, and reputation. The risks associated with operating the

8

“business” of a bank primarily are transaction and compliance risks

he OCC assesses banking risk relative to its

impact on capital and earnings, and has defined nine categories of risk for bank supervision

purposes. These categories of risk are: credit, interest rate, liquidity, price, foreign exchange,

transaction, compliance, strategic, and reputation. The risks associated with operating the

8

“business” of a bank primarily are transaction and compliance risks. Examples of these types

of risks include losses from damage to the bank’s property; losses in connection with suits

resulting from injury or death of both employees and the public, suits alleging official

misconduct, and individual or class action suits alleging mistreatment or the violation of laws

or regulations; and losses resulting from the loss of key personnel.

The OCC defines “transaction risk,” which also is referred to as “operating” or “operational

risk,” as the risk to earnings and capital arising from fraud, error, and the inability to deliver

products or services, maintain a competitive position, and manage information. Risk is

9

inherent in efforts to gain strategic advantage, and in the failure to keep pace with changes in

the financial services marketplace. Transaction risk encompasses: product development and

delivery, transaction processing, systems development, computing systems, complexity of

products and services, and the internal control environment.

- 3 -

See Comptroller’s Handbook, Large Bank Supervision, supra, at 77; Comptroller’s Handbook, Bank

10

Supervision Process, supra, at 21.

In addition to specialized forms of insurance that banks may require, such as fidelity bond coverage, banks

11

may also need many of the same types of insurance coverages required by any business or individual.

12 C.F.R. § 5.34(d)(1).

12

The OCC defines “compliance risk” as the risk to earnings or capital arising from violations

of, or noncompliance with, laws, regulations, prescribed practices, internal policies and

procedures, or ethical standards

y require, such as fidelity bond coverage, banks

11

may also need many of the same types of insurance coverages required by any business or individual.

12 C.F.R. § 5.34(d)(1).

12

The OCC defines “compliance risk” as the risk to earnings or capital arising from violations

of, or noncompliance with, laws, regulations, prescribed practices, internal policies and

procedures, or ethical standards. Compliance risk can lead to diminished reputation, reduced

10

franchise value, limited business opportunities, reduced expansion potential, and lack of

contract enforceability. Specifically, this risk includes exposure to litigation from all aspects

of banking and blends into operational risk.

Banks effectively assume these operational risks since they are a component -- an unavoidable

aspect -- of conducting a banking business. To manage these risks, a bank may purchase

insurance, assume the risks directly, or transfer these risks to a subsidiary or affiliate.

11

Several factors may influence a bank’s decision to purchase insurance coverage or to self-

insure: the cost of coverage versus the probability of the occurrence of a loss; the cost of

coverage versus the size of the loss of each occurrence; and the cost of coverage versus the

cost of correcting a situation that could result in a loss.

As discussed below, inherent in the power of national banks to carry on a “business” under 12

U.S.C. § 24(Seventh), is the authority to assume risks associated with operating a bank.

Thus, the business of banking necessarily includes the presence of those risks as well as the

ability to manage them to the bank’s best advantage.

A national bank may establish or acquire an operating subsidiary to conduct, or may conduct

in an existing operating subsidiary, activities that are part of or incidental to the business of

banking, pursuant to 12 U.S.C. § 24(Seventh), and other activities permissible for national

banks or their subsidiaries under other statutory authority

the

ability to manage them to the bank’s best advantage.

A national bank may establish or acquire an operating subsidiary to conduct, or may conduct

in an existing operating subsidiary, activities that are part of or incidental to the business of

banking, pursuant to 12 U.S.C. § 24(Seventh), and other activities permissible for national

banks or their subsidiaries under other statutory authority. Since we conclude that the

12

proposed self-insurance activities are permissible for a national bank, they are therefore

permissible for a national bank’s operating subsidiary as well.

C.

The Proposed Insurance Activities

Under the proposal, the Bank would establish the Subsidiary as a captive insurance company

authorized to provide insurance coverages exclusively on the risks of the Bank and its bank

affiliates. The Subsidiary would be established in the State of Vermont and would be subject

to applicable Vermont insurance laws and regulations, including capital and reserve

- 4 -

Vt. Stat. Ann. tit 8 §§ 6004 and 6005.

13

Vt. Stat. Ann. tit 8 § 6001(12).

14

The Bank represents that the Vermont Department of Insurance will only permit a captive insurance company

15

of this type to underwrite property and casualty insurance products. Accordingly, the Subsidiary would not

underwrite life, accident or health coverages for the bank or its affiliates.

requirements. The Subsidiary also would be subject to requirements that restrict captive

13

insurance companies to writing coverages for the parent company and its affiliates. As a

14

result, the Subsidiary would have no corporate authority in any jurisdiction to extend its

underwriting business beyond affiliate risks.

The Subsidiary would primarily reinsure credit-related insurance in connection with loans

made by the Bank and affiliated banks

requirements that restrict captive

13

insurance companies to writing coverages for the parent company and its affiliates. As a

14

result, the Subsidiary would have no corporate authority in any jurisdiction to extend its

underwriting business beyond affiliate risks.

The Subsidiary would primarily reinsure credit-related insurance in connection with loans

made by the Bank and affiliated banks. Further, the Subsidiary would insure 1) retentions

(deductibles) on lines of property and casualty insurance (including fiduciary coverages) of the

Bank and its bank affiliates; 2) other business risks, such as catastrophic loss on buildings

15

utilized by the Bank and its bank affiliates; and 3) errors and omissions insurance on activities

of the Bank’s affiliates, to the extent the risk is “self-insured.” The Subsidiary would reinsure

the risks with its current insurance underwriter, except as to some or all of the retention

amounts and self-insured amounts currently assumed by the Bank and its bank affiliates. Thus,

the Subsidiary would not take on risks under the proposal greater than the risks currently

undertaken by the Bank and its affiliates. The decision of ONBI to “self-insure” the risks of

loss associated with its banking businesses through the Subsidiary, instead of managing the

risks as an operating loss of each of its subsidiary banks, will offer ONBI an important risk

management product and enable the Bank to benefit from business efficiencies that are

accomplished by the proposed arrangement.

by the Bank and its affiliates. The decision of ONBI to “self-insure” the risks of

loss associated with its banking businesses through the Subsidiary, instead of managing the

risks as an operating loss of each of its subsidiary banks, will offer ONBI an important risk

management product and enable the Bank to benefit from business efficiencies that are

accomplished by the proposed arrangement.

- 5 -

See Corporate Decision No. 98-28 (May 11, 1998) (authorizing Fleet National Bank’s application to establish

16

operating subsidiaries to underwrite and reinsure credit life insurance, credit disability insurance, and involuntary

unemployment insurance sold to customers that borrow from the bank and its lending subsidiaries); Corporate

Decision No. 97-92 (October 17, 1997) (authorizing Bank of America’s application to establish an operating

subsidiary to underwrite and reinsure credit disability and involuntary unemployment insurance sold to customers that

borrow from the bank’s lending affiliates); Interpretive Letter No. 812, reprinted in [Current Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 81-260 (December 29, 1997) (authorizing the sale, as agent, of credit-related crop

insurance); Letter dated March 31, 1995 (unpublished) (authorizing reinsurance of credit-related involuntary

unemployment, life, and disability insurance); Letter dated June 17, 1993 (unpublished) (authorizing the sale, as

agent, of credit-related mechanical breakdown insurance); Letter dated June 3, 1986 (unpublished) (authorizing the

sale, as agent, of credit-related vendors double interest insurance); Interpretive Letter No. 283, reprinted in [1983-

1984 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,447 (March 16, 1984) (authorizing the sale, as agent, of

credit-related life, disability, involuntary unemployment, and vendors single interest insurance); Interpretive Letter

No. 277, reprinted in [1983-1984 Transfer Binder] Fed. Banking L. Rep

credit-related vendors double interest insurance); Interpretive Letter No. 283, reprinted in [1983-

1984 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,447 (March 16, 1984) (authorizing the sale, as agent, of

credit-related life, disability, involuntary unemployment, and vendors single interest insurance); Interpretive Letter

No. 277, reprinted in [1983-1984 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,441 (December 13, 1983)

(authorizing underwriting and reinsurance of credit-related life insurance); see also 12 C.F.R. Part 2 (Sales of Credit

Life Insurance); IBAA v. Heimann, 613 F.2d 1164 (D.C. Cir. 1979), cert. denied, 449 U.S. 823 (1980) (confirming

the OCC’s authority to adopt its credit life insurance regulation at 12 C.F.R. Part 2).

See, e.g., Merchants’ Bank v. State Bank, 77 U.S. 604 (1871); M & M Leasing Corp. v. Seattle First

17

National Bank, 563 F.2d 1377, 1382 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978); American Insurance

Association v. Clarke, 865 F.2d 278, 282 (2d Cir. 1988).

II.

LEGAL ANALYSIS

National banks have long been recognized to have broad authority to underwrite, reinsure, and

sell as agent, credit-related insurance products. In addition, as discussed below, the proposed

16

self-insurance activities are part of, or incidental to, the business of banking.

A.

The “Business of Banking”

Judicial cases reflect three general principles used to determine whether an activity is within

the scope of the “business of banking”: (1) is the activity functionally equivalent to or a logical

outgrowth of a recognized banking activity; (2) would the activity respond to customer needs

or otherwise benefit the bank or its customers; and (3) does the activity involve risks similar in

nature to those already assumed by banks.

17

1.

Functionally Equivalent to or a Logical Outgrowth of Recognized

Banking Functions

Pursuant to 12 U.S.C. § 24(Seventh), a national bank is authorized generally to conduct the

business of banking

ctivity; (2) would the activity respond to customer needs

or otherwise benefit the bank or its customers; and (3) does the activity involve risks similar in

nature to those already assumed by banks.

17

1.

Functionally Equivalent to or a Logical Outgrowth of Recognized

Banking Functions

Pursuant to 12 U.S.C. § 24(Seventh), a national bank is authorized generally to conduct the

business of banking. Inherent within this authority is the ability, similar to any other

company, to assume the risks of loss associated with operating its banking business, and to

seek to manage and control those risks to the bank’s best advantage. As previously discussed,

those risks may include losses from damage to the bank’s property; losses in connection with

suits resulting from injury or death of both employees and the public, suits alleging official

- 6 -

See Comptroller’s Handbook, Large Bank Supervision (July 1998); Comptroller’s Handbook, Bank

18

Supervision Process (April 1996).

We note that the OCC has, on many occasions, permitted national banks to perform services for

19

affiliates. See Interpretive Letter No. 513, reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶

83,215 (June 18, 1990) (“Allowing a bank holding company to consolidate servicing operations in a single entity

permits all of the banks in the holding company to enjoy economies of scale in obtaining the services.”). See also

Corporate Decision No. 97-92 (October 17, 1997) (permitting Bank of America to establish a subsidiary to self-

insure the safe deposit box liability insurance of the bank and its affiliates in the safe deposit business); Interpretive

Letter No. 493, reprinted in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,078 (November 22,

1989) (a national bank may establish a subsidiary to provide deposit account services to an affiliated national bank);

and Interpretive Letter No. 398, reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep

rance of the bank and its affiliates in the safe deposit business); Interpretive

Letter No. 493, reprinted in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,078 (November 22,

1989) (a national bank may establish a subsidiary to provide deposit account services to an affiliated national bank);

and Interpretive Letter No. 398, reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,622

(September 28, 1987) (a bank holding company may consolidate security and guard services in a subsidiary of a

national bank). We also note that bank holding companies are authorized to furnish services to, or perform services

for, their affiliates under section 4(c)(1)(C) of the Bank Holding Company Act of 1956, as amended. 12 U.S.C. §

1843(c)(1)(C). The Board of Governors of the Federal Reserve System has specifically authorized bank holding

companies to underwrite insurance coverages, including property and casualty insurance, for affiliates under this

authority. 12 C.F.R. § 225(b)(2)(ix); see also Letter dated April 12, 1995, from J. Virgil Mattingly, Jr., General

Counsel, to Michael Briggs, permitting Barnett Banks, Inc., to organize a wholly-owned subsidiary to engage in

underwriting commercial general liability, automobile liability, workers compensation, property, and bankers’

misconduct, and individual or class action suits alleging mistreatment or the violation of laws

or regulations; and losses resulting from the loss of key personnel.

The responsibility for controlling operational risks is generally left with bank management,

who have many options in managing a particular risk. Banks may manage risks of a banking

18

business by purchasing insurance covering potential losses or may retain these risks by not

purchasing insurance or purchasing limited coverages. Through the proposed self-insurance

arrangements, the Subsidiary would retain risks that could similarly be retained by the Bank by

not purchasing insurance

nt,

who have many options in managing a particular risk. Banks may manage risks of a banking

18

business by purchasing insurance covering potential losses or may retain these risks by not

purchasing insurance or purchasing limited coverages. Through the proposed self-insurance

arrangements, the Subsidiary would retain risks that could similarly be retained by the Bank by

not purchasing insurance. These self-insurance activities thus are functionally equivalent to or

a logical outgrowth of the Bank’s authority to assume the risk of loss associated with

conducting a banking business, and are part of the business of banking pursuant to 12 U.S.C.

§ 24(Seventh).

The Bank also proposes to reinsure its insurance coverages so that it will achieve the same risk

exposures it currently holds through the purchase of insurance. At present, the Bank does not

insure deductibles and manages the risk of loss (i.e., self-insures) on the described activities of

the Bank and its bank affiliates. Through the proposed reinsurance arrangements, the Bank

would retain these same risks, and transfer other risks to its current insurance underwriter.

Thus, the proposed self-insurance and reinsurance arrangements are functionally equivalent to

and a logical outgrowth of existing insurance and de facto self-insurance arrangements.

The Subsidiary may assume risks arising from operating a banking business from both its

parent and bank affiliates. As discussed above, each of the affiliated banks separately has the

authority to self-insure risks arising from its banking operations. Each bank also may transfer

those risks to a subsidiary to manage its risk exposure. Similarly, each bank or its subsidiary

19

ce arrangements.

The Subsidiary may assume risks arising from operating a banking business from both its

parent and bank affiliates. As discussed above, each of the affiliated banks separately has the

authority to self-insure risks arising from its banking operations. Each bank also may transfer

those risks to a subsidiary to manage its risk exposure. Similarly, each bank or its subsidiary

19

- 7 -

transportation coverages on the risks of the bank holding company and its subsidiaries.

See Letter from James M. Kane, District Counsel, to Ballard W. Cassady, Jr.(June 8, 1988) (unpublished)

20

(permitting national banks to participate in the ownership of a captive insurance company to provide officers liability

and financial institution bond coverage); Letter from Larry A. Mallinger, Senior Attorney, to James R. Cameron

(March 13, 1987) (unpublished) (permitting national banks to participate in a nonassessable mutual captive insurance

company to provide directors’ and officers’ liability insurance); Letter from Richard V. Fitzgerald, Chief Counsel, to

John J. Gill (October 22, 1986) (unpublished) (permitting national banks to participate in a nonassessable mutual,

not-for-profit insurance company as policyholders, in order to obtain insurance protection for themselves and their

management, although the policyholder banks were also considered insurers as well as insureds). See also Corporate

Decision No. 97-92 (October 17, 1997) (permitting Bank of America to self-insure the safe deposit box liability

insurance of the bank and its affiliates in the safe deposit business); OCC Bulletin 96-51 (September 20, 1996) on

Bank Purchases of Life Insurance, Guidelines for National Banks (As an alternative to purchasing corporate-owned

life insurance, a bank may choose to self-insure against the risk of potential loss arising from the untimely death of a

“key-person.”).

Corporate Decision No. 97-92 (October 17, 1997)

k and its affiliates in the safe deposit business); OCC Bulletin 96-51 (September 20, 1996) on

Bank Purchases of Life Insurance, Guidelines for National Banks (As an alternative to purchasing corporate-owned

life insurance, a bank may choose to self-insure against the risk of potential loss arising from the untimely death of a

“key-person.”).

Corporate Decision No. 97-92 (October 17, 1997).

21

Id.; see also OCC Bulletin 96-51 (September 20, 1996) on Bank Purchases of Life Insurance, Guidelines for

22

National Banks (As an alternative to purchasing corporate-owned life insurance, a bank may choose to self-insure

against the risk of potential loss arising from the untimely death of “key-person.”).

See Corporate Decision No. 97-92 (October 17, 1997).

23

may assume risks arising from banking operations from affiliates for a fee and establish

reserves to cover potential losses. Since a bank and its bank affiliates are separately able to

20

assume the risks arising from their banking business, and since bank affiliates may transfer

these business risks to one another, consolidating these risks within a national bank subsidiary

is permissible. Consolidation is simply a business decision to take advantage of the benefits of

a centralized operation.

21

The proposed self-insurance activities are similar to other self-insurance activities approved by

the OCC for national bank subsidiaries. For example, the OCC has authorized a national bank

subsidiary to underwrite and reinsure safe deposit box liability insurance for the bank and its

affiliates engaged in the safe deposit box business. The OCC’s rationale for authorizing this

22

activity was that self-insurance through the subsidiary is a way for the bank organization to

pool the risks of the safe deposit business, and is essentially an internal risk management

function that is being centralized for risk management efficiencies

sit box liability insurance for the bank and its

affiliates engaged in the safe deposit box business. The OCC’s rationale for authorizing this

22

activity was that self-insurance through the subsidiary is a way for the bank organization to

pool the risks of the safe deposit business, and is essentially an internal risk management

function that is being centralized for risk management efficiencies. Thus, the fact that the

23

banking companies had chosen for business reasons to consolidate this activity in a single bank

subsidiary, did not limit the subsidiary’s authority to engage in the proposed self-insurance

activity. Similarly, as discussed above, the Bank may choose for business reasons to self-

insure bank operating risks through the Subsidiary, rather than through each affiliate

individually.

2.

Respond to Customer Needs or Otherwise Benefit the Bank

- 8 -

See Interpretive Letter No. 544, reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶

24

83,256 (February 14, 1991) (“[I]n general, participation in self-insurance plans is a permissible activity for national

banks.”). See also footnote 19, supra.

513 U.S. 251 (1995) (“VALIC”).

25

or its Customers

As discussed above, the responsibility for controlling operating risks is generally left with bank

management, who have many options in managing a particular risk. Banks may manage these

risks by purchasing insurance covering potential losses or may retain these risks by not

purchasing insurance or purchasing limited coverages. The proposed self-insurance activities

would benefit the Bank and its Subsidiary because they would enable the Bank and the

Subsidiary to manage the risks in the banking business and to obtain new business efficiencies.

The Subsidiary’s involvement in these activities would benefit the Bank by providing a more

efficient risk management mechanism for the Bank’s own business. It may also expand the

options of the Bank and its bank affiliates in choosing their insurance coverages.

3

they would enable the Bank and the

Subsidiary to manage the risks in the banking business and to obtain new business efficiencies.

The Subsidiary’s involvement in these activities would benefit the Bank by providing a more

efficient risk management mechanism for the Bank’s own business. It may also expand the

options of the Bank and its bank affiliates in choosing their insurance coverages.

3.

Risks Similar in Nature to Those Already Assumed by National

Banks

The risk assumed by a bank when it underwrites insurance for its own business or for its

affiliates is essentially the same type of risk a bank already assumes in its banking business.

The OCC has previously recognized that a national bank may insure for itself the risks inherent

in its business. In this case, the Bank would be transferring its own and its bank affiliates’

24

risks to the Subsidiary.

Moreover, the Subsidiary would reinsure the risks with the Bank’s current insurance

underwriter, except as to some or all of the retention amounts and self-insured amounts

currently assumed by the Bank and its bank affiliates. Thus, the proposed arrangements would

not alter the nature of the risks involved, because the Subsidiary would not take on risks under

the proposal different than the risks currently undertaken by the Bank and its affiliates.

B.

The “Incidental to Banking” Analysis

While we conclude that national banks have the power, as part of their power to carry on a

general banking business, to undertake the proposed self-insurance activities as part of the

business of banking, even if that authority were not sufficient, the proposed activities would

clearly qualify as authorized by being incidental to the bank’s banking business.

In NationsBank of North Carolina, N.A. v. Variable Annuity Life Insurance Co., the Supreme

25

Court expressly held that the “business of banking” is not limited to the enumerated powers in

urance activities as part of the

business of banking, even if that authority were not sufficient, the proposed activities would

clearly qualify as authorized by being incidental to the bank’s banking business.

In NationsBank of North Carolina, N.A. v. Variable Annuity Life Insurance Co., the Supreme

25

Court expressly held that the “business of banking” is not limited to the enumerated powers in

- 9 -

Id. at 258, n.2.

26

472 F.2d 427 (1st Cir. 1972) (“Arnold Tours”).

27

Id. at 432 (emphasis added). Even prior to VALIC, the Arnold Tours formula represented a narrow

28

interpretation of the “incidental powers” provision of the National Bank Act. See Interpretive Letter 494, reprinted

in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,083 (December 20, 1989).

See, e.g., Wyman v. Wallace, 201 U.S. 230 (1905) (borrowing is authorized under the statute permitting a

29

national bank to conduct a general banking business);City Nat’l Bank of Huron v. Fuller, 52 F.2d 870 (8th Cir. 1931)

(holding it permissible for the national bank to purchase the assets and assume the liabilities of another bank).

12 U.S.C. § 24(Seventh), but encompasses more broadly activities that are part of the business

of banking. The VALIC decision further established that banks may engage in activities that

26

are “incidental” to the enumerated powers as well as to the broader business of banking as a

whole.

Before VALIC, the standard often considered in determining whether an activity was incidental

to banking was the one advanced by the First Circuit Court of Appeals in Arnold Tours, Inc. v.

Camp

business

of banking. The VALIC decision further established that banks may engage in activities that

26

are “incidental” to the enumerated powers as well as to the broader business of banking as a

whole.

Before VALIC, the standard often considered in determining whether an activity was incidental

to banking was the one advanced by the First Circuit Court of Appeals in Arnold Tours, Inc. v.

Camp. The Arnold Tours standard defined an incidental power as one that is "convenient or

27

useful in connection with the performance of one of the bank's established activities pursuant

to its express powers under the National Bank Act." The VALIC decision, however, has

28

established that the Arnold Tours formula provides that an incidental power includes one that is

“convenient” and “useful” to the business of banking as a whole, as well as a power incidental

to the express powers specifically enumerated in 12 U.S.C. § 24(Seventh).

A review of relevant case law indicates that there are at least three broad categories of

recognizable activities that are incidental to the performance of the business of banking under

12 U.S.C. § 24(Seventh). The first broad category includes activities “incidental” to

operating a bank as a business enterprise. These activities are permissible even though they

are not necessarily substantive banking activities. Instead of relating to the delivery of a

specific banking product or service, these activities are useful and incidental to the operation of

the bank as a business. These types of activities, among others, include hiring employees,

issuing stock to raise capital, owning or renting equipment, purchasing the assets and assuming

the liabilities of other financial institutions, and borrowing money.

29

To illustrate, for example, the power to borrow money for operations is not among the powers

expressly granted to national banks in 12 U.S.C. § 24(Seventh) nor does it fall within the

“business of banking” in the sense that it is a banking activity

ise capital, owning or renting equipment, purchasing the assets and assuming

the liabilities of other financial institutions, and borrowing money.

29

To illustrate, for example, the power to borrow money for operations is not among the powers

expressly granted to national banks in 12 U.S.C. § 24(Seventh) nor does it fall within the

“business of banking” in the sense that it is a banking activity. While most businesses borrow

money, this does not inherently make them banks. Until repealed in 1982, however, a

provision in the National Bank Act restricted the scope of permissible borrowing (12 U.S.C. §

- 10 -

12 U.S.C.§ 82, repealed by Pub. L. 97-320, Title IV, § 402, 96 Stat. 1510 (1982).

30

See, e.g., Aldrich v. Chemical Nat’l Bank, 176 U.S. 618 (1900) (holding it permissible for the national bank

31

to borrow money when necessary for banking business); Auten v. United States Nat’l Bank of New York, 174 U.S.

125 (1899) (borrowing money falls under the usual course of legitimate banking business).

See, e.g., 12 U.S.C. § 78 (defining persons ineligible to be bank employees); 12 U.S.C. § 83 (putting

32

limitations on national bank’s purchase of stock); 12 U.S.C. § 371d (limiting the amount of investment permitted in a

bank premises corporation subsidiary); 12 U.S.C. § 371c (defining “affiliates” to include subsidiaries owned by

national banks).

See, e.g., Morris v. Third Nat’l Bank, 142 F. 25 (8th Cir. 1905), cert. denied, 201 U.S. 649 (1906)

33

(“Morris”) (national bank securing and collecting on loans lawfully may engage in activities to manage and protect its

rights that the bank could not do as a primary business); Cooper v. Hill, 94 F. 582 (8th Cir. 1899) (where a national

bank owned an abandoned mining property, bank had authority under its incidental powers to expend money to put

the property in presentable condition to attract purchasers); Cockrill v. Abeles, 86 F. 505 (8th Cir

g on loans lawfully may engage in activities to manage and protect its

rights that the bank could not do as a primary business); Cooper v. Hill, 94 F. 582 (8th Cir. 1899) (where a national

bank owned an abandoned mining property, bank had authority under its incidental powers to expend money to put

the property in presentable condition to attract purchasers); Cockrill v. Abeles, 86 F. 505 (8th Cir. 1898) (national

bank may purchase other undivided interests in property if necessary to manage or dispose of other previously

82) and, thus, implicitly recognized the power to borrow. Accordingly, the courts uniformly

30

have held that national banks do have the power to borrow funds in order to operate as a

business.31

Thus, these incidental activities are performed, and are permissible powers, not because they

relate to “banking” products and services, but because they are necessary, or at least

convenient and useful, components of conducting the banking business. Similarly, various

federal banking statutes implicitly recognize and regulate business activities of banks as

businesses, without deeming it necessary to authorize the activities expressly. These powers

32

are incidental to the general grant of power to conduct a business under section 24(Seventh).

The self-insurance activities the Bank proposes would qualify as incidental to the business of

banking because they facilitate, and are convenient and useful to, the operation of the bank as

a business. Further, these types of activities permit management of operational risks to the

bank’s best advantage by enabling the Bank and the Subsidiary to manage in a new way

operating risks that arise from the business aspects of banking. Thus, overall, this approach

for meeting the bank’s insurance needs will increase business efficiencies for the Bank and is

both convenient and useful

as

a business. Further, these types of activities permit management of operational risks to the

bank’s best advantage by enabling the Bank and the Subsidiary to manage in a new way

operating risks that arise from the business aspects of banking. Thus, overall, this approach

for meeting the bank’s insurance needs will increase business efficiencies for the Bank and is

both convenient and useful.

A second broad category of “incidental” activities to the performance of the business of

banking optimizes the use and value of a bank’s facilities and competencies, and enables the

bank to avoid economic waste. Reviewing the scope of national banks’ incidental powers

authority, courts have determined that, within reasonable limits, certain business-related

activities may be incidental to banking when those activities enable a bank to realize gain or

avoid loss from activities that are part of, or necessary to, the operation of the bank’s banking

business. For example, as one court observed: “A national bank may lawfully do many

33

- 11 -

acquired property to better advantage); First Nat’l Bank v. National Exchange Bank, 92 U.S. 122 (1875)

(compromises to avoid or reduce losses may be necessary for national banks in certain situations).

Morris, 142 F. at 25.

34

See generally Franklin Nat’l Bank v. New York, 347 U.S. 373 (1954); Clement National Bank v. Vermont,

35

231 U.S. 120 (1913); Carbide v. Devon Bank, 299 N.E.2d 521, 12 Ill. App. 3d 559 (1973).

things in securing and collecting its loans, in the enforcement of its rights and the conservation

of its property previously acquired, which it is not authorized to engage in as a primary

business.”34

Similarly, the proposed self-insurance activities would enable a bank to realize gain or avoid

loss from activities that are part of or necessary to its banking business

12 Ill. App. 3d 559 (1973).

things in securing and collecting its loans, in the enforcement of its rights and the conservation

of its property previously acquired, which it is not authorized to engage in as a primary

business.”34

Similarly, the proposed self-insurance activities would enable a bank to realize gain or avoid

loss from activities that are part of or necessary to its banking business. Insuring coverages on

the risks of the Bank and its bank affiliates would enable the Bank and ONBI to take advantage

of business efficiencies accomplished by conducting the proposed insurance activities. The

ability to conduct this activity in a subsidiary of the Bank, instead of in a subsidiary of each

affiliated bank, would provide ONBI with organizational flexibility that would enable ONBI to

avail itself of benefits that result from conducting the activity in the most efficient manner, and

thereby avoid economic waste.

A third identifiable category involves “incidental” activities that enhance the quality and

efficiency of the content or delivery of banking products or services. Case authority holds that

national banks have an incidental power to promote their banking products and services. By

35

improving the efficiency and profitability of its business operations, a bank can more

effectively promote its banking products and services. The insurance activities proposed for

the Subsidiary would enhance the efficiency of the Bank’s and its affiliates’ business, and

enhance their ability to promote banking products and services. Self-insurance through the

Subsidiary would be a way for the Bank to pool the risks associated with the business of

banking, and essentially would be an internal risk management function that is being

centralized to achieve efficiencies in promoting banking products and services

iciency of the Bank’s and its affiliates’ business, and

enhance their ability to promote banking products and services. Self-insurance through the

Subsidiary would be a way for the Bank to pool the risks associated with the business of

banking, and essentially would be an internal risk management function that is being

centralized to achieve efficiencies in promoting banking products and services.

Thus, even if the proposed insurance activities were not part of the business of banking conducted

by ONBI, they clearly are permissible “incidental” activities because they offer efficiencies that

facilitate the operation of the bank as a business, promote profitability and avoid economic waste,

and enhance the Bank’s ability to promote its products and services.

III.

CONCLUSION

- 12 -

A specific proposal by a national bank to establish a subsidiary to underwrite insurance coverages on the

36

business risks of the parent bank and its bank affiliates requires an application and would be subject to the OCC’s

review under 12 C.F.R. § 5.34. The OCC’s review would include an assessment of whether any supervisory

concerns or legal issues in addition to those discussed herein are presented in each case. Also, of course, activities of

individual banks and their subsidiaries are subject to other applicable laws and regulations.

Based on the foregoing facts and analysis, we agree with your conclusion that the proposed

self-insurance activities are permissible for national banks under the National Bank Act. Any

specific application by a national bank to establish a self-insurance subsidiary will be reviewed

by the OCC for compliance and safety and soundness considerations associated with the

specific facts and circumstances of the application.

36

Sincerely,

/s/

Raymond Natter

Acting Chief Counsel