Applicability of the Bank Merger Act to the assumption of deposits related to corporate trust business being acquired

Interpretive Letter #1164

April 9, 2019 April 2019

Jonathan Rushdoony

Northeastern District Counsel

340 Madison Avenue, 5th Floor

New York, NY 10173

Subject:

Applicability of the Bank Merger Act to the Assumption of Deposits related to

Corporate Trust Business being acquired

Dear Jonathan:

You recently asked whether an unpublished letter of the Northeastern district office dated June

11, 1990, (1990 Letter) represents the current views of the Office of the Comptroller of the

Currency (OCC). The 1990 Letter concerned the applicability of the Bank Merger Act (BMA),

12 U.S.C. § 1828(c), to certain transactions involving the assumption of deposits by a national

bank from another insured depository institution when the assumption of deposits was part of a

transaction in which the national bank was acquiring corporate trust relationships from the other

institution. The 1990 Letter concluded that the bank would not be required to file an application

under the BMA. As explained below, we believe that conclusion is incorrect.

I.

1990 Letter

The transaction in the 1990 Letter involved a national bank’s purchase of the corporate debt

trusteeship, corporate trust agency, and escrow businesses of another national bank. In

connection with the debt trusteeship transaction, certain cash transaction accounts would be

transferred from one bank to the other. These cash transaction accounts were established to

accumulate funds to make payments of principal and interest on debt instruments, redemptions of

and dividends on stock, and other cash disbursement. These cash transaction accounts

constituted deposit liabilities and met the definition of a “deposit” under 12 U.S.C. § 1813(l)

saction accounts would be

transferred from one bank to the other. These cash transaction accounts were established to

accumulate funds to make payments of principal and interest on debt instruments, redemptions of

and dividends on stock, and other cash disbursement. These cash transaction accounts

constituted deposit liabilities and met the definition of a “deposit” under 12 U.S.C. § 1813(l).

The 1990 Letter concluded that the assumption of the cash transaction deposit accounts that are

associated with trust accounts would not require application and approval under the BMA

despite the assumption of deposit liabilities because (1) the deposits are incidental to trust

accounts in which the bank is acting in a fiduciary capacity and (2) the assumption of the

liabilities does not impact competition and is not within the scope of the BMA.

2

II.

BMA Applicability to Assumption of Deposits

The BMA provides, in relevant part: “No insured bank shall merge or consolidate with any other

insured bank or, either directly or indirectly, acquire the assets of, or assume liability to pay any

deposits made in, any other insured bank except with the prior written approval of the

responsible agency….” 12 U.S.C. § 1828(c)(2) (emphasis added).

A. Liability to Pay Any Deposit

The first basis for the 1990 Letter’s conclusion relied on the cash transaction deposit accounts’

relationship to the trust accounts, characterizing the cash transaction accounts as operated on

behalf of the trust customers. However, the BMA applies to the assumption of any deposit (the

Deposit Prong). The cash transaction accounts are deposits. Therefore, their assumption by one

bank from another is covered by the BMA.

In one limited instance, the banking agencies determined that the BMA was not applicable to the

acquisition of deposit liabilities associated with credit card accounts. OCC Interpretive Letter

No

ever, the BMA applies to the assumption of any deposit (the

Deposit Prong). The cash transaction accounts are deposits. Therefore, their assumption by one

bank from another is covered by the BMA.

In one limited instance, the banking agencies determined that the BMA was not applicable to the

acquisition of deposit liabilities associated with credit card accounts. OCC Interpretive Letter

No. 1083 (May 3, 2007) (Interpretive Letter 1083)1 concluded that a bank’s acquisition of credit

card portfolios with de minimis amounts of credit balances that constitute deposits are not subject

to the BMA as long as the transactions meet certain conditions.2

However, while the cash transaction deposit accounts discussed in the 1990 letter are related to

the corporate trust accounts, this relationship is different from the credit card balances and credit

card accounts addressed in Interpretive Letter 1083. Deposit liabilities arising from cash

transaction deposit accounts related to trust accounts are separate relationships between

customers and banks from the associated corporate trust account relationships. In contrast, a

“credit balance” does not represent a separate relationship between a customer and the insured

bank that could be entered into independently of, or transferred or assumed separately from, the

credit card account.3 As such, credit balances may be assumed when credit cards are purchased

subject to certain conditions without an application under the BMA.4 Unlike the credit balances

in Interpretive Letter 1083, the cash transaction deposit accounts in the 1990 letter represent

separate relationships with customers that can be transferred separately from the trust accounts.5

1 This letter was issued on an interagency basis by the Federal Deposit Insurance Corporation, the Federal Reserve,

and the OCC

e the credit balances

in Interpretive Letter 1083, the cash transaction deposit accounts in the 1990 letter represent

separate relationships with customers that can be transferred separately from the trust accounts.5

1 This letter was issued on an interagency basis by the Federal Deposit Insurance Corporation, the Federal Reserve,

and the OCC.

2 The credit balances must represent less than 1 percent of the value of the credit card receivables transferred and the

selling institution must be in compliance with section 165 of the Truth in Lending Act, 15 U.S.C. § 1666d. See

Interpretive Letter 1083, p. 2.

3 Id.

4 Id. The rationale underlying Interpretive Letter 1083 is that assumption of credit balance deposit liabilities would

trigger an application under the BMA if not for the letter’s conclusion regarding the relationship between the

accounts and a transaction meeting the conditions imposed by the letter.

5 See 12 CFR 9.10(c) (funds awaiting investment or distribution may be deposited by the trustee national bank at an

affiliated insured institution). See also OCC Letter from Emory W. Rushton (December 22, 1987), 1987 WL

3

B. Competitive Effects

The second basis for the 1990 Letter’s conclusion is that the assumption of liability for corporate

trust deposits would not result in an impact on competition, and therefore it is not within the

scope of the BMA. This conclusion is incorrect because it inappropriately transposed an element

of the OCC’s reasoning underlying the interpretation of the statutory text of “acquire the assets

of . . . any other insured depository institution” (the Asset Prong) to determine the meaning and

scope of the Deposit Prong of the BMA

t in an impact on competition, and therefore it is not within the

scope of the BMA. This conclusion is incorrect because it inappropriately transposed an element

of the OCC’s reasoning underlying the interpretation of the statutory text of “acquire the assets

of . . . any other insured depository institution” (the Asset Prong) to determine the meaning and

scope of the Deposit Prong of the BMA.

The OCC has long interpreted the Asset Prong of the BMA—emphasizing the BMA covers

acquisitions of “the assets” of one bank by another—to require an application under the BMA

only for acquisitions of all or substantially all of a bank’s assets.6 This reading is most consistent

with the plain text of the statute. The plain reading of the Asset Prong is consistent with the

purpose of the BMA to ensure that mergers do not substantially lessen competition, since

generally only acquisitions of all or substantially all of a bank’s assets could have a substantial

negative effect on the competitive environment as only these acquisitions have the potential to

remove a competitor from the relevant markets.7 Accordingly, generally an application under

the BMA is not required for an acquisition of only some assets, without an assumption of any

deposits.

The 1990 Letter mistakenly extends the reasoning relating to competition in the Asset Prong to

the interpretation of the Deposit Prong despite there being no indication in the statutory text to

support this connection, indeed despite the clear difference in language between “acquire the

assets” and “assume liability to pay any deposits.”8 If a bank is to “assume liability to pay any

deposits” of another insured bank, under the plain language of the statutory text that assumption

is subject to application and approval under the BMA.

149889 (1987 Letter), p. 2-3 (the transaction was structured so that deposit liabilities were not conveyed to the

institution that purchased the trust accounts)

sume liability to pay any

deposits” of another insured bank, under the plain language of the statutory text that assumption

is subject to application and approval under the BMA.

149889 (1987 Letter), p. 2-3 (the transaction was structured so that deposit liabilities were not conveyed to the

institution that purchased the trust accounts).

6 See 1987 Letter, p. 2. See also Interpretive Letter 1083.

7 See 1987 Letter, p. 2. The legislative history discusses purchases of the assets, along with mergers and

consolidations, as ways for one bank to absorb another. See generally Regulation of Bank Mergers, Hearings

Before the Senate Committee on Banking and Currency, 86th Cong., 1st Sess. (Mar. 18-19, 1959); Hearings Before

Subcommittee No. 2 of the House Committee on Banking and Currency, 86th Cong., 2nd Sess. (Feb 16-18, 1960).

8 In this manner, the 1990 Letter erroneously applied a factor—i.e., competition—relating to approval of merger

transactions that are subject to the BMA to determine the scope of the BMA itself. The plain text of the BMA,

however, clearly distinguishes the applicability or scope of the statute from the approval of a transaction that is

within the scope of the statute. Under the BMA, a “merger transaction” includes “any proposed transaction for

which approval is required under paragraphs [1828(c)(1) and (2)].” 12 U.S.C. 1828(c)(3); see also 12 U.S.C.

1831u(g)(7). The responsible agency may not approve a merger transaction under BMA if the transaction would,

among other things, “substantially lessen competition.” 12 U.S.C. 1828(c)(5).

4

If you have any questions regarding this letter, please contact Valerie Song, Assistant Director,

Bank Advisory group, at 202-649-5221.

Sincerely,

/s/

Jonathan V. Gould

Senior Deputy Comptroller and Chief Counsel