January 30, 2009

William E. Stern, Esq.

Goodwin Procter LLP

620 Eighth Avenue

New York, New York 10018

Dear Mr. Stern:

This is in response to the request by Fifth Third Bank (“Bank”),

Cincinnati, Ohio, for an exemption from section 23A of the Federal Reserve Act 

and the Board’s Regulation W to allow (i) Fifth Third Securities, Inc. (“Securities 

Affiliate”), Cincinnati, to hold and receive payments on variable rate demand 

notes (“VRDNs”) that are backed by a liquidity facility provided by Bank and 

(ii) Bank to purchase up to $1 billion of VRDNs from Securities Affiliate, in 

both cases in excess of the quantitative limits of section 23A and the Board’s 

Regulation W.

1

The VRDNs Bank proposes to purchase from Securities Affiliate are 

notes issued by a trust that is sponsored by a municipality or corporate entity

and supported by a liquidity facility provided by Bank. The interest rate on the 

VRDNs resets either daily or weekly, and the VRDNs are remarketed in a 

remarketing process managed by Securities Affiliate. If the remarketing is not 

successful, the VRDN holders are entitled to put the notes back to the trust, 

 

 1

 The Board has delegated authority to the Director of the Division of Banking 

Supervision and Regulation (“Director”), with the concurrence of the General 

Counsel, to approve requests for exemptions from the quantitative limits of 

section 23A and Regulation W when (i) a securities affiliate of the bank holds 

VRDNs or similarly structured securities that are backed by a liquidity facility 

provided by the bank or (ii) the bank purchases such securities from its securities 

affiliate, in each case subject to substantially the same conditions and limits 

established by the Board in the 23A exemption granted to Branch Banking and 

Trust Company, Winston-Salem, North Carolina, on January 9, 2009. 
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which would draw on the liquidity facility provided by Bank to repurchase the 

VRDNs from the holders. In some cases, Securities Affiliate may hold the 

VRDNs in its inventory in the event of a failed remarketing.

[ ]

Consistent with its past practice, Securities Affiliate proposes to repurchase 

VRDNs from current third-party holders as an accommodation to its customers 

that want liquidity. Securities Affiliate proposes to hold the VRDNs, possibly 

for an extended period of time, until it is possible to remarket the notes. During 

that time, Securities Affiliate would receive regular interest payments on the 

notes, which initially are funded by Bank under the liquidity facility. Those 

interest payments are then reimbursed by the issuer. Alternatively, Securities 

Affiliate may sell the VRDNs to Bank or tender the VRDNs to the trust, which 

in turn would draw on the liquidity facility provided by Bank to acquire the 

VRDNs from Securities Affiliate.

 

Section 23A and Regulation W limit the aggregate amount of 

“covered transactions” between a bank and any single affiliate to 10 percent of the 

bank's capital stock and surplus, and limit the aggregate amount of covered 

transactions between a bank and all its affiliates to 20 percent of the bank's capital 

stock and surplus.2

 “Covered transactions” include the purchase of assets by a 

bank from an affiliate, the extension of credit by a bank to an affiliate, the issuance 

of a guarantee by a bank on behalf of an affiliate, and certain other transactions.3

 

The statute and regulation also require a bank to secure its extensions of credit to, 

and guarantees on behalf of, affiliates with prescribed amounts of collateral.4

 In 

addition, section 23A and Regulation W treat a transaction by a member bank with 

any person as a transaction with an affiliate to the extent that the proceeds of the 

transaction are used for the benefit of, or transferred to, that affiliate under the 

“attribution rule.”5

Because Securities Affiliate is a financial subsidiary of Bank, 

Securities Affiliate is an affiliate of Bank for purposes of section 23A and 

 

 2

 12 U.S.C. § 371c(a)(1) and 12 CFR 223.11 and 223.12.

3

 12 U.S.C. § 371c(b)(7) and 12 CFR 223.3(h).

4

 12 U.S.C. § 371c(c) and 12 CFR 223.14.

5

 12 U.S.C. § 371c(a)(2) and 12 CFR 223.16.
- 3 -

Regulation W.

6

 As a result, Bank’s purchases of VRDNs from Securities 

Affiliate would be covered transactions under section 23A and Regulation W. 

In addition, as a result of the attribution rule in section 23A and Regulation W, 

Bank’s funding of a trust’s repurchase of VRDNs from Securities Affiliate 

through Bank’s liquidity facility also would be a covered transaction.7

 

Moreover, while Securities Affiliate holds the VRDNs, the interest or other 

payments Securities Affiliate would receive, which are initially funded by Bank 

under the liquidity arrangement, would be covered transactions under the 

attribution rule. The aggregate amount of the covered transactions would be up 

to $1 billion. This amount would exceed Bank's quantitative limits under the 

statute and rule.8

Section 23A and Regulation W specifically authorize the Board to 

exempt transactions or relationships from the requirements of the statute and rule if 

the Board finds such an exemption to be in the public interest and consistent with 

the purposes of section 23A.

 Accordingly, Bank is requesting an exemption from the 

quantitative limits and collateral requirements of section 23A and Regulation W 

in connection with the proposed transactions.

 

9

 The Board previously has indicated that the twin 

purposes of section 23A are (i) to protect against a depository institution suffering 

losses in transactions with affiliates; and (ii) to limit the ability of an institution to 

transfer to its affiliates the subsidy arising from the institution’s access to the 

federal safety net.10

 6

 12 U.S.C. § 371c(b)(2)(A) and 12 CFR 223.2(b)(1)(ii).

7

 The trust is an unaffiliated third party, and the proceeds of the bank’s loan to the 

trust under the liquidity arrangement are transferred to Securities Affiliate when 

the trust makes payments to holders of the notes, including Securities Affiliate. As 

a result, the extension of credit from Bank to the trust would be a covered 

transaction to the extent the proceeds are used to make interest and other payments 

to Securities Affiliate. 

8

 As of September 30, 2008, Bank’s capital stock and surplus was $6.6 billion. 

Accordingly, for purposes of section 23A and Regulation W, the 10 percent limit 

for covered transactions with a single affiliate would be $659 million, and the 

20 percent limit for covered transactions with all affiliates in the aggregate would 

be $1.3 billion. 

9

 12 U.S.C. § 371c(f)(2) and 12 CFR 223.43.

10 67 Federal Register 76560 (Dec. 12, 2002).

 
- 4 -

Bank believes that granting the requested exemption would

provide public benefits. In particular, Bank has indicated that permitting Bank 

to enter into the proposed transactions with Securities Affiliate would provide 

an efficient means for Securities Affiliate to help its customers obtain 

liquidity for VRDNs.

 

Granting the exemption would not expose Bank to additional credit 

or market risk. Bank is obligated to advance funds to the trusts under the terms 

of the liquidity facility agreements regardless of whether the notes are held or

tendered to the trusts by third-party investors or by Securities Affiliate. 

Moreover, the exemption would be subject to the following limits and 

conditions that are designed to help ensure that the transactions are consistent 

with safe and sound banking practices:

• The aggregate dollar amount of exempt transactions must be limited to 

$1 billion.

• The VRDNs purchased or funded by Bank must be externally rated by a 

nationally recognized statistical rating organization at single-A or better, 

or the credit equivalent thereof. 

• Bank and Bank’s parent, Fifth Third Bancorp (“Fifth Third”), must 

remain well capitalized, as defined in the FDIC’s prompt corrective 

action regulation and the Board’s Regulation Y, respectively.

11

Because the exemption is meant to provide flexibility in addressing the current 

market disruption, the exemption applies only to covered transactions relating to 

VRDNs purchased by Securities Affiliate from customers on or before

December 31, 2009. The proposed transactions also are subject to the market 

terms requirement of section 23B of the Federal Reserve Act, which requires that 

transactions between a bank and its affiliates be on terms that are at least as 

favorable to the bank as the terms of comparable transactions between the bank 

and a third party. 

The Director has reviewed your request for an exemption from 

section 23A and Regulation W and, after consulting with the General Counsel, has 

determined that granting the exemption appears to be consistent with the purposes 

of section 23A and in the public interest. Based on the foregoing and all the facts 

of record, the Director, acting pursuant to authority delegated by the Board, has 

granted the requested exemption, subject to the conditions and limits discussed 

 11 See 12 CFR 325.103 and 12 CFR 225.2(r). 
- 5 -

above. This determination is specifically conditioned on compliance by Fifth 

Third and Bank with all the commitments and representations they made to the 

Board in connection with this exemption request. These commitments and 

representations are deemed to be conditions imposed in writing by the Board in 

connection with granting the request and, as such, may be enforced in proceedings 

under applicable law. This determination is based on the specific facts and 

circumstances described in your correspondence and this letter. Any material 

change in those facts and circumstances or any failure by Fifth Third or Bank to 

observe any commitments or representations may result in a different conclusion or 

in a revocation of the exemption.

Very truly yours,

(signed)

Robert deV. Frierson

Deputy Secretary of the Board

cc: David Tatum, Vice President

 Federal Reserve Bank of Atlanta 

Federal Deposit Insurance Corporation