Federal

Charter

Federal

Charter

ederal

er 

Federal

Charter

Federal

Charter

Federal

Charter

Federal

Charter 

Federal

Charter

Federal

Charter 

Banking 

Review 

FDIC 

1997 

A Unified Federal Charter 

Recent Developments 

Statistical Sampling as a Management Tool 

Federal Deposit Insurance Corporation 

Vol. 10, No. 1 
FDIC Banking Review 

FDIC 

Banking

Review 

1997 

Vol. 10, No. 1 Vol. 10, No. 1 

ChairmanChairman 

Ricki Helfer Ricki Helfer 

Division of Research Division of Research A Unified Federal Charter for Banks and Savings Institutions Institutions 

and Statistics, and Statistics, 

DirectorDirector by FDIC Staff by FDIC Staff Page 1 

Wm. Roger Watson Wm. Roger Watson 

Deputy Directors Deputy Directors This staff study addressesaddresses the issues concerningconcerning the proposalproposal to establishestablish a single 

Barry Kolatch Barry Kolatch 

Steven A. Seelig Steven A. Seelig federal charter for banks and savings associations. associations. The study discussesdiscusses the 

Editor differencesferences in the powers of banking organizationsganizations and thrift organizations. ganizations. It also 

Steven A. Seelig Steven A. Seelig reviews the arguments and evidenceevidence for and against a unificationunification of the federal 

Editorial Committee Editorial Committee 

Jack T. Reidhill Jack T. Reidhill charterscharters for depositorydepository institutions. institutions. 

Detta Voesar Detta Voesar 

Managing Editor Managing Editor 

Detta Voesar Detta Voesar Statistical Sampling as a Management Tool in Banking Editorial Secretary Editorial Secretary 

Cathy Wright Cathy Wright by Charles D. Cowan by Charles D. Cowan Page 17 

Design and Production Design and Production 

Geri Bonebrake Geri Bonebrake The author describesdescribes the use of samplingsampling in a financialfinancial setting and focuses,focuses, as an 

illustration,illustration, on some of the methods used by the FDIC to value assets in 

The views expressedexpressed are 

those of the authors and do liquidation.liquidation. By using sampling,sampling, as opposed to valuing each asset, significantsignificant cost 

not necessarilynecessarily reflect offi-­ savings are achievedachieved while ensuringensuring the accuracyaccuracy and quality of the results.results. 

cial positionspositions of the Federal 

Deposit InsuranceInsurance Corpora-Corporation. ArticlesArticles may be re-­

printed or abstractedabstracted if the 

FDIC Banking Review and Recent Developments Affecting Depository Institutions Recent Developments Affecting Depository Institutions 

author(s)author(s) are credited.credited. 

Please provide the FDIC's by Valentine Valentine V. Craig Page 24 

DivisionDivision of ResearchResearch and 

StatisticsStatistics with a copy of any This regular feature of the FDIC Banking Review containscontains information information on regula-­

publications publications containingcontaining re-­

printed material. printed material. tory agency actions,actions, state legislationlegislation and regulation,regulation, and articlesarticles and studies perti-­

Single-copy Single-copy subscriptions subscriptions nent to banking and deposit insuranceinsurance issues. are availableavailable to the public 

free of charge. RequestsRequests for 

subscriptions, subscriptions, back issues or 

address changes should be 

mailed to: FDIC Banking Re-­

view, Office of CorporateCorporate 

Communications, Communications, Federal 

Deposit InsuranceInsurance Corpora-Corporation, 550 17th Street, N.W., 

Washington, DC Washington, DC 20429. 
A Unified Federal Charter 

A Unified Federal 

Charter for Banks and 

Savings Associations 

A Staff Study 

This article addresses the issues tem and the depository institu­ consist of federal savings associaconcerning the proposal to es­ tions within the system; tions,1 which are regulated by the Oftablish a single federal charter � strengthen the efficiency and fice of Thrift Supervision (OTS), and 

for banks and savings associations. It competitiveness of the U.S. bank- national banks, which are regulated 

is an FDIC staff study and was ing system in financial markets; by the Office of the Comptroller of 

originally published by the FDIC in � the Currency (OCC). Their respec­ support reliance on market-based October of 1996. Following the intro- incentives to guide depository in­ tive holding companies are savingsduction, the differences in the powers stitution choices on strategies and and-loan holding companies, which 

of banking organizations and thrift business activities for meeting are under the jurisdiction of the 

organizations are summarized, and customer needs; OTS, and bank holding companies, data are presented on the various � which are regulated by the Federal reduce the current regulatory bur- categories of organizations. The next dens and supervisory costs on in- Reserve Board (FRB).

section reviews the arguments and sured institutions and/or the cus- Federal savings associations have evidence for and against a unification tomers of those institutions; historically enjoyed four distinct of the federal charters for depository � provide flexibility for insured in- advantages not accorded national institutions. The final section as­ stitutions to respond to changes in banks. These advantages were: (1) sumes the decision is to unify the market conditions, technology, preferential taxation; (2) the most charters and considers the issues that and customer financial needs; liberal branching rights of all federal would then have to be resolved. It 

� increase depository institutions’ depository institutions; (3) expanded should be noted from the start, this efficiency and/or effectiveness subsidiary powers; and (4) virtually review does not include the possible in meeting specific, legislated, unlimited holding company activi­ expansion of powers beyond those public-policy goals; and ties. However, the magnitude of currently exercised by either the these thrift advantages has dissipated banking or thrift industries. Rather, � increase public access to banking 

services. over time, and with enactment of the the review is limited to powers that 

one or the other of the two industries Small Business Job Protection Act on 

currently possess. Major Differences Between

Federal Savings 1 Technically, there are two distinct federal The analysis contained in this thrift charters, a federal savings-and-loan Associations and study flowed from seven broad princi­ association charter and a federal savings 

ples. Any prospective change needed National Banks bank charter. With the very limited exception of mutual state-chartered savings banks to: Federally chartered depository in- that convert to a federal savings bank char­

� ter, the two have identical powers and are re­ strengthen the safety and sound­ stitutions insured by the Federal De­ ferred to collectively in this paper as savings ness of the deposit insurance sys- posit Insurance Corporation (FDIC) associations. 

1 
FDIC Banking Review 

August 20, 1996, the preferential tax 

treatment for thrifts has been eliminated. 

Balanced against the historical 

benefits accruing to federal savings 

associations, national banks have enjoyed the ability to engage in a much 

wider range of lending activities. 

National banks were subject neither 

to an enforced orientation toward a 

particular area, such as real-estate financing, nor to specific asset-type 

lending constraints. National banks 

may focus on a particular area of lending and investment if they desire, but 

they are not forced to. 

This section explores the major areas where savings associations and national banks are treated differently. 

(For a more detailed comparison of 

their differences, a table prepared by 

the OCC and the OTS can be made 

available upon request from the Division of Research and Statistics of the 

FDIC). 

Lending Constraints 

Federal savings associations2 perform a similar financial intermediation function to that of commercial 

banks. However, savings-and-loan 

associations have a distinct focus from 

that of banks—the provision of home 

mortgage credit. The laws promulgated by Congress for the industry in 

the 1930s were motivated by a national policy to encourage home ownership, and this has remained the 

special focus of the thrift industry 

since that time.3 

Federal savings associations are 

subject to several specific lending 

constraints. These constraints were 

also relaxed by the recent legislation. 

In general, loans secured by nonresidential real estate may not exceed 400 

percent of capital. Commercial loans 

may not exceed 20 percent of assets, 

and amounts in excess of 10 percent 

must be used for small-business 

loans. Unsecured residential construction loans may not exceed the 

greater of 5 percent of assets or 100 

percent of capital. In combination, 

consumer loans, commercial paper 

and corporate debt securities may not 

exceed 35 percent of assets. 

In order to receive many of the 

special benefits of a thrift, an institution must pass the qualified thrift 

lender (QTL) test, which requires 

that at least 65 percent of an institution’s portfolio assets be qualified 

thrift investments, primarily residential mortgages and related investments. The Economic Growth and 

Regulatory Paper Reduction Act of 

1996, enacted on September 30, 1996, 

somewhat relaxed the QTL test by 

expanding the list of qualified investments to include small-business 

loans, and by increasing the amount 

of consumer-oriented loans that can 

be counted as qualifying assets. It 

also provided that an institution that 

qualifies as a domestic building-andloan under the Internal Revenue 

Code is considered a qualified thrift 

lender. (See footnote four.) 

Failure to meet the QTL test has 

several consequences. Probably the 

most significant is that a holding 

company owning a nonqualifying 

savings institution is required to register as a bank holding company. 

The activities of bank holding companies are significantly more limited 

than are the activities of most 

savings-and-loan holding companies. 

A later section of this report summarizes the differences in powers of 

bank and savings-and-loan holding 

companies. Other consequences of 

failure to meet the QTL test are restricted access to Federal Home 

Loan Bank (FHLB) financing and 

accelerated repayment of outstanding FHLB advances. 

At the end of 1995, 98 percent of 

1,437 savings associations met the 

QTL test. (As stated above, the test 

has since been relaxed.) The greatest 

Table 1
 

Savings Institutions
 

Data as of December 31, 1995
 

QTL Test Compliance Distribution
 

Savings Institutions Total Assets Return on Assets 

Range of QTL Ratio (Number) (Percent) ($MM) (Percent) (Percent) 

Below 55 percent 12 1 $7,279 1 1.55 

55-65 percent 21 1 2,099 0 1.03 

65-75 percent 153 11 39,705 5 1.22 

75-85 percent 392 27 147,353 19 0.75 

85-95 percent 550 38 312,445 41 0.69 

Over 95 percent 309 22 262,138 34 0.66 

Total 1,437 100 $771,020 100 0.72 

Commercial Banks 

Data as of December 31, 1995 

QTL Test Compliance Distribution 

Commercial Banks Total Assets Return on Assets 

Range of QTL Ratio (Number) (Percent) ($MM) (Percent) (Percent) 

Below 55 percent 8,333 84 $3,629,043 84 1.18 

55-65 percent 996 10 456,330 11 1.14 

65-75 percent 410 4 154,453 4 1.16 

75-85 percent 165 2 59,117 1 0.91 

85-95 percent 31 0 14,114 0 1.34 

Over 95 percent 6 0 1,511 0 0.44 

Total 9,941 100 $4,314,567 100 1.17 

2 Parenthetically, it is worth mentioning that 

Section 28 of the Federal Deposit Insurance 

Act (FDI Act), as added by Section 222 of the 

Financial Institutions Reform, Recovery, 

and Enforcement Act (FIRREA) of 1989, 

generally limits state-chartered savings associations to activities and equity investments 

permissible for federal savings associations 

(12 U.S.C. §21831e). 

3 Federal Home Loan Bank Board, Agenda for

Reform, Washington, DC, March 1983. Source: Division of Research and Statistics, FDIC 

2 
level of profitability of institutions 

meeting the test, an ROA of 1.22 percent for the group, was achieved by 

institutions with QTL assets in the 

range of 65 to 75 percent of portfolio 

assets (see Table 1). Six percent of 

commercial banks appeared to have 

asset portfolios that would meet the 

QTL test. The ROA of the 410 banks 

with QTL assets in the range of 65 to 

75 percent of portfolio assets was 1.16 

percent, which was almost the same 

as the ROA for all banks, 1.17 percent. 

Tax Benefits 

As mentioned previously, the repeal of the thrift tax advantage became law on August 20, 1996. Prior to 

this date, Section 593 of the Internal 

Revenue Code (IRC) of 1986 permitted thrifts that met the definition of a 

domestic building-and-loan association4 to claim deductions for additions 

to a bad-debt reserve, and to use 

either the percentage-of-income 

method or the experience method in 

calculating such additions.5 Those 

thrifts electing to use the percentageof-income method for additions to 

their bad-debt reserve were allowed 

to deduct against their taxable income additions to the reserve equal to 

8 percent of taxable income.6 

4 To qualify as a domestic building-and-loan 

association, a thrift must pass a test similar to 

the QTL test. According to 26 U.S.C. 

§7701(19), at least 60 percent of the institution’s total assets must fall within certain 

categories, largely assets related to realestate financing. Qualifying assets are similar, but not identical, to assets specified for 

the QTL test. While no longer relevant to 

tax treatment, the building-and-loan test 

may be passed as an alternative to the QTL 

test to be considered a qualified thrift lender. 

5 Under the experience method, an institution 

maintains a bad-debt reserve — for which 

taxable deductions may be taken — that in 

general is based on the institution’s bad-debt 

experience over the previous six years. Under the percentage-of-income method, the 

additions to the bad-debt reserve are based 

on a percentage of the institution’s taxable income. 

6 For tax years prior to January 1, 1987, this percentage was 40 percent. 

A Unified Federal Charter 

Public Law 104-188, the Small Liberal Branching 

Business Job Protection Act, which Rights 

was signed by the President on The federal thrift charter confers August 20, 1996, repealed the special the broadest geographic expansion bad-debt reserve provisions for authority of any federally insured thrifts. According to this law, thrifts depository institution charter. Fed- are now treated the same as banks 

for federal income tax purposes. erally chartered savings-and-loan 

Banks are not permitted to use the associations that meet either the 

percentage-of-income method for ac- QTL test or the building-and-loan 

counting for bad debt. Large banks test can branch nationally with no 

(those with aggregate assets over $500 “opting in” or “opting out” requiremillion) may not use any reserve ment. They also are not subject to 

method of accounting for bad debt, any intrastate branching restrictions 

but must deduct bad debts as they oc- whereas banks are subject to a range 

cur (specific charge-off method); of restrictions on their statewide 

small banks are allowed to use the branching. Figure 1 provides a 

experience method or the specific graphic representation of state branch­ charge-off method. These rules now ing laws for commercial banks. apply to thrifts. However, once again, the advan- The Small Business Job Protection tage that thrifts enjoyed relative to Act also waived recapture of bad-debt banks has changed. The Riegle­ reserves for the years prior to 1988. Neal Interstate Banking and Branch- According to the Act, thrifts need only ing Efficiency Act of 1994 reduced to recapture reserves set aside after much of the historical branching ad- January 1, 1988, rather than their en- vantage of savings institutions. Un­ tire bad-debt reserves. Congressional der the terms of the Riegle-Neal estimates are that there are approxi­ legislation, adequately capitalized mately $14.7 billion in bad-debt re- and managed bank holding compa­ serves in the industry, and that nies may acquire a bank in any state approximately $10.3 billion are pre­ beginning on September 29, 1995. 1988 reserves and thus exempt from As of June l, 1997, banks will be taxation. 

Figure 1 

State Branching Laws* 

San Francisco Boston 

WA Kansas City NH ME 

MT ND 

Chicago VT 

OR MN New York MA 

ID SD WI RI 

WY MI CT 

NY 

CA 

NV UT 

NE IA 

IL IN OH PA NJ 

KS MO DC DE 

MD 

AZ 

CO Dallas Memphis KY WV VA TN AK 

AR NC HI OK NM 

MS SC 

LA AL GA TX Atlanta 

 imitation on Bran ing 1 

FL No imitation on Bran ing 

Sour e: Con eren e o State Bank Su ervi or 

 State are grou e into t e eig t C S u ervi ory region . 

1 Colora o will ermit unre tri te tatewi e bran ing in 199 , eorgia in 199 , an rkan a in 1999. 

3 
FDIC Banking Review 

permitted to merge and consolidate 

their operations in the various states 

under one corporate structure, unless 

the state has “opted out” of interstate branching. As of May 1996, 24 

states and Puerto Rico had accelerated the process by permitting interstate branching before June 1997, and 

an additional 11 states had “opted in” 

with interstate branching to begin on 

June 1, 1997. Only one state, Texas, 

had “opted out.” Of the states that 

have “opted in,” however, only Indiana and Puerto Rico allow immediate 

interstate branching by de novo institutions on a nonreciprocal basis and 

without other restrictions. In regards 

to intrastate branching, as depicted 

by the chart on state branching laws, 

most states have eliminated restrictions on intrastate branching for commercial banks, with much of this 

liberalization having occurred since 

1985. Forty-one states now allow 

statewide branching and three additional states, Colorado, Georgia, and 

Arkansas, will permit statewide branching in 1997, 1998, and 1999, respectively. Of the remaining six, all allow 

statewide branching through acquisition. 

service corporations.7 Service corporations of federal savings associations 

may “engage in such activities reasonably related to the activities of 

Federal savings associations as the 

Office [of Thrift Supervision] may 

determine and approve” (12 C.F.R. 

§545.74(c)). Under this “reasonably 

related” standard the OTS has occasionally, on a case by case basis, approved service corporation activities 

that would not be permitted to a 

national bank such as insurance 

underwriting. In addition, the OTS 

has approved by regulation a long list 

of permissible activities for thrift 

service corporations, for which no 

prior approval is required. Most of the 

pre-approved activities are also permissible for national banks. Major 

activities permissible for service corporations of federal savings associations but not for national banks are (1) 

real-estate development and realestate management for third parties 

and (2) selling many types of insurance on an agency basis.8 

As of year-end 1995, 1,437 reporting savings associations had investments in a total of 2,035 service 

corporations. The total reported investments in service corporations 

were $5.4 billion, which represented less than 1 percent of the assets 

of the savings associations. The consolidated assets of the service corporations 

were $18.9 billion, or approximately 

2.5 percent of the assets of the savings associations. Table 2 gives a 

breakdown of the service corporations by major type of activity. 

As shown in Table 2, the greatest 

number of service corporations were 

in the business of real-estate development and sales (481 service corporations); followed by insurance 

brokerages and agencies (347 service 

corporations); acquiring improved 

real estate for sale or rental (254 service corporations); property management and maintenance (117 service 

corporations); and mortgage lending 

(99 service corporations). Of these 

Table 2
 

Active Thrift Subsidiaries as of December 31, 19951
 

Expanded Service
 

Corporation Activities
 

Federal savings associations may 

invest up to 3 percent of their assets in 

7 Not less than one-half of investments in service corporations that exceed 1 percent of a 

federal association’s assets must be primarily 

for community, inner-city, and community 

development purposes (12 U.S.C. §1464(c) 

(4)(B)). Thus, the maximum unfettered investment in service corporations is 2 percent 

of an association’s assets. 

8 Two recent Supreme Court cases have provided authority for national banks to enter 

insurance-related markets previously unavailable to them. In NationsBank of N.C.,N.A.

v. Variable Annuity LifeInsurance Co., 115 S. Ct. 

810 (1995), the Court held that because annuities are not insurance for purposes of the 

“town of 5,000" rule, national banks may sell 

annuities in any location. And in Barnett Bank

ofMarionCounty,N.A. v.Nelson, 116 S. Ct. 1103 

(1996), the Court held that states cannot restrict the federal authority granted to national 

banks under 12 U.S.C.§92 to sell insurance in 

towns with populations of less than 5,000, although it is still uncertain whether national 

banks may use this authority to sell insurance 

in larger towns. 

Number of Number Consolidated 

First-Tier of Their Total Assets2 

Primary Type of Business3 Entities Subsidiaries ($000) 

Subsidiary Savings Association 29 3 $3,326,957 

Finance Subsidiary4 34 1 4,484,385 

Risk-Controlled Arbitrage4 3 1 34,735 

Real-Estate Development and Sales 287 194 1,391,956 

Acquiring Improved Real Estate 

for Sale or Rental 140 114 450,291 

Property Management and Maintenance 82 35 1,513,437 

Mortgage Lending4 82 17 2,243,052 

Mortgage Banking4 54 9 790,240 

Commercial Lending4 3 4 103,056 

Consumer Lending4 28 5 1,174,043 

Insurance Brokerage, Agency5 285 62 350,792 

Escrow, Trustee Services4 35 8 39,056 

Appraisal, Inspection Services4 28 1 21,309 

EDP, RSU Services4 38 1 149,702 

Other 383 69 2,807,156 

Total 1,511 524 $18,880,176 

Source: Division of Research and Statistics, FDIC. 

1 Includes service corporations, their subsidiaries and joint ventures; excludes “operating 

subsidiaries.” 

2 Data are from Thrift Financial Report, Schedule CSS, Item 120.

3 Data are from Thrift Financial Report, Schedule CSS, Item 100.

4 Activities that are also generally permissible for national banks.

5 Activities that are also permissible under certain circumstances for national banks. 

4 
A Unified Federal Charter 

top five thrift service corporation activities, only mortgage lending and, to 

a limited extent, insurance sales are 

activities also permissible for national 

banks. 

Ten thrifts accounted for 75 percent of the industry’s investments, 

with two thrifts accounting for approximately 57 percent of the industry’s total investment in service 

corporations at December 31, 1995. 

These two thrifts are Household 

Bank FSB of Prospect Heights, Illinois, and Home Savings of America 

FSB of Irwindale, California. 

Few Limitations on
 

Holding Companies
 

In considering a unification of the 

federal charters for depository institutions, questions arise not only from 

the differences between the powers 

of federally chartered depository institutions but also from the differences between the powers of their 

holding company owners. Corporate 

owners of savings associations and 

banks are holding companies: savings-and-loan holding companies for 

savings associations and bank holding 

companies for banks. Savings-andloan holding companies can be further subdivided into two categories: 

those in which non-thrift activities are 

essentially unrestricted9 and those in 

which non-thrift activities are restricted. The vast majority of savingsand-loan holding companies fall in 

the first, or unrestricted, category. 

A savings-and-loan holding company in the unrestricted category is 

either a unitary holding company — 

one that controls only one savings association subsidiary, which meets the 

QTL test — or a multiple holding 

company, all of whose savings association subsidiaries meet the QTL test 

and where no more than one subsidiary was not acquired in a qualifying 

supervisory transaction.10 A savingsand-loan holding company in the 

restricted category has one or more 

savings association subsidiaries that 

do not meet the QTL test. A savingsand-loan holding company that has 

two or more savings association subsidiaries that were acquired in other 

than qualifying supervisory transactions would also be in the restricted 

category. 

Unrestricted savings-and-loan holding companies may engage, directly 

or through their non-thrift subsidiaries, in any activities that do not 

threaten the safety and soundness of 

their subsidiary savings associations 

or that do not have the effect of enabling a savings association to evade 

applicable laws or regulations. Beyond these generalities, there are no 

limitations on the scope of permissible activities of savings-and-loan 

holding companies in the unrestricted category. Thus, savings-and-loan 

holding companies in the unrestricted category are generally permitted 

to engage in activities closely related to banking, general securities 

underwriting and dealing, other financial services, real-estate investment 

and development, and commercial 

and industrial enterprises. The latter 

categories allow activities as diverse 

as manufacturing (cigarettes, containers, furniture) to retail operations 

(hotels, drug stores and cosmetics) 

and services (refuse collection, utilities and advertising). In the submission to Congress last year, the OTS 

indicated that nearly all savings-andloan holding companies in existence 

fell into the unrestricted category. 

Another savings-and-loan holding 

company classification is between diversified and non-diversified. A diversified savings-and-loan holding 

company is defined by statute as one 

in which the subsidiary savings association and certain other financial activities represent less than 50 percent 

of consolidated net worth and consolidated net earnings. One of the 

few legal consequences flowing from 

classification as a diversified savingsand-loan holding company is that an 

exception to the Management Interlocks Act may be triggered.11 The 

major affiliations between savings associations and non-banking organizations are found in diversified holding 

companies. 

The counting of savings-and-loan 

holding companies is complicated by 

the existence of a number of multitiered organizations with a variety of 

ownership arrangements. As of 

July 9, 1996, the OTS reported the 

following number of first-tier thrift 

holding companies: 28 diversified 

unitary holding companies; 650 nondiversified unitary holding companies; no diversified multiple holding 

companies; and 44 non-diversified 

multiple holding companies. The total number of savings-and-loan firsttier holding companies by this count 

was 722. 

In contrast to most savings-andloan holding companies, bank holding companies are limited to “nonbank” activities the FRB has found, 

by regulation or order, to be “closely 

related to banking and a proper incident thereto.” The broad categories 

of activities the FRB has found to 

meet these criteria are securities brokerage; to a limited extent securities 

underwriting; mortgage banking; 

commercial finance; consumer finance; leasing; small-business investment companies; insurance 

underwriting; and insurance agency. 

The insurance activities are severely 

constricted by statute and are principally limited to credit-related and 

grandfathered activities. 

9 While non-thrift activities are essentially 

unrestricted, dividend payments from thrift 

to parent are restricted to avoid abuses. 

10 Qualifying supervisory transactions consist 

of transactions involving failed or failing institutions and the participation or oversight 

of the FDIC or the FSLIC. 

11 One of the exceptions to the Management 

Interlocks Act is for a person who serves simultaneously as a director of (1) a diversified 

savings-and-loan holding company and (2) 

an unaffiliated depository institution or depository institution holding company [12 

U.S.C. §3204 (8)(A)]. Also, effective October 1, 1996, the OCC, the FDIC, the FRB, 

and the OTS issued a final rule permitting 

management interlocks between institutions with less than $20 million in assets and 

institutions with more than $20 million in assets that are both located in the same metropolitan statistical area. Management 

interlocks between unaffiliated institutions 

in the same community continue to be impermissible, regardless of size. 

5 
FDIC Banking Review 

As of June 1996, the number of 

bank holding companies was 5,293. 

These holding companies held almost 80.3 percent of the assets of all 

FDIC-insured U.S. banks and thrifts. 

Bank holding company nonbank activities are concentrated in the larger 

bank holding companies, which are 

required to report financial data on 

these activities. According to the latest data available from the FRB, in 

1994, 238 holding companies reported nonbank activities to the FRB. 

Total nonbank assets for these reporting companies were $270.2 billion, 

and the ratio of nonbank assets to total 

assets of the organizations was 8.40 

percent. 

Nonbank net income was $2.9 billion, and the ratio of nonbank net income to total net income was 8.29 

percent. For the period 1986 to 1994, 

the ratio of nonbank assets to total assets for reporting companies ranged 

from a low of 6.91 percent in 1991, to 

the high of 8.40 percent in 1994. Over 

the same period, the ratio of nonbank 

net income to total net income ranged 

from a low of 1.22 percent in 1991, to a 

high of 14.35 percent in 1989. 

Pros and Cons of 

Charter Unification 

The recently enacted Deposit Insurance Funds Act of 1996 requires 

the Secretary of the Treasury to submit a report to the Congress by March 

31, 1997, on the issues surrounding 

the development of a common charter for all insured depository institutions and the abolition of separate and 

distinct charters for banks and savings 

associations. The Act further requires that the BIF and the SAIF be 

unified on January 1, 1999, provided 

no insured depository institution remains as a savings association at that 

time. 

This section discusses the major 

arguments for and against abolishing 

the current two-charter federal system for depository institutions and replacing it with a one-charter system. 

Because it makes little sense to unify 

the charters without also unifying the 

BIF and the SAIF, it assumes that if 

the charters are unified, the BIF and 

the SAIF will be merged by January 1, 

1999.12 

The arguments for a unified charter are not clear-cut — conflicting 

arguments and evidence can be advanced to either support or oppose a 

position. The major argument for a 

unified charter is that there is no 

longer a need for a thrift industry due 

to structural changes in housing finance: the thrift industry is no longer 

necessary to satisfy the societal need 

for which it was established, and 

therefore the thrift charter should be 

abolished. This argument is often 

buttressed with arguments that the 

long-term viability of the thrift industry is in question, and that the current 

restrictions on thrift activities hamper 

the ability of thrift institutions to respond to changes in the marketplace. 

Replacement of the current federal 

two-charter system for depository institutions with a one-charter system 

would “level the playing field” between thrifts and banks and allow 

them to compete head-on. 

These latter arguments for a unified charter, with a few twists, can also 

be used to support the major opposing 

position—that there is no need for 

charter unification, but easier entry 

and exit between banks and thrifts. 

This position argues that what is 

needed are certain adjustments to 

current law, short of charter unification, that will enable banks and thrifts 

to switch charter types easily. These 

changes will “level the playing field,” 

and allow the market to decide of its 

own accord whether the thrift industry is viable and should survive. 

The major arguments are examined below. 

Arguments for Unification of 

Charters. According to proponents 

of this viewpoint, due to structural 

changes in housing finance, a separate 

legal status for a class of institutions to 

ensure availability of housing finance 

has become unnecessary. As Federal 

Reserve Board Chairman Greenspan 

stated in his September 21, 1995, testimony to the Banking Subcommittee on Financial Institutions and 

Consumer Credit... “The nexus 

between thrifts and housing largely 

has been broken without any evident 

detriment to housing finance availability.” 

Statistics would appear to bear 

this out. Over a period of two decades, the thrift industry has seen the 

gradual erosion of its share of the 

market that the industry’s separate 

status was designed to foster. Between 1975 and 1994, the market 

share held by savings institutions 

dropped from 45 percent of total 

mortgages to 13 percent; from 56 

percent of home mortgages to 14 percent; and from 39 percent of multifamily residential mortgages to 22 

percent.13 Concerning originations, 

in 1975, thrifts originated 58 percent 

of home mortgages. By 1994, home 

mortgage originations by thrifts were 

down to 20 percent of the total.14 

Thus, the housing market — the 

support and development of which 

has provided the rationale for a legally distinct thrift industry — has 

come to be less dependent on the 

thrift industry. Much of the thrift industry’s lost share of mortgages it 

held has gone to federally related 

mortgage pools—mortgage-backed 

securities guaranteed or issued by 

the Government National Mortgage 

12 Although not provided for in existing legislation, the BIF and the SAIF could be 

merged without unifying the two charters. 

Indeed, thrifts, in the form of statechartered savings banks, are already insured by the BIF. Similarly, if regulatory 

consolidation were thought to be desirable, 

a single regulatory apparatus could be established without charter unification. 

13 Board of Governors of the Federal Reserve 

System, Flow of Funds. Measuring market 

shares of the mortgage market by the 

percentage of mortgages directly held results in a slight understatement of the position of savings institutions in the market. 

Savings institutions also hold securities issued or guaranteed by the governmentrelated issuers of mortgage-backed securities. If their holdings of these securities 

were considered, savings institutions’ share 

of the total mortgage market in 1994 would 

increase from approximately 13 percent to 

approximately 15 percent. 

14 The Mortgage Market Statistical Annual for

1995, Inside Mortgage Finance Publications, Inc. 

6 
A Unified Federal Charter 

Association, the Federal National 

Mortgage Association, the Federal 

Home Loan Mortgage Corporation, 

and the Farmers Home Administration. Much of the thrift industry’s lost 

share of mortgages that it originated 

has gone to mortgage banking companies. 

It might be argued that though the 

thrift industry today appears to be less 

important to the health of the housing 

industry than in the past, the housing 

industry would still be harmed if the 

forced orientation of thrifts to housing 

were removed. However, this is not 

clear. The threshold for the QTL test 

is 65 percent of portfolio assets invested in specified assets largely related to housing finance. Yet as 

shown in Table 1, as of year-end 1995, 

80 percent of thrifts held 75 percent or 

more of their portfolio assets in assets 

that qualified for the QTL test — 

substantially more than was necessary 

to meet the test. Therefore, as the 

QTL constraints appear to be nonbinding, one would not expect that 

removing these constraints would result in a significant shift in thrift behavior. Moreover, as noted earlier, 

the QTL test has just been relaxed; 

thus, to the extent thrifts want to 

make incremental changes in their 

portfolios, they will be able to do so. 

In addition, thrifts have not demonstrated a desire to expand into 

other fields by making full use of the 

asset powers now available to them. 

For example, federal savings associations can invest up to 10 percent of 

their assets in commercial loans, but 

as of year-end 1995, their commercial 

loans amounted to only 1 percent of 

assets.15 At that same date, only 89 

institutions had more than 5 percent 

of their assets in commercial loans. 

Consequently, any shifts of institutions from or to a focus on housing finance is likely to be over an extended 

period and in response to market 

forces. 

Indeed, lack of flexibility in responding to changing market forces 

caused by savings associations’ mandatory orientation toward housing is 

another reason often advanced for 

eliminating the federal savings association charter. If savings associations 

cannot redeploy their assets in response to the market, there will be excess capacity in the thrift industry. 

This in turn will lead to lower profitability, difficulty in attracting new 

capital, and a tendency to invest in 

riskier assets in order to maintain 

earnings. According to this view, it 

is better to eliminate the savings association charter than risk the losses 

— especially in light of federal deposit insurance—resulting from an inflexible charter. 

Arguments against Unification of 

Charters. According to proponents 

of this viewpoint, the market — not 

the government — should decide 

whether a charter is obsolete. Thus, 

while the status quo is not desirable 

because it impedes the workings of 

the market, if certain adjustments 

were made to current law to enable 

banks and thrifts to switch charter 

types more easily, the institutions 

themselves could choose their future 

organizations based upon their individual situations. If thrifts could become banks without penalty and 

without adverse consequences for 

themselves or their owners, many, 

perhaps most, might do so. Removal 

of many of the barriers to entry and 

exit would allow the thrifts themselves to decide their future. If housing finance were profitable, then 

many thrifts — those that are operated with the proper attention to controlling costs and to prudent practices 

— would likely choose to remain as 

thrifts. But if housing finance entered 

a period of doldrums, particularly for 

an extended period of time, they 

would be free to reorient their efforts, 

and the industry would not become 

burdened with excess capacity. 

The current impediments to thrifts 

switching to banks were described 

earlier. The major financial penalty 

— the recapture of bad-debt reserves 

for thrifts that became banks — has 

been addressed by legislation. Another restriction — imposition of the 

banking industry’s remaining geographic restrictions upon converting 

thrifts — has been whittled away 

over time by activity of the states, 

and, as discussed earlier, has been 

addressed by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Two major 

impediments remain to switching 

charters. They are the prohibition 

against banks owning service corporations engaged in many insurance 

activities and real-estate development activities;16 and the different 

requirements for thrift and bank 

holding companies — some corporate owners of thrifts could not qualify as bank holding companies. Short 

of changing the laws governing banks 

and bank holding companies, one 

way to ease these impediments 

would be to allow a number of years 

for a thrift or holding company to divest of the impermissible activity. 

Charter Unification 

Implementation Issues 

If a decision were made to unify 

the federal bank and thrift charters, 

implementation issues would arise at 

both the institution and holding company level. Many of these issues, 

such as the sale of insurance products 

by depository institutions or the 

separation between banking and 

commerce, are legitimate publicpolicy concerns in their own right. 

The prospect of charter unification 

brings them to the fore. 

15 The relationship between the legal limit 

and actual use of other powers of federal 

savings institutions as of year-end 1995 

was: loans secured by nonresidential real 

estate—the limit is approximately 32 percent of assets (400 percent of capital, which 

for the industry stands at approximately 8 

percent of assets), loans amounted to 6 percent of assets; unsecured residential construction loans— the limit is the greater of 5 

percent of assets or 100 percent of capital 

(which is approximately 8 percent of assets), residential and nonresidential construction loans together totaled 2 percent of 

assets. Of course, individual institutions 

may be closer to these limits. 

16 As discussed earlier, recent judicial decisions have narrowed the differences between banks and thrifts in the sale of 

insurance. 

7 
FDIC Banking Review 

This section discusses these implementation issues and presents options for dealing with them. Again, as 

stated in the introduction, the options 

it examines concern only those powers that either banks or savings associations currently have. It does not 

broach financial modernization in its 

broader sense. 

This section also reviews the impact that charter unification would 

have in several related areas: the 

QTL test, state-chartered thrift institutions, mutual savings associations, 

and the Federal Home Loan Bank 

System. Grandfathering is one option 

to deal with some of the implementation issues that would arise from charter unification. An appendix contains 

an historical overview of grandfathering within the context of financial industry legislation. 

Issues at the Depository
 

Institution Level
 

At the depository institution level, 

implementation issues arise in three 

17 The FDIC presents the risks in detail in the 

Federal Register publication, 61 FR 43486, 

“Proposed Rule: Activities and Investments 

of Insured State Banks,” August 23, 1996. 

18 Institutions that were eventually taken over 

by the RTC held $11.1 billion of this amount. 

19 The FDIC has dealt with real-estate investments by depository institutions in 

conjunction with applications made by 

state-chartered banks under Section 24 

of the Federal Deposit Insurance Act (12 

U.S.C. §1831a). The FDIC deals with 

each Section 24 case individually. However, in many cases, the FDIC has conditioned its approval of an application from a 

state-chartered bank to engage in realestate investment on the following conditions: that the real-estate activity be conducted in an adequately capitalized, 

separately-operated subsidiary with at 

least one separate director; that the bank’s 

investment in the subsidiary (except 

arm’s-length end loans) be deducted from 

capital; that the capital deduction is also 

used for setting risk-related premiums 

and prompt corrective action; and that the 

restrictions of Section 23A and 23B of the 

Federal Reserve Act apply to transactions 

with the subsidiary. The FDIC has also 

proposed a “safe harbor” rule under which 

institutions meeting certain conditions 

may engage in real-estate activities after 

notice to the FDIC if the FDIC does not 

object. 

areas: the asset powers of the depository institution; the powers of thrift 

service corporations; and branching 

restrictions. 

Asset Powers. At the institution 

level, commercial banks have more 

extensive asset powers than savings 

associations whose investment in certain types of loans is restricted. As discussed in the previous section, the 

major argument for unifying the federal bank and thrift charters is that 

there is no longer a need for a specialpurpose charter focused on the housing industry. In addition, broader 

asset powers allow for greater diversification and more competition, while 

not precluding the possibility of an institution specializing if that is its business strategy. Given the above, if the 

federal bank and thrift charters were 

to be merged, the only plausible alternative is to give the resultant institution the asset powers of a national 

bank. 

Savings Association Service Corporations. One of the more difficult 

questions about charter unification at 

the institution level concerns the 

service corporations of federal savings associations. As discussed earlier, federal savings associations can 

invest up to 3 percent of their assets in 

service corporations. Also, while national banks can perform most of the 

pre-approved activities permissible 

for thrift service corporations, both 

directly and through operating subsidiaries, they are not permitted to engage in real-estate development and 

the management of real estate for 

third parties, or to sell most types of 

insurance without restriction (although recent judicial decisions have 

expanded the insurance agency powers of national banks). 

As of year-end 1995, there were 

255 savings associations with insurance subsidiaries. Most of these were 

at relatively small institutions, 207 of 

the 255 had under $1 billion in assets. 

Although no data are available on the 

activities of these insurance subsidiaries, anecdotal evidence indicates 

that many are restricted to the sale of 

credit-related insurance products, an 

activity permissible to subsidiaries of 

national banks. 

Insurance brokerage and agency 

are basically sales-oriented activities 

and do not present safety-andsoundness issues. The sale of insurance by banks would provide customers with greater choice, and 

promote greater efficiency in the 

marketplace. Therefore, if federal 

bank and thrift charters were 

merged, a reasonable course of action 

would be to extend full insurance 

agency powers to national banks. 

However, as a practical matter, such a 

move might encounter significant 

political opposition. 

Unlike insurance, real-estate 

activities, especially real-estate development, do raise safety-and-soundness issues.17 FIRREA required that 

equity investments and loans to service corporations engaged in activities 

not permissible for national banks be 

deducted from capital. As a result, 

federal savings associations no longer 

engage in real-estate activities on a 

large-scale basis. Savings associations reported $77.7 billion in realestate service corporation assets at 

year-end 1989.18 By year-end 1995, 

this figure had fallen to $3.4 billion. 

Despite the current low level of 

real-estate investment by savings associations, the divergent real-estate 

powers of federal savings associations and banks would need to be addressed if the federal charters were 

merged. One way to deal with those 

risks would be to require that any 

real-estate development or management activities be conducted in a 

bona fide subsidiary, with the bank’s 

investment (both equity and loans) 

deducted from capital, and with the 

subsidiary subject to Section 23 of 

the Bank Holding Company Act type 

restrictions. With the exception of 

the Section 23 requirements, these 

conditions already apply to thrift 

service corporations.19 

Branching Restrictions. As discussed earlier, bank branching powers are in some cases more restrictive 

than federal savings association 

branching powers, although they 

8 
A Unified Federal Charter 

have come much closer together over 

time. Full interstate and intrastate 

branching provides for the greatest 

diversification of risk, the greatest 

convenience for customers, and the 

greatest market efficiencies. Given 

these facts, the near universality today of statewide branching, and the 

clear momentum to interstate branching, a reasonable course of action 

should the federal charters be unified 

would be to allow full interstate and 

intrastate branching. 

Issues at the Holding
 

Company Level
 

The most difficult issue regarding 

the single federal charter concerns 

holding companies. Except for possible grandfathered situations (and ignoring the complication that would 

result if thrift charters were continued 

at the state level), the distinctions between savings-and-loan holding companies and bank holding companies 

would have to be eliminated. Table 3 

contains a list of unitary diversified 

savings-and-loan holding companies, 

the type of savings-and-loan holding 

company most likely to contain significant nonfinancial businesses. As 

can be seen from the table, as of June 

1996, there were only 28 such companies. 

Four approaches to eliminating 

the prospective differences between 

savings-and-loan holding companies 

and bank holding companies could be 

taken (existing affiliations are discussed below): (1) holding companies could be allowed to engage in 

virtually any activity, the approach 

taken with unrestricted savings-andloan holding companies; (2) holding 

companies could be restricted to a 

limited number of financially related 

activities, the approach currently 

taken with bank holding companies; 

(3) holding companies could be allowed to engage in most financially 

related activities, including, with 

proper safeguards, investment banking and the insurance business, but 

prohibited from nonfinancial activities; or (4) holding companies whose 

depository institutions met the QTL 

Table 3
 

28 Thrift Unitary Diversified Holding Companies*
 

as of June 1996
 

Thrift 

Type of Assets 

Holding Company Business Thrift Name ($000s) 

Acacia Mutual Life 

Insurance Co. Insurance Acacia Federal Savings Bank $515,811 

American Mutual 

Holding Company Life Insurance Amerus Bank 1,198,139 

B.A.T. Industries Tobacco, 

Cigarettes First FS&LA of Rochester 7,341,422 

Carpenters Pension Trust 

Fund Southern 

California Pension Trust United Labor Bank, FSB 71,114 

Club Corp. International Resorts Franklin Federal Bancorp., FSB 900,188 

Equity Holdings Ltd. Real Estate Firstate Fin., F.A. 103,266 

Estate of Bernice 

Pauahi Bishop Non-Profit Educ. Southern Cal. FS&LA 1,694,535 

First Pacific Investment Numerous 

Ltd. Holdings United Savings Bank 1,526,791 

First Pacific Investment Numerous 

Ltd. II Holdings United Savings Bank 1,526,791 

Hawaiian Electric 

Industries, Inc. Public Electric American Savings Bank, FSB 3,412,595 

Heritage Mutual 

Insurance Co. Insurance Westland Savings Bank SA 91,405 

Hy-Vee Food Stores Grocery Midwest Heritage Bank, FSB 96,685 

Illinois Mutual Life & 

Casualty Co. Insurance Bankplus, FSB 189,909 

Krause Gentle Corp. Gas and Food Liberty Savings Bank, FSB 76,903 

Massachusetts State Pension First Trade Union 

Carpenters Pension Fund Trust Savings Bank, FSB 286,468 

Massachusetts State 

Carpenters Guaranteed First Trade Union 

Annuity Fund Trust Savings Bank, FSB 286,468 

McMorgan & Co. Manages Union 

Pension Funds United Labor Bank, FSB 71,114 

P H M Corporation Home Building First Heights Bank, FSB 252,057 

Pacific Electric Wire 

& Cable Manufacturer Pacific Southwest Bank 1,337,198 

Prudential Insurance Co. Insurance The Prudential Savings 

Bank, FSB 203,641 

Raymond James Security Raymond James 

Financial, Inc. Brokerage Bank, FSB 189,791 

Southwest Gas Corp. Gas Transmission Primerit Bank, FSB 1,704,885 

Sun Life Assurance Co. Insurance New London Trust, FSB 288,881 

Temple Inland, Inc. Paper Guaranty Federal Bank, FSB 9,153,087 

The Langdale Co. ManufacturingForest Based 

Products Commercial Banking Co. 33,684 

The Monticello Cos., Inc. Medicine Sales Monticello Bank 23,526 

United Services Automobile Insurance USAA Federal Savings Bank 5,805,837 

Watts Health Systems, Inc. Health Plans Family Savings Bank, FSB 167,239 

*First-Tier Holding Companies 

Source: The Office of Thrift Supervision 

9 
FDIC Banking Review 

test (or similar test) could be allowed 

to engage in any activity that did not 

threaten the safety and soundness of 

the institution. 

Of these four options, the third option — permitting bank holding companies to expand into most financially 

related activities but with a continued prohibition against nonfinancial 

activities — would appear to be the 

most desirable. While the elimination of the separation between banking and commerce may be worth 

considering in the long run, a more 

cautious policy of bank expansion 

into other financial activities is probably a more prudent short-term course. 

Banking organizations have expertise in managing certain financial 

risks. They should leverage this expertise before branching out into 

commercial ventures. In addition, 

bank regulators should develop a 

body of experience to evaluate the 

safety-and-soundness implications of 

any new financial affiliations before 

allowing broader affiliations with 

firms exposed to a different range of 

risks. On the other hand, compared to 

the status quo, allowing banks to expand into other financially related 

activities — perhaps through either 

holding companies or direct subsidiaries — would strengthen banking 

organizations by allowing diversification of income sources and better 

service to customers, and would promote 

an efficient and competitive evolution 

of U. S. financial markets. 

With respect to using the QTL 

test, or some variant thereof, to determine holding company powers, in order for such an approach to make 

20 Because unrestricted savings-and-loan 

holding companies are essentially unregulated, only limited data on their activities 

exist. This makes it difficult to gauge, except in the most general terms, the number 

engaged in nonfinancial activities, or activities not permissible to a bank holding company. 

21 Under current law, a state-chartered thrift 

must apply to the FDIC to engage in any activity not permissible to a federal savings association (12 U.S.C. §1831e). 

sense, some nexus would have to be 

established between the test and 

broader holding company powers. 

Absent such a nexus there would be 

no reason to distinguish between the 

powers of a holding company of a depository institution that met the test 

and powers of one that did not. 

As to existing affiliations, commercial companies have not historically 

been a source of risk to the thrift industry. The OTS reports that unitary 

thrift holding companies, rather than 

having caused harm to their subsidiaries in the past, have in fact provided a 

source of strength to them during 

times of need. Additionally, affiliations between thrifts and commercial 

organizations do not appear to be extensive.20 Thus, the grandfathering 

of existing relationships might be feasible. In fact, some affiliations between commercial companies and 

bank holding companies were already 

grandfathered by the 1970 Amendments to the Bank Holding Company 

Act (see appendix). On the other 

hand, given the limited number of affiliations, divestiture would not require widespread restructuring of the 

thrift industry. 

Other Issues 

Charter unification raises issues in 

addition to the powers of depository 

institutions, their affiliates, and their 

holding companies. The topics in the 

following discussion concern the 

QTL test, state-chartered savings associations, mutual savings associations, and the Federal Home Loan 

Bank System. 

QTL Test. If the charters are 

merged, the QTL test would basically be moot with two possible exceptions. First, as noted earlier, the 

QTL test could be used to exempt a 

holding company from the strictures 

of the Bank Holding Company Act. 

However, also as noted earlier, such a 

distinction would only make sense if 

there was a nexus between the QTL 

test and holding company powers. 

Second, the QTL test — or more 

accurately the percentage of QTL 

assets — is used to establish the 

amount of FHLB stock a non-savings 

association FHLB member must 

hold for a given amount of advances 

(the higher the ratio, the less stock). 

The role of the FHLBs and what 

characteristics, if any, their members 

should have is beyond the scope of 

this study. Depending on the mission of the FHLB System, requiring 

some continued portfolio orientation 

(although not necessarily the current 

QTL assets) in order to enjoy the 

benefits of FHLB advances may 

make sense. 

State-Chartered Savings Associations. If the federal savings association charter were eliminated, a 

major question is whether statechartered savings associations should 

be eliminated as well. As noted earlier, the Deposit Insurance Funds 

Act of 1996 requires that the BIF and 

the SAIF be merged on January 1, 

1999, provided no institution remains as a savings association at that 

time. 

Eliminating state-chartered thrifts 

might prove difficult. In order to 

eliminate state-chartered thrifts effectively, such a ban would have to 

include state-chartered savings 

banks as well as state-chartered 

savings-and-loan associations. As a 

general matter, states are allowed to 

issue limited-purpose charters. In 

addition to chartering savings-andloan associations and savings banks, 

the states issue charters for trust companies, cooperative banks, and industrial banks. To force them to 

eliminate a specific type of limited 

charter would be a blow to the dual 

banking system. It would also be difficult to prevent a state from reincarnating a charter that looked very 

much like a savings association charter with a different name. 

Short of mandating the elimination of the state thrift charter, statechartered savings associations could 

be subjected to Section 24 of the FDI 

Act, which would require that they 

not engage in any activity not permissible for a national bank without 

FDIC approval.21 They could also 

be made subject to the Bank Holding 

10 
A Unified Federal Charter 

Company Act with whateverwhateverwhateverwhatever grand-­

fatheringfatheringfatheringfathering or other provisionsprovisionsprovisionsprovisions that 

would apply to federal savings asso-­

ciations.ciations.ciations.ciations.22 Under such circumstances, circumstances, 

state-chartered state-chartered savings associations associations 

would probablyprobablyprobablyprobably lose their attractive-attractive-attractive-attractiveness. Many state-chartered state-chartered savings 

associationsassociationsassociationsassociations might choose to convert 

to banks and some states might elimi-­

nate their thrift charters,charters,charters,charters, but this 

would be accomplished accomplished without tam-­

pering with the dual banking system. 

Mutual Savings Associations. At 

June 30, 1996, there were 410 mutual 

federal savings associations and 714 

stock federal savings banks. While in 

number mutuals represent 36 percent 

of federal savings associations, they 

accounted for only 10 percent of the 

assets held by such institutions ($72 

billion out of a total of $717 billion in 

assets). Including state-chartered 

savings and loans and savings banks 

there were a total of 943 mutual thrifts 

and 1,038 stock institutions. Mutual 

institutions hold a total of 17 percent 

of thrift assets ($179 billion out of a total of $1,023 billion). Commercial 

banks all take stock form. 

The FDIC Division of Research 

and Statistics has looked at recently 

chartered de novo savings associations 

to determine whether the mutual 

form of organization has proven to be 

attractive to new industry entrants. 

According to a preliminary review, 

only a handful of savings associations 

over the past ten years have chosen 

the mutual form of organization. At 

least two were credit unions converting to savings associations. It is not 

clear that any of the new mutual charters over this period were true de novo

mutual savings associations. 

Given the large number of mutual 

thrifts, it does not make sense to 

change the status quo and require conversion. The other options are to 

grandfather existing mutuals but not 

grant new mutual charters, or to continue to grant new mutual charters, 

effectively extending the possibility 

of the mutual form to commercial 

banks. Historically, the mutual form 

of organization has not raised safetyand-soundness concerns. As such, 

there does not appear to be any reason 

not to follow this latter course. 

Federal Home Loan Bank System 

(FHLBS). Replacement of the twocharter federal system with a single 

charter would have an impact on the 

Federal Home Loan Bank System 

(FHLBS). Federal savings associations 

are currently required to be members 

of the FHLBS. Elimination of the 

federal thrift charter could result in a 

voluntary FHLBS that would not 

have the automatic capital support of 

the current system. However, it 

should be noted that as of August 

1996, federal savings associations 

accounted for only 19 percent of 

FHLBS members (commercial 

banks accounted for 65 percent, 

state-chartered thrifts 13 percent, 

and others 3 percent). Moreover, according to the Federal Housing Finance Board, since April 1995, when 

FHLBS membership was made voluntary for OTS-regulated statechartered thrifts, no such thrift has 

left the system.23 It is likely that 

many federal savings associations 

would also choose to retain their 

FHLBS membership if such membership were to become voluntary. 

The FHLBS is therefore unlikely to 

face crisis if the federal thrift charter 

were eliminated. 

22 State-chartered savings banks are presently 

subject to the Bank Holding Company Act 

unless they elect under §10(e) of the Home 

Owners Loan Act to be treated as a thrift for 

purposes of §10 and comply with the QTL 

test. 

23 One state-chartered savings-and-loan association, Wauwatosa Savings and Loan Association, managed to exit the system in April 

1993. 

11 
FDIC Banking Review 

APPENDIX
 

Grandfathering in Banking Legislation
 

This appendix outlines how past 

legislation mandating changes in the 

banking industry dealt with the problem of existing activities and ownership arrangements. The approaches 

taken fall into two general categories: 

(1) requiring that existing activities 

and arrangements be ceased or divested; and (2) permitting the continuation of existing activities and 

arrangements. The second approach 

is often termed “grandfathering” and 

itself encompasses a range of controls. At one end of the spectrum, the 

continuation of existing activities 

and arrangements has been tightly 

circumscribed, even “frozen” as they 

were on a grandfather date. At the 

other end of the spectrum, few controls have been placed on the continuation, and the activities have thus 

enjoyed room for growth. An accompanying table summarizes the prohibition, divestiture, and grandfather 

provisions of the major laws covered 

in the discussion. 

Glass-Steagall. Four provisions 

of the Banking Act of 1933 largely required the divestiture and continued 

separation of the investment banking 

and commercial banking businesses. 

The divestiture period was one year. 

The Glass-Steagall Act is still the law, 

but judicial and regulatory interpretations and developments in financing 

and investment techniques have 

eroded many of the distinctions between the two businesses. 

Bank Holding Company Act of 

1956 — Nonbanking Activities. 

The Bank Holding Company Act of 

1956 generally required multibank 

holding companies to divest themselves of businesses extraneous to 

banking. The divestiture period was 

two years, which the Federal Reserve 

Board (FRB) could extend in individual cases to a maximum of five years. 

Bank Holding Company Act of 

1956 — Interstate Banking. The 

Bank Holding Company Act of 1956 

provided that the FRB could not approve 

an application by a bank holding company to acquire voting shares on substantially all assets of a bank outside 

of its home state unless the acquisition was expressly permitted by the 

law of the target state. Twelve existing interstate holding companies 

were grandfathered. In the late 1970s 

and throughout the 1980s, states relaxed their laws to permit various degrees of interstate expansion by bank 

holding companies. The Riegle-Neal 

Interstate Banking and Branching Efficiency Act of 1994 authorized interstate expansion by bank holding 

companies beginning one year after 

its enactment. The Act also authorized interstate branching by banks 

beginning on June 1, 1997, unless a 

state either accelerates the effective 

date or opts out of interstate branching. 

Bank Holding Company Act 

Amendments of 1970. The Bank 

Holding Company Act Amendments 

of 1970 brought single-bank holding 

companies within the jurisdiction of 

the Act and gave the FRB leeway to 

expand the nonbanking activities 

permitted bank holding companies. 

Companies that became bank holding companies as a result of the 

Amendments were given a ten-year 

period to divest impermissible activities they were directly or indirectly 

engaging in. Two primary grandfathered situations were provided for, 

the $60-million limitation and the 

hardship exemption.1 

$60-Million Limitation. Under 

Section 4(a)(2) of the Bank Holding 

Company Act (12 U.S.C. §1843(a)(2)), 

a company that became a bank holding company as a result of the Amendments and that was engaged in 

activities on June 30, 1968, that became impermissible because of the 

Amendments could continue to engageintheactivitiesunlesstheFRBdetermined termination was necessary to 

prevent undue concentration of 

resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The FRB 

was required to make such a determination within two years if a company's bank had assets of over $60 

million or within two years of the 

reaching of that level by a bank. The 

divestiture period after such a determination by the FRB was ten years. 

Under the $60-million limitation, a 

bank holding company could only 

continue existing impermissible nonbanking activities and not engage in 

new impermissible ones. 

Hardship Exemption. Under 

Section 4(d) of the Bank Holding 

Company Act (12 U.S.C. §1843(d)), 

the FRB could grant exemptions 

from the Act for a company that 

became a bank holding company as a 

result of the Amendments, that controlled a single bank on July 1, 1968, 

and that did not subsequently acquire another bank. The exemptions 

could be subject to such conditions as 

the FRB considered necessary to 

protect the public interest. Unlike 

the grandfather privileges under the 

Section 4(a)(2) $60-million exemption, an exemption under Section 

4(d) permitted a bank holding company to expand into new nonbanking 

activities. An exemption had to be 

based on one of three grounds: (1) to 

avoid disrupting business relationships that had existed over a long 

period of years without adversely affecting the banks or communities 

involved; (2) to avoid forced sales 

of small locally owned banks to purchasers not similarly representative 

1 The Amendments also exempted from the 

nonbanking restrictions (1) certain bank 

holding companies that were also taxexempt labor, agricultural, or horticultural 

organizations and (2) any one-bank holding 

company that was more than 85 percent 

owned by a single family on June 30, 1968, 

and continued to be so. 

12 
A Unified Federal Charter 

Prohibitions, Divestitures, and Grandfathering in Banking Legislation 

Selected banking industry legislation containing prohibition, divestiture, and grandfathering provisions are listed in this 

table. The provisions are described in greater detail in the accompanying text, which also covers additional legislation. 

Law Prohibitions and Divestitures Grandfathering 

Glass-Steagall Act, 1933 Investment Banking and Commercial Banking — None 

One-Year Divestiture Period 

Bank Holding Company Act of 1956 (1) Bank Holding Company Nonbank Activities (1) None 

Unless Permissible — Two-Year Divestiture Period, 

Extendable to Five Years 

(2) Interstate Bank Holding Companies Prohibited (2) Existing Interstate Bank Holding 

Without State Permission Companies 

Bank Holding Company Act Bank Holding Company Nonbank Activities (1) Existing Nonbank Activities of 

Amendments of 1970 Unless Permissible — Ten-Year Divestiture Period Bank Holding Companies With 

Bank Subsidiaries Smaller Than 

$60 Million in Assets 

(2) Hardship Exemption 

International Banking Act of 1978 U.S. Nonbank Activities of Foreign Banks With Branches, Existing Securities Affiliates 

Agencies, or Commercial Lending Companies in 

U.S. — Seven-Year Divestiture Period 

Garn-St Germain Act, 1982 Bank Holding Company Insurance Activities Unless (1) Existing Insurance Activities 

Specifically Permitted by Statute (2) Any Insurance Activities by a 

Bank Holding Company Conducting an Insurance Activity Prior 

to January 1, 1971 

Competitive Equality Banking Act, Nonbank Banks (Nonbank banks were not prohibited, Existing Nonbank Banks (Owners that 

1987 just brought within the Bank Holding Company Act's were not bank holding companies 

definition of a bank.) could continue ownership without 

becoming bank holding companies; 

owners that were bank holding 

companies could continue ownership 

despite what might otherwise be 

violations of interstate banking 

restrictions.) 

of community interests; or (3) to allow activities contained in the Bank 1987, a foreign bank that acquires a 

retention of a bank so small in relation Holding Company Act applicable to bank in the United States loses its 

to the holding company's total inter- a foreign bank that maintained a grandfather rights. 

est and so small in relation to the branch, agency, or commercial lend- Bank Holding Company In- banking market as to minimize the ing company in the United States (12 surance Activities. In 1982, the likelihood that the bank's powers to U.S.C. §3106(a)). Foreign banks Garn-St Germain Act, among other grant or deny credit would be influ­ could retain any nonbank investment things, amended Section 4(c)(8) of enced by a desire to further the hold- or continue any nonbank activity un­ the Bank Holding Company Act (12 ing company's other interests. til December 31, 1985. Grandfather U.S.C. §1843(c)(8)) to restrict the inAltogether, the FRB granted ap­ privileges were granted beyond that surance activities of bank holding 

proximately 12 hardship exemptions. date for direct or affiliate activities companies. Two grandfather situaAmong the companies that received conducted on or applied for by July tions were provided for. First, insur­ exemptions were The Goodyear Tire 26, 1978. In addition, foreign banks ance agency activities conducted by a & Rubber Company, Olin Corpora- engaged since July 26, 1978, in under- bank holding company on May 1, tion, Minnesota Mining and Manu­ writing, distributing, or selling securi­ 1982, or approved for the company by facturing Company, and Beneficial ties in the United States through the FRB on or before that date, could Corporation. Data on the hardship “domestically controlled affiliates” be continued. Further, the activities exemptions are presented in an ac- were permitted to engage in new ac- could be expanded to new locations companying table. tivities through the affiliates or ac- in the state of the bank holding comForeign Banks — Nonbanking quire the assets of going concerns pany's principal place of business, in 

Activities. Among other things, the through the affiliates. Under an FRB adjacent states, and in other states 

International Banking Act of 1978 interpretation that was codified into where the activities were conducted 

made the restrictions on nonbanking the International Banking Act in on the grandfather date. And the 

13 
FDIC Banking Review 

Section 4(d) Approvals	 agency activities could be expanded 

Holding Company and Bank Assets of Bank Board Action to include new types of insurance in-

(in $ millions) suring against the same types of risk. 

1. The Goodyear Tire & Rubber Company	 $108 12/07/71 (A) 

Akron, Ohio 

The Goodyear Bank, Akron, Ohio 

Goodyear Bank was part of Goodyear until 07/15/82. Now owned by National City Corp of 

Cleveland. 

2. Olin Corporation, New York, New York 20	 12/07/71 (A) 

Illinois State Bank, East Alton, Illinois 

Illinois State Bank of East Alton was controlled by Olin until 08/12/85. Now a branch of Magna 

Bank of St. Louis. 

3. Milton Hershey School and School Trust	 43 02/17/72 (A) 

Hershey, Pennsylvania 

The Hershey National Bank, Hershey, Pennsylvania 

Hershey National Bank was affiliated with Milton Hershey until 03/14/86. Now a branch of PNC 

Bank of Pittsburgh. 

4. CPC International, Inc.	 30 03/23/72 (A) 

Englewood Cliffs, New Jersey 

Argo State Bank, Summit, New Jersey 

Argo State Bank was part of CPC until 08/04/82. It then became part of Harris Bancorp, which became a subsidiary of Bank of Montreal. Still a bank under same identification number. Assets totaled $192,517 (in thousands) as of 12/31/95. 

5. Minnesota Mining and Manufacturing	 29 05/09/72 (A) 

Company 

St. Paul, Minnesota 

Eastern Heights State Bank, St. Paul, Minnesota 

Eastern Heights State Bank is still owned by MMM. Bank assets totaled $376,151 (in thousands) 

as of 12/31/95. 

6. Beneficial Corporation	 20 08/09/72 (A) 

Wilmington, Delaware 

Peoples Bank and Trust Company, 

Wilmington, Delaware 

Peoples Bank and Trust is still owned by Beneficial Corporation. Bank assets totaled $414,430 (in 

thousands) as of 12/31/95. 

7. Heldenfels Brothers, Contractors	 12 01/05/73 (A) 

Corpus Christi, Texas 

First National Bank, Rockport, Texas 

FNB of Rockport became a branch after it was merged into Victoria Bank and Trust Co. on 12/02/92. 

8. R. R. Donnelley & Sons Company	 28 05/16/73 (A) 

Chicago, Illinois 

Lakeside Bank, Chicago, Illinois 

Lakeside Bank was owned by Donnelley until 09/28/93. It is now owned by Lakeside Bancorp.
 

Bank assets totaled $217,965 (in thousands) as of 12/31/95.
 

9. The Moody Foundation, Galveston, Texas	 46 07/12/73 (A) 

The Moody National Bank of Galveston 

Galveston, Texas 

Moody NB of Galveston was owned by Moody Foundation until 05/25/84. Now owned by Moody 

Bankshares. Bank assets totaled $289,724 (in thousands) as of 12/31/95. 

10. W. J. Young & Co., Clinton, Iowa 38	 12/12/74 (A) 

The Clinton National Bank, Clinton, Iowa 

Clinton National Bank is still owned by W. J. Young and Co. Bank assets totaled $225,444 (in 

thousands) as of 12/31/95. 

11. Trustees of Dartmouth College	 20 02/12/75 (A) 

Hanover, New Hampshire 

Dartmouth National Bank 

Hanover, New Hampshire 

Dartmouth National Bank became a branch of Fleet Bank - NH on 10/01/89. 

12. Charles Stewart Mott Foundation	 425 8/06/79 (A) 

Flint, Michigan 

The Wayne Oakland Bank, Royal Oak, Michigan 

The Wayne Oakland Bank was acquired by First of America on 06/06/83. 

Second, the FRB could approve new 

insurance activities for a bank holding company engaged in insurance 

agency activities prior to January 1, 

1971, pursuant to FRB approval prior 

to that day. Insurance activities permitted under this second grandfather 

provision were not limited to those 

conducted in 1971. The Garn-St 

Germain amendment also provided 

for the growth of a $10,000 ceiling it 

imposed on extensions of credit for 

which finance company subsidiaries 

of bank holding companies could sell 

credit-related insurance. The ceiling 

increased annually to match the increase in the Consumer Price Index. 

Competitive Equality Banking 

Act — Nonbank Banks. The 

Competitive Equality Banking Act 

of 1987 (CEBA) was signed into law 

on August 10, 1987. The cut-off date 

used in the grandfather provisions of 

this legislation was March 5, 1987. 

Among other things, CEBA closed 

the “nonbank bank” loophole in the 

Bank Holding Company Act by 

broadening the definition of “bank” 

in that Act to cover any institution 

that either met the then-existing 

definition or was insured by the 

FDIC (12 U.S.C. §1841). Several 

grandfather situations were provided 

for: 

Nonbank Holding Company 

Owners. A company that controlled 

a nonbank bank on March 5, 1987, 

and was not a bank holding company 

before the enactment of CEBA 

would not be treated as a bank holding company solely by virtue of its 

control of the nonbank bank (12 

U.S.C. §1843(f)). Within 60 days after enactment, such companies had 

to identify themselves to the FRB. 

In general, grandfather rights would 

be lost if the company otherwise became a bank holding company or if 

the nonbank bank did one or more of 

several things: (1) began to engage in 

activities in which it was not lawfully 

engaged on March 5, 1987; (2) offered 

or marketed products or services of 

14 
A Unified Federal Charter 

affiliates that were not permitted for 

bank holding companies, or permitted its products or services to be offered or marketed by affiliates whose 

activities were broader than those 

permitted for bank holding companies, unless the products or services 

were offered or marketed as of March 

5, 1987, and then only in the same 

manner; (3) permitted any overdraft 

on behalf of an affiliate or incurred 

any overdraft in its account at a Federal Reserve Bank on behalf of an affiliate (with exceptions regarding 

inadvertent overdrafts and affiliates 

that were primary dealers); or (4) increased its assets by more than 7 percent in any one 12-month period 

beginning one year after enactment 

of CEBA. A company losing its 

grandfather exemption would have 

180 days after loss of the exemption 

to either divest each bank it controlled 

or come into compliance with the 

Bank Holding Company Act. A list of 

nonbank banks and their parents is 

given in an accompanying table. 

Bank Holding Company Owners. Notwithstanding most other 

provisions of Section 4 of the Bank 

Holding Company Act—the thenlimitations on interstate banking operations being the main concern—a 

bank holding company controlling an 

institution that became a bank by virtue of CEBA generally could retain 

control of the bank if the bank: (1) did 

not engage after enactment in any activity that would have caused it to be a 

bank pre-CEBA (that is, it did not begin both accepting demand deposits 

and making commercial loans); or (2) 

did not increase the number of locations from which it conducted business after March 5, 1987 (12 U.S.C. 

§1843(g)). 

Nonbank Banks and Their Parents 

December 31, 1995 

Explicit Exemptions. CEBA 

exempted certain special-purpose 

banks from the Bank Holding Company Act's new, broader definition of 

a bank. These exemptions included 

limited-purpose trust companies, 

credit-card banks, certain industrial 

loan companies, and the U.S. branches of foreign banks. 

Competitive Equality Banking 

Act — Savings Banks. CEBA created 

a grandfathered entity called a “qualified savings bank,” which was defined 

as a state savings bank organized on 

or before March 5, 1987. Under Section 3(f) of the Bank Holding Company Act (12 U.S.C. §1842(f)) as 

amended by CEBA, a “qualified 

savings bank” controlled by a bank 

holding company was permitted to 

engage in any activities allowed by 

the law of its state, other than certain 

Domestic 

Assets 

Nonbank Parent State ($000s) 

American Express Centurion Bank Shearson American Express NY $11,173,428 

Greenwood TC Sears Roebuck & Company IL 10,133,809 

First Deposit NB Providian Corporation KY 2,183,269 

Merrill Lynch Bank & Trust Co. Merrill Lynch & Company NY 1,891,714 

Custodial Trust Company Bear Stearns Companies, Inc. NY 1,769,849 

Hurley Street Bank Sears Roebuck & Company IL 1,558,562 

Firstrust Savings Bank Semperverde HC PA 1,378,314 

Prudential Bank & Trust Company Prudential Insurance Company NJ 1,369,450 

Hickory Point Bank & Trust Co. Archer-Daniels-Midland Company IL 748,170 

J C Penny NB J C Penny Company TX 683,531 

Travelers Bank Commercial Credit Company MD 435,892 

American Investment Bank NA Leucadia National Corporation NY 210,846 

Franklin Bank Franklin Resources CA 182,056 

Century Bank State Savings Bank OH 180,176 

First Signature Bank & Trust Co. John Hancock Mutual Life Ins. Co. MA 156,959 

California Central TR BK CORP Continental Corporation NY 139,627 

Domestic L&IC Domestic Credit Corporation RI 118,166 

Fidelity Management Trust Co. Fidelity Management & Research MA 89,344 

First American Trust Company First American FC CA 40,096 

Lyndon Guaranty Bk of New York ITT Corporation NY 18,714 

Avco NB Textron RI 1,884 

Total $34,454,856 

15 
FDIC Banking Review 

insurance activities. The grandfather 

right would be lost if the savings bank 

was acquired by a company that was 

not a savings bank or a savings bank 

holding company, which was defined 

as a company whose qualified savings 

bank subsidiaries constituted at least 

70 percent of its assets. 

Competitive Equality Banking 

Act — Savings-and-Loan Holding 

Companies. CEBA grandfathered 

rights for certain savings-and-loan 

holding companies that would otherwise cease to qualify as unrestricted 

savings-and-loan holding companies 

because of a failure of their savingsand-loan subsidiaries to satisfy a new 

QTL test. Without grandfather protection, the period to bring savingsand-loan subsidiaries into compliance 

with the new QTL test was two years. 

A grandfathered savings-and-loan 

holding company was one that had received permission prior to March 5, 

1987, to acquire control of a savingsand-loan association. Such a grandfathered company was permitted to engage in any activity in which it was 

lawfully engaged on that date. This 

grandfather right could be lost for a 

number of reasons: (1) the holding 

company acquired control of a bank or 

another savings-and-loan association 

(except in a qualified supervisory 

transaction); (2) any savings-and-loan 

subsidiary of the holding company 

failed to qualify under the Internal 

Revenue Code thrift test; (3) the 

holding company engaged in any 

business activity in which it was not 

engaged on March 5, 1987, and which 

was not otherwise permissible for 

savings-and-loan holding companies; 

(4) any savings-and-loan subsidiary of 

the holding company increased its 

number of business locations after 

March 5, 1987, except by means of a 

qualified supervisory transaction; and 

(5) any savings-and-loan subsidiary of 

the holding company permitted an 

overdraft on behalf of an affiliate or 

incurred an overdraft in its account at 

a Federal Reserve Bank on behalf of 

an affiliate, except an inadvertent 

overdraft. CEBA also grandfathered 

cross-marketing arrangements involving a savings-and-loan subsidiary 

of a diversified savings-and-loan 

holding company—a company whose 

savings-and-loan subsidiary and related activities represented less than 

50 percent of its consolidated net 

worth and consolidated net earnings­

—and an affiliate to the extent they 

engaged in such arrangements on 

March 5, 1987. 

FIRREA — Savings Association Activities and Investments. 

Section 222 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) 

created Section 28 of the FDI Act. 

Section 28 prohibits any state savings 

association from engaging in any type 

of activity, or in an activity in any 

amount, that is not permissible for a 

federal savings association unless the 

FDIC determines the activity would 

pose no significant risk to the affected 

insurance fund and the savings association is and continues to be in compliance with certain capital standards 

(12 U.S.C. §1831e).2 The compliance 

date was January 1, 1990, less than 

four months from the enactment of 

FIRREA, but divestiture of existing 

non-conforming assets was not required. State savings associations also 

cannot make equity investments impermissible for federal associations, 

except that certain investments in 

service corporations are permissible. 

Impermissible investments had to be 

divested by July 1, 1994. 

FDICIA — State Bank Activities. Section 303 of the Federal 

Deposit Insurance Corporation Improvement Act (FDICIA) created 

Section 24 of the FDI Act, which restricted the charter powers of insured 

state banks (12U.S.C.§1831a). Section 

24 prohibits insured state banks from 

engaging directly or through subsidiaries in any activities not permissible 

for a national bank unless the FDIC 

determines that an activity poses no 

significant risk to the deposit insurance fund and the bank is in 

compliance with applicable capital 

standards. The compliance period 

was one year from the date of FDICIA's enactment. Certain very limited insurance activities provided 

through subsidiaries were grandfathered. State banks also cannot make 

equity investments that are not permissible for a national bank, with 

certain exceptions and subject to the 

grandfathering of limited statepermitted investments in listed securities. Impermissible equity investments had to be divested in five 

years, except a three-year period was 

provided for compliance with the 

limitation on state-permitted investments in securities. 

Conclusion. Generalizations 

about Congressional selections between divestiture on the one hand 

and a grandfather scheme on the 

other are difficult to make. Each 

situation had its own unique circumstances. The relative political power 

of the defenders of the status quo and 

of those who sought change varied 

considerably from situation to situation, as did the degree of the apparent “evil” that was the subject of the 

legislation. Nevertheless, it seems 

reasonable to conclude that the selection was often influenced by magnitude, that is, by the relative scope 

of the activities concerned. Grandfather solutions appear to have been 

used more often in situations when 

the relative impact would not be 

large. 

2 Under certain circumstances, the FDIC 

could allow a state association to engage in 

an activity permissible for federal associations to a greater extent than allowed for federal associations. 

16 
Statistical Sampling as a Management Tool 

Statistical Sampling as 

a Management Tool 

in Banking 

by Charles D. Cowan * 

The purpose of this article is to eral Deposit Insurance Corporation some will be written off. Similar to 

discuss potential uses of sta­ (FDIC) also performs functions that the portfolios of banks, the FDIC 

tistical sampling in a financial are similar, or identical, to those in portfolio is turning over continuously 

institution environment. Banks and banks and thrifts, including the man- as new loans are acquired, old assets 

other financial firms are faced with a agement of loans acquired from failed exit the population of assets, and 

number of managerial challenges banks and thrifts and the resultant some loans are converted to real and 

where the use of sampling can pro- need to estimate both the financial personal property. In banking a simivide information at a reasonable cost. risk and the value of these loan port­ lar process occurs. New loans are unGiven today’s competitive environ- folios. This article describes the use derwritten with different amounts 

ment and the move toward consolida­ of sampling in a financial setting and and types of collateral; loans are paid 

off, sold, written off, or converted to tion in the banking industry, it is focuses, as an illustration, on some property owned by the bank through imperative for financial managers to of the methods used by the FDIC to foreclosure. be able to value assets of target insti­ value assets in liquidation as part of 

tutions quickly and efficiently. Simi­ its preparation of financial statements. In order for an institution’s manlarly, as customers are faced with an By using sampling, as opposed to agement to assess its financial condiever increasing array of financial- valuing each asset, significant cost tion, not to mention a potential 

service providers, the quality of serv­ savings are achieved while ensuring merger target, it needs to value the asice provided to customers becomes the accuracy and quality of the results. set portfolio. The same is true for the 

increasingly important for maintain- FDIC. The FDIC annually is required In fulfilling its mission as deposit ing market share. Manufacturing to prepare financial statements for insurer and receiver of failed banks, firms, hotel chains, and other busi­ each of the insurance funds under its the FDIC has acquired hundreds of nesses have long used sampling as a management, in accordance with thousands of assets, including loans means to assure that customers are re- Generally Accepted Accounting Prin­ and real-estate properties, that it 

ceiving quality goods and service. Fi­ manages until disposition. These ciples (GAAP), and these statements 

nancial institutions similarly can use range across the broad spectrum of 

sampling techniques to monitor the asset types and collateral. Some of 

quality of customer service and inter- the loans will be held by the FDIC 

actions. The need for this clearly in- until they are paid off in full, some 

creases as back office processing will be resolved through settlement *Charles D. Cowan is Director, Management 

operations and customer service hot negotiations with the borrower, some Consulting, Price Waterhouse. This article 

was prepared when Mr. Cowan held the posi­ lines become remote from the branch will be sold as individual assets, some tion of statistician in the FDIC’s Division of 

originating the business. The Fed- will be sold as part of a bulk sale, and Research and Statistics. 

17 
FDIC Banking Review 

are audited by the U. S. General Accounting Office. As part of the preparation of its financial statements the 

FDIC must determine the value of its 

claim against the various receiverships for failed institutions by determining the value of the underlying 

assets of the receiverships. Moreover, intermediate valuations are prepared to assist in the monitoring of 

the financial position of the funds and 

to assist in the liquidation planning 

process. The use of sampling allows 

for more frequent valuations at relatively low cost. 

Given the existence of a large number of loans and other assets, and 

changing conditions in the economy 

and financial markets, there is no way 

to value simultaneously all of the 

loans held in a portfolio. Nor would 

one want to do so, given the expense 

and time constraints that surround 

the preparation of financial statements. Instead, a sample of assets is 

valued, and the sample is extrapolated to the full population of loans. 

This process can be repeated multiple times during the year and can be 

used to track the ongoing value of the 

portfolio. The same can be done in 

any bank, using the records and loan 

systems of the bank and a few formulas that are presented below. 

Sampling has become a standard 

part of audit methodology and is fairly 

well known and accepted in that profession as a useful tool. This article 

will, therefore, not attempt to introduce the reader to the rudiments of 

sampling, but rather will focus on the 

introduction of some basic assumptions to standard audit sampling 

methodology. By introducing these 

assumptions one can decrease the required sample size and make the estimation process more efficient. While 

the article focuses on the valuation of 

assets, the same methodologies and 

techniques can be used to develop a 

sample of customers to survey regarding their satisfaction with the services 

provided by the bank. 

Basics — The Tools We Use 

Suppose one has to value a single pool of homogeneous assets, such as performing commercial loans. The discussion that follows describes how to set a 

sample size for the valuation of the pool, and how to extrapolate an estimate from 

the sample to the full population of loans. This methodology can easily be extended to multiple asset types by treating each of the asset types as a stratum, 

making separate estimates for each by stratum, and adding across strata to derive 

an estimate for the full population. 

There are two basic functions that can be used to estimate the market value of 

the pool. We assume that for each asset there is a current book value that is 

known and easily retrievable. We also assume that we are going to select a simple 

random sample without replacement. The question then becomes: How many 

assets need to be selected? Alternatively, how large a sample is needed to obtain a 

good estimate of market value for the entire loan portfolio? The answer is driven 

by the underlying distribution of the values we are trying to estimate and the 

“estimator” we plan to use with the sample. An estimator is the mathematical formula that summarizes the data and extrapolates the sample back to the population. One estimator we could use is a direct sample projection, hereafter called 

the “direct” estimator. Another is the “ratio” estimator that uses the additional 

information we can get from the book value of the loans. The formulas for each 

are: 

Direct: Y

YD = N x ; where N is the number of assets in the pool, and 

x is the average market value of the assets in the sample. 

Ratio: Y

YR = (y / x) X; where y is the total market value of assets in the sample; 

x is the total book value of assets in the sample; and 

X is the total book value of assets in the population. 

Regression: Y

YRegr= N [y − b (x − X)]; 

where y is the average market value of assets in the sample; 

x is the average book value of assets in the sample; and 

b is the slope coefficient in the regression of y on x. 

The direct estimate is simply the average market value of the assets in the sample, multiplied by the number of assets in the population. If we value 100 assets 

in a sample taken from 1,000 assets in the population, we calculate the average 

market value for the 100 assets (a market value per asset) and multiply it times 

1,000. The ratio estimate works in a similar fashion, but weights the market values obtained from the sample by their book values, rather than by counting each 

with equal weight, which is what the direct estimate does. The ratio estimate calculates the average recovery rate and multiplies this rate times the total dollar 

book value in the pool. If the market value is well-correlated with the book value, 

for example, the larger the book value, the larger the market value, and they track 

well, then the ratio estimate will be more accurate than the direct estimate. That 

is, the ratio estimate will, in general, be closer to the true population value than 

the direct estimate. The regression estimate is similar to the ratio estimate. 

If one is to rely on estimates derived from samples, a rule for determining the 

accuracy of the estimates is needed. This rule usually is determined by the size of 

the confidence interval around the estimated market value. Suppose we want a 

95-percent level of confidence that the true population value will be within plus 

18 
Statistical Sampling as a Management Tool 

or minus 5 percent of our estimate. To obtain this, we simply set the ratio of the 

half confidence interval over the estimate equal to 5 percent .1 

The market value estimate is obtained from one of the three formulas given 

above, and the variance is the sampling variance estimated from the sample collected. Sampling variance is the variability due to the fact that each sample yields 

a slightly different estimate, which on average will be equal to the value we want 

to estimate. In order to estimate the market value of a portfolio and determine the 

sample size, one must have some knowledge of the variance of the market value estimate as well as the estimate itself. Obviously this is problematic because we do 

not know either the market value or its variance. 

Knowing this in advance of doing the survey is the key to determining the sample size, but this appears somewhat backward because this is what we are trying to 

estimate. However, what we can know in advance is derived by having a good intuitive feel for the data, some expectation about the results one might obtain, 

possibly from previous analyses, and a little help from probability theory. The 

next section reviews some assumptions and how they work to solve the above 

equations to derive the sample size. 

Before turning to the use of external knowledge in the sample selection process, it is worth reviewing the definitions for sample variance for both the direct 

and ratio estimators for market value. The following are the mathematical expressions for the “population recovery rate,” that is, the ratio of the population’s 

market value to book value, and the variance of the book and market values for 

the population as a whole and the variance terms for the estimates of market value 

obtained by using the direct estimator and the ratio estimator: 

Population Recovery Rate = R = Y/X 

Population Variance of Total Book Value = S\

x

Population Variance of Total Market Value = S\

y

\

N (xi − X)

\ N x 

S x = ∑ , where X= 

i

i ∑ = the average book value i = 1 N = 1N 

\ N N x − Y y
 \ ( i ) i S y = ∑ , where Y =∑ = the average market value i = 1N i=1 N 

The direct estimator for total market value has sampling variance VD, which is 

the variance of the estimate because we used a sample: 

⎛ n ⎞ N\

\ V D = ⎜1− ⎟ S y

⎝ N⎠ n 

N is the number of assets in the population, 

n is the number of assets in the sample, which is to be determined. 

The ratio estimator for total market value has sampling variance VR : 

n N\

⎛ ⎞ \ \ \ V R = ⎜1− ⎟ (S y + RS x − 2R ρSS y x ) ⎝ N⎠ n 

where ρ is the correlation between the book value x and the market value y. 

1The algebraic statement for this measure is: 

1.96 ∗ Variance [Market Value Estimate] = 5 percent Market Value Estimate

The value 1.96 is used to set the width of the confidence interval to cover 95 percent of the sample 

values that would come from the population. 

Incorporating Knowledge in 

the Planning Process 

Knowledge about the values to be 

estimated can be incorporated in the 

estimation process in advance, and 

the use of this information can reduce 

the sample size needed and improve 

the accuracy of the estimates. The 

more information that is available, 

the more cost-efficient the process of 

estimating a total will become. 

There are many sets of assumptions that can be used to determine in 

advance the sample size needed to 

achieve a fixed confidence interval 

around estimates. This discussion focuses on four that are easy to implement and that highlight the different 

assumptions made about the data and 

the estimator to be used. Two of the 

scenarios are commonplace, while 

the other two, though less well 

known, lead to a better understanding of the sample sizes needed for estimation. Each of the four scenarios 

makes assumptions about what we 

know about the market values relative to the book values. There is no 

way to determine sample sizes for the 

sampling process without making 

some assumptions, no matter how 

simplistic. 

Scenario 1: 

Traditional Sampling Theory With 

No Connection to the Valuations 

The most common procedure in 

basic survey sampling is to turn any 

problem into one that assumes a binomial distribution. This approach provides an easy solution to the sample 

size problem and requires no explicit 

assumptions about the data. Instead, 

the approach uses an implicit assumption of an upper bound on the 

variance. If one is attempting to use 

sampling to estimate an error rate in 

financial records, that is, the proportion of records containing an error, the 

largest variance will be found when 

the error rate is 0.5. Based on this 

knowledge, one can work backwards 

to derive the sample size necessary to 

satisfy the criterion involving a fixed 

proportional confidence limit band. 

19 
FDIC Banking Review 

This rationale, however, is inade- of market values. This is not the 

quate for valuation measures because same as assuming that the book value 

one is measuring a dollar value, rather and the market value move in the 

than a proportion or number of errors. same direction or that they are correHence, while this scenario is com- lated in any way. 

monly used as a fallback procedure One can derive the necessary samfor estimating sample size, it is in­ ple size by using the assumption that 

appropriate for many financial the relative variances of book values 

applications because of the need to and market values are equal and then 

estimate items calibrated in dollar solve for the sample size. By plugging 

values. these two values into the formula presented above for the confidence in- Scenario 2: 

terval, one can solve for “n,” the Traditional Sampling Theory sample size needed for the valuation With No Probability of a portfolio.2 We do not need to Assumptions Placed on the know anything more. Everything is Valuations based on one simple assumption, two 

The simplest assumption is that numbers easily calculated from the 

almost nothing is known about the population, and reliance is placed on market value of the assets, but that the direct estimator, not the ratio estithe book values of the assets in the mator. However, the simple assump­ pool are known. This is a very conser­ tion ignores anything else known vative assumption. By using the book about the relationship between the value of all the assets in the popula­ book values and the market values. 

tion, one can calculate the population This may be an overly conservative value of the variability of the book assumption for many situations. values (S2x) and the population value 

of the average book value (x). Both of Scenario 3: 

these are known with certainty and Linear Estimators in Sampling can be calculated easily from the data Theory Combined With in most record systems. If one assumes Assumptions That the Values to that the relative variability of the mar- Be Estimated Have an ket value is equal to the relative vari- Underlying Normal Distribution ability of the book value, then one can 

substitute the relative variance of To use supplemental information 

book values for the relative variance for the calculation of the sample size, 

2 This result is derived by noting that E(Y)= ∗R E(X), where Y is the total market value of the 

portfolio and X is the total book value, and using: 

2 2 2 Variance [Market Value Total] (1− n / N) N /R S , /n (1− n / N) S, / n = = Market Value Total N R∗ ∗ X X

Both x and S, are calculated directly from the population, that is, from the book values, so 

they are known. By inserting these two values into the formula above for the confidence interval, we now can solve for “n,” the sample size needed. 

1 1

1.96 ∗ Variance 1.96 ∗ − sx [Market Value Estimate] n N = = .05 Market Value Estimate X

1 n= 2

⎛ .05 ∗ X ⎞ 1 ⎜ ⎟ + ⎝ 1.96 ∗ sx ⎠ N

3 Note that the value of “a” in the linear equation is not determined. However, it is not necessary to use regression analysis to estimate it because it is reasonable to assume that it is zero if 

one is willing to assume that the market value of an asset is zero when the book value is 

zero. 

we need to make some assumptions 

regarding the joint distributions of 

the book value and the market value. 

A simple assumption is that the book 

value and the market value are related. A commonly made distributional assumption is that the variables 

are jointly normally distributed. This 

allows us to incorporate easily a 

straight line relationship assumption 

and a parameter for correlation between the variables. The normal distribution is not required — we can 

actually use any joint distribution that 

does not constrain the values of either 

variable, but does allow the two variables to be correlated. However, any 

moderate distributional assumption 

like this can lead to some very severe 

complications, as will be seen as we 

develop this method. 

The use of the assumption of a bivariate normal distribution requires 

that one know something about five 

parameters: the two population means, 

the two population variances, and 

the correlation between market 

value and book value. Typically, information is readily available only on 

two of the five parameters: the mean 

and variance of the book values (see 

the previous section). Estimates of 

the population mean and variance of 

the market values and the correlation 

between the book value and the market value are needed. The latter can 

be estimated by using simple regression analysis. In the case where one 

assumes a straight line relationship 

between book value and market value, 

one can assume to know something 

about the relative return on the assets, namely the rate of recovery, R. 

This value will be approximately 

what one would expect to see as the 

measure of return in a linear equation: 

Market Value = +a b(Book Value) . 

The value “b” estimated in this relationship is the same as the coefficient “b” estimated with regression 

analysis. However, one can assume 

that “b” is approximately equal to R, 

and from past experience an estimate 

20 
Statistical Sampling as a Management Tool 

of R may be obtainable. Specifically, 

data on past sales, audits, auction information, etc., may be available. This 

assumption will be formalized in the 

next scenario. 

The use of regression analysis 

allows for the estimation of the 

correlation between book value and 

market value. However, this still 

requires some knowledge about the 

variation of the market values (the 

y’s) separate from the variation of the 

book values (the x’s). Because 

market values and book values are 

supposed to be closely related, one 

can define two (extreme) assumptions: (1) the market values are as 

variable as the book values, or (2) 

the market values are only a portion 

of the book values, therefore they 

vary proportionally less. 

Finally, an assumption about the 

expected market value total is needed: specifically, that the expected 

value of the market value estimate is 

equal to the recovery rate, times our 

known total book value. 

Using the regression relationship 

and the first variance assumption 

(S2y = S2x), a simplified variance 

formula that can be solved for “n” is 

derived, using the regression estimator given above.4 This formula looks 

remarkably like the formula obtained 

in scenario 2, but it is multiplied by a 

factor that incorporates information 

about the expected recovery rate. 

This factor will play an important role 

in determining the sample size 

needed. 

If the second variance assumption 

2 2 (S = R ∗ S2 y ) ) is used instead, 

one gets a very strange result — the 

sampling variance is always equal to 

zero! This occurs because the assumption leads to a situation in which 

there are too many restrictions and 

the variability of the data is assumed 

away under a normal distribution. 

This makes no sense, because it may 

be reasonable to expect the market 

value to be less than the book value, 

and that the variability of the market 

value will be less than the variability 

of the book value but there still will 

be variability. Based on these assumptions, this would be a lower 

bound for the variability of the 

market value. And logically, if the 

market value is only a proportion of 

the book value, one would expect 

that the variability of the market 

value would not be greater than the 

variability of the book value, thus 

providing an upper bound. This assumption is used because it is conservative. 

In this scenario the assumptions 

placed no limitations on either the 

book value or the market value of the 

assets. Both the book value and the 

market value can take on any value 

between−∞ and+∞, though very large 

values of either are highly unlikely, 

and negative values also are unlikely. 

In practice one is more likely to find 

that assets carried with a positive 

value have a market value that is positive and even highly distressed assets 

typically will have a sales value 

slightly greater than zero. There may 

be exceptions, however, such as in 

the case of environmentally contaminated property where the costs 

of remediation (and potential legal 

liability) are greater than the value of 

the property cleaned up, thus yielding a negative market value. The normal joint distribution also allows the 

market value to be greater than the 

book value, which would happen if 

market interest rates are below the 

rates on financial assets or when property has appreciated in value. 

Scenario 4: 

Ratio Estimators in Sampling 

Theory Combined With 

Assumptions That the Values 

to Be Estimated Have an 

Underlying Conditional Gamma 

Distribution 

An alternative approach that incorporates more information about the 

data clearly is more useful in making 

the sampling process more efficient 

and cost-effective. For example, when 

using the assumption that the data 

were normally distributed (scenario 

3), book and market values could 

conceivably range from −∞ to +∞ . 

Assuming that both the book values 

and market values in the portfolio are 

both gamma distributed, one can incorporate both assumptions about the 

portfolio as well as previously known 

information. The gamma distribution is a probability distribution that 

is skewed to the right, implying that 

the portfolio will have many assets 

with relatively small book values and 

only a few with very large book values. In addition, it is assumed that 

the market value is less than, or equal 

to, the book value. 

Three parameters must be dealt 

with by using this approach, although 

there is an additional assumption that 

the market value is bounded above 

and below by the book value and 

zero, respectively. This assumption 

is consistent with floating-rate assets 

and those with short maturities. 

However, it will prove problematic 

when valuing fixed-rate loans with 

above-market rates or for fixed assets 

where depreciation may have reduced the book value below the market value. 

Under these assumptions, and using this distribution, one can determine the population variances for 

both the book value (x) and the market value (y), and also the correlation 

between the book value and the market value. Substituting these values 

into the variance equation given 

above for a ratio estimator, we get:5 

1 4 n= 2 ⎛ .05 ∗ X ⎞

2

⎛ ⎞ 1 ⎜ ⎟ ⎜ 2 ⎟ + ⎝ ⎠ 1.96 ∗ sx ⎝ 1 − ⎠ N

5 This result is obtained by observing some 

basic results for gamma distributions, 

namely that for the population S2 = (p+q)/ x

a2, S2 = p/a2, E(X) = (p+q)/a, E(Y) = p/a y 

and ρ=p/(p+q) in terms of the parameters of 

the joint conditional gamma, and then using 

method of moments techniques we can substitute the known values of x and S2 to 

solve for functions of the parameter values. x 

21 
FDIC Banking Review 

Sampli£g Varia£ce [Market Value] = 

⎛ ⎞ -2

⎜1 − £

-⎟ S2 R (1 − R) ⎝ ⎠ £ x

As was the case in scenario 3, there is a fortuitous relationship between the 

known values and the parameters that causes unknown values to cancel out and 

thus the equation can be solved directly. This is much more appealing because we 

can get three parameter values and the interrelationships between market value 

and book value directly from the three values we can observe or know through 

other sources, namely, total book value of the portfolio, the variability of the book 

values, and the anticipated recovery rate.6 

This results in the equation above, and solving for n again we get: 

1 

n = ⎛ .05 ∗ X ⎞

\

⎛ R ⎞ 1 ⎜ ⎟ ⎜ ⎟ + ⎝ ⎠ 1.96 ∗ S x ⎝1R − ⎠ N

The sampling variance equation is much more intuitive because it says that, 

as R approaches 1.0, which can only happen when all the assets have a market 

value equal to the book value, the sampling variance declines to zero. The same is 

true as R approaches 0.0, meaning all assets have no value, and so again there is 

no sampling variability. By placing bounds on the results when one estimates the 

market value, and by allowing the market value to be a random value conditional 

on the book value, one obtains a more sensible solution in terms of prior expectations, and at the same time a more sensible solution in terms of the effort required 

to conduct the valuation. 

Solving for the Sample Size 

If the population size N is large, then the term 1 over N in the denominator of 

each of the solutions disappears, and we get equations for the sample size that are 

easier to use and interpret. Each of the following equations for the sample size is 

subscripted to correspond to the assumptions in each of the scenarios discussed 

above. 

⎡ ⎤ \ 1R ⎞ \ − R⎟ 1.96 ∗ S ⎡1.96 ∗ S ⎤ ⎛ − \

x x ⎡1.96 ∗ S x
 ⎤ ⎛1 ⎞ n\ = , n3 = ⎜ \ ⎟ , n4 = ⎜
 ⎣ .05X ⎦ ⎣ .05X ⎦ ⎝ R ⎠ ⎣ .05X ⎦ ⎝ R ⎠ 

Note that each of the sample sizes can be expressed as a function of the sample 

size n2, the sample size required when we make no distributional assumptions. 

For the sample size required when we assume that the book value and the market value are normally distributed and that the variance of the book value is 

equal to the variance of the market value, we get much larger required sample 

sizes until the recovery rate exceeds 0.7. Note also that the sample size required 

for the joint gamma distribution assumption is less than the sample size required for the no assumption scenario when the recovery rate exceeds 0.5. 

More importantly, the joint gamma assumption always yields a smaller required 

sample size than the normal assumption. This is especially gratifying, because 

scenario 4 required fewer assumptions and placed some reasonable bounds on 

the data to be observed. 

6 Data about the book values of a portfolio should be readily obtainable from accounting records and 

anticipated recovery rates can be based on previous studies or an a priori assumption based on general knowledge of the portfolio. 

How to Choose 

Based on the preceding discussion, the choices may appear to be 

exceptionally confusing. How does 

one use this information and draw a 

reliable sample? Fortunately, there is 

good news regarding both the variance estimate and the assumption 

choices. 

First, the variance estimates. The 

assumptions reviewed above are offered as alternative ways to think 

about the data before assets are valued in order to avoid the selection of 

a larger sample than is necessary. 

However, once the sample has been 

selected and the valuation completed, the assumptions no longer 

come into play. The estimation of the 

market value and the confidence interval around that estimate is strictly a 

function of the actual data. The assumptions are not used in the estimation process, but only in the equations 

used to derive sample size. With the 

equations presented above, one can 

use either the direct method or the ratio method, and compare the results 

to see which makes more sense and 

provides the better confidence interval. The only requirement with respect to their use is that the sample 

selected is a simple random sample. 

Thus, even if the assumptions were 

flawed, the estimates are not a function of the assumptions but of the actual data sampled. However, bad 

assumptions may lead to the choice of 

a sample that is either too large or too 

small, yielding results that may not 

measure up to expectations. 

The other piece of good news is 

that one can test some of the assumptions before choosing which scenario 

to use in deriving sample sizes. This 

is done easily by simply charting the 

book values as a histogram and determining whether the distribution 

appears to be uniform, normal, or 

gamma. (See the appendix for a discussion on how to create the histogram.) This allows a reasoned choice 

of scenario and distribution assumption to be used in the calculation of 

22 
Statistical Sampling as a Management Tool 

sample size. In addition, if one be­ 90 percent of the book value of the scribed for the normal distribution 

lieves that the market values will fall loans being valued, then one might the standard error (half the confibetween zero and book value, the be able to use the assumptions of sce­ dence interval) will increase by 133 

choice of scenario 4 is clearly sup­ nario 4 to reduce the sample size. percent. For the gamma distribution 

ported. However, if the market value of the the standard error of the estimate will 

loans in the portfolio is estimated to increase by approximately 137 per- Hedging Our Sampling Bets be 80 percent after a valuation is com- cent. In either case, this is a rather 

The last point to be made is that pleted using a sample that assumed a large increase in the confidence interthis process requires caution. If one 90 percent valuation, the sample size val and results from overly optimistic 

uses the assumptions listed above to was too small to achieve the desired assumptions. This problem can be 

determine how large a sample to se- confidence level used in the sample minimized by the conservatism in 

lect, significant cost and time savings construction. In order to obtain the making a priori assumptions about 

can be achieved. However, excessive desired level of confidence the sam­ the value of the portfolio, while at the 

optimism regarding the market value ple size will have to be increased. same time recognizing the cost tradeof the assets to be valued can lead to The impact on the final confidence offs associated with these decisions. 

the derivation of a sample size that is interval will differ according to the 

too small for the task. For example, if distributional assumption that is 

one expects that the market value is used. Specifically, in the situation deREFERENCES 

Raj, Des. Sampling Theory. New York: McGraw-Hill Book Company, 1968. 

Mardia, K.V. Families of Bivariate Distributions. London: Charles Griffin & Company 

Limited, 1970. 

23 
�

FDIC Banking Review 

APPENDIX 

Creation of the Histogram 

One can easily create a histogram to assess which assumption concerning the distribution of the assets in 

a portfolio is the appropriate one to use. This process requires that a tabulation of book values of assets be 

obtained from the general ledger and that 20 segments be created. These segments for tabulation can be 

created by taking the maximum book value minus the minimum book value and dividing by 20. We call this 

value w: Maximum book value − Minimum book value 

w= 20 

The twenty categories appear as follows: 

Category 1: Minimum book value ≥ Minimum + 1w 

Category 2: Minimum + 1w ≥ Minimum + 2w 

Category 20: Minimum + 19w ≥ Maximum 

Count the number of assets with book values in each of these ranges and tabulate as a bar chart. If the 

distribution looks flat, then the portfolio has a uniform distribution and the best plan is to use scenario 2. If 

the distribution looks bell shaped and symmetric, then the best option is scenario 3, because the data appear 

to be normally distributed (no unusually large high or low values). If the distribution looks like a mound that 

leans to the right (most values are smaller, but there are a significant number of large values), then the data 

are good candidates for scenario 4. Scenario 4 is enhanced if you believe your market values fall between 

worthless (zero) and the book value. 

24 
Recent Developments 

Recent Developments 

Affecting Depository 

Institutions 

by Valentine V. Craig * 

REGULATORY AGENCY ACTIONS 

Inter-Agency Actions provement Act, which requires the Proposal to Amend 

The federal bank and thrift regula­ agencies to review their regulations in Risk-Based Transaction

order to streamline and modify regu­ tory agencies are engaging in joint or Requirements

lations to improve efficiency, reduce coordinated efforts in a number of The OCC, the FRB, the FDIC, unnecessary costs, and eliminate un­ regulatory areas that are mentioned and the OTS proposed a rule to warranted constraints on credit avail- specifically in this issue of the Review. amend their respective risk-based ability. FR, Vol. 61, No. 150. pg. 40293, 8/2/96, These joint initiatives concern: capital standards to establish uni- OTS Transmittal, No. 154, 9/3/96. form treatment for transactions sup- Bank Management Flood Insurance ported by qualifying collateral. The Interlocks Rule Changes proposal would allow banks, bank On August 2, 1996, the Office of The OCC, the FRB, the FDIC, holding companies, and savings asso­ the OTS, the Farm Credit Admin­ the Comptroller of the Currency ciations to hold less capital for trans­ istration (FCA), and the National (OCC), the Federal Deposit Insur­ actions collateralized by cash or ance Corporation (FDIC), the Fed- Credit Union Administration qualifying securities. In order to receive (NCUA) adopted a final rule imple­ eral Reserve Board (FRB), and the such capital treatment, the lending Office of Thrift Supervision (OTS) menting the requirements of the Na- institution would need to maintain 

published a joint final rule that rein- tional Flood Insurance Reform Act of control over the collateral. FR, Vol. 61, 1994. Under the rule, financial insti­ terpreted the Depository Institution No. 160, pp. 42565-42570; OTS Transmittal, 

Management Interlocks Act (12 tutions are required to escrow flood No. 155, 9/3/96. 

U.S.C. 3201-3208). The new rule insurance premiums on properties

permits management interlocks used as collateral for loans that are lowithin a relevant metropolitan statis­ cated in special flood hazard areas 

tical area (MSA) when either of the participating in the National Flood 

depository institutions in the MSA Insurance Fund. Lenders are not rehas assets of less than $20 million. quired to monitor loan portfolios conThe intent of this new rule is to ex­ tinuously to determine the status of 

pand the pool of available managerial flood insurance coverage. Institu­ *Valentine V. Craig is a program analyst in the 

talent for small depository institu­ tions may charge a fee to determine FDIC's Division of Research and Statistics. 

tions. The final rule implements pro- the need for flood insurance. OCC News Reference sources: American Banker (AB); 

visions of the Riegle Community Release, NR 96-90, 8/29/96; FR, Vol. 61, No. 169, Wall Street Journal (WSJ); BNA's Banking ReDevelopment and Regulatory Im­ pp. 45683-45716. port (BBR); and Federal Register (FR).

25 
FDIC Banking Review 

Final Rule Amending Final Rule Amending
 

Risk-Based Capital Risk-Based Capital
 

Requirements Requirements
 

The OCC, the FRB, and the 

FDIC issued a joint final rule, effec-­

tive January 1, 1997, amendingamending their 

respectiverespective risk-basedrisk-based capital stan-­

dards to incorporateincorporate a measure for 

market risk for all positionspositions in an 

institution's institution's trading account and 

foreign-exchange foreign-exchange and commoditycommodity po-­

sitions.sitions. The final rule implements implements an 

amendment amendment to the Basle Capital Ac-­

cord, and requiresrequires that any bank or 

bank holding company with signifi-significant exposureexposure to market risk to meas-­

ure the risk using its own internalinternal 

value-at-risk value-at-risk model and hold a com-­

mensuratemensurate amount of capital.capital. Man-­

datory compliancecompliance is not required 

until January 1, 1998. until January 1, 1998. FDIC, FIL-84-96,FIL-84-96, 

10/10/96;10/10/96; FR, pp. 47358-47378, 9/6/96. FR, pp. 47358-47378, 9/6/96. 

Guidelines Establishing Guidelines Establishing
 

Standards for Safety Standards for Safety
 

and Soundness and Soundness
 

The OCC, the FRB, the FDIC, 

and the OTS jointly amended the 

Inter-agency GuidelinesGuidelines EstalishingEstalishing 

StandardsStandards for Safety and SoundnessSoundness 

to include asset quality and earningsearnings 

standards.standards. The guidelinesguidelines completecomplete 

the safety-and-soundness safety-and-soundness standardsstandards 

requiredrequired by the Federal Deposit In-­

surance Corporation Corporation Improvement Improvement 

Act of 1991. The guidelinesguidelines give the 

insured depositorydepository institutionsinstitutions the 

flexibilityflexibility to adopt systems appropri-appropriate to their size and the nature and 

scope of their activities,activities, and should 

not require well-managed well-managed institu-­

tions to modify their operations.operations. The 

guidelinesguidelines direct that the systems 

should be capable of identifying identifying 

emerging problem assets and pre-­

venting deterioration deterioration in those assets; 

and that the systems be able to evalu-­

ate and monitor earnings,earnings, and ensure 

they are sufficientsufficient to maintainmaintain ade-­

quate capital and reserves.reserves. FR, Vol. 61, 

No. 167, pp. 43948-43952; 43948-43952; OTS Transmittal,ransmittal, 

Number 156, 9/3/96. Number 156, 9/3/96. 

Electronic Banking Electronic Banking 

The U.S. Department Department of the 

Treasury held a two-day conferenceconference 

in SeptemberSeptember on electronicelectronic banking 

and commerce, commerce, at which it an-­

nounced the formationformation of an interagency task force to examine con-­

sumer protectionprotection issues related to the 

use of stored-value stored-value cards, smart cards, 

InternetInternet banking,banking, and other elec-­

tronic banking and commercecommerce prod-­

ucts. The task force consistsconsists of the 

U.S. Department Department of the Treasury, the 

Federal Trade Commission Commission (FTC), 

the FRB, and the FDIC. The U.S. 

Department Department of the Treasury is also 

examiningexamining international international monetarymonetary 

policy, law enforcement, enforcement, and pay-­

ment systems regardingregarding the global 

use of computerscomputers to conduct busi-­

ness. It expects to report its conclu-­

sions at the Group of Seven meeting 

next June in Denver, Colorado.Colorado. BBR, 

pg. 436, 9/23/96. 436, 9/23/96. 

Check Fraud Check Fraud 

The Bank Fraud Working Group, 

composedcomposed of representatives representatives of the 

OCC, the Federal Bureau of Investi-Investigation, the FDIC, the FRB, InternalInternal 

Revenue Service,Service, the Justice Depart-­

ment, the OTS, the Postal InspectorInspector, 

and the Secret Service,Service, has producedproduced 

a booklet entitledentitled “Check Fraud: A 

Guide to Avoiding Losses.”Losses.” The 

booklet describesdescribes common check 

fraud schemes and fraud preventionprevention 

techniques.techniques. Copies can be obtainedobtained 

from the Office of the Comptroller Comptroller of 

the CurrencyCurrency, Communications Communications Divi-­

sion, Washington,ashington, DC, 20219. OCC News 

Release, NR 96-125, 11/12/96. Release, NR 96-125, 11/12/96. 

Federal Financial Federal Financial 

Institutions Examination Institutions Examination 

Council (FFIEC) Council (FFIEC) 

Community Reinvestment Community Reinvestment 

Act (CRA) Information Act (CRA) Information 

DocumentDocument 

The OTS, the OCC, the FDIC, 

and the FRB, under the auspicesauspices of 

the FFIEC, producedproduced a document,document, 

“Inter-agency QuestionsQuestions and An-­

swers RegardingRegarding Community Community Rein-­

vestment.” vestment.” The documentdocument was 

publishedpublished in the Federal RegisterRegister on 

October 21, 1996. It consolidates consolidates in-­

formationformation about the revised CRA 

regulationsregulations issued by the agenciesagencies on 

May 4, 1995, and attemptsattempts to answer 

the most frequentlyfrequently asked questionsquestions 

about community community reinvestment. reinvestment. 

Public comment is invited on a con-­

tinuing basis. tinuing basis. FR,pp.54647-54667,11/21/96.11/21/96. 

Bank Rating System Bank Rating System
 

Updated
 

The FFIEC has expandedexpanded the 

Uniform FinancialFinancial InstitutionsInstitutions Rat-­

ing System, in effect since the late 

1970s, to take into consideration consideration an 

additionaladditional risk component. component. The bank 

rating system known as “CAMEL” 

(which stood for Capital AdequacyAdequacy, 

Asset Quality, Management Management Admin-­

istration,istration, Earnings,Earnings, and Liquidity)Liquidity) 

has now been changed to “CAM-­

ELS” to adjust for a sixth component, component, 

SensitivitySensitivity to Market Risk. The new 

componentcomponent reflectsreflects an institution's institution's 

sensitivitysensitivity to interest-rate interest-rate changes,changes, 

foreign-exchange foreign-exchange rate changes,changes, or 

commoditycommodity or equity price move-­

ments. BBR, pg. 1052, 12/23/96. BBR, pg. 1052, 12/23/96. 

Proposed Electronic Filing Proposed Electronic Filing 

Requirement for Requirement for 

Call Reports Call Reports 

The FRB, the FDIC, and the 

OCC, under the aegis of the FFIEC, 

requestedrequested commentscomments on whether to 

discontinuediscontinue Call Reports in hard copy 

form and to require them to be filed 

electronically electronically or on computercomputer disk-­

ette with the agencies'agencies' electronicelectronic col-­

lection agent. Written commentscomments 

were requiredrequired by January 3, 1997. FR, pp. 

56737 -56740, 11/4/96. 56737 -56740, 11/4/96. 

Federal Deposit 

InsuranceInsurance CorporationCorporation 

Electronic Banking Electronic Banking
 

Issues
 

On SeptemberSeptember 12, the FDIC host-­

ed a day-longday-long public hearing on the 

technological technological changes occurringoccurring in 

banking,banking, finance and commercecommerce as a 

result of the evolutionevolution of electronicelectronic 

banking.banking. The hearing focused on the 

use of stored-value stored-value cards and federal 

insurance;insurance; what disclosuresdisclosures financialfinancial 

institutionsinstitutions should provide to con-­

sumers; and safety-and-soundness safety-and-soundness 

concerns.concerns. The hearing followedfollowed an 

FDIC Board decisiondecision that funds rep-­

resentedresented by stored-value stored-value cards are not 

26 
Recent Developments 

generallygenerallyprotectedprotectedbyfederaldeposit 

insurance.insurance. 

Subsequent Subsequent to this public hearing,hearing, 

the FDIC has begun a monthly “Cy-­

berbankingberbanking SpeakersSpeakers Series” for its 

employees,employees, which is concernedconcerned with 

issues related to electronicelectronic banking.banking. 

The series focuses on the latest elec-­

tronic technologies technologies and the implica-implications for the financialfinancial regulatoryregulatory 

system. The first event, held on No-­

vember 6, 1996, focused on two new 

developments: developments: “smart-cards” “smart-cards” and the 

government's government's plans to pay all benefitsbenefits 

electronically electronically by the year 1999. The 

second event, held in DecemberDecember, fo-­

cused on regulationregulation in the world of 

electronic banking. electronic banking. FDIC News, pp. 1-6, 

10/96. 

Semiannual Agenda Semiannual Agenda
 

of Regulations of Regulations
 

The FDIC publishedpublished its most re-­

cent semiannualsemiannual regulatoryregulatory agenda in 

the Federal RegisterRegister on NovemberNovember 29, 

1996. The FDIC publishespublishes the 

agenda to inform the public of its 

regulatoryregulatory actions and to encourageencourage 

participation participation in rulemaking. rulemaking. Many of 

the rules have been sponsoredsponsored jointly 

with the other financialfinancial regulatoryregulatory 

agencies.agencies. Some are in responseresponse to the 

Federal Deposit InsuranceInsurance Corpora-Corporation Improvement Improvement Act and the Riegle 

Community Community Development Development and Regu-­

latory Improvement Act of 1994. latory Improvement Act of 1994. 

The agenda providesprovides informationinformation 

about the FDIC's current and pro-­

jected rulemakings, rulemakings, as well as infor-­

mation on existingexisting regulationsregulations under 

review, and completedcompleted rulemakings. rulemakings. 

There are 34 final or proposedproposed 

changes to FDIC regulationsregulations in the 

most recent agenda. IncludedIncluded in this 

agenda is the action imposingimposing the 

one-timeone-time special assessment assessment on 

SAIF-insured SAIF-insured institutionsinstitutions and the 

final rule loweringlowering SAIF assessments. assessments. 

FDIC News Release,Release, PR-91-96,PR-91-96, 12/3/96;12/3/96; FR, pp. 

63460-63469, 11/29/96. 63460-63469, 11/29/96. 

Expansion of Data on Expansion of Data on
 

World Wide Web World Wide Web
 

The FDIC expandedexpanded it presencepresence 

on the World Wide Web by providingproviding 

statisticalstatistical data on individualindividual FDICinsured depositorydepository institutions. institutions. Us-­

ers are now able to search FDIC rec-­

ords by institution,institution, state, charter 

type, and asset or deposit size. Avail-­

able data include quarterlyquarterly and annual 

statisticsstatistics on income and expensesexpenses and 

key profitabilityprofitability ratios; institutional institutional 

health and performance performance ratings are 

not available,available, however. There is no 

charge for the service.service. The InternetInternet 

address for the FDIC service,service, called 

the InstitutionInstitution Directory, o r ID service,service, 

is www.fdic.gov.fdic.gov. BBR, pg. 1004, DecemberDecember 

16, 1996; FDIC News Release,Release, PR-94-96,PR-94-96, 12/10/96.12/10/96. 

Bank Insurance Fund (BIF) Bank Insurance Fund (BIF) 

Premiums Remain at Premiums Remain at 

Same Level Same Level 

Due to the current financialfinancial 

strengthstrength of the banking industryindustry and 

the Bank InsuranceInsurance Fund (BIF), the 

FDIC Board of DirectorsDirectors voted to 

maintainmaintain assessmentassessment rates for the BIF 

at current levels (0 to 27 cents per 

$100 of assessableassessable deposits)deposits) for the 

first six months of 1997. The Board 

also voted to collect an assessmentassessment 

against BIF-assessable BIF-assessable depositsdeposits to be 

paid to the FinancingFinancing Corporation Corporation 

(FICO) as authorizedauthorized by the Deposit 

InsuranceInsurance Funds Act of 1996 (Funds 

Act); eliminatedeliminated the $2,000 minimum 

annual assessmentassessment as requiredrequired by the 

Funds Act; and authorizedauthorized the refund 

of the fourth-quarter fourth-quarter portion of the 

semiannual semiannual minimum assessment assessment 

($500) charged to all BIF members.members. 

Approximately Approximately 8,700 institutionsinstitutions will 

receive the refund of $500 plus inter-­

est. As of June 30, 1996, the BIF re-­

serve ratio was 1.32 percent. ratio was 1.32 percent. BBR, pg. 

911, 12/2/96; 911, 12/2/96; FDIC, FIL-99-96, 12/9/96. FDIC, FIL-99-96, 12/9/96. 

Savings Association Savings Association 

Insurance Fund (SAIF) Insurance Fund (SAIF) 

and FICO Assessments Set and FICO Assessments Set 

The FDIC lowered SAIF assess-­

ment rates to a range of 0 to 27 cents 

per $100 in assessableassessable depositsdeposits for the 

first six months of 1997. The new 

rates are identicalidentical to those previouslypreviously 

approvedapproved for BIF members,members, and be-­

came effectiveeffective October 1, 1996, for 

Sasser and Oakar institutions, institutions, and 

January 1 for all other SAIF-insured SAIF-insured 

institutions. institutions. The Board had previ-­

ously establishedestablished a risk-basedrisk-based sched-­

ule for SAIF assessmentassessment rates ranging 

from 4 to 31 cents per $100 of assess-­

able deposits,deposits, and was permittedpermitted to 

adjust the scheduleschedule by as much as five 

cents without notice-and-comment notice-and-comment 

rulemaking. rulemaking. 

The FDIC Board also set FICO 

assessmentassessment rates for the 1997 first 

semiannualsemiannual period at 6.48 basis points 

for SAIF members and 1.30 basis 

points for BIF members.members. These rates 

are in additionaddition to the insuranceinsurance funds' 

assessments. assessments. FDIC News Release,Release, PR-95-96,PR-95-96, 

12/11/96.12/11/96. 

Oakar Bank Reporting Oakar Bank Reporting
 

Requirements Requirements
 

The FDIC has adopted a final 

rule, effectiveeffective January 1, 1997, limit-­

ing Oakar institutionsinstitutions to membership membership 

in their primary insuranceinsurance fund only. 

Oakar institutions institutions belong to one 

FDIC insuranceinsurance fund but hold de-­

posits that are insured by the other 

FDIC insuranceinsurance fund. AccordingAccording to 

the new rule, BIF-member BIF-member banks will 

continuecontinue to be BIF-members BIF-members after 

acquiringacquiring SAIF-insured SAIF-insured depositsdeposits in 

Oakar transactions. Oakar transactions. BBR, pg. 911, 12/2/96.12/2/96. 

Real-Estate Markets Real-Estate Markets
 

Continue to Improve Continue to Improve
 

The outlook for the nation'snation's realestate markets continuedcontinued to be favor-­

able during the third quarter of 1996 

accordingaccording to the FDIC's October 1996 

Survey of Real Estate Trends. The 

quarterlyquarterly survey asks field personnelpersonnel 

from all federal bank and thrift regu-­

latory agenciesagencies about developments developments 

during the prior three months in their 

local real-estatereal-estate markets.markets. The na-­

tional compositecomposite index, summarizing summarizing 

assessments assessments of both commercialcommercial and 

residentialresidential real-estatereal-estate markets,markets, stood 

at 67 in October, down slightlyslightly from 

68 in July. Values above 50 indicateindicate 

that more examinersexaminers and asset man-­

agers at federal bank and thrift regula 

tory agenciesagencies thought conditionsconditions 

were improving than declining. were improving than declining. 

27 
FDIC Banking Review 

Respondents to the survey were 

especially positive concerning trends 

in commercial markets. The October 

commercial summary index rose to 

72, the most positive assessment of 

this market in over two years. Almost 

half of the respondents — 46 percent 

— reported improving conditions in 

the commercial market compared to 

38 percent in the previous quarterly 

survey. Additionally, 29 percent of 

the respondents reported an oversupply of commercial space — the 

lowest level since the survey began. 

Eighty-four percent reported aboveaverage or average commercial property sales. 

The commercial real-estate survey results showed strong geographic 

differences. While 68 percent of the 

respondents considered the commercial market in the West a little better 

or a lot better than three months before, 

48 percent in the South, 39 percent in 

the Northeast, and 33 percent in the 

Midwest felt similarly. Only 2 percent of all respondents considered 

the direction of the commercial market to be a little worse. 

Residential markets, while continuing to be strong, did not register 

the improvements in these markets 

observed earlier. The summary index 

for residential markets fell to 63 in 

October from 69 registered in July. 

Overall, 35 percent of the respondents to the October survey considered the general direction of the 

housing market better than three 

months before; in July, 45 percent of 

the respondents saw an improved 

housing market. 

Again, the residential survey results showed wide geographic disparities. The assessment for the West 

again was the most positive, with 55 

percent of respondents reporting better housing conditions there over the 

quarter. This compares to 35 percent 

of the respondents in the Northeast 

and South, and 24 percent in the Midwest reporting improvements. 

The positive real-estate assessments reported from the West reflect 

to a large extent improved conditions 

in California. Almost two-thirds of the 

respondents reported improving commercial markets in California, and 70 

percent reported a strengthened California residential market. Survey of Real 

Estate Trends, July 1996 and October 1996. 

Federal Reserve Board 

FRB Adopts Final
 

Reg M Rule
 

On September 18, the FRB 

adopted a final rule amending Regulation M, substantially changing the 

way auto-leasing firms disclose the 

cost of leasing a car. The final rule requires that charges be presented in a 

more intelligible format, and for the 

first time, requires disclosure of the 

total amount due when a lease is 

signed. According to the Consumer 

Bankers Association, leasing has increased 30 to 40 percent annually 

over recent years at some banks. The 

new disclosure requirements go into 

effect on October l, 1997. BBR, pg. 438­

439, 9/23/96. 

FRB Recommends
 

Additional Day for
 

Holding Deposits
 

On October 9, 1996, the FRB recommended to Congress that banks be 

allowed to hold funds deposited by 

check an additional day before requiring consumer access to the funds. 

Current law allows banks to hold 

funds for two days, but most banks allow access to the funds before the 

two-day period due to competitive 

pressures. Check fraud costs the financial industry $600 million a year. 

According to the FRB study, an additional day-hold would catch 80 percent of all local returned checks 

before the funds were released. BBR, 

pg. 623, 10/14/96. 

Amendment to Loans to
 

Insiders Regulation
 

In November 1996, the FRB 

amended its Regulation O, which imposes limits on loans to insiders and 

insiders of affiliates, and requires that 

any such insider loans not be on terms 

unavailable to those not affiliated 

with the bank or affiliate. The 

amendment was in response to, and 

conforms with, the Economic Growth 

and Regulatory Paperwork Reduction Act of 1996, which amended the 

preferential lending prohibition by 

allowing extension of credit to insiders as long as the credit was available 

to all employees of the lending bank, 

and insiders were not given preference over other employees. The 

OTS has also incorporated the FRB 

amendment, and savings associations 

and their subsidiaries will be treated 

in the same manner as banks in this 

regard. FR, Vol. 61, No. 218, pp. 57769­

57770, 11/8/96; FR, Vol.61, No. 224, pg. 58782, 

11/19/96; OTS Transmittal, No. 161, 11/26/96. 

Rules Amended Expediting 

Bank Entry into 

Other Businesses 

On October 23, the FRB issued interim rules expediting the application process for well-capitalized bank 

holding companies to enter new nonbank lines of business. The new rule 

implements provisions of the Economic Growth and Regulatory Paperwork Reduction Act, signed by the 

President on September 30, which 

allowed bank holding companies to 

enter activities permitted under Regulation Y without first notifiying the 

FRB. 

The new rule applies only to wellcapitalized bank holding companies. 

Under the new rule, the FRB defines 

well-capitalized bank holding companies as those which, on a consolidated basis: (1) maintain a total riskbased capital ratio of 10 percent or 

more; (2) maintain a Tier 1 risk-based 

capital ratio of 6 percent or more; (3) 

maintain either a Tier 1 leverage ratio 

of 4 percent or more, or have a composite 1 rating, or have implemented 

risk-based capital measures for market risk; and (4) are not subject to any 

written agreements to meet and 

maintain capital levels for any capital 

measure. BBR, pg. 683, 10/28/96. 

28 
Recent Developments 

Preferred Stock to
 

Count for
 

Core Capital
 

The FRB announced on October 

21, 1996, that bank holding companies may use certain cumulative preferred stock to meet Tier 1 capital 

requirements. The preferred stock 

should be issued by special-purpose 

wholly-owned subsidiaries, who lend 

the proceeds of the offerings to the 

parent through long-term, subordinated notes. BBR, pg. 685, 10/28/96. 

External Audits for
 

Poorly Managed
 

Foreign Branches
 

to Be Required
 

The FRB, in a November 12 guidance to bank examiners, is requiring 

all foreign bank branches, with 

mangement ratings of three or lower, 

to hire independent accountants to 

perform audits of the branches. The 

auditors are to look for unreported 

losses; to verify the accuracy of reports filed with regulators; and to recommend improvements to internal 

controls and oversight. This development follows the Daiwa bank scandal, in which a New York branch of 

this Japanese bank hid a $1.1 billion 

loss from regulators. AB, 11/18/96. 

Fees for Electronic Funds 

Transfers Reduced 

Effective January 2, 1997, the 

FRB lowered the price for Fedwire 

funds transfers to 45 cents per transaction. The FRB estimates that this 

reduction, coupled with one made in 

September, should save the industry 

over $18 million annually. The FRB 

has also lowered fees on automated 

clearinghouse transactions. AB, 11/6/96. 

Other FRB Actions 

Effective November 12, 1996, the 

FRB will exclude corporate and municipal bond interest of “easily-sold” 

securities from the cap on commercial 

underwriting revenue. This change 

will permit certain Section 20 subsidiaries to earn more from underwriting 

activities. Effective October 21, the 

FRB also revised the list of fees that 

banks must disclose under the Truthin-Lending Act. The FRB also provided some lawsuit relief to banks by 

increasing the amount by which they 

could misstate finance charges and 

avoid liability. 

At a meeting of the FRB on December 20, the FRB withdrew a proposal that would have encouraged 

banks to record the race and gender of 

consumer and small-business borrowers. At the same meeting, the 

FRB raised the revenue limit on securities underwriting by commercial 

banks through their Section 20 subsidiaries from 10 percent to 25 percent. It also adopted a rule protecting 

the confidentiality of fair-lending 

self-tests. AB, pg. 3, 9/13/96; AB, 12/23/96; 

WSJ, 12/23/96. 

Office of the Comptroller 

of the Currency 

Derivatives Activity
 

Increases
 

The OCC reported that commercial bank derivatives activity increased dramatically in the second 

quarter of 1996, with the notional 

amount of bank derivatives rising 

$1.2 trillion to $19 trillion for the 

quarter. Nine banks accounted for 94 

percent of the total notional amount 

of derivatives; 507 banks held derivatives during the quarter, an increase 

of 42 over the previous quarter. Interest-rate and foreign-exchange contracts accounted for 98 percent of the 

notional amount of the derivatives. 

Approximately $8 trillion of the derivatives were futures and forward 

trades; swaps constituted almost $7 

trillion; and over $4 trillion of the derivatives were options. OCC News Release, 

NR 96-97, 9/13/96. 

OCC Provides Incentives 

to Banks Entering 

Low-Income Areas 

The OCC has waived branching or 

chartering fees for national banks 

entering low- and moderate-income 

areas that are unserved by other depository institutions. These fees 

range from $700 for opening a branch 

to $17,400 for receiving an independent bank charter. According to the 

OCC, 12 million U. S. households, or 

12.5 percent of the population, do not 

have an account with a depository institution. The OCC is also planning 

an educational forum to assist bankers in understanding the banking 

needs of this population. AB, 10/1/96. 

Insurance Sales 

In November, the OCC gave permission to First Union Corp. and 

Mellon Bank to sell and market insurance anywhere, including from bank 

offices, as long as the insurance applications were processed, and the 

agent commissions paid, from a town 

with fewer than 5,000 persons. AB, pg. 2, 

11/14/96. 

Expedited Process Allowing 

Bank Entry into 

Other Activities 

The OCC issued a final rule on 

November 20, 1996, revising OCC 

Part 5 rules governing bank corporate 

activities. The new rule creates an 

expedited approval process for wellmanaged and well-capitalized banks 

(banks with a CAMEL 1 or 2 rating, a 

Satisfactory CRA rating, and without 

enforcement orders against them) to 

enter into other bank-related businesses through their subsidiaries. 

Banks may also apply for approval to 

engage in business activities through 

subsidiaries that are impermissible 

for the parent, but these requests will 

not receive expedited approval. The 

new rule is expected to facilitate entry into securities and insurance underwriting, data processing, and 

information delivery by bank subsidiaries. The rule took effect on December 31, 1996. BBR, pp. 873-875, 11/25/96. 

OCC Amends Rules on
 

National Bank Trust
 

Activities
 

Effective January 29, 1997, the 

OCC has eliminated several restrictions governing bank fiduciary activities. The new rules removed many 

restrictions on collective investment 

29 
FDIC Banking Review 

funds. They rescind an OCC provision barring individual trust accounts 

from constituting more than 10 percent of a collective investment fund; 

eliminate another provision barring 

banks from putting more than 10 

percent of a fund into one investment; eliminate restrictions on treatment of a fiduciary's money before it 

is invested; and codify an earlier OCC 

interpretive ruling that national 

banks in a particular jurisdiction have 

the same powers as state-chartered fiduciaries. AB, 12/31/96. 

Office of Thrift Supervision 

Lending and Investment 

Regulations Streamlined 

The OTS issued a final rule, effective October 30, 1996, that updated, 

reorganized and streamlined its lending and investment regulations. The 

final rule almost cut in half the 

number of lending and investment 

regulations — from 43 to 22 — and 

brings OTS regulations more in line 

with those of the other banking agencies. In many instances, more general 

rules have replaced detailed rules to 

allow institutions greater flexibility. 

For convenience, all lending-related 

regulations have been reorganized in 

new Part 560. Other changes are: the 

rule increases thrifts' commercial 

lending authority through service 

corporations; does away with limits 

on the amount of loans relative to the 

value of collateral and payback periods for manufactured housing; modifies requirements for the selection of 

indices to set interest rates on 

adjustable-rate mortgages; narrows 

disclosure requirements for 

adjustable-rate mortgages; modifies 

restrictions on federal savings institutions in regard to investment in state 

housing authorities and government 

obligations; and relaxes limits on leasing. 

The Economic Growth and Regulatory Paperwork Reduction Act of 

1996, passed by Congress on September 30, 1996 — the same day as the 

OTS new regulation — expands 

thrift lending powers in many instances beyond that provided in the 

final rule. The OTS will issue guidance to thrifts on the impact of this 

new law. OTS Transmittal, No. 158, 10/24/96; 

FR, pp. 50951-50984, 9/30/96. 

Expanded Lending and
 

Investment Authority
 

for Thrifts
 

The OTS published interim rules 

on November 27 expanding thrifts' 

ability to make credit-card, education, and small-business loans. Although the regulation is in effect immediately, the OTS invites comments for 60 days. 

The rule changes implement provisions of the Economic Growth and 

Regulatory Paperwork Act of 1996 

(EGRPRA). EGRPRA permits thrifts 

to make credit-card and educational 

loans without any percentage of assets investment limit. Additionally, it 

permits loans secured by business or 

agricultural real estate to be made in 

amounts up to 400 percent of capital, 

with additional secured and unsecured business and farm loans allowed in amounts of up to 20 percent 

of assets. It restricts loans above 10 

percent of assets to small-business 

loans. The new law also amends the 

qualified thrift lender (QTL) test of 

the Home Owners' Loan Act to count 

small-business, credit-card, and educational loans as qualified thrift investments without restriction; other 

consumer loans can now count as 

qualifed thrift investments in 

amounts up to 20 percent of the 

thrifts' assets. The legislation also 

gives thrifts the option of complying 

with the amended QTL test requirements or the Internal Revenue's domestic building-and-loan association 

compliance requirements. BBR, pg. 929, 

12/2/96; OTS Transmittal, Number 163, 12/2/96; 

FR, Vol. 61, pp. 60179-60185, 11/27/96. 

Corporate Governance
 

Rules Streamlined
 

The OTS revised its corporate 

governance rules, effective January 1, 

1997. The revisions, the first since 

1983, reduced by 36 percent the 

number of charter and bylaw rules 

and policy statements on corporate 

governance. Savings institutions may 

now notify the OTS after adopting 

charter and bylaw amendments that 

have been preapproved by the 

agency rather than filing an application and paying a fee. The final rule 

permits federal stock savings associations, and in some cases federal mutual savings associations, to follow the 

corporate governance law of their 

home state, their holding company's 

home state, or Delaware General 

Corporation Law or the Model Business Corporation Act. Other revisions 

remove restrictions on the location of 

shareholder meetings; authorize the 

gathering of proxies by telephone or 

electronically; and remove requirements for formal stockholder meetings when unanimous written 

consent of shareholders exists. The 

revisions do not require any institutions to change their charters. OTS Transmittal, No. 164, 12/10/96; FR, Vol. 61, No. 233, 

pp. 64007-64021. 

National Credit Union 

Administration 

Multiple-Group Fields
 

of Membership
 

A three-judge D. C. Circuit Court 

ruled on July 30 (First National Bank 

& Trust Co. v. National Credit Union 

Administration) that federal credit 

unions may only serve members of a 

single occupational group. At yearend 1995, almost 2,000 of the approximate 7,300 federal credit unions had 

multiple-group fields of membership. The NCUA has permitted 

multiple-occupational groups for federal credit unions since 1982. 

Following the Circuit Court ruling, the NCUA requested a delay to 

enforcement of a October 25 injunction banning federal credit unions 

from adding new groups from outside 

the single occupational common 

bond to existing fields of membership. Also, on November 14, the NCUA 

adopted interim rules permitting 

occupation-based credit unions to 

serve an entire profession rather than 

just the employees of a single company, subject to certain distance restrictions. The NCUA plan also would 

30 
Recent Developments 

allow credit unions with members agency violatedviolated the Administrative Administrative 24, the U. S. Court of Appeals granted 

at several local companiescompanies to retain ProceduresProcedures Act by not publishingpublishing a temporarytemporary stay on the injunctioninjunction and 

members by convertingconverting to community- advancedadvanced notice of the NovemberNovember allowed credit unions the right to serve 

based institutions, institutions, and expandedexpanded the 14 meeting and by not providingproviding all companiescompanies within their existingexisting 

communitycommunity credit union charter to per- advanced notice of the rule change. fields of membership, membership, but preventedprevented 

mit institutionsinstitutions to serve occupational occupational On DecemberDecember 4, the U. S. DistrictDistrict them from signing up new “non-core”“non-core” 

groups, associational associational groups, and Court for D.C. set aside the NCUA members.members. 

community community groups in areas with interim field of membership membership policy and The NationalNational AssociationAssociation of Credit 

populationspopulations of less than a million peo-­ declareddeclared null and void all charter con- Unions on DecemberDecember 30 asked the 

ple. versionsversions and common bond redesigna-redesigna- Supreme Court to hear the case; the 

The tions approvedapproved by the NCUA under its banking industryindustry asked the AmericanAmerican Bankers AssociationAssociation has 

new policy. The Court also denied the court to block the NCUA member- also filed a brief asking the Supreme NCUA's request for a delay of the ship policy on the grounds that the Court to reject the case. BBR,pg.454, 9/23/96;9/23/96;

October 25 injunction.injunction. On DecemberDecember AB, pg. 1, 11/15/96;11/15/96; BBR, pg. 895, 11/25/96;11/25/96; BBR, 

pp. 983-984,983-984, 12/9/96;12/9/96; NYT, 12/25/96;12/25/96; AB, 12/31/96.12/31/96. 

STATE LEGISLATION AND REGULATION STATE LEGISLATION AND REGULATION 

CaliforniaCalifornia new employeeemployee hired above a mini- state savings banks should the courts 

The state of CaliforniaCalifornia enacted mum of 50 beginningbeginning in 1997. In or- ultimatelyultimately disallowdisallow expansionexpansion outside 

legislation,legislation, effectiveeffective January 1, 1997, der to qualify for the credit, the banks a credit union's originaloriginal common bond. 

protectingprotecting banks from toxic waste must invest a minimum of $15,000 Thirty other states currentlycurrently offer a 

cleanup liabilityliability under state and local per new employee.employee. The credit may state savings bank charter. AB, 12/10/96.12/10/96. 

law. The new statute providesprovides im-­ not exceed half of the bank's fran-­

munity from environmental environmental clean-up chise tax.chise tax. AB, pg. 3, 11/15/96. AB, pg. 3, 11/15/96. MichiganMichigan

costs to unsecuredunsecured lenders and fidu- The MichiganMichigan FinancialFinancial Institu-Institu- ciaries if they were not responsibleresponsible Florida

tions Bureau reduced many of the for the contamination contamination and did not State regulatorsregulators in Florida have fees it charges its financialfinancial institu-institumanage the propertyproperty before foreclo-foreclo­ proposedproposed a new state savings bank tions, beginningbeginning in October 1996. sure. The state statute expands re-­ charter that would allow either mu- Bank applicationapplication fees were reduced cently passed federal protections, protections, tual or stock form of ownership.ownership. The 

which to $6200 from $9000; consolidation protectedprotected only lenders with a state currentlycurrently offers charterscharters for

securitysecurity interestinterest in the propertyproperty. applicationapplication fees were cut to $1800 commercialcommercial banks and savings and CaliforniaCalifornia environmental environmental laws are from $2200; and fees to convert to a loans; the state did away with mutual consideredconsidered to be the toughesttoughest in the state bank were decreaseddecreased to $1300 ownershipownership in 1992. The proposedproposed nation according to its state banking from $2200. It also abolishedabolished the re-­

state charter would allow thrifts to trade group. AB, 11/4/96.11/4/96. quirementquirement that banks publish the re- continuecontinue in businessbusiness should the fedDelawareDelaware locationlocation of principalprincipal offices and new eral thrift charter be merged into a branches,branches, and abolishedabolished the $1000 Banks in DelawareDelaware are eligibleeligible to federal bank charter. It might also be fee. AB, 11/25/96. receive a $400 tax credit for every used by credit unions to convert to 

BANK AND THRIFT PERFORMANCE BANK AND THRIFT PERFORMANCE 

President Signs Small- thrifts.thrifts. Under this new law, thrifts the 50 percent interestinterest exclusionexclusion on 

Business Tax Bill Business Tax Bill need only record as income bad-debtbad-debt EmployeeEmployee Stock OwnershipOwnership Plan 

On August reservesreserves set aside after 1987 rather loans made by financialfinancial institutions; 20, 1996, PresidentPresident 

Clinton than their entire bad-debtbad-debt reserves.reserves. creates “financial“financial asset securitizasecuritiza- signed the Small BusinessBusiness 

This removes a major financialfinancial dis-­ tion investmentinvestment trusts (FASITs), al- Jobs ProtectionProtection Act, which containscontains 

incentiveincentive for thrifts convertingconverting to lowing for the securitization securitization of debt some major provisionsprovisions affectingaffecting de-­

banks. Additionally, the new law al- obligations;obligations; and allows some financialfinancial positorypository institutions. institutions. Of special im-­

lows for tax-freetax-free conversionconversion of com- institutionsinstitutions to be eligibleeligible for Sub-­ portance,portance, it repeals the InternalInternal 

Revenue Code mon trust funds to mutual funds; chapter S Tchapter S Treatment.reatment. BBR, pg. 281, Section 593 bad-debtbad-debt 

subject to certain restrictions,restrictions, repeals 8/26/96.8/26/96. reserve recapturerecapture requirements requirements for 

31 
FDIC Banking Review 

SAIF Capitalization Bill 

Enacted 

On September 30, 1996, President 

Clinton signed legislation capitalizing the SAIF and warding off a default on FICO bonds. The legislation 

also approximately equalized the premiums that banks and savings and 

loans pay for insurance. Legislation 

to capitalize the SAIF had been debated for two years. The new legislation requires the banking industry to 

assist in paying the $8 billion in interest on FICO bonds. According to the 

legislation, the thrift industry is responsible for approximately 59 percent of the $780 million annual 

interest for the next three years, and 

the banking industry the remainder. 

After three years, the two industries 

will share the cost on a pro rata basis. 

Thrifts are also required to make a 

one-time payment of $4.7 billion to 

capitalize the SAIF. The only exception to the special assessment is for 

banks that own thrift deposits (for example, Sasser and Oakar banks), 

whose special assessment has been 

reduced by 20 percent. The Washington 

Post, 10/2/96; FDIC News, pg. 1, 11/96; AB, 

10/2/96. 

Commercial Banks' Earnings 

Commercial bank earnings were 

$38.6 billion for the first nine months 

of 1996, a 4.8-percent increase from 

the same nine-month period a year 

before, according to preliminary data 

released by the FDIC. 

Approximately $13.2 billion in net 

earnings were reported for the third 

quarter of 1996. This represented the 

third-highest quarterly net income 

ever reported, but is a 4.5-percent decline ($618 million) from the previous 

quarter, and a 4.8-percent decline 

($666 million) from third-quarter 

earnings a year earlier. However, almost all of the third-quarter earnings 

decline was due to the one-time 

SAIF assessment. The commercial 

banks' share of the assessment was 

approximately $1 billion, with an 

after-tax net income impact of approximately $650 million. 

Third-quarter net interest income 

was a record $41.4 billion, a 5.2­

percent increase over the third quarter of 1995. More than half — 58 percent — of insured banks reported 

earnings gains for the 1996 third quarter, and almost three-quarters reported return on assets (ROA) in 

excess of one percent. Third-quarter ROA for the industry was an annualized 1.19 percent. Asset-quality 

indicators remained favorable overall, 

with noncurrent loans falling to the 

lowest level in the 15 years that they 

have been reported. However, an increase in troubled loans to individuals, primarily credit-card loans, was 

reported. At the end of the third 

quarter, 2.71 percent of credit-card 

loans were reported 30-89 days overdue; 1.83 percent were reported past 

90 days overdue or in non-accrual 

status; and an annualized year-to-date 

net charge-off rate of 4.31 percent was 

reported. 

Profitability at FDIC-insured savings institutions remained strong despite a reported net loss of $55 million 

for the third quarter of 1996. This loss 

was largely due to the $3.5 billion special SAIF assessment levied on the 

industry. Net earnings for the quarter 

would have been approximately $2.2 

billion, compared to $2.6 billion in 

the previous quarter, absent the SAIF 

assessment. Almost two-thirds of institutions reported losses for the quarter. However, of the 340 savings 

institutions with no SAIF deposits, 

only 5 percent were unprofitable for 

the quarter. Net earnings for the first 

three quarters of 1996 were $4.9 billion, a decrease of $1.1 billion from 

net earnings for the third quarter the 

previous year. 

The SAIF became fully capitalized as of October 1, 1996. A special 

assessment against all SAIF-assessable deposits raised $4.5 billion, 

which brought the SAIF reserve ratio 

to 1.27 percent of insured deposits. The 

FDIC Quarterly Banking Profile, Second Quarter 

1996 and Third Quarter 1996; FDIC News Release, PR-75-96, 9/11/96; PR-96-96, 12/13/96. 

Delinquency Rates Improve 

in Third Quarter 

According to an OCC survey of examiners at the 82 largest national 

banks, released on September 11, 

credit risk increased for the 12-month 

period ending May 1996, despite 

tightening of retail underwriting 

standards. The survey reported that 

credit cards, middle-market commercial loans and indirect consumer loans 

were responsible for most of the increased risk during the period. 

At the same time, the FDIC reported a sharp rise in charge-off rates, 

with levels rising from 1.40 percent of 

loans during the second quarter of 

1994 to 2.24 percent of loans during 

the second quarter of this year. The 

American Bankers Association (ABA) 

also reported a 13-basis point rise in 

late credit-card payments during the 

second quarter of 1996, raising the 

late-payment ratio to 3.66 percent, 

the highest level since 1974. However, according to the ABA, this ratio 

fell to 3.48 percent during the third 

quarter of 1996, the first improvement in two years. 

Meanwhile, the Mortgage Bankers Association reported that the third 

quarter of 1996 represented the third 

straight quarter of improvement in 

mortgage delinquency rates. For the 

three months ended September 30, 

mortgage delinquencies fell to 4.16 

percent on a seasonally adjusted basis 

from 4.35 percent the previous quarter. Improvements in mortgage 

delinquencies occurred in all categories — 30-day, 60-day, and 90-day-ormore delinquencies. AB, pg. 1, 9/12/96; 

BBR, pg. 439, 9/23/96; The Washington Post, 

12/14/96; AB, 12/19/96. 

Tax Ruling Affecting Banks 

The U.S. Tax Court upheld the Internal Revenue Service (IRS) in a dispute over international tax laws, 

ruling that Riggs National Bank of 

Washington, DC, was not entitled to 

the tax write-offs it had taken to reduce taxes on profits from loans to 

Brazil. The Tax Court ruled that 

32 
Recent Developments 

bank and BrazilianBrazilian officialsofficials in an 

“elaborate“elaborate legal fiction”fiction” came up 

with a plan to withholdwithhold taxes from the 

interestinterest paid to the bank, thereby cre-­

ating a U.S. tax write-ofwrite-off that the bank 

passed on to Brazil in the form of 

lower interestinterest rates. The decisiondecision is 

expectedexpected to cost 300 AmericanAmerican banks 

hundredshundreds of millionsmillions of dollars in fed-­

eral taxes.eral taxes. The Washington Post, 12/12/96. ashington Post, 12/12/96. 

Thrifts May Seek Thrifts May Seek
 

“Lost Profits” “Lost Profits”
 

The U. S. Court of Federal Claims 

ruled that thrifts may use the “lost-­

profits”profits” theory to determinedetermine damages 

against the government government for renegingreneging 

on favorablefavorable goodwillgoodwill accounting. accounting. 

Under the lost-profitslost-profits theory, a plain-­

tiff can sue for profits that would have 

been earned had there been no 

breach-of-contract. breach-of-contract. In 1989, the Con-­

gress changed the period for goodwillgoodwill 

amortization amortization from 40 years to five 

years, forcing many thrifts into bank-­

ruptcy. The suit of GlendaleGlendale Federal 

Bank, the first of the more than 100 

thrifts seeking redress,redress, will begin on 

February 24. February 24. AB, 12/20/96. AB, 12/20/96. 

Merger of Federal Merger of Federal
 

Banking Regulators Banking Regulators
 

SuggestedSuggested
 

In a recentlyrecently issued report, the 

General AccountingAccounting Office found the 

bank oversightoversight system in the United 

States to be duplicativeduplicative and ineffi-­

cient, and recommended recommended collapsingcollapsing 

the OTS, the OCC, and the supervi-supervisory and regulatoryregulatory responsibilities responsibilities of 

the FDIC into a new independent independent 

federal banking agency. It recom-­

mended that the FRB maintainmaintain its in-­

dependence, dependence, and also concludedconcluded that 

the FDIC retain its power to examine 

any bank.any bank. AB, 11/27/96. AB, 11/27/96. 

“Smart Cards” “Smart Cards” 

The three major U. S. card compa-­

nies — MasterCard, MasterCard, AmericanAmerican Ex-­

press, and Visa — continue isa — continue to work 

on developing developing consumerconsumer-friendly-friendly 

“smart-cards.” “smart-cards.” MasterCard MasterCard an-­

nounced that it had acquiredacquired 51 per-­

cent of Mondex International, International, a 

British maker of “smart cards.” The 

Mondex card combinescombines credit, debt 

and stored-value stored-value functions.functions. Ameri-­

can Express has also announcedannounced an 

agreementagreement with Banksys,Banksys, a Belgian 

company, to test market its smart 

card. Visa International International has also de-­

veloped a smart card. veloped a smart card. WSJ, 12/19/96. WSJ, 12/19/96. 

Credit-Card Cobranding Credit-Card Cobranding 

Sears Roebuck,Roebuck, which issues its 

own proprietaryproprietary store card, has intro-­

duced a cobrandedcobranded card with MasterCard International, International, and is testing it in 

several markets in the Midwest and 

Texas. The issuer of the card is Sears 

NationalNational Bank of Phoenix.Phoenix. People'sPeople's 

Bank in Connecticut Connecticut has also an-­

nounced that it is issuing a cobrandedcobranded 

VISA card with T.J. Maxx amd Mar-­

shalls. L.L. Bean recentlyrecently issued a 

cobrandedcobranded Visa card with MBNA 

Bank of Delaware. Bank of Delaware. AB, pg. 1, 9/11/96. AB, pg. 1, 9/11/96. 

Fidelity and Schwab Work Fidelity and Schwab Work 

With Banks’ Trusts With Banks’ Trusts 

and Mutual Funds and Mutual Funds 

FidelityFidelity Investments Investments of Boston, 

MA, the mutual fund giant and 

number two discountdiscount broker in the 

United States, bought part of a bank 

trust-processing trust-processing firm in May through 

which it plans to offer record-keeping record-keeping 

servicesservices linking FidelityFidelity funds and 

the FidelityFidelity fund supermarket supermarket to 

bank trust departments. departments. Charles 

Schwab, the number one discountdiscount 

broker in the United States, has an-­

nounced plans to serve as a fundtrading clearinghouse clearinghouse for bank bro-­

kerage firms and trust departments, departments, 

permittingpermitting them to offer Schwab'sSchwab's 

fund supermarket supermarket to bank customerscustomers 

under their own names. WSJ, pg. A5, 9/23/96.9/23/96. 

NationsBank Offering NationsBank Offering 

Its Mutual Funds through Its Mutual Funds through 

Schwab and Fidelity Schwab and Fidelity 

NationsBank NationsBank Corp. of Charlotte,Charlotte, 

NC, has announcedannounced that it will offer 

seven of its 44 mutual funds through 

the Charles Schwab OneSourceOneSource net-­

work. The bank also offers its own 

fund supermarket, supermarket, called Fund Solu-­

tions, and its funds are also availableavailable 

through FidelityFidelity Investment's Investment's FundsNetwork.Network. After its acquisitionacquisition of 

Boatmen'sBoatmen's BancsharesBancshares of St. Louis is 

completed,completed, NationsBank NationsBank will be the 

fourth-larfourth-largest bank manager of mu-­

tual funds.tual funds. AB, pg. 1, 9/11/96. AB, pg. 1, 9/11/96. 

Home Banking Network Home Banking Network 

IBM and 15 major banks, repre-­

senting more than half the retail 

banking populationpopulation of the United 

States and Canada, formed a home 

banking network,network, IntegrionIntegrion Finan-­

cial Network.Network. IntegrionIntegrion will offer 

bank-branded bank-branded remote banking serv-­

ices through the Internet,Internet, on-line 

consumerconsumer networks,networks, personalpersonal finan-­

cial software,software, and telephone.telephone. The 

network is expectedexpected to compete with 

systems currentlycurrently operatedoperated by Micro-­

soft and Intuit, which have been pro-­

viding on-line banking softwaresoftware that 

connectsconnects to dozens of financialfinancial insti-­

tutions.tutions. IntegrionIntegrion will allow any bank 

to join its network,network, and says it is inter-­

ested in signing up banks as either ad-­

ditionalditional co-ownersco-owners or customers.customers. 

Both owner-banks and customercustomerbanks will be charged the same serv-­

ice rates. On DecemberDecember 2 the FRB 

approvedapproved purchasespurchases of voting shares 

in IntegrionIntegrion for Norwest Corp. of 

Minneapolis Minneapolis and several foreign 

banks. AB, pg. 1, 9/10/96,9/10/96, The Washingtonashington 

Post, 9/10/96; Post, 9/10/96; BBR, pg. 954, 12/9/96. BBR, pg. 954, 12/9/96. 

Foreign Bank Activities Foreign Bank Activities 

Japan 

JapaneseJapanese bank regulatorsregulators an-­

nounced the closure of Hanwa Bank, 

the first closure of a JapaneseJapanese bank in 

the postwar era. Hanwa, a regionalregional 

commercialcommercial bank, made substantialsubstantial 

real-estatereal-estate loans through two affili-­

ates during the 1980s, and has re-­

ported $694 million in bad loans. The 

Bank of Japan is reportedlyreportedly extendingextending 

more than $360 million in loans to re-­

pay depositors. pay depositors. The Washingtonashington Post, 11/22/96.11/22/96. 

Mexico 

The government government of Mexico plans 

to begin to dispose of the estimatedestimated 

$40 billion in assets (book value) that 

it acquiredacquired in its bank-bailout bank-bailout effort. 

The assets consist primarilyprimarily of loans 

and real estate. The government government has 

created an agency called Asset Valua-­

tion and Sale (VVA). The VVA is ex-­

pected to begin the sales by holding 

two auctionsauctions early in 1997. WSJ, 12/23/96.12/23/96. 

33