Source: https://www.fdic.gov/regulations/laws/rules/4000-350.html
Timestamp: 2019-04-19 02:21:53+00:00

Document:
The following is in response to your request for an opinion regarding the application of proposed Part 349 of FDIC's regulations to *** (the "Bank's") plan to increase its capital accounts. Additionally, your letter raises the question of whether or not the proposed financing arrangements may present problems under 18 U.S.C. § 656 which provides criminal penalties for theft, embezzlement or misapplication of bank funds.
Proposed Part 349 implements Title VIII of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 which generally prohibits any two banks that maintain, or wish to establish, a correspondent relationship from making preferential extensions of credit to each other's directors, executive officers, or principal shareholders.1 A loan will not be considered to be preferential if (1) it is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons that are not covered by the regulation, and (2) it does not involve more than the normal risk of repayment or present other unfavorable features (see § 349.3(b)).
The relevant facts as outlined in your letter are as follows. The Bank is about to increase its capital accounts. In connection with that increase, the *** Corporation, which holds 92.3 percent of the stock of the Bank is going to obtain a loan of $2,400,000 from *** National Bank ***. The Bank and *** will establish a correspondent relationship contemporaneously with the extension of credit.2 At the time of the writing of your letter, no terms had been agreed to on the above loan other than that the loan would be secured by a second lien on the stock of the Bank and a first lien on the stock of *** Corporation.
The loan to *** Corporation by *** is likely to be subject to the restrictions of Part 349. *** is a principal shareholder of the Bank (see footnote 1) and a correspondent relationship will be created contemporaneously with the extension of credit. If the loan is preferential, the Bank would be subject to a fine of up to $1,000 per day for every day in which the violation of Part 349 continues (see § 349.3).
It is entirely possible that the financing package being negotiated between *** and *** may result in a violation of 18 U.S.C. § 656. *** is making a loan to a principal shareholder of the Bank. The Bank is in turn establishing a correspondent account with *** but none of the funds transferred to *** will benefit the Bank. If the correspondent account relationship appears to be detrimental to the Bank as noted above, its maintenance might be considered a misapplication of bank funds within the meaning of 18 U.S.C. § 656. There are several steps the Bank could take to avoid this result. One would be to obtain a letter from *** to the effect that the correspondent account balances are not compensating balances and that the Bank is free to terminate the correspondent relationship at any time. Another would be to compare the "costs" associated with maintenance of the correspondent account with services to be furnished by ***. You should be advised, however, that any determination the FDIC would make with respect to the application of 18 U.S.C. § 656 is not binding. Title 18 of the United States Code is enforced by the U.S. Attorneys and it rests with them as to whether a given set of facts constitutes evidence that a crime has been committed.

References: § 656
 § 349
 § 349
 § 656
 § 656
 § 656