WASHINGTON - The Federal Deposit Insurance Corp. adopted a regulation Tuesday that bars state-chartered banks from offering products or services that national banks may not offer.
Congress in 1991 instructed the FDIC to crack down on states that allow their banks to engage in activities that federal regulators consider unsafe. The same prohibition was slapped on state-chartered thrifts by the 1989 thrift bailout law.
Separately at its open meeting Tuesday, the FDIC proposed a regulation that would require banks to disclose their capital ratings in writing to employee benefit plans.
Move Was Expected
The FDIC's action on state bank powers has been anticipated for months and little in the final rule is surprising. While the new regulation limits what state banks may do, these institutions may apply for an exemption from the ban. The final rule lays out the application procedure.
In a departure from the agency's proposal, the FDI decided to set conditions on exemptions case by case. The original proposal automatically set conditions for every exemption.
For example, as proposed, the FDIC would have deducted from capital the investment any state bank made in a subsidiary offering a product not allowed to national banks. Under the final rule, the FDIC will decide case by case whether the capital set-aside is necessary.
Door Is Wide Open
In the final rule, the FDIC also scrapped a list of activities it said it would never approve for state banks. That means any activity has a shot at approval.
For any product or service the FDIC denies a state bank, institutions will have one year to quit the business. If the activity is being done in a subsidiary, the institution may opt to sell the entire unit. In those cases, the bank has until 1996 to divest.
Robert F. Miailovich, the FDIC associate director who presented the final rule to the board, said the agency does not know for certain how many banks and thrifts will be affected. But the FDIC estimates it will receive 390 applications to continue conducting directly an activity not allowed to national banks, and another 500 applications to continue offering such products or services indirectly through subsidiaries.
Divestitures Expected
The FDIC expects about 230 banks will need to divest products and services currently being offered that go beyond what national banks can do.
On the employee benefit plan proposal, Mr. Miailovich said fund administrators do not know whether deposits are fully covered by insurance.
Under the 1991 banking law, individual participants in employee benefit funds receive the full $100,000 of deposit insurance only if the bank holding the funds is well capitalized or adequately capitalized.
Individual participants in employee benefit plans kept at well-capitalized banks get full insurance automatically.
At adequately capitalized banks, individuals contributing to these funds only get the full coverage if the bank gets approval from the FDIC.
At any bank that is less than adequately capitalized - that is, that has less than 8% risk-based capital and a leverage ratio of 4% or less - the entire employee benefit plan only gets $100,000 of insurance. That means individuals in the plan are exposed to loss if the bank fails.
Notice Required
To guard against these depositors being surprised, the FDIC proposal would require banks to tell employee benefit fund administrators whether individuals in the plan get the full insurance coverage.
Bank would have to provide fund administrators with their capital ratios and their "prompt corrective action" rating. The FDIC said these disclosures would be triggered when requested by an employee benefit fund administrator, a new employee benefit fund account is opened, and a bank's capital drops.
Mr. Miailovich said these rules are likely to encourage employee benefit fund administration to transfer these funds to well-capitalized institutions.
Comments on this proposal will be accepted at the FDIC for 60 days.
