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Banking Interpretations

November 7, 1985

John D. Hardy, Jr., Esq.
O'Melveny & Myers
680 Fifth Avenue
New York, New York 10019

Dear Mr. Hardy:

I am writing in reply to your letter of October 24, 1985 addressed to Deputy Superintendent and Counsel David T. Halvorson by which you sought an opinion from the Banking Department that it is within the incidental powers of a New York savings bank under Banking Law sections 234(1) and (23) to establish finance subsidiaries which would issue preferred stock. It is our opinion that a savings bank's finance subsidiaries, whether the savings bank is itself a mutual or stock-form corporation, may issue preferred stock, such as the Preferred Auction Rate Stock designed by Bankers Trust Company.

The conclusion that a savings bank may exercise its B.L. §234(5-a) borrowing authority by means of the issuance of preferred stock by a wholly-owned subsidiary relies upon an analysis focusing on the desired goal of the transaction. Savings banks were first granted the power to borrow money for purposes other than the repayment of depositors in the early 1950's to provide them with an additional means to obtain cash with which to carry on the banking business (see memorandum in support of Chapter 399 of the Laws of 1953 at pages 108-109 of 1953 New York State Legislative Annual). The authority has been expanded over time until at present no statutory limits are imposed on such borrowings. The same legislation that subjected borrowings to none but regulatory constraints (Chapter 1 of the Laws of 1984) also enhanced savings banks' ability to fund themselves by empowering them to issue negotiable certificates of deposit. The issuance of equity securities, rather than the debt instruments discussed in my June 5, 1985 letter, as the financing device to be used by a savings bank to leverage its assets is viewed by us as being consistent with the borrowing power of savings banks, the issuance of the preferred stock, like the issuance of common stock to the parent savings bank, being merely a corporate power of stock corporations. This approach is further supported by our understanding that the proceeds of the preferred stock issue would be accounted for as borrowings on the parent's balance sheet.

The aggregate limitation on the parent savings bank's secured borrowings imposed by General Regulations of the Banking Board, Part 93 applies to financing by means of the issuance of preferred stock, as would any other limitations the Banking Board may in the future adopt concerning savings banks' B.L. §234(5-a) authority. The only other current restriction, not made explicit in my earlier letter, is that a finance subsidiary may engage in no other activity.

I feel compelled to add one further point, more as an aside than in relation to the issue at hand. The opinions and analyses of the Federal bank regulators in interpreting Federal statutes, while of great interest and use to the Banking Department, are not relied upon by this Department as authority for interpreting provisions of State law, and should not be viewed as having any precedential value where questions of State law appear.

I believe this letter satisfies your request.

Very truly yours,

Michael Schussler
Assistant Counsel