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Banking Interpretations

NYSBL Sections 30 and 606(4)

April 6, 1990

REPLY LETTER

Patricia S. Skigen, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York , N.Y. 10022-4669

Dear Ms. Skigen:

This is in reply to your March 28, 1990 letter in which you ask the Banking Department to concur in your opinion that a New York state-licensed branch of a foreign bank may issue subordinated certificates and that the issuance of such certificates and the implementation of their subordination provisions would not contravene the New York Banking Law or any public policy expressed therein.

Stated simply, such obligations would be junior to general creditors of the bank. Depending upon whether the bank was in default in its home country at the time of the Superintendent's taking possession of the New York branch, the funds remaining in the Superintendent's hands after payment of New York creditors would be either transmitted to the home country receiver or held in New York until the earlier of (a) the obligations' maturity or (b) the date the central bank of the home country approves payment thereof. The foregoing description of the certificates' terms is subject to the more complete and precise description contained in your letter.

The certificates are intended to be issued in minimum denominations of $100,000 and will be accompanied by complete descriptions of their subordination features. Moreover, the terms and conditions thereof do not differ materially from those contained in a subordinated note issue previously passed upon favorably by the Department.

Accordingly, please be advised that the Department concurs in your opinion that such certificates may be issued by the New York branch of a foreign banking corporation.

Very truly yours,

Arthur A. Gelman
First Assistant Counsel

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REQUEST LETTER

March 28, 1990
State of New York Banking Department
Two Rector Street
New York , New York 10006

Attention: Barbara T. Barrantes
Deputy Superintendent and Counsel

Dear Sirs:

On behalf of our client, a New York State-licensed branch (the "New York Branch") of a foreign bank (the "Foreign Bank"), we are writing to request the opinion of the New York State Banking Department (the "Banking Department") with respect to the application of the New York Banking Law (the "NYBL") to subordinated certificates of deposit (the "Subordinated Certificates of Deposit") which the New York Branch proposes to issue. The Subordinated Certificates of Deposit, which are expected to have a maturity of fifteen years, will state that they are governed by New York law and will constitute unsecured obligations of the New York Branch and the Foreign Bank. The Subordinated Certificates of Deposit will be issued in minimum denominations of $100,000 and are expected to qualify as Tier II capital of the Foreign Bank under the risk-based capital guidelines proposed by the central bank of the Foreign Bank's home country (the "Central Bank") in furtherance of the July 1988 Basle Accord. To qualify as Tier II capital of the Foreign Bank under the risk-based capital guidelines proposed by the Central Bank, the Subordinated Certificates of Deposit may not be redeemed or repaid prior to maturity without the prior consent of the Central Bank.

Subordination Provisions

General

  1. The Subordinated Certificates of Deposit will be subordinated obligations of both the New York Branch and the Foreign Bank, and the principal of, interest (including all additional amounts payable in respect of withholding or deduction of taxes as provided in the Subordinated Certificates of Deposit) on, and all other amounts owing under, the Subordinated Certificates of Deposit will be junior in right of payment upon the occurrence of any event of default, all of which relate to the insolvency or winding-up of the Foreign Bank ("Event of Default"), to the prior payment in full of (i) all deposit and other liabilities of the New York Branch and (ii) all deposit and other liabilities of the Foreign Bank (including all deposit and other liabilities of the head office and all other offices of the Foreign Bank wherever located) except, in each case, those liabilities which by their terms rank pari passu with or junior to the Subordinated Certificates of Deposit, and
  2. upon the Superintendent of Banks of the State of New York (the "Superintendent of Banks") taking possession of the business and property of the New York Branch, to the prior payment of all of the deposit and other liabilities of the New York Branch except those liabilities which by their terms rank pari passu with or junior to the Subordinated Certificates of Deposit.

Under the terms of the Subordinated Certificates of Deposit, the holders of the Subordinated Certificates of Deposit irrevocably waive their rights as "preferred creditors" under Section 606.4 of the NYBL to the extent necessary to effectuate the subordination provisions of the Subordinated Certificates of Deposit.

Subordination in the Event of Default and Upon the Taking of Possession of the New York Branch by the Superintendent of Banks

In order to implement the subordination provisions of the Subordinated Certificates of Deposit, the holder of a Subordinated Certificate of Deposit would agree, by purchasing or otherwise acquiring the same, that in the event the Superintendent of Banks takes possession of the business and property of the New York Branch after an Event of Default has occurred and is continuing (hereinafter a "Continuing Event of Default"), the Superintendent of Banks will apply any amounts that would be due to the holders of the Subordinated Certificates of Deposit in the absence f the subordination provisions (1) first, to the payment in full of all deposit and other liabilities of the New York Branch (other than the Subordinated Certificates of Deposit and other obligations of the New York Branch ranking pari passu with or junior to the Subordinated Certificates of Deposit) and (2) thereafter, to any receiver or similar administrator in insolvency of the Foreign Bank with similar powers appointed with respect to the Foreign Bank or its assets for application (i) first, to the payment in full of obligations of the Foreign Bank ranking senior in right of payment to the Subordinated Certificates of Deposit and (ii) thereafter, to the payment of the Subordinated Certificates of Deposit and all obligations ranking pari passu in right of payment with the Subordinated Certificates of Deposit.

Subordination Upon the Taking of Possession of the New York Branch by the Superintendent of Banks

By acquiring a Subordinated Certificate of Deposit, the holder thereof also would agree that if the Superintendent of Banks takes possession of the business and property of the New York Branch at any time when there is no Continuing Event of Default, the Superintendent of Banks will pay in full all deposit and other liabilities of the New York Branch which by their terms do not rank pari passu or junior in right of payment to the Subordinated Certificates of Deposit prior to making any payment on the Subordinated Certificates of Deposit. The holders of the Subordinated Certificates of Deposit would be entitled to payment of the Subordinated Certificates of Deposit thereafter upon the earlier of (i) the date upon which payment of the Subordinated Certificates of Deposit is approved by the Central Bank and (ii) the maturity of the Subordinated Certificates of Deposit; prior to the making of such payment, the Superintendent of Banks would retain the funds for such payment. Any assets of the New York Branch other than those retained by the Superintendent of Banks as set forth in the prior sentence would be remitted to the head office of the Foreign Bank. By acquiring the Subordinated Certificates of Deposit, the holders of the Subordinated Certificates of Deposit will have also agreed that if a Continuing Event of Default occurs after the Superintendent of Banks takes possession of the business and property of the Branch, then any funds available for payment of the Subordinated Certificates of Deposit shall instead be paid to any receiver or similar administrator in insolvency of the Foreign Bank with similar powers appointed with respect to the Foreign Bank or its assets for application in accordance with the preceding paragraph.

____________________

1 The Foreign Bank would continue to be obligated to make interest payments as they become due on the Subordinated Certificates of Deposit.

Voluntary Liquidation of New York Branch

The Subordinated Certificates of Deposit would provide that the Foreign Bank would not voluntarily liquidate or close the New York Branch unless the Foreign Bank first made provision for the obligations evidenced by the Subordinated Certificates of Deposit to be assumed by another branch or agency of the Foreign Bank located in the United States. The assumption would be subject to certain conditions, including the condition that the assumption not adversely affect the rights of the holders of the Subordinated Certificates of Deposit in any material respect.

Although there is no statutory provision or case law directly on point, we believe that the issuance of Subordinated Certificates of Deposit containing substantially the same terms as those described above would not contravene the NYBL or any public policy expressed therein. The subordination provisions set forth above are substantially the same as. those contained in the subordinated notes described in the letter dated August 31, 1988, of Paul L. Lee, Esq., of Shearman & Sterling to the Banking Department (the "Lee Letter"). By letter dated September 1, 1988 (the "1988 Letter"), the Banking Department concurred with the interpretation and views expressed in the Lee Letter. We are unaware of any letter or interpretation rescinding or otherwise modifying the position expressed by the 1988 Letter.

The primary difference between the instrument described in the Lee Letter and the instrument described herein is that the instrument in the Lee Letter is referred to as a "subordinated note" while the instrument described herein is referred to as a "Subordinated Certificate of Deposit."2 The New York State

___________________

2 The Lee Letter discussed subordinated notes which provided that, in the event of an involuntary liquidation or closing of the New York agency, the right of holders to receive any distribution from the assets of the New York agency be suspended until after the fifth anniversary of the date of issuance of the subordinated notes. The holders of Subordinated Certificates of Deposit would agree, in the event of an involuntary liquidation or closing of the New York Branch, to suspend their right to receive any distribution from the assets of the New York Branch until the earlier of (i) the date upon which payment of the Subordinated Certificates of Deposit is approved by the Central Bank and (ii) the maturity date of the Subordinated Certificates of Deposit.

Banking Board (the "Banking Board") may prescribe the extent to which, and the conditions on which, the New York State-licensed agencies and branches of foreign banks may establish, maintain and pay out credit balances and deposits. NYBL §§ 14.1(g)-(h), 14-c and 202-a(3). However, the only regulation of the Banking Board governing time deposits, Part 13 of the General Regulations of the Banking Board, pertains to retail deposits and expressly excludes the uninsured branches of foreign banks and deposits in the amount of $100,000 or more from the banking organizations and deposits covered by Part 13.

In the absence of specific regulation of deposits and other liability instruments, the New York State policy appears to be to permit the parties to the debtor-creditor relationship to determine the terms of that relationship as a matter of contract. Gaita v. Windsor Bank, 251 N.Y. 152, 154-155, 167 N.E. 203, 204 (1929); David v. Manufacturers Hanover Trust Co., 59 Misc. 2d 248, 249 298 N.Y.S. 2d 847, 848 (1969). Strong evidence of this policy appears in subdivision 1 of § 96 of the NYBL, which empowers a State-chartered commercial bank to borrow money and receive deposits "upon such terms as the bank or trust company shall prescribe." Except for § 618's limitation on the Superintendent of Bank's power to compromise deposit claims in the event of a liquidation and for the priority given by § 621 to deposits made by certain financial institutions, the NYBL does not grant priority to depositors or otherwise distinguish them from the other unsecured creditors of a depository institution in the event of its liquidation. Absent such statutory priority, there appears to be no public policy that would be contravened by a contractual subordination of a claim against the institution, regardless of whether the claim is characterized as a deposit or as a note.

We would very much appreciate your confirming, in writing, that the Banking Department concurs in our opinion that the New York State-licensed branch of a foreign bank may issue subordinated certificates of deposit and that the issuance of such certificates and the implementation of their subordination provisions would not contravene the NYBL or any public policy expressed therein.

Very truly yours,

Patricia S. Skige

 

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