BL Section 106
April 15, 1996
Re: Section 106 of the Banking Law
Your letter of January 16, 1996 to First Assistant Counsel Gelman, which concerns the impact of Section 106 of the Banking Law on intra-day overdrafts, has been referred to me for reply. In your letter, you request confirmation of your opinion that the provisions of Section 106, which limit the amount of funds which a bank may deposit in any domestic or foreign banking organization or private banker, do not apply to intra-day overdrafts (i.e. intra-day credit exposures which generally emanate from the conduct of correspondent banking through centralized electronic payment systems).
As indicated in a letter to you from former Assistant Counsel Schussler in August of 1994, the Banking Department has historically taken the position that intra-day overdrafts are not subject to the lending limitations contained in Section 103 of the Banking Law. The extension of that position to Section 106 would be both logical, as Sections 103 and 106 serve similar functions in limiting the credit exposure of banking institutions, and consistent with the position taken by Federal regulators. National banks are not subject to any lending or deposit limitations in the conduct of their intra-day overdraft business (national banks generally are not subject to legal limits on deposits at other banking institutions) and Regulation F of the Federal Reserve, which concerns interbank liabilities, specifically exempts intra-day overdrafts from any numerical limits on credit exposure. I also note that Section 106 itself does not contain any overall limit on the amount of funds which banks may deposit in other banking institutions as the Superintendent is given the discretion to approve the deposit of any amount exceeding 25%ofa bank's capital, surplus and undivided profits.
In view of the foregoing, I concur with your view that the provisions of Section 106 are not applicable to intra-day overdrafts. I am also of the opinion that the meaning of "intra-day" for purposes of Section 106 should be the same as it is for Section 103 purposes. Consequently, this term should be defined by reference not to the calendar but to each bank's own designation of its business day. Such a definition may be utilized to determine whether transactions are subject to the provisions of Sections 103 and Section 106. This opinion is rendered on the assumption that a bank engaged in such activity has in place appropriate internal risk management controls and conducts such activity in accordance with applicable safety and soundness standards.
I trust that this letter is responsive to your inquiry.
Very truly yours,