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Explanatory All Institutions Letter

October 30, 2006

TO THE INDIVIDUAL OR INSTITUTION ADDRESSED:

Re: Adoption of New Part 6.10 of the General Regulations of the Banking Board ( Investment in a public deposit bank subsidiary by a savings bank or savings and loan association)

The Banking Board has adopted the attached new Part 6.10 of the General Regulations of the Banking Board, Title 3 NYCRR . The regulation will become effective upon publication in the State Register, which is expected to occur on November 8, 2006. This regulation has been renumbered; it was proposed for public comment as Part 6.12.

The regulation uses the authority granted by Section 14-h of the Banking Law, the so-called “wild card” authority, to permit New York State chartered savings banks and savings and loan associations to invest in public deposit bank subsidiaries to the same extent as federal thrift institutions.

Thrift institutions, pursuant to section 237 of the Banking Law and section 10 of the General Municipal Law, cannot accept deposits of public moneys. Commercial banks, however, may accept such deposits, and a number of thrift institutions have chartered commercial bank subsidiaries whose activities are limited to doing so.

Thrift investments in public deposit banks were previously subject to the normal limits on leeway investments. Section 235(31) of the Banking Law limits the amount of investments under the leeway authority to one (1) percent of the thrift institution’s assets in any one entity and five (5) percent in the aggregate in all such entities.

Apart from the public deposit bank’s own retained earnings, the parent thrift is the sole source of capital through which its subsidiary bank can be capitalized. Since the sole business purpose of these subsidiary banks is to accept public deposits, they are limited in their ability to generate earnings and therefore add to their capital position.

By contrast, OTS regulations permit a federal thrift to invest in an “operating subsidiary” without limitation as to amount. 12 CFR Section 559.3(g). An operating subsidiary may be a commercial bank. 12 CFR Section 559.3(e). Federal and state chartered thrifts in this state have formed state-chartered commercial banks for the primary purpose of accepting deposits of public funds, which such thrifts are prevented from accepting pursuant to section 10 of the General Municipal Law. The federal Bank Holding Company Act provides for an exemption from bank holding company status for the thrift owner of a state-chartered bank that is wholly owned by one or more thrift institutions and is limited to accepting deposits of public moneys. 12 USC Section 1841(a)(5)(E).

The wild card regulation provides parity with federal thrift institutions by permitting a savings bank or savings and loan association to invest in a public deposit bank subsidiary without limitation as to amount. The subsidiary must be an insured bank that is more than fifty percent owned and controlled by the thrift institution, and which accepts only public deposits. The regulation enables thrift institutions to have subsidiaries that are national banks or banks chartered by states other than New York, although in practice the former could not be used if the thrift institution wishes to avoid bank holding company status and New York municipal corporations would not be permitted to deposit their funds in the latter. In any event, such subsidiaries would be restricted to taking deposits of public moneys.

No special approval process is required for permission to invest in a public deposit bank subsidiary unless the aggregate amount of the thrift institution’s investments in that subsidiary were to exceed one percent of the thrift’s assets – the amount presently permitted for individual investments, including investments in commercial bank subsidiaries that accept public deposits, under the leeway authority. The regulation requires that a thrift institution wishing to make an investment in a public deposit bank which exceeds the amount permitted under the leeway authority give the Department 30 days prior written notice. The thrift institution can then make the proposed investment unless the Department has advised it that additional time or information is required, or has disapproved the proposal.

The Notice of Proposed Rule Making was published in the August 2, 2006 issue of the State Register. No comments were received from the public.

Very truly yours,

Sam L. Abram
Secretary of the Banking Board

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