Banking Interpretations

NYBL 96(1);103(1)

New York State Banking Department

To: Senior Examiner Gerald J. Stein
From: Assistant Counsel Sullivan

April 15, 2010 


[---] ("the Bank") - Use of Lending Power to Acquire Bond


Whether the Bank can acquire a bond (the "Bond") issued by an Industrial Development Authority (the "Authority") and supported by the credit of a borrower (the "Borrower") under the Bank's lending power instead of its investment power?


Yes. The Bank may acquire and hold the Bond as a loan provided it complies with the Bank's policies for making and purchasing loans generally.


The Bond will be issued by the Authority under an indenture with a Trustee. The Bond will have a CUSIP number and will be eligible to be held at the Depository Trust Company, but will not be rated by an NRSRO.

However, among other things, the Bank's acquisition of the Bond has been underwritten and approved as a commercial loan in accord with the Bank's commercial loan policies, and the Bank intends to record the Bond on its commercial loan system. The terms of the Bond have resulted from direct negotiations between the Borrower and the Bank. Although the Bond has a stated term of 24 years, the Bank has negotiated with the Authority and the underlying Borrower to hold the Bond for only five years. The Bank has obtained credit-related information directly from the Borrower, and under the terms of the Bond, the Bank "is entitled to receive a variety of financial, operating and budget information on an on-going basis." Further, the Bank is entering into an inter-creditor agreement with respect to the collateral supporting the Bond.


Investment Authority:

Under Section 97 of the Banking Law, a New York “bank ... may invest in . . .

Bonds, notes, debentures and other obligations for payment of money,
which are not in default as to either principal or interest when acquired."

As a member of the Federal Reserve System, the Bank's authority to invest in bonds is also subject to the restrictions of Part 1 of the Regulations of the Office of the Comptroller of the Currency (the "OCC"), 12 C.F.R. Part 1, which are made applicable to state member banks by Paragraph 20 of Section 9 of the Federal Reserve Act, 12 U.S.C. § 335.

Lending Authority:

Under Section 96 of the Banking Law, a New York bank may:

"discount, purchase and negotiate promissory notes, drafts, bills of
exchange, other evidences of debt."

This authority includes the power to purchase and hold debt securities as loans even if they do not satisfy the requirements applicable to "bonds, notes, debentures and other obligations for payment of money" under Section 97 of the Banking Law or those applicable to "investment securities" under 12 C.F.R. Part 1.1

A New York bank that purchases a security as a loan must comply with that bank's normal loan underwriting, approval and administrative policies and procedures. In this regard, a state member bank must establish a formal lending policy as described in Section 2040.1 of the Federal Reserve's Commercial Bank Examination Manual. As you explained, the Banking Department examines the loan management of New York-chartered member banks in light of their compliance with such manual. This means that the bank should, among other things, conduct an independent credit analysis of the security and maintain an ongoing credit file with complete information about the borrower's financial condition. Moreover, a New York bank's purchases of a debt security as a loan would be subject not only to the lending limits in Section 103 of the Banking Law but also to the limits on concentrations of credit in the bank's lending policy.

That being said, a full discussion of the considerations that a bank should address in formulating a lending policy is beyond the scope of this memorandum. Besides it is clear from the memorandum of the Bank's Administrative VP and Deputy General Counsel2 that the Bank is aware that it must follow "its normal loan underwriting, approval and administrative policies and processes in connection with the acquisition of" the Bond.

Noted: M.E.G.

  1. The OCC has similarly permitted national banks to purchase and hold investment securities under their lending power. E.g., OCC Interpretive Letter No. 908 (April 23, 2001).
  2. Dated November 5, 2009.