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Adopted Regulations

Explanatory All Institutions Letter

October 28, 2005 


RE: Adoption of New Part 6.7 of the General Regulations of the Banking Board, Title 3 NYCRR (Additional Authority of Banks and Trust Companies to Underwrite and Deal in Certain Securities, Including Municipal Bonds)

The Banking Board has adopted the attached new Part 6.7 of the General Regulations of the Banking Board . The regulation will become effective upon publication in the State Register, which is expected to occur on November 9, 2005.

New Part 6.7 uses the wild card authority in Section 14-g of the Banking Law to give New York banks and trust companies parity with national banks in underwriting, dealing in and investing in municipal revenue bonds and other government securities.

As part of the Gramm-Leach-Bliley Act of 1999 (“GLB”), well-capitalized national banks were granted the authority to underwrite municipal revenue bonds; that is, obligations of a state or political subdivision other than general obligations.

The investment regulation applicable to national banks delineates three types of government securities.

Type I securities can be underwritten by a national bank without limitation as to capital. Such securities include general obligations of the U.S. government and its agencies and general obligations of any State or political subdivision thereof.

Type II securities can be underwritten by a national bank up to 10% of its capital. Type II securities include: (i) obligations issued by a State or political subdivision for housing, university or dormitory purposes that do not qualify as Type I securities; and (ii) obligations of certain international and multinational development banks.

Type III securities are other investment securities, including government obligations that do not qualify as Type I or II. A national bank may purchase and sell Type III securities for its own account, up to a limit of 10% of its capital for one obligor, but it may not underwrite or deal in Type III securities. While municipal revenue bonds have typically been Type III securities, under GLB a well-capitalized national bank may treat municipal bonds as Type I securities.

Since the New York Banking Law does not directly address the underwriting authority of banks and trust companies, there are no provisions directly analogous to the national bank investment regulations.

However, Section 103 does apply different loan limits to different types of obligations. For example, there is no limit on loans to, or underwriting of obligations of, the U.S. Government or the New York State government or its political subdivisions. This category is somewhat narrower than national bank Type I securities.

Section 103 imposes a 25% of capital limit on loans to all other States of the United States, foreign nations, certain municipal authorities and corporations of New York State and certain other designated obligors. New York banks can also underwrite obligations of such obligors, to the extent a national bank can do so, up to the 25% limit.

The new regulation essentially adopts the national bank Type I and Type II categories for New York banks, and grants New York banks the same underwriting authority as national banks have with respect thereto. Thus, New York banks will be permitted to deal in, underwrite, purchase and sell for their own accounts Type I securities without limitation as to capital. This will effectively remove the present 25% limit on underwriting obligations of other states and their political subdivisions. New York banks will also be permitted to deal in, underwrite, purchase and sell for their own account those securities categorized as Type II under the national bank regulations, up to a limit of 10% of capital.

The rule also changes the present system under which New York banks must combine loans and securities investments to the same obligor for loan limits purposes. In the case of Type I and Type II securities, New York banks, like national banks, will not be required to aggregate investments in and loans to the same obligor for purposes of the lending and investment limits. The investment authority will be in addition to the authority to lend to the same borrower up to applicable lending limits.

Municipal revenue bonds are only considered Type I securities for well-capitalized national banks. Thus, while a well-capitalized national bank can invest in and underwrite municipal revenue bonds without limitation as to capital, a national bank that is not well-capitalized can invest in (but not underwrite) such obligations up to 10% of capital to the extent they are Type III securities, and can both underwrite and invest up to the 10% limit in those which are Type II securities.

Since a wild card regulation cannot grant New York banks greater powers than those enjoyed by national banks, only well-capitalized New York banks will be able to invest in or underwrite municipal revenue bonds without limitation as to capital. New York banks that are not well-capitalized will not be able to underwrite municipal revenue bonds (unless they happen to constitute Type II securities), but will continue to be able to invest in such securities, as they now can, subject to the limits in Section 103 and those imposed by federal law.

Finally, the regulation adopts the federal definition of “well capitalized”, since the additional powers granted under the wild card authority must be on the same terms and conditions as applicable to national banks.

It is important to note that while the effect of the regulation will be to remove or liberalize the present quantitative limits on banks and trust companies underwriting, dealing and investing in government securities, nothing in the regulation alters the requirement that banks and trust companies, like national banks, adhere to safe and sound lending practices in conducting their underwriting, dealing and investment activities. Specifically, a bank or trust company will be expected to consider the same risk factors with respect to such activities, make the same determinations regarding obligors and maintain the same records as would be expected of a national bank under Section 1.5 of Title 12, Code of Federal Regulations.

When underwriting, dealing, or investing in government securities, as when engaging in other activities, the bank or trust company should consider, as appropriate, the interest rate, credit, liquidity, price, foreign exchange, transaction, compliance, strategic and reputational risks involved, and the particular activity undertaken by the bank should be appropriate for that bank. In addition, the bank should determine that there is adequate evidence that an obligor possesses resources sufficient to provide for all required payments on such securities or otherwise reasonably believe the obligor will be able to satisfy the obligation. The bank should maintain records available for examination purposes that are adequate to support its determinations regarding the matters described in this paragraph.

Very truly yours,

Sam L. Abram
Secretary of the Banking Board

Text of Amendments

Department of Financial Services


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