INVESTMENTS—By State Member Banks in Bank Premises

A bank received the Board’s approval to invest in the stock of a real estate holding company subsidiary (the holding corporation), wholly owned by the bank, for the purposes of acquiring premises to be used by the bank. The bank funded the holding corporation through the purchase of stock in excess of the bank’s capital, but in an amount approved by the Board for investment in premises under section 24A of the Federal Reserve Act (FRA), and the holding corporation made an initial investment in premises to be used primarily by the bank of approximately the approved amount.

The holding corporation has charged the bank annual rent for use of the premises, has collected rent from unrelated tenants, and has earned interest on investments in government securities. It has paid no dividends to the bank. It has made capital improvements to the premises from its earnings and profits and has been cited by Federal Reserve examiners because these improvements, together with the bank’s initial investment in holding corporation stock, were in excess of the approved amount for building premises under section 24A. The staff believes that the bank’s investment in bank premises exceeds the limit approved by the Board under section 24A.

As a general rule, state member banks cannot invest in the stock of a corporation (FRA § 9, ¶ 20; 12 USC 335); however, they may invest in a subsidiary that is wholly owned by the state member bank and is engaged in holding bank premises. Section 24A states:

Hereafter . . . no State member bank, without the approval of the Board of Governors of the Federal Reserve System, shall (1) invest in bank premises, or in the stocks, bonds, debentures, or other such obligations of any corporation holding the premises of such bank or (2) make loans to or upon the security of the stock of any such corporation, if the aggregate of all such investments and loans, together with the amount of any indebtedness incurred by any such corporation which is an affiliate of the bank, as defined in section 2 of the Banking Act of 1933, as amended, will exceed the amount of the capital stock of such bank.

Under section 2 of the Banking Act of 1933, “affiliate” includes any corporation of which a member bank directly or indirectly owns a majority of the voting shares.

A determination of the aggregate investment in an affiliate must be made in accordance with regulatory accounting principles. The general instructions of the FFIEC Consolidated Reports of Condition and Income (page 7) state:

For purposes of these reports, all offices (i.e., . . . subsidiaries . . .) that are within the scope of the consolidated bank as defined above are to be reported on a consolidated basis. Unless the report form captions or the line item instructions specifically state otherwise, this consolidation shall be on a line-by-line basis, according to the caption shown. As part of the consolidation process, the results of all transactions and all outstanding asset/debt relationships between offices included in the scope of the consolidated bank are to be eliminated in the consolidation and must be excluded from the consolidated Reports of Condition and Income. . . . [emphasis in original].

The staff has found no line-item instructions relevant to the transactions pertinent here that are specifically contrary to the general instructions.

For reporting purposes, the financial activities of the holding corporation must be consolidated with the activities of the bank; therefore, the bank exceeded the section 24A limit. The bank invested an amount equal to the authorized section 24A limit in the stock of the holding corporation; the holding corporation used this investment to acquire bank premises and used its earnings on that investment to make additional investments in bank premises. These additional investments caused the total investment in bank premises to exceed the authorized section 24A limit. STAFF OP. of July 13, 1992.