I've been trying to track down the reason(s) why national banks can't offer their commercial, non-public customers deposit products secured by letters of credit or other bank assets. I understand that it has something to do with FDIC insurance, but what?

Thanks as usual -

Look at your state banking laws - regulations - no bank can pledge assets against a deposit account of a non-public entity.

As far as I can tell, from the OCC handbook on Permissible Activities and any relevant state law/regulations, all that's said is that banks can pledge assets against public funds. The Permissible Activities book does not say specifically that anything not listed is definitely prohibited, and it gives legal or other citations to support the numerous items that are listed.

I'm hoping that someone can explain how or why a bank's soundness would be hurt if it pledged assets against corporate deposits. Or - another possibility I heard was that if a bank failed, the pledging of those bank assets may somehow interfere with the FDIC's use of the BIF/SAIF assets to offset the losses of the bank's customers -

Whether a pledge of assets by a bank to secure a deposit by a nonprofit organization would be legally enforceable in the event of the appointment of the FDIC as receiver or conservator for the institution

FDIC--97--1
January 6, 1997
Robert C. Fick, Counsel


Your letter to the FDIC dated October 7, 1996 has been forwarded to me for reply. You stated in that letter that your client is a nonprofit organization under IRC § 501(c)(6), but not a municipality, and you asked that we confirm that "securities pledged by a bank to secure a deposit are only valid as to municipalities." We understand your question to be whether a pledge of assets by a bank to secure a deposit by a nonprofit organization would be legally enforceable in the event of the appointment of the FDIC as receiver or conservator for the institution.

Your letter states that the institution is a bank, but does not specify whether it is a national bank or a state bank. The determination of whether the security interest is legally enforceable may vary based upon this factor.

National banks are prohibited from collateralizing private deposits. Texas & Pacific Railway Co. v. Pottorff, 291 U.S. 245, 54 S. Ct. 416 (1934). Consequently, any attempt by a national bank to secure private deposits would not be legally enforceable. However, Federal law authorizes national banks to secure deposits made by a State, political subdivision thereof, or any agency or other governmental instrumentality of a State or political subdivision thereof, but only to the extent, and with the same kind of security, that State law authorizes for State banks. 12 U.S.C. § 90. Your client which you describe as a "non-profit organization, [under] IRC Section 501(c)(6)," does not appear to qualify as a one of the listed public entities. See, e.g., Bossier Bank and Trust Co. v. FDIC, 753 F.2d 847 (10th Cir. 1985). Therefore, a pledge of assets by a national bank to secure your client's deposits would not be legally enforceable.

If the bank in this case is a State bank as opposed to a national bank, applicable State law would need to be consulted to determine whether, and under what circumstances, State-chartered banks are authorized to secure deposits. To the extent that (1) State law authorizes State-chartered banks to secure deposits, and (2) the security interest otherwise complies with applicable State and Federal law, the FDIC would generally not seek to avoid such a security interest.{1}

{1}Pursuant to section 24 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831a, State banks are required to obtain the FDIC's approval prior to collateralizing any deposits.}

It is important to note, however, that while the foregoing represents our current view of this matter, the FDIC is currently studying this particular issue and may issue regulations or promulgate policies that alter the analysis and conclusion set forth in this paragraph.

The opinions expressed herein are the views of the FDIC Legal Division staff and, like all staff opinions, are not binding upon the FDIC or its Board of Directors. Moreover, the opinions expressed herein are based upon the facts as you have presented them and any change in those facts might result in different conclusions.

If you have any further questions about this matter, please feel free to contact me at 202--898--8962.