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FDIC Rules and Regulations

3-31-76

benefit of that insider or person related to that insider shall give timely notice of such transaction to the bank's board of directors or board of trustees.

(g) Supervisory Action in Regard to Certain Insider Transactions. Notwithstanding compliance with the review and approval requirements of paragraph (b) of this section, the Corporation will take appropriate supervisory action against the bank, its officers or its directors or trustees when the Corporation determines that an insider transaction, alone or when aggregated with other insider transactions, is indicative of unsafe or unsound practices. Such supervisory action may involve institution of formal proceedings under section 8 of the Federal Deposit Insurance Act. Among the factors which the Corporation will consider in determining the presence of unsafe or unsound banking practices involving insider transactions are: (1) Whether, because of preferential terms and conditions, such insider transactions are likely to result in significant loan losses, excessive costs, or other significant economic detriment which would not occur in a comparable arm's length transaction with a person of comparable creditworthiness or otherwise similarly situated:

(2) Whether transactions with an insider and all persons related to that insider are excessive in amount, either in relation to the bank's capital' and reserves or in relation to the total of all transactions of the same type; or

(3) Whether, from the nature and extent of the bank's insider transactions, it appears that certain insiders are abusing their positions with the bank.

[Codified to 12 C.F.R. § 337.3]

[Section 337.3 added at 41 Fed Reg. 8948, March 2, 1976, effective May 1, 1976; 41 Fed. Reg. 18286, May 3, 1976; 41 Fed. Reg. 18495, May 4, 1976, effective May 1, 1976] §§ 337.4-337.9

[Reserved]

§ 337.10 Waiver.

An insured State nonmember bank has the right to petition the Board of Directors of the Corporation for a waiver of this Part or any subpart thereof with respect to any particular transaction or series of similar transactions. A waiver may be granted at the discretion of the Board upon a showing of good cause. All such petitions should be filed with the Office of the Executive Secretary, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429. [Codified to 12 C.F.R. § 337.10]

§ 337.11 Effect on Other Banking Practices.

Nothing in this Part shall be construed as restricting in any manner the Corporation's authority to deal with any banking practice which is deemed to be unsafe or unsound or otherwise not in accordance with law, rule, or regulation; or which violates any condition imposed in writing by the Corporation in connection with the granting of any application or other request by an insured State nonmember bank, or any written agreement entered into by such bank with the Corporation. Compliance with the provisions of this Part shall not relieve an insured State nonmember bank from its duty to conduct its operations in a safe and sound manner nor prevent the Corporation from taking whatever action it deems necessary and desirable to deal with specific acts or practices which, although they do not violate the provisions of this Part, are considered detrimental to the safety and sound operation of the bank engaged therein.

[Codified to 12 C.F.R. § 337.11]

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FDIC Rules and Reg3, § 337.3

Federal Deposit Insurance Corporation

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On behalf of the Subcommittee, I wish to express our appreciation for your testimony on September 14 on the provisions of the Safe Banking Act of 1977, H.R. 9086.

You will recall that, during the hearing, I mentioned we would perhaps have additional questions for which we would appreciate your response for the record. The questions are as follows:

1. The "Texas case", as you may know, highlighted questions relating to the relationships between State, FDIC, and OCC officials both at the regional and national levels. Ready access to information concerning banks, whether state or national, is particularly important for FDIC, the insurer of banks. Would you provide the Subcommittee with a description of your working relationship with the State banking commissioners for your region and with the Regional Administrator of national banks? If problems exist, please offer your suggestions for improving this line of communication between your office and the other regulators in your region.

2. How many cases involving correspondent account and insider loan ties has your region referred to U.S. Attorneys since 1970? What is the record of prosecution for those cases?

3.

How many banks does your region supervise? How many of those are on a problem list or in need of special supervision by your office? What types of problems have you found in those situations? Please provide a summary of each type.

4. Is check-kiting a major problem in your region? Specify its magnitude and indicate what steps are being taken to curb this activity.

5. As you know, this Subcommittee conducted a field hearing in San Antonio, Texas, last year. A major concern at those hearings was the existence of "control groups" operating in the Dallas region of the FDIC. Those groups were buying and selling banks with little or no equity investment to use for their own benefit. Is there any evidence that such groups are operating in your region? If so, please provide detailed information on each group and the efforts you have taken to control this practice.

Because of ongoing legislative and oversight hearings, your early response would be appreciated; and, again, we appreciate your assistance. Sincerely,

FJSTG:aSb

Fernand J. St Germain
Chairman

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In response to the Subcommittee's request contained in your letter of
September 26, 1977, I respectfully submit the following in answer to the
specific questions listed therein.

1.

2.

3.

The working relationship that exists between the Chicago Regional Office and the other Federal and State supervisors in this Region is harmonious, cooperative, and supportive in all respects. Each of the supervisory authorities freely communicates important information to the appropriate agency and lends both examination and supervisory assistance in those matters of dual interest. Each displays a sincere interest in sound banking and supervision and cooperates to the fullest extent to bring about desired results.

Since 1970, eight cases involving correspondent account and insider loan ties have been referred by the Chicago Regional Office to the U. S. Attorney. To our knowledge there has been no prosecutions in any of the referred cases.

As of this date, the Chicago Region supervises 988 State nonmember
banks. Twelve State nonmember banks presently appear on the
Corporation's problem list and are receiving special supervision by
this office. In each of these situations, liberal lending policies
and practices, involvement in real estate speculation or real
estate supported credits, and out-of-territory extensions of credit
have brought about an excessive volume of inferior loans, a heavy
volume of pastdue paper, burdensome loan charge-offs, and led to
inadequate capital accounts and reserves and poor earnings results.
In each of the problem situations, poor active management and/or
controlling ownership have followed hazardous policies, which have
led to a deteriorating asset condition and a serious dissipation of
capital funds. A brief summary of each of the 12 situations follows:

a.

A long-standing problem situation characterized by inferior management, poor policies in all areas, and a deteriorating trade area. Continued operating losses and heavy loan

Honorable Fernand J. St Germain, Chairman
Subcommittee on Financial Institutions

b.

c.

d.

e.

f.

8.

h.

October 4, 1977

charge-offs have seriously impaired the bank's capital.
Section 8 (a) proceedings are continuing in an effort to
bring about needed corrective measures.

Asset problems centered in loans to real estate developers and associated other real estate confront the institution. New ownership-management and the injection of needed additional capital funds should provide needed rehabilitation.

A massive volume of inferior loans, huge losses, deficit earnings, and virtually depleted capital accounts are the result of hazardously inept credit practices fostered by former management. Ownership has acted responsibly and injected additional capital funds and reorganized the institution's board of directors. With new executive management in place, problems are slowly being resolved.

A heavy volume of classified assets centered in real estate related loans and other real estate have burdened existing capital protection. Stock ownership is in process of transfer to a responsible group and capital accounts will be strengthened by additional new funds.

A large volume of distressed real estate loans led to significant losses, an excessive amount of other real estate, a significant capital deficiency, and an over-all unsatisfactory asset condition. Liberal lending practices have been curbed, new funds are under commitment, and board supervision has improved. Rehabilitation seems assured, although a long workout situation continues to exist.

Liberal lending practices and ineffective loan administration by active management have resulted in an eroding capital base and a heavy volume of classified assets and loan losses. Controlling ownership has taken an active interest and low capital accounts are in process of being replenished by a sizable injection of new funds.

An excessive volume of real estate related loans, which be-
came distressed, resulted in an inordinate amount of classi-
fied assets and poor earnings. Both ownership and the
board of directors have come to grips with problem assets
and the over-all asset condition is improving.

Hazardous lending practices, coupled with a series of abuse of self-serving acts, perpetrated by three insiders, rendered capital accounts inadequate and produced an excessive volume of classified loans. Self-serving and abusive practices have ceased and the bank's condition has been restored to an acceptable level.

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