Banking Interpretations

NYSBL 131(1) & 200

New York State Banking Department
Memorandum

Issue

Is there any legal objection to the establishment of a nonbank lending subsidiary in New York by [—]? Would any licenses under the NYBL be required?

Recommendation

No legal objection.  We note also that the Federal Reserve raised no objection.

Background

[—] ("Bank") is a foreign bank headquartered in Germany that currently maintains a representative office in New York. It plans to close its representative office and establish a lending subsidiary ("Capital Corp") in New York, for which it believes it would not require a banking license. The Bank is seeking to avoid requiring a banking license in the U.S. so that it is not subject to the federal Bank Holding Company Act. It seeks to operate the lending company by January 1, 2008.

Reasoning

The Bank's counsel, Sullivan & Cromwell, provided a lengthy outline summarizing the proposed structure and operations of the Bank, and seeking the Department's non objection to the proposal as well as confirmation that no banking license would be required.

Without repeating all the points made in the outline, the Bank's counsel sought to illustrate that Capital Corp will be operated as a bona fide stand-alone subsidiary of the Bank, and would not function as the "alter ego" of the Bank (which, if it did, would cause the Bank to in effect operate an office in the US but evade licensing requirements).

• Capital Corp's activities would consist of approving, making and managing loans; purchasing and selling loans and loan participations for its own account, and offering and entering into certain treasury products.

• Capital Corp might occasionally refer customers to the Bank for products sought by the customers.

• Capital Corp would have its own capital, management, and infrastructure and will conduct its activities without any routine day to day involvement from the Bank (except that Capital Corp will enter into a servicing agreement to obtain certain services from Bank personnel).

• Capital Corp will not solicit or accept deposits in the U.S. Capital Corp will not issue L/Cs or provide fiduciary services.

• The Bank will not solicit or accept deposits in the U.S. It may from time to time directly solicit and make loans to U.S. customers, but these activities would not involve Capital Corp, and no employees of the Bank will be located in the U.S. The Bank will not operate out of Capital Corp premises or make joint customer calls with Capital Corp personnel.

• Capital Corp's advertising, stationery, etc. will not indicate that it is the Bank or a banking entity.

• Capital Corp's own Board of directors will manage Capital Corp.

• Capital Corp will have its own management and employees, none of whom will also be officers, employees or agents of the Bank.

• Capital Corp will perform its own credit origination and loan credit approvals, except for loans of a certain size or having certain characteristics for which the Bank Group's policy requires certain Bank committees to approve the loans.

Since Capital Corp would be engaged only in lending-related activities, Capital Corp would not be deemed to require a banking license (since generally an entity must be engaged in other activities beyond merely lending - such as deposit-taking - in order to be required to be licensed to engage in banking). Also, based on the structure, it appears clear that Capital Corp will be acting on its own behalf and not the Bank's behalf, so the Bank would not be deemed to be conducting an unlicensed banking business.

Accordingly, we do not believe a banking license is required and we have no objections to the proposal. We also note that the Federal Reserve raised no objections to [—]'s proposal.

R.N.