Banking Interpretations


February 26, 1968

Examiner Paul
Assistant Counsel Shanbron

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In your memorandum of February 21, 1968 you requested an opinion concerning approval for the above named institution to include reserve for contingencies in its capital funds for the purpose of computing the 10% and 25% loan limitations specified in S103 of the Banking Law.

In my opinion the reserve for contingencies may be included in the capital funds for the purpose stated so long as it is a general reserve and is not a reserve for specific losses or liabilities.

A memorandum from the Legal Division on September 21, 1944 confirmed the then existing opinion that such reserve should not be included in determining the lending limits of a commercial bank.

Special Assistant Strum in an opinion dated September 5, 1967 (Op. File S202(f)), answering a similar inquiry concerning a foreign bank, points out that a reserve for contingencies may in certain instances be an accounting procedure designed to reduce the surplus funds or undivided profits account. He further states that the approach used in the 1944 memorandum is, "... unnecessary since some reserves are created for different reasons and their inclusion or exclusion in the capital base should be reviewed in the light of the purpose of the creation of such reserve. One of the purposes served by encouraging the establishment of reserve for contingencies is to remove stockholder pressure for larger dividends out of undivided profits. This purpose is well served by permitting a reserve contingencies account to be considered part of the lending limit base, thus accommodating the bank's desire to make larger loans while at the same time limiting dividends."

As noted in Special Assistant Strum's opinion national banks are able to include reserves in their capital base (Comptroller of the Currency Rulings 1100-c).

Deputy Superintendent and Cousel Schmidt has concurred with Special Assistant Strum's opinion so long as the reserve for contingencies does not provide for a specific loss or liability.

S202(f) of the Banking Law, in referring to restrictions on loans by foreign banks, states, in part:

"... Loans, purchases and discounts of notes, bills of exchange, bonds, debentures and other obligations, and extensions of credit and acceptances by a branch of a foreign banking corporation within the state shall be subject to the same limitations as to amount in relation to capital stock, surplus funds, and undivided profits as are applicable to banks and trust companies pursuant to article three of this chapter..."

Since the loan restrictions on a foreign branch are subject to the same limitations as a domestic bank or trust company, Mr. Strum's interpretation of S202(f), is applicable to S103, as well.

My conclusion, based upon the referred to recent opinion of this division, is that the reserve for contingencies may be added to the capital account in determining the base for loans, except to the extent that the reserve account applies to specific loans or liabilities.

B. S. S.