March 7, 1977
Associate Attorney Gelman
Section 103 (1) (i), [ ]
Your memo of 1/31/77 raises the issue of whether B.L Section 103(1)(i) supplements the ordinary 10% loan limit under Section 103 or establishes a separate loan limit for the rated bonds described therein. In other words, is a bank's ownership of rated bonds of one issuer limited to 10% or 20% of the bank's capital accounts?
B.L. 103(1) states the general lending limit rule, in relevant part as follows:
"No bank or trust company shall: 1. lend to any person (which term shall mean, for the purposes of this sub- division, any individual, partnership, unincorporated association, corporation or body politic) an amount which will exceed ten per centum of the capital stock, surplus fund and undivided profits of such bank or trust company."
B.L. Section 103(1)(1) states an exception as follows:
"The limitations in this subdivision shall not apply to the investment of such bank or trust company in the bonds, debentures, notes or other obligations of any person, provided: (i) such bonds, debentures, notes or other obligations mature not less than one year after their respective dates of issuance, and at the time of such investment, are rated in one of the three highest rating grades by an independent rating service designated by the banking board; (ii) such investment does not exceed ten per centum of the capital stock, surplus fund and undivided profits of such bank or trust company; and (iii) such investment complies with such additional limitations and conditions as the banking board from time to time may prescribe by general regulation.
The question raised in the first paragraph of this memo is not altogether clear based upon a reading of the statute. One must examine the legislative history which in this case clarifies the point. The memo in support of the bill provides as follows:
"These provisions would provide a separate statutory limit for the amount which New York-chartered banks may invest in certain marketable debt securities of high quality."
" A disparity presently exists in the respective abilities of New York-chartered banks and national banks to purchase marketable debt securities of private issuers. An investment of a New York-chartered bank in such securities is subject to the general lending limits of the Banking Law, while the investment of a national bank in such securities is not subject to the general lending limits of the National Bank Act--but only to a special limit restricting the amount of such investment in the securities of any one issuer to ten per cent of the bank's capital funds.
"Large corporations frequently obtain long-term operating funds by issuing bonds or debentures to the public while also obtaining short-term operating funds through direct borrowing from banks. Thus, bonds and debentures which may offer attractive investment opportunities to a bank may be issued by some of the same corporations as those to which it makes direct loans. In these cases, the ability of a New York-chartered bank to make such investments may be curtailed to the extent of its loans to the same issuer. For small or medium-sized New York-chartered banks, having relatively low lending limits, this may interfere significantly with their power to purchase desirable debt issues while at the same time serving the normal borrowing requirements of the issuers.
Debt securities of private issuers which have been rated as high quality investments by leading independent rating services would, because of their reduced risk and their marketability, properly be entitled to special lending limit treatment. This would be consistent with the philosophy of the lending limit provisions of the Banking Law which currently provide higher limits or exemptions for various other types of loans or investments involving a low degree of risk."
The foregoing legislative history seems to make it clear that the section 103 (1) 10% limit on direct bank lending to any one entity is to be supplemented by the 103 (1) (i) 10% limit on bank purchase of the bonds of that same entity. As a result, it is my opinion that Section 103 (1) (i) based upon the legislature history cited above authorizes a bank to purchase securities meeting the requirements of Section 103 (1) (i) only to the extent of 10% of its capital accounts.