NY Banking Law to Have Broad Impact on Financial Institutions
Karol, Bernard, American Banker
The so-called Omnibus Banking Bill, recently enacted in New York, has received considerable attention because of the opposition of certain consumer groups. The new law, however, has a much broader scope which will be felt by New York bankers at all levels.
The bill is a result of a comprehensive review of the New York banking law by the state banking department. Its 163 sections affect every segment of the New York banking and thrift industries. It should be remembered that the banking law governs nine of the 12 major money center banks of the *new York Clearing House Association, 146 foreign branches and agencies, and a significant, if dwindling, number of New York savings institutions. The department supervises more than $500 billion in assets of New York financial institutions and the banking law has been used as a model by many other states.
While the bill is not a recondification of the banking law, it is the first comprehensive and systematic revision in more than 50 years. The department's goal was to eliminate obsolete provisions and unnecessary restrictions, reduce the regulatory burden, and grant limited new powers. The act's preamble unabashedly states that one of its purposes is to enhance the attractiveness of a state rather than federal charter for financial institutions in New York.
The DeWind Commission, a temporary panel created by the state legislature in 1983 to study the financial regulatory structure in New York, and in particular the relationship between banking and insurance, issued a report in February 1984 which recommended that banks be allowed greater access to the insurance business. The banking and insurance departments drafted separate legislation, based on the commission's recommendations, which was not enacted this session but will probably be reconsidered next year.
However, the bill's broad new real estate powers resulted from a commission recommendation. A comprehensive review of all of the bill's provisions is beyond the scope of this article, but the most significant provisions are discussed below. The number of each section of the banking law affected is noted for each topic. The bill's provisions become effective on Oct. 8, 1984.
The statutory authority enabling banks to make loans which take a percentage of the borrower's profits has been unclear for some time. Authority to take equity payments is even more tenuous. The bill specifically allows loans wich entitle the bank to additional payments beyond principal and interest of equity or a share of the borrower's profits. While not explicitly stated, it apperas that they must be in addition to repayment, not a substitute thereof. The department has been given extensive rule-making authority in this area.
The bill grants sweeping real estate investment powers to both banks and thrifts, including purchase of unrelated premises and real estate developments. Only California has previously granted such authority. The department is expected to issue regulations which restrict investments to 5% of assets. This authority "sunsets" in 1988. However, if it is not then reenacted, institutions will be able to retain all of the property owned at the time. The legislature traditionally sunsets especially attractive new powers in order to retain some political leverage over banks at renewal time.
The power of banks to issue guarantees has long been restricted to guarantees "incidental or usual in carrying on the banking or trust business," which has been narrowly construed. The bill liberalizes the term to read "incidental to carrying on the business of a bank or trust company." The extent of the liberalization, however, is unclear and will depend on the department's interpretation. It would seem that the power extends to thsoe situations where banks now issue standby letters of credit, but does not grant a general surety power to banks. Given the limited defenses which can be asserted with a letter of credit, this new power is extremely significant. …