TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
In January 1992, the Federal Reserve, together with the
other federal banking agencies, issued a Supervisory Policy
Statement on Securities Activities (SR 92-1). The Policy Statement
addressed a number of matters, including purchased securities and
repurchase agreement collateral left in safekeeping with selling
dealers. In this regard, the Policy Statement indicated that
"purchased securities and repurchase agreement collateral should
only be left in safekeeping with selling dealers when: (1) the
board of directors or an appropriate committee thereof is
completely satisfied as to the creditworthiness of the securities
dealer and (2) the aggregate market value of securities held in
safekeeping is within credit limitations that have been approved by
the board of directors (or an appropriate committee of the board)
for unsecured transactions."
As you are aware, state member banks are limited, under
their respective state statutes, in the amount of loans or other
types of credit that they may extend to single borrowers or their
related interests. A question has been raised as to whether the
safekeeping portion of the Policy Statement quoted above extends
the application of a bank's statutory single borrower lending
limits to safekeeping arrangements.
The Policy Statement does not by itself extend state
lending limits to safekeeping arrangements and we believe that such
limits generally would not apply.
Notwithstanding the general inapplicability of state
legal lending limits to safekeeping arrangements, a bank's board of
directors should establish prudential limits for safekeeping arrangements. "Prudential" limits are different from the
"statutory" limits for unsecured extensions of credit because a
safekeeping arrangement generally involves a fiduciary
relationship, which presents operational risks rather than credit
risks.
Banking organizations should, to the extent possible,
seek diversification with regard to the firms used for safekeeping
arrangements in order to avoid concentrations of assets or other
types of risk. Further, while certain transactions with securities
dealers and safekeeping custodians may entail only operational
risks, other transactions with these parties may also involve
credit risk that could, under some limited circumstances, be
subject to statutory lending limits depending on applicable state
laws. If deemed subject to a state legal lending limit statute due
to the nature of a particular safekeeping arrangement, the
provisions of the state's statutes would, of course, control the
extent to which the safekeeping arrangement comports with an
individual state's legal lending limit.
Director
Cross Reference: SR 92-1 (FIS)
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