| March 6, 1997 |
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Mr. Jack Otten Dear Mr. Otten: This is in response to your request for an interpretation regarding the exemption from section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, that the Board granted The Bank of Bentonville, Bentonville, Arkansas ("Bank"), in order that Bank could increase its quantitive limit, up to 100 percent of its equity capital, for loans made to unaffiliated third parties secured by the shares of Wal-Mart Stores, Inc., ("Wal-Mart"). Bank and Wal-Mart are affiliates for purposes of section 23A because the Walton family controls over 25 percent of the voting shares of Wal-Mart and Bank. You have asked three questions regarding the loan amount that is used to calculate the quantitative limit. In particular, you have asked how to calculate the loan amount where Wal-Mart shares are used as collateral, but where the borrower qualifies for unsecured lending and where Wal-Mart shares, as well as other assets, are used to secure the loan. When the Board reviewed Bank's request for the exemption to increase its lending limit, it based its decision to increase the limits on the entire amount of the loan counting against the higher quantitative limit. This position is consistent with a previous interpretation of section 23A, where it was determined that if an affiliate's securities, as well as other assets, are used as collateral for a loan, the entire loan amount is the appropriate measure of the value of the covered transaction. 1 F.R.R.S.¶ 1199 (1984). You also have asked how Bank should calculate the 70 percent loan-to-value ratio. As noted in your letter, the loan-to-value ratio was imposed by the Arkansas State Bank Department, and any questions interpreting their method of calculating this ratio should be addressed to the Bank Department. If you have any questions, please contact Ms. Pamela G. Nardolilli of the Board's Legal Division, at 202/452-3289.
Very truly yours,
(signed) William W. Wiles
William W. Wiles
cc: Joan P. Cronin
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