Traditionally, the Office of the Comptroller of the Currency (OCC) did not require a national bank seeking to engage in non-depository, trust-only activities (a “trust-only bank”) to obtain Federal Deposit Insurance Corporation (FDIC) insurance as a prerequisite to granting it a charter. Recently, however, the OCC changed its position; today, a trust-only bank must obtain FDIC insurance in order to be granted a charter. This change in policy, which is designed to ensure that the OCC is not forced to act as receiver for a failed trust-only bank, impacts the available options for entities that seek to charter a trust-only bank, particularly due to its interplay with provisions of the Dodd-Frank Act.

The rationale underlying the OCC’s change in policy is grounded in the responsibilities that would fall to the OCC if a trust-only bank without FDIC insurance failed. In such a situation, the OCC would be forced to act as receiver of the failed trust-only bank. But the position of the Comptroller of the Currency sworn into office in 2012, Thomas J. Curry, is that the OCC is not structured to act as a receiver. By requiring FDIC insurance for trust-only banks, the OCC ensured that it will not be forced to act as a receiver. That role will fall to the FDIC, an organization that is better structured to serve as receiver of failed banks.

The interplay between the OCC’s change in policy and the Dodd-Frank Act guarantees that no new trust-only banks owned or controlled by commercial firms can be chartered prior to July 22, 2013. Dodd-Frank imposed a moratorium on the provision of FDIC insurance for trust-only banks owned or controlled by commercial firms for three years following the date of its enactment, which moratorium expires July 21, 2013. The moratorium coupled with the OCC’s new stance that trust-only banks must have FDIC insurance means that a charter for a trust-only bank owned or controlled by a commercial firm cannot be granted until such entities can receive FDIC insurance beginning July 22, 2013.

Although the OCC’s change in policy affects federal banking law, state banking laws are not affected. State charters remain available for trust-only banks without the requirement that the chartering entity obtain FDIC insurance and serve as a viable alternative to trust-only banks chartered at the national level. Delaware, in particular, provides many advantages to entities that charter as trust-only banks in its state. Some advantages include the ability to structure trusts to avoid certain income taxes, rules that are more flexible than those of other states, favorable directed trust and decanting statutes and rigid enforcement of spendthrift clauses to protect assets from beneficiaries’ creditors. Many trust-only banks have chartered in Delaware to take advantage of the benefits of its banking laws; a full list of such chartered banks is available at: http://banking.delaware.gov/reports/annual/Annual%20Report%202011.pdf.

Pepper Points

• Additional explanation for change in policy. The OCC has assumed former Office of the Thrift Supervision (OTS) responsibilities, which include oversight of federal savings banks (FSBs). The OTS previously required deposit insurance for trust-only FSBs, so the OCC’s change in policy could be explained as adopting the OTS’s stance on deposit insurance for trust-only charters.
• Issuances of new FDIC insurance. Not much may change with respect to the issuance of new FDIC insurance even after the expiration of the moratorium imposed by Dodd-Frank. The FDIC has been reluctant to grant new FDIC insurance and appears likely to retain this position.
• Existing trust banks without FDIC insurance. Indications suggest that the OCC’s change in policy will not be extended to require existing trust-only banks previously chartered without FDIC insurance to now obtain FDIC insurance. But questions persist regarding the new policy in other circumstances; for example, will the OCC impose the FDIC insurance requirement on existing trust banks that undergo a change in ownership, by merger or otherwise?