Law of Banking and Financial Institutions Benchmark - Assignment Example

Law of Banking and Financial Institutions Benchmark Question 1 There are several provisions that an organisation needs to undertake in order for it to be able to form a commercial bank that has a national charter in the US. Some of the general provisions required for the same are as described herein. The Banking laws under various statutes in the US provide that persons desirous of forming a bank to have them incorporated under a charter specifying their powers, rights, and duties. This decision is usually based on the requirement that the new bank attains a status of a national charter bank (Williams & American Bar Association, 2006). However, the general process that applies under the New York law for the incorporation of a bank is that; first, the organisers file a notice of intent for forming the bank. This notification of resolved is required to contain all the names of the principal directors/owners of the bank and nature of capital set aside for the operation of the bank. Second, the law requires that the organisers serve the nearby banks with a notice informing them of the intended new bank to be set in the country or locality. Subsequently, the bank is required to have a minimum number of five incorporators and in its application describe the classes of stock that it wishes to register and trade. Additionally, in the event that the nature of the bank to be formed is under the management of private bankers, they would be required to pass a fitness test for banking, have a minimal permanent capital amount of $1 million, and not engage in any purchases of real estate’s investments. In addition, the general limit is set for real estate loans that they are allowed to in the event of an unimproved realty. This limit is two-thirds of the realty and three-quarters of the realty when it improves (Bender, 2012). The statutes also restrict the bank from having any dealings with similar businesses. In other instances, the organizers of the bank will need to organise regular meetings with the Comptroller of Currency’s office and attend informal conferences with regard to the application. Based on these meetings, the formal application of the bank will take place with the submission to the District Office where the bank will be situated. After this, the public opinion is sought for a period of 30 days from other parties of interest before the final declaration of the bank’s application status (Asser, 2001). Given that the application is satisfactory, the Comptroller issues a letter of preliminary approval. From the date of preliminary approval, the law requires that the bank begin operations within 18 months. Upon meeting all these requirements, the bank is to be provided with a certificate from the Comptroller of Currency that permits it to commence its operations as a nationally chartered bank. Entirely, the whole process of chartering can be summarised into three stages of pre-filling discussions, submission of application and organisation of the bank (Bender, 2012). Question 2 Upon incorporation of a bank in a particular state, the bank is permitted to engage in various activities including the diversification of its operations into other localities. This is made possible using branches. A bank’s branch is a separate and distinct business entity from its parent bank, but with no separate legal entity; hence, always subject to the supervision of the main banks. Therefore, it may be referred to as a form of multiple banking in which the parent bank, which is the single legal entity, runs in more than one office. A branch of a bank carries out all its operations under the guidance of the parent bank since it has no separate capital structure or board of directors from its parent bank. A branch of a bank is also limited on the loans that it can approve to clients since this is determined based on the capital structure of the parent bank (Hong Kong Institute of Bankers, 2013). Banks use branches for several purposes, but the main one being in advancing their operations. In this, a branch acts as a business place for receiving deposits, lending money, and payment of checks. As such, the branch is considered as an agent to the parent bank. There are different facilities that may be regarded as branches and others that may not be regarded as such. Facilities such as customer-bank computer terminals, drive-in teller windows, and armored car messenger services may be considered as branches. However, shared auto teller machines (ATMs) are not considered as branches, a case in point being the decision given by the US Court of Appeal in Independent Bankers Association v. Marine Midland Bank. In this case, the use of a shared ATM by a national bank did not imply its ownership or renting by the bank; hence, not considered its branch. The Riegle-Neal and the Dodd-Frank Acts have had profound effects on the capacity of banks to have branches in various states. The Riegle-Neal Act of 1994 is applied in the understanding of interstate banking in which new legislative views to geographic boundaries was established that restricted the expansion of banks to other states outside that of their incorporation (Calomiris, 2006). Before this Act, interstate banking based on holding company ownership was permitted, but with the passage of the Act, restrictions were placed and this led to court battles that resulted in a federal ruling. In the federal ruling, the Riegel-Neal Act was appealed to give express federal approval to interstate banking. However, it resulted into restrictions that affected the operations of banks. These restrictions included requiring target bank to be existing for a particular minimum period not exceeding 5 years before becoming eligible to acquire out-of-state holding companies. Consequently, it was required that the holding company seeking to acquire a branch have adequate capital and be adequately managed. Banks were also required to submit their measurements for capital adequacy before and after mergers for branches, and were to ensure that they became compliant to the Community Reinvestment Act (CRA) regulations. Finally, the concentration limit that required regulatory censure of applications from banks proposing for more than 10% of the insured deposits, was established (Bender, 2012). Question 3 Directors of the bank are tasked with the establishment of organizational policies, approval of major transactions, and the supervision of other bank officers on a daily basis. Their conduct as directors in the performance of these duties at individual levels defines their form of fiduciary. This implies that the directors act in a fiduciary capacity on behalf of the bank in a manner that allows them to assert the benefit of the doubt (judgment rule) in the understanding of the bank’s operations. The fiduciary duties and the standards of care that apply to the bank directors are ascertained through common law rules, by-laws, generally accepted business practices, bank customs and the corporate charter (Asser, 2001). The fiduciary duties also entail the duty of loyalty and care to the organisation. Essentially, this requires that the directors act as prudent and diligent persons capable of selecting, monitoring, and evaluating the competency of the management, assessing the business progress, establishing and monitoring the adherence to the policies. Subsequently, they are required to make decisions based on fully informed and meaningful deliberations by acting prudently and diligently in safeguarding the property of the bank (Bender, 2012). The directors are also obligatory to conform to the national and state statutes. The fiduciary concept also demands of the directors to accomplish their responsibilities in good faith and in a fashion that is judiciously understood to be in the superlative attention of the bank, but taking care of the ordinarily prudent persons. In studies involving the common law causes of actions against the bank directors, the general rule of corporate law is that lawsuits may be brought against the bank directors by the corporation or shareholders in the event that they believe there has been a breach in the fiduciary duties. It is a national law that administrates the standards for the determination of the fiduciary duty levels that applies to bank directors. Largely, the affairs of the directors is defined by the National Bank Act, the Financial Institutions Reform, Recovery and Enforcement Act (1989), the Federal Deposit Insurance Act, the Federal Reserve Act and the Bank Tying Act (Williams & American Bar Association, 2006). Question 4 Indemnification refers to a type of agreement in which the concerned parties both agree that one party is not to be apprehended accountable for legal causes of action in the future. In the context of banks and directors, the concept of indemnification relates to the promise that is legally made that the directors would not be held liable for losses or sues them for any such losses. An understanding of the concept of indemnification as a provision of common law is one of the most frequently used in the event that two parties are negotiating a contract. However, the expectation is that the parties to the contract do not understand its meaning. The comprehension of the moment when indemnification comes into play is significant as that moment also defines the importance of contexts to which it is used. Largely, the term is used when a contractual shift in monetary responsibilities is involved and the possibility of loss or damage occurring to one party is high. A case in point would be the insurance business where one party (insurer) indemnifies the homeowner (Asser, 2001). In the context of a bank, the term indemnification is used to relate to protection or shielding that directors receive from personal liability to debts or damages and decisions made by them on behalf of the company. Under California state and federal laws, the concept of indemnification is regulated in the banking institutions by ensuring that the provisions of indemnification are powerful and consider value (Williams & American Bar Association, 2006). Question 5 A conflict of interest refers to a condition in which the apprehensions or purposes of two people become incompatible or different based on the decisions made by them during the official capacities. In the case of the bank where the directors have agreed to act fiduciary and absolve the employee of any payment of damages (Calomiris, 2006). In the allocation of loans to persons including the insiders, adequate monitoring and management become essential in the event that the directors will always be informed of the firm’s decisions. The directors here are expected to act with showing impartiality in handling the needs from clients to the extent that they would feel their best interest is being catered for. The securing of loans as an insider requires the involvement of the directors since it would help in determining the interests to the exercise. References Asser, T. M. C. (2001). Legal aspects of regulatory treatment of banks in distress. Washington, DC: International Monetary Fund. Bender, M. (2012). Banking Law. New York: Lexis-Nexis Group. Calomiris, C. W. (2006). U.S. bank deregulation in historical perspective. New York: Cambridge University Press. Hong Kong Institute of Bankers. (2013). Banking law and practice. Singapore: John Wiley & Sons. Williams, H. C., & American Bar Association. (2006). Federal banking law and regulations: A handbook for lawyers. Chicago: American Bar Association. Read More