BankXX stock as collateral for a loan
Some have questioned why we cannot service our stockholders and make loans collateralized in whole or in part by BankXX, N.A. stock. For national banks, banking regulation 12 USC 83 stipulates that banks cannot make a loan using their own stock as collateral.
12 USC Sec. 83 01/03/05
TITLE 12 – Banks and Banking Chapter 2 – National Banks
Subchapter IV – Regulation of the Banking Business; Powers and Duties of National Banks
Sec. 83. Loans by bank on its own stock
-STATUTE-
(a) General prohibition - No national bank shall make any loan or discount on the security of the shares of its own capital stock.
(b) Exclusion - For purposes of this section, a national bank shall not be deemed to be making a loan or discount on the security of the shares of its own capital stock if it acquires the stock to prevent loss upon a debt previously contracted for in good faith.
While this is a regulation of the Office of the Comptroller of the Currency, the other regulators have similar laws.
Reason (the confusion)
For many of us, it might seem odd – for example, at Bank of America (“BoAâ€), you can walk into any BoA branch office with BoA stock and walk out with a loan. There is a very subtle difference. The bank is Bank of America, N.A., and the stock is Bank of America Corporation – the holding company. If an applicant walked into a BoA office with Bank of America, N.A. (bank) stock, they would be declined for collateral. The holding company is a separate entity, and not the bank. (The same for Wachovia Corporation [HC] and Wachovia Bank, N.A. [bank], The South Financial Group [HC] and Carolina First [bank], First South Bancorp, Inc. [HC] and First South Bank, etc.)
Logic
If a bank had to liquidate the loan and take back their stock, it would have to be considered Treasury stock. Treasury stock is a direct reduction to a company’s Capital account, and a reduction in the number of shares outstanding.
A customer could go to any other bank and get a loan on BankXX stock, just as we can take stock from any other bank as long as the loan and collateral otherwise meet BankXX’s underwriting guidelines.
Please let me know if there are any questions.
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Integrity. With it, nothing else matters. Without it, nothing else matters.