BANKING

DEPARTMENT OF BANKING AND INSURANCE

DIVISION OF BANKING

Depository Institutions

Proposed Readoption with Amendments: N.J.A.C 3:4

Authorized By: Holly C. Bakke, Commissioner,

Department of Banking and Insurance

Authority: N.J.S.A. 17:1-8.1, 1-15e, 17:9A-8.10, 17:9A-27.50, 17:9A-106, 17:9A-266 et seq., 17:12B-72 and 17:12B-177 et seq.

Calendar Reference: See Summary below for explanation of exception to calendar requirement.

Proposal Number: PRN 2002-206

Submit comments by August 20, 2002 to:

Karen Garfing, Assistant Commissioner

Regulatory Affairs

New Jersey Department of Banking and Insurance

P.O. Box 325

Trenton, NJ 08625-0325

Fax: (609) 292-0896

Email: Legsregs@dobi.state.nj.us

 

The agency proposal follows:

 

Summary

The Department of Banking and Insurance ("Department") proposes to readopt N.J.A.C. 3:4 governing depository institutions. Pursuant to N.J.S.A. 52:14B-5.1c, the rules in this chapter are scheduled to expire August 15, 2002. In accordance with N.J.S.A. 52:14B-5.1c, the submission of this notice of proposal to the Office of Administrative Law extended that expiration date 180 days to February 11, 2003.

The Department proposes to amend the chapter by making the language in the definitions standardized and by correcting certain references to Federal regulations.

The Department proposes to readopt the balance of the rules without amendment. The Department has reviewed the rules and has determined that they continue to be necessary, reasonable and proper for the purpose for which they were originally promulgated. The rules proposed to be readopted thus will continue to provide the regulatory framework to enable the Commissioner to monitor depository institutions. They also help ensure that institutions do not operate in an unsafe and unsound manner, and that they maintain appropriate levels of capital and file necessary reports. Further, the rules continue to set standards for stock options plans offered to directors, officers and employees.

A 60 day comment period is provided and, therefore, pursuant to N.J.A.C. 1:30-3.3(a)5, the proposal is not subject to the provisions of N.J.A.C. 1:30-3.1 and 3.2 governing rulemaking calendars.

Social Impact

The rules proposed for readoption with amendments apply to all New Jersey State chartered depository institutions. N.J.A.C. 3:4-3 also applies to those out-of-State state chartered depository institutions that have a branch in New Jersey.

The rules in this chapter provide standards with respect to capital requirements for depository institutions for determining whether such institutions are operating in an unsafe or unsound condition, and reflect permissible activities with respect to the provision of stock option plans consistent with law.

With respect to capital requirements, the Department notes that reviewing capital ratios is an important way to measure the safety of a depository institution. A depository with a higher capital ratio has a larger cushion for protection in the event of a business decline. By periodically reviewing capital ratios, the Department is able to identify potential problem institutions and assist those institutions in their recovery before their condition becomes such that they may require that the Commissioner take possession of the institutions pursuant to N.J.S.A. 17:9A-269 or 17:12B-179. This, in turn, should help avoid disruptions to the depositors, and the public generally, that may result from such occurrences.

With respect to compensation requirements, the rules proposed for readoption will continue to reflect existing statutory requirements by providing flexibility to State depositories in compensating their directors, officers and employees. This, in turn, may better enable such depositories to attract and retain qualified persons to such positions. To the extent that depositories are able to operate efficiently and profitably through this employment, the pubic should similarly benefit.

The banking industry has also come to rely on the presence and viability of these rules and their operation. State depository institutions are provided with standards concerning capital requirements and threshold levels at which the Department will determine whether such depositories are in an unsafe or unsound financial condition for purposes of taking action in accordance with N.J.S.A. 17:9A-266 et seq. and 17:12B-177 et seq. The rules further reflect and implement provisions with respect to compensation and the offering of stock options by State depositories to their directors, officers and employees. These rules in this chapter thus implement various statutory requirements and enable the Department to fulfill its statutory duties under law. Failure to readopt these rules would impair the Department's ability properly to oversee banking operations, and would unsettle established relations between banking institutions and the public, their directors, officers and employees, and the Department. The protections that these rules afford depositors and the operational guidance that they afford the banking industry mandate their continued existence both to implement statutory provisions and to foster or promote a sound regulatory policy. Therefore, the rules will have a beneficial social impact for the institutions, their customers and the general public.

The amendments to the various rules set forth in the chapter are technical in nature and should not have any significant impact on depository institutions or the public.

Economic Impact

The readoption with amendments will not impose any additional economic impact on State depository institutions or depositors in that the readoption will continue existing requirements. The proposed amendments address stylistic changes in the rules and updating of some legal citations, and do not impose any additional recordkeeping or compliance requirements on banks, savings banks or savings and loan associations.

State depositories will continue to be required to incur any costs associated with continued compliance with the requirements set forth in the chapter. These requirements include maintaining applicable capital to asset ratios as set forth in N.J.A.C. 3:4-1. As indicated above, these ratios are comparable to those applicable to Nationally chartered banks and to members of the Federal Reserve Board and FDIC. Moreover, by continuing to define unsafe operation and unsafe condition, the rules specify when the Department may take enforcement action against the depository institution in accordance with N.J.S.A. 17:9A-266 et seq. and 17:12B-177 et seq. State depository institutions will continue to be required to incur costs associated with any order issued due to the failure of such institution to maintain appropriate capital ratios as set forth in the rules. However, the Department believes that any costs that may be imposed are outweighed by the benefits to be achieved through the potential elimination of unsafe or unsound financial conditions and attendant costs and disruptions.

With respect to stock option plans, the rules will continue to provide a positive economic impact on these institutions to the extent that depositories are able to transact business more efficiently and attract and retain qualified people. Since depositories are not required to make stock options available, the Department does not believe that any negative economic impact should result from the readoption of N.J.A.C. 3:4-2.

Further, as noted in the Social Impact above, the rules in this chapter address various statutory requirements governing banks and other regulated entities. The rules will continue to provide standards by which the Department may monitor the financial position of State depositories to help ensure that such entities will not be or become in an unsafe or unsound financial condition, and if a State depository is in such condition, to take appropriate action pursuant to law to help avoid further deterioration. This, in turn, should benefit depositors, banks, savings banks, savings and loan associations, taxpayers, and the public generally.

The failure to readopt this chapter would require State depository institutions to engage in business without guidance from the Department. This could impose significant costs on the industry since current compliance requirements would not be readily available to the industry, requiring it to implement guidelines which may or may not be acceptable to the Department. This, in turn, could result in disruption to the market with attendant additional costs. Further, the readoption of the current rules will enable the Department to continue to monitor State depository institutions in an appropriate manner.

Further, the Department has carefully monitored, and continues to monitor, the impact of the rules in this chapter through communication with the banking industry and the public. The Department is unaware of any provisions of these rules that impose undue or unnecessary financial burdens on State depositories.

Finally, the Department will continue to be required to incur any costs associated with monitoring the financial position of depository institutions to ensure compliance with this chapter. The Department anticipates that future annual costs of compliance with these rules should be consistent with current annual costs. Some depository institutions may choose to seek or continue to use professional assistance for compliance with the rules. This assistance would be in the form of accountants, financial industry consultants or attorneys. The cost of the professional will vary based on the individual professional and the amount of work requested.

Federal Standards Statement

The rules proposed for readoption with amendments do not contain standards or requirements that exceed standards or requirements imposed by Federal law. The rules proposed for readoption with amendments continues to apply to depositories certain Federal standards, as set forth at 12 C.F.R. 325 Appendix A, 12 C.F.R. 304.4, 12 C.F.R. 324, 12 C.F.R. 325.2t and 325.2v, 12 C.F.R. 567.6, and 12 U.S.C. 1813(a)(2).

Jobs Impact

The Department does not anticipate that any jobs will be lost as a result of the rules proposed for readoption with amendments. Most depository institutions will use existing staff for continued compliance with the existing rules. Some institutions may choose to employ professional services to meet the recordkeeping, reporting and other compliance requirements. The costs of these professional services are discussed in the Economic Impact above.

The Department invites commenters to submit any data or studies concerning the jobs impact of the proposed readoption with amendments together with their written comments on other aspects of this proposal.

Agriculture Industry Impact

The Department does not expect any agriculture industry impact from the rules proposed for readoption with amendments.

Regulatory Flexibility Analysis

Some depository institutions operating in this State are small businesses as defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. No new requirements are being proposed. The rules proposed for readoption with amendments will continue to impose recordkeeping and reporting requirements on these entities in the form of reports of financial conditions to the Department. The rules proposed for readoption with amendments will also continue to require New Jersey banks, savings banks and savings and loan associations to maintain capital in the amount set forth in the rules and, if such institution seeks to do so, to provide for stock option plans in accordance with the rules.

The Department believes that these requirements are generally mandated pursuant to good banking practice. The costs are discussed in the Economic Impact above. Moreover, the Department does not believe that these requirements are unduly burdensome and should not require professional services for compliance. The purpose of these rules is to assist depository institutions in their operations and to protect consumers. Thus, the purpose does not vary based upon business size. Accordingly, no differentiation based on business size is provided.

Smart Growth Impact

The rules proposed for readoption with amendments will have no impact on the achievement of smart growth and implementation of the State Development and Redevelopment Plan.

Full text of the proposed readoption may be found in the New Jersey Administrative Code at N.J.A.C. 3:4.

Full text of the proposed amendments follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

SUBCHAPTER 1. CAPITAL REQUIREMENTS

3:4-1.1 Definitions

The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.

"Bank" [shall have the meaning ascribed to it] means a bank as defined in N.J.S.A. 17:9A-1.

"Capital stock association" [shall have the meaning ascribed to it] means a capital stock association as defined in N.J.S.A. 17:12B-244.

"Capital stock savings bank" [shall have the meaning ascribed to it] means a capital stock savings bank as defined in N.J.S.A. 17:9A-8.1.

. . .

"Depository institution" [shall mean] means a bank, savings bank, capital stock savings bank, capital stock association or mutual association.

"Mutual association" [shall have the meaning ascribed to it] means a mutual association as defined in N.J.S.A. 17:12B-5.

"Qualifying capital" [shall have the same meanings ascribed to it] means qualifying capital as defined in Appendix A to 12 C.F.R. Part 325.

"Risk weighted assets" for a bank and savings bank [shall have the meaning ascribed to it] means risk weighted assets as defined in Appendix A to 12 C.F.R. Part 325, and for a savings and loan association [shall have the meaning ascribed to it] means risk weighted assets as defined in 12 C.F.R. 567.6

"Savings bank" [shall have the meaning ascribed to it] means a savings bank as defined in N.J.S.A. 17:9A-1(13).

"Tier 1 capital" [shall have the meaning ascribed to it] means Tier 1 capital as defined in 12 C.F.R. 325.2[m]t.

"Total assets" [shall have the meaning ascribed to it] means total assets as defined in 12 C.F.R. 325.2[n]v.

SUBCHAPTER 2. COMPENSATION

3:4-2.1 Definitions

The following words and terms, when used in the subchapter, shall have the following meanings, unless the context clearly indicates otherwise.

"Bank" [shall have the same definition as provided] means a bank as defined in N.J.S.A. 17:9A-1.

"Depository" [shall mean] means a bank, savings bank or savings and loan association, and includes a limited purpose trust company.

"Savings and loan association" [shall mean] means a capital stock association established pursuant to N.J.S.A. 17:12B-244 et seq.

"Savings bank" [shall mean] means a capital stock savings bank established pursuant to N.J.S.A. 17:9A-8.1 et seq.

SUBCHAPTER 3. REPORTING REQUIREMENTS

3:4-3.2 Definitions

The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.

. . .

"Branch office" [is] means a branch office as defined in N.J.S.A. 17:9A-1.

. . .

 

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