Can a North Carolina state-chartered bank invest in a 'banker's bank', a depository institution chartered to do business with other banks and majority-owned by banks, by treating the banker's bank as a 'central reserve bank' under one of the exceptions to G.S. 53-47's bar on a bank investing in another bank? And does the answer change if the investment is in a holding company that owns the banker's bank?

Plain-English summary

Commissioner of Banks William T. Graham asked the AG whether a state-chartered NC bank may invest in a "banker's bank," and whether the answer changes if the investment passes through a holding company that owns the banker's bank. The AG, through Senior Deputy AG Ann Reed and Assistant AG L. McNeil Chestnut, said no in both cases.

G.S. § 53-47 forbids a NC state-chartered bank from investing in "the stock of any other state or national bank," with four exceptions:

1. Clearing corporations defined at G.S. § 25-8-102(3);
2. Edge Act banks organized under federal law;
3. Central reserve banks "having a capital stock of more than one million dollars"; and
4. Federal Home Loan Banks.

A banker's bank is plainly not a clearing corporation, an Edge Act bank, or a Federal Home Loan Bank, so the only question was whether it fit within the central-reserve-bank exception. The statute defines central reserve bank functionally: at least 50 percent of the capital stock must be owned by other banks, and capital stock must exceed one million dollars. A banker's bank, as described in the Commissioner's request, met both technical thresholds.

The AG said the technical thresholds were not enough. The phrase "central reserve bank" is rooted in the institutional concept of a central bank. Barron's Dictionary of Banking Terms (2d ed. 1993) describes a central bank as a "central monetary authority, usually an agency of a national government," that issues the nation's currency, regulates the supply of credit, manages the external value of currency in foreign exchange markets, holds reserves of other banks and other central banks, acts as fiscal agent for the central government, and maintains an orderly market in government securities. The U.S. District Court for the Southern District of Florida, construing the term "central bank" in 12 U.S.C. § 632, similarly described central banks as "primary financial organization[s] of the State" performing those central-bank functions (Republic of Panama v. Citizens & Southern International Bank, 682 F. Supp. 1544, 1546 (S.D. Fla. 1988)).

A banker's bank, by contrast, is a "depository institution, usually a commercial bank, organized and chartered to do business with other banks and owned by the banks it services. These banks do not take deposits (from) or make loans to the public" (Barron's at 60). The AG framed the distinction: a central bank is typically an extension of a governmental unit designed to facilitate the state or national banking system; a banker's bank is a private commercial bank providing specialized financial services to its member banks. Functional overlap exists (a banker's bank may offer services that resemble central reserve functions), but the institutional character is different.

The AG also relied on the canon that long-standing agency interpretation of a statute carries weight when not in conflict with statutory intent or judicial construction. The Office of the Commissioner of Banks had historically read § 53-47 to prohibit state banks from investing in banker's banks. That reading aligned with the statute's clear purpose of limiting investment by NC banks in other banks. NC courts had not interpreted the statute, so the agency reading did not run up against any prior judicial construction.

On the holding-company variant, the AG applied a functional look-through: an investment in a bank holding company is the functional equivalent of an investment in the bank itself. So a state-chartered bank cannot invest in a holding company that owns a controlling interest in a banker's bank either, because that would accomplish indirectly what § 53-47 forbids directly.

The AG closed with an explicit caution. Because no court had construed § 53-47 on these facts, this was a case of first impression. A court could adopt the contrary reading the private memorandum had offered: that a banker's bank technically meets the textual thresholds for "central reserve bank" and so qualifies for the exception. The AG's opinion was guidance to the Commissioner, not a guaranteed answer.

Currency note

This opinion was issued in 1994. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

NC's banking code has been substantially revised since 1994 (state-chartered commercial bank powers are now largely under Chapter 53C). Bankers' banks have grown more common nationally since the 1990s, and many states have adopted explicit statutes addressing them rather than forcing the question through the "central reserve bank" exception. Any current question about NC state-chartered bank investment in a banker's bank or its holding company should be checked against the current bank-powers statutes, current Office of the Commissioner of Banks interpretive letters, and any federal preemption arguments based on the bank's specific charter.

Common questions

Q: What is a banker's bank?
A: A specialized depository institution that exists to serve other banks rather than the general public. Typical services include check clearing, federal funds transactions, loan participations, securities safekeeping, payment processing, and sometimes correspondent lending. Banker's banks are owned by their member banks. They do not take deposits from or make loans to non-bank customers.

Q: What is a central reserve bank in the § 53-47 sense?
A: The AG read the term in light of the central-bank concept: a governmental-extension institution that performs core central-bank functions like issuing currency, regulating credit, managing reserves, and acting as fiscal agent. The Federal Reserve Banks fit; foreign central banks fit. A banker's bank, however, is a private commercial enterprise even if its capital ownership is concentrated among member banks. The statutory thresholds (capital over $1 million, 50% bank ownership) describe necessary but not sufficient conditions.

Q: Why isn't the textual threshold enough?
A: Because text doesn't read in a vacuum. The statute uses a name ("central reserve bank") that carries institutional meaning, and the AG concluded that meaning matters. If the General Assembly had wanted to permit investment in any bank in which 50%+ of capital was held by other banks and capital exceeded $1 million, it could have said so. The use of the term "central reserve bank" signals that the institutional character of the investee matters, not just the bookkeeping facts about its capital and ownership.

Q: Why does the holding-company answer follow from the bank answer?
A: Because of the functional-equivalent reasoning. If a bank cannot invest in stock of a banker's bank directly, it cannot achieve the same end by investing in stock of a holding company whose principal asset is the banker's bank. The look-through principle is a common feature of bank-regulatory law: regulators apply the same restrictions to direct and indirect investments.

Q: What is a case of first impression and why does the AG flag it?
A: A case of first impression is one in which the courts of the jurisdiction have not previously addressed the legal question. The AG flagged it to signal that the Commissioner's reading (and the AG's confirmation) had not been judicially tested. If a NC bank challenged the agency's interpretation, a court might adopt the contrary reading offered by the bank's private memorandum. The opinion is best read as guidance with disclosed litigation risk.

Q: Does federal law affect any of this?
A: It might, especially for nationally chartered banks or federally insured institutions, but the opinion is limited to NC state-chartered banks under Chapter 53. National banks operate under federal preemption rules. A state-chartered bank that is also subject to federal regulation needs to clear both layers.

Background and statutory framework

NC's longstanding policy in Chapter 53 has been to bar banks from owning each other. The § 53-47 prohibition reflects two related concerns: concentration of banking power in pyramided structures, and systemic risk from cross-holdings that link the health of multiple banks. The four exceptions are narrow and policy-justified: clearing corporations (settlement infrastructure), Edge Act banks (specialized international banking subsidiaries), central reserve banks (system-level monetary infrastructure), and Federal Home Loan Banks (federal housing-finance system support).

Banker's banks emerged in the 1980s as a way for community banks to pool resources for correspondent services they could not efficiently provide themselves. They typically have a single charter that limits their business to serving member banks. The 1994 opinion reads § 53-47's central-reserve-bank exception too narrowly to encompass them.

The opinion is a useful example of statutory construction using institutional context, not just textual triggers. Where a definition gives both quantitative thresholds and a categorical label, the AG reads the label as carrying meaning that the thresholds alone do not capture. It is also a clean illustration of holding-company look-through reasoning.

Citations

• N.C. Gen. Stat. § 25-8-102(3) (definition of clearing corporation)
• N.C. Gen. Stat. § 53-47 (state-chartered bank may not invest in stock of any other state or national bank, with four exceptions including clearing corporations, Edge Act banks, central reserve banks > $1 million capital stock, and Federal Home Loan Banks)
• 12 U.S.C. § 632 (federal jurisdiction over foreign branch banking; "central bank" terminology)
• Republic of Panama v. Citizens & Southern International Bank, 682 F. Supp. 1544 (S.D. Fla. 1988) (central bank is primary financial organization of the State performing central-bank functions)
• State ex rel. Commissioner of Insurance v. North Carolina Automobile Rate Administrative Office, 294 N.C. 60, 241 S.E.2d 324 (1978) (agency interpretation entitled to weight)
• Watson Industries, Inc. v. Shaw, 235 N.C. 203, 69 S.E.2d 505 (1952) (administrative construction relevant)
• Duke Power Company v. Clayton, 274 N.C. 505, 164 S.E.2d 289 (1968) (administrative construction relevant)
• NC Index, Statutes § 33 (1994) (long-standing agency interpretation may be considered in construing a statute)

Source

• Landing page: https://ncdoj.gov/opinions/authority-for-north-carolina-banks-to-invest-in-a-bankers-bank/

Original opinion text

September 8, 1994

The Honorable William T. Graham
Commissioner of Banks
PO Box 29512
Raleigh, NC 27626-0512

Re: Advisory Opinion — Authority for North Carolina Banks to Invest in a Banker's Bank under N. C. Gen. Stat. § 53-47

Dear Commissioner Graham:

This will respond to your request for an opinion on whether or not a bank, organized under Chapter 53 of the North Carolina General Statues, i.e., a state chartered bank, may invest in a banker's bank.

You indicated that for the purposes of our response, we are to assume that a banker's bank is a financial institution chartered under the laws of the United States or any state, which is engaged primarily in providing services to other banks and their directors, officers and employees, and at least 50% of the capital stock of which is held, either directly or through one or more holding companies, by other banks. You also advised that historically your agency has construed N.C. Gen. Stat. § 53-47 to prohibit a state bank from investing in a banker's bank as well as a holding company which may own such a bank, since an investment in the holding company is tantamount to an investment in the bank itself.

QUESTION OF LAW

N.C. Gen. Stat. § 53-47 prohibits a state bank from investing in the stock of ". . . any other state or national bank . . . ." with the following exceptions: (1) clearing corporations defined at N. C. Gen. Stat. § 25-8-102(3); (2) Edge Act banks organized under federal law; (3) central reserve banks having a capital stock of more than one million dollars; and (4) Federal Home Loan Banks.

As a banker's bank is not a clearing corporation, Edge Act bank or Federal Home Loan Bank, the question of law is whether a banker's bank can be included within the definition of a central reserve bank. If it can, then clearly there is statutory authority for a state bank to invest in the same. On the other hand, if a banker's bank does not come within the definition of a central reserve bank, there would be no authority for a state chartered bank to invest in these banks.

Together with your request you enclosed a memorandum submitted by a private law firm which concluded that a banker's bank meets the definition of a central reserve bank and, therefore, a state bank may invest in the same. While this memorandum offers a plausible argument that a banker's bank may be considered a central reserve bank as defined at N.C. Gen. Stat. § 53-47; on balance we conclude that a banker's bank is not a central reserve bank and for that reason a state bank may not invest in a banker's bank.

DISCUSSION OF THE ISSUE

N. C. Gen. Stat. § 53-47 provides that "[t]o constitute a central reserve bank as contemplated by this Chapter [Chapter 53 of the General Statutes], at least fifty per cent (50%) of the capital stock of such bank [which must be more than one million dollars] shall be owned by other banks." It is our opinion that the definition of a central reserve bank contemplates more than the technical requirements of having a capital stock of more than a million dollars and fifty per cent ownership by other banks. We believe the focus of this definition should be placed on the terms "central" or "reserve." BARRON'S DICTIONARY OF BANKING TERMS (2d ed. 1993) at p.113, defines a central bank as follows:

[A] central monetary authority, usually an agency of a national government, that performs a number of key functions; (1) issues the nations currency; (2) regulates the supply of credit in the economy; (3) manages the external value of its currency in the foreign exchange markets; (4) holds deposits representing reserves of other banks and other central banks; (5) acts as fiscal agent for the central government, when the government sells new issues of securities to finance its operations; and (6) attempts to maintain an orderly market in these securities by actively participating in the government securities market.

Although we were unable to find any authority precisely on point, the United States District Court for the Southern District of Florida, in construing the term "central bank" at 12 U.S.C. § 632, concluded that they are a ". . . . primary financial organization of the State . . . ." performing typical central bank functions. Republic of Panama v. Citizens & Southern International Bank, 682 F.Supp. 1544 at 1546 (S.D.Fla. 1988). The functions alluded to by the Court are the same as those enumerated above.

A banker's bank is a ". . . depository institution, usually a commercial bank, organized and chartered to do business with other banks and owned by the banks it services. These banks do not take deposits (from) or make loans to the public. . . (and). . . [t]hey may be chartered as national banks. . . ." BARRON'S at p.60.

A banker's bank may offer services to its members which closely resemble those of a central reserve bank; however, it is not, in our opinion, a central reserve bank as perceived by N. C. Gen. Stat. § 53-47. The distinction we see between a central bank and a banker's bank is that the former is typically an extension of a governmental unit designed to facilitate the state or national banking system, whereas the latter is a private commercial bank which is designed to provide specialized financial services to its member banks.

Finally, when an issue of statutory construction arises, the interpretation adopted by those who execute and administer the law in question is relevant and may be considered provided that it does not conflict with the intent and purpose of the act, or conflict with the interpretation of the courts. See, NC Index, Statutes § 33 (1994). See also, State ex rel Commissioner of Insurance v. North Carolina Automobile Rate Administrative Office, 294 N.C. 60, 241 S.E.2d 324 (1978), Watson Industries, Inc. v. Shaw, 235 N.C. 203, 69 S.E.2d 505 (1952), and Duke Power Company v. Clayton, 274 N.C. 505, 164 S.E.2d 289 (1968). In our view, the interpretation by your agency does not conflict with the clear intent of the statute, which is to limit investment by North Carolina banks in other banks. Also, as the statute in question has not been interpreted by the courts, your interpretation is not in conflict with judicial construction.

CONCLUSION

In summary, it is our opinion that a banker's bank, as described in your letter of August 16, 1994, is not a "central reserve bank" as defined at N.C. Gen. Stat. § 53-47. Therefore, a state chartered bank is not permitted to invest in a banker's bank.

Further, since an investment in a bank holding company is the functional equivalent of an investment in the bank itself, we conclude that a state chartered bank cannot invest in a bank holding company which owns a controlling interest in a banker's bank.

We must caution, however, that, this would be a case of first impression and a court may adopt another interpretation. We trust that this adequately addresses your questions to us. Please let us know if we may be of further assistance.

Ann Reed
Senior Deputy Attorney General

L. McNeil Chestnut
Assistant Attorney General