IN THE MATTER OF THE REQUEST BY CHOICEONE BANK, SPARTA, MICHIGAN, FOR A RULING ON WHETHER THE BANK MAY OWN AND OPERATE AND TRAVEL AGENCY

Order No. 97-01

DECLARATORY RULING

Issued and Entered this 13th day of June, 1997 by Patrick M. McQueen Commissioner of the Financial Institutions Bureau.

BACKGROUND

By letter dated May 30, 1997, ChoiceOne Bank of Sparta, Michigan (BANK), requested the Financial Institutions Bureau either (1) state its concurrence that travel agency services are a "business related or incidental to banking" within the meaning of Section 151 of the Michigan Banking Code of 1969 (Code); MCL 487.301 et seq; MSA 23.710 et seq, or, alternatively (2) issue an order, pursuant to Section 151(32) of the Code. determining that the exercise of travel agency services is appropriate and necessary to enable Michigan state chartered banks to compete with other depository financial institutions and other providers of financial services. BANK proposes to enter into a acquisition or merger agreement on June 30, 1997 wherein it would acquire in a cash transaction Alpine Travel, Inc. of Grand Rapids (Alpine Travel). Alpine Travel is a Michigan corporation which operates as a general travel agency business. BANK proposes to operate Alpine Travel as a wholly-owned subsidiary of BANK.

Because of the broad applicability of the issue, it is the Bureau's position that a declaratory ruling is the most appropriate vehicle for a decision rather than an order as provided in Section 151(32) of the Code.

ISSUE PRESENTED

May a Michigan state-chartered bank own and operate a subsidiary that provides travel agency services?

ANALYSIS

Applicable Statutes:

Section 151(32) provides a bank with the authority:

"TO EXERCISE ALL INCIDENTAL POWERS AS SHALL BE NECESSARY TO CARRY ON THE BUSINESS OF BANKING. In order to implement the provisions of this subdivision, the commissioner may promulgate rules pursuant to section 19, or issue declaratory rulings in accordance with the administrative procedures act of 1969, Act No. 306 of the Public Acts of 1969, being sections 24.201 to 24.328 of the Michigan Compiled Laws, or issue orders on applications by 1 or more banks to exercise powers not specifically authorized by this act. It is intended that this subdivision shall vest in the commissioner the discretion and authority to authorize banks to exercise the powers APPROPRIATE AND NECESSARY TO COMPETE WITH OTHER DEPOSITORY FINANCIAL INSTITUTIONS AND OTHER PROVIDERS OF FINANCIAL SERVICES. In the exercise of the discretion permitted by this subdivision the commissioner shall consider the ability of banks to exercise any additional power in a safe and sound manner, the authority of national banks operating pursuant to federal law or regulation, POWERS OF OTHER COMPETING ENTITIES PROVIDING FINANCIAL SERVICES in the bank's service area, and any specific limitations on bank powers contained in this act or in any other state law. On a quarterly basis, the commissioner shall give notice to all banks of rules promulgated or declaratory rulings or determinations issued pursuant to this subdivision." (emphasis added)

Section 151 of the Code states in part:

"Subject to the limitations and restrictions contained in this act or in a bank's articles. the bank may engage in the business of banking and a business RELATED OR INCIDENTAL TO BANKING, and for that purpose, without specific mention in its articles, a bank has the powers conferred by the act and the following additional corporate powers." (emphasis added)

Section 11a of the Code provides:

"This act shall be implemented by the commissioner to maximize the capacity of banks in this state to offer convenient and efficient services, to promote economic development, and to ensure that banks remain competitive with other types of financial institutions."

Discussion:

Section 11a of the Code requires the commissioner consider the evolution of the financial marketplace and, if justified, act favorably on matters that promote competition among financial institutions. Section 151 of the Code defines the corporate powers of a bank by providing the initial parameters for the operation of a bank. A bank is authorized to engage in the business of banking and exercise those powers contained in the Code as well as engage in a business related or incidental to banking. Section 151 also provides a list of additional specific corporate powers authorized to a state-chartered bank. More specifically, section 151(32) authorizes a bank to exercise all incidental powers necessary to carry on the business of banking and grants the commissioner discretionary power to authorize banks additional powers to compete with other depository institutions and other providers of financial services.

Section 151(32) further allows the commissioner, after considering a number of factors, to authorize a bank the power to compete with other providers of financial services consistent with the ability of banks to exercise any additional power in a safe and sound manner and to exercise other powers not specifically authorized by the Code. However, any additional power authorized pursuant to section 151(32) must still be incidental to the business of banking, though it need not be incidental to a specifically authorized power. In First National Bank of Eastern Arkansas v. Taylor, 907 F.2d 775 (8th Cir. 1990), a federal appeals court panel observed that the incidental powers of national banks are not limited to activities that are deemed essential to the exercise of express powers, but rather, have been analyzed in terms of whether a particular activity is closely related to an express power and is useful in carrying out the business of banking. The business of banking must also be viewed in a broad perspective and must encompass evolutionary advancements of the business of banking into areas not historically associated with banks. Furthermore, as the business of banking is a dynamic concept which is constantly evolving, activities incidental or closely related to banking are also dynamic and evolving. Market forces, not regulations, shape and define the business of banking.

Section 151(32) of the Code requires the commissioner to consider four factors in exercising his discretion to authorize banks to exercise new powers:

(1) The ability of banks to exercise the additional power in a safe and sound manner

(2) The authority of national banks

(3) Powers of competing entities providing financial services

(4) Any specific limitations imposed in the Code or in other state law.

First, the commissioner must consider a bank's ability to exercise the new power in a safe and sound manner. Bank ownership and operation of a travel agency represents very little risk. A bank's investment in a travel agency would typically be nominal compared with its other investments. Possible risks might involve the handling of cash and credit cards for payment of travel and possible mistakes in booking various travel arrangements. Risks of this nature are the type commonly taken by banks in their traditional activities. Adequate insurance coverage combined with proper policies and procedures will mitigate against most travel agency risks.

BANK addressed the safety and soundness issue by stating:

"Section 24 of the Federal Deposit Insurance Act, added as part of FDICIA, provides that state-chartered banks must obtain authority from the FDIC before engaging as principal, directly or through a subsidiary, in any activity that is not permissible for national banks. In the preamble to the regulation issued in December 1993 that implements this statute, the FDIC used travel service activities to illustrate a service that, when offered in an agency capacity, could be offered by state-chartered banks without the need for approval under Section 24:

[T]ravel agency activities would not be brought within the scope of part 326 if the definition were adopted as proposed (i.e., would not require prior consent from the FDIC) even though a national bank is not permitted to act as travel agent. This results from the fact that the state bank would not be acting 'as principal' in providing those service...The final regulation adopts the proposed definition...58 Fed. Reg. 64462 (December 8, 1993)."

Notwithstanding, the National Bank Act and the Code differ in what type of incidental powers are authorized. The National Bank Act permits a bank to exercise "all such incidental powers as shall be necessary to carry on the business of banking," (12 U.S.C. Section 24 (Seventh)), while the Code permits Michigan state-chartered banks to engage in a business related or incidental to the business of banking (MCL 487.451)

Third, the commissioner must consider powers of competing entities providing financial services in the bank's service area. Because this declaratory ruling will have applicability for all state-chartered banks and because Act 202 of the Public Act of 1995, effective November 29, 1995, created a multi-state banking environment, the commissioner will consider competitors in both a statewide and a multi-state environment. Currently, eight states permit their respective state-chartered banks to own and operate aspects of travel agency services.

Many credit card issuers are lenders or are affiliates of lenders and offer aspects of travel agency services. The American Express Company is a diversified financial services provider, e.g. it offers international banking services, investment advisory services, brokerage services, investment in sponsored mutual funds, credit card travel and entertainment card services, and financial data-processing services. Automobile clubs which regularly provide full travel agency services also provide loans and lender services to their members. And, virtually all major airlines provide co-branded credit card lending with financial institutions. Finally, both Michigan chartered and federally chartered credit unions, direct competitors of banks for loans and deposits, are authorized to provide travel agency services to their members.

Conversely, as BANK indicates, banks are major issuers of travelers checks and banks are a large source of financing for business travel expenses through their credit card programs. BANK also points out that bank ATMs are a significant source of funding for personal and business travel. Furthermore, the information services capabilities available in a bank's communication and data processing system are readily transferrable to respond to the needs of travel customers.

Fourth, the commissioner must determine whether there are any specific limitations on bank powers contained in the Code or in any other state law. The Code does not prohibit a state chartered bank from owning a travel agency. Further, no other Michigan law prohibits a bank from owning a travel agency.

FINDINGS OF FACT

Owning and operating a travel agency represents only a nominal risk to a bank or its subsidiary. The risk is manageable through proper policies and procedures and appropriate insurance. Owning a travel agency does not per se raise significant safety and soundness concerns.

National banks are not authorized to own travel agencies. However, the Comptroller of the Currency and the Supreme Court of the United States of America generally support a broad- based view of the business of banking.

Banks must compete on a variety of fronts. Traditionally, banks focused upon making loans, taking deposits, and cashing checks. However, the competitive environment for banks is rapidly changing. Nonbanks and providers of financial services frequently offer traditional-banking services as well as bank-related and other services while operating outside the jurisdiction of bank regulators. Further, Michigan chartered and federally chartered credit unions are authorized to provide travel agency services to their members.

Finally, neither the Code nor any other state law prohibits the ownership of a travel agency by a Michigan state chartered bank.

DECLARATORY RULING

Consistent with the spirit and intent of sections 11a and 151(32) of the Code, the commissioner finds that ownership of a travel agency is permitted pursuant to the banking code of 1969.

Patrick M. McQueen, Commissioner
Financial Institutions Bureau
Department of Consumer and Industry Services
Date: June 13, 1997