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Recently, Illinois amended several provisions of its banking laws (HB3467). These changes were supported by the Illinois banking community and are intended to harmonize Illinois Banking Act and Illinois Savings Bank Act. While many of the changes are non-substantive updates or focused solely on Illinois savings banks, some are relevant to commercial banks.1
The changes in HB3467 are effective immediately, but do not generally impose new compliance obligations. In this Legal Update, we discuss the provisions of potential relevance to commercial banks.
Secured Deposits
Under Illinois law, banks may issue secured obligations only in prescribed circumstances. While banks generally may pledge assets to secure non-deposit obligations, their authority to secure deposit obligations is far more limited. This may be because secured creditors have priority in the event of insolvency (to the extent of their security), and permitting banks to secure some deposits and not others could cause additional losses to the federal deposit insurance fund, and place some uninsured depositors in an unfavorable position.2
Accordingly, under the existing law, Illinois banks may pledge assets to secure deposits only if the depositor is (i) the federal government; (ii) a state or subdivision of the state; (iii) required to obtain security under the federal Bankruptcy Code; or (iv) the bank or an affiliate that is making a deposit of trust funds to a commingled account.3
HB3467 expands the existing law by permitting banks to pledge assets to secure any type of deposits, regardless of the identity of the depositor or purpose of the deposit.
Powers
Banks are entities of limited powers, meaning that they may only engage in activities that are specifically authorized by law (in contrast to corporations, which may be chartered for any lawful purpose). Illinois law authorizes numerous activities for banks, such as the power to issue letters of credit.4
HB3467 amends the powers that Illinois banks may exercise by authorizing banks to (i) provide data processing services to others, and (ii) invest in commodity derivatives. To rely on the data processing authority, the total revenue attributable to the bank's data processing activities must be derived predominantly from processing (i) banking, financial, or economic data, and (ii) other types of data if the derivative or resultant product is banking, financial, or economic data.
Notably, Illinois law already authorizes Illinois banks to engage in any activity that is permissible for national banks.5 National banks are expressly authorized to provide third-party data processing and enter into many types of commodity derivatives.6 Therefore, Illinois banks already should have been able to engage in the newly authorized activities.
Further, federal law generally prohibits insured state-chartered banks from engaging in an activity if that activity is not permissible for a national bank.7 This means that an Illinois bank generally cannot engage in an activity unless a national bank could engage in that activity. Therefore, to the extent that HB3467 intended to authorize Illinois banks to engage in activities that are not permissible for a national bank (e.g., certain impermissible commodity derivative investments), the federal prohibition will prevent insured Illinois banks from relying on HB3467.
Bank-Owned Real Estate
Under Illinois law, banks may own real estate only in certain circumstances (e.g., for bank premises).8 If a bank acquires or holds title to real estate through because of the collection of a debt or because it will no longer use the real estate for bank premises, the bank may own the real estate no longer than 10 years.
HB3467 expands the existing law by permitting Illinois-chartered banks to hold such real estate for the longer of 10 years or the maximum period permitted for a national bank under federal law. The maximum period permitted for national banks usually is 10 years, so again, HB3467 should not result in an extended holding period for Illinois banks.9
Shareholders Meetings and Lists
HB3467 modernizes the corporate governance provisions of Illinois banking law by authorizing banks to:
- Provide notice of shareholder meetings using electronic communications.
- Provide access to the list of shareholders through an electronic network (e.g., Internet portal).
- Hold shareholder meetings via conference call lines or interactive technology (e.g., Internet virtual meeting), as long as shareholders still may participate and vote (e.g., cannot be a one-way broadcast).
Employment Practices
Illinois law prohibits a bank from employing a person who has been convicted of a felony or criminal offense relating to dishonesty or breach of trust.10 This largely mirrors a federal law that applies to all insured depository institutions and their holding companies.11
HB3467 streamlines compliance by providing that compliance with the federal employment prohibition is deemed compliance with the state prohibition.
Footnotes
1 For example, one provision of HB3467 (amending 205 ILCS 5/32.1) expands the Illinois law allowing loans to single females to apply to all single individuals, even though discrimination against a single individual of any sex is independently prohibited by the federal Equal Credit Opportunity Act.
2 FDIC, Options for Deposit Insurance Reform 52 (May 1, 2023) ("secured deposits stand ahead of the FDIC in the priority of receivership claims, and so could increase losses to the DIF and uninsured depositors in resolution").
3 205 ILCS 5/5(7).
4 205 ILCS 5/5.
5 205 ILCS 5/5(11).
6 12 C.F.R. §§ 7.1030, 7.5006.
7 12 U.S.C. § 1831a(a)(1).
8 205 ILCS 5/5(8)-(9).
9 12 U.S.C. § 29.
10 205 ILCS 5/16.5.
11 12 U.S.C. § 1829.
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