Community Developments Investments
Community Developments Investments Community Developments Investments Community Developments Investments
Community Developments Investments

Winter 2005

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Options for Structuring a Bank CDC

  Affiliate Subsidiary
Capital If the CDC is funded by the bank through the holding company, the capital contribution to form the CDC will reduce the bank’s capital. The capital contribution will not reduce the bank’s capital because the assets of the CDC will be consolidated with the bank’s capital. If a third party also invests in the CDC, the minority investment will increase the bank’s Tier 1 capital.
Dividend capacity

If the CDC is funded by the bank through the holding company, the funds contributed by the bank will also reduce the bank’s future dividend-paying capacity.

The funding of the CDC will not affect the bank’s future dividend-paying capacity.
CDC’s earnings If the CDC is profitable, the benefits accrue to the holding company. If the CDC is profitable, the benefits accrue to the bank.
Affiliate transaction limits After the CDC is formed, transactions between the bank and the CDC will be subject to limitations imposed by sections 23A and 23B of the Federal Reserve Act. These transactions will count toward an aggregate limit on all such transactions, and thus may reduce the bank’s ability to engage in transactions with other affiliates. Compliance with these laws may also increase the cost of funding the CDC. Sections 23A and 23B do not apply to transactions with the CDC subsidiary, so the bank’s ability to conduct transactions with other affiliates will not be impaired, and the CDC’s cost of funds is minimized, which can allow the CDC greater flexibility when making investments.
Regulation Two regulatory agencies are involved in supervision of the CDC. Only the bank’s primary regulator is directly involved in supervision of the CDC.