Investment in Industrial Development Bonds by State Chartered Banks
Following the recent decision by the Wisconsin Supreme Court to the effect that Wis. Stat. s. 66.521 is not violative of any of the provisions of the Constitutions of Wisconsin or the United States, this Office has received numerous inquiries with respect to investment limitations for state banks in the purchase of Industrial Development Bonds. In full recognition of the vital role these instruments will play in promoting and stimulating economic growth in Wisconsin, the following departmental rule hereby issued:
- Industrial Development Bonds are revenue obligations within the meaning of Wis. Stat. s. 221.29(2)(c), and are governed by the investment limitations of that section: i.e., 25% of capital and surplus of the investing bank.
- The 25% investment limitation under (1) above may be applied separately to each security issue of a single issuer, if the proceeds of each issue are to be used to acquire and lease real estate and related facilities to economically and legally separate industrial tenants; in other words, several issues of the same municipality need not be combined for investment limitation purposes as long as the industrial occupants under each issue are separate legal and economic entities. This interpretation gives recognition to the fact that the bank relies on the creditworthiness of the industrial tenant, rather than the municipality in investing its funds. It therefore follows that every bank investing in Industrial Development Bonds must maintain in its files credit information on the lessee which is adequate to demonstrate that it has exercised prudent banking judgment in entering into the transaction.
- The investment limitations outlined above are separate and distinct from the lending limitation of Wis. Stat. s. 221.29. Accordingly, a state bank may invest in Industrial Development Bonds to the full extent indicated above and, at the same time, make loans to the industrial lessee or tenant up to its legal lending limit. Again, the bank must weigh the creditworthiness of the lessee — borrower, and observe prudent banking judgment.
Banking Letter 14, May 2, 1973, Commissioner Mildenberg