05-3

05-3

February 14, 2005

Dear Ms. ________:

This is in response to your letter of February 2, 2005 relating to the hypothecation of assets in connection with the acceptance of public deposits from non-California public depositors.

We understand that ________, which currently has offices in ________ states including California, currently accepts public deposits from those states and/or political subdivisions of those states. The bank has a specialized industry group (Government Services) which, among other activities, markets deposit products to state and local governments, and various municipal districts, such as school districts and water districts. This is an important business for the bank, with both California and non-California public deposits approximating $___ billion as of December 31, 2004. We understand that the bank pledges certain securities, as required by the statutes of the various states, to give security for the safekeeping of such public deposits.

Section 1203 of the California Financial Code provides that a commercial bank may hypothecate its assets in any manner provided by law to secure the deposits of moneys of the United States, of postal savings funds, of bankrupt estates, of the State of California, or of any political subdivision, public corporation, or district of the State of California. The statute further provides that with the prior approval of the Commissioner, a bank may hypothecate its assets to secure moneys payable to other states. Section 1203 was written decades before the advent of interstate branching, and the authors of the law could never have contemplated the extent to which a California state chartered bank could have customers from other states, much less the concept of branches within those other states. Even so, the law does provide for the Commissioner to be able to approve the hypothecation of a bank’s assets to secure moneys payable to other states.

Because of the multi-state nature of the bank’s business, it is reasonable for the bank to be able to accept public deposits from states or political subdivisions within states in which it is currently located, as well as other states into which it may expand. Additionally, we recognize that the laws of states may require that public deposits be collateralized through a pledge of securities. Accordingly, pursuant to the provisions of Section 1203 of the California Financial Code, the Commissioner grants his approval for ________ to hypothecate its assets in any manner provided by the law of any other state to secure moneys payable to that state or any political subdivision of that state.

If you have any questions, please do not hesitate to contact the undersigned at (415) 263-8575.

Very truly yours,

JAMES E. BRODIE

Deputy Commissioner