The Comptroller of the Currency said yesterday that the First National Bank of Maryland has been lending out government securities held in safekeeping for customers without clearly informing those customers of the practice.
The bank agreed to get explicit permission from customers in the future before lending their securities and also agreed to pay customers a portion of the fees the bank earned by lending customers' securities from Jan. 1, 1982, through June 30, 1984.
Carroll S. Jackson, senior vice president of First National, said the safekeeping agreement used by the bank included a clause noting that securities might be used in a lending program and that customers could tell the bank they did not want their securities lent out.
But Jackson said bank officials agreed with the comptroller that the bank should obtain customers' explicit permission before using the securities. He also said banking industry practice warranted giving the safekeeping customers part of the fee First Maryland earned from lending those securities.
For the most part, the customers paid First National a fee for safekeeping government securities. The lending program did not involve the physical securities, but so-called book-entry securities held by the institution's investment department. Book-entry securities are electronic acknowledgements that the customer has invested in government securities.
Jackson said no securities held by the bank's trust department were involved in the lending program.
Jackson said every loan was fully collateralized and that, in any event, because First Maryland was acting as principal and not broker in the loan, any losses would be borne by the bank and not by the customer. He said no losses have been incurred in the program.
Most of the customers were big institutional investors, such as life insurance companies or pension funds. Their book-entry securities generally were lent to government securities dealers who had a short-term need for them.
The bank said the comptroller criticized its lending practices after an examination of the institution carried out last winter.
First National is a subsidiary of First Maryland Bancorp, which is controlled by Allied Irish Banks Ltd. The Baltimore-based bank company had assets of $4.1 billion at the end of September.
The comptroller's office said that First Maryland had entered into a consent order with the regulatory agency to make changes in its government securities lending practices, but said that in agreeing to the order the bank neither admitted nor denied wrongdoing.