[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Proposed Rules]
[Pages 68424-68464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33411]
[[Page 68423]]
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Part IV
Federal Reserve System
_______________________________________________________________________
12 CFR Parts 211 and 265
International Banking Operations; Rules Regarding Delegation of
Authority; Proposed Rule
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 /
Proposed Rules
[[Page 68424]]
FEDERAL RESERVE SYSTEM
12 CFR Parts 211 and 265
[Regulation K; Docket No. R-0994]
International Banking Operations; Rules Regarding Delegation of
Authority
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: Consistent with section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994 (the Regulatory
Improvement Act) and the International Banking Act of 1978 (the IBA),
the Board has reviewed Regulation K, which governs international
banking operations, and is proposing for comment a number of changes to
Subparts A, B and C of Regulation K.
Subpart A of Regulation K governs the foreign investments and
activities of all member banks (national banks as well as state member
banks), Edge and agreement corporations, and bank holding companies.
The proposed amendments would streamline foreign branching procedures
for U.S. banking organizations, authorize expanded activities in
foreign branches of U.S. banks, and implement recent statutory changes
authorizing a bank to invest up to 20 percent of capital in surplus in
Edge corporations. Changes also are proposed to the provisions
governing permissible foreign activities of U.S. banking organizations,
including securities activities, and investments by U.S. banking
organizations under the general consent procedures and portfolio
investments authority.
Subpart B of Regulation K (Foreign Banking Organizations) governs
the U.S. activities of foreign banking organizations. The proposed
amendments include revisions aimed at streamlining the applications
procedures applicable to foreign banks seeking to expand operations in
the United States, changes to provisions regarding the qualification of
certain foreign banking organizations for exemption from the nonbanking
prohibitions of the section 4 of the Bank Holding Company Act (the BHC
Act), and implementation of provisions of the Reigle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the Interstate Act) that
affect foreign banks.
In addition, there are proposed a number of technical and
clarifying amendments for Subparts A and B, as well as Subpart C, which
deals with export trading companies, and certain amendments to the
Board's Rules Regarding Delegation of Authority.
DATES: Comments must be received by March 14, 1998.
ADDRESSES: Comments, which should refer to Docket No. R-0994, may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th and C Streets, NW., Washington, DC. 20551.
Comments addressed to Mr. Wiles also may be delivered to the Board's
mail room between 8:45 a.m. and 5:15 p.m., and to the security control
room outside of those hours. Both the mail room and the security
control room are accessible from the courtyard entrance on 20th Street
between Constitution Avenue and C Street, NW. Comments received will be
available for inspection in Room MP-500 of the Martin Building between
9:00 a.m. and 5:00 p.m. weekdays, except as provided in Sec. 261.14 of
the Board's Rules Regarding the Availability of Information, 12 CFR
261.14.
FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General
Counsel (202/452-3786); Sandra L. Richardson, Managing Senior Counsel
(202/452-6406), or Jon Stoloff, Senior Attorney (202/452-3269),
regarding Subpart A; Ann Misback, Managing Senior Counsel (202/452-
3788), or Janet Crossen, Senior Attorney (202/452-3281), regarding
Subparts B or C, Legal Division; or Michael G. Martinson, Associate
Director (202/452-2798), or Betsy Cross, Assistant Director (202/452-
2574), Division of Banking Supervision and Regulation. For the users of
Telecommunications Device for the Deaf (TDD) only, please contact Diane
Jenkins (202/452-3544).
SUPPLEMENTARY INFORMATION:
Subpart A: International Operations of U.S. Banking Organizations
Expansion of Permissible Foreign Activities
Statutory Framework
The proposed amendments to Regulation K, which are in part the
result of the Board's review of its regulations under section 303 of
the Regulatory Improvement Act, seek to eliminate unnecessary
regulatory burden, increase transparency, and streamline the approval
process for U.S. banking organizations seeking to expand their
operations abroad and foreign banks seeking to establish or expand
operations in the United States. The Federal Reserve Act, as amended by
the IBA, also requires the Board to review and revise its regulations
issued under section 25A of the Federal Reserve Act (the Edge Act) at
least once every five years to ensure that the purposes of the Edge Act
are being served in light of prevailing economic conditions and banking
practices. The provisions of Subpart A, which govern the operations of
Edge corporations, also were reviewed with this statutory mandate in
mind.1
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\1\ The Board last revised Subpart A in December 1995, at which
time the general consent investment authority for strongly-
capitalized and well-managed U.S. banking organizations was expanded
significantly. A comprehensive review of Regulation K in its
entirety was completed in 1991.
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Edge corporations are international banking and financial vehicles
through which U.S. banking organizations offer international banking or
other foreign financial services and through which they compete with
similar foreign-owned institutions in the United States and abroad. The
purposes of the Edge Act, which amended the Federal Reserve Act in
1919, include enabling U.S. banking organizations to compete
effectively with foreign-owned institutions; providing the means to
finance international trade, especially U.S. exports; fostering the
participation of regional and smaller U.S. banks in providing
international banking and financing services to U.S. business and
agriculture; and stimulating competition in the provision of
international banking and financing services throughout the United
States. Congress, in enacting this legislation, recognized that U.S.
banks needed vehicles that could exercise wider financial powers abroad
than were permitted domestically in order to be competitive
internationally and to serve the international needs of U.S. firms. At
the same time, the Edge Act places limits on U.S. banks' exposure to
these broader foreign activities, by limiting the amount that U.S.
banks may invest in Edge corporations, establishing a number of
statutory safety and soundness constraints, and granting the Board wide
discretion in determining what activities should be permissible for
such entities. In exercising its authority in this area, the Board is
required by the IBA to implement the objectives of the Edge Act
consistent with supervisory standards relating to the safety and
soundness of U.S. banking organizations.
As a result of the current review, the Board has not identified any
changes that appear to be necessary with regard to the provisions
relating to the activities of Edge corporations in the United States.
Nevertheless, comment is sought on any changes to the permissible U.S.
activities of Edge corporations that are considered necessary or
appropriate to fulfill the purposes of the Edge Act.
[[Page 68425]]
The Board, however, has determined that a number of the provisions
relating to foreign activities of U.S. banking organizations could be
revised. The Board proposes revisions to Subpart A that would: (1)
Expand permissible government bond trading by foreign branches of
member banks; (2) streamline procedures for establishment of foreign
branches by U.S. banking organizations; (3) expand permissible foreign
activities of U.S. banking organizations, including securities
activities; (4) expand general consent and portfolio investment
authority for U.S. banking organizations; (5) amend the debt/equity
swaps authority to reflect changes in circumstances of eligible
countries; (6) implement the new statutory provision allowing member
banks to invest, with the Board's approval, up to 20 percent of capital
and surplus in the stock of Edge and agreement corporations; and (7)
include additional technical and clarifying amendments. Each of these
proposed changes is discussed below.
Expansion of Government Bond Trading by Foreign Branches
Section 25 of the Federal Reserve Act permits the Board to
authorize foreign branches of member banks to conduct abroad activities
that are not permitted domestically. However, the statute states that
the Board shall not ``except to such limited extent as the Board may
deem necessary with respect to securities issued by any `foreign state'
* * * authorize a foreign branch to engage or participate, directly or
indirectly, in the business of underwriting, selling, or distributing
securities.''
Given the statutory language, the Board, to date, has only
permitted foreign branches to underwrite and sell securities of the
government of the country in which the branch was located. This was
determined to be appropriate on the basis that it is often necessary in
the ordinary course of banking business for a branch to participate in
the selling of the bonds of the host country.
In recent years, U.S. banking organizations have become more active
in trading and underwriting foreign government securities.
Increasingly, such business, where possible, is being conducted in the
foreign branches of U.S. banks. Rather than distributing the securities
through their various branches, centralizing trading for all or for
certain groups of countries in a single branch can be desirable to
facilitate management and funding of this business. For example, a
banking organization might wish to centralize government securities
trading for all countries in the European Union in one European branch.
For these reasons, the Board proposes that banks be permitted to
underwrite and deal through their foreign branches in obligations of
governments other than the host government, provided that the
obligations are of investment grade and the business is otherwise
subject to sound banking practices and prudential regulations. The
Board considers the requirement that the obligations must be investment
grade would limit cross-border transfer risk to the bank because
trading of government securities giving rise to such risk would be
required to be conducted either directly through a local branch that is
funded locally or through a subsidiary instead of through the bank.
The Board believes that permitting branches to underwrite and sell
securities of governments other than the host government on this basis
is consistent with sound risk management and general business
practices, as well as with the Board's statutory authority. The Board
also proposes to retain the existing authority of foreign branches of
member banks to underwrite and deal in host government bonds regardless
of whether they are investment grade.
The Board seeks comment on these proposals, as well as on what
ratings should be considered to be investment grade for these purposes.
Foreign Branching
The Board's responsibilities as home country supervisor under the
Minimum Standards for the Supervision of International Banking Groups
and their Cross-border Establishments issued by the Basle Committee on
Banking Supervision (the Minimum Standards) call for its specific
authorization of a U.S. banking organization's outward expansion.
Outward expansion for these purposes means the initial establishment of
a banking presence in a country by the bank or any affiliate.
Regulation K currently requires the specific consent of the Board
for the establishment of branches by a member bank, an Edge or
agreement corporation, or a foreign bank subsidiary in its first two
foreign countries. The Board believes that 30 days' prior notice before
establishment of those initial foreign branches would be sufficient and
would be consistent with the Minimum Standards. The Board considers
that 30 days' prior notice also should be required consistent with the
Minimum Standards if the initial banking presence abroad is in the form
of a subsidiary bank; such notice would be required even if the amount
to be invested were below the general consent limits.
Under Regulation K at present, no prior Board approval is required
for a banking entity to establish additional branches in any foreign
country where it already operates one or more branches. However, a
banking entity must give the Board prior notice before establishing a
branch in a foreign country where it has no branches even though a
banking entity affiliate operates a branch in that country.
The Board proposes that Regulation K be liberalized such that if
any of the member bank, its Edge or agreement corporation subsidiaries,
or a foreign bank subsidiary (whether a subsidiary of the bank or of
the bank holding company) already has a branch in a particular foreign
country, a banking affiliate would be able to branch there without
prior notice to the Board. After-the-fact notice, however, would still
be required.
The Board also proposes that the 45 days' prior notice currently
required in order to branch into additional countries where there is no
affiliated banking presence (after the organization has branches
engaged in banking in two foreign countries) should be reduced to 12
business days. In taking this approach, the foreign branching
experience of the entire banking organization would be taken into
account in determining whether the banking entity would be subject to
the 30 day or 12 day prior notice procedure. Where a U.S. banking
organization as a whole already operates foreign branches of banking
entities in two countries, any banking affiliate would be able to open
a branch in a country where such organization has no banking presence
pursuant to the 12 days' prior notice procedure.
Finally, currently under Regulation K, nonbanking subsidiaries held
pursuant to Regulation K may branch into any country in which any
affiliate has a branch without prior notice, but a 45-day prior notice
must be submitted to establish a branch in a country where no affiliate
has a presence. The Board proposes permitting nonbanking subsidiaries
held pursuant to Regulation K to establish foreign branches without
prior review, subject only to an after-the-fact notice requirement.
The Board seeks comment on these proposed changes, including in
particular whether the proposed modified notice periods would
sufficiently accommodate foreign expansion plans.
[[Page 68426]]
Permissible Activities of Foreign Subsidiaries of U.S. Banking
Organizations
One aspect of bank regulation to which the Federal Reserve
subscribes is the fostering of a level competitive playing field for
financial intermediaries. Thus, in the United States, the Board has
advocated that expansion by banking organizations into nonbanking
activities should generally occur through the bank holding company and
not the bank. Banks in the United States benefit from the implicit
support of the national government and its sovereign credit rating
through federal deposit insurance, Federal Reserve discount window
access, and final riskless settlement of payment system transactions.
Extension of this system would make the existing playing field in the
United States unlevel for nonbank competitors and create unnecessary
distortions in competition.
The same principle applies to American banks abroad. Other nations
have chosen to allow their banks to engage in a broad array of
financial activities, especially investment banking activities, thereby
extending to these banks the implicit support of their governments. In
those markets, U.S. banks would be at a disadvantage if unable to offer
their customers an equivalent range of key services with the
convenience and efficiency of their local bank competitors. Indeed, in
many of these markets, banks are the only significant providers of
capital markets services. Independent securities firms are not
generally substantial competitors in these markets, both for historical
reasons and because they may be unable to compete effectively with
banks that have the explicit and implicit support of their governments.
Congress has recognized the existence of the different competitive
environments faced by U.S. banks operating abroad and has legislated
specifically to deal with it. Under the Edge Act, the Board has been
granted broad authority to permit Edge corporations, which may be owned
by U.S. banks, to engage in a wider range of activities outside the
United States than has been permitted to U.S. banks domestically,
consistent with safety and soundness standards. As noted, the purposes
of the Edge Act include enabling U.S. banking organizations to compete
effectively with foreign-owned institutions. Congress, in enacting this
legislation, recognized that U.S. banks needed vehicles that could
exercise broader financial powers abroad in order to be able to be
competitive internationally and to serve the needs of U.S. firms.
Congress granted the Board similar broad discretion to allow bank
holding companies to engage in activities outside the United States.
In exercising its statutory authority, the Board has sought to
balance the need for U.S. banks to be competitive abroad with the
public interest in assuring the safety and soundness of the banks,
protecting the deposit insurance fund, and limiting the extension of
the federal safety net. In proposing these revisions to Regulation K,
the Board has sought to give U.S. banks appropriate expansion of those
activities, such as investment banking, in which the competitive need
is the greatest. Liberalization in relation to other activities, such
as venture capital investments and insurance activities, has been
proposed only in relation to subsidiaries of the bank holding company.
These latter activities appear to be able to be conducted competitively
outside the bank chain of ownership.
Securities Activities
Current Restrictions on Securities Activities
Foreign subsidiaries of U.S. banking organizations have been
permitted broad authority to underwrite and deal in debt securities for
over 25 years, subject to the provision that the securities must be
included with loans for purposes of compliance with the parent bank's
lending limit. No separate dollar limits have been placed on
underwriting and dealing in debt securities.
Since 1979, Regulation K also has authorized foreign subsidiaries
of both U.S. banks and bank holding companies to underwrite and deal in
equity securities outside the United States, subject to certain
limitations and restrictions. These activities were determined to be
permissible, within the applicable limits, on two bases. First, it
became clear that it was necessary for U.S. banking organizations to be
able to engage in these activities abroad, if they were to compete
successfully with foreign banks in the provision of services to foreign
customers. Indeed, for some time, virtually all the major foreign
competitors of U.S. banking organizations have been foreign banks that
conduct equity securities activities either directly in the bank or in
a subsidiary of the bank. Thus, consistent with the purposes underlying
the Edge Act and the BHC Act, there is clear statutory authority for
U.S. banking organizations to engage in these activities through
subsidiaries abroad. Second, in any event, the provisions of the Glass-
Steagall Act do not apply extra-territorially to the operations of
foreign subsidiaries of U.S. banking organizations.
While equity underwriting and dealing have been permissible
activities for U.S. banking organizations' foreign subsidiaries for
some time, as noted above, the level of such activity is subject to
limits under Regulation K. Prudential restrictions currently applied to
equity securities underwriting and dealing activities under Regulation
K include the following.
Underwriting limits--Through a foreign subsidiary, an investor
2 may underwrite equity securities in amounts up to the
lesser of $60 million or 25 percent of its tier 1 capital. These limits
do not include amounts covered by binding commitments from sub-
underwriters or other purchasers. If the underwriting is done in a
subsidiary of the member bank, the amount of the uncovered underwriting
must be included in computing the bank's single borrower lending limit
with respect to the issuer.
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\2\ An investor for these purposes means an Edge corporation,
agreement corporation, bank holding company, member bank and any
foreign bank owned directly by a member bank.
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Dealing limits--Through a foreign subsidiary, an investor may hold
a dealing position in the equity securities of any one issuer in
amounts up to the lesser of $30 million or 10 percent of its tier 1
capital. An investor must include any shares of a company held in an
affiliate's dealing account in determining compliance with any
percentage limits placed on ownership of that company.
Aggregate limit--There is an aggregate limit on the total amount of
equity securities that may be held in investment and dealing accounts,
aggregating all shares held by subsidiaries: for a bank holding
company, the limit is 25 percent of tier 1 capital; for an Edge
corporation,3 the limit is 100 percent of the Edge's tier 1
capital.4
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\3\ Any foreign bank directly owned by a U.S. bank is treated as
an Edge corporation for purposes of its limits.
\4\ Investments in companies must be added to any shares of such
companies held in the dealing account for purposes of this limit.
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Prior review--Banking organizations must submit to a review of
their foreign securities operations prior to engaging in foreign equity
securities activities to the extent of these limits. They may also seek
Board approval for higher underwriting limits, subject to certain
conditions.
[[Page 68427]]
Proposed Revisions
Determination of Applicable Limits
Although, as discussed above, the limits on underwriting and
dealing in equity securities in Regulation K are expressed both in
terms of percentages of tier 1 capital of the investor and absolute
dollar limits, as a practical matter it has been the dollar limits that
have constrained the ability of U.S. banking organizations to engage in
these activities through their foreign subsidiaries and, consequently,
have impeded their efforts to compete with foreign banks abroad. In
order to reduce further these constraints on competition, the Board
proposes to replace the dollar limits for underwriting or dealing
activity with limits based solely on percentages of the investor's tier
1 capital for well-capitalized and well-managed organizations.
The Board considers that, if a banking organization is well-
capitalized and well-managed, tying the underwriting or dealing limits
solely to capital levels would have the benefit of more closely linking
the limits to the ability of the company to support the activity. It
would also provide U.S. banking organizations with greater flexibility
in responding to changing market conditions, because the amount of
capital devoted to an activity is, after meeting regulatory
constraints, determined by the firm.5
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\5\ Arguably, this flexibility could be enhanced further if
foreign subsidiaries of U.S. banking organizations were permitted to
exceed the individual and aggregate limits, subject to a requirement
that the amount in excess of the limits be deducted from capital
and, after such deduction, the institution would continue to be
well-capitalized.
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Accordingly, the Board proposes to amend Regulation K in relation
to those banking organizations that are well-capitalized and well-
managed by removing the existing dollar limits applicable to equity
securities activities, and instead providing that such activities would
be limited to percentages of the investor's tier 1 capital. For well-
capitalized and well-managed organizations, the Board proposes
applicable limits to be determined as follows.6 In relation
to securities activities of subsidiaries of bank holding companies,
their limits would be determined by reference to percentages of the
tier 1 capital of the holding company. The Board proposes, however,
that limits applicable to such activities undertaken by subsidiaries of
Edge and agreement corporations, as well as foreign banks that may be
direct subsidiaries of member banks, would be determined by reference,
at least in the first instance, to the tier 1 capital of the parent
bank.
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\6\ The Board proposes that existing dollar limits would be
retained for companies that are not well-capitalized and well-
managed.
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In the Board's view, tying applicable limits to the capital of the
parent bank is particularly important for subsidiaries of Edge
corporations. As previously noted, Congress has limited a member bank's
investment in Edge and agreement corporations to 20 percent of the
bank's capital.7 However, partly for tax reasons, Edge
corporations historically have tended to retain their earnings rather
than dividending them to the parent bank. In some cases due to such
retained earnings, the capital of a bank's Edge and agreement
corporations may be in excess of 20 percent of the parent bank's
consolidated capital, even though its investment in the Edge subject to
the above-referenced statutory limit is below 20 percent.
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\7\ The Edge Act prohibited member banks from investing more
than 10 percent of their capital and surplus in the capital stock of
Edge and agreement corporations. In September 1996, Congress amended
this limit to permit investments in excess of 10 percent of capital
and surplus with the specific approval of the Board, provided the
amount invested shall not exceed 20 percent of capital and surplus
of the bank.
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In these circumstances, the Board considers that the capital of an
Edge corporation that is in excess of 20 percent of the parent bank's
consolidated capital, when retained earnings are counted, should be
excluded for purposes of determining applicable limits for activities
of the Edge and its subsidiaries. The Board proposes to accomplish this
by setting limits for Edge corporations tied both to percentages of the
Edge's and parent bank's capital, respectively.8 Limits tied
to the parent bank's capital would be 20 percent of the limits
otherwise applicable to Edge corporations. The lower limit would be the
binding limit. For example, if a limit proposed for a given activity of
an Edge corporation is 10 percent of capital but the Edge's capital is
in excess of 20 percent of the bank's total capital, the binding limit
for the Edge would be two percent of the parent bank's tier 1 capital.
For those U.S. banks that do not have significant levels of retained
earnings at the Edge, the binding limit more than likely would be the
separate limit tied to the Edge's capital.
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\8\ As noted above, Regulation K currently treats any foreign
bank owned directly by a member bank as an Edge corporation for
purposes of its limits. The Board proposes that this treatment would
be continued under the revised Regulation K limits.
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The Board considers that this approach would be consistent with the
intent underlying the provisions of the Edge Act limiting the total
amount of capital a bank may invest in Edge corporations. This approach
effectively would place a cap on the percentage of total bank capital
that could be placed at risk through activities or investments not
otherwise permitted to the bank directly, regardless of the capital
level of the Edge corporation. This approach also would remove any
regulatory incentive to retain earnings at the Edge because any
regulatory benefit from such retained earnings, in terms of expanded
limits on activities abroad, would be denied.
The Board proposes that all limits applicable to well-capitalized
and well-managed Edge corporations under the amended Regulation K would
proceed on this basis. Comment is requested on these proposals and
whether any other approach might achieve similar objectives.
Equity Underwriting
The $60 million limit on underwriting equity securities
significantly impedes the ability of U.S. banking organizations to
compete for this business in foreign markets, where securities
underwriting is increasingly a service offered by local banks. At the
same time, the risks associated with the activity suggest that such a
stringent limit is not required for safety and soundness purposes for
well-capitalized and well-managed banking organizations. While initial
underwriting commitments may involve large sums, in most cases by the
time the underwriting goes to market, large portions of the exposure
have been passed on sub-underwriters or presold. Thus, in most cases,
the initial underwriting commitment overstates the risk being assumed.
The Board proposes to remove the absolute dollar limits on
underwriting exposure for well-capitalized and well-managed banking
organizations, but retain a limit based on a percentage of the
investor's capital. More specifically, limits for underwriting exposure
to a single company would be established at 15 percent of the bank
holding company's tier 1 capital for its subsidiaries and, for
subsidiaries of Edge corporations, the lesser of three percent of tier
1 capital of the bank or 15 percent of the tier 1 capital of the Edge.
These limits on underwriting exposure to a single company would be
applied on an aggregate basis. A bank holding company's limit would
include all underwriting exposure to one issuer by all of the holding
company's direct and indirect subsidiaries, including exposures held
through its bank subsidiaries. The bank's and Edge's
[[Page 68428]]
limits would include all exposures held by their respective
subsidiaries. The Board proposes, however, that this expanded
underwriting authority would be available to U.S. banking organizations
only if each of the bank holding company, bank and Edge or agreement
corporation qualify as well-capitalized and well-managed.9
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\9\ The Board proposes that what, if any, action should be taken
in relation to banking organizations' limits and dealing positions
if they cease to be well-capitalized and well-managed would be
addressed on a case-by-case basis through supervisory action.
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For organizations that fail to meet the well-capitalized and well-
managed criteria, the Board proposes that the existing dollar limits
(i.e., $60 million) on commitments by an investor and its affiliates
for the shares of an organization would be retained.
The Board proposes that, in order to engage in such activities, all
banking organizations would be required to implement internal systems
and controls adequate to ensure proper risk management. Controls would
have to be in place to assure that underwriting positions do not result
in violations of limits on securities held in the trading account or
exceed the parent bank's lending limits when the underwriting positions
are combined with other credit exposures. Sanctions (such as temporary
suspension of underwriting authority) may be imposed for violations of
such limits.
Dealing in Equity Securities
The Board also proposes for comment liberalization of dealing
activities for well-capitalized and well-managed banking organizations.
As with underwriting limits, the proposed dealing limits would be based
on percentages of capital of the organization and, thus, on the ability
of the organization to accommodate risk. This change would permit U.S.
banking organizations to compete more effectively with foreign banks in
providing equity dealing and underwriting services to customers abroad,
where such activities are generally permissible to banking
organizations. Nevertheless, in the Board's view, dealing activities
appear to present somewhat greater risk of loss than underwriting,
which suggests somewhat more restrictive limits are needed for dealing
activities relative to underwriting activities.
For well-capitalized and well-managed organizations, the Board,
therefore, proposes to remove the current dollar limits and revise the
existing percentage of capital limits as follows. First, in order to
provide diversification in the trading account, the Board proposes a
limit on holdings of any one stock in the trading account of 10 percent
of the tier 1 capital of the bank holding company for its subsidiaries
and, for subsidiaries of an Edge corporation, the lesser of two percent
of the bank's tier 1 capital or 10 percent of the Edge's tier 1
capital.
Second, the Board proposes an aggregate limit applicable to all
holdings of equities in the trading accounts of all direct and indirect
subsidiaries authorized pursuant to Subpart A.10 Without
such an aggregate ceiling, the Board is concerned that a banking
organization could have excessive exposure to movements in equity
markets. The Board proposes aggregate limits of 50 percent of the bank
holding company's tier 1 capital for its subsidiaries and, in the case
of an Edge's subsidiaries, the lesser of 10 percent of the tier 1
capital of the bank or 50 percent of the Edge's tier 1 capital.
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\10\ As at present, shares held as an investment pursuant to
Subpart A also would be included in calculating the applicable
aggregate limits.
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The Board proposes that the limits on equity trading and dealing
would apply to net positions across legal vehicles held, directly or
indirectly, by the regulated entity to which the limit is applicable
(that is, the bank holding company, the bank or the Edge
corporation).11 Long equity positions in a single stock
could be netted against short positions in the same stock and against
derivatives referenced to the same stock.12 For purposes of
the aggregate limits, all physical and derivative long positions could
be netted against physical and derivative short positions. It is
further proposed that, for purposes of measuring compliance with these
investment limits, banks would be permitted to use internal models to
calculate the value of derivative positions used to offset exposures
and net dealing positions in individual stocks, as well as the value of
total net equity holdings in the trading account.13 The
Board considers that the adequacy of such models is subject to review
during the exam process, and proposes that no special review would be
required for their use in connection with the proposed limits on
securities activities. 14
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\11\ Currently these limits are normally applied on a gross
basis.
\12\ The Board also proposes that a basket of stocks,
specifically segregated by the banking organization as an offset to
a position in a stock index derivative product, as computed by the
bank's internal model, may be netted as a whole against the stock
index.
\13\ Currently, the use of internal models in computing net
positions in stocks is subject to prior Board review and the
limitation that any position in a security shall not be deemed to
have been reduced through netting by more than 75 percent.
\14\ The Board also seeks comment on allowing netting of
underwriting exposures.
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For organizations that fail to satisfy the well-capitalized and
well-managed criteria, the Board proposes to retain the existing dollar
limit on individual shares held in the trading account (i.e., $30
million), which would be calculated in the same manner as at present.
With regard to an aggregate limit on shares held in the trading
account, the Board considers that a reasonable limit for all equity
positions of such organizations, aggregating all positions and
investments held pursuant to Subpart A, would be 25 percent of the
holding company's capital for its subsidiaries and, for subsidiaries of
Edges and any foreign bank held directly by a member bank, the lesser
of 5 percent of the bank's tier 1 capital or 25 percent of the Edge's
tier 1 capital. These limits would be half of those applicable to
organizations that are well-capitalized and well-managed as proposed
above.
These proposed percentage limits may appear lower than the existing
limits (which are 25 percent of tier 1 for subsidiaries of bank holding
companies and 100 percent of tier 1 for any other investor). In this
regard, however, the Board also proposes that an organizations'
aggregate position in stocks also could be calculated on the net basis
described above in determining compliance with these limits, rather
than on the gross basis presently required by Regulation K. This
netting authority in most cases would allow organizations to continue
to conduct their current levels of activities, even under the proposed
new limits. In these circumstances, the Board considers that the
aggregate limits should be reduced. In particular, the Board is
concerned that permitting an organization that is not well capitalized
or well managed to maintain what would be essentially an open exposure
to the stock markets in excess of 25 percent of the tier 1 capital of
the holding company or the Edge or five percent of the tier 1 capital
of the bank simply would not be consistent with safety and soundness
considerations.
The Board seeks comment generally on the proposed limits and
netting authority. Commenters' views in particular are solicited on
whether:
--The revised limits, when taken together with the netting authority,
would enable U.S. banking organizations to compete with foreign banks
in these activities abroad;
--Appropriate distinctions have been drawn, in terms of dealing
authority,
[[Page 68429]]
between organizations that are well-capitalized and those that are not;
--The proposed netting authority should be available to organizations
that are not well-capitalized or well-managed;
--Even with the proposed netting authority, the reduction in percentage
limits for organizations that are not well-capitalized or well-managed
would give rise to a need for grandfathering of, e.g., existing
portfolio investments;
--It would be appropriate to include underwriting commitments in the
aggregate limits for dealing activities and portfolio investments; and
--Provision should be made for higher dealing limits for banking
organizations on a case-by-case basis.
For organizations that are not well capitalized and well managed,
the Board proposes to retain the existing dollar limits applicable to
underwriting and dealing positions (that is, $60 million on and $30
million, respectively), without regard to limits on percentage of
capital. As noted, it is generally the dollar limits that currently
constrain organizations in their ability to conduct these activities.
This is because, at present, only the largest banking organizations are
engaged in these activities. The Board notes, however, that in the
future a relatively small organization may seek to enter these lines of
business and, for it, exposures of $30 or $60 million may be large
relative to its capital. The Board seeks comments on whether, in
addition to dollar limits, limits based on percentage of capital also
should be adopted for organizations that are not well capitalized and
well managed in order to address the relative exposure of such
organizations to these activities.
Additional Option
The Board also seeks comment on whether, instead of imposing the
limits discussed above in relation to equity underwriting and dealing
activities by subsidiaries of well-capitalized and well-managed bank
holding companies, it would be appropriate to lift all limits on these
activities for such entities except for the limits on individual stocks
held in the trading account discussed above (i.e., 10 percent of the
holding company's tier 1 capital). The Board considers that, at a
minimum, this limit should be imposed on holding companies in order to
assure diversification in individual stock holdings. Under this
alternative, banking organizations also would be required to implement
internal systems and controls adequate to ensure proper risk management
and that underwriting positions do not result in violations of limits
on investments in any one company.
Authority to Engage in Equity Securities Activity
Board approval currently is required to engage in underwriting and
dealing in equity securities pursuant to Regulation K. Because of the
increased supervisory focus on risk management procedures, the Board
seeks comment on whether banking organizations that are well
capitalized and well managed should be allowed to engage in the
expanded equity securities activities without seeking prior Board
approval provided that they already have experience in equity
securities activities under either Regulation K or Regulation Y.
As discussed above, the Board proposes that other banking
organizations would be authorized to take positions in individual
stocks only to the extent currently permissible (i.e., subject to the
existing dollar limitations on equity underwriting and dealing). In
view of these lower limits, the Board proposes that these banking
organizations would not be required to obtain prior Board approval to
engage in equity securities activities to this limited extent, provided
that these organizations satisfy minimum capital and managerial
criteria.
Venture Capital Activities Through Portfolio Investments
Current Restrictions
Regulation K currently allows U.S. banking organizations to make
portfolio investments, that is, limited, noncontrolling investments in
foreign commercial and industrial companies. This authority is intended
to enhance the competitiveness of U.S. banking organizations by
increasing the range of financial services they may provide abroad.
Many foreign financial institutions, including foreign banks, engage in
venture capital activities, at times in connection with the provision
of other financial services to the company.
At present, in order for a portfolio investment to be a permissible
investment, an investor must hold less than 20 percent of the voting
stock of the company, and no more than 40 percent of the company's
total equity. Additionally, bank holding companies are subject to an
aggregate limit on such investments in non-financial firms of 25
percent of tier 1 capital, and Edge corporations are subject to an
aggregate limit of 100 percent of tier 1 capital. 15 These
limits are designed to ensure that U.S. banking organizations do not
control commercial and industrial companies and that their overall risk
exposure to nonfinancial investments is limited.
---------------------------------------------------------------------------
\15\ In determining compliance with both the individual and
aggregate limits, shares in such companies held in the dealing or
trading account by the investor and any of its affiliates must be
included.
---------------------------------------------------------------------------
As a practical matter, however, venture capital, or portfolio,
investments presently are made almost exclusively under general consent
procedures and consequently also have been subject to a dollar limit of
$25 million in a single company (the same limit currently applied to
most other investments for purposes of general consent). Such
investments are generally made in companies engaged in activities
unrelated to banking or finance. The $25 million limit has had the
effect of focusing banking organizations primarily on the small company
end of the venture capital business.
Proposed Investment Limits
The Board believes that removing the practical constraint of the
dollar limit on such investments by keying the limits solely to a
percentage of the investor's tier 1 capital may be appropriate for
well-capitalized and well-managed bank holding companies. The Board
proposes to limit any liberalization in this area to subsidiaries of
holding companies because it is concerned that, in view of the risk of
loss inherent in venture capital investments and their low liquidity,
these activities may be more appropriately conducted outside the bank
ownership chain. In proposing this approach, the Board is aware that,
even in the existing regulatory environment, much of the current
venture capital activity abroad is conducted through subsidiaries of
the holding company. Thus, there appear to be no major operational or
competitive considerations that would weigh in favor of expanding the
authority of Edge subsidiaries to engage in this activity. However, if
appropriate diversification and aggregate limits were established, the
Board considers that some expansion of the ability of holding company
subsidiaries to engage in this activity, using shareholder funds, would
not present undue risks to the affiliated U.S. bank and would enhance
the ability of U.S. banking organizations to compete in the provision
of banking and financial services abroad.
[[Page 68430]]
For these reasons, the Board proposes to establish limits for
portfolio investments made by subsidiaries of well-capitalized and
well-managed bank holding companies of 2 percent of the holding
company's tier 1 capital for an individual investment (in order to
assure diversification of these potentially volatile and illiquid
investments), and an aggregate limit of 25 percent of the holding
company's tier 1 capital for all such investments. In determining
compliance with the individual limit, shares in such companies held in
the trading account by the investor and any of its affiliates would be
included.
For all other investors (i.e., Edge corporation and foreign bank
subsidiaries of member banks, and subsidiaries of bank holding
companies that are adequately capitalized but fail to meet the well-
capitalized and well-managed standards), the Board proposes limits on
investments in any one organization of $25 million; larger investments
would continue to be eligible for approval on a case-by-case basis. An
aggregate limit on such investments, when taken together with other
positions in equity securities held in the dealing account, also would
be imposed consistent with the aggregate dealing limits discussed
above, namely, 25 percent of tier 1 capital for subsidiaries of holding
companies and, for Edge or foreign bank subsidiaries, the lesser of 5
percent of the parent bank's tier 1 capital or 25 percent of the Edge's
tier 1 capital.
The Board seeks comment on these proposals, including regarding the
relative risk of portfolio investments and whether there is a need for
competitive reasons for foreign subsidiaries of banks also to have
expanded authority in relation to such investments.
Limits on Voting Shares in Target Company
At present, portfolio investments are limited to less than 20
percent of a company's voting shares. At the time this limit was
adopted by the Board, the equity method of accounting was used for
investments of 20 percent or more of a company's voting shares and the
cost method of accounting was used for investments under this level.
Venture capital investments, however, now may be reported at fair value
irrespective of the percentage of ownership, with changes in fair value
recognized in income and correspondingly in tier 1 capital. In light of
these developments, the Board considers that the current limit of less
than 20 percent of voting shares has lost its original purpose.
In these circumstances, the Board proposes permitting investors to
make noncontrolling venture capital investments in up to 24.9 percent
of a company's voting shares in recognition of this fact. The proposed
limit on voting shares would be set at less than 25 percent in order to
provide further assurance of the noncontrolling nature of the
investment. The Board is concerned that at levels above 25 percent of
voting shares, both other investors and foreign authorities may view
the bank holding company as a controlling investor, with implicit
responsibilities to support the company or with liability for
industrial accidents. As at present, these investments also would be
permissible only if the investor in fact does not control the company
in which the investment is made. Thus, the investor may not control a
majority of the board of directors or have a disproportionate
representation on the board; it may not have a management contract with
the company or exercise veto power over its actions; nor may the
investor use other means to control the operations of the company.
``Incidental'' Activities in the United States
As a result of limitations in the Federal Reserve Act and the BHC
Act, U.S. banking organizations are prohibited from investing in more
than 5 percent of the voting shares of foreign companies that engage in
impermissible activities in the United States other than those
activities that are an incident to their international or foreign
business.16 The Board previously has taken the view that
such permissible incidental activities in the United States are limited
to those activities that the Board has determined are permissible for
Edge corporations to conduct in the United States.17
---------------------------------------------------------------------------
\16\ In particular, the FRA prohibits investments in companies
engaging in ``the general business of buying or selling goods,
wares, merchandise or commodities in the United States.'' 12 U.S.C.
section 615. Section 4(c)(13) investments under the BHC Act are
limited only by a requirement that the company do ``no business in
the United States except as incident to its international or foreign
business.''
\17\ See 12 CFR 211.4(e).
---------------------------------------------------------------------------
However, as noted above, companies in which portfolio investments
are made generally are engaged in industrial or commercial activities,
which are not permissible activities for Edge corporations.
Consequently, under Regulation K at present, if a portfolio investment
company decides to engage in activities in the United States, the U.S.
banking organization is forced to sell the portfolio investment even if
market considerations would not warrant selling the shares at that
time. This is despite the fact that the U.S. banking organization, by
reason of the mandatory noncontrolling nature of portfolio investments,
is unlikely to be in a position to influence any decision regarding
entry into the U.S. market. The Board is aware that, with the
increasing globalization of economies around the world, this situation
may become more common in the future.
The Board considers that these changes in circumstance may warrant
a limited change in the interpretation of what constitutes activities
in the United States that are ``incidental'' to international or
foreign activities in order to provide some relief for U.S. banking
organizations making portfolio investments abroad. Given the minority
nature of the portfolio investments and the significant changes in
international markets, the Board considers that, consistent with the
Federal Reserve Act and the BHC Act, portfolio investment companies
that derive no more than 10 percent of their total revenue in the
United States may be considered to be engaged only in business that is
an incident to their international or foreign business and therefore
may be held for an appropriate investment period consistent with the
nature of venture capital activities. In reaching this view, the Board
has taken into account the particular nature of portfolio investments.
Most portfolio investments are venture capital investments that are
intended to be sold after a period of time. They are not intended to be
permanent holdings of the banking organization. In addition, the
preponderance of the value of the portfolio investment is derived from
its foreign business.
The Board seeks comment on this proposed change. The Board also
seeks comment regarding what an appropriate period for divestiture
would be for investments that exceed the proposed U.S. revenue limits,
as well as whether a time limit should be placed on the period for
holding these types of portfolio investments in view of their
supposedly medium-term nature.
Insurance Activities
Regulation K currently permits bank holding companies to own
foreign companies that underwrite and reinsure life and related types
of insurance outside the United States. The Board requests comment on
whether the reinsuring by a foreign subsidiary of a bank holding
company of annuities or life insurance policies sold to U.S. persons is
an activity that should be considered to fall within this authority.
[[Page 68431]]
This issue has been raised recently by several bank holding companies.
Under one proposal, an offshore insurance subsidiary, which has no U.S.
office, would reinsure certain annuities sold in the United States to
U.S. residents. These annuities would be underwritten by a U.S.
insurance company unaffiliated with the bank holding company, and sold
by various insurance agencies, including those affiliated with the bank
holding company. The U.S. insurance company would cede a portion of the
portfolio of annuities sold to the bank holding company's customers to
the insurance company's foreign affiliate and the offshore insurance
subsidiary of the bank holding company would enter into a retrocession
agreement with that foreign company to reinsure no more than 50 percent
of the portfolio of annuities sold to the bank holding company's
customers. The offshore insurance subsidiary of the bank holding
company would not have any contact with the annuity purchasers and
would assume no liability to them. Moreover, the offshore insurance
subsidiary would have no reinsurance liability to the U.S. insurance
company, but only to the foreign affiliate of the U.S. insurance
company.
The Board does not consider that an offshore insurance subsidiary
of a bank holding company under Regulation K may sell policies directly
into the United States. It appears, however, that the relevant statutes
could permit a bank holding company, through its Regulation K
subsidiary, to reinsure all or a portion of the risk of policies or
annuities sold in the United States by U.S. affiliates of the bank
holding company or unrelated parties. A question is presented, however,
regarding whether the fact that the reinsurance takes place offshore is
sufficient evidence that the activity is conducted outside the United
States. On this view, any U.S. aspects of the activity would be
considered merely an incident to the permissible offshore reinsurance
activity. Alternatively, the fact that the risk to be reinsured is in
the United States could cause the activity to be considered located in
the United States, particularly given the significant involvement of
the bank holding company's U.S. affiliates. In view of what appears to
be increasing interest in this activity, the Board requests comment on
these matters.
Debt/Equity Swaps
Regulation K currently permits banking organizations to swap
certain developing country debt for equity interests in companies of
any type. The debt/equity swap authority was established in 1987. Under
this authority, the Board granted its general consent for investors to
invest up to one percent of their tier 1 capital in up to 40 percent of
the shares, including voting shares, of private sector companies in
eligible countries. These foreign investment provisions are more
liberal than provided elsewhere in Regulation K. Eligible countries
were defined as countries that have rescheduled their debt since 1980,
or any country the Board deemed to be eligible.18
---------------------------------------------------------------------------
\18\ Fifty-one countries reached debt relief agreements with
commercial banks during the period January 1980-December 1995.
---------------------------------------------------------------------------
The debt/equity swap authority was viewed by the Board at that time
as adding to the menu of options available to banking organizations for
managing large amounts of sovereign developing country debt that was
nonperforming and illiquid.19 In considering ways in which
banking organizations could deal with these debt problems, the Board
adopted an approach analogous to foreclosure on debts previously
contracted (``DPC'') by private parties and extended the DPC concept to
permit an exchange of sovereign debt for any equity assets, private or
public, in the country. Such an investment had to be held through the
bank holding company, unless the Board specifically permitted it to be
held through the bank or a bank subsidiary.
---------------------------------------------------------------------------
\19\ The only significant alternatives at that time were
establishing provisions for the bad debts or writing the debts off
and accepting the losses.
---------------------------------------------------------------------------
There is now a well developed secondary market in developing
country debt. The vast bulk of developing country problem debt has been
repackaged in the form of long-term Brady bonds, mostly denominated in
U.S. dollars and fully collateralized as to principal by U.S.
government bonds. Many banking organizations actively trade these
instruments in the secondary market.
Due to the development of the secondary markets for emerging market
debt, U.S. banks now have the same options with regard to many of these
assets as they have with other bank assets--namely, they can hold the
asset with a view toward collecting at maturity or sell the asset for
cash to invest in other bank eligible assets. Indeed, the sovereign
debt of most of the historically ``eligible countries'' is no longer
illiquid, and those eligible countries that account for the vast share
of rescheduled debt have largely regularized their relations with
commercial banks.
Accordingly, the Board proposes that the term ``eligible country''
be redefined so that only countries with currently impaired sovereign
debt (i.e., debt for which an allocated transfer risk reserve would be
required under the International Lending Supervision Act and for which
there is no liquid market) would be eligible for investments through
debt/equity swaps under Regulation K. This proposal would redirect this
special authority to the asset quality problem it was originally
intended to help resolve. In connection with this change, the Board
also proposes that existing holdings of such investments would be
grandfathered, subject to the existing time period for divestiture of
such investments (i.e., generally 10 years from the date of
acquisition).
Comment is requested regarding these proposed changes. The Board
also seeks comment on whether, alternatively, this exception to the
limitations on investments by banking organizations in non-financial
fitness is no longer needed and should be deleted in its entirety.
Streamlining Application Procedures
General Consent Limits
While existing Regulation K procedures have proved effective in
maintaining the safety and soundness of U.S. banks' international
operations, they have become increasingly complex over the years. For
example, under prior notice procedures, the Board has reviewed all
foreign investments made by banking organizations above a de minimis
level as a principal mechanism for overseeing the safety and soundness
of the investing organization. In view of relatively recent shift in
emphasis to supervision based upon risk management capabilities, the
Board believes that prior review of relatively small investments is no
longer useful as a fundamental supervisory tool, especially where the
investor is well capitalized and well managed. Accordingly, the Board
proposes that only significant investments, as determined solely on the
basis of the investor's capital, would be subject to prior review by
the Board, provided that the investors are well capitalized
20 and
[[Page 68432]]
well managed.21 The proposed changes to the general consent
procedures attempt to balance safety and soundness considerations with
the objective of enhancing the ability of U.S. banking organizations to
compete with foreign banks overseas.
---------------------------------------------------------------------------
\20\ A bank holding company is considered well capitalized if,
on a consolidated basis, it maintains total and tier 1 risk-based
capital ratios of at least 10 percent and 6 percent, respectively.
Further, the bank holding company may not be subject to any written
agreement, order, capital directive, or prompt corrective action
directive. In the case of an insured depository institution, well
capitalized means that the institution maintains at least the
capital levels required to be well capitalized under the capital
adequacy regulations or guidelines applicable to the institution
that have been adopted under section 38 of the Federal Deposit
Insurance Act (12 U.S.C. 1831o). The Board proposes that an Edge or
agreement corporation would be considered well capitalized if it
maintains total and tier 1 capital ratios of 10 and 6 percent,
respectively.
\21\ A bank holding company or insured depository institution is
considered well managed if, at it most recent inspection or
examination or subsequent review, the holding company or institution
received at least a satisfactory composite rating and at least a
satisfactory rating for management and for compliance, if such a
rating is given. Under the standards adopted by the Board in
connection with the December 1995 expansion of general consent
authority in Regulation K, an Edge or agreement corporation will be
considered to be well managed for these purposes if it has received
a composite rating of 1 or 2 at its most recent examination or
review and it is not subject to any supervisory enforcement action.
---------------------------------------------------------------------------
Limits on Investments in One Company
Historically, all general consent investments under Regulation K
were subject to absolute dollar limits. Currently, the general consent
limit for most investments is $25 million. However, as a result of
amendments to Regulation K implemented in December 1995, certain
investments by strongly capitalized and well-managed banks are subject
to Board review only to the extent they exceed a percentage of the
investor's capital.
The Board proposes expanding upon this approach by eliminating the
absolute dollar limits on foreign investments permissible under general
consent authority for well-capitalized and well-managed investors (with
the exception of those on venture capital investments made by the
bank). Under the proposal, general consent limits for all investors
(bank holding companies, banks, and Edge corporations) would be based
solely on a percentage of their tier 1 capital.22
---------------------------------------------------------------------------
\22\ If the Edge corporation were making the investment, then
the Edge corporation, the member bank, and the bank holding company
would be required to meet the well-capitalized and well-managed
tests. If the member bank were making the investment, then the bank
and the bank holding company would be required to meet the tests.
---------------------------------------------------------------------------
The limits on individual investments made under general consent
authority would vary according to the investor (bank holding company,
bank, or Edge corporation) and the type of entity in which the
investment is made. For well-capitalized and well-managed investors,
the Board proposes the following percentage limits.
General Consent Limits on Investment in a Subsidiary
------------------------------------------------------------------------
------------------------------------------------------------------------
Bank holding company 10 percent of tier 1 capital of the bank
subsidiaries. holding company.
Bank subsidiaries............ The lesser of 2 percent of tier 1 capital
of the bank or 10 percent of tier 1
capital of the bank subsidiary.
------------------------------------------------------------------------
General Consent Limits on Investment in a Joint Venture
------------------------------------------------------------------------
------------------------------------------------------------------------
Bank holding company 5 percent of tier 1 capital of the bank
subsidiaries. holding company.
Bank subsidiaries............ The lesser of 1 percent of tier 1 capital
of the Bank or 5 percent of tier 1
capital of the Bank subsidiary.
------------------------------------------------------------------------
The proposed limits are intended to reflect the risk involved in
the type of investment. A higher percentage of capital would be
permitted in the case of an investment in a subsidiary as opposed to an
investment in a joint venture because the latter is considered to carry
a greater risk of loss. Thus, with joint ventures, investors acquire
less than full control, and the record on such investments has shown
that they experience a higher rate of loss. As a result, most U.S.
banks do not now make sizeable joint venture investments. In light of
these considerations, the Board believes that lower general consent
limits may be appropriate for joint venture investments.
For investors that fail to meet the well-capitalized or well-
managed standards, the Board proposes the following limits. Individual
investments under general consent authority would be limited to the
lesser of $25 million or 5 percent of tier 1 capital in the case of an
investor that is a bank holding company, or 1 percent of tier 1 capital
if the investor is a member bank. Limits on individual investments for
an Edge corporation would be $25 million or the lesser of 1 percent of
the parent bank's tier 1 capital or 5 percent of the Edge's tier 1
capital. The Board proposes, however, that authority would be delegated
to the Director of Banking Supervision and Regulation to approve higher
investment limits on a case-by-case basis or as part of an investment
program as described above.
The Board seeks comment on these proposed limits, as well as
whether general consent limits should be established for investments in
joint ventures that are lower than the limits on investments in
subsidiaries. The Board notes that these limits reflect only the
investments that may be made under general consent authority; larger
investments may continue to be made with 30 days' prior notice.
Aggregate Limits
The above limits are intended to address the fact that individual
foreign investments above a certain size may be a source of potential
concern, and therefore prior review of such investments should be
required. In addition, the Board is also concerned with any rapid
increase in an organization's foreign investments overall, made without
prior review. Accordingly, it is proposed that when the cumulative
investments made under general consent reach a certain amount over a
given period, new or additional investments would become subject to
prior review. Investments by all affiliates of a bank holding company
would be taken into account in determining compliance of the holding
company with the aggregate limits; investments of subsidiaries of a
bank or of an Edge, respectively, would be aggregated in determining
compliance with their limits. Under the proposed liberalized general
consent procedures, the new aggregate limit for all investments during
any 12-month period for investors meeting the well-capitalized and
well-managed tests would be:
Bank holding companies....... 20 percent of tier 1 capital.
[[Page 68433]]
Bank subsidiaries............ The lesser of 10 percent of tier 1
capital of the bank or 50 percent of the
bank subsidiary's tier 1 capital.
The Board considers that, because the bank would have the exposure
on a consolidated basis for investments by either the bank or the Edge,
these investments should have a combined aggregate limit. However, the
Board proposes that this limit could be waived, in whole or in part by
the Director of the Division of Banking Supervision and Regulation,
under delegated authority, based upon a review of the financial
strength of the investor and its investment strategy and business
plans.
For bank holding companies, banks or Edge corporations that are
adequately capitalized but do not meet the well-capitalized and well-
managed standards, the Board proposes that the aggregate limits on all
investments made under authority of general consent in any 12-month
period would be half that applicable to well-capitalized and well-
managed organizations (i.e., 10 percent of tier 1 capital for bank
holding companies, 5 percent of tier 1 capital for banks, and, for Edge
corporations, the lesser of 5 percent of the parent bank's tier 1
capital or 10 percent of the Edge's tier 1 capital).
Application of Limits to the Edge Corporation
The Board notes that an argument can be made that, in cases where
the investment is made by the Edge corporation, the well-capitalized
and well-managed tests should be based on a review of the parent bank,
not the Edge corporation. In considering these proposals, the Board
believes that the well-capitalized and well-managed tests for the Edge
corporation itself should be retained as one of the bases for
determining limits applicable to general consent investments. This
approach would help to ensure the safety and soundness of the Edge
corporation in its own right and is consistent with the statutory (and
supervisory) rationale underlying Edge corporations. As discussed
above, Congress limited the amount of capital that banks could invest
in Edge corporations, which in turn could invest in activities
otherwise prohibited to banks that were perceived to be higher risk.
Congress also subjected Edge corporations to regulation and examination
by the Federal Reserve. For these reasons, the Board considers that
Edge corporations should themselves be operating satisfactorily and not
be a source of potential weakness to the U.S. parent bank. The Board
therefore is proposing limits that are tied to the condition of the
Edge. The Board seeks comment on this approach generally.
Preclearance of Investment Program
The Board proposes to establish a procedure that would permit U.S.
banking organizations to obtain preclearance of an investment program
even though one or more of the investments would be in excess of the
individual or aggregate general consent investment limits and would be
made over a period of time longer than one year. The Board believes
such a procedure would be useful to banking organizations that may wish
to engage in a specific investment program with respect to an
individual company, a market segment, a region, or worldwide. Providing
a preclearance mechanism would serve to ensure that the regulatory
process would not impede the organization's ability to pursue its
business plans.
For example, an organization that is well managed and well
capitalized might contemplate bidding on a large privatization that
would require the organization to commit in advance to making an
investment in excess of the general consent limit if selected.
Obtaining preclearance would enable the organization to make such a
commitment. The Board proposes that the preclearance authority would be
delegated to the Director of the Division of Banking Supervision and
Regulation.
Comment is requested on whether such a preclearance program would
be useful to U.S. banking organizations and whether it should be
available to all banking organizations.
Authorization to Invest More Than Ten Percent of a Bank's Capital in
its Edge and Agreement Corporation Subsidiaries
Prior to September 30, 1996, section 25A of the Federal Reserve Act
prohibited member banks from investing more than 10 percent of capital
and surplus in the stock of Edge and agreement corporation
subsidiaries. With the enactment of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 on September 30, 1996, member banks may
now invest, with the Board's prior approval, up to 20 percent of
capital and surplus in the stock of such subsidiaries.
The Board may not approve the investment of more than 10 percent of
capital and surplus in the stock of Edge and agreement corporation
subsidiaries unless the Board determines that the investment of an
additional amount by the bank would not be unsafe or unsound. As
discussed above, due to the accumulation of retained earnings in Edge
corporations, some U.S. banking organizations now have over 20 percent
of the member bank's consolidated capital resident in Edge corporation
subsidiaries.
Accordingly, the Board proposes to implement the new statutory
provision by adding to Regulation K an application requirement to
obtain the Board's approval of an increase in invested capital in the
stock of Edge and agreement corporations above 10 percent of the parent
bank's capital, as well as a general description of the types of
considerations that would be taken into account in reaching a decision
on such an application. Criteria that the Board considers would be
appropriate to take into account would include: the composition of the
assets of the bank's Edge and agreement corporations; the total capital
invested by the bank in its Edge and agreement corporations when
combined with retained earnings of the Edge and agreement corporations,
as a percentage of the bank's capital; whether the bank, bank holding
company, and Edge and agreement corporations are well capitalized and
well managed; and whether the bank is adequately capitalized after
deconsolidating and deducting the aggregate investment in and assets of
all Edge or agreement corporations and all foreign bank subsidiaries.
The Board seeks comment on whether the above criteria are
appropriate in determining whether investments of up to 20 percent of
the parent bank's capital and surplus in Edge and agreement corporation
subsidiaries would not be unsafe or unsound. Additionally, the Board
seeks comment on whether only the well-capitalized and well-managed
criteria should apply where the total Edge and agreement corporation
capital (including retained earnings) on a pro forma basis would not
exceed 20 percent of the bank's capital.
Other Revisions to Subpart A
Harmonization of Regulation K With Other Regulatory Changes
As a result of the substantial liberalizations made in the recent
revisions to other Board regulations, particularly Regulation Y,
certain activities on the laundry list of
[[Page 68434]]
permissible activities in Regulation K are now more restrictive than
those authorized domestically. As noted above, Regulation K
traditionally has permitted U.S. banking organizations to conduct a
wider range of financial activities abroad than may be permitted
domestically in order to compete more effectively abroad. Accordingly,
in addition to the expanded activities discussed above, the Board
proposes removing certain restrictions on the laundry list of
permissible activities to reflect recent liberalizations in other
regulations.
Leasing Activities
Regulation K currently requires that leasing activities conducted
under authority of Regulation K serve as the functional equivalent of
an extension of credit to the lessee. The Regulation Y revisions
removed that limitation with respect to high residual value leasing.
Accordingly, Regulation K would be interpreted consistent with this
authority.
Swaps Activities
The Regulation K proposal would also remove the requirement that
commodity-related swaps must provide an option for cash settlement that
must be exercised upon settlement. Regulation Y now authorizes
investment as principal in commodity derivatives where the contract
either: (i) Requires cash settlement, or (ii) allows for assignment,
termination or offset prior to expiration and reasonable efforts are
made to avoid delivery. The Regulation K restriction would be relaxed
to the same extent.
Data Processing
No changes are proposed to the provision authorizing data
processing. The Board notes, however, that this authority extends only
to the processing of information and does not authorize general
manufacture of hardware for such services.
Loans to Officers at Foreign Branches
Regulation K currently places certain restrictions on mortgage
loans to officers of foreign branches. However, the Board has
liberalized its Regulation O, which governs loans to executive
officers, such that the provisions in Regulation K now are more
restrictive. The more restrictive provision in Regulation K would be
eliminated.
Changes With Respect to Edge and Agreement Corporations
The Board proposes adding provisions to Regulation K that would
outline procedures under which Edge and agreement corporations could be
liquidated on a voluntary basis.
Liquidation Procedures
The Board is proposing to provide procedures for the liquidation of
Edge corporations and to clarify certain matters regarding the
appointment of receivers for Edge corporations. Under paragraph 17 of
the Edge Act (12 U.S.C. 623), an Edge corporation may go into voluntary
liquidation by a vote of its shareholders owning two-thirds of its
stock. Staff proposes to add a new Sec. 211.13 to Regulation K that
would provide for 45 day's prior notice to the Board of an Edge
corporation's intent to dissolve. This notice would create greater
certainty as to the date that the Edge corporation would cease business
and permit the Board to take any necessary supervisory actions. Under
paragraph 18 of the Edge Act (12 U.S.C. 624), the Board is authorized
to appoint a receiver for an Edge corporation if it determines that the
corporation is insolvent. The proposal would specify the grounds for
determining that an Edge corporation is insolvent and clarify the
powers of the receiver.
Additional Areas of Liberalization
The Board believes there are other areas that should be liberalized
in order to reduce regulatory burden and enable U.S. banking
organizations to compete more effectively with foreign banks.
Authorizing Foreign Branches of Operating Subsidiaries of Member Banks
The Board proposes clarifying that a member bank may establish
foreign branches through its operating subsidiaries with the Board's
approval, provided that the foreign branches of the operating
subsidiary would engage only in activities that are permissible
directly for the member bank parent. 23
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\23\ The establishment of foreign branches of operating
subsidiaries would be subject to the prior notice and general
consent provisions of Regulation K.
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The Board has previously approved the establishment of foreign
branches by an operating subsidiary of a member bank. The Board
determined that the ability of an operating subsidiary to establish
foreign branches is incidental to the member bank's authority to
establish such branches, subject to the condition stated above.
Accordingly, this proposed addition would codify the Board's
determination and allow other member banks to establish foreign
branches of operating subsidiaries on the same basis as outlined above.
FCM Activities
Regulation K currently states that investors must seek prior Board
approval for futures commission merchant (FCM) activities conducted on
any exchange or clearing house that requires members to guarantee or
otherwise contract to cover losses suffered by other members (a mutual
exchange). This requirement has been eliminated for subsidiaries of
bank holding companies, due to the revision of Regulation Y. The Board
also seeks comment on whether to eliminate the requirement for prior
notice where: (i) the activity is conducted through a separately
incorporated subsidiary of the bank;24 and (ii) the parent
bank does not provide a guarantee or otherwise become liable to the
exchange or clearing house for an amount in excess of the applicable
general consent limits.25 The Board believes that in these
circumstances the potential exposure of the parent bank to a mutual
exchange or clearing house would be sufficiently limited, such that
prior approval would no longer be necessary. Eliminating the
requirement for prior review of these activities would reduce the prior
notice and application requirements associated with FCM activities.
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\24\ If the investment is made through an Edge corporation, the
investment in the subsidiary would be limited to no more than 2
percent of the parent bank's tier 1 capital.
\25\ This proposal is generally consistent with the FCM
requirements under Regulation Y, except that it would place a limit
on the amount of exposure to the exchange or clearing house, tied to
the bank's tier 1 capital.
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Additional Delegation of Authority
The Board proposes delegating additional authority to the Director
of the Division of Banking Supervision and Regulation in order to
decrease processing periods in appropriate circumstances. Under the
proposal, authority would be delegated in the areas of: (1) Indicating
no objection to the establishment of foreign branches by prior notice;
(2) authorizing a banking organization to exceed its aggregate general
consent investment limits based upon the financial and managerial
strength of the organization and the soundness of its investment
strategy and future plans; and (3) allowing organizations that are not
well-capitalized and well-managed to invest under a reduced general
consent limit in appropriate circumstances.
Subpart B: Foreign Banking Organizations
Subpart B of Regulation K governs the U.S. activities of foreign
banking
[[Page 68435]]
organizations. It implements the IBA and provisions of the BHC Act that
affect foreign banks.
This proposed revision of Subpart B seeks to eliminate unnecessary
regulatory burden, increase transparency, and streamline the
application/notice process for foreign banks operating in the United
States based on the Board's recent experience with foreign bank
applications. In addition, the proposal implements certain application
related provisions of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the 1996 Act).
If adopted, the proposal would liberalize the standards under which
certain foreign banking organizations qualify for exemptions from the
nonbanking prohibitions of section 4 of the BHC Act. Comment is also
being requested on a change in the scope of an existing exemption that
would better conform the exemption to the policy of national treatment.
The proposal also implements several provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the Interstate
Act) that affect foreign banks. Finally, several technical changes to
various other provisions in Subpart B are being proposed.
Streamlining the Regulatory Process
The Board is required to approve the establishment by foreign banks
of branches, agencies, commercial lending companies, and representative
offices in the United States. This authority is contained in the
Foreign Bank Supervision Enhancement Act of 1991 (FBSEA), which amended
the IBA, and was intended to close perceived gaps in the supervision
and regulation of foreign banks. Prior to FBSEA, there was no federal
approval required for the establishment of most types of direct U.S.
offices of foreign banks nor were uniform standards applicable to these
offices.
In the six years since the enactment of FBSEA, the Board has gained
substantial experience with the issues presented by applications by
foreign banks to establish direct offices. The proposed revisions would
streamline the applications process based on experience gained over
this period. In addition, the proposal implements new discretionary
authority and time limits contained in the 1996 Act.
Adoption of Single Supervision Standard for Approval of Representative
Offices
Under FBSEA, in order to approve an application by a foreign bank
to establish a branch, agency, or commercial lending company, the Board
generally is required to determine, among other things, that the
applicant bank, and any parent bank, are subject to comprehensive
supervision or regulation on a consolidated basis by their home country
authorities (the consolidated comprehensive supervision or CCS
determination 26). A lesser supervision standard, however,
applies under FBSEA to representative office applications. While the
Board is required to ``take into account'' home country supervision in
evaluating an application by a foreign bank to establish a
representative office, a CCS determination is not required to approve
such an application. The law simply requires the Board to consider the
extent to which applicant bank is subject to CCS. A lesser standard
applies because representative offices do not conduct a banking
business, such as taking deposits or making loans, and therefore
present less risk to U.S. customers and markets than do branches or
agencies.
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\26\ As discussed later in the summary, the 1996 Act amended
FBSEA to allow the Board, under certain conditions, to approve an
application if the bank is not subject to CCS.
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Regulation K currently restates the statutory ``take into account''
standard but does not define a minimum supervision standard that a
foreign bank must meet in order to establish a representative office.
Instead, the Board has developed standards in the context of specific
cases. To date, the Board has used two different supervision standards
in approving applications by foreign banks to establish representative
offices.27 Under the first standard, the Board has permitted
a foreign bank to establish a representative office able to exercise
all powers available under applicable law and regulation on the basis
of a finding that the home country supervisors exercise a significant
degree of supervision over the bank.28 The second standard
is more flexible. In cases in which a foreign bank has committed to
limit the scope of activities of its proposed representative office to
those posing only the most minimal risk to U.S. customers and markets
(such as by agreeing not to solicit deposits from retail customers or
possibly any customers), the Board has approved the establishment of
the office on the basis of a finding that the foreign bank is subject
to a supervisory framework that is consistent with approval of the
application, taking into account the limited activities of the proposed
office and the operating record of the bank.29
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\27\ Wherever the record submitted by an applicant in a
representative office case is sufficient to support a CCS finding,
the Board generally has do so. See, e.g., Caisse Nationale de Credit
Agricole, 81 Fed. Res. Bull. 1055 (1995). The two representative
office standards have been applied in those cases where the record
is not sufficient to support a CCS finding.
\28\ See, e.g., Citizens National Bank, 79 Fed. Res. Bull. 805
(1993).
\29\ See, e.g., Promstroybank of Russia, 82 Fed. Res. Bull. 599
(1996).
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Based on experience in dealing with representative office
applications, the Board believes that the existence of two standards
can be confusing and is unnecessary, particularly in light of the
generally minimal risk presented to U.S. customers or markets by
representative offices. Consequently, the Board is proposing that
Sec. 211.24(d)(2) of Regulation K be amended to establish only one
flexible standard. Under the proposal, assuming all other factors were
consistent with approval, the Board could approve an application to
establish a representative office if it were able to make a finding
that the applicant bank was subject to a supervisory framework that is
consistent with the activities of the proposed office, taking into
account the nature of such activities and the operating record of the
applicant.
The record necessary to support the required finding would depend
on the nature of the activities the applicant proposed to conduct in
the representative office. Approval of a representative office that
could conduct all permissible activities would require a record
demonstrating that the applicable supervisory framework was consistent
with level of risk presented by such activities. If the proposal is
adopted, the Board expects that most applicants would be able to
conduct all permissible activities. In those instances in which the
Board had particular concerns regarding the consistency of the
applicant's home country supervision with the proposed activities of
the office, however, the applicant could commit to restrict the
activities. A less comprehensive record would be required where the
applicant has committed to limit the activities of the office to those
posing minimal risk to U.S. customers.
The Board intends that the publishing of a single flexible standard
will, in most cases, simplify the application process. The Board
requests comment on the elimination of the significant degree of
supervision standard and adoption of the proposed single standard.
Reduced Filing Requirements for the Establishment of U.S. Offices
A major thrust of the proposed revisions is reduction of burden in
the
[[Page 68436]]
application process by streamlining existing application procedures for
the establishment of new U.S. offices of foreign banks. Under the
current Subpart B, the establishment by a foreign bank of a U.S.
branch, agency, commercial lending company subsidiary, or
representative office generally requires the Board's specific approval.
Once the Board has approved the establishment of a foreign bank's first
office under the standards set out in FBSEA, additional offices with
the same or lesser powers may be approved by the Reserve Banks under
delegated authority.30 Prior notice and general consent
procedures are currently available for the establishment of certain
kinds of representative offices. The Board is now proposing that
additional types of applications be processed under prior notice and
general consent procedures.
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\30\ See 12 CFR 265.11(d)(11).
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Prior Notice Available After First CCS Determination
The proposal would amend Sec. 211.24(a) to provide that any foreign
bank which the Board has determined to be subject to CCS in a prior
application under FBSEA may establish additional branches, agencies,
commercial lending company subsidiaries, and representative offices
pursuant to a 45 day prior notice procedure. This time frame would
allow for review of whether any material changes had occurred with
respect to home country supervision, a determination of whether the
bank continues to meet capital requirements, and a review of any other
relevant factors. If this proposal is adopted, the current delegation
to the Reserve Banks for such applications would be deleted as no
longer necessary. This procedure would also be available even if the
CCS determination had been made in connection with an application for
an office with lesser powers than the office the foreign bank seeks to
establish.
Prior Notice Available for Representative Offices Established by
Foreign Banks Subject to the BHC Act or Previously Approved to
Establish a Representative Office Under FBSEA
Many foreign banks have a U.S. banking presence and therefore are
subject to the provisions of the BHC Act, but have not received a CCS
determination under FBSEA. The proposal also seeks to reduce the burden
on such banks applying to establish representative offices. If a
foreign bank is subject to the provisions of the BHC Act through
ownership of a bank or commercial lending company or operation of a
branch or agency, it is already subject to supervision and oversight
through the Board's Foreign Banking Organization (FBO) program. Through
the FBO program, the Board gains knowledge of the bank, its policies
and procedures, and a general view on home country supervision. In
these instances, the Board believes that an expedited procedure may be
adopted for the establishment of representative offices by these banks,
even where the foreign bank had not previously been reviewed under the
standards of FBSEA.
In addition, the proposal would permit the establishment by prior
notice of additional representative offices by any foreign bank not
subject to the BHC Act but previously approved by the Board to
establish a representative office, regardless of the type of
supervision finding made by the Board in the prior case. Such
applications are currently delegated to the Reserve Banks. The Board
sees no reason to continue to require full application from such banks.
The Board is proposing that Sec. 211.24(a) be amended to permit banks
in these two categories to use the 45-day prior notice procedure for
opening a representative office, rather than requiring them to use the
application procedure.
New General Consent Authority
The proposal would permit the establishment by general consent of a
representative office by a foreign bank that is both subject to the BHC
Act and has been previously determined by the Board to be subject to
CCS. Establishment of a representative office by such a foreign bank is
currently subject to the prior notice procedure. The proposal is based
on an assessment that a foreign bank that is subject to supervision
under the FBO program and has been judged subject to CCS should
generally qualify to establish a representative office.
Finally, the Board is proposing that a foreign bank that is subject
to the BHC Act could establish a regional administrative office by
general consent, whether or not the Board had determined the bank to be
subject to CCS. Regional administrative offices currently can be
established using the prior notice procedure.
Suspension of Prior Notice and General Consent Procedures
The proposal also provides that the Board, upon notice, may modify
or suspend the prior notice and general consent procedures described
above for any foreign bank. For example, modification or suspension of
these procedures might be appropriate if the composite rating of the
foreign bank's combined U.S. operations was less than satisfactory
31 or if the foreign bank were subject to supervisory
action. In general, the Board envisions that these procedures would be
available for the establishment of offices by foreign banks only where
the establishment does not present material issues.
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\31\ See 12 CFR 225.2(s) (definition of ``well-managed'' foreign
banking organization).
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These proposals should reduce the burden and delay associated with
the establishment of new U.S. offices by certain categories of foreign
banks without compromising the Board's ability to make the
determinations necessary in connection with the establishment of such
offices.
After-the-Fact Approvals
In implementing FBSEA in 1993, the Board recognized that it would
be impractical to require prior approval for the establishment of
foreign bank offices acquired in certain types of overseas
transactions, such as a merger of two foreign banks, and provided for
an after-the-fact approval in such cases. The regulation currently
requires the foreign banks involved to commit to file an application to
retain the acquired U.S. office as soon as possible after the
occurrence of such transactions.
Since the enactment of FBSEA, a number of applicants using the
after-the-fact procedure have chosen to wind down and close acquired
offices or consolidate them with existing offices, in each case within
a reasonable time frame. In most instances, no regulatory purpose was
served by requiring the filing of an application. The regulation
currently does not address this possibility. The proposal would amend
the rules to contemplate both after-the-fact applications to retain, as
well as decisions to wind-down and close, U.S. offices acquired in a
transaction eligible for the after-the fact approval process. Where the
foreign bank chooses to close the acquired U.S. office, the Board could
impose appropriate conditions on the U.S. operations until the winding-
down is completed.
Implementation of the 1996 Act
As noted above, FBSEA generally requires the Board to determine
that a foreign bank applicant is subject to CCS in order to approve the
establishment of a branch, agency, or commercial lending company. The
1996 Act gave the Board discretion to approve the establishment of such
offices by a foreign bank where the application record is insufficient
to support a finding that the bank is
[[Page 68437]]
subject to CCS, provided the Board finds that the home country
supervisor is actively working to establish arrangements for the
consolidated supervision of the bank, and all other factors are
consistent with approval. This discretion gives the Board flexibility
to approve applications on an exceptional basis where the home country
authorities are making progress in upgrading the bank supervisory
regime but the record may not yet be sufficient to support a full CCS
finding. The Board has stated that this authority should be viewed as a
limited exception to the general requirement relating to
CCS.32 The statutory standards are included in the proposed
revision.
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\32\ The Board first exercised its discretion under the 1996 Act
when it approved an application by a Korean bank to establish a
state-licensed branch in New York City. See Housing & Commercial
Bank, 83 Fed. Res. Bull. 935 (1997).
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The proposal also would incorporate into Regulation K the statutory
time limits in the 1996 Act for Board action on applications for
branches, agencies, and commercial lending companies. The 1996 Act
provided that the Board must act on such an application within 180 days
of its receipt. The time period may be extended once for an additional
180 days, provided notice of the extension and the reasons for it are
provided to the applicant and the licensing authority; the applicant
may also waive the time periods. Although the regulation will reflect
these statutory time periods, the Board proposes to maintain existing
internal time schedules that would require faster processing where
possible.
New Discretionary Factor
In light of the increasing attention being paid to the problem of
money laundering, the Board currently requests that foreign banks
applying to establish U.S. offices provide information on the measures
taken to prevent the bank from being used to launder money, the legal
regime to prevent money laundering in the home country, and the extent
of the home country's participation in multilateral efforts to combat
money laundering. The Board considers this information in reaching its
decision on applications. In light of this practice, the proposed
revision includes as a new discretionary standard for the establishment
of U.S. offices by foreign banks that the Board may consider the
adequacy of measures for the prevention of money laundering.
Qualifications of Foreign Banks for Nonbank Exemptions
Changes to the QFBO Test
Regulation K implements statutory exemptions from the BHC Act for
certain activities of foreign banks. These exemptions are available to
qualifying foreign banking organizations (QFBOs) and are found in
sections 2(h) and 4(c)(9) of the BHC Act. Section 2(h) allows a foreign
company principally engaged in banking business outside the United
States to own foreign affiliates that engage in impermissible
nonfinancial activities in the United States, subject to certain
requirements. These include that the foreign affiliate must derive most
of its business from outside the United States and it may engage in the
United States only in the same lines of business it conducts outside
the United States. Section 4(c)(9) allows the Board to grant foreign
companies an exemption from the nonbank activity restrictions of the
BHC Act where the exemption would not be substantially at variance with
the BHC Act and would be in the public interest. Under this exemption,
the Board has exempted, among other things, all foreign activities of
QFBOs from the nonbanking prohibitions of the BHC Act.
In order to qualify as a QFBO, a foreign banking organization must
demonstrate that more than half of its business is banking and more
than half of its banking business is outside the United States. Banking
business is defined to include the activities permissible for a U.S.
banking organization to conduct, directly or indirectly, outside of the
United States.33 Under the current regulations, however,
such activities can be counted as banking business for the purposes of
the QFBO test only if they are conducted in the foreign bank ownership
chain; that is, by the foreign bank or a subsidiary of the foreign
bank. Activities conducted by a parent holding company or sister
affiliate do not count toward qualification.
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\33\ These activities include, in addition to traditional
banking activities, underwriting various types of insurance (credit
life, life, annuity, pension fund-related, and other types of
insurance where the associated risks are actuarially predictable);
underwriting, distributing, and dealing in debt and equity
securities outside the United States; providing data processing,
investment advisory, and management consulting services; and
organizing, sponsoring, and managing a mutual fund.
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Removal of the Banking Chain Requirement From One Prong of the QFBO
Test
In connection with the 1991 revisions to Regulation K, a number of
commenters suggested that the Board eliminate the requirement that
banking activities be conducted in the bank ownership chain. The Board
did not adopt this suggestion in 1991 because it was concerned that to
do so could have allowed a foreign financial conglomerate with no
substantial commercial bank to conduct full-scope banking operations in
the United States. The Board determined that the intent of the BHC Act
was to grant exemptions only to those foreign organizations that were
substantially engaged in commercial banking.
The Board has reconsidered the QFBO test in light of this
background and believes that the test can be liberalized without
extending the BHC Act exemptions to foreign firms that are not engaged
substantially in commercial banking. As noted above, the QFBO test has
two prongs: first, more than half of the organization's activities must
be banking, and second, more than half its banking business must be
outside the United States. Under the proposed revision, the requirement
that all activities must be conducted under the bank ownership chain to
count as ``banking'' would be eliminated from the first prong. By
eliminating the banking chain requirement for this prong of the test, a
foreign banking organization that has substantial life insurance
activities outside of the banking chain would be able to count such
activities toward meeting this prong of the QFBO test. The Board
understands that, in at least some recent instances where foreign
banking organizations failed the current QFBO test, these organizations
would have been able to pass the test under the proposed re-
formulation.
The banking chain requirement has not been eliminated, however, for
purposes of determining whether a foreign banking organization's
banking operations outside of the United States are larger than those
in the United States. Eliminating the banking chain requirement for
this part of the test would enable a foreign organization engaged
primarily in certain financial activities, such as life insurance,
outside of the United States to meet the QFBO test even if its U.S.
commercial banking operations were larger than the commercial banking
operations of its foreign bank or banks. The exemptions under sections
2(h) and 4(c)(9) of the BHC Act, which this section of
[[Page 68438]]
Regulation K implements, are intended to limit the extraterritorial
effect of the BHC Act on foreign banks and to prevent foreign financial
companies that own U.S. banks from obtaining competitive advantages.
Accordingly, the proposal retains the banking chain requirement for
this prong of the QFBO test. The Board believes that this approach
would give appropriate flexibility to foreign banking organizations
that operate under different economic and regulatory environments while
still addressing the intent of the BHC Act to give exemptions only to
true foreign banks that conduct more banking business outside the
United States than in the United States.
Request for Comments With Respect to the Expansion of the Activities
That May be Counted as Banking
The QFBO test in Regulation K permits foreign banking organizations
to count only those assets, revenues, or net income related to
activities which are permissible for a U.S. banking organization to
conduct outside of the United States. Under the current test, a
predominantly financial organization that engages to a significant
extent in activities not permissible for a U.S. bank abroad--for
example, property and casualty insurance--could fail to meet the QFBO
test.
In formulating the QFBO test, the Board has sought to balance the
potentially competing goals of avoiding the extraterritorial
application of U.S. law on the one hand and ensuring competitive
equality with U.S. banking organizations on the other. In this regard,
the Board does not intend the QFBO exemptions to permit foreign
commercial and industrial firms to conduct a commercial banking
business in the United States. This view, however, is not necessarily
inconsistent with granting the QFBO exemptions to a foreign banking
organization that is engaged to a significant extent in financial
activities not permissible for a U.S. bank abroad. For this reason, the
Board is requesting comment with respect to whether and how to expand
the list of activities that would be considered banking for purposes of
the QFBO test.
Comment is requested on both of these proposals and on any other
issues arising under the QFBO rules.
Applications for Special Determination of Eligibility for QFBO
Treatment
Regulation K permits a foreign banking organization that ceases to
qualify as a QFBO to request a special determination of eligibility.
The proposal would permit a foreign banking organization that has
applied for a specific determination of eligibility to continue to
conduct its business as if it were a QFBO, except with respect to
making investments in U.S. companies under section 2(h) of the BHC Act
for which Board consent would be required. The proposal reflects the
approach taken in a prior case considered by the Board.
Comment Requested on Limiting the Ability of Foreign Banks to Conduct
Unregulated Activities Abroad Through U.S. Companies in the Interests
of National Treatment
Regulation K currently exempts from the BHC Act any activity
conducted by a QFBO outside the United States. There appears to be a
growing trend by foreign banks under this exemption toward using U.S.
companies operating under section 4(c)(8) of the BHC Act to hold
foreign subsidiaries that such foreign banks regard as unrestricted in
their activities.
Under the BHC Act, a U.S. bank holding company may own foreign
subsidiaries only under the authority of Regulation K, which sets
limits on the activities that can be conducted in such subsidiaries. In
the past, in response to inquiries, Board staff has provided advice
that the activities of foreign subsidiaries of section 4(c)(8)
companies owned by foreign banking organizations should be operated
subject to these same limitations. Nonetheless, it appears that some
foreign banking organizations have interpreted the general exemption in
Regulation K for all non-U.S. activities of foreign banking
organizations as also extending to the foreign subsidiaries of section
4(c)(8) companies. The question is raised of whether this provides an
unfair competitive advantage to foreign banks in using and marketing
the name and operations of the regulated U.S. company.
Given the fact that the foreign activities of a QFBO are exempt
under Regulation K, the Board recognizes the ability to own a foreign
subsidiary through a section 4(c)(8) company may not be viewed as a
material competitive advantage for foreign banks. Even if the ownership
of impermissible foreign subsidiaries through section 4(c)(8) companies
were to be prohibited, a foreign bank could comply simply by moving the
ownership from the U.S. company to a true foreign subsidiary.
The purpose of the exemption in Regulation K, however, was to
permit foreign banking organizations to conduct their non-U.S.
activities outside the scope of U.S. regulation because there was no
U.S. interest served by regulating such activities. The Board, however,
does have a regulatory interest in section 4(c)(8) companies. The
exemption was not intended to allow U.S. companies regulated under
section 4(c)(8) of the BHC Act and owned by foreign banking
organizations to engage in unrestricted foreign activities.
Accordingly, the Board is requesting comment on limiting the
availability of the exemption in Regulation K to activities conducted
by true foreign subsidiaries of foreign banks, and preventing the use
of such exemption by foreign-owned but U.S.-regulated companies such as
those operating under section 4(c)(8).
Implementation of New Interstate Rules
In addition to application procedures and rules on nonbanking
activities, Regulation K implements the restrictions on interstate
operations of foreign banks provided in the IBA and the BHC Act. The
Interstate Act amended the IBA and the BHC Act to remove geographic
restrictions on interstate acquisitions of banks by foreign banks,
permitted foreign banks to branch interstate by merger and de novo on
the same basis as domestic banks with the same home state as the
foreign bank, and modified the definition of a foreign bank's home
state for purposes of interstate branching. The Interstate Act became
fully effective in June 1997.
In May 1996, the Board published a final rule to implement certain
of the changes made by the Interstate Act. The rule required certain
foreign banks to select a home state for the first time, or have a home
state designated by the Board, removed obsolete provisions of
Regulation K that restricted the ability of a foreign bank to effect
major bank mergers through U.S. subsidiary banks located outside the
foreign bank's home state, and deleted certain other obsolete rules
governing home state selection.
This proposal would implement and interpret certain other changes
made by the Interstate Act. The proposal would permit foreign banks to
make additional changes in home state under certain circumstances and
clarify the extent to which a foreign bank changing its home state is
required to conform its existing network of bank subsidiaries and
banking offices. In addition, the proposal sets forth the additional
standards for approval of applications by foreign banks to establish
interstate branches. It also would clarify that the ``upgrade'' of
agencies and limited branches to full branches requires Board approval
and that the Board will approve such upgrades (absent a merger
[[Page 68439]]
transaction) only if the host state has enacted laws permitting de novo
interstate branching. Finally, the proposal deletes the Board's home
state attribution rule, which provides that a foreign bank (or other
company) and all other foreign banks which it controls must have the
same home state.
Changes of Home State
In 1980, the Board allowed foreign banks a single change of home
state as a compromise between the need for comparable treatment with
domestic banks and Congress' intent, in adopting the IBA, that foreign
banks be allowed some flexibility to change home state. The basic
framework for interstate banking, however, has changed substantially
since 1980, when domestic banks generally could not branch interstate
and rarely, if ever, could change home states. Domestic and foreign
banks may now branch into other states either de novo or by merger in
certain circumstances; interstate branching by merger between banks is
now possible in all states other than Montana and Texas, and de novo
interstate branching is permitted in 13 states. As a result, many
domestic banks with interstate branches now have significant
opportunities to change home state, although these opportunities are
not available to all banks under all circumstances.
In light of these changes, the proposal gives foreign banks
additional opportunities to change home state in a way that affords
comparable treatment to foreign and domestic banks. The proposal would
retain the ability of foreign banks under current rules to change their
home state once by filing a notice with the Board. Changes made by
foreign banks prior to the entry into effect of the proposed amendments
would count toward this one-time limit. The proposal would also
establish a new procedure for foreign banks to change home state an
unlimited number of times, by applying for the prior approval of the
Board for each such change. A foreign bank applying to change its home
state under the new procedure would be required to show that a domestic
bank with the same home state would be able to make the same change.
The new procedure advances the policy of national treatment
underlying the IBA by allowing foreign banks to take advantage of
changes in laws concerning interstate branching in order to change home
state, when and to the extent those laws make it possible for domestic
banks to change home state as well. The new procedure also seeks to
prevent foreign banks from gaining an unfair competitive advantage over
domestic banks by changing home state in circumstances where a domestic
bank would be unable to do so. Although the Interstate Act made it
possible for domestic banks to change home state in some cases, there
are other cases where such changes in home state may be difficult or
impossible. Accordingly, the new procedure would allow foreign banks to
change home state only in cases where a domestic bank could effect the
same change.
The Board would have discretion to grant the request of a foreign
bank to change home state under the new proposed procedure. In
evaluating these applications, the Board would consider whether the
proposed change of home state would be consistent with competitive
equity between foreign and domestic banks. Relevant factors in this
regard include the degree to which a national or state bank would be
able to make the same change of home state while retaining its existing
operations outside the new home state.
Changes in home state would generally have no impact on which
Reserve Bank will supervise the operations of a foreign bank nor on
which Reserve Bank will receive a foreign bank's reports and
applications.
Conforming U.S. Operations Upon Change in Home State
Regulation K currently requires a foreign bank that changes its
home state to conform its banking operations outside the new home state
to what would have been permissible at the time of the bank's original
home state selection. The requirement, adopted in 1980, implemented
section 5 of the IBA which sought to prevent foreign banks from using a
home state change to acquire and maintain subsidiary banks or branches
in more than one state in circumstances where a domestic bank or bank
holding company would be unable to do so.
The Interstate Act liberalized the rules on interstate branches and
eliminated the geographic restrictions on the purchases of banks by
domestic bank holding companies and foreign banks under the BHC Act and
the IBA. Consequently, the Board is proposing that the provisions on
conforming operations upon a foreign bank's change of home state be
revised to reflect changes made by the Interstate Act. For example,
with respect to subsidiary banks, a foreign bank would no longer be
required to divest a subsidiary bank outside its new home state; the
Interstate Act authorizes interstate acquisitions of bank subsidiaries.
With respect to conforming branches outside the foreign bank's new
home state, the proposed amendment would reflect the liberalized
interstate branching rules applicable to foreign and domestic banks as
a result of the Interstate Act. A foreign bank changing its home state
would be permitted to retain all branches which the foreign bank could
establish (under current law) if it already had its new home state.
This relaxation is appropriate given that domestic, as well as foreign
banks, now have significant opportunities to establish and retain
interstate branches.
The proposal would not change the current rule which allows a
foreign bank to retain branches grandfathered under the IBA, and
limited branches (that is, branches that ``limit'' their deposit-taking
to only those deposits that an Edge corporation may accept).
Additional Standards for Interstate Offices
The proposal also contains the additional standards required by the
Interstate Act for approval by the Board of the establishment by a
foreign bank of branches located outside of the bank's home state.
These standards are designed to insure that foreign banks seeking to
establish interstate branches meet requirements comparable to those
imposed on domestic banks seeking to operate interstate.
Upgrading of Agencies and Limited Branches to Full Branches
Section 5 of the IBA, as amended by the Interstate Act, allows a
foreign bank to establish full branches outside its home state only if
a domestic bank with the same home state could establish branches in
the same host state under the Interstate Act. The Interstate Act allows
interstate branching by merger with an existing bank or branch (the
merger provisions) or through de novo branching (the de novo
provisions). The merger provisions further distinguish between
interstate mergers of entire banks and interstate acquisition of
individual branches.
Some foreign bank trade groups have argued that a foreign bank with
interstate offices, including agencies and limited branches, should be
permitted to convert such agencies and limited branches outside the
home state into full-service branches. The argument is based on the
fact that domestic banking organizations can consolidate their existing
interstate subsidiary banks and establish interstate branches through
the merger provisions. Accordingly, the argument goes, in order to
provide national treatment, foreign banks should be able to
[[Page 68440]]
``consolidate'' their own existing interstate operations into full-
service branches.
The Board has several concerns with this argument. In an interstate
merger of bank subsidiaries, different legal entities are merged into
one; operations are retained as branches of the surviving bank. In the
case of a foreign bank's interstate network of offices, each office is
already part of one legal entity; there is no merger. Moreover, in an
interstate merger transaction, all existing subsidiary banks would
generally have full deposit-taking authority; the merger does not
increase the ability of the merged entities to take deposits. In the
case of foreign banks, however, many of the interstate offices do not
have full deposit powers 34 and granting the request would
allow foreign banks substantially to increase their deposit powers.
Finally, unlike foreign banks, domestic banks did not have the
opportunity to establish agencies and limited branches outside their
home states prior to enactment of the Interstate Act. One possible
issue is whether the existing networks of such interstate offices of
foreign banks, established at a time when such interstate offices were
unavailable to domestic banks, would give foreign banks an unfair
advantage over domestic banks if the Board decides that such offices
can be upgraded to full branches under the merger
provisions.35
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\34\ Limited branches may take only Edge-type deposits; agencies
may accept only foreign-source deposits.
\35\ It could be argued that the ability of foreign banks to
maintain agency, limited branch, and representative office networks
outside their home states since 1978 gave foreign banks a slight
competitive advantage, and that foreign banks wishing to upgrade
their out-of-home-state offices should be allowed to do so only if a
domestic bank could open a de novo branch under the Interstate Act.
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On balance, the Board believes it should approve upgrades of
agencies and limited branches to full branches only if the host state
permits de novo interstate branching. Comment is being requested on
whether foreign banks wishing to upgrade their out-of-home-state
offices should be permitted to do so only if a domestic bank with the
same home state as the foreign bank could open a de novo branch, or
whether there are other circumstances in which a foreign bank should be
permitted to upgrade its offices.
In connection with this issue, the Board is proposing a change in
the current definition of ``change in status'' in Regulation K.
Regulation K requires the prior approval of the Board under the FBSEA
for any ``change in the status'' of a U.S. office. The current
definition of change in status in Regulation K does not expressly
include upgrades from limited to full branches because foreign banks
generally were unable to effect such upgrades without changing home
state until the Interstate Act gave foreign banks the ability to
establish full branches on an interstate basis.
As discussed above, upgrading a limited branch of a foreign bank to
a full branch implicates policy concerns similar to those raised by
changes in the status of an office requiring prior Board approval under
FBSEA. Thus, the Board proposes to expand the definition of ``change in
status'' to include upgrades from a limited branch to a full branch,
such that prior approval of the Board under FBSEA would be necessary
for such upgrades. Where a foreign bank proposes to upgrade a limited
branch to a full branch outside its home state, the prior approval of
the Board under the interstate branching provisions of section 5 of the
IBA also would be required as a result of this rule change.
Home State Attribution Rule Deleted
Regulation K currently provides that a foreign banking organization
and all its affiliates are entitled to only one home state. This would
be true even if the foreign banking organization owned several
different foreign banks with operations in the United States.
At the time the rule was adopted, domestic banks generally could
not branch into states other than the ones in which they were located,
nor could bank holding companies generally acquire banks outside their
home state. In that context, the Regulation K provision was structured
to prevent affiliated groups of foreign banks from gaining an unfair
advantage over domestic banks by having each of the affiliated foreign
banks select a different home state. Having done so, the foreign banks
would be able to open and operate branches in more than one state. The
rule sought to prevent this by stating that a foreign banking
organization and any foreign bank that it controls would be entitled to
only one home state.
The Interstate Act has substantially changed the rules on
interstate expansion since this provision was originally adopted. Under
current law, a bank holding company may own many banks in different
states; each of these banks is entitled to its own home state
regardless of the home states of its affiliates. Consequently, the
Board proposes that Regulation K be amended to eliminate the
requirement that a foreign bank and all its affiliates are entitled to
only one home state. The proposal would preserve national treatment for
foreign banks and would not put U.S. banking organizations at any
competitive disadvantage.36
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\36\ Section 5 of the IBA provides that a foreign bank may not
establish a branch ``directly or indirectly'' outside its home
state. Staff does not believe that this provision affects the
ability of several foreign bank affiliates to maintain different
home states. Rather, in light of Congress's intent to provide
foreign banks with national treatment in interstate expansion, staff
believes this prohibition on ``indirect'' establishment of branches
refers to preventing one foreign bank from acting as the branch of
another foreign bank, without the latter having met the requirements
of the IBA, including section 5.
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The Board requests comment on the specific proposals with respect
to the Interstate Act as well as any other comments on appropriate or
desirable changes.
Additional Matters
Temporary Additional Office Location
From time to time over the past six years, the Board has received
requests from foreign banks that desire to have an additional temporary
location, usually as an interim measure before moving into new office
space that can accommodate the entire staff of the branch or agency.
These requests typically occur when the office is expanding into new
areas or otherwise adding staff. The Board is proposing that prior
approval under FBSEA would not be required where a foreign bank
temporarily, for a period not to exceed 12 months, relocates part of
the staff of a branch or agency pending movement of the entire office
to a new location as long as there is not direct public access with
respect to any branch or agency function. Any foreign bank taking
advantage of this authority would be required to advise the Board prior
to the relocation, make certain commitments, and provide periodic
information, as requested.
Changes to Definition Section
The revision makes certain technical changes in the definition
section of Subpart B, including in the definitions of ``appropriate
Federal Reserve Bank,'' ``foreign banking organization,'' and
``regional administrative office.''
Conforming Changes to Termination Provisions
The Board proposes to amend the provisions of Subpart B dealing
with termination of a U.S. office of a foreign bank to add as a grounds
for termination a finding that the home country supervisor of a foreign
bank is not making demonstrable progress in establishing arrangements
for the comprehensive supervision or
[[Page 68441]]
regulation of such foreign bank on a consolidated basis.
Permissible U.S. Securities Activities for Foreign Banking Organization
Subpart B currently provides that a foreign banking organization
may not own or control shares of a foreign company that directly
underwrites, sells or distributes, or that owns or controls more than
five percent of the shares of a company that underwrites, sells or
distributes, securities in the United States, except to the extent
permitted bank holding companies. The current five percent limitation
is intended to limit any competitive advantage the foreign banking
organization might have by virtue of owning a larger interest in an
impermissible U.S. securities company then is permitted to a U.S. bank
holding company. Based on recent experience, the Board is proposing
that the five percent limit be raised to ten percent. In the Board's
view, a less than ten percent ownership interest would not generally
permit the foreign banking organization to exert a significant
influence over a securities company in order to gain a competitive
advantage over U.S. bank holding companies.
New Delegations
Staff is proposing adding several new delegations related to
Subpart B of Regulation K to the Board's delegation rules. The
following authority would be delegated to the Director of the Division
of Banking Supervision and Regulation:
Together with the appropriate Federal Reserve Bank,
authority to waive or suspend the prior notice period in connection
with the establishment of any particular new foreign bank office in the
United States or to require that an application be filed in lieu of a
prior notice;
Authority to suspend a particular foreign banking
organization's ability to establish additional offices by general
consent or prior notice would also be delegated to the Director of the
Division of Banking Supervision and Regulation.
Authority to determine that the temporary operation by a
foreign bank of a second location of an existing office does not
constitute the establishment of a new office.
The following authority would be delegated to the General Counsel.
Authority not to require an application in the event of a
merger or acquisition transaction involving two foreign banks that
would otherwise qualify for after-the-fact approval where the foreign
bank in question commits promptly to wind down the acquired U.S.
operations; and
Authority to approve routine requests for exemptive
authority under section 4(c)(9) of the BHC Act.
Reduction of Reporting Requirements
Foreign banking organizations currently are required to report
certain acquisitions of shares in companies engaged in activities in
the United States on a quarterly basis. The Board is proposing that
such reports be required only on an annual basis.
Subpart C: Export Trading Companies
Subpart C of the Regulation K sets out the rules governing
investments and participation in export trading companies (ETCs) by
bank holding companies and other eligible investors.
ETCs are companies in which bank holding companies and certain
other eligible investors may invest for the purpose of promoting U.S.
exports. Currently, an eligible investor must give the Board 60 days
prior written notice of an investment of any amount in an ETC. To ease
regulatory burden, the Board is proposing a general consent procedure
whereby an eligible investor that is well capitalized and well managed
may invest in an ETC without submitting prior notice. An eligible
investor that makes such an investment would have to provide certain
information to the Board in a post-investment notice. The terms well
capitalized and well managed would have the same meanings as in the
Board's Regulation Y.
The Board is also proposing that eligible investors be able, under
general-consent authority, to reinvest an amount equal to dividends
received from the ETC in the prior year and to acquire an ETC from an
affiliate at net asset value. Both provisions are based on the general-
consent provisions of subpart A.
The proposed revision of subpart C would also move all defined
terms into a new definitions section; remove an obsolete provision
relating to the calculation of an ETC's revenues; and make certain
minor, technical amendments.
Request for Comment
The Board seeks comment on all of these proposals, including any
changes not noted above but that are set forth in the draft
regulations.
Initial Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an
initial regulatory flexibility analysis with any notice of proposed
rulemaking. A description of the reasons why the action by the agency
is being considered and a statement of the objectives of, and the legal
basis for, the proposed rule are contained in the supplementary
information above. The overall effect of the proposed rule would be to
reduce regulatory burden. The rule should not have a significant
economic impact on a substantial number of small business entities
consistent with the spirit and purpose of the Regulatory Flexibility
Act.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.) and its implementing regulation (5 CFR 1320, app. A.1),
the Board reviewed the proposed rule under the authority delegated to
the Board by the Office of Management and Budget (OMB). The Federal
Reserve may not conduct or sponsor, and an organization is not required
to respond to, an information collection unless the Board displays a
currently valid OMB control number. The Board's OMB control numbers for
the collections revised by this proposal are 7100-0107 (the
International Applications and Prior Notifications under Subparts A and
C of Regulation K; FR K-1), 7100-0110 (the Notification Required
Pursuant to Section 211.23(h) of Regulation K on Acquisitions by
Foreign Banking Organizations; FR 4002), and 7100-0284 (the
International Applications and Prior Notifications under Subpart B of
Regulation K; FR K-2).
The collections of information that are proposed to be revised by
this rulemaking are authorized by sections 25 and 25A of the Federal
Reserve Act (12 U.S.C. 601-604a, 611-631), sections 4(c)(13), 4(c)(14),
and 5(c) of the BHC Act (12 U.S.C. 1843(c)(13), 1843(c)(14), 1844(c)),
and sections 7, 8(a), and 10 of the IBA (12 U.S.C. 3105, 3106(a),
3107). These information collections are required to evidence
compliance with the requirements of Regulation K. The respondents are
for-profit financial institutions, including small businesses.
The current estimated annual burden for the 7100-0107 is 440 hours.
The proposed rule would result in an estimated 25 percent reduction in
the number of applications filed. The proposal would permit well-
capitalized and well-managed U.S. banking organizations making
investments pursuant to general consent authority to file an
abbreviated post-investment notice with the Board. This notice would
take the place of the requirements relating to prior notice or
application to the Board that would be required under existing
Regulation K procedures before any such investment could be made. The
current estimated annual burden for the 7100-0110 is 80
[[Page 68442]]
hours. It is estimated that the proposed rule would reduce the burden
by 50 percent due to a decrease in the frequency of reports to be filed
for certain foreign banking organizations. The current estimated annual
burden for the 7100-0284 is 1,000 hours. It is estimated that the
proposed rule would reduce the burden by 10 percent due to a decrease
in the average number of hours required to complete an application. The
Board estimates there would be no cost burden in addition to the annual
hour burden.
For the 7100-0107 and the 7100-0284, the applying organization has
the opportunity to request confidentiality for information that it
believes will qualify for an exemption under the Freedom of Information
Act (5 U.S.C. 552(b)). For the 7100-0110, the information may be deemed
confidential if the respondent requests confidential treatment and is
able to demonstrate the need for confidentiality under one or more of
the exemptions provided by FOIA (5 U.S.C. 552(b)).
Comments are invited on: a. whether the proposed revised
collections of information are necessary for the proper performance of
the Federal Reserve's functions, including whether the information has
practical utility; b. the accuracy of the Federal Reserve's estimate of
the burden of the proposed revised information collections, including
the cost of compliance; c. ways to enhance the quality, utility, and
clarity of the information to be collected; and d. ways to minimize the
burden of information collection on respondents, including through the
use of automated collection techniques or other forms of information
technology. Comments on the collections of information should be sent
to Mary M. McLaughlin, Chief, Financial Reports Section, Division of
Research and Statistics, Mail Stop 97, Board of Governors of the
Federal Reserve System, Washington, DC 20551, with copies of such
comments to be sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-00107, 7100-0110, or 7100-0284), Washington, DC
20503.
List of Subjects
12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
12 CFR Part 265
Authority delegations (Government agencies), Banks, banking,
Federal Reserve System.
For the reasons set out in the preamble, the Board of Governors
proposes to amend 12 CFR parts 211 and 265 as set forth below:
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for part 211 continues to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq.,
3101 et seq., 3109 et seq.
2. Subparts A, B, and C (consisting of Secs. 211.1 through 211.34)
are revised to read as follows:
Subpart A--International Operations of U.S. Banking Organizations
Sec.
211.1 Authority, purpose, and scope.
211.2 Definitions.
211.3 Foreign branches of U.S. banking organizations.
211.4 Permissible investments and activities of foreign branches of
member banks.
211.5 Edge and agreement corporations.
211.6 Permissible activities of Edge and agreement corporations in
the United States.
211.7 Investments and activities abroad.
211.8 Investment procedures.
211.9 Permissible activities abroad.
211.10 Lending limits and capital requirements.
211.11 Supervision and reporting.
211.12 Reports of crimes and suspected crimes.
211.13 Liquidation of Edge and agreement corporations.
Subpart B--Foreign Banking Organizations
211.20 Authority, purpose, and scope.
211.21 Definitions.
211.22 Interstate banking operations of foreign banking
organizations.
211.23 Nonbanking activities of foreign banking organizations.
211.24 Approval of offices of foreign banks; procedures for
applications; standards for approval; representative office
activities and standards for approval; preservation of existing
authority.
211.25 Termination of offices of foreign banks.
211.26 Examination of offices and affiliates of foreign banks.
211.27 Disclosure of supervisory information to foreign
supervisors.
211.28 Provisions applicable to branches and agencies: limitation
on loans to one borrower.
211.29 Applications by state branches and state agencies to conduct
activities not permissible for federal branches.
211.30 Criteria for evaluating U.S. operations of foreign banks not
subject to consolidated supervision.
Subpart C--Export Trading Companies
211.31 Authority, purpose, and scope.
211.32 Definitions.
211.33 Investments and extensions of credit.
211.34 Procedures for filing and processing notices.
Subpart A--International Operations of U.S. Banking Organizations
Sec. 211.1 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (Board) under the authority of the Federal
Reserve Act (FRA) (12 U.S.C. 221 et seq.); the Bank Holding Company Act
of 1956 (BHC Act) (12 U.S.C. 1841 et seq.); and the International
Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
(b) Purpose. This subpart sets out rules governing the
international and foreign activities of U.S. banking organizations,
including procedures for establishing foreign branches and Edge and
agreement corporations to engage in international banking, and for
investments in foreign organizations.
(c) Scope. This subpart applies to:
(1) Corporations organized under section 25A of the FRA (12 U.S.C.
611-631) (Edge corporations);
(2) Corporations having an agreement or undertaking with the Board
under section 25 of the FRA (12 U.S.C. 601-604a), (agreement
corporations);
(3) Member banks with respect to their foreign branches and
investments in foreign banks under section 25 of the FRA (12 U.S.C.
601-604a); 1 and
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\1\ Section 25 of the FRA (12 U.S.C. 601-604a), which refers to
national banking associations, also applies to state member banks of
the Federal Reserve System by virtue of section 9 of the FRA (12
U.S.C. 321).
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(4) Bank holding companies with respect to the exemption from the
nonbanking prohibitions of the BHC Act afforded by section 4(c)(13) of
that act (12 U.S.C. 1843(c)(13)).
Sec. 211.2 Definitions.
Unless otherwise specified, for the purposes of this subpart:
(a) An affiliate of an organization means:
(1) Any entity of which the organization is a direct or indirect
subsidiary; or
(2) Any direct or indirect subsidiary of the organization or such
entity.
(b) Capital Adequacy Guidelines means the ``Capital Adequacy
Guidelines for State Member Banks: Risk-Based Measure'' (12 CFR part
208, app. A) and the ``Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure'' (12 CFR part 225, app. A).
(c) Capital and surplus means, unless otherwise provided in this
part:
(1) Tier 1 and tier 2 capital included in an organization's risk-
based capital
[[Page 68443]]
(under the Capital Adequacy Guidelines); and
(2) The balance of allowance for loan and lease losses not included
in an organization's tier 2 capital for calculation of risk-based
capital, based on the organization's most recent consolidated Report of
Condition and Income.
(d) Directly or indirectly, when used in reference to activities or
investments of an organization, means activities or investments of the
organization or of any subsidiary of the organization.
(e) Eligible country means any country:
(1) For which an allocated transfer risk reserve is required
pursuant to Sec. 211.43 and that has restructured its sovereign debt
held by foreign creditors; and
(2) Any other country that the Board deems to be eligible.
(f) An Edge corporation is engaged in banking if it is ordinarily
engaged in the business of accepting deposits in the United States from
nonaffiliated persons.
(g) Engaged in business or engaged in activities in the United
States means maintaining and operating an office (other than a
representative office) or subsidiary in the United States.
(h) Equity means an ownership interest in an organization, whether
through:
(1) Voting or nonvoting shares;
(2) General or limited partnership interests;
(3) Any other form of interest conferring ownership rights,
including warrants, debt, or any other interests that are convertible
into shares or other ownership rights in the organization; or
(4) Loans that provide rights to participate in the profits of an
organization, unless the investor receives a determination that such
loans should not be considered equity in the circumstances of the
particular investment.
(i) Foreign or foreign country refers to one or more foreign
nations, and includes the overseas territories, dependencies, and
insular possessions of those nations and of the United States, and the
Commonwealth of Puerto Rico.
(j) Foreign bank means an organization that:
(1) Is organized under the laws of a foreign country;
(2) Engages in the business of banking;
(3) Is recognized as a bank by the bank supervisory or monetary
authority of the country of its organization or principal banking
operations;
(4) Receives deposits to a substantial extent in the regular course
of its business; and
(5) Has the power to accept demand deposits.
(k) Foreign branch means an office of an organization (other than a
representative office) that is located outside the country where the
organization is legally established, at which a banking or financing
business is conducted.
(l) Foreign person means an office or establishment located outside
the United States, or an individual residing outside the United States.
(m) Investment means:
(1) The ownership or control of equity;
(2) Binding commitments to acquire equity;
(3) Contributions to the capital and surplus of an organization; or
(4) The holding of an organization's subordinated debt when the
investor and the investor's affiliates hold more than 5 percent of the
equity of the organization.
(n) Investor means an Edge corporation, agreement corporation, bank
holding company, or member bank.
(o) Joint venture means an organization that has 25 percent or more
of its voting shares held directly or indirectly by the investor or by
an affiliate of the investor, but which is not a subsidiary of the
investor.
(p) Loans and extensions of credit means all direct and indirect
advances of funds to a person made on the basis of any obligation of
that person to repay the funds.
(q) Organization means a corporation, government, partnership,
association, or any other entity.
(r) Person means an individual or an organization.
(s) Portfolio investment means an investment in an organization
other than a subsidiary or joint venture.
(t) Representative office means an office that:
(1) Engages solely in representational and administrative functions
(such as soliciting new business or acting as liaison between the
organization's head office and customers in the United States); and
(2) Does not have authority to make any business decision (other
than decisions relating to its premises or personnel) for the account
of the organization it represents, including contracting for any
deposit or deposit-like liability on behalf of the organization.
(u) Subsidiary means an organization that has more than 50 percent
of its voting shares held directly or indirectly, or that is otherwise
controlled or capable of being controlled, by the investor or an
affiliate of the investor under any authority. Among other
circumstances, an investor is considered to control an organization if:
(1) The investor or an affiliate is a general partner of the
organization; or
(2) If the investor and its affiliates directly or indirectly own
or control more than 50 percent of the equity of the organization.
(v) Tier 1 capital has the same meaning as provided under the
Capital Adequacy Guidelines.
(w) Well capitalized means:
(1) In relation to a parent member or insured bank, that the
standards set out in Sec. 208.33(b)(1) of Regulation H (12 CFR
208.33(b)(1)) are satisfied;
(2) In relation to a bank holding company, that the standards set
out in Sec. 225.2(r)(1) of Regulation Y (12 CFR 225.2(r)(1)) are
satisfied; and
(3) In relation to an Edge or agreement corporation, that it has
tier 1 and total risk-based capital ratios of 6.0 and 10.0 percent,
respectively, or greater.
(x) Well managed means that the Edge or agreement corporation, any
parent insured bank, and the bank holding company have received a
composite rating of 1 or 2 at their most recent examination or review
and are not subject to any supervisory enforcement action.
Sec. 211.3 Foreign branches of U.S. banking organizations.
(a) General.--(1) Definition of banking organization. For purposes
of this section, a banking organization is defined as a member bank and
its affiliates.
(2) A banking organization is considered to be operating a branch
in a foreign country if it has an affiliate that is a member bank, Edge
or agreement corporation, or foreign bank that operates an office
(other than a representative office) in that country.
(3) For purposes of this subpart, a foreign office of an operating
subsidiary of a member bank shall be treated as a foreign branch of the
member bank and may engage only in activities permissible for a branch
of a member bank.
(4) At any time upon notice, the Board may modify or suspend
branching authority conferred by this section with respect to any
banking organization.
(b)(1) Establishment of foreign branches. (i) Foreign branches may
be established by any member bank having capital and surplus of
$1,000,000 or more, an Edge corporation, an agreement corporation, any
subsidiary
[[Page 68444]]
the shares of which are held directly by the member bank, or any other
subsidiary held pursuant to this subpart.
(ii) The Board grants its general consent under section 25 of the
FRA (12 U.S.C. 601-604a) for a member bank to establish a branch in the
Commonwealth of Puerto Rico and the overseas territories, dependencies,
and insular possessions of the United States.
(2) Prior notice. Unless otherwise provided in this section, the
establishment of a foreign branch requires 30 days' prior written
notice to the Board.
(3) Branching into additional foreign countries. After giving the
Board 12 days' prior written notice, a banking organization that
operates branches in two or more foreign countries may establish a
branch in an additional foreign country.
(4) Additional branches within a foreign country. No prior notice
is required to establish additional branches in any foreign country
where the banking organization operates one or more branches.
(5) Branching by nonbanking organizations. No prior notice is
required for an organization that is not an Edge or agreement
corporation, member bank, or foreign bank to establish branches within
a foreign country or in additional foreign countries.
(6) Expiration of branching authority. Authority to establish
branches, when granted following prior written notice to the Board,
shall expire one year from the earliest date on which the authority
could have been exercised, unless extended by the Board.
(7) Reporting. Any banking organization that opens, closes, or
relocates a branch shall report such change in a manner prescribed by
the Board.
(8) Reserves of foreign branches of member banks. Member banks
shall maintain reserves against foreign branch deposits when required
by Regulation D (12 CFR part 204).
Sec. 211.4 Permissible investments and activities of foreign branches
of member banks.
In addition to its general banking powers, and to the extent
consistent with its charter, a foreign branch of a member bank may
engage in the following activities, so far as usual in connection with
the business of banking in the country where it transacts business:
(a) Guarantees. Guarantee debts, or otherwise agree to make
payments on the occurrence of readily ascertainable events,2
if the guarantee or agreement specifies a maximum monetary liability;
but, except to the extent that the member bank is fully secured, it may
not have liabilities outstanding for any person on account of such
guarantees or agreements which, when aggregated with other unsecured
obligations of the same person, exceed the limit contained in section
5200(a)(1) of the Revised Statutes (12 U.S.C. 84) for loans and
extensions of credit;
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\2\ Readily ascertainable events include, but are not limited
to, nonpayment of taxes, rentals, customs duties, or costs of
transport and loss or nonconformance of shipping documents.
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(b) Government obligations. (1) Underwrite, distribute, buy, sell,
and hold obligations of:
(i) The national government of any country rated as investment
grade by at least two established international rating agencies;
(ii) An agency or instrumentality of such national government where
supported by the taxing authority, guarantee, or full faith and credit
of that government; and
(iii) The national government and the political subdivisions of the
country in which the branch is located;
(2) No member bank, under authority of this paragraph (b), may hold
or be under commitment with respect to, such obligations for its own
account in relation to any one country in an amount exceeding the
greater of:
(i) 10 percent of its tier 1 capital; or
(ii) 10 percent of the total deposits of the bank's branches in
that country on the preceding year-end call report date (or the date of
acquisition of the branch, in the case of a branch that has not been so
reported);
(c) Other investments. (1) Invest in:
(i) The securities of the central bank, clearinghouses,
governmental entities other than those authorized under paragraph
(b)(1) of this section, and government-sponsored development banks of
the country in which the foreign branch is located;
(ii) Other debt securities eligible to meet local reserve or
similar requirements; and
(iii) Shares of automated electronic-payments networks,
professional societies, schools, and the like necessary to the business
of the branch.
(2) The total investments of a bank's branches in a country under
this paragraph (c) (exclusive of securities held as required by the law
of that country or as authorized under section 5136 of the Revised
Statutes (12 U.S.C. 24, Seventh) may not exceed 1 percent of the total
deposits of the bank's branches in that country on the preceding year-
end call report date (or on the date of acquisition of the branch, in
the case of a branch that has not so reported);
(d) Real estate loans. Take liens or other encumbrances on foreign
real estate in connection with its extensions of credit, whether or not
of first priority and whether or not the real estate has been improved;
(e) Insurance. Act as insurance agent or broker;
(f) Employee benefits program. Pay to an employee of the branch, as
part of an employee benefits program, a greater rate of interest than
that paid to other depositors of the branch;
(g) Repurchase agreements. Engage in repurchase agreements
involving securities and commodities that are the functional
equivalents of extensions of credit;
(h) Investment in subsidiaries. With the Board's prior approval,
acquire all of the shares of a company (except where local law requires
other investors to hold directors' qualifying shares or similar types
of instruments) that engages solely in activities:
(1) In which the member bank is permitted to engage; or
(2) That are incidental to the activities of the foreign branch;
and
(i) Other activities. With the Board's prior approval, engage in
other activities that the Board determines are usual in connection with
the transaction of the business of banking in the places where the
member bank's branches transact business.
Sec. 211.5 Edge and agreement corporations.
(a) Organization. (1) Board authority. The Board shall have the
authority to approve:
(i) The establishment of Edge corporations; and
(ii) Investments in Edge and agreement corporations.
(2) Permit. A proposed Edge corporation shall become a body
corporate when the Board issues a permit approving its proposed name,
articles of association, and organization certificate.
(3) Name. The name shall include international, foreign, overseas,
or a similar word, but may not resemble the name of another
organization to an extent that might mislead or deceive the public.
(4) Federal Register notice. The Board shall publish in the Federal
Register notice of any proposal to organize an Edge corporation and
shall give interested persons an opportunity to express their views on
the proposal.
(5) Factors considered by Board. The factors considered by the
Board in
[[Page 68445]]
acting on a proposal to organize an Edge corporation include:
(i) The financial condition and history of the applicant;
(ii) The general character of its management;
(iii) The convenience and needs of the community to be served with
respect to international banking and financing services; and
(iv) The effects of the proposal on competition.
(6) Authority to commence business. After the Board issues a
permit, the Edge corporation may elect officers and otherwise complete
its organization, invest in obligations of the U.S. government, and
maintain deposits with depository institutions, but it may not exercise
any other powers until at least 25 percent of the authorized capital
stock specified in the articles of association has been paid in cash,
and each shareholder has paid in cash at least 25 percent of that
shareholder's stock subscription.
(7) Expiration of unexercised authority. Unexercised authority to
commence business as an Edge corporation shall expire one year after
issuance of the permit, unless the Board extends the period.
(8) Amendments to articles of association. No amendment to the
articles of association shall become effective until approved by the
Board.
(9) Shareholders' meeting. An Edge corporation shall provide in its
bylaws that:
(i) A shareholders' meeting shall be convened at the request of the
Board within five days after the Board gives notice of the request to
the Edge corporation;
(ii) Any shareholder or group of shareholders that owns or controls
25 percent or more of the shares of the Edge corporation shall attend
such a meeting in person or by proxy; and
(iii) Failure by a shareholder or authorized representative to
attend such meeting in person or by proxy may result in removal or
barring of such shareholder or representative from further
participation in the management or affairs of the Edge corporation.
(b) Nature and ownership of shares--(1) Shares. Shares of stock in
an Edge corporation may not include no-par-value shares and shall be
issued and transferred only on its books and in compliance with section
25A of the FRA (12 U.S.C. 611 et seq.) and this subpart.
(2) Contents of share certificates. The share certificates of an
Edge corporation shall:
(i) Name and describe each class of shares, indicating its
character and any unusual attributes, such as preferred status or lack
of voting rights; and
(ii) Conspicuously set forth the substance of:
(A) Any limitations upon the rights of ownership and transfer of
shares imposed by section 25A of the FRA (12 U.S.C. 611 et seq.); and
(B) Any rules that the Edge corporation prescribes in its bylaws to
ensure compliance with this paragraph (b).
(3) Change in status of shareholder. Any change in status of a
shareholder that causes a violation of section 25A of the FRA (12
U.S.C. 611 et seq.) shall be reported to the Board as soon as possible,
and the Edge corporation shall take such action as the Board may
direct.
(c) Ownership of Edge corporations by foreign institutions--(1)
Prior Board approval. One or more foreign or foreign-controlled
domestic institutions referred to in section 25A(11) of the FRA (12
U.S.C. 619) may apply for the Board's prior approval to acquire
directly or indirectly a majority of the shares of the capital stock of
an Edge corporation.
(2) Conditions and requirements. Such an institution shall:
(i) Provide the Board information related to its financial
condition and activities and such other information as the Board may
require;
(ii) Ensure that any transaction by an Edge corporation with an
affiliate 3 is on substantially the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions by the Edge corporation with nonaffiliated
persons, and does not involve more than the normal risk of repayment or
present other unfavorable features;
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\3\ For purposes of this paragraph (c)(2)(ii), affiliate means
any organization that would be an affiliate under section 23A of the
FRA (12 U.S.C. 371c) if the Edge corporation were a member bank.
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(iii) Ensure that the Edge corporation will not provide funding on
a continual or substantial basis to any affiliate or office of the
foreign institution through transactions that would be inconsistent
with the international and foreign business purposes for which Edge
corporations are organized; and
(iv) Invest no more than 10 percent of the institution's capital
and surplus in the aggregate amount of stock held in all Edge and
agreement corporations (or, with the Board's prior approval, up to 20
percent of the investor's capital and surplus).
(3) Foreign institutions not subject to the BHC Act. In the case of
a foreign institution not subject to section 4 of the BHC Act (12
U.S.C. 1843), that institution shall:
(i) Comply with any conditions that the Board may impose that are
necessary to prevent undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices
in the United States; and
(ii) Give the Board 30 days' prior written notice before engaging
in any nonbanking activity in the United States, or making any initial
or additional investments in another organization, that would require
prior Board approval or notice by an organization subject to section 4
of the BHC Act (12 U.S.C. 1843); in connection with such notice, the
Board may impose conditions necessary to prevent adverse effects that
may result from such activity or investment.
(d) Change in control. --(1) Prior notice. (i) Any person shall
give the Board 60 days' prior written notice before acquiring, directly
or indirectly, 25 percent or more of the voting shares, or otherwise
acquiring control, of an Edge corporation.
(ii) The Board may extend the 60-day period for an additional 30
days by notifying the acquiring party.
(iii) A notice under this paragraph (d) need not be filed where a
change in control is effected through a transaction requiring the
Board's approval under section 3 of the BHC Act (12 U.S.C. 1842).
(2) Board review. In reviewing a notice filed under this paragraph
(d), the Board shall consider the factors set forth in paragraph (a)(5)
of this section, and may disapprove a notice or impose any conditions
that it finds necessary to assure the safe and sound operation of the
Edge corporation, to assure the international character of its
operation, and to prevent adverse effects, such as decreased or unfair
competition, conflicts of interest, or undue concentration of
resources.
(e) Domestic branches. --(1) Prior notice. (i) An Edge corporation
may establish branches in the United States 30 days after the Edge
corporation has given notice to its Reserve Bank, unless the Edge
corporation is notified to the contrary within that time.
(ii) The notice to the Reserve Bank shall include a copy of the
notice of the proposal published in a newspaper of general circulation
in the communities to be served by the branch.
(iii) The newspaper notice may appear no earlier than 90 calendar
days prior to submission of notice of the proposal to the Reserve Bank.
The newspaper notice shall provide an opportunity for the public to
give
[[Page 68446]]
written comment on the proposal to the appropriate Federal Reserve Bank
for at least 30 days after the date of publication.
(2) Factors considered by Board. The factors considered in acting
upon a proposal to establish a branch are enumerated in paragraph
(a)(5) of this section.
(3) Expiration of authority. Authority to establish a branch under
prior notice shall expire one year from the earliest date on which that
authority could have been exercised, unless the Board extends the
period.
(f) Agreement corporations. --(1) General. With the prior approval
of the Board, a member bank or bank holding company may invest in a
federally or state-chartered corporation that has entered into an
agreement or undertaking with the Board that it will not exercise any
power that is impermissible for an Edge corporation under this subpart.
(2) Factors considered by Board. The factors considered in acting
upon a proposal to establish an agreement corporation are enumerated in
paragraph (a)(5) of this section.
(g) Reserve requirements and interest rate limitations. The
deposits of an Edge or agreement corporation are subject to Regulations
D and Q (12 CFR parts 204 and 217) in the same manner and to the same
extent as if the Edge or agreement corporation were a member bank.
(h) Liquid funds. Funds of an Edge or agreement corporation that
are not currently employed in its international or foreign business, if
held or invested in the United States, shall be in the form of:
(1) Cash;
(2) Deposits with depository institutions, as described in
Regulation D (12 CFR part 204), and other Edge and agreement
corporations;
(3) Money-market instruments (including repurchase agreements with
respect to such instruments), such as banker's acceptances, federal
funds sold, and commercial paper; and
(4) Short- or long-term obligations of, or fully guaranteed by,
federal, state, and local governments and their instrumentalities.
Sec. 211.6 Permissible activities of Edge and agreement corporations
in the United States.
Activities incidental to international or foreign business. An Edge
corporation may engage, directly or indirectly, in activities in the
United States that are permitted by section 25A(6) of the FRA (12
U.S.C. 615) and are incidental to international or foreign business,
and in such other activities as the Board determines are incidental to
international or foreign business. The following activities will
ordinarily be considered incidental to an Edge corporation's
international or foreign business:
(a) Deposits from foreign governments and foreign persons. An Edge
corporation may receive in the United States transaction accounts,
savings, and time deposits (including issuing negotiable certificates
of deposits) from foreign governments and their agencies and
instrumentalities, and from foreign persons.
(b) Deposits from other persons. An Edge corporation may receive
from any other person in the United States transaction accounts,
savings, and time deposits (including issuing negotiable certificates
of deposit) if such deposits:
(1) Are to be transmitted abroad;
(2) Consist of funds to be used for payment of obligations to the
Edge corporation or collateral securing such obligations;
(3) Consist of the proceeds of collections abroad that are to be
used to pay for exported or imported goods or for other costs of
exporting or importing or that are to be periodically transferred to
the depositor's account at another financial institution;
(4) Consist of the proceeds of extensions of credit by the Edge
corporation;
(5) Represent compensation to the Edge corporation for extensions
of credit or services to the customer;
(6) Are received from Edge or agreement corporations, foreign
banks, and other depository institutions (as described in Regulation D
(12 CFR part 204)); or
(7) Are received from an organization that by its charter, license,
or enabling law is limited to business that is of an international
character, including foreign sales corporations, as defined in 26
U.S.C. 922; transportation organizations engaged exclusively in the
international transportation of passengers or in the movement of goods,
wares, commodities, or merchandise in international or foreign
commerce; and export trading companies established under subpart C of
this part.
(c) Borrowings. An Edge corporation may:
(1) Borrow from offices of other Edge and agreement corporations,
foreign banks, and depository institutions (as described in Regulation
D (12 CFR part 204));
(2) Issue obligations to the United States or any of its agencies
or instrumentalities;
(3) Incur indebtedness from a transfer of direct obligations of, or
obligations that are fully guaranteed as to principal and interest by,
the United States or any agency or instrumentality thereof that the
Edge corporation is obligated to repurchase; and
(4) Issue long-term subordinated debt that does not qualify as a
deposit under Regulation D (12 CFR part 204).
(d) Credit activities. An Edge corporation may:
(1) Finance the following:
(i) Contracts, projects, or activities performed substantially
abroad;
(ii) The importation into or exportation from the United States of
goods, whether direct or through brokers or other intermediaries;
(iii) The domestic shipment or temporary storage of goods being
imported or exported (or accumulated for export); and
(iv) The assembly or repackaging of goods imported or to be
exported;
(2) Finance the costs of production of goods and services for which
export orders have been received or which are identifiable as being
directly for export;
(3) Assume or acquire participations in extensions of credit, or
acquire obligations arising from transactions the Edge corporation
could have financed including acquisition of obligations of foreign
governments;
(4) Guarantee debts, or otherwise agree to make payments on the
occurrence of readily ascertainable events (including, but not limited
to, events such as nonpayment of taxes, rentals, customs duties, or
cost of transport and loss or nonconformance of shipping documents), so
long as the guarantee or agreement specifies the maximum monetary
liability thereunder and is related to a type of transaction described
in paragraphs (d)(1) and (2) of this section; and
(5) Provide credit and other banking services for domestic and
foreign purposes to foreign governments and their agencies and
instrumentalities; foreign persons; and organizations of the type
described in paragraph (b)(7) of this section.
(e) Payments and collections. An Edge corporation may receive
checks, bills, drafts, acceptances, notes, bonds, coupons, and other
instruments for collection abroad, and collect such instruments in the
United States for a customer abroad; and may transmit and receive wire
transfers of funds and securities for depositors.
(f) Foreign exchange. An Edge corporation may engage in foreign
exchange activities.
(g) Fiduciary and investment advisory activities. An Edge
corporation may:
(1) Hold securities in safekeeping for, or buy and sell securities
upon the order
[[Page 68447]]
and for the account and risk of, a person, provided such services for
U.S. persons are with respect to foreign securities only;
(2) Act as paying agent for securities issued by foreign
governments or other entities organized under foreign law;
(3) Act as trustee, registrar, conversion agent, or paying agent
with respect to any class of securities issued to finance foreign
activities and distributed solely outside the United States;
(4) Make private placements of participations in its investments
and extensions of credit; however, except to the extent permissible for
member banks under section 5136 of the Revised Statutes (12 U.S.C.
24(Seventh)), no Edge corporation may otherwise engage in the business
of underwriting, distributing, or buying or selling securities in the
United States;
(5) Act as investment or financial adviser by providing portfolio
investment advice and portfolio management with respect to securities,
other financial instruments, real-property interests and other
investment assets, 4 and by providing advice on mergers and
acquisitions, provided such services for U.S. persons are with respect
to foreign assets only; and
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\4\ For purposes of this section, management of an investment
portfolio does not include operational management of real property,
or industrial or commercial assets.
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(6) Provide general economic information and advice, general
economic statistical forecasting services, and industry studies,
provided such services for U.S. persons shall be with respect to
foreign economies and industries only.
(h) Banking services for employees. Provide banking services,
including deposit services, to the officers and employees of the Edge
corporation and its affiliates; however, extensions of credit to such
persons shall be subject to the restrictions of Regulation O (12 CFR
part 215) as if the Edge corporation were a member bank.
(i) Other activities. With the Board's prior approval, engage in
other activities in the United States that the Board determines are
incidental to the international or foreign business of Edge
corporations.
Sec. 211.7 Investments and activities abroad.
(a) General policy. Activities abroad, whether conducted directly
or indirectly, shall be confined to activities of a banking or
financial nature and those that are necessary to carry on such
activities. In doing so, investors 5 shall at all times act
in accordance with high standards of banking or financial prudence,
having due regard for diversification of risks, suitable liquidity, and
adequacy of capital. Subject to these considerations and the other
provisions of this section, it is the Board's policy to allow
activities abroad to be organized and operated as best meets corporate
policies.
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\5\ For purposes of this section and Secs. 211.8 and 211.9, a
direct subsidiary of a member bank is deemed to be an investor.
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(b) Direct investments by member banks. A member bank's direct
investments under section 25 of the FRA (12 U.S.C. 601 et seq.) shall
be limited to:
(1) Foreign banks;
(2) Domestic or foreign organizations formed for the sole purpose
of holding shares of a foreign bank;
(3) Foreign organizations formed for the sole purpose of performing
nominee, fiduciary, or other banking services incidental to the
activities of a foreign branch or foreign bank affiliate of the member
bank; and
(4) Subsidiaries established pursuant to Sec. 211.4(h).
(c) Eligible investments. Subject to the limitations set out in
paragraphs (b) and (d) of this section, an investor may directly or
indirectly:
(1) Investment in subsidiary. Invest in a subsidiary that engages
solely in activities listed in Sec. 211.9, or in such other activities
as the Board has determined in the circumstances of a particular case
are permissible; provided that, in the case of an acquisition of a
going concern, existing activities that are not otherwise permissible
for a subsidiary may account for not more than 5 percent of either the
consolidated assets or revenues of the acquired organization;
(2) Investment in joint venture. Invest in a joint venture,
provided that, unless otherwise permitted by the Board, not more than
10 percent of the joint venture's consolidated assets or revenues are
attributable to activities not listed in Sec. 211.9; and
(3) Portfolio investments. Make portfolio investments in an
organization, provided that:
(i) Individual limits. The total direct and indirect portfolio
investments by the investor and its affiliates in an organization
engaged in activities that are not permissible for joint ventures do
not exceed:
(A) 40 percent of the total equity of the organization, when
combined with shares in the organization held in trading or dealing
accounts pursuant to Sec. 211.9(a)(15), and shares in the organization
held under any other authority; and
(B) Where the investor is a well capitalized and well managed bank
holding company, 2 percent of the investor's tier 1 capital in any one
organization; or
(C) For any other investor, amounts permissible under
Sec. 211.8(c)(2);
(ii) Aggregate limits. The total direct and indirect portfolio
investments by the investor and its affiliates in all organizations
engaged in activities that are not permissible for joint ventures (when
combined with shares held under any authority other than
Sec. 211.9(a)(15) 6) shall not exceed:
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\6\ For investors that are not well capitalized and well
managed, shares held in trading or dealing accounts pursuant to
Sec. 211.9(a)(15) shall be included in calculating these limits.
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(A) 25 percent of the investor's tier 1 capital, where the investor
is a bank holding company; or
(B) For any other investor, the lesser of 5 percent of the member
bank's tier 1 capital or 25 percent of the investor's capital;
(iii) Loans and extensions of credit. Any loans and extensions of
credit made by an investor or its affiliates to the organization are on
substantially the same terms, including interest rates and collateral,
as those prevailing at the same time for comparable transactions
between the investor or its affiliates and nonaffiliated persons; and
(iv) Protecting shareholder rights. Nothing in this paragraph
(c)(3) shall prohibit an investor from otherwise exercising rights it
may have as shareholder to protect the value of its investment.
(d) Investment limit. In calculating the amount that may be
invested in any organization under this section and Secs. 211.8 and
211.9, there shall be included any unpaid amount for which the investor
is liable and any investments in the same organization held by
affiliates under any authority.
(e) Divestiture. An investor shall dispose of an investment
promptly (unless the Board authorizes retention) if:
(1) The organization invested in:
(i) Engages in impermissible activities to an extent not permitted
under paragraph (c) of this section; or
(ii) Engages directly or indirectly in other business in the United
States that is not permitted to an Edge corporation in the United
States, provided that an investor may:
(A) Retain portfolio investments in companies that derive no more
than 10 percent of their total revenue from activities in the United
States; and
(B) Hold up to 5 percent of the shares of a foreign company that
engages directly or indirectly in business in the United States that is
not permitted to an Edge corporation; or
[[Page 68448]]
(2) After notice and opportunity for hearing, the investor is
advised by the Board that such investment is inappropriate under the
FRA, the BHC Act, or this subpart.
(f) Debts previously contracted. Shares or other ownership
interests acquired to prevent a loss upon a debt previously contracted
in good faith are not subject to the limitations or procedures of this
section, provided that such interests shall be disposed of promptly but
in no event later than two years after their acquisition, unless the
Board authorizes retention for a longer period.
(g) Investments made through debt-for-equity conversions--(1)
Permissible investments. A bank holding company may make investments
through the conversion of sovereign- or private-debt obligations of an
eligible country, either through direct exchange of the debt
obligations for the investment, or by a payment for the debt in local
currency, the proceeds of which, including an additional cash
investment not exceeding in the aggregate more than 10 percent of the
fair value of the debt obligations being converted as part of such
investment, are used to purchase the following investments:
(i) Public-sector companies. A bank holding company may acquire up
to and including 100 percent of the shares of (or other ownership
interests in) any foreign company located in an eligible country, if
the shares are acquired from the government of the eligible country or
from its agencies or instrumentalities.
(ii) Private-sector companies. A bank holding company may acquire
up to and including 40 percent of the shares, including voting shares,
of (or other ownership interests in) any other foreign company located
in an eligible country subject to the following conditions:
(A) A bank holding company may acquire more than 25 percent of the
voting shares of the foreign company only if another shareholder or
group of shareholders unaffiliated with the bank holding company holds
a larger block of voting shares of the company;
(B) The bank holding company and its affiliates may not lend or
otherwise extend credit to the foreign company in amounts greater than
50 percent of the total loans and extensions of credit to the foreign
company; and
(C) The bank holding company's representation on the board of
directors or on management committees of the foreign company may be no
more than proportional to its shareholding in the foreign company.
(2) Investments by bank subsidiary of bank holding company. Upon
application, the Board may permit an indirect investment to be made
pursuant to this paragraph (g) through an insured bank subsidiary of
the bank holding company, where the bank holding company demonstrates
that such ownership is consistent with the purposes of the FRA. In
granting its consent, the Board may impose such conditions as it deems
necessary or appropriate to prevent adverse effects, including
prohibiting loans from the bank to the company in which the investment
is made.
(3) Divestiture--(i) Time limits for divestiture. A bank holding
company shall divest the shares of, or other ownership interests in,
any company acquired pursuant to this paragraph (g) within the longer
of:
(A) Ten years from the date of acquisition of the investment,
except that the Board may extend such period if, in the Board's
judgment, such an extension would not be detrimental to the public
interest; or
(B) Two years from the date on which the bank holding company is
permitted to repatriate in full the investment in the foreign company.
(ii) Maximum retention period. Notwithstanding the provisions of
paragraph (g)(3)(i) of this section:
(A) Divestiture shall occur within 15 years of the date of
acquisition of the shares of, or other ownership interests in, any
company acquired pursuant to this paragraph (g); and
(B) A bank holding company may retain such shares or ownership
interests if such retention is otherwise permissible at the time
required for divestiture.
(iii) Report to Board. The bank holding company shall report to the
Board on its plans for divesting an investment made under this
paragraph (g) two years prior to the final date for divestiture, in a
manner to be prescribed by the Board.
(iv) Other conditions requiring divestiture. All investments made
pursuant to this paragraph (g) are subject to paragraph (e) of this
section requiring prompt divestiture (unless the Board upon application
authorizes retention), if the company invested in engages in
impermissible business in the United States that exceeds in the
aggregate 10 percent of the company's consolidated assets or revenues
calculated on an annual basis; provided that such company may not
engage in activities in the United States that consist of banking or
financial operations (as defined in Sec. 211.23(f)(5)(iii)(B)), or
types of activities permitted by regulation or order under section
4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), except under regulations
of the Board or with the prior approval of the Board.
(4) Investment procedures. --(i) General consent. Subject to the
other limitations of this paragraph (g), the Board grants its general
consent for investments made under this paragraph (g) if the total
amount invested does not exceed the greater of $25 million or 1 percent
of the tier 1 capital of the investor.
(ii) All other investments shall be made in accordance with the
procedures of Sec. 211.8(f) and (g), requiring prior notice or specific
consent.
(5) Conditions. --(i) Name. Any company acquired pursuant to this
paragraph (g) shall not bear a name similar to the name of the
acquiring bank holding company or any of its affiliates.
(ii) Confidentiality. Neither the bank holding company nor its
affiliates shall provide to any company acquired pursuant to this
paragraph (g) any confidential business information or other
information concerning customers that are engaged in the same or
related lines of business as the company.
Sec. 211.8 Investment procedures.
(a) General provisions. 7 Direct and indirect
investments shall be made in accordance with the general-consent,
limited general-consent, prior-notice, or specific-consent procedures
contained in this section.
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\7\ When necessary, the provisions of this section relating to
general consent and prior notice constitute the Board's approval
under section 25A(Eighth) of the FRA (12 U.S.C. 616) for investments
in excess of the limitations therein based on capital and surplus.
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(1) Minimum capital adequacy standards. Except as the Board may
otherwise determine, in order for an investor to make investments
pursuant to the procedures set out in this section, the investor, the
bank holding company, and the member bank shall be in compliance with
applicable minimum standards for capital adequacy set out in the
Capital Adequacy Guidelines; provided that, if the investor is an Edge
or agreement corporation, the minimum capital required is total and
tier 1 capital ratios of 8 percent and 4 percent, respectively.
(2) Composite rating. Except as the Board may otherwise determine,
in order for an investor to make investments under the general-consent
or limited general-consent procedures of paragraphs (b) and (c) of this
section, the investor and any parent insured bank must have received a
composite rating of at least 2 at the most recent examination.
[[Page 68449]]
(3) Board's authority to modify or suspend procedures. The Board,
at any time upon notice, may modify or suspend the procedures contained
in this section with respect to any investor or with respect to the
acquisition of shares of organizations engaged in particular kinds of
activities.
(4) Long-range investment plan. Any investor may submit to the
Board for its specific consent a long-range investment plan. Any plan
so approved shall be subject to the other procedures of this section
only to the extent determined necessary by the Board to assure safety
and soundness of the operations of the investor and its affiliates.
(5) Prior specific consent for initial investment. An investor
shall apply for and receive the prior specific consent of the Board for
its initial investment under this subpart in its first subsidiary or
joint venture, unless an affiliate previously has received approval to
make such an investment.
(6) Expiration of investment authority. Authority to make
investments granted under prior-notice or specific-consent procedures
shall expire one year from the earliest date on which the authority
could have been exercised, unless the Board determines a longer period
shall apply.
(7) Conditional approval. The Board may impose such conditions on
authority granted by it under this section as it deems necessary, and
may require termination of any activities conducted under authority of
this subpart if an investor is unable to provide information on its
activities or those of its affiliates that the Board deems necessary to
determine and enforce compliance with U.S. banking laws.
(b) General consent. The Board grants its general consent for a
well capitalized and well managed investor to make investments, subject
to the following:
(1) Well capitalized and well managed investor. In order to qualify
for making investments under authority of this paragraph (b), both
before and immediately after the proposed investment, the investor, any
parent insured bank, and any parent bank holding company shall be well
capitalized and well managed.
(2) Investment in subsidiaries. In the case of an investment in a
subsidiary, the total amount invested in such subsidiary (in one
transaction or a series of transactions) does not exceed:
(i) 10 percent of the investor's tier 1 capital, where the investor
is a bank holding company; or
(ii) 2 percent of the investor's tier 1 capital, where the investor
is a member bank; or
(iii) For any other investor, the lesser of 2 percent of the tier 1
capital of any parent insured bank or 10 percent of the investor's tier
1 capital.
(3) Investment in joint ventures. In the case of an investment in a
joint venture, the total amount invested in such joint venture (in one
transaction or a series of transactions) does not exceed:
(i) 5 percent of the investor's tier 1 capital, where the investor
is a bank holding company; or
(ii) 1 percent of the investor's tier 1 capital, where the investor
is a member bank; or
(iii) The lesser of 1 percent of the tier 1 capital of any parent
insured bank or 5 percent of the investor's tier 1 capital, for any
other investor.
(4) Portfolio investments. A bank holding company may make
portfolio investments conforming to the limits set out in
Sec. 211.7(c)(3).
(5) Aggregate investment limits.--(i) Investment limits. All
investments made, directly or indirectly, during the previous 12-month
period under authority of this section, when aggregated with the
proposed investment, shall not exceed:
(A) In the case of a bank holding company, 20 percent of the
investor's tier 1 capital;
(B) In the case of a member bank, 10 percent of the investor's tier
1 capital; or
(C) In the case of any other investor, the lesser of 10 percent of
the tier 1 capital of any parent insured bank or 50 percent of the tier
1 capital of the investor.
(ii) Downstream investments. In determining compliance with the
aggregate limits set out in this paragraph (b), an investment by an
investor in a subsidiary shall be counted only once, notwithstanding
that such subsidiary may, within 12 months of the date of making the
investment, downstream all or any part of such investment to another
subsidiary.
(6) Aggregating shares held in dealing accounts. In determining
compliance with the limits set out in this paragraph (b), an investor
shall combine the value of all shares of an organization held in
trading or dealing accounts under Sec. 211.9(a)(15) with investments in
the same organization.
(c) Limited general consent. The Board grants its general consent
for an investor that is not well capitalized and well managed to make:
(1) Individual limit for investment in subsidiary or joint venture.
Any investment in a subsidiary or joint venture, if the total amount
invested (in one transaction or in a series of transactions) does not
exceed the lesser of $25 million or:
(i) 5 percent of the investor's tier 1 capital, where the investor
is a bank holding company;
(ii) 1 percent of the investor's tier 1 capital, where the investor
is a member bank; or
(iii) The lesser of 1 percent of any parent insured bank's tier 1
capital or 5 percent of the investor's tier 1 capital, for any other
investor.
(2) Individual limit for portfolio investment. The Board grants its
general consent for any investor not eligible to make portfolio
investments under Sec. 211.7(c)(3)(i)(B) to make such investments
subject to the limits set out in paragraph (c)(1) of this section.
(3) Aggregate limit. The amount of general-consent investments made
by any investor subject to this section during the previous 12-month
period, when aggregated with the proposed investment, shall not exceed:
(i) 10 percent of the investor's tier 1 capital, where the investor
is a bank holding company;
(ii) 5 percent of the investor's tier 1 capital, where the investor
is a member bank; and
(iii) The lesser of 5 percent of any parent insured bank's capital
or 25 percent of the investor's capital, for any other investor.
(d) Other eligible investments under general consent. In addition
to the authority granted under paragraphs (b) and (c) of this section,
the Board grants its general consent for any investor to make the
following investments:
(1) Investment in organization equal to cash dividends. Any
investment in an organization in an amount equal to cash dividends
received from that organization during the preceding 12 calendar
months; and
(2) Investment acquired from affiliate. Any investment that is
acquired from an affiliate at net asset value or through a contribution
of shares.
(e) Investments ineligible for general consent. The following
investments may not be made under authority of paragraphs (b) and (c)
this section:
(1) Investment in a general partnership or unlimited liability
company; and
(2) Investment in a foreign bank if:
(i) After the investment, the foreign bank would be an affiliate of
a member bank; and
(ii) The foreign bank is located in a country in which the member
bank and its affiliates have no existing banking presence.
(f) Notices relating to general-consent investments. Notice of
investments made pursuant to general-consent
[[Page 68450]]
authority under this section shall be provided to the Board by the end
of the month following the month in which any such investment is made.
The investor shall provide the Board with the following information
relating to the investment:
(1) If the investment is in a joint venture, the respective
responsibilities of the parties to the joint venture; and
(2) Where the investment is made in an organization that incurred a
loss in the last year, a description of the reasons for the loss and
the steps taken to address the problem.
(g) Prior notice. An investment that does not qualify for general
consent under paragraph (b), (c), or (d) of this section may be made
after the investor has given the Board 30 days' prior written notice,
such notice period to commence at the time the notice is received,
provided that:
(1) The Board may waive the 30-day period if it finds the full
period is not required for consideration of the proposed investment, or
that immediate action is required by the circumstances presented; and
(2) The Board may suspend the 30-day period or act on the
investment under the Board's specific-consent procedures.
(h) Specific consent. Any investment that does not qualify for
either the general-consent or the prior-notice procedure may not be
consummated without the specific consent of the Board.
Sec. 211.9 Permissible activities abroad.
(a) Activities usual in connection with banking. The Board has
determined that the following activities are usual in connection with
the transaction of banking or other financial operations abroad:
(1) Commercial and other banking activities;
(2) Financing, including commercial financing, consumer financing,
mortgage banking, and factoring;
(3) Leasing real or personal property, or acting as agent, broker,
or advisor in leasing real or personal property, if the lease serves as
the functional equivalent of an extension of credit to the lessee of
the property;
(4) Acting as fiduciary;
(5) Underwriting credit life insurance and credit accident and
health insurance;
(6) Performing services for other direct or indirect operations of
a U.S. banking organization, including representative functions, sale
of long-term debt, name-saving, holding assets acquired to prevent loss
on a debt previously contracted in good faith, and other activities
that are permissible domestically for a bank holding company under
sections 4(a)(2)(A) and 4(c)(1)(C) of the BHC Act (12 U.S.C.
1843(a)(2)(A), (c)(1)(C));
(7) Holding the premises of a branch of an Edge corporation or
member bank or the premises of a direct or indirect subsidiary, or
holding or leasing the residence of an officer or employee of a branch
or subsidiary;
(8) Providing investment, financial, or economic advisory services;
(9) General insurance agency and brokerage;
(10) Data processing;
(11) Organizing, sponsoring, and managing a mutual fund, if the
fund's shares are not sold or distributed in the United States or to
U.S. residents and the fund does not exercise managerial control over
the firms in which it invests;
(12) Performing management consulting services, if such services,
when rendered with respect to the U.S. market, shall be restricted to
the initial entry;
(13) Underwriting, distributing, and dealing in debt securities
outside the United States;
(14) Underwriting and distributing equity securities outside the
United States as follows:
(i) An investor that is well capitalized and well managed may
underwrite equity securities, provided that commitments by an investor
and its affiliates for the shares of a single organization do not, in
the aggregate, exceed:
(A) 15 percent of the bank holding company's tier 1 capital, where
the investor is a subsidiary of a bank holding company (but not a
subsidiary of an insured bank); or
(B) The lesser of 3 percent of any parent insured bank's tier 1
capital or 15 percent of the investor's tier 1 capital, for any other
investor; and
(ii) An investor that is not well capitalized and well managed may
underwrite equity securities, provided that commitments by the investor
and its affiliates for the shares of an organization do not, in the
aggregate, exceed $60 million; and
(iii) For purposes of determining compliance with the limitations
of this paragraph (a)(14), the investor may subtract portions of an
underwriting that are covered by binding commitments obtained by the
investor or its affiliates from sub-underwriters or other purchasers;
(15) Dealing in equity securities outside the United States as
follows:
(i) Well capitalized and well managed investor. An investor that is
well capitalized and well managed may deal in the shares of an
organization, subject to the following:
(A) Limit on shares of a single issuer. Shares of an organization
held in all trading or dealing accounts by the investor and its
affiliates, when combined with all other equity interests in the
organization held under any authority and shares held pursuant to
Sec. 211.7(c)(3), do not, in the aggregate, exceed:
(1) 10 percent of the bank holding company's tier 1 capital, where
the investor is a subsidiary of a bank holding company (but not a
subsidiary of an insured bank); or
(2) The lesser of 2 percent of any parent insured bank's tier 1
capital or 10 percent of the tier 1 capital of the investor, for any
other investor; and
(B) Aggregate dealing limit. Shares of all organizations held in
all dealing or trading accounts under this subpart by an investor and
its affiliates, when combined with all other equity interests in such
organizations held under any other authority and shares held pursuant
to Sec. 211.7(c)(3), may not exceed:
(1) 50 percent of the bank holding company's tier 1 capital, where
the investor is a subsidiary of a bank holding company (but not a
subsidiary of an insured bank); or
(2) The lesser of 10 percent of any parent insured bank's tier 1
capital or 50 percent of the tier 1 capital of the investor, for any
other investor.
(ii) Other investors. An investor that is not well capitalized and
well managed may deal in the shares of an organization, subject to the
following:
(A) Limit on shares of a single issuer. Shares of an organization
held in all trading or dealing accounts by the investor and its
affiliates, when combined with all other equity interests in the
organization held under any authority and shares held pursuant to
Sec. 211.7(c)(3), do not, in the aggregate, exceed $30 million for any
investor; and
(B) Aggregate dealing limit. Shares of all organizations held in
all dealing or trading accounts under this subpart by an investor and
its affiliates, when combined with all other equity interests in such
organizations held under any other authority and shares held pursuant
to Sec. 211.7(c)(3), may not exceed:
(1) 25 percent of the bank holding company's tier 1 capital, where
the investor is a subsidiary of a bank holding company (but not a
subsidiary of an insured bank); or
(2) The lesser of 5 percent of any parent insured bank's tier 1
capital or 25
[[Page 68451]]
percent of the tier 1 capital of the investor, for any other investor.
(iii) Determining compliance with limits. (A) Netting. (1) For
purposes of determining compliance with the limitations of this
paragraph (a)(15), the investor may use an internal hedging model that
nets long and short positions in the same security, and offsets
positions in a security by futures, forwards, options, and similar
instruments referenced to the same security; and
(2) For purposes of determining compliance with the aggregate
dealing limits of paragraphs (a)(15)(i)(B) and (a)(15)(ii)(B) of this
section, the investor may use an internal hedging model that offsets
its long positions in equity securities by futures, forwards, options,
and similar instruments, on a portfolio basis;
(B) Underwriting commitments. Any shares acquired pursuant to an
underwriting commitment for up to 90 days after the payment date for
such underwriting shall not be subject to the percentage limitations of
paragraphs (a)(15)(i) and (ii) of this section or the investment
provisions of Secs. 211.7 and 211.8.
(iv) Authority to deal in shares of U.S. organization. The
authority to deal in shares under paragraphs (a)(15)(i) and (ii) of
this section includes the authority to deal in the shares of a U.S.
organization:
(A) With respect to foreign persons only; and
(B) Subject to the limitations on owning or controlling shares of a
company in section 4 of the BHC Act (12 U.S.C. 1843) and Regulation Y
(12 CFR part 225).
(v) Report to senior management. Any shares held in trading or
dealing accounts for longer than 90 days shall be reported to the
senior management of the investor;
(16) Operating a travel agency, but only in connection with
financial services offered abroad by the investor or others;
(17) Underwriting life, annuity, pension fund-related, and other
types of insurance, where the associated risks have been previously
determined by the Board to be actuarially predictable, provided that:
(i) Investments in, and loans and extensions of credit (other than
loans and extensions of credit fully secured in accordance with the
requirements of section 23A of the FRA (12 U.S.C. 371c), or with such
other standards as the Board may require) to, the company by the
investor or its affiliates are deducted from the capital of the
investor;
(ii) 50 percent of such capital deduction shall be from tier 1
capital; and
(iii) Activities conducted directly or indirectly by a subsidiary
of a U.S. insured bank are excluded from the authority of this
paragraph (a)(17), unless authorized by the Board;
(18) Providing futures commission merchant services (including
clearing without executing and executing without clearing) for
nonaffiliated persons with respect to futures and options on futures
contracts for financial and nonfinancial commodities, provided that
prior notice under Sec. 211.8(g) shall be provided to the Board before
any subsidiaries of a member bank operating pursuant to this subpart
may join a mutual exchange or clearinghouse, unless the potential
liability of the investor to the exchange, clearinghouse, or other
members of the exchange, as the case may be, is legally limited by the
rules of the exchange or clearinghouse to an amount that does not
exceed applicable general-consent limits under Sec. 211.8;
(19) Acting as principal or agent in commodity-swap transactions in
relation to:
(i) Swaps on a cash-settled basis for any commodity, provided that
the investor's portfolio of swaps contracts is hedged in a manner
consistent with safe and sound banking practices; and
(ii) Contracts that require physical delivery of a commodity,
provided that such contracts are entered into solely for the purpose of
hedging the investor's position in the underlying commodity or
derivative contracts based on the commodity.
(b) Regulation Y activities. An investor may engage in activities
that the Board has determined in Sec. 225.25(b) of Regulation Y (12 CFR
225.25(b)) are closely related to banking under section 4(c)(8) of the
BHC Act (12 U.S.C. 1843(c)(8)).
(c) Specific approval. With the Board's specific approval, an
investor may engage in other activities that the Board determines are
usual in connection with the transaction of the business of banking or
other financial operations abroad and are consistent with the FRA or
the BHC Act.
Sec. 211.10 Lending limits and capital requirements.
(a) Acceptances of Edge corporations.--(1) Limitations. An Edge
corporation shall be and remain fully secured for acceptances of the
types described in section 13(7) of the FRA (12 U.S.C. 372), as
follows:
(i) All acceptances outstanding in excess of 200 percent of its
tier 1 capital; and
(ii) All acceptances outstanding for any one person in excess of 10
percent of its tier 1 capital.
(2) Exceptions. These limitations do not apply if the excess
represents the international shipment of goods, and the Edge
corporation is:
(i) Fully covered by primary obligations to reimburse it that are
guaranteed by banks or bankers; or
(ii) Covered by participation agreements from other banks, as
described in 12 CFR 250.165.
(b) Loans and extensions of credit to one person. (1) Loans and
extensions of credit defined. Loans and extensions of credit has the
meaning set forth in Sec. 211.2(p) 8 and, for purposes of
this paragraph (b), also include:
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\8\ In the case of a foreign government, these include loans
and extensions of credit to the foreign government's departments or
agencies deriving their current funds principally from general tax
revenues. In the case of a partnership or firm, these include loans
and extensions of credit to its members and, in the case of a
corporation, these include loans and extensions of credit to the
corporation's affiliates, where the affiliate incurs the liability
for the benefit of the corporation.
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(i) Acceptances outstanding that are not of the types described in
section 13(7) of the FRA (12 U.S.C. 372);
(ii) Any liability of the lender to advance funds to or on behalf
of a person pursuant to a guarantee, standby letter of credit, or
similar agreements;
(iii) Investments in the securities of another organization, except
where the organization is a subsidiary; and
(iv) Any underwriting commitments to an issuer of securities, where
no binding commitments have been secured from subunderwriters or other
purchasers.
(2) Limitations. Except as the Board may otherwise specify:
(i) The total loans and extensions of credit outstanding to any
person by an Edge corporation engaged in banking, and its direct or
indirect subsidiaries, may not exceed 15 percent of the Edge
corporation's tier 1 capital; 9 and
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\9\ For purposes of this paragraph (b), subsidiary includes
subsidiaries controlled by the Edge corporation, but does not
include companies otherwise controlled by affiliates of the Edge
corporation.
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(ii) The total loans and extensions of credit to any person by a
foreign bank or Edge corporation subsidiary of a member bank, and by
majority-owned subsidiaries of a foreign bank or Edge corporation, when
combined with the total loans and extensions of credit to the same
person by the member bank and its majority-owned subsidiaries, may not
exceed the member bank's
[[Page 68452]]
limitation on loans and extensions of credit to one person.
(3) Exceptions. The limitations of paragraph (b)(2) of this section
do not apply to:
(i) Deposits with banks and federal funds sold;
(ii) Bills or drafts drawn in good faith against actual goods and
on which two or more unrelated parties are liable;
(iii) Any banker's acceptance, of the kind described in section
13(7) of the FRA (12 U.S.C. 372), that is issued and outstanding;
(iv) Obligations to the extent secured by cash collateral or by
bonds, notes, certificates of indebtedness, or Treasury bills of the
United States;
(v) Loans and extensions of credit that are covered by bona fide
participation agreements; and
(vi) Obligations to the extent supported by the full faith and
credit of the following:
(A) The United States or any of its departments, agencies,
establishments, or wholly owned corporations (including obligations, to
the extent insured against foreign political and credit risks by the
Export-Import Bank of the United States or the Foreign Credit Insurance
Association), the International Bank for Reconstruction and
Development, the International Finance Corporation, the International
Development Association, the Inter-American Development Bank, the
African Development Bank, the Asian Development Bank; or the European
Bank for Reconstruction and Development;
(B) Any organization, if at least 25 percent of such an obligation
or of the total credit is also supported by the full faith and credit
of, or participated in by, any institution designated in paragraph
(b)(3)(vi)(A) of this section in such manner that default to the lender
would necessarily include default to that entity. The total loans and
extensions of credit under this paragraph (b)(3)(vi)(B) to any person
shall at no time exceed 100 percent of the tier 1 capital of the Edge
corporation.
(c) Capitalization. (1) An Edge corporation shall at all times be
capitalized in an amount that is adequate in relation to the scope and
character of its activities.
(2) In the case of an Edge corporation engaged in banking, the
minimum ratio of qualifying total capital to risk-weighted assets, as
determined under the Capital Adequacy Guidelines, shall not be less
than 10 percent, of which at least 50 percent shall consist of tier 1
capital; provided that for purposes of this paragraph (c), no
limitation shall apply on the inclusion of subordinated debt that
qualifies as tier 2 capital under the Capital Adequacy Guidelines.
Sec. 211.11 Supervision and reporting.
(a) Supervision--(1) Foreign branches and subsidiaries. U.S.
banking organizations conducting international operations under this
subpart shall supervise and administer their foreign branches and
subsidiaries in such a manner as to ensure that their operations
conform to high standards of banking and financial prudence.
(i) Effective systems of records, controls, and reports shall be
maintained to keep management informed of their activities and
condition.
(ii) Such systems shall provide, in particular, information on risk
assets, exposure to market risk, liquidity management, operations,
internal controls, legal and operational risk, and conformance to
management policies.
(iii) Reports on risk assets shall be sufficient to permit an
appraisal of credit quality and assessment of exposure to loss, and,
for this purpose, provide full information on the condition of material
borrowers.
(iv) Reports on operations and controls shall include internal and
external audits of the branch or subsidiary.
(2) Joint ventures. Investors shall maintain sufficient information
with respect to joint ventures to keep informed of their activities and
condition. Such information shall include audits and other reports on
financial performance, risk exposure, management policies, operations,
and controls. Complete information shall be maintained on all
transactions with the joint venture by the investor and its affiliates.
(3) Availability of reports and information to examiners. The
reports specified in paragraphs (a) (1) and (2) of this section and any
other information deemed necessary to determine compliance with U.S.
banking law shall be made available to examiners of the appropriate
bank supervisory agencies.
(b) Examinations. Examiners appointed by the Board shall examine
each Edge corporation once a year. An Edge corporation shall make
available to examiners information sufficient to assess its condition
and operations and the condition and activities of any organization
whose shares it holds.
(c) Reports--(1) Reports of condition. Each Edge corporation shall
make reports of condition to the Board at such times and in such form
as the Board may prescribe. The Board may require that statements of
condition or other reports be published or made available for public
inspection.
(2) Foreign operations. Edge and agreement corporations, member
banks, and bank holding companies shall file such reports on their
foreign operations as the Board may require.
(3) Acquisition or disposition of shares. Member banks, Edge and
agreement corporations, and bank holding companies shall report, in a
manner prescribed by the Board, any acquisition or disposition of
shares.
(d) Filing and processing procedures. (1) Unless otherwise directed
by the Board, applications, notices, and reports required by this part
shall be filed with the Federal Reserve Bank of the District in which
the parent bank or bank holding company is located or, if none, the
Reserve Bank of the District in which the applying or reporting
institution is located. Instructions and forms for applications,
notices, and reports are available from the Reserve Banks.
(2) The Board shall act on an application under this subpart within
60 calendar days after the Reserve Bank has received the application,
unless the Board notifies the investor that the 60-day period is being
extended and states the reasons for the extension.
Sec. 211.12 Reports of crimes and suspected crimes.
An Edge or agreement corporation, or any branch or subsidiary
thereof, shall file a suspicious-activity report in accordance with the
provisions of Sec. 208.62 of Regulation H (12 CFR 208.62).
Sec. 211.13 Liquidation of Edge and agreement corporations.
(a) Voluntary dissolution--(1) Prior notice. An Edge or agreement
corporation desiring voluntarily to discontinue normal business and
dissolve, shall provide the Board with 45 days' prior written notice of
its intent to do so.
(2) Waiver of notice period. The Board may waive the 45-day period
if it finds that immediate action is required by the circumstances
presented.
(b) Involuntary dissolution--(1) Grounds for determining
insolvency. The Board may appoint a receiver for an Edge corporation if
the Board determines that:
(i) The corporation's assets are less than the corporation's
obligations;
(ii) The corporation has been unable, or is likely to be unable, to
pay the corporation's obligations as they fall due in the normal course
of business;
(iii) The corporation has incurred, or is likely to incur, losses
that will deplete
[[Page 68453]]
all or substantially all of the corporation's capital, and there is no
reasonable prospect for recapitalization; or
(iv) The corporation is otherwise insolvent.
(2) Powers of receiver. A receiver appointed by the Board for an
Edge corporation shall have the same rights, privileges, powers, and
authority with respect to the corporation and the corporation's assets
as a receiver of a national bank may exercise with respect to a
national bank and its assets, provided that the assets of the
corporation subject to the laws of a foreign country shall be dealt
with in accordance with the terms of such laws.
Subpart B--Foreign Banking Organizations
Sec. 211.20 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (Board) under the authority of the Bank
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.) and the
International Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
(b) Purpose and scope. This subpart is in furtherance of the
purposes of the BHC Act and the IBA. It applies to foreign banks and
foreign banking organizations with respect to:
(1) The limitations on interstate banking under section 5 of the
IBA (12 U.S.C. 3103);
(2) The exemptions from the nonbanking prohibitions of the BHC Act
and the IBA afforded by sections 2(h) and 4(c)(9) of the BHC Act (12
U.S.C. 1841(h), 1843(c)(9));
(3) Board approval of the establishment of an office of a foreign
bank in the United States under sections 7(d) and 10(a) of the IBA (12
U.S.C. 3105(d), 3107(a));
(4) The termination by the Board of a foreign bank's representative
office, state branch, state agency, or commercial lending company
subsidiary under sections 7(e) and 10(b) of the IBA (12 U.S.C. 3105(e),
3107(b)), and the transmission of a recommendation to the Comptroller
to terminate a federal branch or federal agency under section 7(e)(5)
of the IBA (12 U.S.C. 3105(e)(5));
(5) The examination of an office or affiliate of a foreign bank in
the United States as provided in sections 7(c) and 10(c) of the IBA (12
U.S.C. 3105(c), 3107(c));
(6) The disclosure of supervisory information to a foreign
supervisor under section 15 of the IBA (12 U.S.C. 3109);
(7) The limitations on loans to one borrower by state branches and
state agencies of a foreign bank under section 7(h)(2) of the IBA (12
U.S.C. 3105(h)(2));
(8) The limitation of a state branch and a state agency to
conducting only activities that are permissible for a federal branch
under section (7)(h)(1) of the IBA (12 U.S.C. 3105(h)(1)); and
(9) The deposit insurance requirement for retail deposit taking by
a foreign bank under section 6 of the IBA (12 U.S.C. 3104).
(c) Additional requirements. Compliance by a foreign bank with the
requirements of this subpart and the laws administered and enforced by
the Board does not relieve the foreign bank of responsibility to comply
with the laws and regulations administered by the licensing authority.
Sec. 211.21 Definitions.
The definitions contained in Secs. 211.1 and 211.2 apply to this
subpart, except as a term is otherwise defined in this section:
(a) Affiliate of a foreign bank or of a parent of a foreign bank
means any company that controls, is controlled by, or is under common
control with, the foreign bank or the parent of the foreign bank.
(b) Agency means any place of business of a foreign bank, located
in any state, at which credit balances are maintained, checks are paid,
money is lent, or, to the extent not prohibited by state or federal
law, deposits are accepted from a person or entity that is not a
citizen or resident of the United States. Obligations shall not be
considered credit balances unless they are:
(1) Incidental to, or arise out of the exercise of, other lawful
banking powers;
(2) To serve a specific purpose;
(3) Not solicited from the general public;
(4) Not used to pay routine operating expenses in the United States
such as salaries, rent, or taxes;
(5) Withdrawn within a reasonable period of time after the specific
purpose for which they were placed has been accomplished; and
(6) Drawn upon in a manner reasonable in relation to the size and
nature of the account.
(c)(1) Appropriate Federal Reserve Bank means, unless the Board
designates a different Federal Reserve Bank:
(i) For a foreign banking organization, the Reserve Bank assigned
to the foreign banking organization in Sec. 225.3(b)(2) of Regulation Y
(12 CFR 225.3(b)(2));
(ii) For a foreign bank that is not a foreign banking organization
and proposes to establish an office, an Edge corporation, or an
agreement corporation, the Reserve Bank of the Federal Reserve District
in which the foreign bank proposes to establish such office or
corporation; and
(iii) In all other cases, the Reserve Bank designated by the Board.
(2) The appropriate Federal Reserve Bank need not be the Reserve
Bank of the Federal Reserve District in which the foreign bank's home
state is located.
(d) Banking subsidiary, with respect to a specified foreign bank,
means a bank that is a subsidiary as the terms bank and subsidiary are
defined in section 2 of the BHC Act (12 U.S.C. 1841).
(e) Branch means any place of business of a foreign bank, located
in any state, at which deposits are received, and that is not an
agency, as that term is defined in paragraph (b) of this section.
(f) Change the status of an office means to convert a
representative office into a branch or agency, or an agency or limited
branch into a branch, but does not include renewal of the license of an
existing office.
(g) Commercial lending company means any organization, other than a
bank or an organization operating under section 25 of the Federal
Reserve Act (FRA) (12 U.S.C. 601-604a), organized under the laws of any
state, that maintains credit balances permissible for an agency, and
engages in the business of making commercial loans. Commercial lending
company includes any company chartered under article XII of the banking
law of the State of New York.
(h) Comptroller means the Office of the Comptroller of the
Currency.
(i) Control has the same meaning as in section 2(a) of the BHC Act
(12 U.S.C. 1841(a)), and the terms controlled and controlling shall be
construed consistently with the term control.
(j) Domestic branch means any place of business of a foreign bank,
located in any state, that may accept domestic deposits and deposits
that are incidental to or for the purpose of carrying out transactions
in foreign countries.
(k) A foreign bank engages directly in the business of banking
outside the United States if the foreign bank engages directly in
banking activities usual in connection with the business of banking in
the countries where it is organized or operating.
(l) To establish means:
(1) To open and conduct business through an office;
(2) To acquire directly, through merger, consolidation, or similar
transaction with another foreign bank,
[[Page 68454]]
the operations of an office that is open and conducting business;
(3) To acquire an office through the acquisition of a foreign bank
subsidiary that will cease to operate in the same corporate form
following the acquisition;
(4) To change the status of an office; or
(5) To relocate an office from one state to another.
(m) Federal agency, federal branch, state agency, and state branch
have the same meanings as in section 1 of the IBA (12 U.S.C. 3101).
(n) Foreign bank means an organization that is organized under the
laws of a foreign country and that engages directly in the business of
banking outside the United States. The term foreign bank does not
include a central bank of a foreign country that does not engage or
seek to engage in a commercial banking business in the United States
through an office.
(o) Foreign banking organization means a foreign bank, as defined
in section 1(b)(7) of the IBA (12 U.S.C. 3101(7)), that:
(1) Operates a branch, agency, or commercial lending company
subsidiary in the United States;
(2) Controls a bank in the United States;
(3) Controls an Edge corporation acquired after March 5, 1987; or
(4) Controls any company of which the foreign bank or its affiliate
is a subsidiary.
(p) Home country, with respect to a foreign bank, means the country
in which the foreign bank is chartered or incorporated.
(q) Home country supervisor, with respect to a foreign bank, means
the governmental entity or entities in the foreign bank's home country
with responsibility for the supervision and regulation of the foreign
bank.
(r) Licensing authority means:
(1) The relevant state supervisor, with respect to an application
to establish a state branch, state agency, commercial lending company,
or representative office of a foreign bank; or
(2) The Comptroller, with respect to an application to establish a
federal branch or federal agency.
(s) Limited branch means a branch of a foreign bank that enters
into an agreement with the Board to limit its liabilities to those that
would be permissible for an Edge corporation.
(t) Office or office of a foreign bank means any branch, agency,
representative office, or commercial lending company subsidiary of a
foreign bank in the United States.
(u) A parent of a foreign bank means a company of which the foreign
bank is a subsidiary. An immediate parent of a foreign bank is a
company of which the foreign bank is a direct subsidiary. An ultimate
parent of a foreign bank is a parent of the foreign bank that is not
the subsidiary of any other company.
(v) Regional administrative office means a representative office
that:
(1) Is established by a foreign bank that operates two or more
branches, agencies, commercial lending companies, or banks in the
United States;
(2) Is located in the same city as one or more of the foreign
bank's branches, agencies, commercial lending companies, or banks in
the United States;
(3) Manages, supervises, or coordinates the operations of the
foreign bank or its affiliates, if any, in a particular geographic area
that includes the United States or a region thereof, including by
exercising credit approval authority in that area pursuant to written
standards, credit policies, and procedures established by the foreign
bank; and
(4) Does not solicit business from actual or potential customers of
the foreign bank or its affiliates.
(w) Relevant state supervisor means the state entity that is
authorized to supervise and regulate a state branch, state agency,
commercial lending company, or representative office.
(x) Representative office means any place of business of a foreign
bank, located in any state, that is not a branch, agency, or subsidiary
of the foreign bank.
(y) State means any state of the United States or the District of
Columbia.
(z) Subsidiary means any organization that:
(1) Has 25 percent or more of its voting shares directly or
indirectly owned, controlled, or held with the power to vote by a
company, including a foreign bank or foreign banking organization; and
(2) Is otherwise controlled, or capable of being controlled, by a
foreign bank or foreign banking organization.
Sec. 211.22 Interstate banking operations of foreign banking
organizations.
(a) Determination of home state. (1) A foreign bank that, as of
December 10, 1997, had declared a home state or had a home state
determined pursuant to the law and regulations in effect prior to that
date shall have that state as its home state.
(2) A foreign bank that has any branches, agencies, commercial
lending company subsidiaries, or subsidiary banks in one state, and has
no such offices or subsidiaries in any other states, shall have as its
home state the state in which such offices or subsidiaries are located.
(b) Change of home state--(1) Prior notice. A foreign bank may
change its home state once, if it files 30 days' prior notice of the
proposed change with the Board.
(2) Application to change home state. (i) A foreign bank, in
addition to changing its home state by filing prior notice under
paragraph (b)(1) of this section, may apply to the Board to change its
home state, upon showing that a national bank or state-chartered bank
with the same home state as the foreign bank would be permitted to
change its home state to the new home state proposed by the foreign
bank.
(ii) A foreign bank may apply to the Board for such permission one
or more times.
(iii) In determining whether to grant the request of a foreign bank
to change its home state, the Board shall consider whether the proposed
change is consistent with competitive equity between foreign and
domestic banks.
(3) Effect of change in home state. The home state of a foreign
bank and any change in its home state by a foreign bank shall not
affect which Federal Reserve Bank or Reserve Banks supervise the
operations of the foreign bank, and shall not affect the obligation of
the foreign bank to file required reports and applications with the
appropriate Federal Reserve Bank.
(4) Conforming branches to new home state. Upon any change in home
state by a foreign bank under paragraph (b)(1) or (b)(2) of this
section, the domestic branches of the foreign bank established in
reliance on any previous home state of the foreign bank shall be
conformed to those which a foreign bank with the new home state could
permissibly establish as of the date of such change.
(c) Prohibition against interstate deposit production offices. A
covered interstate branch of a foreign bank may not be used as a
deposit production office in accordance with the provisions in
Sec. 208.28 of Regulation H (12 CFR 208.28).
Sec. 211.23 Nonbanking activities of foreign banking organizations.
(a) [Reserved]
(b) Qualifying foreign banking organizations. Unless specifically
made eligible for the exemptions by the Board, a foreign banking
organization shall qualify for the exemptions afforded by this section
only if, disregarding its United States banking, more than half of its
worldwide business is banking; and more than half of its banking
business
[[Page 68455]]
is outside the United States.10 In order to qualify, a
foreign banking organization shall:
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\10\ None of the assets, revenues, or net income, whether held
or derived directly or indirectly, of a subsidiary bank, branch,
agency, commercial lending company, or other company engaged in the
business of banking in the United States (including any territory of
the United States, Puerto Rico, Guam, American Samoa, or the Virgin
Islands) shall be considered held or derived from the business of
banking ``outside the United States''.
---------------------------------------------------------------------------
(1) Meet at least two of the following requirements:
(i) Banking assets held outside the United States exceed total
worldwide nonbanking assets;
(ii) Revenues derived from the business of banking outside the
United States exceed total revenues derived from its worldwide
nonbanking business; or
(iii) Net income derived from the business of banking outside the
United States exceeds total net income derived from its worldwide
nonbanking business; and
(2) Meet at least two of the following requirements:
(i) Banking assets held outside the United States exceed banking
assets held in the United States;
(ii) Revenues derived from the business of banking outside the
United States exceed revenues derived from the business of banking in
the United States; or
(iii) Net income derived from the business of banking outside the
United States exceeds net income derived from the business of banking
in the United States.
(c) Determining assets, revenues, and net income. (1)(i) For
purposes of paragraph (b) of this section, the total assets, revenues,
and net income of an organization may be determined on a consolidated
or combined basis.
(ii) The foreign banking organization shall include assets,
revenues, and net income of companies in which it owns 50 percent or
more of the voting shares when determining total assets, revenues, and
net income.
(iii) The foreign banking organization may include assets,
revenues, and net income of companies in which it owns 25 percent or
more of the voting shares, if all such companies within the
organization are included.
(2) Assets devoted to, or revenues or net income derived from,
activities listed in Sec. 211.9(a) shall be considered banking assets,
or revenues or net income derived from the banking business, when
conducted within the foreign banking organization for purposes of
paragraph (b)(1) of this section, and when conducted within the foreign
banking organization by a foreign bank or its subsidiaries for purposes
of paragraph (b)(2) of this section.
(d) Loss of eligibility for exemptions--(1) Failure to meet
qualifying test. A foreign banking organization that qualified under
paragraph (b) of this section shall cease to be eligible for the
exemptions of this section if it fails to meet the requirements of
paragraph (b) of this section for two consecutive years, as reflected
in its annual reports (FR Y-7) filed with the Board.
(2)(i) Continuing activities and investments. A foreign banking
organization that ceases to be eligible for the exemptions of this
section may continue to engage in activities or retain investments
commenced or acquired prior to the end of the first fiscal year for
which its annual report reflects nonconformance with paragraph (b) of
this section.
(ii) Termination or divestiture. Activities commenced or
investments made after that date shall be terminated or divested within
three months of the filing of the second annual report, or at such time
as the Board may determine upon request by the foreign banking
organization to extend the period, unless the Board grants consent to
continue the activity or retain the investment under paragraph (e) of
this section.
(3) Request for specific determination of eligibility. (i) A
foreign banking organization that ceases to qualify under paragraph (b)
of this section, or an affiliate of such foreign banking organization,
that requests a specific determination of eligibility under paragraph
(e) of this section may, prior to the Board's determination on
eligibility, continue to engage in activities and make investments
under the provisions of paragraphs (f) (1), (2), (3), and (4) of this
section.
(ii) The Board may grant consent for the foreign banking
organization or its affiliate to make investments under paragraph
(f)(5) of this section.
(e) Specific determination of eligibility for nonqualifying foreign
banking organizations--(1) Application. (i) A foreign banking
organization that does not qualify under paragraph (b) of this section
for the exemptions afforded by this section, or that has lost its
eligibility for the exemptions under paragraph (d) of this section, may
apply to the Board for a specific determination of eligibility for the
exemptions.
(ii) A foreign banking organization may apply for a specific
determination prior to the time it ceases to be eligible for the
exemptions afforded by this section.
(2) Factors considered by Board. In determining whether eligibility
for the exemptions would be consistent with the purposes of the BHC Act
and in the public interest, the Board shall consider:
(i) The history and the financial and managerial resources of the
foreign banking organization;
(ii) The amount of its business in the United States;
(iii) The amount, type, and location of its nonbanking activities,
including whether such activities may be conducted by U.S. banks or
bank holding companies;
(iv) Whether eligibility of the foreign banking organization would
result in undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices; and
(v) The extent to which the foreign banking organization is subject
to comprehensive supervision or regulation on a consolidated basis.
(3) Conditions and limitations. The Board may impose any conditions
and limitations on a determination of eligibility, including
requirements to cease activities or dispose of investments.
(4) Eligibility not granted. Determinations of eligibility
generally would not be granted where:
(i) A majority of the business of the foreign banking organization
derives from commercial or industrial activities; or
(ii) The U.S. banking business of the organization is larger than
the non-U.S. banking business conducted directly by the foreign bank or
banks of the organization.
(f) Permissible activities and investments. A foreign banking
organization that qualifies under paragraph (b) of this section may:
(1) Engage in activities of any kind outside the United States;
(2) Engage directly in activities in the United States that are
incidental to its activities outside the United States;
(3) Own or control voting shares of any company that is not
engaged, directly or indirectly, in any activities in the United
States, other than those that are incidental to the international or
foreign business of such company;
(4) Own or control voting shares of any company in a fiduciary
capacity under circumstances that would entitle such shareholding to an
exemption under section 4(c)(4) of the BHC Act (12 U.S.C. 1843(c)(4))
if the shares were held or acquired by a bank;
(5) Own or control voting shares of a foreign company that is
engaged directly or indirectly in business in the United States other
than that which is
[[Page 68456]]
incidental to its international or foreign business, subject to the
following limitations:
(i) More than 50 percent of the foreign company's consolidated
assets shall be located, and consolidated revenues derived from,
outside the United States; provided that, if the foreign company fails
to meet the requirements of this paragraph (f)(5)(i) for two
consecutive years (as reflected in annual reports (FR Y-7) filed with
the Board by the foreign banking organization), the foreign company
shall be divested or its activities terminated within one year of the
filing of the second consecutive annual report that reflects
nonconformance with the requirements of this paragraph (f)(5)(i),
unless the Board grants consent to retain the investment under
paragraph (g) of this section;
(ii) The foreign company shall not directly underwrite, sell, or
distribute, nor own or control more than 10 percent of the voting
shares of a company that underwrites, sells, or distributes securities
in the United States, except to the extent permitted bank holding
companies;
(iii) If the foreign company is a subsidiary of the foreign banking
organization, the foreign company must be, or must control, an
operating company, and its direct or indirect activities in the United
States shall be subject to the following limitations:
(A) The foreign company's activities in the United States shall be
the same kind of activities, or related to the activities, engaged in
directly or indirectly by the foreign company abroad, as measured by
the ``establishment'' categories of the Standard Industrial
Classification (SIC). An activity in the United States shall be
considered related to an activity outside the United States if it
consists of supply, distribution, or sales in furtherance of the
activity;
(B) The foreign company may engage in activities in the United
States that consist of banking, securities, insurance, or other
financial operations, or types of activities permitted by regulation or
order under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), only
under regulations of the Board or with the prior approval of the Board,
subject of the following:
(1) Activities within Division H (Finance, Insurance, and Real
Estate) of the SIC shall be considered banking or financial operations
for this purpose, with the exception of acting as operators of
nonresidential buildings (SIC 6512), operators of apartment buildings
(SIC 6513), operators of dwellings other than apartment buildings (SIC
6514), and operators of residential mobile home sites (SIC 6515); and
operating title abstract offices (SIC 6541); and
(2) The following activities shall be considered financial
activities and may be engaged in only with the approval of the Board
under paragraph (g) of this section: credit reporting services (SIC
7323); computer and data processing services (SIC 7371, 7372, 7373,
7374, 7375, 7376, 7377, 7378, and 7379); armored car services (SIC
7381); management consulting (SIC 8732, 8741, 8742, and 8748); certain
rental and leasing activities (SIC 4741, 7352, 7353, 7359, 7513, 7514,
7515, and 7519); accounting, auditing, and bookkeeping services (SIC
8721); courier services (SIC 4215 and 4513); and arrangement of
passenger transportation (SIC 4724, 4725, and 4729).
(g) Exemptions under section 4(c)(9) of the BHC Act. A foreign
banking organization that is of the opinion that other activities or
investments may, in particular circumstances, meet the conditions for
an exemption under section 4(c)(9) of the BHC Act (12 U.S.C.
1843(c)(9)) may apply to the Board for such a determination by
submitting to the appropriate Federal Reserve Bank a letter setting
forth the basis for that opinion.
(h) Reports. (1) The foreign banking organization shall inform the
Board through the organization's appropriate Federal Reserve Bank,
within 30 days after the close of each calendar year, of all shares of
companies engaged, directly or indirectly, in activities in the United
States that were acquired during the calendar year under the authority
of this section.
(2) The foreign banking organization also shall report any direct
activities in the United States commenced during each calendar quarter
by a foreign subsidiary of the foreign banking organization. This
information shall (unless previously furnished) include a brief
description of the nature and scope of each company's business in the
United States, including the 4-digit SIC numbers of the activities in
which the company engages. Such information shall also include the 4-
digit SIC numbers of the immediate parent of any U.S. company acquired,
together with a statement of total assets and revenues of the immediate
parent.
(i) Availability of information. If any information required under
this section is unknown and not reasonably available to the foreign
banking organization (either because obtaining it would involve
unreasonable effort or expense, or because it rests exclusively within
the knowledge of a company that is not controlled by the organization)
the organization shall:
(1) Give such information on the subject as it possesses or can
reasonably acquire, together with the sources thereof; and
(2) Include a statement showing that unreasonable effort or expense
would be involved, or indicating that the company whose shares were
acquired is not controlled by the organization, and stating the result
of a request for information.
Sec. 211.24 Approval of offices of foreign banks; procedures for
applications; standards for approval; representative office activities
and standards for approval; preservation of existing authority.
(a) Board approval of offices of foreign banks--(1) Prior Board
approval of branches, agencies, commercial lending companies, or
representative offices of foreign banks. (i) Except as otherwise
provided in paragraphs (a)(2) and (a)(3) of this section, a foreign
bank shall obtain the approval of the Board before it:
(A) Establishes a branch, agency, commercial lending company
subsidiary, or representative office in the United States; or
(B) Acquires ownership or control of a commercial lending company
subsidiary.
(2) Prior notice for certain offices. (i) After providing 45 days'
prior written notice to the Board, a foreign bank may establish:
(A) An additional office (other than a domestic branch) outside the
home state of the foreign bank, provided that the Board has previously
determined the foreign bank to be subject to comprehensive supervision
or regulation on a consolidated basis by its home country supervisor
(comprehensive consolidated supervision or CCS); or
(B) A representative office, if:
(1) The Board has not yet determined the foreign bank to be subject
to CCS, but the foreign bank is subject to the BHC Act, either directly
or through section 8(a) of the IBA (12 U.S.C. 3106(a));
(2) The Board previously has approved, by order, an application by
the foreign bank to establish a representative office.
(ii) The Board may waive the 45-day notice period if it finds that
immediate action is required by the circumstances presented. The notice
period shall commence at the time the notice is received by the
appropriate Federal Reserve Bank. The Board may suspend the period or
require Board approval prior to the establishment of such office
[[Page 68457]]
if the notification raises significant policy or supervisory concerns.
(3) General consent for certain representative offices. (i) The
Board grants its general consent for a foreign bank that is subject to
the BHC Act, either directly or through section 8(a) of the IBA (12
U.S.C. 3106(a)), to establish:
(A) A representative office, but only if the Board has previously
determined that the foreign bank proposing to establish a
representative office is subject to CCS;
(B) A regional administrative office; or
(C) An office that solely engages in limited administrative
functions (such as separately maintaining back-office support systems)
that:
(1) Are clearly defined;
(2) Are performed in connection with the U.S. banking activities of
the foreign bank; and
(3) Do not involve contact or liaison with customers or potential
customers, beyond incidental contact with existing customers relating
to administrative matters (such as verification or correction of
account information).
(ii) A foreign bank must notify the Board in writing within 30 days
of establishing an office under the general-consent provisions in this
paragraph (a)(3).
(4) Suspension of general-consent or prior-notice procedures. The
Board may, at any time, upon notice, modify or suspend the prior-notice
and general-consent procedures in paragraphs (a)(2) and (3) of this
section for any foreign bank with respect to the establishment by such
foreign bank of any U.S. office of such foreign bank.
(5) Temporary offices. The Board may, in its discretion, determine
that a foreign bank that is well managed as defined in Sec. 225.2(s) of
Regulation Y (12 CFR 225.2(s)) has not established an office if the
foreign bank temporarily operates, for a period not to exceed 12
months, a second location in the same city of an existing branch or
agency due to an expansion of the permissible activities of such
existing office or an increase in personnel of such office that cannot
be accommodated in the physical space of the existing office. The
foreign bank must provide reasonable advance notice of its intent
temporarily to utilize a second location and commit, in writing, to
operate only a single location for the office at the end of the 12-
month period.
(6) After-the-fact Board approval. Where a foreign bank proposes to
establish an office in the United States through the acquisition of, or
merger or consolidation with, another foreign bank with an office in
the United States, the Board may, in its discretion, allow the
acquisition, merger, or consolidation to proceed before an application
to establish the office has been filed or acted upon under this section
if:
(i) The foreign bank or banks resulting from the acquisition,
merger, or consolidation, will not directly or indirectly own or
control more than 5 percent of any class of the voting securities of,
or control, a U.S. bank;
(ii) The Board is given reasonable advance notice of the proposed
acquisition, merger, or consolidation; and
(iii) Prior to consummation of the acquisition, merger, or
consolidation, each foreign bank, as appropriate, commits in writing
either:
(A) To comply with the procedures for an application under this
section within a reasonable period of time; to engage in no new
business, or otherwise to expand its U.S. activities until the
disposition of the application; and to abide by the Board's decision on
the application, including, if necessary, a decision to terminate the
activities of any such U.S. office, as the Board or the Comptroller may
require; or
(B) Promptly to wind-down and close the office, the establishment
of which would have required an application under this section; and to
engage in no new business or otherwise to expand its U.S. activities
prior to the closure of such office.
(7) Notice of change in ownership or control or conversion of
existing office or establishment of representative office under
general-consent authority. A foreign bank with a U.S. office shall
notify the Board in writing within 10 days of the occurrence of any of
the following events:
(i) A change in the foreign bank's ownership or control, where the
foreign bank is acquired or controlled by another foreign bank or
company and the acquired foreign bank with a U.S. office continues to
operate in the same corporate form as prior to the change in ownership
or control;
(ii) The conversion of a branch to an agency or representative
office; an agency to a representative office; or a branch or agency
from a federal to a state license, or a state to a federal license; or
(iii) The establishment of a representative office under general-
consent authority.
(8) Transactions subject to approval under Regulation Y. Subpart B
of Regulation Y (12 CFR 225.11-225.17) governs the acquisition by a
foreign banking organization of direct or indirect ownership or control
of any voting securities of a bank or bank holding company in the
United States if the acquisition results in the foreign banking
organization's ownership or control of more than 5 percent of any class
of voting securities of a U.S. bank or bank holding company, including
through acquisition of a foreign bank or foreign banking organization
that owns or controls more than 5 percent of any class of the voting
securities of a U.S. bank or bank holding company.
(b) Procedures for application--(1) Filing application. An
application for the Board's approval pursuant to this section shall be
filed in the manner prescribed by the Board.
(2) Publication requirement--(i) Newspaper notice. Except with
respect to a proposed transaction where more extensive notice is
required by statute or as otherwise provided in paragraphs (b)(2)(ii)
and (iii) of this section, an applicant or notificant under this
section shall publish a notice in a newspaper of general circulation in
the community in which the applicant or notificant proposes to engage
in business.
(ii) Contents of notice. The newspaper notice shall:
(A) State that an application or notice is being filed as of the
date of the newspaper notice; and
(B) Provide the name of the applicant or notificant, the subject
matter of the application or notice, the place where comments should be
sent, and the date by which comments are due, pursuant to paragraph
(b)(3) of this section.
(iii) Copy of notice with application. The applicant or notificant
shall furnish with its application or notice to the Board a copy of the
newspaper notice, the date of its publication, and the name and address
of the newspaper in which it was published.
(iv) Exception. The Board may modify the publication requirement of
paragraphs (b)(2)(i) and (ii) of this section in appropriate
circumstances.
(v) Federal branch or federal agency. In the case of an application
or notice to establish a federal branch or federal agency, compliance
with the publication procedures of the Comptroller shall satisfy the
publication requirement of this section. Comments regarding the
application or notice should be sent to the Board and the Comptroller.
(3) Written comments. (i) Within 30 days after publication, as
required in paragraph (b)(2) of this section, any person may submit to
the Board written comments and data on an application or notice.
(ii) The Board may extend the 30-day comment period if the Board
determines that additional relevant information is likely to be
provided by interested
[[Page 68458]]
persons, or if other extenuating circumstances exist.
(4) Board action on application--(i) Time limits. (A) The Board
shall act on an application from a foreign bank to establish a branch,
agency, or commercial lending company subsidiary within 180 calendar
days after the receipt of the application.
(B) The Board may extend for an additional 180 calendar days the
period within which to take final action, after providing notice of and
reasons for the extension to the applicant and the licensing authority.
(C) The time periods set forth in this paragraph (b)(4)(i) may be
waived by the applicant.
(ii) Additional information. The Board may request any information
in addition to that supplied in the application when the Board believes
that the information is necessary for its decision, and may deny an
application if it does not receive the information requested from the
applicant or its home country supervisor in sufficient time to permit
adequate evaluation of the information within the time periods set
forth in paragraph (b)(4)(i) of this section.
(5) Coordination with other regulators. Upon receipt of an
application by a foreign bank under this section, the Board shall
promptly notify, consult with, and consider the views of the licensing
authority.
(c) Standards for approval of U.S. offices of foreign banks--(1)
Mandatory standards--(i) General. As specified in section 7(d) of the
IBA (12 U.S.C. 3105(d)), the Board may not approve an application to
establish a branch or an agency, or to establish or acquire ownership
or control of a commercial lending company, unless it determines that:
(A) Each of the foreign bank and any parent foreign bank engages
directly in the business of banking outside the United States and,
except as provided in paragraph (c)(1)(iii) of this section, is subject
to comprehensive supervision or regulation on a consolidated basis by
its home country supervisor; and
(B) The foreign bank has furnished to the Board the information
that the Board requires in order to assess the application adequately.
(ii) Basis for determining comprehensive consolidated supervision.
In determining whether a foreign bank and any parent foreign bank is
subject to CCS, the Board shall determine whether the foreign bank is
supervised or regulated in such a manner that its home country
supervisor receives sufficient information on the worldwide operations
of the foreign bank (including the relationships of the bank to any
affiliate) to assess the foreign bank's overall financial condition and
compliance with law and regulation. In making such a determination, the
Board shall assess, among other factors, the extent to which the home
country supervisor:
(A) Ensures that the foreign bank has adequate procedures for
monitoring and controlling its activities worldwide;
(B) Obtains information on the condition of the foreign bank and
its subsidiaries and offices outside the home country through regular
reports of examination, audit reports, or otherwise;
(C) Obtains information on the dealings and relationship between
the foreign bank and its affiliates, both foreign and domestic;
(D) Receives from the foreign bank financial reports that are
consolidated on a worldwide basis, or comparable information that
permits analysis of the foreign bank's financial condition on a
worldwide, consolidated basis;
(E) Evaluates prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis.
(iii) Determination of comprehensive consolidated supervision not
required in certain circumstances. (A) If the Board is unable to find,
under paragraph (c)(1)(i) of this section, that a foreign bank is
subject to comprehensive consolidated supervision, the Board may,
nevertheless, approve an application by the foreign bank if:
(1) The home country supervisor is actively working to establish
arrangements for the consolidated supervision of such bank; and
(2) All other factors are consistent with approval.
(B) In deciding whether to use its discretion under this paragraph
(c)(1)(iii), the Board also shall consider whether the foreign bank has
adopted and implemented procedures to combat money laundering. The
Board also may take into account whether the home country supervisor is
developing a legal regime to address money laundering or is
participating in multilateral efforts to combat money laundering. In
approving an application under this paragraph (c)(1)(iii), the Board,
after requesting and taking into consideration the views of the
licensing authority, may impose any conditions or restrictions relating
to the activities or business operations of the proposed branch,
agency, or commercial lending company subsidiary, including
restrictions on sources of funding. The Board shall coordinate with the
licensing authority in the implementation of such conditions or
restrictions.
(2) Additional mandatory standards for certain interstate
applications. As specified in section 5(a)(3) of the IBA (12 U.S.C.
3103(a)(3)), the Board may not approve an application by a foreign bank
to establish a branch, other than a limited branch, outside the home
state of the foreign bank under section 5(a)(1) or (2) of the IBA (12
U.S.C. 3103(a)(1), (2)) unless the Board:
(i) Determines that the foreign bank's financial resources,
including the capital level of the bank, are equivalent to those
required for a domestic bank to be approved for branching under section
5155 of the Revised Statutes (12 U.S.C. 36) and section 44 of the
Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1831u);
(ii) Consults with the Department of the Treasury regarding capital
equivalency;
(iii) Applies the standards specified in section 7(d) of the IBA
(12 U.S.C. 3105(d)) and this paragraph (c);
(iv) Applies the same requirements and conditions to which an
application by a domestic bank for an interstate merger is subject
under section 44(b)(1), (3), and (4) of the FDIA (12 U.S.C.
1831u(b)(1), (3), (4)); and
(v) In the case of an application to establish a branch through a
change in status of an agency or limited branch, the establishment and
operation of the branch would be permitted:
(A) In the case of a federal branch, under section 5155 of the
Revised Statutes (12 U.S.C. 36(g)) (relating to de novo branching), if
the foreign bank were a national bank whose home state (as defined in
section 5155 of the Revised Statutes (12 U.S.C. 36(g))) is the same
state as the home state of the foreign bank; or
(B) In the case of a state branch, under section 18(d)(4) of the
FDIA (12 U.S.C. 1828(d)(4)) (relating to de novo branching), if the
foreign bank were a state-chartered bank whose home state (as defined
in section 18(d)(4) of the FDIA (12 U.S.C. 1828(d)(4))) is the same
state as the home state of the foreign bank.
(3) Discretionary standards. In acting on any application under
this subpart, the Board may take into account:
(i) Consent of home country supervisor. Whether the home country
supervisor of the foreign bank has consented to the proposed
establishment of the branch, agency, or commercial lending company
subsidiary;
(ii) Financial resources. The financial resources of the foreign
bank (including the foreign bank's capital position, projected capital
position, profitability, level of indebtedness, and future
[[Page 68459]]
prospects) and the condition of any U.S. office of the foreign bank;
(iii) Managerial resources. The managerial resources of the foreign
bank, including the competence, experience, and integrity of the
officers and directors; the integrity of its principal shareholders;
management's experience and capacity to engage in international
banking; and the record of the foreign bank and its management of
complying with laws and regulations, and of fulfilling any commitments
to, and any conditions imposed by, the Board in connection with any
prior application;
(iv) Sharing information with supervisors. Whether the foreign
bank's home country supervisor and the home country supervisor of any
parent of the foreign bank share material information regarding the
operations of the foreign bank with other supervisory authorities;
(v) Assurances to Board. (A) Whether the foreign bank has provided
the Board with adequate assurances that information will be made
available to the Board on the operations or activities of the foreign
bank and any of its affiliates that the Board deems necessary to
determine and enforce compliance with the IBA, the BHC Act, and other
applicable federal banking statutes.
(B) These assurances shall include a statement from the foreign
bank describing the laws that would restrict the foreign bank or any of
its parents from providing information to the Board;
(vi) Measures for prevention of money laundering. Whether the
foreign bank has adopted and implemented procedures to combat money
laundering, whether there is a legal regime in place in the home
country to address money laundering, and whether the home country is
participating in multilateral efforts to combat money laundering; and
(vii) Compliance with U.S. law. Whether the foreign bank and its
U.S. affiliates are in compliance with applicable U.S. law, and whether
the applicant has established adequate controls and procedures in each
of its offices to ensure continuing compliance with U.S. law, including
controls directed to detection of money laundering and other unsafe or
unsound banking practices.
(4) Additional discretionary factors. The Board may consider the
needs of the community and the history of operation of the foreign bank
and its relative size in its home country, provided that the size of
the foreign bank is not the sole factor in determining whether an
office of a foreign bank should be approved.
(5) Board conditions on approval. The Board may impose any
conditions on its approval as it deems necessary, including a condition
which may permit future termination by the Board of any activities or,
in the case of a federal branch or a federal agency, by the
Comptroller, based on the inability of the foreign bank to provide
information on its activities or those of its affiliates that the Board
deems necessary to determine and enforce compliance with U.S. banking
laws.
(d) Representative offices--(1) Permissible activities. A
representative office may engage in:
(i) Representational and administrative functions. Representational
and administrative functions in connection with the banking activities
of the foreign bank, which may include soliciting new business for the
foreign bank; conducting research; acting as liaison between the
foreign bank's head office and customers in the United States;
performing any of the activities described in 12 CFR 250.141; or
performing back-office functions; but shall not include contracting for
any deposit or deposit-like liability, lending money, or engaging in
any other banking activity for the foreign bank; and
(ii) Other functions. Other functions for or on behalf of the
foreign bank or its affiliates, such as operating as a regional
administrative office of the foreign bank, but only to the extent that
these other functions are not banking activities and are not prohibited
by applicable federal or state law, or by ruling or order of the Board.
(2) Standards for approval of representative offices. As specified
in section 10(a)(2) of the IBA (12 U.S.C. 3107(a)(2)), in acting on the
application of a foreign bank to establish a representative office, the
Board shall take into account, to the extent it deems appropriate, the
standards for approval set out in paragraph (c) of this section. The
standard regarding supervision by the foreign bank's home country
supervisor (as set out in paragraph (c)(1)(i)(A) of this section) will
be met, in the case of a representative office application, if the
Board makes a finding that the applicant bank is subject to a
supervisory framework that is consistent with the activities of the
proposed representative office, taking into account the nature of such
activities and the operating record of the applicant.
(3) Special-purpose foreign government-owned banks. A foreign
government owned organization engaged in banking activities in its home
country that are not commercial in nature may apply to the Board for a
determination that the organization is not a foreign bank for purposes
of this section. A written request setting forth the basis for such a
determination may be submitted to the Reserve Bank of the District in
which the foreign organization's representative office is located in
the United States, or to the Board, in the case of a proposed
establishment of a representative office. The Board shall review and
act upon each request on a case-by-case basis.
(4) Additional requirements. The Board may impose any additional
requirements that it determines to be necessary to carry out the
purposes of the IBA.
(e) Preservation of existing authority. Nothing in this subpart
shall be construed to relieve any foreign bank or foreign banking
organization from any otherwise applicable requirement of federal or
state law, including any applicable licensing requirement.
(f) Reports of crimes and suspected crimes. Except for a federal
branch or a federal agency or a state branch that is insured by the
Federal Deposit Insurance Corporation (FDIC), a branch, agency, or
representative office of a foreign bank operating in the United States
shall file a suspicious activity report in accordance with the
provisions of Sec. 208.20 of Regulation H (12 CFR 208.20).
Sec. 211.25 Termination of offices of foreign banks.
(a) Grounds for termination--(1) General. Under sections 7(e) and
10(b) of the IBA (12 U.S.C. 3105(d), 3107(b)), the Board may order a
foreign bank to terminate the activities of its representative office,
state branch, state agency, or commercial lending company subsidiary if
the Board finds that:
(i) The foreign bank is not subject to comprehensive consolidated
supervision in accordance with Sec. 211.24(c)(1), and the home country
supervisor is not making demonstrable progress in establishing
arrangements for the consolidated supervision of the foreign bank; or
(ii) Both of the following criteria are met:
(A) There is reasonable cause to believe that the foreign bank, or
any of its affiliates, has committed a violation of law or engaged in
an unsafe or unsound banking practice in the United States; and
(B) As a result of such violation or practice, the continued
operation of the foreign bank's representative office, state branch,
state agency, or commercial lending company
[[Page 68460]]
subsidiary would not be consistent with the public interest, or with
the purposes of the IBA, the BHC Act, or the FDIA.
(2) Additional ground. The Board also may enforce any condition
imposed in connection with an order issued under Sec. 211.24.
(b) Factor. In making its findings under this section, the Board
may take into account the needs of the community, the history of
operation of the foreign bank, and its relative size in its home
country, provided that the size of the foreign bank shall not be the
sole determining factor in a decision to terminate an office.
(c) Consultation with relevant state supervisor. Except in the case
of termination pursuant to the expedited procedure in paragraph (d)(3)
of this section, the Board shall request and consider the views of the
relevant state supervisor before issuing an order terminating the
activities of a state branch, state agency, representative office, or
commercial lending company subsidiary under this section.
(d) Termination procedures.--(1) Notice and hearing. Except as
otherwise provided in paragraph (d)(3) of this section, an order issued
under paragraph (a)(1) of this section shall be issued only after
notice to the relevant state supervisor and the foreign bank and after
an opportunity for a hearing.
(2) Procedures for hearing. Hearings under this section shall be
conducted pursuant to the Board's Rules of Practice for Hearings (12
CFR part 263).
(3) Expedited procedure. The Board may act without providing an
opportunity for a hearing, if it determines that expeditious action is
necessary in order to protect the public interest. When the Board finds
that it is necessary to act without providing an opportunity for a
hearing, the Board, solely in its discretion, may:
(i) Provide the foreign bank that is the subject of the termination
order with notice of the intended termination order;
(ii) Grant the foreign bank an opportunity to present a written
submission opposing issuance of the order; or
(iii) Take any other action designed to provide the foreign bank
with notice and an opportunity to present its views concerning the
order.
(e) Termination of federal branch or federal agency. The Board may
transmit to the Comptroller a recommendation that the license of a
federal branch or federal agency be terminated if the Board has
reasonable cause to believe that the foreign bank or any affiliate of
the foreign bank has engaged in conduct for which the activities of a
state branch or state agency may be terminated pursuant to this
section.
(f) Voluntary termination. A foreign bank shall notify the Board at
least 30 days prior to terminating the activities of any office. Notice
pursuant to this paragraph (f) is in addition to, and does not satisfy,
any other federal or state requirements relating to the termination of
an office or the requirement for prior notice of the closing of a
branch, pursuant to section 39 of the FDIA (12 U.S.C. 1831p).
Sec. 211.26 Examination of offices and affiliates of foreign banks.
(a) Conduct of examinations--(1) Examination of branches, agencies,
commercial lending companies, and affiliates. The Board may examine:
(i) Any branch or agency of a foreign bank;
(ii) Any commercial lending company or bank controlled by one or
more foreign banks, or one or more foreign companies that control a
foreign bank; and
(iii) Any other office or affiliate of a foreign bank conducting
business in any state.
(2) Examination of representative offices. The Board may examine
any representative office in the manner and with the frequency it deems
appropriate.
(b) Coordination of examinations. To the extent possible, the Board
shall coordinate its examinations of the U.S. offices and U.S.
affiliates of a foreign bank with the licensing authority and, in the
case of an insured branch, the FDIC, including through simultaneous
examinations of the U.S. offices and U.S. affiliates of a foreign bank.
(c) Annual on-site examinations. Unless otherwise specified, each
branch, agency, or commercial lending company subsidiary of a foreign
bank shall be examined on-site at least once during each 12-month
period (beginning on the date the most recent examination of the office
ended) by:
(1) The Board;
(2) The FDIC, if the branch of the foreign bank accepts or
maintains insured deposits;
(3) The Comptroller, in the case of a federal branch or federal
agency; or
(4) The relevant state supervisor, in the case of a state branch or
state agency.
Sec. 211.27 Disclosure of supervisory information to foreign
supervisors.
(a) Disclosure by Board. The Board may disclose information
obtained in the course of exercising its supervisory or examination
authority to a foreign bank regulatory or supervisory authority, if the
Board determines that disclosure is appropriate for bank supervisory or
regulatory purposes and will not prejudice the interests of the United
States.
(b) Confidentiality. Before making any disclosure of information
pursuant to paragraph (a) of this section, the Board shall obtain, to
the extent necessary, the agreement of the foreign bank regulatory or
supervisory authority to maintain the confidentiality of such
information to the extent possible under applicable law.
Sec. 211.28 Provisions applicable to branches and agencies: limitation
on loans to one borrower.
(a) Limitation on loans to one borrower. Except as provided in
paragraph (b) of this section, the total loans and extensions of credit
by all the state branches and state agencies of a foreign bank
outstanding to a single borrower at one time shall be aggregated with
the total loans and extensions of credit by all federal branches and
federal agencies of the same foreign bank outstanding to such borrower
at the time; and shall be subject to the limitations and other
provisions of section 5200 of the Revised Statutes (12 U.S.C. 84), and
the regulations promulgated thereunder, in the same manner that
extensions of credit by a federal branch or federal agency are subject
to section 4(b) of the IBA (12 U.S.C. 3102(b)) as if such state
branches and state agencies were federal branches and federal agencies.
(b) Preexisting loans and extensions of credit. Any loans or
extensions of credit to a single borrower that were originated prior to
December 19, 1991, by a state branch or state agency of the same
foreign bank and that, when aggregated with loans and extensions of
credit by all other branches and agencies of the foreign bank, exceed
the limits set forth in paragraph (a) of this section, may be brought
into compliance with such limitations through routine repayment,
provided that any new loans or extensions of credit (including renewals
of existing unfunded credit lines, or extensions of the maturities of
existing loans) to the same borrower shall comply with the limits set
forth in paragraph (a) of this section.
Sec. 211.29 Applications by state branches and state agencies to
conduct activities not permissible for federal branches.
(a) Scope. A state branch or state agency shall file with the Board
a prior written application for permission to engage in or continue to
engage in any type of activity that:
(1) Is not permissible for a federal branch, pursuant to statute,
regulation,
[[Page 68461]]
official bulletin or circular, or order or interpretation issued in
writing by the Comptroller; or
(2) Is rendered impermissible due to a subsequent change in
statute, regulation, official bulletin or circular, written order or
interpretation, or decision of a court of competent jurisdiction.
(b) Exceptions. No application shall be required by a state branch
or state agency to conduct any activity that is otherwise permissible
under applicable state and federal law or regulation and that:
(1) Has been determined by the FDIC, pursuant to 12 CFR
362.4(c)(3)(i)-(c)(3)(ii)(A), not to present a significant risk to the
affected deposit insurance fund;
(2) Is permissible for a federal branch, but the Comptroller
imposes a quantitative limitation on the conduct of such activity by
the federal branch;
(3) Is conducted as agent rather than as principal, provided that
the activity is one that could be conducted by a state-chartered bank
headquartered in the same state in which the branch or agency is
licensed; or
(4) Any other activity that the Board has determined may be
conducted by any state branch or state agency of a foreign bank without
further application to the Board.
(c) Contents of application. An application submitted pursuant to
paragraph (a) of this section shall be in letter form and shall contain
the following information:
(1) A brief description of the activity, including the manner in
which it will be conducted, and an estimate of the expected dollar
volume associated with the activity;
(2) An analysis of the impact of the proposed activity on the
condition of the U.S. operations of the foreign bank in general, and of
the branch or agency in particular, including a copy, if available, of
any feasibility study, management plan, financial projections, business
plan, or similar document concerning the conduct of the activity;
(3) A resolution by the applicant's board of directors or, if a
resolution is not required pursuant to the applicant's organizational
documents, evidence of approval by senior management, authorizing the
conduct of such activity and the filing of this application;
(4) If the activity is to be conducted by a state branch insured by
the FDIC, statements by the applicant:
(i) Of whether or not it is in compliance with 12 CFR 346.19
(Pledge of Assets) and 12 CFR 346.20 (Asset Maintenance);
(ii) That it has complied with all requirements of the FDIC
concerning an application to conduct the activity and the status of the
application, including a copy of the FDIC's disposition of such
application, if available; and
(iii) Explaining why the activity will pose no significant risk to
the deposit insurance fund; and
(5) Any other information that the Reserve Bank deems appropriate.
(d) Factors considered in determination. (1) The Board shall
consider the following factors in determining whether a proposed
activity is consistent with sound banking practice:
(i) The types of risks, if any, the activity poses to the U.S.
operations of the foreign banking organization in general, and the
branch or agency in particular;
(ii) If the activity poses any such risks, the magnitude of each
risk; and
(iii) If a risk is not de minimis, the actual or proposed
procedures to control and minimize the risk.
(2) Each of the factors set forth in paragraph (d)(1) of this
section shall be evaluated in light of the financial condition of the
foreign bank in general and the branch or agency in particular and the
volume of the activity.
(e) Application procedures. Applications pursuant to this section
shall be filed with the appropriate Federal Reserve Bank. An
application shall not be deemed complete until it contains all the
information requested by the Reserve Bank and has been accepted.
Approval of such an application may be conditioned on the applicant's
agreement to conduct the activity subject to specific conditions or
limitations.
(f) Divestiture or cessation. (1) If an application for permission
to continue to conduct an activity is not approved by the Board or, if
applicable, the FDIC, the applicant shall submit a detailed written
plan of divestiture or cessation of the activity to the appropriate
Federal Reserve Bank within 60 days of the disapproval.
(i) The divestiture or cessation plan shall describe in detail the
manner in which the applicant will divest itself of or cease the
activity, and shall include a projected timetable describing how long
the divestiture or cessation is expected to take.
(ii) Divestiture or cessation shall be complete within one year
from the date of the disapproval, or within such shorter period of time
as the Board shall direct.
(2) If a foreign bank operating a state branch or state agency
chooses not to apply to the Board for permission to continue to conduct
an activity that is not permissible for a federal branch, or which is
rendered impermissible due to a subsequent change in statute,
regulation, official bulletin or circular, written order or
interpretation, or decision of a court of competent jurisdiction, the
foreign bank shall submit a written plan of divestiture or cessation,
in conformance with paragraph (f)(1) of this section within 60 days of
the effective date of this part or of such change or decision.
Sec. 211.30 Criteria for evaluating U.S. operations of foreign banks
not subject to consolidated supervision.
(a) Development and publication of criteria. Pursuant to the
Foreign Bank Supervision Enhancement Act, Pub. L. 102-242, 105 Stat.
2286 (1991), the Board shall develop and publish criteria to be used in
evaluating the operations of any foreign bank in the United States that
the Board has determined is not subject to comprehensive consolidated
supervision.
(b) Criteria considered by Board. Following a determination by the
Board that, having taken into account the standards set forth in
Sec. 211.24(c)(1), a foreign bank is not subject to CCS, the Board
shall consider the following criteria in determining whether the
foreign bank's U.S. operations should be permitted to continue and, if
so, whether any supervisory constraints should be placed upon the bank
in connection with those operations:
(1) The proportion of the foreign bank's total assets and total
liabilities that are located or booked in its home country, as well as
the distribution and location of its assets and liabilities that are
located or booked elsewhere;
(2) The extent to which the operations and assets of the foreign
bank and any affiliates are subject to supervision by its home country
supervisor;
(3) Whether the home country supervisor of such foreign bank is
actively working to establish arrangements for comprehensive
consolidated supervision of the bank, and whether demonstrable progress
is being made;
(4) Whether the foreign bank has effective and reliable systems of
internal controls and management information and reporting, which
enable its management properly to oversee its worldwide operations;
(5) Whether the foreign bank's home country supervisor has any
objection to the bank continuing to operate in the United States;
(6) Whether the foreign bank's home country supervisor and the home
country supervisor of any parent of the
[[Page 68462]]
foreign bank share material information regarding the operations of the
foreign bank with other supervisory authorities;
(7) The relationship of the U.S. operations to the other operations
of the foreign bank, including whether the foreign bank maintains funds
in its U.S. offices that are in excess of amounts due to its U.S.
offices from the foreign bank's non-U.S. offices;
(8) The soundness of the foreign bank's overall financial
condition;
(9) The managerial resources of the foreign bank, including the
competence, experience, and integrity of the officers and directors,
and the integrity of its principal shareholders;
(10) The scope and frequency of external audits of the foreign
bank;
(11) The operating record of the foreign bank generally and its
role in the banking system in its home country;
(12) The foreign bank's record of compliance with relevant laws, as
well as the adequacy of its anti-money-laundering controls and
procedures, in respect of its worldwide operations;
(13) The operating record of the U.S. offices of the foreign bank;
(14) The views and recommendations of the Comptroller or the
relevant state supervisors in those states in which the foreign bank
has operations, as appropriate;
(15) Whether the foreign bank, if requested, has provided the Board
with adequate assurances that such information will be made available
on the operations or activities of the foreign bank and any of its
affiliates as the Board deems necessary to determine and enforce
compliance with the IBA, the BHC Act, and other U.S. banking statutes;
and
(16) Any other information relevant to the safety and soundness of
the U.S. operations of the foreign bank.
(c) Restrictions on U.S. operations.--(1) Terms of agreement. Any
foreign bank that the Board determines is not subject to CCS may be
required to enter into an agreement to conduct its U.S. operations
subject to such restrictions as the Board, having considered the
criteria set forth in paragraph (b) of this section, determines to be
appropriate in order to ensure the safety and soundness of its U.S.
operations.
(2) Failure to enter into or comply with agreement. A foreign bank
that is required by the Board to enter into an agreement pursuant to
paragraph (c)(1) of this section and either fails to do so, or fails to
comply with the terms of such agreement, may be subject to:
(i) Enforcement action, in order to ensure safe and sound banking
operations, under 12 U.S.C. 1818; or
(ii) Termination or a recommendation for termination of its U.S.
operations, under Sec. 211.25 (a) and (e) and section (7)(e) of the IBA
(12 U.S.C. 3105(e)).
Subpart C--Export Trading Companies
Sec. 211.31 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (Board) under the authority of the Bank
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.), the
Bank Export Services Act (title II, Pub. L. 97-290, 96 Stat. 1235
(1982)) (BESA), and the Export Trading Company Act Amendments of 1988
(title III, Pub. L. 100-418, 102 Stat. 1384 (1988)) (ETC Act
Amendments).
(b) Purpose and scope. This subpart is in furtherance of the
purposes of the BHC Act, the BESA, and the ETC Act Amendments, the
latter two statutes being designed to increase U.S. exports by
encouraging investments and participation in export trading companies
by bank holding companies and the specified investors. The provisions
of this subpart apply to eligible investors as defined in this subpart.
Sec. 211.32 Definitions.
The definitions in Secs. 211.1 and 211.2 apply to this subpart,
subject to the following:
(a) Appropriate Federal Reserve Bank has the same meaning as in
Sec. 211.21(c).
(b) Bank has the same meaning as in section 2(c) of the BHC Act (12
U.S.C. 1841(c)).
(c) Company has the same meaning as in section 2(b) of the BHC Act
(12 U.S.C. 1841(b)).
(d) Eligible investors means:
(1) Bank holding companies, as defined in section 2(a) of the BHC
Act (12 U.S.C. 1841(a));
(2) Edge and agreement corporations that are subsidiaries of bank
holding companies but are not subsidiaries of banks;
(3) Banker's banks, as described in section 4(c)(14)(F)(iii) of the
BHC Act (12 U.S.C. 1843(c)(14)(F)(iii)); and
(4) Foreign banking organizations, as defined in Sec. 211.21(o).
(e) Export trading company means a company that is exclusively
engaged in activities related to international trade and, by engaging
in one or more export trade services, derives:
(1) At least one-third of its revenues in each consecutive four-
year period from the export of, or from facilitating the export of,
goods and services produced in the United States by persons other than
the export trading company or its subsidiaries; and
(2) More revenues in each four-year period from export activities
as described in paragraph (e)(1) of this section than it derives from
the import, or facilitating the import, into the United States of goods
or services produced outside the United States. The four-year period
within which to calculate revenues derived from its activities under
this section shall be deemed to have commenced with the first fiscal
year after the respective export trading company has been in operation
for two years.
(f) Revenues shall include net sales revenues from exporting,
importing, or third-party trade in goods by the export trading company
for its own account and gross revenues derived from all other
activities of the export trading company.
(g) Subsidiary has the same meaning as in section 2(d) of the BHC
Act (12 U.S.C. 1841(d)).
(h) Well capitalized has the same meaning as in Sec. 225.2(r) of
Regulation Y (12 CFR 225.2(r)).
(i) Well managed has the same meaning as in Sec. 225.2(s) of
Regulation Y (12 CFR 225.2(s)).
Sec. 211.33 Investments and extensions of credit.
(a) Amount of investments. In accordance with the procedures of
Sec. 211.34, an eligible investor may invest no more than 5 percent of
its consolidated capital and surplus in one or more export trading
companies, except that an Edge or agreement corporation not engaged in
banking may invest as much as 25 percent of its consolidated capital
and surplus but no more than 5 percent of the consolidated capital and
surplus of its parent bank holding company.
(b) Extensions of credit--(1) Amount. An eligible investor in an
export trading company or companies may extend credit directly or
indirectly to the export trading company or companies in a total amount
that at no time exceeds 10 percent of the investor's consolidated
capital and surplus.
(2) Terms. (i) An eligible investor in an export trading company
may not extend credit directly or indirectly to the export trading
company or any of its customers or to any other investor holding 10
percent or more of the shares of the export trading company on terms
more favorable than those afforded similar borrowers in similar
circumstances, and such extensions of credit shall not involve more
than the normal risk of repayment or present other unfavorable
features.
(ii) For the purposes of this section, an investor in an export
trading
[[Page 68463]]
company includes any affiliate of the investor.
(3) Collateral requirements. Covered transactions between a bank
and an affiliated export trading company in which a bank holding
company has invested pursuant to this subpart are subject to the
collateral requirements of section 23A of the Federal Reserve Act (12
U.S.C. 371c), except where a bank issues a letter of credit or advances
funds to an affiliated export trading company solely to finance the
purchase of goods for which:
(i) The export trading company has a bona fide contract for the
subsequent sale of the goods; and
(ii) The bank has a security interest in the goods or in the
proceeds from their sale at least equal in value to the letter of
credit or the advance.
Sec. 211.34 Procedures for filing and processing notices.
(a) General policy. Direct and indirect investments by eligible
investors in export trading companies shall be made in accordance with
the general consent or prior notice procedures contained in this
section. The Board may at any time, upon notice, modify or suspend the
general-consent procedures with respect to any eligible investor.
(b) General consent--(1) Eligibility for general consent. Subject
to the other limitations of this subpart, the Board grants its general
consent for any investment an export trading company:
(i) If the eligible investor is well capitalized and well managed;
(ii) In an amount equal to cash dividends received from that export
trading company during the preceding 12 calendar months; or
(iii) That is acquired from an affiliate at net asset value or
through a contribution of shares.
(2) Post-investment notice. By the end of the month following the
month in which the investment is made, the investor shall provide the
Board with the following information:
(i) The amount of the investment and the source of the funds with
which the investment was made; and
(ii) In the case of an initial investment, a description of the
activities in which the export trading company proposes to engage and
projections for the export trading company for the first year following
the investment.
(c) Filing notice--(1) Prior notice. An eligible investor shall
give the Board 60 days' prior written notice of any investment in an
export trading company that does not qualify under the general consent
procedure.
(2) Notice of change of activities. (i) An eligible investor shall
give the Board 60 days' prior written notice of changes in the
activities of an export trading company that is a subsidiary of the
investor if the export trading company expands its activities beyond
those described in the initial notice to include:
(A) Taking title to goods where the export trading company does not
have a firm order for the sale of those goods;
(B) Product research and design;
(C) Product modification; or
(D) Activities not specifically covered by the list of activities
contained in section 4(c)(14)(F)(ii) of the BHC Act (12 U.S.C.
1843(c)(14)(F)(ii)).
(ii) Such an expansion of activities shall be regarded as a
proposed investment under this subpart.
(d) Time period for Board action. (1) A proposed investment that
has not been disapproved by the Board may be made 60 days after the
appropriate Federal Reserve Bank accepts the notice for processing. A
proposed investment may be made before the expiration of the 60-day
period if the Board notifies the investor in writing of its intention
not to disapprove the investment.
(2) The Board may extend the 60-day period for an additional 30
days if the Board determines that the investor has not furnished all
necessary information or that any material information furnished is
substantially inaccurate. The Board may disapprove an investment if the
necessary information is provided within a time insufficient to allow
the Board reasonably to consider the information received.
(3) Within three days of a decision to disapprove an investment,
the Board shall notify the investor in writing and state the reasons
for the disapproval.
(e) Time period for investment. An investment in an export trading
company that has not been disapproved shall be made within one year
from the date of the notice not to disapprove, unless the time period
is extended by the Board or by the appropriate Federal Reserve Bank.
PART 265--RULES REGARDING DELEGATION OF AUTHORITY
1. The authority citation for part 265 would continue to read as
follows:
Authority: 12 U.S.C. 248 (i) and (k).
2. Paragraph (f) of Sec. 265.6 would be revised to read as follows:
Sec. 265.6 Functions delegated to General Counsel.
* * * * *
(f) International banking--(1) After-the-fact applications. With
the concurrence of the Board's Director of the Division of Banking
Supervision and Regulation, to grant a request by a foreign bank to
establish a branch, agency, commercial lending company, or
representative office through certain acquisitions, mergers,
consolidations, or similar transactions, in conjunction with which:
(i) The foreign bank would be required to file an after-the-fact
application for the Board's approval under Sec. 211.24(a)(6) of
Regulation K (12 CFR 211.24(a)(6)); or
(ii) The General Counsel may waive the requirement for an after-
the-fact application if:
(A) The surviving foreign bank commits to wind down the U.S.
operations of the acquired foreign bank; and
(B) The merger or consolidation raises no significant policy or
supervisory issues.
(2) To modify the requirement that a foreign bank that has
submitted an application or notice to establish a branch, agency,
commercial lending company, or representative office pursuant to
Sec. 211.24(a)(6) of Regulation K (12 CFR 211.24(a)(6)) shall publish
notice of the application or notice in a newspaper of general
circulation in the community in which the applicant or notificant
proposes to engage in business, as provided in Sec. 211.24(b)(2) of
Regulation K (12 CFR 211.24(b)(2)).
(3) With the concurrence of the Board's Director of the Division of
Banking Supervision and Regulation, to grant a request for an exemption
under section 4(c)(9) of the Bank Holding Company Act (12 U.S.C.
1843(c)(9)), provided that the request raises no significant policy or
supervisory issues that the Board has not already considered.
* * * * *
3. Section 265.7 would be amended as follows:
a. Paragraph (d)(4) would be revised; and
b. New paragraphs (d)(9), (d)(10), and (d)(11) would be added.
The revision and additions would read as follows:
Sec. 265.7 Functions delegated to Director of Division of Banking
Supervision and Regulation.
* * * * *
(d) * * *
(4) Authority under general-consent and prior-notice procedures.
(i) With regard to a prior notice to establish a branch in a foreign
country under Sec. 211.3 of Regulation K (12 CFR 211.3):
(A) To waive the notice period;
(B) To suspend the notice period;
(C) To determine not to object to the notice; or
[[Page 68464]]
(D) To require the notificant to file an application for the
Board's specific consent.
(ii) With regard to a prior notice to make an investment under
Sec. 211.8(g) of Regulation K (12 CFR 211.8(g)):
(A) To waive the notice period;
(B) To suspend the notice period; or
(C) To require the notificant to file an application for the
Board's specific consent.
(iii) With regard to a prior notice of a foreign bank to establish
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR
211.24(a)(2)(i)):
(A) To waive the notice period;
(B) To suspend the notice period; or
(C) To require the notificant to file an application for the
Board's specific consent.
(iv) To suspend the ability:
(A) Of a foreign banking organization to establish an office under
the prior-notice procedures in Sec. 211.24(a)(2)(i) of Regulation K (12
CFR 211.24(a)(2)(i)) or the general-consent procedures in
Sec. 211.24(a)(3) of Regulation K (12 CFR 211.24(a)(3));
(B) Of a U.S. banking organization to establish a foreign branch
under the prior-notice or general-consent procedures in Sec. 211.3(b)
of Regulation K (12 CFR 211.3(b));
(C) Of an investor to make investments under the general-consent or
prior-notice procedures in Sec. 211.8 of Regulation K (12 CFR 211.8);
and
(D) Of an eligible investor to make an investment in an export
trading company under the general-consent procedures in Sec. 211.34(b)
of Regulation K (12 CFR 211.34(b)).
* * * * *
(9) Allowing use of general-consent procedures. To allow an
investor that is not well capitalized and well managed to make
investments under the general-consent procedures in Sec. 211.8 or
211.34(b) of Regulation K (12 CFR 211.8 or 211.34(b)), provided that:
(i) The investor has implemented measures to become well
capitalized and well managed;
(ii) Granting such authority raises no significant policy or
supervisory concerns; and
(iii) Authority granted by the Director under this paragraph (d)(9)
expires after one year, but may be renewed.
(10) Exceeding general-consent investment limits. To allow an
investor to exceed the general-consent investment limits under
Sec. 211.8 of Regulation K (12 CFR 211.8), provided that:
(i) The investor demonstrates adequate financial and managerial
strength;
(ii) The investor's investment strategy is not unsafe or unsound;
(iii) Granting such authority raises no significant policy or
supervisory concerns; and
(iv) Authority granted by the Director under this paragraph (d)(10)
expires after one year, but may be renewed.
(11) Approval of temporary U.S. offices. To allow a foreign bank to
operate a temporary office in the United States, pursuant to
Sec. 211.24 of Regulation K (12 CFR 211.24), provided that:
(i) There is no direct public access to such office, with respect
to any branch or agency function; and
(ii) The proposal raises no significant policy or supervisory
issues.
* * * * *
4. Section 265.11 would be amended as follows:
a. Paragraph (d)(8) would be revised; and
b. Paragraph (d)(11) would be removed.
The revision would read as follows:
Sec. 265.11 Functions delegated to Federal Reserve Banks.
* * * * *
(d) * * *
(8) Authority under prior-notice procedures. (i) With regard to a
prior notice to make an investment under Sec. 211.8(g) of Regulation K
(12 CFR 211.8(g)):
(A) To suspend the notice period; or
(B) To require the notificant to file an application for the
Board's specific consent.
(ii) With regard to a prior notice of a foreign bank to establish
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR
211.24(a)(2)(i)):
(A) To suspend the notice period; or
(B) To require that the foreign bank file an application for the
Board's specific consent.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, December 17, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-33411 Filed 12-30-97; 8:45 am]
BILLING CODE 6210-01-P
