[Federal Register Volume 60, Number 185 (Monday, September 25, 1995)]
[Proposed Rules]
[Pages 49350-49353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23670]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 60, No. 185 / Monday, September 25, 1995 /
Proposed Rules
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FEDERAL RESERVE SYSTEM
12 CFR Part 211
[Regulation K; Docket No. R-0896]
International Operations of United States Banking Operations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board is publishing for comment proposed amendments to
Subpart A of Regulation K (International Operations of U.S. Banking
Operations). The amendments provide additional general consent
authority for de novo investments in foreign companies by U.S. banking
organizations that are strongly capitalized and well managed. This
expanded general consent authority is designed to permit U.S. banking
organizations meeting these requirements to make certain investments
without the need for prior approval or review. In order to strike a
reasonable balance, however, between reduced regulatory burden and
continued Board oversight, the amendments would impose aggregate limits
on the total amount of general consent investments that may be made in
the course of a year. In addition, certain investments or activities
would not be eligible for the expanded authority. The proposed rule
would require an investor making use of the expanded authority to
provide the Board with a post-investment notice. In addition, for those
investments requiring prior notice to the Board, the proposed rule
would streamline the processing of such notices.
DATES: Comments must be submitted by October 30, 1995.
ADDRESSES: Comments should refer to Docket No. R-0896, and 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 also may be delivered to Room B-2222 of the Eccles Building
between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard station in
the Eccles Building courtyard on 20th Street NW., (between Constitution
Avenue and C Street) at any time. Comments received will be available
for inspection in Room MP-500 of the Martin Building between 9 a.m. and
5 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's
rules regarding the availability of information.
FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General
Counsel (202/452-3786), Sandra L. Richardson, Managing Senior Counsel
(202/452-6406), or Andres L. Navarrete, Attorney (202/452-2300), Legal
Division; William A. Ryback, Associate Director (202/452-2722), Michael
G. Martinson, Assistant Director (202/452-2798), or Betsy Cross,
Manager (202/452-2574), Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System. For the users of
Telecommunication Device for the Deaf (TDD) only, please contact
Dorothea Thompson (202/452-3544), Board of Governors of the Federal
Reserve System, 20th and C Streets NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION: Subpart A of the Board's Regulation K sets
out the rules governing the foreign activities of U.S. banking
organizations, including procedures for making investments in foreign
banking and non-banking organizations. Under Sec. 211.5(c), all such
investments, whether made directly or indirectly, are required to be
made in accordance with the general consent, prior notice, or specific
consent procedures contained in that paragraph. 12 CFR 211.5(c). No
prior notice or application is required for any investment that falls
within the general consent authority. Such authority at present is
limited to investments where the total amount invested in any one
organization, in one transaction or a series of transactions, does not
exceed the lesser of $25 million or 5 percent of the investor's Tier 1
capital where the investor is a member bank, bank holding company, or
Edge corporation engaged in banking.1
\1\ In the case of an Edge corporation not engaged in banking,
the relevant general consent limit is the lesser of $25 million or
25 percent of its Tier 1 capital.
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The Board has reviewed the general consent authority in light of
the amount and nature of the investments that required prior review
because they exceeded the general consent dollar limits. The Board has
concluded that the current general consent authority may be safely
expanded for U.S. banking organizations that are strongly capitalized
and well managed. This expanded general consent authority is intended
to reduce the burden associated with obtaining approval for such
investments for U.S. banking organizations meeting these requirements.
The constraining limit in the general consent authority that
triggers the requirement of prior notice often has been the $25 million
cap. The Board seeks comment on a rule that, in order to reduce burden
on applicants, would add additional general consent authority for U.S.
banking organizations that are strongly capitalized and well managed by
removing the absolute dollar limit and linking the general consent
limits solely to percentages of capital.
Proposed Rule
The proposed rule would streamline the Board's notice requirement
under Subpart A of Regulation K by increasing the limit on investments
that may be made abroad without providing prior notice to the Board.
This liberalization would be available in relation to certain de novo
investments and for additional investments in existing subsidiaries and
joint ventures by investors that have demonstrated strong capital and
management. This expanded general consent authority also is intended to
reduce the burden associated with obtaining approval for such
investments for U.S. banking organizations meeting the strongly-
capitalized and well-managed standards. The Board seeks comment on each
of the requirements or limitations discussed below.
Strongly-Capitalized and Well-Managed Requirement
The expanded general consent authority would be available for
investments by member banks, bank holding companies, Edge corporations
that are not engaged in banking, and agreement corporations. The
expanded authority would only be available where the investor, its
parent member bank, if any, and the bank holding company are strongly
capitalized and well managed, as those terms are defined by the Board.
``Strongly capitalized,'' in relation to
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member banks, is defined with reference to the definition of ``well
capitalized'' set out in the prompt corrective action standards, which
requires, at a minimum, a 6 percent Tier 1 and 10 percent total risk-
based capital ratio and a leverage ratio of 5 percent.2 12 CFR
208.33(b)(1). For purposes of Regulation K, Edge or agreement
corporations and bank holding companies would be required to have a
total risk-based capital ratio of 10 percent or more in order to be
considered strongly capitalized for purposes of the expanded authority.
A definition of ``well managed'' is also included in the proposed rule,
which provides that, in order to be considered well managed, the Edge
or agreement corporation, its parent member bank, if any, and the bank
holding company must each have received a composite rating of at least
1 or 2, with no component below 3, at its most recent examination or
review.
\2\ The member bank also may not be subject to any written
agreement, order, capital directive, or prompt corrective action
directive issued by the Board to meet and maintain a specific
capital level for any capital measure. 12 CFR 208.33(b)(1).
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Expanded Authority for General Consent Investments
The new proposed limits for the expanded general consent authority
would be tied to the capital of the investor. With regard to limits on
investments in any one company by Edge corporations not engaged in
banking or agreement corporations that meet the requirements discussed
above, the Board proposes that the limits should be changed to the
lesser of 20 percent of the Edge or agreement corporation's Tier 1
capital or 2 percent of the Tier 1 capital of the member bank.3 So
long as the 2 percent limit is not exceeded by its parent, Edge
corporations not engaged in banking will be permitted to invest up to
20 percent of their capital. This higher limit is authorized because
such Edge corporations do not take deposits in the United States or own
U.S. depository institutions. Any financial effect on the parent bank
would be constrained by the 2 percent limit.
\3\ The proposed 20 percent limit of the Edge's Tier 1 capital
derives from the constraint imposed by section 25A of the Federal
Reserve Act, which prohibits any investment in excess of 10 percent
of the subscribing bank's capital in Edge and agreement
corporations.
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A limit of 2 percent of the Tier 1 capital of a member bank appears
to strike a reasonable balance between two objectives: permitting an
organization considered to be strongly capitalized and well managed to
make investments that management considers to be appropriate with a
minimum of regulatory interference, and requiring prior review for
investments involving a high percentage of capital. The latter
investments may cause supervisory concern because an initial capital
investment can be leveraged many times.
The proposed rule also sets an overall aggregate limit on all
investments made during the previous 12-month period under the existing
and the expanded general consent authority. All such investments made
by an Edge corporation not engaged in banking or an agreement
corporation, when aggregated with the proposed investment, would not be
permitted to exceed the lesser of 50 percent of the Edge or agreement
corporation's total capital or 5 percent of the parent member bank's
total capital. An overall aggregate limit of 5 percent of their total
capital would apply to investments by member banks and bank holding
companies. These limits again were selected in an effort to strike a
reasonable balance between giving such entities credit for their
strongly-capitalized and well-managed status, in the form of reduced
regulatory burden, but maintaining the requirement for, at a minimum,
prior notice to the Board once the overall level of foreign investments
may give rise to supervisory concern.
The proposal provides, however, that in determining compliance with
these aggregate limits, an investment in a subsidiary shall be counted
only once notwithstanding that such subsidiary may, within the next 12
months, downstream all or part of such investment to another
subsidiary. This change is designed to avoid double counting and simply
recognizes that often, especially for tax purposes, investments are
downstreamed from one subsidiary to another in a banking group--an
event that, so long as the investors are strongly capitalized and well
managed, generally would not raise supervisory concerns. It would,
however, significantly reduce the burden upon investors that meet the
requirements for the expanded authority by removing the need for prior
notices to the Board for transactions that really constitute the
movement of funds within the banking group.
Additional Investments
The proposed rule also confirms that strongly-capitalized and well-
managed investors making investments under the expanded general consent
authority may also make additional investments in subsidiaries and
joint ventures under the standards set out in the existing general
consent authority. 12 CFR 211.5(c)(1)(ii-iv). Thus, once the expanded
general consent authority for initial investments has been exhausted in
respect of one organization, additional investments may be made
consistent with the provisions of Sec. 211.5(c)(1).
Eligible Investments
The proposed rule establishes the nature of investments eligible
for the expanded general consent authority, as well as the types of
activities that may be conducted by the organization in which the
investment is to be made. Subject to certain exceptions, the rule would
permit investments in any activities either permissible for
subsidiaries under Regulation K or permissible for national banks to
engage in directly. Ineligible investments are limited to an investor's
initial entry into a foreign country, the establishment or acquisition
of an initial subsidiary bank in a foreign country, investments in
general partnerships or unlimited liability companies, and an
acquisition of shares or assets of a corporation that is not an
affiliate of the investor. Retention of specific approval authority
over establishment of new foreign bank offices and outward expansion of
banking institutions is consistent with the minimum standards for
consolidated supervision of the Basle Committee on Banking Supervision.
Exclusion of the acquisitions is intended to limit the expanded
authority to investments in de novo subsidiaries (including subsequent
investments in such subsidiaries) by excluding the acquisition of going
concerns (unless already held by an affiliate). The risks associated
with such acquisitions are considered to be greater than the amount of
capital invested (extending also, for example, to the value of the
company's assets).
The Board seeks comment on the exclusion of these investments from
the expanded general consent authority. In particular, the Board seeks
comment on whether additional investments in companies acquired as
going concerns also should be eligible for the expanded authority.
Post-Investment Notice Requirement
The proposed rule would require an investor making use of the
expanded authority to provide the Board with a post-investment notice
within 10 days of making the investment. The notice would require
provision of certain minimal information for purposes of supervising
the banking organizations making use of the expanded authority,
including a description of the investment, the terms and sources of
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funding, the entities involved, and, where the investment is to redress
a loss, a description of the reasons for the loss and the steps taken
to address the problem. The Board solicits comment regarding this
requirement generally, the information to be submitted in any such
notice, and ways in which such a post-investment notice may be
coordinated with existing reporting requirements.
Simultaneous Review
The proposal would amend the Board's current procedures for
processing prior notices and applications under Subpart A of Regulation
K. Specifically, under Sec. 211.5(c)(2), the Board has 45 days to
object to any investment that is the subject of a prior notice and the
45-day period commences on the day that the prior notice is accepted by
the relevant Reserve Bank. The proposed rule would amend the regulation
to provide that the 45-day period starts on the date of the Reserve
Bank's receipt of the prior notice. This change is expected to
accelerate the processing of such notices, reduce the number of
information requests that applicants must answer, and more generally
reduce the regulatory burden associated with sequential review. Under
the proposed rule, however, the Board would continue to have the
ability to modify or suspend the general consent and prior notice
procedures. The Board also proposes to extend this treatment to the
processing of applications under Regulation K.
Request for Comment
The Board requests comments on all aspects of the rule discussed
above. In addition, comments are requested regarding other ways in
which the provisions of Subpart A of Regulation K might be streamlined
or rendered less burdensome, either in terms of U.S. banking
organizations that meet strongly-capitalized and well-managed
standards, or more generally.
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 and Regulatory Burden
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) also requires
that the federal banking agencies must consider the administrative
burdens and benefits of any new regulation that imposes additional
requirements on insured depository institutions. The Board does not
consider that the proposed rule would impose additional requirements on
insured depository institutions, nor would it increase the regulatory
paperwork burden of banking organizations pursuant to the provisions of
the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). To the contrary,
the proposed rule would reduce regulatory burden for U.S. banking
organizations that are strongly capitalized and well managed. The
current annual burden for these application and notification
requirements is estimated to be 440 hours. The proposed amendments
could reduce the burden estimate by as much as half.
Although the proposal would require U.S. banking organizations
making investments pursuant to the expanded 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 for prior approval that would be
required under existing Regulation K procedures before any such
investment could be made.
List of Subjects in 12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, the Board of Governors
proposes to amend 12 CFR Part 211 as set forth below:
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for part 211 is revised to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et
seq., 3901 et seq.
2. Section 211.2 is amended by redesignating paragraphs (u) and (v)
as paragraphs (v) through (w), respectively, and by adding new
paragraphs (u) and (x) to read as follows:
Sec. 211.2 Definitions.
* * * * *
(u) Strongly capitalized means:
(1) In relation to a parent member bank, that the standards set out
in 12 CFR 208.33(b)(1) are satisfied; and
(2) In relation to an Edge or Agreement corporation or a bank
holding company, that it has a total risk-based capital ratio of 10.0
percent or greater.
* * * * *
(x) Well managed means that the Edge or Agreement corporation, its
parent member bank, if any, and the bank holding company have each
received a composite rating of at least 1 or 2, with no component below
3, at its most recent examination or review.
3. Section 211.5 is amended by:
a. Redesignating paragraphs (c) (2) and (3) as paragraphs (c) (3)
and (4) respectively;
b. By adding a new paragraph (c)(2); and
c. In newly designated paragraph(c)(3), by removing the word
``accepted'' in the third sentence and adding in its place the word
``received''.
The addition reads as follows:
Sec. 211.5 Investments and activities abroad.
* * * * *
(c) * * *
* * * * *
(2)(i) Additional general consent for de novo investments.
Notwithstanding the amount limitations of paragraph (c)(1) of this
section, but subject to the other limitations of this section, the
Board grants additional general consent authority for investments in an
organization by an investor that is strongly capitalized and well
managed if:
(A) The activities of the organization are limited to activities in
which a national bank may engage directly or in which a subsidiary may
engage under Sec. 211.5(d);
(B) In the case of an investor that is an Edge corporation that is
not engaged in banking or agreement corporation, the total amount
invested in such organization (in one transaction or a series of
transactions) does not exceed the lesser of the investor's 20 percent
of the Tier 1 capital or 2 percent of the Tier 1 capital of the parent
member bank;
(C) In the case of a bank holding company or member bank investor,
the total amount invested in such organization (in one transaction or a
series of transactions) directly or indirectly does not exceed 2
percent of the investor's Tier 1 capital;
(D) All investments made by an Edge corporation not engaged in
banking or
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an agreement corporation during the previous 12-month period under
paragraph (c)(1) and (c)(2) of this section, when aggregated with the
proposed investment, would not exceed the lesser of 50 percent of the
total capital of the Edge or agreement corporation, or 5 percent of the
total capital of the parent member bank;
(E) All investments made by a member bank or a bank holding company
during the previous 12-month period under paragraph (c)(1) and (c)(2)
of this section without providing prior notice to or obtaining the
consent of the Board, when aggregated with the proposed investment,
would not exceed 5 percent of its total capital; and
(F) Both before and immediately after the proposed investment the
investor, its parent member bank, if any, and the bank holding company
are strongly capitalized and well managed.
(ii) Determining aggregate investment limits. For purposes of
determining compliance with the aggregate investment limits set out in
paragraph (c)(2)(i) (D) and (E) of this section, 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.
(iii) Additional investments. An investor that makes investments
under paragraph (c)(2)(i) of this section may also make additional
investments in an organization under the standards set forth in
paragraphs (c)(1)(ii), (c)(1)(iii) and (c)(1)(iv) of this section.
(iv) Ineligible investments. The following investments are not
eligible for the general consent under paragraph (c)(2)(i) of this
section:
(A) The initial entry into a foreign country;
(B) The establishment or acquisition of an initial subsidiary bank
in a foreign country;
(C) Investments in general partnerships or unlimited liability
companies; and
(D) An acquisition of shares or assets of an organization that is
not an affiliate of the investor.
(v) Post-investment notice. Within 10 business days of making the
investment, the investor shall provide the Board with a notice setting
out all material information relating to the investment, including:
(A) A description of the investment and the activities to be
conducted;
(B) The identity of all entities involved in the investment,
including any downstream investment, and, if the investment is in a
joint venture, the respective responsibilities of the parties to the
joint venture;
(C) A description of the terms and sources of funds for the
transaction and projections for the organization in which the
investment is made for the first year following the investment; and
(D) In the case of additional investments, an explanation of the
reasons for the investment and, 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.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, September 20, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-23670 Filed 9-22-95; 8:45 a.m.]
BILLING CODE 6210-01-P
