BOARD OF GOVERNORS 

Of THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D. C. 2055 I 

ADDRESS OFFICIAL CORRESPONDENCE 

TO THE BOARD 

November 26, 2008 

Arthur S. Long, Esq. 

Davis Polk & Wardwell 

450 Lexington Avenue 

New York, NY 10017 

Dear Mr. Long: 

This is in response to your letter dated November 7, 2008, and the 

application under section 3 of the Bank Holding Company Act ("BHC Act") by 

UK Financial Investments Limited ("UKFI"), a company organized under the laws 

of the United Kingdom, for approval to acquire an indirect controlling interest in 

the U.S. bank subsidiaries of The Royal Bank of Scotland Group pic ("RBSG"), 

Edinburgh, Scotland. UKFI is wholly owned by the U.K. government and was 

formed to manage the government's shareholdings in U.K. banking organizations 

that subscribe to the government's recapitalization fund.1 [Footnote 1. UKFI 

will manage the U.K. government's investments in RBSG, Lloyds TSB 

Group pic, Northern Rock pic, and Bradford & Bingley pic. End footnote.] 

Her Majesty's Treasury 

("HMT") will be underwriting a placing and open offer by RBSG and might as a 

result acquire a significant shareholding in RBSG. Because existing RBSG 

shareholders may acquire ordinary shares in this offering, HMT could acquire as 

little as 10 percent or as much as 58.1 percent of the ordinary shares of RBSG. 

UKFI will manage the shares of RBSG held by HMT and will, therefore, have 

control over the U.K. government's shares within the meaning of the BHC Act. 

The Board understands the offer of ordinary shares of RBSG is anticipated to 

close on December 1, 2008. 

RBSG operates in the United States through direct offices of two 

subsidiary foreign banks, The Royal Bank of Scotland pic ("RBS"), Edinburgh, 

and ABN AMRO Bank N.V. ("ABN AMRO"), Amsterdam, Netherlands. RBS 
maintains branches in New York, New York, and Greenwich, Connecticut, and 

representative offices in Houston, Texas, and Los Angeles, California. ABN 

AMRO operates branches in New York, New York, and Chicago, Illinois. 

RBSG also controls Citizens Financial Group, Inc., Providence, Rhode Island, 

and its subsidiary banks, RBS Citizens, National Association ("RBS Citizens"), 

Providence, Rhode Island, and Citizens Bank of Pennsylvania, Philadelphia, 

Pennsylvania. In addition, RBSG operates nonbanking companies in the United 

States. RBSG is a financial holding company for purposes of the BHC Act and is a 

qualifying foreign banking organization under Regulation K.2 [Footnote 2. 12 

CFR 211.23(a). End footnote.] 

Approval under Section 3 

UKFI has requested the Board's approval under section 3 of the 

BHC Act to become a bank holding company in connection with its acquisition 

of control of up to 58.1 percent of the shares of RBSG.3 [Footnote 3. 12 U.S.C. § 

1842. End footnote.] Section 3 of the BHC Act 

requires the Board to consider the competitive effects of the proposal in the 

relevant banking markets, the financial and managerial resources and future 

prospects of the companies and depository institutions involved in the proposal, 

and certain other supervisory factors. In addition, the Board must consider the 

convenience and needs of the community to be served by the transaction and the 

records of performance under the Community Reinvestment Act ("CRA") of the 

relevant insured depository institutions. Section 3 of the BHC Act also provides 

that the Board may not approve an application involving a foreign bank unless the 

bank is subject to comprehensive supervision or regulation on a consolidated basis 

by the appropriate authorities in the bank's home country. 

The Board has carefully considered these factors in light of all the 

facts of record, including confidential supervisory and examination information 

regarding RBSG, publicly reported and other financial information, and 

information provided by RBSG. The competitive effects of the proposal are 

consistent with approval. With respect to the financial and managerial resources 

and future prospects of the companies and depository institutions involved in the 

proposal, RBSG's subsidiary U.S. banks currently are well capitalized and would 

remain so on consummation of this proposal. In addition, the Board has 

determined that considerations relating to the convenience and needs factor and 

the CRA performance records of RBSG's subsidiary U.S. banks are consistent 

with approval. With respect to the supervision of RBS, the Board previously has 
determined that RBS is subject to comprehensive supervision on a consolidated 

basis by its home country supervisor, the Financial Services Authority ("FSA").4 

[Footnote 4. The Royal Bank of Scotland pic, 93 Federal Reserve Bulletin CI04 

(2007); The Royal Bank of Scotland Group pic, 89 Federal Reserve Bulletin 386 

(2003). End footnote] There has been no material change in the manner in which 

RBS is supervised by 

the FSA. Based on all the facts of record, the Board has concluded that RBS 

continues to be subject to comprehensive supervision on a consolidated basis by 

its home country supervisors.5 [Footnote 5. The Board has received adequate 

assurances of access to information from 

RBSG and RBS in connection with prior applications. The Royal Bank of 

Scotland pic, 93 Federal Reserve Bulletin CI04 (2007); The Royal Bank of 

Scotland Group pic, 89 Federal Reserve Bulletin 386 (2003). In the Board's 

view, such assurances are sufficient for purposes of this approval. End footnote.] 

In light of the unusual and exigent circumstances affecting the 

financial markets in the United Kingdom, and all other facts and circumstances, 

the Board has determined that emergency conditions exist that justify expeditious 

action on this proposal in accordance with the provisions of the BHC Act and the 

Board's regulations.6 [Footnote 6. 12 CFR 225.16(g)(2). End footnote.] The 

Board has provided notice to the primary federal and 

state supervisors of RBSG's U.S. bank subsidiaries and to the Department of 

Justice. Those agencies have indicated that they have no objection to the Board's 

approval of the proposal. Because this transaction represents the recapitalization 

of a foreign bank holding company by a foreign government, the Board has waived 

public notice of the proposal.7 [Footnote 7. 12 CFR 225.16(b)(3), 225.16(g)(2), 

and 262.3(/). End footnote.] 

The Board, having considered the relevant statutory factors, has 

approved UKFI's acquisition of a controlling interest of up to 58.1 percent of 

the voting shares of RBSG pursuant to section 3(a)(1) of the BHC Act. The 

acquisition may not be consummated before the fifth calendar day, or later 

than three months, after the date of this letter, unless such period is extended 

for good cause by the Board or by the appropriate Federal Reserve Bank, acting 

pursuant to delegated authority.8 [Footnote 8. 12 U.S.C. § 1849. End footnote.] 
Financial Holding Company Election 

UKFI also has filed an election to become a financial holding 

company pursuant to sections 4(k) and (/) of the BHC Act and sections 225.82 

and 225.91 of the Board's Regulation Y9 [Footnote 9. 12 U.S.C. §§ 1843(k) 

and(/); 12 CFR 225.82 and 225.91. End footnote.] on UKFI's acquisition of 

RBSG. 

In reliance on RBSG's status as a financial holding company, UKFI has 

certified that RBS and ABN AMRO are well capitalized as defined in 

section 225.90(b)(l)(i) and (ii) and well managed as defined in section 225.90(c).10 

[Footnote 10. 12 CFR 225.90(b)(l)(i)-(ii) and 225.90(c). End footnote.] 

UKFI has also certified that the U.S. depository institution subsidiaries of RBSG, 

RBS Citizens and Citizens Bank of Pennsylvania, meet the well-capitalized 

standard of section 225.2(r)(2) and the well-managed standard of section 225.2(s) 

of Regulation Y.11 [Footnote 11. 12 CFR225.2(r)(2) and(s). End footnote.] 

The Board has previously found both RBS and ABN AMRO to 

12 [Footnote 12. With respect to supervision of RBS, see note 6. With respect 

to supervision of ABN AMRO, see MeesPierson N.V., 80 Federal Reserve 

Bulletin 662 (1994). End footnote.] be subject to comprehensive consolidated 

supervision. Based on all the facts of record, the Board has determined that the 

election by UKFI to become a financial 

holding company will become effective on consummation of the proposal if, on 

that date, RBSG continues to meet the requirements for financial holding company 

status. 

Exemptions under Section 4(c)(9) 

The Board previously has considered the issues that arise when 

a foreign government-owned company seeks to conduct banking operations 

indirectly in the United States through foreign bank subsidiaries or by acquiring 

U.S. banks."13 [Footnote 13. See 68 Federal Reserve Bulletin 423, 425 (1982). 

End footnote.] In a 1988 case involving a corporation wholly owned by the Italian 

government, the Board determined that, as a legal matter, foreign governments 

were not themselves "companies" for purposes of the BHC Act, and so not covered 

by the act. However, the Board found that the government-owned corporation 

used by the Italian government to hold its interest in an Italian bank was structured 
as a corporate vehicle and was, therefore, a company under the BHC Act.14 

[Footnote 14. See Board letter to Patricia Skigen, Esq., dated August 19, 1988. 

The Board 

confirmed this approach in a recent case. See Board letter to H. Rodgin Cohen, 

Esq., dated August 5, 2008. End footnote.] In 

considering the status of foreign government-owned companies under the 

BHC Act, the Board has stated that broad public policy issues are raised by 

applying the restrictions of the BHC Act to such companies. In the 1988 Board 

letter discussed above, the Board noted that the Congress had been mindful of 

those concerns and had provided the Board with broad authority to exempt foreign 

companies from the nonbanking restrictions of the BHC Act where the act has 

the effect of extending the impact of the U.S. regulatory framework to economic 

transactions and relationships that take place entirely outside the United States. 

The Board stated it was particularly appropriate to exercise the express authority 

of section 4(c)(9) of the BHC Act in the case of foreign government-owned 

companies to ameliorate restrictions of the act in the public interest. 

Section 4(c)(9) of the BHC Act provides that the Board may exempt 

from the restrictions of the act: 

shares held or activities conducted by any company organized under 

the laws of a foreign country the greater part of whose business is 

conducted outside the United States, if the Board by regulation or 

order determines that, under the circumstances and subject to the 

conditions set forth in the regulation or order, the exemption would 

not be substantially at variance with the purposes of [the act] and 

would be in the public interest.15 [Footnote 15. 12 U.S.C. § 

1843(c)(9). End footnote.] 

The Board has considered the situation of UKFI and its proposed 

acquisition of control of RBSG in the context of this background and has 

determined that it would be in the public interest and not substantially at variance 

with the purposes of the act to grant to UKFI exemptions from the nonbanking 

restrictions of the BHC Act under the authority of section 4(c)(9). 

Under the exemptions, and subject to the conditions described 

below, the BHC Act would not apply to investments made by UKFI or any 

company (including a foreign bank) controlled by UKFI in any company, 

including a U.S. company or a foreign company with U.S. operations, other than a U.S. depository institution. However, any foreign bank subsidiary of 
UKFI that now or in the future operates a branch, agency, commercial lending 

company, or bank subsidiary in the United States would remain fully subject to 

the Board's Regulations K and Y with respect to its activities and investments 

and would be treated the same as any other foreign banking organization. 

These exemptions are conditioned on compliance with limitations 

designed to minimize the potential for conflicts of interest, concentration of 

resources, and unsound banking practices, as well as to mitigate any potential 

competitive advantage that may accrue to UKFI and its subsidiaries from the 

exemptions. 

First, all transactions by a U.S. branch or agency of any foreign 

bank subsidiary of UKFI with a company in which UKFI has made a controlling 

investment (a "controlled company") would be limited. Transactions by the 

U.S. branch or agency with a single controlled company are limited to 10 percent 

of the branch's or agency's lending base, as described below, and transactions with 

all controlled companies in the aggregate are limited to 20 percent of the branch's 

or agency's lending base,16 [Footnote 16. For purposes of this condition, the 

"lending base" of a U.S. branch or agency 

shall be equal to 5 percent of the branch's or agency's third-party assets. 

"Third-party assets" means the amount of total claims on nonrelated entities as 

reported on the report of condition filed by the branch or agency (FFIEC 002). 

End footnote.] and all such transactions must be fully collateralized. 

Any transaction between the U.S. branch or agency and a controlled company must 

be on market terms. The U.S. branches and agencies of foreign bank subsidiaries 

of UKFI may not cross-market goods and services in the United States with such 

controlled companies. 

Second, UKFI must continue to conduct a majority of its business 

outside the United States, consistent with the requirement of section 4(c)(9). 

Third, consistent with the requirements of the BHC Act and the 

Federal Reserve Act, UKFI and any company, including any foreign bank, that is 

controlled by UKFI are required to obtain prior Board approval to make a direct 

or indirect investment in 5 percent or more of the voting shares of a bank holding 

company or U.S. bank,17 [Footnote 17. 12 U.S.C. § 1842(a). End footnote.] or 

to make a controlling investment in a corporation 

organized under section 25A of the Federal Reserve Act (an Edge corporation).18 

[Footnote 18. 12 U.S.C. §611,619. End footnote.] 
In addition, prior Board approval is required for the acquisition of a controlling 

interest in a U.S. insured depository institution. 

The Board also has determined to exempt UKFI from the regular 

reporting, filing, and capital requirements of the BHC Act and the Board's 

regulations. With respect to reporting, UKFI, or RBSG acting on behalf of UKFI, 

must inform the Board of any acquisition of more than 25 percent of the shares of 

any company that engages in activities in the United States. UKFI is not required 

to report separately an investment that is made by a subsidiary foreign bank that 

is subject to the BHC Act when such investment is reported by that bank to the 

Board as part of the bank's regular reporting requirements. In addition, UKFI 

should monitor investments made by its controlled companies, including in this 

case, its foreign bank subsidiaries, in order to determine whether, in the aggregate, 

such investments might trigger an application threshold with respect to a U.S. 

depository institution or cause UKFI to be considered to control a company that 

owns a U.S. depository institution. 

Based on all the facts of record, the Board has determined that the 

exemptions granted to UKFI would be in the public interest and not substantially 

at variance with the purposes of the BHC Act. Should there be a material change 

in the facts, the Board may review its determination. 

The Board's decisions under sections 3 and 4(c)(9) of the BHC Act are 

specifically conditioned on compliance with the conditions imposed in this letter. 

For purposes of these actions, the conditions contained herein are deemed to be 

imposed by the Board in connection with its findings and decisions and, as such, 

may be enforced in proceedings under applicable law. 

Very truly yours, 

Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Federal Reserve Bank of Boston