BOARO OF GOVERNORS 


OF'THE 


FEDERAL RESERVE SYSTEM 

WASHINGTON, D. C. 20551 

ADDRESS OFFICIAL CORRESPONDENCE 


TO THE BOARD 


January 14,2009 

John G. Holinka, Esq. 

Associate General Counsel 

HSBC Bank USA, National Association 

One HSBC Center 

Buffalo, New York 14203 

Dear Mr. Holinka: 

This is in response to the request by HSBC Bank USA, National 

Association ("Bank"), McLean, Virginia, for exemptions from section 23A ofthe 

Federal Reserve Act and the Board's Regulation WI to permit Bank to acquire 

(l) automobile loans and retail installment contracts and (2) certain credit card 

receivables and related securitization interests from several subsidiaries ofBank's 

affiliate, HSBC Finance Corporation ("HSBC Finance"), Mettawa, Illinois. 

HSBC North America Holdings, Inc. ("Holdings"), the top tier U.S. 

bank holding company, intends for the HSBC organization in the United States to 

cease making automobile loans, and HSBC Finance will discontinue its new 

automobile loan originations. 2 As part ofthis business plan, Bank proposes to 

purchase certain automobile loans (the "Auto Portfolio") from HSBC Finance's 

portfolio of subprime and near-prime automobile loans. As of Julv 31, 2008, 

HSBC Finance's automobile loans totaled approximately [ JThe Auto 

Portfolio that Bank proposes to purchase would total approxlmately[ lbillion in 

loans.3 The Auto Portfolio would continue to be serviced by HSBC Auto Finance 

Inc., a subsidiary ofHSBC Finance. Bank does not propose to purchase any 

I 12 U.S.C. §371c; 12 CFR part 223. 

2 Bank, Holdings, and HSBC Finance are all subsidiaries of HSBC Holdings, pIc, 

London, England ("HSBC"). 

3 The remaining L J in automobile loans will be retained by HSBC Finance 

until maturity. 
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automobile loans from its affiliates that would constitute "low-quality assets," as 

defined by section 23A ofthe Federal Reserve Act.4 

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Bank proposes to purchase automobile loans, credit card loans, and 

related securitization interests from HSBC Finance to provide liquidity to HSBC 

Finance. Bank indicates that its purchase of the portfolios will provide a 

lower-cost option for the overall HSBC organization. HSBC Bank has retained 

( ] to determine the fair market value of each portfolio. 

Section 23A and Regulation W limit the amount of "covered 

transactions" between a bank and any single affiliate to 10 percent of the bank's 

capital stock and surplus and limit the amount of covered transactions between a 

bank and all its affiliates to 20 percent of the bank's capital stock and surpl\ls. 

"Covered transactions" include a bank's purchase of assets from an affiliate and a 

bank's extension of credit to an affiliate. The statute and regulation also require a 

bank to secure its extensions of credit to, and certain other covered transactions 

with, affiliates with prescribed amounts of collateral. In addition, section 23A and 

Regulation W prohibit a bank from purchasing low-quality assets from an affiliate. 

Section 23A and Regulation W specifically authorize the Board to 

exempt, in its discretion, transactions or relationships from the requirements of the 

statute and rule ifthe Board finds such exemptions to be in the public interest and 

4 12 CFR 223.3(v). 

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consistent with the purposes of section 23A. 8 The Board has approved exemptions 

under section 23A for one-time asset transfers that are part of a corporate 

reorganization and that are structured to ensure the quality of the transferred assets. 

As in previous cases reviewed by the Board, the proposed transactions in this case 

are a byproduct of a one-time corporate reorganization. The sale ofthe assets to 

Bank is part of a restructuring HSBC's operations for automobile lending and 

credit cards. According to Bank, this exemption is in the public interest because 

the reorganization will provide liquidity to HSBC Finance and enhance its ability 

to offer credit to the public. 

HSBC, Bank, and its mid-tier U.S. bank holding company parent, 

HSBC USA, Inc., New York, New York ("HSBC USA"), have made the 

commitments listed in Appendix A (auto loans) and Appendix B (credit cards) to 

ensure Bank is made whole if the quality of the assets that Bank proposes to 

purchase deteriorates.9 HSBC, HSBC USA, and Bank have committed to comply 

with these commitments for the life of the automobile loans and for five years for 

the Card Portfolios. These commitments are similar to commitments relied on by 

the Board in previous internal corporate reorganizations. These commitments 

require that the funds transferred by HSBC or HSBC USA to Bank to support any 

ofthe low-quality assets will remain in the bank to provide a cushion of additional 

capital in excess of Bank's required regulatory capital. The commitments ensure 

that these funds will remain available to Bank and will not be returned to HSBC or 

HSBC USA through a dividend or a return of capital. 10 In addition, a majority of 

Bank's board of directors has reviewed and approved the transaction. The Office 

of the Comptroller ofthe Currency and the Federal Deposit Insurance Corporation 

have reviewed the transaction and infonned the Board that they have no objection 

to the proposal. 

In light ofthese considerations and all the facts presented, the 

reorganization transaction appears to be consistent with safe and sound banking 

practices and on tenns that would ensure the quality of the assets transferred. 

Accordingly, the transaction appears to be consistent with the purposes of 

section 23A, and the Director ofthe Division of Banking Supervision and 

8 12 U.S.C. § 371c(f)(2); 12 CFR 223.43(a). 


9 See 12 CFR 223.41(d). 


10 See Board letter dated December 21,2007, to Andres Navarette, Esq. 


(Capital One Financial Corporation). 
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Regulation, pursuant to authority delegated by the Board, and with the concurrence 

of the General Counsel, hereby grants the requested exemptions. 

This determination is specifically conditioned on compliance by 

HSBC, HSBC USA, and Bank with all the commitments and representations made 

to the Board in connection with the exemption request. These commitments and 

representations are deemed to be conditions imposed in writing in connection with 

granting the exemptions and, as such, may be enforced in proceedings under 

applicable law. This determination also is based on the specific facts and 

circumstances of the proposed transaction and may be revoked if a material change 

in those facts or circumstances occurs or ifHSBC, HSBC USA, or Bank fails to 

observe any of their commitments or representations. Granting this exemption 

request does not represent a determination concerning the permissibility of any 

other transactions engaged in by HSBC, HSBC USA, or Bank that are subject to 

section 23A or Regulation W. 

Sincerely yours, 

(~) 

Robert deY. Frierson 


Deputy Secretary of the Board 


cc: 	 Federal Reserve Bank of Chicago 

Federal Deposit Insurance Corporation 

Office ofthe Comptroller of the Currency 

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APPENDIXB 


HSBC Credit Card Loans ("Card Loans") 


1. 	 HSBC Holdings pIc ("HSBC") and HSBC USA Inc. ("HSBC USA") 

commit to ensure that funds are contributed to Bankl in the amount of the 

book value of any low-quality assets2 that are transferred to Bank at the time 

that the Card Loans are transferred to Bank. HSBC Holdings and HSBC 

USA will ensure that Bank holds an amount of risk-based capital equal to 

the book value of any low-quality assets that are transferred to Bank as long 

as Bank retains ownership or control of the transferred assets.3 HSBC and 

HSBC USA commit that for a five year period following the purchase of the 

residual or retained interests in the trusts that hold securitized assets, cash 

contributions will be made as necessary to Bank to ensure that Bank holds 

additional capital (1) in the amount of any write down during that quarter on 

any such transferred residual or retained interest and (2) in any amount that 

Bank is required to contribute to any such securitization trust to support the 

performance ofthat trust (together, "securitized contributions,,).4 

2. 	 At the beginning of each year, HSBC USA and Bank will estimate the dollar 

value of (1) all the transferred Card Loans that they believe will become 

low-quality assets and (2) the amount of securitized contributions for that 

calendar year. HSBC and HSBC USA commit to ensure that Bank receives 

sufficient capital to equal a dollar-for-dollar capital contribution ("capital 

pool") for the full book value of these assets. For any asset that becomes a 

low-quality asset during the year, the capital pool will be allocated against 

1 In this context, Bank includes HSBC Bank USA, National Association as well as 

any HSBC-affiliated bank organized in the United States that may purchase or 

otherwise acquire Card Loans. 

2 For the purposes of the "low-quality asset" definition, open-end credit such as 

credit cards are considered past due when the customer has not made the minimum 

payment for two or more billing cycles. 

3 For example, under this dollar-for-dollar capital requirement, the risk-based 

capital charge for each transferred low-quality loan asset would be 100 percent 

(equivalent to a 1250 percent risk weight) rather than the 8 percent requirement 

(equivalent to 100 percent risk weight) that would apply to a similar defaulted loan 

asset that is not a part of the transferred asset pool. 

4 See footnote 3. 
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the specific asset, including any charge-offs taken since quarter end. At the 

end of each quarter, HSBC USA and Bank will update the estimate of 

potential low-quality assets and securitized contributions in relation to the 

remaining unallocated capital pool. If at the time ofthe review, the forecast 

for the volume of low-quality assets and securitized contributions exceeds 

the unallocated capital pool, HSBC and HSBC USA commit to ensure that 

additional capital is contributed to Bank in an amount adequate to provide 

coverage. Any additional required capital contributions should be made 

within 30 days after the end of each calendar quarter. This commitment will 

remain in effect for five years after the transfer. 

3. 	 HSBC and HSBC USA commit that Bank will hold an amount of risk-based 

capital equal to the book value of any low-quality assets so long as Bank 

retains ownership or control of the assets.5 

4. 	 Once the capital pool has been allocated to specific assets as described 

above, the capital cannot be applied to other low-quality assets ifthe initial 

low-quality asset returns to performing status. Bank can only apply the 

allocated capital pool to new assets if the initial assets are ful1y paid off or 

sold. 

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6. 	 Before the purchase of assets is consummated, a majority of Bank's 

directors will review and approve the transaction. 

5 See footnote 3.