[Federal Register Volume 62, Number 175 (Wednesday, September 10, 1997)]
[Rules and Regulations]
[Pages 47728-47738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23950]



[[Page 47727]]

_______________________________________________________________________

Part III

Department of the Treasury
Office of the Comptroller of the Currency



12 CFR Part 25

Federal Reserve System



12 CFR Parts 208 and 211

Federal Deposit Insurance Corporation



12 CFR Part 369



_______________________________________________________________________



Prohibition Against Use of Interstate Branches Primarily for Deposit 
Production; Joint Final Rule

Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / 
Rules and Regulations

[[Page 47728]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 25

[Docket No. 97-16]
RIN 1557-AB50

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 211

[Regulations H and K; Docket No. R-0962]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 369

RIN 3064-AB97


Prohibition Against use of Interstate Branches Primarily for 
Deposit Production

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); and Federal 
Deposit Insurance Corporation (FDIC).

ACTION: Joint final rule.

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SUMMARY: The OCC, Board, and FDIC (collectively, agencies) are adopting 
uniform regulations to implement section 109 (section 109) of the 
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 
(Interstate Act). The final rule reflects comments received on the 
proposal and further internal consideration by the agencies.
    As required by section 109, the final rule prohibits any bank from 
establishing or acquiring a branch or branches outside of its home 
state under the Interstate Act primarily for the purpose of deposit 
production, and provides guidelines for determining whether such bank 
is reasonably helping to meet the credit needs of the communities 
served by these branches.

EFFECTIVE DATE: October 10, 1997.

FOR FURTHER INFORMATION CONTACT:

    OCC: Neil M. Robinson, Senior Attorney, Community & Consumer Law 
Division (202) 874-5750; Kevin L. Lee, Senior Attorney, Enforcement and 
Compliance Division (202) 874-4800; Andrew T. Gutierrez, Attorney, 
Legislative and Regulatory Activities Division (202) 874-5090; or with 
respect to Federal branches of foreign banks, Maureen Cooney, Senior 
Attorney, International Activities Division (202) 874-0680.
    Board: Lawranne Stewart, Senior Attorney, Legal Division (202) 452-
3513; Robert L. McKague, Attorney, Legal Division (202) 452-2810; Shawn 
McNulty, Assistant Director, Division of Consumer and Community Affairs 
(202) 452-3946; or with respect to foreign banks, Kathleen M. O'Day, 
Associate General Counsel, Legal Division (202) 452-3786.
    FDIC: Louise Kotoshirodo, Review Examiner, Division of Consumer 
Affairs (202) 942-3599; Doris L. Marsh, Examination Specialist, 
Division of Supervision (202) 898-8905; or Gladys Cruz Gallagher, 
Counsel, Legal Division (202) 898-3833.

SUPPLEMENTARY INFORMATION:

Background

    The Interstate Act <SUP>1</SUP> provides expanded authority for a 
domestic or foreign bank to establish or acquire a branch in a state 
other than the bank's home state (host state). Section 109 requires the 
agencies to prescribe uniform rules that prohibit the use of the 
authority under the Interstate Act to engage in interstate branching 
primarily for the purpose of deposit production.<SUP>2</SUP> The 
agencies must also provide guidelines to ensure that banks that operate 
such branches are reasonably helping to meet the credit needs of the 
communities served by the branches. Congress enacted section 109 to 
ensure that the new interstate branching authority provided by the 
Interstate Act would not result in the taking of deposits from a 
community without banks reasonably helping to meet the credit needs of 
that community. See H.R. Conf. Rep. No. 103-651, at 62 (1994).
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    \1\ Pub. L. No. 103-328, 108 Stat. 2338.
    \2\ 12 U.S.C. 1835a.
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Overview of Proposed Rule and Comments

    The agencies published a joint notice of proposed rulemaking on 
March 17, 1997 (62 FR 12730). The proposed rule applied to any bank 
that established or acquired, directly or indirectly, a branch under 
the authority of the Interstate Act or amendments to any other 
provision of law made by the Interstate Act. These branches were 
referred to as ``covered interstate branches.'' The proposed rule 
provided that, beginning no earlier than one year after a bank 
established or acquired a covered interstate branch, the appropriate 
agency would determine whether the bank satisfied a ``loan-to-deposit 
ratio screen'' based on reasonably available data.
    The loan-to-deposit ratio screen compared the bank's loan-to-
deposit ratio within the state where the bank's covered interstate 
branches were located (the bank's statewide loan-to-deposit ratio) 
<SUP>3</SUP> with the loan-to-deposit ratio of banks whose home state 
was that state (host state loan-to-deposit ratio). If the loan-to-
deposit ratio screen indicated that the bank's statewide loan-to-
deposit ratio was at least 50 percent of the host state loan-to-deposit 
ratio, no further analysis would be required. If, however, the 
appropriate agency determined that the bank's statewide loan-to-deposit 
ratio was less than 50 percent of the host state loan-to-deposit ratio, 
or determined that reasonably available data did not exist that 
permitted the agency to determine the bank's statewide loan-to-deposit 
ratio, the agency would perform a ``credit needs determination.''
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    \3\ The proposed rule designated this ratio as the ``covered 
interstate branch loan-to-deposit ratio.'' The agencies changed the 
term because some commenters mistakenly interpreted the proposed 
rule as requiring each covered interstate branch to be tested under 
section 109's loan-to-deposit ratio screen. Section 109 requires 
consideration of a bank's statewide lending and deposit taking as 
determined by the appropriate agency.
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    Under the credit needs determination, the appropriate agency would 
review the loan portfolio of the bank and determine whether the bank 
was reasonably helping to meet the credit needs of the communities 
served by the bank in the host state. Consistent with section 109, the 
agencies would consider the following in making a credit needs 
determination: (1) Whether the covered interstate branches were 
formerly part of a failed or failing depository institution; (2) 
whether the covered interstate branches were acquired under 
circumstances where there was a low loan-to-deposit ratio because of 
the nature of the acquired institution's business; (3) whether the 
covered interstate branches have a higher concentration of commercial 
or credit card lending, trust services, or other specialized 
activities; (4) the ratings received by the bank under the Community 
Reinvestment Act of 1977 (CRA); <SUP>4</SUP> (5) economic conditions, 
including the level of loan demand, within the communities served by 
the covered interstate branches; and (6) the safe and sound operation 
and condition of the bank.
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    \4\ 12 U.S.C. 2901 et seq.
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    A bank that failed the loan-to-deposit ratio screen and that 
received a determination that it was not reasonably helping to meet the 
credit needs of the communities served by the bank's interstate 
branches could be subject to section 109's sanctions after a hearing 
under section 8(h) of the Federal Deposit Insurance Act.<SUP>5</SUP>
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    \5\ 12 U.S.C. 1818(h).

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[[Page 47729]]

    The proposed rule also recognized that data necessary to perform 
the calculations required by the loan-to-deposit ratio screen may not 
be reasonably available without imposing additional regulatory burdens 
on banks. As discussed in the proposal, data that are currently 
reported have limited use in showing the geographic location of 
depositors and borrowers that is necessary for calculating the host 
state loan-to-deposit ratio. In addition, data storage practices vary 
widely from bank to bank, thereby making it difficult to determine how 
many multistate banks would have reasonably available data relevant to 
calculating the bank's statewide loan-to-deposit ratio in each state in 
which the bank has branches. The agencies requested comment on the data 
availability issues raised by section 109, including possible sources 
of relevant data that would be reasonably available to the agencies and 
appropriate methods of calculating the ratios. The agencies also 
requested comment on the proposed rule's approach of conducting a 
credit needs determination before applying the loan-to-deposit ratio 
screen, if data sufficient to calculate the bank's statewide loan-to-
deposit ratio were not reasonably available.
    Collectively, the agencies received 54 comments on the proposal. 
Comments were received from bank holding companies (11), individual 
banks (17), banking industry representatives (8), state bank 
commissioners and an association of state bank commissioners (7), 
consumer and community representatives (9), a nonbanking company (1), 
and an individual (1). Commenters supporting the proposal noted that 
the agencies were limited by section 109's prohibition against imposing 
new burdens on banks. Commenters opposing the proposal generally 
disagreed with the statutory scheme rather than its proposed 
implementation. Other commenters suggested modifications to the 
proposal. In developing the final rule, the agencies have carefully 
considered all comments in light of the language and legislative intent 
of section 109. For the reasons discussed in detail below, the agencies 
have adopted the rule substantially as proposed.

Analysis of Comments and Final Rule

Interstate Branches Covered

    Several commenters raised a threshold issue based on a statement in 
the proposed rule concerning its coverage. The proposed rule stated 
that domestic banks may have branches located outside a bank's home 
state that are not within the scope of section 109 because they were 
not established or acquired pursuant to authority in the Interstate 
Act.<SUP>6</SUP> Several commenters disputed this statement, especially 
as applied to any bank not grandfathered under the McFadden Act of 
1927.<SUP>7</SUP> These commenters cited, in particular, pending 
litigation challenging the legality of branches established under the 
main office relocation provision in the National Bank Act.<SUP>8</SUP> 
Commenters also stated that ``thousands'' of branches retained in 
transactions involving the relocation of a national bank's main office 
across state lines before June 1, 1997 (retained branches), may be 
among the bank branches deemed to be outside the coverage of section 
109.
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    \6\ As noted in the proposed rule, limited branches (i.e., 
offices that only accept internationally-related deposits 
permissible for an Edge Act corporation to accept) and agencies 
operated by foreign banks outside their home state are not subject 
to section 109.
    \7\ 12 U.S.C. 36.
    \8\ 12 U.S.C. 30.
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    The coverage of the final rule coincides with the coverage of the 
Interstate Act thereby ensuring that the agencies will apply section 
109 consistent with the Interstate Act. Consistent with section 109, 
and as stated in the proposed rule, the final rule applies to any 
branch (1) established or acquired outside a bank's home state pursuant 
to the Interstate Act or any amendment made by the Interstate Act to 
any other provision of law, or (2) that could not have been established 
or acquired outside a bank's home state but for the previous 
establishment or acquisition of a branch established pursuant to the 
Interstate Act.
    The issue of the applicability of section 109 to branches in 
connection with a relocation under the National Bank Act is an issue 
within the jurisdiction of the OCC. The OCC notes that a Federal court 
of appeals recently issued an opinion in one pending case involving 
relocations under the National Bank Act.<SUP>9</SUP> The OCC believes 
that the commenters significantly overestimated the potential number of 
affected branches. The OCC estimates that by mid-1998, as banks 
establish or acquire branches pursuant to the Interstate Act, at most 
only a few hundred retained branches, owned by a small number of 
community or mid-sized banks, would remain and expects that the number 
of these retained branches will continue to decrease as the banks 
engage in transactions pursuant to the Interstate Act.
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    \9\ See Ghiglieri v. Sun World Nat'l Ass'n, Nos. 96-50847 and 
96-50948 (5th Cir. July 22, 1997).
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Data Availability

    Commenters described in detail the shortcomings of reported data 
for calculating the host state loan-to-deposit ratio.<SUP>10</SUP> 
Other commenters described the significant limitations on currently 
available data for providing the geographic location of a depositor or 
borrower that is necessary to calculate the bank's statewide loan-to-
deposit ratio. A number of commenters also noted that sampling loan 
files to calculate this ratio could significantly increase regulatory 
burden by extending the duration of an examination and by requiring a 
bank to devote additional resources to the examination 
process.<SUP>11</SUP> Some commenters recommended, however, that the 
agencies require banks to report publicly additional data on the 
geographic locations of their loans and deposits, and requested that 
the agencies obtain sufficient data to calculate the bank's statewide 
loan-to-deposit ratio in all cases regardless of the regulatory burdens 
imposed.
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    \10\ The agencies have also reviewed a report by the Comptroller 
General of the United States entitled ``Bank Data: Material Loss of 
Oversight Information From Interstate Banking Is Unlikely'' (GAO/
GGD/97049) (March 26, 1997).
    \11\ The commenters also confirmed the agencies' supervisory 
experience that sampling at a particular branch would not always 
produce reliable data because of wide variations in data collection 
practices. For example, a bank may book loans or deposits at 
locations outside the state where the borrowers or depositors are 
located. Many domestic and foreign institutions often consolidate 
commercial loans and deposits at a bank's main office, while 
mortgage lending may be booked at a mortgage lending subsidiary. 
Although the loans may have been made through a bank's covered 
interstate branch, they might not be booked at that branch.
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    The language of section 109 and its legislative history make clear 
that the agencies are to administer section 109 without imposing 
additional regulatory burdens on banks. Section 109 directs the 
agencies to calculate the bank's statewide loan-to-deposit ratio from 
reasonably available information, including an agency's sampling of the 
bank's loan files during an examination, or other available data. The 
agencies also are required to calculate the host state loan-to-deposit 
ratio as determinable from relevant sources. The House Conference 
Report states that ``[t]he Conferees do not intend that section 109 
create any additional regulatory or paperwork burdens for any 
institution.'' H.R. Conf. Rep. No. 103-651, at 62 (1994). Therefore, 
consistent with the language and intent of section 109, the final rule 
does not impose additional data reporting requirements

[[Page 47730]]

nor does it generally require a bank to produce, or assist in 
producing, relevant data.
    When data sufficient to calculate a bank's statewide loan-to-
deposit ratio are not reasonably available, the agencies will conduct a 
credit needs determination as discussed below. The agencies believe 
that this approach accomplishes the purpose of section 109 without 
imposing additional burdens on the bank.

Two-Step Analysis

    Commenters generally supported the approach of the appropriate 
agency conducting a credit needs determination if reasonably available 
data are insufficient to calculate the bank's statewide loan-to-deposit 
ratio. Some commenters, however, suggested that a bank should be 
allowed to request a credit needs determination before the application 
of the loan-to-deposit ratio screen in a section 109 review. Other 
commenters stated that the credit needs determination should be 
abandoned in favor of testing only with the loan-to-deposit ratio 
screen.
    After carefully considering the comments received on this point, 
the agencies have concluded that the Interstate Act requires the 
agencies to conduct a loan-to-deposit ratio screen--or to determine 
that sufficient data are not reasonably available--before making a 
credit needs determination.
    Section 109 provides a two-step analysis to confirm a bank's 
compliance with its prohibition against deposit production offices. The 
first step attempts to measure compliance with the prescribed loan-to-
deposit ratio screen, and the agencies will take into account all 
reasonably available data relevant to calculating the bank's statewide 
loan-to-deposit ratio on a case-by-case basis in order to determine 
whether that ratio can be calculated from such data.
    Relevant data are data that, for example, geocode loans or that can 
be used to sort borrowers by zip codes. The agencies also will consider 
data that are reasonably determinable from available information, which 
would include the agency's sampling of the bank's loan files during an 
examination, or data that would be otherwise available from the bank, 
such as data currently required to be reported by the bank. In 
determining whether to sample a bank's loan files for the purposes of 
section 109 during an examination, the agencies will consider the 
regulatory burden imposed within the context of the examination. For 
example, an undue regulatory burden could result if a bank were 
required to expend resources that materially exceeded the resources 
required to produce data for sampling for other examination purposes. 
Similarly, sampling for the purpose of section 109 that would require a 
substantial extension of the scope or duration of the examination could 
also produce an undue regulatory burden on the bank. In such cases, the 
language and legislative intent of section 109 support proceeding to 
the second step in the two-step analysis.
    If the appropriate agency determines that data relevant to 
calculating the bank's statewide loan-to-deposit ratio are not 
reasonably available without imposing an undue regulatory burden, or if 
the bank fails the loan-to-deposit ratio screen based on reasonably 
available data, in the second step the appropriate agency will look at 
the bank's activities through a credit needs determination. A credit 
needs determination therefore will be made in all cases in which the 
appropriate agency is unable to readily verify compliance with the 
section 109 loan-to-deposit ratio screen. Banks may provide the 
agencies with any relevant information, including loan data, if a 
credit needs determination is required.
    If the appropriate agency has not determined the bank's statewide 
loan-to-deposit ratio and the bank subsequently receives an adverse 
credit needs determination, the agency will then apply the loan-to-
deposit ratio screen. Applying the loan-to-deposit screen at this stage 
in the process is consistent with the agencies' statutory duty to 
determine a bank's compliance with section 109 and to seek sanctions 
against a bank that fails to comply, as appropriate. Since a bank must 
fail both the loan-to-deposit screen and the credit needs determination 
in order to be out of compliance with section 109, the agencies have an 
obligation to apply the loan-to-deposit screen before seeking 
sanctions. Obtaining sufficient data to calculate the bank's statewide 
loan-to-deposit ratio may require the appropriate agency to expand the 
scope and duration of its examination and may require the bank to 
assist the appropriate agency in producing data that may not be 
reasonably available. The agencies conclude that their statutory 
responsibility to ensure compliance with the statute after an adverse 
credit needs determination must outweigh consideration of regulatory 
burden that may be imposed on a bank in order to carry out the 
legislative purpose of section 109.

Section 109 Loan-to-Deposit Ratios

A. Host State Loan-to-Deposit Ratio

Relevant Data
    The agencies will use the annual Summary of Deposits (prepared as 
of June 30) as the most reasonably available source of reported data on 
deposits. The agencies also will use quarterly Consolidated Reports of 
Condition and Income (Call Reports), which provide loan data for banks, 
as the most readily available source of reported data on loans.
    The agencies recognize that Summary of Deposits and Call Report 
data do not provide precise information on the geographic location of 
depositors and borrowers for all the reasons detailed in the proposed 
rule and the comments. However, these data are the most useful data 
that are reasonably available at this time.
Method of Calculating
    Some commenters suggested alternative ways of calculating the host 
state loan-to-deposit ratio. One commenter suggested using the 
unweighted average loan-to-deposit ratio <SUP>12</SUP> for all of the 
home state banks in the host state. Another commenter recommended using 
the average daily balance for loans instead of the actual amount of 
loans held at the end of the reporting period. One commenter suggested 
using third-quarter data for states with large rural and agricultural 
areas to capture the highest loan-to-deposit ratio. The agencies have 
also considered using peer group ratios based on the Uniform Bank 
Performance Reports, and separating the peer groups into quintiles so 
that the banks in the quintiles with unusually high or low loan-to-
deposit ratios could be eliminated.
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    \12\ The unweighted average loan-to-deposit ratio is calculated 
by adding the individual banks' loan-to-deposit ratios and dividing 
the result by the number of banks. A weighted average loan-to-
deposit ratio is calculated by separately summing loans and deposits 
for all of the banks and then dividing the sum of loans by the sum 
of deposits.
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    The agencies have determined to adopt the methodology discussed 
below which uses a weighted average loan-to-deposit ratio and second-
quarter loan data generally. An unweighted average loan-to-deposit 
ratio for home state banks in the host state would fail to account for 
the greater lending and deposit-taking activities of the larger banks. 
In addition, third-quarter data for loans would not be appropriate 
because the Summary of Deposits data are only as of June 30, and loan 
and deposit data should be as of the same date. Moreover, available 
data are insufficient to

[[Page 47731]]

calculate the average daily balance for all loan categories reported in 
the Call Reports, and there is no indication that the purpose of the 
section 109 screen was to capture the highest loan-to-deposit ratio of 
host state banks. Finally, methodologies based on peer groups require a 
sufficient number of institutions in each peer group, and it is likely 
that some states would not have sufficiently large peer groups, 
particularly for larger banks, to make a methodology using peer groups 
and quintiles feasible.
    Several commenters raised concerns that data for specialized banks, 
which do not engage in traditional deposit taking or lending, would 
distort the host state loan-to-deposit ratio. As noted in the proposed 
rule, limited purpose banks, such as credit card banks, and wholesale 
banks could have very large loan portfolios, but few, if any, deposits. 
The agencies will therefore exclude data from banks designated as 
limited purpose or wholesale banks under the CRA regulations of the 
appropriate agency in calculating the loan-to-deposit ratio for the 
host state.<SUP>13</SUP>
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    \13\ See 12 CFR 25.25 (OCC); 12 CFR 228.25 (Board); and 12 CFR 
345.25 (FDIC).
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    In addition, certain lending activities of banks with foreign 
branches could distort the ratio. The agencies will use a measure of 
domestic loans that excludes loans to non-U.S. addressees and loans in 
foreign offices to the extent that these adjustments can be made to 
data in the Call Reports. A measure of domestic deposits from the 
Summary of Deposits does not include foreign deposits so that, to the 
maximum extent possible, domestic loans will be divided by domestic 
deposits.
Consideration of Multistate Banks
    As discussed in the proposal, banks with branches outside their 
home state (multistate banks), in light of the data limitations imposed 
by section 109, pose particular problems for purposes of calculating 
host state loan-to-deposit ratios. Loan and deposit data from those 
banks could distort substantially the host state loan-to-deposit 
ratios, unless the data are adjusted to account for the banks' out-of-
state branches' lending and deposit-taking activities. Because the 
Summary of Deposits contains data on a branch-by-branch basis, the 
agencies can account for the deposit-taking activities of out-of-state 
branches of multistate banks by using the aggregate deposit-taking 
activities of a multistate banks' home state branches only.
    Accounting for the lending activities of out-of-state branches of 
multistate banks is more difficult. Neither the Call Report nor any 
other source of loan data contain data on a branch-by-branch or state-
by-state basis. Thus, unless a bank maintains loan data on a state-by-
state basis, there are no reasonably available data to calculate a 
multistate bank's home state lending activities.
    In the proposal, the agencies suggested excluding multistate banks 
that have more than 50 percent of their branches outside their home 
state from the host state loan-to-deposit ratio. Recognizing the 
limitations in this approach, the agencies requested comment on this 
approach and on any approach that would more accurately reflect a 
multistate bank's home state activities.
    In response to the agencies' request for comment, one commenter 
supported the exclusion of large multistate banks from the host state 
loan-to-deposit ratio because larger banks can maintain higher than 
average loan-to-deposit ratios by funding loans without using deposits. 
Another commenter suggested using a bank's deposits reported in its 
home state and a proportionate amount of the bank's loans based on the 
percentage of its total deposits that are reported in the bank's home 
state. A third commenter suggested that deposit and loan proration be 
based on the number of home state branches as a percentage of the 
bank's total number of branches.
    On further consideration of this issue, the agencies have concluded 
that the host state loan-to-deposit ratio could be distorted 
substantially if multistate banks with 50 percent or more of their 
branches outside their home state are excluded, or if large multistate 
banks are excluded altogether. As interstate branching becomes more 
prevalent, some host states could eventually be left with few, if any, 
eligible host state banks <SUP>14</SUP> to include in the ratio. 
Moreover, including all loans and deposits of any multistate bank in 
calculating the host state loan-to-deposit ratio for its home state 
would give too much weight to that bank's lending and deposit-taking 
activities, and excluding all its loans and deposits would give no 
weight at all.
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    \14\ Host state banks are banks in a host state that have that 
state as their home state.
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    After carefully considering all comments, and given the statutory 
limitation on additional data collection, the agencies believe the best 
available approach requires assuming that a multistate bank's lending 
and deposit-taking activities in its home state correspond to its total 
lending and deposit-taking activities (i.e., the percentage of its 
total loans that are in-state is the same as the percentage of its 
total deposits that are in-state). In particular, the agencies will 
calculate the percentage of a multistate bank's deposits that are 
attributable to in-state branches (as determined from the Summary of 
Deposits), and apply that percentage to the bank's total domestic loans 
(as determined from the Call Report) in order to determine a proxy for 
the bank's domestic loans attributable to that state. The agencies 
believe that this approach is preferable to including or excluding all 
loans and deposits of a multistate bank.
    The agencies recognize that this method for calculating the host 
state loan-to-deposit ratio makes certain assumptions that may not be 
universally true. For example, intrastate banks do not necessarily make 
loans only to in-state borrowers. In addition, there is not necessarily 
a one-to-one correlation between in-state deposits and in-state loans 
for a multistate bank. Nevertheless, the data limitations imposed by 
section 109 necessitate these assumptions. The agencies will adjust 
this method as appropriate to account for changes in reporting 
requirements or additional sources of relevant data. The agencies also 
will continue to review ways to improve the calculation of the host 
state loan-to-deposit ratio. The agencies will make each state's host 
state loan-to-deposit ratio, and any changes in the way the ratio is 
calculated, publicly available.

B. A Bank's Statewide Loan-to-Deposit Ratio

Relevant Data
    Several commenters suggested that a ``loan'' under the final rule 
should be defined more expansively than that term is defined in the 
Call Reports and should include, for example, loans originated and 
sold, securitized loans, investments in mortgage-backed securities and 
municipal bonds secured by loans, outstanding letters of credit, and 
loans booked through a bank's affiliates. Since banks generally do not 
report these data, or do not report them in a format that would provide 
a differentiation between in-state quantities and out-of-state 
quantities, the data could not be used in calculating the host state 
loan-to-deposit ratios. Using such data for a particular bank's 
statewide loan-to-deposit ratio, and not for the corresponding host 
state loan-to-deposit ratio, would distort the loan-to-deposit ratio 
screen. Consequently, the agencies will not consider these data in 
applying the loan-to-deposit ratio screen. However, the agencies may

[[Page 47732]]

consider such data as appropriate in making a credit needs 
determination.

Credit Needs Determination

Consideration of CRA Rating
    Some commenters maintained that a satisfactory or better CRA rating 
in a host state should provide a ``safe harbor'' from evaluation under 
section 109 in that state. Other commenters, however, believed that 
little, if any, reliance should be placed on CRA ratings because these 
commenters viewed CRA ratings as inflated and often out-of-date. One 
commenter suggested that a less than satisfactory CRA rating should 
automatically warrant an adverse credit needs determination.
    The agencies believe that it is consistent with the language and 
intent of section 109 to carefully weigh the CRA rating of the bank in 
making a credit needs determination under the factors enumerated in 
section 109. Section 109 specifies the bank's CRA rating as a factor to 
be considered, and most of the other factors listed in section 109 are 
taken into account as part of the performance context evaluation 
pursuant to the agencies' CRA regulations.<SUP>15</SUP>
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    \15\ The CRA regulations specify that the agencies will evaluate 
a bank's performance in the context of a number of considerations, 
including the nature of the bank's product offerings and business 
strategy, the lending opportunities within a bank's assessment area, 
and any constraints on the bank such as the financial condition of 
the bank, the economic climate (national, regional and local), and 
safety and soundness limitations. See 12 CFR 25.21(b) (OCC); 12 CFR 
228.21(b) (Board); and 12 CFR 345.21(b) (FDIC).
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    Moreover, section 110 of the Interstate Act (section 110) 
<SUP>16</SUP> requires the following separate written evaluations and 
CRA ratings of the institution's CRA performance (1) as a whole, (2) in 
each state in which it maintains a branch, and (3) in any multistate 
metropolitan area in which it maintains a branch in two or more states. 
In addition, the statewide written evaluation of a multistate bank must 
contain separate discussions of the institution's performance in any 
metropolitan area in the state in which it maintains a branch, as well 
as in the nonmetropolitan area of the state if a branch is maintained 
there. Accordingly, information from a CRA performance evaluation is 
particularly relevant in determining compliance with section 109 
because it directly evaluates a bank's performance in helping to meet 
the credit needs of the communities it serves in a host state. As 
discussed below, the agencies expect to conduct the section 109 review 
in connection with an evaluation of the bank's CRA performance in the 
host state under section 110, as the appropriate agency deems 
necessary, thereby ensuring that the section 109 review will be based 
on current information.
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    \16\ 12 U.S.C. 2906(b) and (d).
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    In this light, the agencies expect that a credit needs 
determination for a bank with CRA performance ratings of 
``satisfactory'' or ``outstanding'' in the host state (including any 
multistate metropolitan area) would be favorable. The agencies also 
expect that a credit needs determination for a bank with less than 
satisfactory ratings for CRA performance in the host state (including 
any multistate metropolitan area) would be adverse unless mitigated by 
the other factors enumerated in section 109.
    Commenters requested that a credit needs determination only 
consider the lending component of a large bank's CRA rating, or that 
the lending component be given extra weight. The CRA rating for a large 
retail bank already weighs lending performance so that a bank may not 
receive an overall ``satisfactory'' CRA performance rating unless its 
lending performance component is rated at least ``satisfactory.'' 
Accordingly, the agencies are not adopting the suggested change.
Other Factors
    Commenters also discussed other factors that section 109 requires 
the agencies to consider in making a credit needs determination. Some 
commenters suggested that, in considering economic conditions, the 
agencies should grant multistate banks greater leeway to anticipate 
economic trends in the host state and, if these trends are adverse, to 
reduce their efforts in helping to meet community credit needs. Another 
commenter suggested eliminating all factors that could be used to 
mitigate a poor CRA performance record. There also were requests for 
more guidance in the regulation on how the statutory factors would be 
considered in a credit needs determination.
    The final rule incorporates the statutory factors as they are set 
forth in section 109. The agencies intend to apply these factors 
consistent with the plain meaning of the language used in section 109, 
as discussed above. With respect to institutions designated as 
wholesale or limited purpose banks under the CRA regulations, the 
agencies will consider the CRA performance for these banks under the 
special CRA performance test provided in the CRA regulations and the 
banks' specialized operations.
Banks Not Subject to CRA
    Some entities that could be subject to section 109, including 
certain special purpose banks and uninsured branches of foreign 
banks,<SUP>17</SUP> are not evaluated for CRA performance by the 
agencies. Several commenters maintained that, in making a credit needs 
determination for such institutions, the agencies should apply the same 
standards that are applied to CRA-rated institutions. As discussed in 
the proposed rule, neither the language nor the legislative history of 
section 109 supports applying the CRA to these institutions. The 
agencies intend to use the CRA regulations as guidelines in making a 
credit needs determination for these institutions. The CRA regulations 
would provide only guidance to assess whether activities identified by 
the institution help to meet the community's credit needs, and would 
not obligate the institution to have a record of performance under the 
CRA or require that the institution pass any performance tests in the 
CRA regulations.
---------------------------------------------------------------------------

    \17\ A special purpose bank that does not perform commercial or 
retail banking services by granting credit to the public in the 
ordinary course of business is not evaluated for CRA performance by 
the agencies. See 12 CFR 25.11(c)(3) (OCC); 12 CFR 228.11(c)(3) 
(Board); and 12 CFR 345.11(c)(3) (FDIC). In addition, the CRA does 
not apply to the branch of a foreign bank unless the branch is 
insured or results from an acquisition described in section 5(a)(8) 
of the International Banking Act (12 U.S.C. 3103(a)(8)) (IBA, 12 
U.S.C. 3101 et seq.). See 12 CFR 25.11(c)(2) (OCC); 12 CFR 
228.11(c)(2) (Board); and 12 CFR 345.11(c)(1) (FDIC).
---------------------------------------------------------------------------

    The agencies also intend, as proposed, to give substantial weight 
to the factor relating to specialized activities in making a credit 
needs determination for institutions not evaluated under the CRA. For 
example, most branches of foreign banks derive substantially all their 
deposits from wholesale deposit markets, which are generally national 
or international in scope.<SUP>18</SUP> This approach

[[Page 47733]]

is consistent with section 109's overall purpose of preventing banks 
from using the Interstate Act to establish branches primarily to gather 
deposits in their host state without reasonably helping to meet the 
credit needs of the communities served by the bank in the host state.
---------------------------------------------------------------------------

    \18\ U.S. branches of foreign banks generally accept only 
uninsured wholesale deposits, and are not established primarily to 
gather deposits in their host state. In 1991, the Federal Deposit 
Insurance Corporation Improvement Act amended the IBA to prohibit 
U.S. branches of foreign banks from taking deposits in amounts of 
less than $100,000, other than through the relatively few branches 
that were already insured by the FDIC in 1991, or to the extent the 
OCC or the FDIC determine that the branch is not engaged in domestic 
retail deposit taking activities requiring deposit insurance 
protection. 12 U.S.C. 3104. Congress reaffirmed this prohibition in 
the Interstate Act, directing the OCC and the FDIC to revise their 
regulations to reduce further the opportunities for retail deposit-
taking available to these branches.
    See section 107(b) of the Interstate Act (12 U.S.C. 3104, 
Historical and Statutory Notes). As a general matter, interstate 
branches of foreign banks established under the Interstate Act 
therefore cannot take retail deposits or draw a significant level of 
deposits from retail-oriented deposit markets where the branches are 
located.
---------------------------------------------------------------------------

Other Comments
    Several commenters requested that the public, including 
representatives of community organizations and state bank 
commissioners, participate in a credit needs determination. Information 
provided to examiners through contacts with community representatives 
during a CRA examination or through other activities, and the bank's 
public comment file provide the agencies substantial information to 
assess the views of community organizations, government officials, and 
other interested persons. In addition, the agencies encourage written 
comments from the public about a bank's CRA performance at any time and 
publicly announce their CRA examination schedules. The agencies will 
carefully review information provided to examiners from community 
contacts or through other activities, and the public comment file in 
making a credit needs determination.
    State bank commissioners also requested that the agencies consider 
compliance with state CRA laws in making a credit needs determination. 
The agencies will take into account state CRA compliance evaluations in 
a credit needs determination, as appropriate.
    Some commenters requested the agencies to consider affiliate 
lending activities in making a credit needs determination while other 
commenters cautioned against giving too much consideration to affiliate 
lending activities. The agencies' CRA regulations permit a bank's 
affiliate lending to be considered as part of its CRA performance 
evaluation. Affiliate lending, therefore, would be relevant to a 
section 109 review to the extent that such lending is reflected in the 
bank's overall CRA performance rating.

Sanctions

Application of Loan-to-Deposit Ratio Screen
    Before a bank could be sanctioned under section 109, the 
appropriate agency would be required to demonstrate that the bank 
failed to comply with the section 109 loan-to-deposit ratio screen and 
failed to reasonably help in meeting the credit needs of the bank's 
communities in the host state. Accordingly, the proposed rule required 
the agencies to determine a bank's compliance with the loan-to-deposit 
ratio screen. Some commenters suggested that the agencies could impose 
sanctions on a bank without verifying noncompliance with the loan-to-
deposit ratio screen and other commenters contended that requiring such 
a verification would impose significant regulatory burdens. As 
previously discussed, the agencies have concluded that the two-step 
compliance analysis in section 109 requires the agencies to verify 
noncompliance with both steps before imposing sanctions, and that the 
agencies' responsibility to ensure compliance with section 109 after an 
adverse credit needs determination outweighs potential regulatory 
burdens associated with such a verification.
Consultation and Public Comment
    If a bank fails both steps in the analysis, section 109's sanctions 
(1) allow the appropriate agency to order the closing of a covered 
interstate branch in the host state unless the bank provides reasonable 
assurances to the satisfaction of the agency that it has an acceptable 
plan that will reasonably help to meet the credit needs of the 
communities served by the bank, and (2) prohibit the bank from opening 
a new branch in the host state unless the bank provides reasonable 
assurances to the satisfaction of the agency that the bank will 
reasonably meet the credit needs of the community to be served by the 
new branch.<SUP>19</SUP>
---------------------------------------------------------------------------

    \19\ Section 109 requires the appropriate agency to issue a 
notice of intent to close a covered interstate branch to the bank 
and schedule a hearing in accordance with section 8(h) of the 
Federal Deposit Insurance Act (12 U.S.C. 1818(h)) before a branch 
can be closed.
---------------------------------------------------------------------------

    State banking commissioners requested consultation before the 
agencies ordered a branch closing. Informal consultations with state 
banking regulators may assist the agencies in assessing the impact of 
branch closures, or a prohibition against new branches, on a state 
bank's ability to comply with state CRA laws. Informal consultations 
may also assist in assessing the bank's assurances to help meet credit 
needs in light of its record with state banking regulators for 
addressing supervisory concerns. Accordingly, the agencies intend to 
consult with state banking authorities before imposing sanctions, as 
appropriate.
    Other commenters requested that the agencies solicit public comment 
on any plan proposed by the bank for meeting the credit needs of the 
community to avoid a branch closing order. The agencies will review any 
proposal by the bank in light of all comments from the public in the 
bank's community contacts portion of the CRA examination or through 
other activities, and the bank's public comment file. In addition, the 
agencies intend to provide an opportunity for public comment on 
nonconfidential portions of the bank's proposal.

Timing of Review

    Some commenters stated that section 109 reviews and CRA performance 
examinations should be conducted at the same time. One commenter 
requested clarification that section 109 reviews would be conducted 
more than once, another commenter requested that section 109 reviews be 
conducted annually, and a third commenter recommended a two-year grace 
period before conducting the reviews.
    As previously noted, the agencies intend to conduct section 109 
reviews in connection with an evaluation of a multistate bank's CRA 
performance in a host state under section 110 of the Interstate Act. 
The appropriate agency will conduct a section 109 review of a 
multistate bank during the section 110 review, and a section 109 review 
of banks not subject to CRA, when the agency deems such a review to be 
necessary. The agencies will also coordinate with state banking 
authorities in applying section 109 to state-chartered branches of 
foreign banks that may be subject to section 109.

Other Comments

    The agencies also received several recommendations that are 
inconsistent with section 109. These suggestions include: (1) 
Increasing the loan-to-deposit screen to more than 50 percent; (2) 
excluding a covered interstate branch if it does not solicit deposits 
from the public, or if it has a loan-to-deposit ratio in the host state 
comparable to the bank's overall loan-to-deposit ratio; (3) applying 
section 109 to all the bank's interstate branches in a host state 
rather than to ``covered interstate branches''; (4) applying the loan-
to-deposit ratio to partial but geographically specific lending data 
(for example, home mortgages); and (5) exempting a bank that primarily 
lends in a particular state from compliance with the loan-to-deposit 
ratio screen and from the calculation of the host state loan-to-deposit 
ratio. The agencies believe that it would be inappropriate to implement 
these recommendations because they are inconsistent with the agencies' 
understanding of the language of section 109 and, accordingly, are not 
adopting them in the final rule.

[[Page 47734]]

Regulatory Flexibility Act Analysis

    Consistent with the requirement that the agencies use only 
available information to conduct a section 109 review, the final rule 
does not impose any additional regulatory burden on banks beyond what 
is required by statute. In particular, the final rule does not impose 
any additional paperwork or reporting requirements. Thus, the final 
rule will not have a significant economic impact on a substantial 
number of small entities consistent with the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.). Moreover, the final rule affects only banks 
that have branches in more than one state, which are primarily larger 
banks. However, the agencies note that some institutions with covered 
interstate branches may be subject to more extensive examinations or 
requests for information necessary to obtain the relevant data if the 
agencies determine to impose sanctions. As noted above, the agencies 
believe that this information is required by the two-step analysis 
under section 109 before sanctions can be imposed, and that there are 
no feasible alternatives to mitigate this potential burden.

Paperwork Reduction Act

    The agencies have determined that the final rule would not increase 
the regulatory paperwork burden of banking organizations pursuant to 
the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) (Title II, Pub. L. 104-121) provides generally for agencies to 
report rules to Congress and the General Accounting Office (GAO) for 
review. The reporting requirement is triggered when a federal agency 
issues a final rule. The agencies will file the appropriate reports 
with Congress and the GAO as required by SBREFA.
    Because the Office of Management and Budget has determined that the 
uniform rule promulgated by the agencies does not constitute a ``major 
rule'' as defined by SBREFA, the final rule will take effect 30 days 
from publication in the Federal Register.

OCC Executive Order 12866 Determination

    The OCC has determined that this final rule is not a significant 
regulatory action.

OCC Unfunded Mandates Reform Act of 1995 Determination

    The OCC has determined that the final rule would not result in 
expenditures by state, local, and tribal governments, or by the private 
sector, of $100 million or more in any one year. Accordingly, a 
budgetary impact statement is not required under section 202 of the 
Unfunded Mandates Reform Act of 1995.

List of Subjects

12 CFR Part 25

    Community development, Credit, Investments, National banks, 
Reporting and recordkeeping requirements.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 369

    Banks, banking, Community development.

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the joint preamble, the Office of the 
Comptroller of the Currency amends part 25 of chapter I of title 12 of 
the Code of Federal Regulations as follows:

PART 25--COMMUNITY REINVESTMENT ACT AND INTERSTATE DEPOSIT 
PRODUCTION REGULATIONS

    1. The part heading for part 25 is revised to read as set forth 
above.
    2. The authority citation for part 25 is revised to read as 
follows:

    Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215, 
215a, 481, 1814, 1816, 1828(c), 1835a, 2901 through 2907, and 3101 
through 3111.

    3. Section 25.11 is amended by revising paragraph (a)(1) to read as 
follows:


Sec. 25.11  Authority, purpose, and scope.

    (a) Authority and OMB control number--(1) Authority. The authority 
for subparts A, B, C, D, and E is 12 U.S.C. 21, 22, 26, 27, 30, 36, 
93a, 161, 215, 215a, 481, 1814, 1816, 1828(c), 1835a, 2901 through 
2907, and 3101 through 3111.
* * * * *
    4. Part 25 is amended by adding a new subpart E to read as follows:

Subpart E--Prohibition Against Use of Interstate Branches Primarily for 
Deposit Production

Sec.
25.61  Purpose and scope.
25.62  Definitions.
25.63  Loan-to-deposit ratio screen.
25.64  Credit needs determination.
25.65  Sanctions.

Subpart E--Prohibition Against Use of Interstate Branches Primarily 
for Deposit Production


Sec. 25.61  Purpose and scope.

    (a) Purpose. The purpose of this subpart is to implement section 
109 (12 U.S.C. 1835a) of the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994 (Interstate Act).
    (b) Scope. (1) This subpart applies to any national bank that has 
operated a covered interstate branch for a period of at least one year, 
and any foreign bank that has operated a covered interstate branch that 
is a Federal branch for a period of at least one year.
    (2) This subpart describes the requirements imposed under 12 U.S.C. 
1835a, which requires the appropriate Federal banking agencies (the 
OCC, the Board of Governors of the Federal Reserve System, and the 
Federal Deposit Insurance Corporation) to prescribe uniform rules that 
prohibit a bank from using any authority to engage in interstate 
branching pursuant to the Interstate Act, or any amendment made by the 
Interstate Act to any other provision of law, primarily for the purpose 
of deposit production.


Sec. 25.62  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Bank means, unless the context indicates otherwise:
    (1) A national bank; and
    (2) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and 
12 CFR 28.11(j).
    (b) Covered interstate branch means any branch of a national bank, 
and any Federal branch of a foreign bank, that:
    (1) Is established or acquired outside the bank's home state 
pursuant to the interstate branching authority granted by the 
Interstate Act or by any amendment made by the Interstate Act to any 
other provision of law; or
    (2) Could not have been established or acquired outside of the 
bank's home

[[Page 47735]]

state but for the establishment or acquisition of a branch described in 
paragraph (b)(1) of this section.
    (c) Federal branch means Federal branch as that term is defined in 
12 U.S.C. 3101(6) and 12 CFR 28.11(i).
    (d) Home state means:
    (1) With respect to a state bank, the state that chartered the 
bank;
    (2) With respect to a national bank, the state in which the main 
office of the bank is located; and
    (3) With respect to a foreign bank, the home state of the foreign 
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR 
28.11(o).
    (e) Host state means a state in which a bank establishes or 
acquires a covered interstate branch.
    (f) Host state loan-to-deposit ratio generally means, with respect 
to a particular host state, the ratio of total loans in the host state 
relative to total deposits from the host state for all banks (including 
institutions covered under the definition of ``bank'' in 12 U.S.C. 
1813(a)(1)) that have that state as their home state, as determined and 
updated periodically by the appropriate Federal banking agencies and 
made available to the public.
    (g) State means state as that term is defined in 12 U.S.C. 
1813(a)(3).
    (h) Statewide loan-to-deposit ratio means, with respect to a bank, 
the ratio of the bank's loans to its deposits in a state in which the 
bank has one or more covered interstate branches, as determined by the 
OCC.


Sec. 25.63  Loan-to-deposit ratio screen.

    (a) Application of screen. Beginning no earlier than one year after 
a bank establishes or acquires a covered interstate branch, the OCC 
will consider whether the bank's statewide loan-to-deposit ratio is 
less than 50 percent of the relevant host state loan-to-deposit ratio.
    (b) Results of screen. (1) If the OCC determines that the bank's 
statewide loan-to-deposit ratio is 50 percent or more of the host state 
loan-to-deposit ratio, no further consideration under this subpart is 
required.
    (2) If the OCC determines that the bank's statewide loan-to-deposit 
ratio is less than 50 percent of the host state loan-to-deposit ratio, 
or if reasonably available data are insufficient to calculate the 
bank's statewide loan-to-deposit ratio, the OCC will make a credit 
needs determination for the bank as provided in Sec. 25.64.


Sec. 25.64  Credit needs determination.

    (a) In general. The OCC will review the loan portfolio of the bank 
and determine whether the bank is reasonably helping to meet the credit 
needs of the communities in the host state that are served by the bank.
    (b) Guidelines. The OCC will use the following considerations as 
guidelines when making the determination pursuant to paragraph (a) of 
this section:
    (1) Whether covered interstate branches were formerly part of a 
failed or failing depository institution;
    (2) Whether covered interstate branches were acquired under 
circumstances where there was a low loan-to-deposit ratio because of 
the nature of the acquired institution's business or loan portfolio;
    (3) Whether covered interstate branches have a high concentration 
of commercial or credit card lending, trust services, or other 
specialized activities, including the extent to which the covered 
interstate branches accept deposits in the host state;
    (4) The CRA ratings received by the bank, if any;
    (5) Economic conditions, including the level of loan demand, within 
the communities served by the covered interstate branches;
    (6) The safe and sound operation and condition of the bank; and
    (7) The OCC's CRA regulations (subparts A through D of this part) 
and interpretations of those regulations.


Sec. 25.65  Sanctions.

    (a) In general. If the OCC determines that a bank is not reasonably 
helping to meet the credit needs of the communities served by the bank 
in the host state, and that the bank's statewide loan-to-deposit ratio 
is less than 50 percent of the host state loan-to-deposit ratio, the 
OCC:
    (1) May order that a bank's covered interstate branch or branches 
be closed unless the bank provides reasonable assurances to the 
satisfaction of the OCC, after an opportunity for public comment, that 
the bank has an acceptable plan under which the bank will reasonably 
help to meet the credit needs of the communities served by the bank in 
the host state; and
    (2) Will not permit the bank to open a new branch in the host state 
that would be considered to be a covered interstate branch unless the 
bank provides reasonable assurances to the satisfaction of the OCC, 
after an opportunity for public comment, that the bank will reasonably 
help to meet the credit needs of the community that the new branch will 
serve.
    (b) Notice prior to closure of a covered interstate branch. Before 
exercising the OCC's authority to order the bank to close a covered 
interstate branch, the OCC will issue to the bank a notice of the OCC's 
intent to order the closure and will schedule a hearing within 60 days 
of issuing the notice.
    (c) Hearing. The OCC will conduct a hearing scheduled under 
paragraph (b) of this section in accordance with the provisions of 12 
U.S.C. 1818(h) and 12 CFR part 19.

    Dated: September 4, 1997.
Eugene A. Ludwig,
Comptroller of the Currency.

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the joint preamble, the Board of 
Governors of the Federal Reserve System amends parts 208 and 211 of 
chapter II of title 12 of the Code of Federal Regulations as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 24, 248(a), 248(c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1820(d)(9), 1823(j), 1828(o), 1831o, 1831p-
1, 1835a, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 
78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 
5318.

    2. A new Sec. 208.28 is added to subpart A to read as follows:


Sec. 208.28  Prohibition against use of interstate branches primarily 
for deposit production.

    (a) Purpose and scope--(1) Purpose. The purpose of this section is 
to implement section 109 (12 U.S.C. 1835a) of the Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994 (Interstate 
Act).
    (2) Scope. (i) This section applies to any State member bank that 
has operated a covered interstate branch for a period of at least one 
year, and any foreign bank that has operated a covered interstate 
branch licensed by a State for a period of at least one year.
    (ii) This section describes the requirements imposed under 12 
U.S.C. 1835a, which requires the appropriate Federal banking agencies 
(the Board, the Office of the Comptroller of the Currency, and the 
Federal Deposit Insurance Corporation) to prescribe uniform rules that 
prohibit a bank from using any authority to engage in interstate 
branching pursuant to the Interstate Act, or any amendment made by the 
Interstate Act to any other

[[Page 47736]]

provision of law, primarily for the purpose of deposit production.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Bank means, unless the context indicates otherwise:
    (i) A State member bank as that term is defined in 12 U.S.C. 
1813(d)(2); and
    (ii) A foreign bank as that term is defined in 12 U.S.C. 3101(7) 
and 12 CFR 211.21.
    (2) Covered interstate branch means any branch of a State member 
bank, and any uninsured branch of a foreign bank licensed by a State, 
that:
    (i) Is established or acquired outside the bank's home state 
pursuant to the interstate branching authority granted by the 
Interstate Act or by any amendment made by the Interstate Act to any 
other provision of law; or
    (ii) Could not have been established or acquired outside of the 
bank's home state but for the establishment or acquisition of a branch 
described in paragraph (b)(2)(i) of this section.
    (3) Home state means:
    (i) With respect to a state bank, the state that chartered the 
bank;
    (ii) With respect to a national bank, the state in which the main 
office of the bank is located; and
    (iii) With respect to a foreign bank, the home state of the foreign 
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR 
211.22.
    (4) Host state means a state in which a bank establishes or 
acquires a covered interstate branch.
    (5) Host state loan-to-deposit ratio generally means, with respect 
to a particular host state, the ratio of total loans in the host state 
relative to total deposits from the host state for all banks (including 
institutions covered under the definition of ``bank'' in 12 U.S.C. 
1813(a)(1)) that have that state as their home state, as determined and 
updated periodically by the appropriate Federal banking agencies and 
made available to the public.
    (6) State means state as that term is defined in 12 U.S.C. 
1813(a)(3).
    (7) Statewide loan-to-deposit ratio means, with respect to a bank, 
the ratio of the bank's loans to its deposits in a state in which the 
bank has one or more covered interstate branches, as determined by the 
Board.
    (c) Loan-to-deposit ratio screen--(1) Application of screen. 
Beginning no earlier than one year after a bank establishes or acquires 
a covered interstate branch, the Board will consider whether the bank's 
statewide loan-to-deposit ratio is less than 50 percent of the relevant 
host state loan-to-deposit ratio.
    (2) Results of screen. (i) If the Board determines that the bank's 
statewide loan-to-deposit ratio is 50 percent or more of the host state 
loan-to-deposit ratio, no further consideration under this section is 
required.
    (ii) If the Board determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit 
ratio, or if reasonably available data are insufficient to calculate 
the bank's statewide loan-to-deposit ratio, the Board will make a 
credit needs determination for the bank as provided in paragraph (d) of 
this section.
    (d) Credit needs determination--(1) In general. The Board will 
review the loan portfolio of the bank and determine whether the bank is 
reasonably helping to meet the credit needs of the communities in the 
host state that are served by the bank.
    (2) Guidelines. The Board will use the following considerations as 
guidelines when making the determination pursuant to paragraph (d)(1) 
of this section:
    (i) Whether covered interstate branches were formerly part of a 
failed or failing depository institution;
    (ii) Whether covered interstate branches were acquired under 
circumstances where there was a low loan-to-deposit ratio because of 
the nature of the acquired institution's business or loan portfolio;
    (iii) Whether covered interstate branches have a high concentration 
of commercial or credit card lending, trust services, or other 
specialized activities, including the extent to which the covered 
interstate branches accept deposits in the host state;
    (iv) The Community Reinvestment Act ratings received by the bank, 
if any, under 12 U.S.C. 2901 et seq.;
    (v) Economic conditions, including the level of loan demand, within 
the communities served by the covered interstate branches;
    (vi) The safe and sound operation and condition of the bank; and
    (vii) The Board's Regulation BB--Community Reinvestment (12 CFR 
Part 228) and interpretations of that regulation.
    (e) Sanctions--(1) In general. If the Board determines that a bank 
is not reasonably helping to meet the credit needs of the communities 
served by the bank in the host state, and that the bank's statewide 
loan-to-deposit ratio is less than 50 percent of the host state loan-
to-deposit ratio, the Board:
    (i) May order that a bank's covered interstate branch or branches 
be closed unless the bank provides reasonable assurances to the 
satisfaction of the Board, after an opportunity for public comment, 
that the bank has an acceptable plan under which the bank will 
reasonably help to meet the credit needs of the communities served by 
the bank in the host state; and
    (ii) Will not permit the bank to open a new branch in the host 
state that would be considered to be a covered interstate branch unless 
the bank provides reasonable assurances to the satisfaction of the 
Board, after an opportunity for public comment, that the bank will 
reasonably help to meet the credit needs of the community that the new 
branch will serve.
    (2) Notice prior to closure of a covered interstate branch. Before 
exercising the Board's authority to order the bank to close a covered 
interstate branch, the Board will issue to the bank a notice of the 
Board's intent to order the closure and will schedule a hearing within 
60 days of issuing the notice.
    (3) Hearing. The Board will conduct a hearing scheduled under 
paragraph (e)(2) of this section in accordance with the provisions of 
12 U.S.C. 1818(h) and 12 CFR part 263.

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, 1835a, 1841 et seq., 
3101 et seq., and 3901 et seq.

    2. In Sec. 211.22, a new paragraph (d) is added to read as follows:


Sec. 211.22  Interstate banking operations of foreign banking 
organizations

* * * * *
    (d) 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 the Board's Regulation H (12 CFR 208.28).

    By order of the Board of Governors of the Federal Reserve 
System, September 4, 1997.
William W. Wiles,
Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the joint preamble, the Board of 
Directors of the Federal Deposit Insurance Corporation adds part 369 to 
chapter III of title 12 of the Code of Federal Regulations to read as 
follows:

[[Page 47737]]

PART 369--PROHIBITION AGAINST USE OF INTERSTATE BRANCHES PRIMARILY 
FOR DEPOSIT PRODUCTION

Sec.
369.1  Purpose and scope.
369.2  Definitions.
369.3  Loan-to-deposit ratio screen.
369.4  Credit needs determination.
369.5  Sanctions.

    Authority: 12 U.S.C. 1819 (Tenth) and 1835a.


Sec. 369.1  Purpose and scope.

    (a) Purpose. The purpose of this part is to implement section 109 
(12 U.S.C. 1835a) of the Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994 (Interstate Act).
    (b) Scope--(1) This part applies to any State nonmember bank that 
has operated a covered interstate branch for a period of at least one 
year.
    (2) This part describes the requirements imposed under 12 U.S.C. 
1835a, which requires the appropriate Federal banking agencies (the 
FDIC, the Office of the Comptroller of the Currency, and the Board of 
Governors of the Federal Reserve System) to prescribe uniform rules 
that prohibit a bank from using any authority to engage in interstate 
branching pursuant to the Interstate Act, or any amendment made by the 
Interstate Act to any other provision of law, primarily for the purpose 
of deposit production.


Sec. 369.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Bank means, unless the context indicates otherwise:
    (1) A State nonmember bank; and
    (2) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and 
12 CFR 346.1(a).
    (b) Covered interstate branch means any branch of a State nonmember 
bank, and any insured branch of a foreign bank licensed by a State, 
that:
    (1) Is established or acquired outside the bank's home state 
pursuant to the interstate branching authority granted by the 
Interstate Act or by any amendment made by the Interstate Act to any 
other provision of law; or
    (2) Could not have been established or acquired outside of the 
bank's home state but for the establishment or acquisition of a branch 
described in paragraph (b)(1) of this section.
    (c) Home state means:
    (1) With respect to a state bank, the state that chartered the 
bank;
    (2) With respect to a national bank, the state in which the main 
office of the bank is located; and
    (3) With respect to a foreign bank, the home state of the foreign 
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR 
346.1(j).
    (d) Host state means a state in which a bank establishes or 
acquires a covered interstate branch.
    (e) Host state loan-to-deposit ratio generally means, with respect 
to a particular host state, the ratio of total loans in the host state 
relative to total deposits from the host state for all banks (including 
institutions covered under the definition of ``bank'' in 12 U.S.C. 
1813(a)(1)) that have that state as their home state, as determined and 
updated periodically by the appropriate Federal banking agencies and 
made available to the public.
    (f) State means state as that term is defined in 12 U.S.C. 
1813(a)(3).
    (g) Statewide loan-to-deposit ratio means, with respect to a bank, 
the ratio of the bank's loans to its deposits in a state in which the 
bank has one or more covered interstate branches, as determined by the 
FDIC.


Sec. 369.3  Loan-to-deposit ratio screen.

    (a) Application of screen. Beginning no earlier than one year after 
a bank establishes or acquires a covered interstate branch, the FDIC 
will consider whether the bank's statewide loan-to-deposit ratio is 
less than 50 percent of the relevant host state loan-to-deposit ratio.
    (b) Results of screen. (1) If the FDIC determines that the bank's 
statewide loan-to-deposit ratio is 50 percent or more of the host state 
loan-to-deposit ratio, no further consideration under this part is 
required.
    (2) If the FDIC determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit 
ratio, or if reasonably available data are insufficient to calculate 
the bank's statewide loan-to-deposit ratio, the FDIC will make a credit 
needs determination for the bank as provided in Sec. 369.4.


Sec. 369.4  Credit needs determination.

    (a) In general. The FDIC will review the loan portfolio of the bank 
and determine whether the bank is reasonably helping to meet the credit 
needs of the communities in the host state that are served by the bank.
    (b) Guidelines. The FDIC will use the following considerations as 
guidelines when making the determination pursuant to paragraph (a) of 
this section:
    (1) Whether covered interstate branches were formerly part of a 
failed or failing depository institution;
    (2) Whether covered interstate branches were acquired under 
circumstances where there was a low loan-to-deposit ratio because of 
the nature of the acquired institution's business or loan portfolio;
    (3) Whether covered interstate branches have a high concentration 
of commercial or credit card lending, trust services, or other 
specialized activities, including the extent to which the covered 
interstate branches accept deposits in the host state;
    (4) The Community Reinvestment Act (CRA) ratings received by the 
bank, if any, under 12 U.S.C. 2901 et seq.;
    (5) Economic conditions, including the level of loan demand, within 
the communities served by the covered interstate branches;
    (6) The safe and sound operation and condition of the bank; and
    (7) The FDIC's Community Reinvestment regulations (12 CFR Part 345) 
and interpretations of those regulations.


Sec. 369.5  Sanctions.

    (a) In general. If the FDIC determines that a bank is not 
reasonably helping to meet the credit needs of the communities served 
by the bank in the host state, and that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit 
ratio, the FDIC:
    (1) May order that a bank's covered interstate branch or branches 
be closed unless the bank provides reasonable assurances to the 
satisfaction of the FDIC, after an opportunity for public comment, that 
the bank has an acceptable plan under which the bank will reasonably 
help to meet the credit needs of the communities served by the bank in 
the host state; and
    (2) Will not permit the bank to open a new branch in the host state 
that would be considered to be a covered interstate branch unless the 
bank provides reasonable assurances to the satisfaction of the FDIC, 
after an opportunity for public comment, that the bank will reasonably 
help to meet the credit needs of the community that the new branch will 
serve.
    (b) Notice prior to closure of a covered interstate branch. Before 
exercising the FDIC's authority to order the bank to close a covered 
interstate branch, the FDIC will issue to the bank a notice of the 
FDIC's intent to order the closure and will schedule a hearing within 
60 days of issuing the notice.
    (c) Hearing. The FDIC will conduct a hearing scheduled under 
paragraph (b) of this section in accordance with the provisions of 12 
U.S.C. 1818(h) and 12 CFR part 308.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 26th day of August, 1997.


[[Page 47738]]


Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 97-23950 Filed 9-9-97; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P