47728 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations

1Pub. L. No. 103–328, 108 Stat. 2338.

2 12 U.S.C. 1835a.

3The 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.

4 12 U.S.C. 2901 et seq.

5 12 U.S.C. 1818(h).

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.

SUMMARY: The OCC, Board, and FDIC

(collectively, agencies) are adopting

uniform regulations to implement

section 109 (section 109) of the RiegleNeal 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 1 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.2

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).

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-todeposit 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) 3 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.’’

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); 4 (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.

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.5
Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations 47729

6As 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.

9See Ghiglieri v. Sun World Nat’l Ass’n, Nos. 96–

50847 and 96–50948 (5th Cir. July 22, 1997).

10The 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).

11The 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.

The proposed rule also recognized

that data necessary to perform the

calculations required by the loan-todeposit 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 loanto-deposit ratio screen, if data sufficient

to calculate the bank’s statewide loanto-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.6 Several commenters

disputed this statement, especially as

applied to any bank not grandfathered

under the McFadden Act of 1927.7

These commenters cited, in particular,

pending litigation challenging the

legality of branches established under

the main office relocation provision in

the National Bank Act.8 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.

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.9 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.

Data Availability

Commenters described in detail the

shortcomings of reported data for

calculating the host state loan-to-deposit

ratio.10 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.11

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-todeposit ratio in all cases regardless of

the regulatory burdens imposed.

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
47730 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations

12The unweighted average loan-to-deposit ratio is

calculated by adding the individual banks’ loan-todeposit 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.

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-todeposit 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 loanto-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 loanto-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-todeposit 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 12 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-todeposit 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.

The agencies have determined to

adopt the methodology discussed below

which uses a weighted average loan-todeposit 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
Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations 47731

13See 12 CFR 25.25 (OCC); 12 CFR 228.25

(Board); and 12 CFR 345.25 (FDIC).

14Host state banks are banks in a host state that

have that state as their home state.

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-todeposit 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.13

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 deposittaking 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 14 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.

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 deposittaking activities in its home state

correspond to its total lending and

deposit-taking activities (i.e., the

percentage of its total loans that are instate 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 instate 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-todeposit 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-todeposit ratio, would distort the loan-todeposit ratio screen. Consequently, the

agencies will not consider these data in

applying the loan-to-deposit ratio

screen. However, the agencies may
47732 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations

15The 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).

16 12 U.S.C. 2906(b) and (d).

17A 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).

18U.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.

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.15

Moreover, section 110 of the Interstate

Act (section 110) 16 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.

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,17 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.

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.18 This approach
Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations 47733

19Section 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.

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.

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-todeposit 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-todeposit ratio screen. Some commenters

suggested that the agencies could

impose sanctions on a bank without

verifying noncompliance with the loanto-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.19

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-todeposit 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-todeposit ratio in the host state

comparable to the bank’s overall loanto-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.
47734 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations

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 twostep 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:

§ 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

§ 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.

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

§ 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-todeposit 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-todeposit ratio, the OCC will make a

credit needs determination for the bank

as provided in § 25.64.

§ 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.

§ 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 § 208.28 is added to subpart

A to read as follows:

§ 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
47736 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations

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 loanto-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-todeposit 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 § 211.22, a new paragraph (d) is

added to read as follows:

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

§ 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.

§ 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.

§ 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-todeposit 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-todeposit ratio, the FDIC will make a

credit needs determination for the bank

as provided in § 369.4.

§ 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.

§ 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.
47738 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations

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