[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Proposed Rules]
[Pages 68424-68464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33411]



[[Page 68423]]

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Part IV





Federal Reserve System





_______________________________________________________________________



12 CFR Parts 211 and 265



International Banking Operations; Rules Regarding Delegation of 
Authority; Proposed Rule

Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / 
Proposed Rules

[[Page 68424]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 211 and 265

[Regulation K; Docket No. R-0994]


International Banking Operations; Rules Regarding Delegation of 
Authority

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Consistent with section 303 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (the Regulatory 
Improvement Act) and the International Banking Act of 1978 (the IBA), 
the Board has reviewed Regulation K, which governs international 
banking operations, and is proposing for comment a number of changes to 
Subparts A, B and C of Regulation K.
    Subpart A of Regulation K governs the foreign investments and 
activities of all member banks (national banks as well as state member 
banks), Edge and agreement corporations, and bank holding companies. 
The proposed amendments would streamline foreign branching procedures 
for U.S. banking organizations, authorize expanded activities in 
foreign branches of U.S. banks, and implement recent statutory changes 
authorizing a bank to invest up to 20 percent of capital in surplus in 
Edge corporations. Changes also are proposed to the provisions 
governing permissible foreign activities of U.S. banking organizations, 
including securities activities, and investments by U.S. banking 
organizations under the general consent procedures and portfolio 
investments authority.
    Subpart B of Regulation K (Foreign Banking Organizations) governs 
the U.S. activities of foreign banking organizations. The proposed 
amendments include revisions aimed at streamlining the applications 
procedures applicable to foreign banks seeking to expand operations in 
the United States, changes to provisions regarding the qualification of 
certain foreign banking organizations for exemption from the nonbanking 
prohibitions of the section 4 of the Bank Holding Company Act (the BHC 
Act), and implementation of provisions of the Reigle-Neal Interstate 
Banking and Branching Efficiency Act of 1994 (the Interstate Act) that 
affect foreign banks.
    In addition, there are proposed a number of technical and 
clarifying amendments for Subparts A and B, as well as Subpart C, which 
deals with export trading companies, and certain amendments to the 
Board's Rules Regarding Delegation of Authority.

DATES: Comments must be received by March 14, 1998.

ADDRESSES: Comments, which should refer to Docket No. R-0994, may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW., Washington, DC. 20551. 
Comments addressed to Mr. Wiles also may be delivered to the Board's 
mail room between 8:45 a.m. and 5:15 p.m., and to the security control 
room outside of those hours. Both the mail room and the security 
control room are accessible from the courtyard entrance on 20th Street 
between Constitution Avenue and C Street, NW. Comments received will be 
available for inspection in Room MP-500 of the Martin Building between 
9:00 a.m. and 5:00 p.m. weekdays, except as provided in Sec. 261.14 of 
the Board's Rules Regarding the Availability of Information, 12 CFR 
261.14.

FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General 
Counsel (202/452-3786); Sandra L. Richardson, Managing Senior Counsel 
(202/452-6406), or Jon Stoloff, Senior Attorney (202/452-3269), 
regarding Subpart A; Ann Misback, Managing Senior Counsel (202/452-
3788), or Janet Crossen, Senior Attorney (202/452-3281), regarding 
Subparts B or C, Legal Division; or Michael G. Martinson, Associate 
Director (202/452-2798), or Betsy Cross, Assistant Director (202/452-
2574), Division of Banking Supervision and Regulation. For the users of 
Telecommunications Device for the Deaf (TDD) only, please contact Diane 
Jenkins (202/452-3544).

SUPPLEMENTARY INFORMATION:

Subpart A: International Operations of U.S. Banking Organizations 
Expansion of Permissible Foreign Activities

Statutory Framework

    The proposed amendments to Regulation K, which are in part the 
result of the Board's review of its regulations under section 303 of 
the Regulatory Improvement Act, seek to eliminate unnecessary 
regulatory burden, increase transparency, and streamline the approval 
process for U.S. banking organizations seeking to expand their 
operations abroad and foreign banks seeking to establish or expand 
operations in the United States. The Federal Reserve Act, as amended by 
the IBA, also requires the Board to review and revise its regulations 
issued under section 25A of the Federal Reserve Act (the Edge Act) at 
least once every five years to ensure that the purposes of the Edge Act 
are being served in light of prevailing economic conditions and banking 
practices. The provisions of Subpart A, which govern the operations of 
Edge corporations, also were reviewed with this statutory mandate in 
mind.<SUP>1</SUP>
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    \1\ The Board last revised Subpart A in December 1995, at which 
time the general consent investment authority for strongly-
capitalized and well-managed U.S. banking organizations was expanded 
significantly. A comprehensive review of Regulation K in its 
entirety was completed in 1991.
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    Edge corporations are international banking and financial vehicles 
through which U.S. banking organizations offer international banking or 
other foreign financial services and through which they compete with 
similar foreign-owned institutions in the United States and abroad. The 
purposes of the Edge Act, which amended the Federal Reserve Act in 
1919, include enabling U.S. banking organizations to compete 
effectively with foreign-owned institutions; providing the means to 
finance international trade, especially U.S. exports; fostering the 
participation of regional and smaller U.S. banks in providing 
international banking and financing services to U.S. business and 
agriculture; and stimulating competition in the provision of 
international banking and financing services throughout the United 
States. Congress, in enacting this legislation, recognized that U.S. 
banks needed vehicles that could exercise wider financial powers abroad 
than were permitted domestically in order to be competitive 
internationally and to serve the international needs of U.S. firms. At 
the same time, the Edge Act places limits on U.S. banks' exposure to 
these broader foreign activities, by limiting the amount that U.S. 
banks may invest in Edge corporations, establishing a number of 
statutory safety and soundness constraints, and granting the Board wide 
discretion in determining what activities should be permissible for 
such entities. In exercising its authority in this area, the Board is 
required by the IBA to implement the objectives of the Edge Act 
consistent with supervisory standards relating to the safety and 
soundness of U.S. banking organizations.
    As a result of the current review, the Board has not identified any 
changes that appear to be necessary with regard to the provisions 
relating to the activities of Edge corporations in the United States. 
Nevertheless, comment is sought on any changes to the permissible U.S. 
activities of Edge corporations that are considered necessary or 
appropriate to fulfill the purposes of the Edge Act.

[[Page 68425]]

    The Board, however, has determined that a number of the provisions 
relating to foreign activities of U.S. banking organizations could be 
revised. The Board proposes revisions to Subpart A that would: (1) 
Expand permissible government bond trading by foreign branches of 
member banks; (2) streamline procedures for establishment of foreign 
branches by U.S. banking organizations; (3) expand permissible foreign 
activities of U.S. banking organizations, including securities 
activities; (4) expand general consent and portfolio investment 
authority for U.S. banking organizations; (5) amend the debt/equity 
swaps authority to reflect changes in circumstances of eligible 
countries; (6) implement the new statutory provision allowing member 
banks to invest, with the Board's approval, up to 20 percent of capital 
and surplus in the stock of Edge and agreement corporations; and (7) 
include additional technical and clarifying amendments. Each of these 
proposed changes is discussed below.

Expansion of Government Bond Trading by Foreign Branches

    Section 25 of the Federal Reserve Act permits the Board to 
authorize foreign branches of member banks to conduct abroad activities 
that are not permitted domestically. However, the statute states that 
the Board shall not ``except to such limited extent as the Board may 
deem necessary with respect to securities issued by any `foreign state' 
* * * authorize a foreign branch to engage or participate, directly or 
indirectly, in the business of underwriting, selling, or distributing 
securities.''
    Given the statutory language, the Board, to date, has only 
permitted foreign branches to underwrite and sell securities of the 
government of the country in which the branch was located. This was 
determined to be appropriate on the basis that it is often necessary in 
the ordinary course of banking business for a branch to participate in 
the selling of the bonds of the host country.
    In recent years, U.S. banking organizations have become more active 
in trading and underwriting foreign government securities. 
Increasingly, such business, where possible, is being conducted in the 
foreign branches of U.S. banks. Rather than distributing the securities 
through their various branches, centralizing trading for all or for 
certain groups of countries in a single branch can be desirable to 
facilitate management and funding of this business. For example, a 
banking organization might wish to centralize government securities 
trading for all countries in the European Union in one European branch.
    For these reasons, the Board proposes that banks be permitted to 
underwrite and deal through their foreign branches in obligations of 
governments other than the host government, provided that the 
obligations are of investment grade and the business is otherwise 
subject to sound banking practices and prudential regulations. The 
Board considers the requirement that the obligations must be investment 
grade would limit cross-border transfer risk to the bank because 
trading of government securities giving rise to such risk would be 
required to be conducted either directly through a local branch that is 
funded locally or through a subsidiary instead of through the bank.
    The Board believes that permitting branches to underwrite and sell 
securities of governments other than the host government on this basis 
is consistent with sound risk management and general business 
practices, as well as with the Board's statutory authority. The Board 
also proposes to retain the existing authority of foreign branches of 
member banks to underwrite and deal in host government bonds regardless 
of whether they are investment grade.
    The Board seeks comment on these proposals, as well as on what 
ratings should be considered to be investment grade for these purposes.

Foreign Branching

    The Board's responsibilities as home country supervisor under the 
Minimum Standards for the Supervision of International Banking Groups 
and their Cross-border Establishments issued by the Basle Committee on 
Banking Supervision (the Minimum Standards) call for its specific 
authorization of a U.S. banking organization's outward expansion. 
Outward expansion for these purposes means the initial establishment of 
a banking presence in a country by the bank or any affiliate.
    Regulation K currently requires the specific consent of the Board 
for the establishment of branches by a member bank, an Edge or 
agreement corporation, or a foreign bank subsidiary in its first two 
foreign countries. The Board believes that 30 days' prior notice before 
establishment of those initial foreign branches would be sufficient and 
would be consistent with the Minimum Standards. The Board considers 
that 30 days' prior notice also should be required consistent with the 
Minimum Standards if the initial banking presence abroad is in the form 
of a subsidiary bank; such notice would be required even if the amount 
to be invested were below the general consent limits.
    Under Regulation K at present, no prior Board approval is required 
for a banking entity to establish additional branches in any foreign 
country where it already operates one or more branches. However, a 
banking entity must give the Board prior notice before establishing a 
branch in a foreign country where it has no branches even though a 
banking entity affiliate operates a branch in that country.
    The Board proposes that Regulation K be liberalized such that if 
any of the member bank, its Edge or agreement corporation subsidiaries, 
or a foreign bank subsidiary (whether a subsidiary of the bank or of 
the bank holding company) already has a branch in a particular foreign 
country, a banking affiliate would be able to branch there without 
prior notice to the Board. After-the-fact notice, however, would still 
be required.
    The Board also proposes that the 45 days' prior notice currently 
required in order to branch into additional countries where there is no 
affiliated banking presence (after the organization has branches 
engaged in banking in two foreign countries) should be reduced to 12 
business days. In taking this approach, the foreign branching 
experience of the entire banking organization would be taken into 
account in determining whether the banking entity would be subject to 
the 30 day or 12 day prior notice procedure. Where a U.S. banking 
organization as a whole already operates foreign branches of banking 
entities in two countries, any banking affiliate would be able to open 
a branch in a country where such organization has no banking presence 
pursuant to the 12 days' prior notice procedure.
    Finally, currently under Regulation K, nonbanking subsidiaries held 
pursuant to Regulation K may branch into any country in which any 
affiliate has a branch without prior notice, but a 45-day prior notice 
must be submitted to establish a branch in a country where no affiliate 
has a presence. The Board proposes permitting nonbanking subsidiaries 
held pursuant to Regulation K to establish foreign branches without 
prior review, subject only to an after-the-fact notice requirement.
    The Board seeks comment on these proposed changes, including in 
particular whether the proposed modified notice periods would 
sufficiently accommodate foreign expansion plans.

[[Page 68426]]

Permissible Activities of Foreign Subsidiaries of U.S. Banking 
Organizations

    One aspect of bank regulation to which the Federal Reserve 
subscribes is the fostering of a level competitive playing field for 
financial intermediaries. Thus, in the United States, the Board has 
advocated that expansion by banking organizations into nonbanking 
activities should generally occur through the bank holding company and 
not the bank. Banks in the United States benefit from the implicit 
support of the national government and its sovereign credit rating 
through federal deposit insurance, Federal Reserve discount window 
access, and final riskless settlement of payment system transactions. 
Extension of this system would make the existing playing field in the 
United States unlevel for nonbank competitors and create unnecessary 
distortions in competition.
    The same principle applies to American banks abroad. Other nations 
have chosen to allow their banks to engage in a broad array of 
financial activities, especially investment banking activities, thereby 
extending to these banks the implicit support of their governments. In 
those markets, U.S. banks would be at a disadvantage if unable to offer 
their customers an equivalent range of key services with the 
convenience and efficiency of their local bank competitors. Indeed, in 
many of these markets, banks are the only significant providers of 
capital markets services. Independent securities firms are not 
generally substantial competitors in these markets, both for historical 
reasons and because they may be unable to compete effectively with 
banks that have the explicit and implicit support of their governments.
    Congress has recognized the existence of the different competitive 
environments faced by U.S. banks operating abroad and has legislated 
specifically to deal with it. Under the Edge Act, the Board has been 
granted broad authority to permit Edge corporations, which may be owned 
by U.S. banks, to engage in a wider range of activities outside the 
United States than has been permitted to U.S. banks domestically, 
consistent with safety and soundness standards. As noted, the purposes 
of the Edge Act include enabling U.S. banking organizations to compete 
effectively with foreign-owned institutions. Congress, in enacting this 
legislation, recognized that U.S. banks needed vehicles that could 
exercise broader financial powers abroad in order to be able to be 
competitive internationally and to serve the needs of U.S. firms. 
Congress granted the Board similar broad discretion to allow bank 
holding companies to engage in activities outside the United States.
    In exercising its statutory authority, the Board has sought to 
balance the need for U.S. banks to be competitive abroad with the 
public interest in assuring the safety and soundness of the banks, 
protecting the deposit insurance fund, and limiting the extension of 
the federal safety net. In proposing these revisions to Regulation K, 
the Board has sought to give U.S. banks appropriate expansion of those 
activities, such as investment banking, in which the competitive need 
is the greatest. Liberalization in relation to other activities, such 
as venture capital investments and insurance activities, has been 
proposed only in relation to subsidiaries of the bank holding company. 
These latter activities appear to be able to be conducted competitively 
outside the bank chain of ownership.

Securities Activities

Current Restrictions on Securities Activities

    Foreign subsidiaries of U.S. banking organizations have been 
permitted broad authority to underwrite and deal in debt securities for 
over 25 years, subject to the provision that the securities must be 
included with loans for purposes of compliance with the parent bank's 
lending limit. No separate dollar limits have been placed on 
underwriting and dealing in debt securities.
    Since 1979, Regulation K also has authorized foreign subsidiaries 
of both U.S. banks and bank holding companies to underwrite and deal in 
equity securities outside the United States, subject to certain 
limitations and restrictions. These activities were determined to be 
permissible, within the applicable limits, on two bases. First, it 
became clear that it was necessary for U.S. banking organizations to be 
able to engage in these activities abroad, if they were to compete 
successfully with foreign banks in the provision of services to foreign 
customers. Indeed, for some time, virtually all the major foreign 
competitors of U.S. banking organizations have been foreign banks that 
conduct equity securities activities either directly in the bank or in 
a subsidiary of the bank. Thus, consistent with the purposes underlying 
the Edge Act and the BHC Act, there is clear statutory authority for 
U.S. banking organizations to engage in these activities through 
subsidiaries abroad. Second, in any event, the provisions of the Glass-
Steagall Act do not apply extra-territorially to the operations of 
foreign subsidiaries of U.S. banking organizations.
    While equity underwriting and dealing have been permissible 
activities for U.S. banking organizations' foreign subsidiaries for 
some time, as noted above, the level of such activity is subject to 
limits under Regulation K. Prudential restrictions currently applied to 
equity securities underwriting and dealing activities under Regulation 
K include the following.
    Underwriting limits--Through a foreign subsidiary, an investor 
<SUP>2</SUP> may underwrite equity securities in amounts up to the 
lesser of $60 million or 25 percent of its tier 1 capital. These limits 
do not include amounts covered by binding commitments from sub-
underwriters or other purchasers. If the underwriting is done in a 
subsidiary of the member bank, the amount of the uncovered underwriting 
must be included in computing the bank's single borrower lending limit 
with respect to the issuer.
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    \2\ An investor for these purposes means an Edge corporation, 
agreement corporation, bank holding company, member bank and any 
foreign bank owned directly by a member bank.
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    Dealing limits--Through a foreign subsidiary, an investor may hold 
a dealing position in the equity securities of any one issuer in 
amounts up to the lesser of $30 million or 10 percent of its tier 1 
capital. An investor must include any shares of a company held in an 
affiliate's dealing account in determining compliance with any 
percentage limits placed on ownership of that company.
    Aggregate limit--There is an aggregate limit on the total amount of 
equity securities that may be held in investment and dealing accounts, 
aggregating all shares held by subsidiaries: for a bank holding 
company, the limit is 25 percent of tier 1 capital; for an Edge 
corporation,<SUP>3</SUP> the limit is 100 percent of the Edge's tier 1 
capital.<SUP>4</SUP>
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    \3\ Any foreign bank directly owned by a U.S. bank is treated as 
an Edge corporation for purposes of its limits.
    \4\ Investments in companies must be added to any shares of such 
companies held in the dealing account for purposes of this limit.
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    Prior review--Banking organizations must submit to a review of 
their foreign securities operations prior to engaging in foreign equity 
securities activities to the extent of these limits. They may also seek 
Board approval for higher underwriting limits, subject to certain 
conditions.

[[Page 68427]]

Proposed Revisions

Determination of Applicable Limits
    Although, as discussed above, the limits on underwriting and 
dealing in equity securities in Regulation K are expressed both in 
terms of percentages of tier 1 capital of the investor and absolute 
dollar limits, as a practical matter it has been the dollar limits that 
have constrained the ability of U.S. banking organizations to engage in 
these activities through their foreign subsidiaries and, consequently, 
have impeded their efforts to compete with foreign banks abroad. In 
order to reduce further these constraints on competition, the Board 
proposes to replace the dollar limits for underwriting or dealing 
activity with limits based solely on percentages of the investor's tier 
1 capital for well-capitalized and well-managed organizations.
    The Board considers that, if a banking organization is well-
capitalized and well-managed, tying the underwriting or dealing limits 
solely to capital levels would have the benefit of more closely linking 
the limits to the ability of the company to support the activity. It 
would also provide U.S. banking organizations with greater flexibility 
in responding to changing market conditions, because the amount of 
capital devoted to an activity is, after meeting regulatory 
constraints, determined by the firm.<SUP>5</SUP>
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    \5\ Arguably, this flexibility could be enhanced further if 
foreign subsidiaries of U.S. banking organizations were permitted to 
exceed the individual and aggregate limits, subject to a requirement 
that the amount in excess of the limits be deducted from capital 
and, after such deduction, the institution would continue to be 
well-capitalized.
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    Accordingly, the Board proposes to amend Regulation K in relation 
to those banking organizations that are well-capitalized and well-
managed by removing the existing dollar limits applicable to equity 
securities activities, and instead providing that such activities would 
be limited to percentages of the investor's tier 1 capital. For well-
capitalized and well-managed organizations, the Board proposes 
applicable limits to be determined as follows.<SUP>6</SUP> In relation 
to securities activities of subsidiaries of bank holding companies, 
their limits would be determined by reference to percentages of the 
tier 1 capital of the holding company. The Board proposes, however, 
that limits applicable to such activities undertaken by subsidiaries of 
Edge and agreement corporations, as well as foreign banks that may be 
direct subsidiaries of member banks, would be determined by reference, 
at least in the first instance, to the tier 1 capital of the parent 
bank.
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    \6\ The Board proposes that existing dollar limits would be 
retained for companies that are not well-capitalized and well-
managed.
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    In the Board's view, tying applicable limits to the capital of the 
parent bank is particularly important for subsidiaries of Edge 
corporations. As previously noted, Congress has limited a member bank's 
investment in Edge and agreement corporations to 20 percent of the 
bank's capital.<SUP>7</SUP> However, partly for tax reasons, Edge 
corporations historically have tended to retain their earnings rather 
than dividending them to the parent bank. In some cases due to such 
retained earnings, the capital of a bank's Edge and agreement 
corporations may be in excess of 20 percent of the parent bank's 
consolidated capital, even though its investment in the Edge subject to 
the above-referenced statutory limit is below 20 percent.
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    \7\ The Edge Act prohibited member banks from investing more 
than 10 percent of their capital and surplus in the capital stock of 
Edge and agreement corporations. In September 1996, Congress amended 
this limit to permit investments in excess of 10 percent of capital 
and surplus with the specific approval of the Board, provided the 
amount invested shall not exceed 20 percent of capital and surplus 
of the bank.
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    In these circumstances, the Board considers that the capital of an 
Edge corporation that is in excess of 20 percent of the parent bank's 
consolidated capital, when retained earnings are counted, should be 
excluded for purposes of determining applicable limits for activities 
of the Edge and its subsidiaries. The Board proposes to accomplish this 
by setting limits for Edge corporations tied both to percentages of the 
Edge's and parent bank's capital, respectively.<SUP>8</SUP> Limits tied 
to the parent bank's capital would be 20 percent of the limits 
otherwise applicable to Edge corporations. The lower limit would be the 
binding limit. For example, if a limit proposed for a given activity of 
an Edge corporation is 10 percent of capital but the Edge's capital is 
in excess of 20 percent of the bank's total capital, the binding limit 
for the Edge would be two percent of the parent bank's tier 1 capital. 
For those U.S. banks that do not have significant levels of retained 
earnings at the Edge, the binding limit more than likely would be the 
separate limit tied to the Edge's capital.
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    \8\ As noted above, Regulation K currently treats any foreign 
bank owned directly by a member bank as an Edge corporation for 
purposes of its limits. The Board proposes that this treatment would 
be continued under the revised Regulation K limits.
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    The Board considers that this approach would be consistent with the 
intent underlying the provisions of the Edge Act limiting the total 
amount of capital a bank may invest in Edge corporations. This approach 
effectively would place a cap on the percentage of total bank capital 
that could be placed at risk through activities or investments not 
otherwise permitted to the bank directly, regardless of the capital 
level of the Edge corporation. This approach also would remove any 
regulatory incentive to retain earnings at the Edge because any 
regulatory benefit from such retained earnings, in terms of expanded 
limits on activities abroad, would be denied.
    The Board proposes that all limits applicable to well-capitalized 
and well-managed Edge corporations under the amended Regulation K would 
proceed on this basis. Comment is requested on these proposals and 
whether any other approach might achieve similar objectives.

Equity Underwriting

    The $60 million limit on underwriting equity securities 
significantly impedes the ability of U.S. banking organizations to 
compete for this business in foreign markets, where securities 
underwriting is increasingly a service offered by local banks. At the 
same time, the risks associated with the activity suggest that such a 
stringent limit is not required for safety and soundness purposes for 
well-capitalized and well-managed banking organizations. While initial 
underwriting commitments may involve large sums, in most cases by the 
time the underwriting goes to market, large portions of the exposure 
have been passed on sub-underwriters or presold. Thus, in most cases, 
the initial underwriting commitment overstates the risk being assumed.
    The Board proposes to remove the absolute dollar limits on 
underwriting exposure for well-capitalized and well-managed banking 
organizations, but retain a limit based on a percentage of the 
investor's capital. More specifically, limits for underwriting exposure 
to a single company would be established at 15 percent of the bank 
holding company's tier 1 capital for its subsidiaries and, for 
subsidiaries of Edge corporations, the lesser of three percent of tier 
1 capital of the bank or 15 percent of the tier 1 capital of the Edge.
    These limits on underwriting exposure to a single company would be 
applied on an aggregate basis. A bank holding company's limit would 
include all underwriting exposure to one issuer by all of the holding 
company's direct and indirect subsidiaries, including exposures held 
through its bank subsidiaries. The bank's and Edge's

[[Page 68428]]

limits would include all exposures held by their respective 
subsidiaries. The Board proposes, however, that this expanded 
underwriting authority would be available to U.S. banking organizations 
only if each of the bank holding company, bank and Edge or agreement 
corporation qualify as well-capitalized and well-managed.<SUP>9</SUP>
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    \9\ The Board proposes that what, if any, action should be taken 
in relation to banking organizations' limits and dealing positions 
if they cease to be well-capitalized and well-managed would be 
addressed on a case-by-case basis through supervisory action.
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    For organizations that fail to meet the well-capitalized and well-
managed criteria, the Board proposes that the existing dollar limits 
(i.e., $60 million) on commitments by an investor and its affiliates 
for the shares of an organization would be retained.
    The Board proposes that, in order to engage in such activities, all 
banking organizations would be required to implement internal systems 
and controls adequate to ensure proper risk management. Controls would 
have to be in place to assure that underwriting positions do not result 
in violations of limits on securities held in the trading account or 
exceed the parent bank's lending limits when the underwriting positions 
are combined with other credit exposures. Sanctions (such as temporary 
suspension of underwriting authority) may be imposed for violations of 
such limits.

Dealing in Equity Securities

    The Board also proposes for comment liberalization of dealing 
activities for well-capitalized and well-managed banking organizations. 
As with underwriting limits, the proposed dealing limits would be based 
on percentages of capital of the organization and, thus, on the ability 
of the organization to accommodate risk. This change would permit U.S. 
banking organizations to compete more effectively with foreign banks in 
providing equity dealing and underwriting services to customers abroad, 
where such activities are generally permissible to banking 
organizations. Nevertheless, in the Board's view, dealing activities 
appear to present somewhat greater risk of loss than underwriting, 
which suggests somewhat more restrictive limits are needed for dealing 
activities relative to underwriting activities.
    For well-capitalized and well-managed organizations, the Board, 
therefore, proposes to remove the current dollar limits and revise the 
existing percentage of capital limits as follows. First, in order to 
provide diversification in the trading account, the Board proposes a 
limit on holdings of any one stock in the trading account of 10 percent 
of the tier 1 capital of the bank holding company for its subsidiaries 
and, for subsidiaries of an Edge corporation, the lesser of two percent 
of the bank's tier 1 capital or 10 percent of the Edge's tier 1 
capital.
    Second, the Board proposes an aggregate limit applicable to all 
holdings of equities in the trading accounts of all direct and indirect 
subsidiaries authorized pursuant to Subpart A.<SUP>10</SUP> Without 
such an aggregate ceiling, the Board is concerned that a banking 
organization could have excessive exposure to movements in equity 
markets. The Board proposes aggregate limits of 50 percent of the bank 
holding company's tier 1 capital for its subsidiaries and, in the case 
of an Edge's subsidiaries, the lesser of 10 percent of the tier 1 
capital of the bank or 50 percent of the Edge's tier 1 capital.
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    \10\ As at present, shares held as an investment pursuant to 
Subpart A also would be included in calculating the applicable 
aggregate limits.
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    The Board proposes that the limits on equity trading and dealing 
would apply to net positions across legal vehicles held, directly or 
indirectly, by the regulated entity to which the limit is applicable 
(that is, the bank holding company, the bank or the Edge 
corporation).<SUP>11</SUP> Long equity positions in a single stock 
could be netted against short positions in the same stock and against 
derivatives referenced to the same stock.<SUP>12</SUP> For purposes of 
the aggregate limits, all physical and derivative long positions could 
be netted against physical and derivative short positions. It is 
further proposed that, for purposes of measuring compliance with these 
investment limits, banks would be permitted to use internal models to 
calculate the value of derivative positions used to offset exposures 
and net dealing positions in individual stocks, as well as the value of 
total net equity holdings in the trading account.<SUP>13</SUP> The 
Board considers that the adequacy of such models is subject to review 
during the exam process, and proposes that no special review would be 
required for their use in connection with the proposed limits on 
securities activities. <SUP>14</SUP>
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    \11\ Currently these limits are normally applied on a gross 
basis.
    \12\ The Board also proposes that a basket of stocks, 
specifically segregated by the banking organization as an offset to 
a position in a stock index derivative product, as computed by the 
bank's internal model, may be netted as a whole against the stock 
index.
    \13\ Currently, the use of internal models in computing net 
positions in stocks is subject to prior Board review and the 
limitation that any position in a security shall not be deemed to 
have been reduced through netting by more than 75 percent.
    \14\ The Board also seeks comment on allowing netting of 
underwriting exposures.
---------------------------------------------------------------------------

    For organizations that fail to satisfy the well-capitalized and 
well-managed criteria, the Board proposes to retain the existing dollar 
limit on individual shares held in the trading account (i.e., $30 
million), which would be calculated in the same manner as at present. 
With regard to an aggregate limit on shares held in the trading 
account, the Board considers that a reasonable limit for all equity 
positions of such organizations, aggregating all positions and 
investments held pursuant to Subpart A, would be 25 percent of the 
holding company's capital for its subsidiaries and, for subsidiaries of 
Edges and any foreign bank held directly by a member bank, the lesser 
of 5 percent of the bank's tier 1 capital or 25 percent of the Edge's 
tier 1 capital. These limits would be half of those applicable to 
organizations that are well-capitalized and well-managed as proposed 
above.
    These proposed percentage limits may appear lower than the existing 
limits (which are 25 percent of tier 1 for subsidiaries of bank holding 
companies and 100 percent of tier 1 for any other investor). In this 
regard, however, the Board also proposes that an organizations' 
aggregate position in stocks also could be calculated on the net basis 
described above in determining compliance with these limits, rather 
than on the gross basis presently required by Regulation K. This 
netting authority in most cases would allow organizations to continue 
to conduct their current levels of activities, even under the proposed 
new limits. In these circumstances, the Board considers that the 
aggregate limits should be reduced. In particular, the Board is 
concerned that permitting an organization that is not well capitalized 
or well managed to maintain what would be essentially an open exposure 
to the stock markets in excess of 25 percent of the tier 1 capital of 
the holding company or the Edge or five percent of the tier 1 capital 
of the bank simply would not be consistent with safety and soundness 
considerations.
    The Board seeks comment generally on the proposed limits and 
netting authority. Commenters' views in particular are solicited on 
whether:

--The revised limits, when taken together with the netting authority, 
would enable U.S. banking organizations to compete with foreign banks 
in these activities abroad;
--Appropriate distinctions have been drawn, in terms of dealing 
authority,

[[Page 68429]]

between organizations that are well-capitalized and those that are not;
--The proposed netting authority should be available to organizations 
that are not well-capitalized or well-managed;
--Even with the proposed netting authority, the reduction in percentage 
limits for organizations that are not well-capitalized or well-managed 
would give rise to a need for grandfathering of, e.g., existing 
portfolio investments;
--It would be appropriate to include underwriting commitments in the 
aggregate limits for dealing activities and portfolio investments; and
--Provision should be made for higher dealing limits for banking 
organizations on a case-by-case basis.

    For organizations that are not well capitalized and well managed, 
the Board proposes to retain the existing dollar limits applicable to 
underwriting and dealing positions (that is, $60 million on and $30 
million, respectively), without regard to limits on percentage of 
capital. As noted, it is generally the dollar limits that currently 
constrain organizations in their ability to conduct these activities. 
This is because, at present, only the largest banking organizations are 
engaged in these activities. The Board notes, however, that in the 
future a relatively small organization may seek to enter these lines of 
business and, for it, exposures of $30 or $60 million may be large 
relative to its capital. The Board seeks comments on whether, in 
addition to dollar limits, limits based on percentage of capital also 
should be adopted for organizations that are not well capitalized and 
well managed in order to address the relative exposure of such 
organizations to these activities.

Additional Option

    The Board also seeks comment on whether, instead of imposing the 
limits discussed above in relation to equity underwriting and dealing 
activities by subsidiaries of well-capitalized and well-managed bank 
holding companies, it would be appropriate to lift all limits on these 
activities for such entities except for the limits on individual stocks 
held in the trading account discussed above (i.e., 10 percent of the 
holding company's tier 1 capital). The Board considers that, at a 
minimum, this limit should be imposed on holding companies in order to 
assure diversification in individual stock holdings. Under this 
alternative, banking organizations also would be required to implement 
internal systems and controls adequate to ensure proper risk management 
and that underwriting positions do not result in violations of limits 
on investments in any one company.

Authority to Engage in Equity Securities Activity

    Board approval currently is required to engage in underwriting and 
dealing in equity securities pursuant to Regulation K. Because of the 
increased supervisory focus on risk management procedures, the Board 
seeks comment on whether banking organizations that are well 
capitalized and well managed should be allowed to engage in the 
expanded equity securities activities without seeking prior Board 
approval provided that they already have experience in equity 
securities activities under either Regulation K or Regulation Y.
    As discussed above, the Board proposes that other banking 
organizations would be authorized to take positions in individual 
stocks only to the extent currently permissible (i.e., subject to the 
existing dollar limitations on equity underwriting and dealing). In 
view of these lower limits, the Board proposes that these banking 
organizations would not be required to obtain prior Board approval to 
engage in equity securities activities to this limited extent, provided 
that these organizations satisfy minimum capital and managerial 
criteria.

Venture Capital Activities Through Portfolio Investments

Current Restrictions

    Regulation K currently allows U.S. banking organizations to make 
portfolio investments, that is, limited, noncontrolling investments in 
foreign commercial and industrial companies. This authority is intended 
to enhance the competitiveness of U.S. banking organizations by 
increasing the range of financial services they may provide abroad. 
Many foreign financial institutions, including foreign banks, engage in 
venture capital activities, at times in connection with the provision 
of other financial services to the company.
    At present, in order for a portfolio investment to be a permissible 
investment, an investor must hold less than 20 percent of the voting 
stock of the company, and no more than 40 percent of the company's 
total equity. Additionally, bank holding companies are subject to an 
aggregate limit on such investments in non-financial firms of 25 
percent of tier 1 capital, and Edge corporations are subject to an 
aggregate limit of 100 percent of tier 1 capital. <SUP>15</SUP> These 
limits are designed to ensure that U.S. banking organizations do not 
control commercial and industrial companies and that their overall risk 
exposure to nonfinancial investments is limited.
---------------------------------------------------------------------------

    \15\ In determining compliance with both the individual and 
aggregate limits, shares in such companies held in the dealing or 
trading account by the investor and any of its affiliates must be 
included.
---------------------------------------------------------------------------

    As a practical matter, however, venture capital, or portfolio, 
investments presently are made almost exclusively under general consent 
procedures and consequently also have been subject to a dollar limit of 
$25 million in a single company (the same limit currently applied to 
most other investments for purposes of general consent). Such 
investments are generally made in companies engaged in activities 
unrelated to banking or finance. The $25 million limit has had the 
effect of focusing banking organizations primarily on the small company 
end of the venture capital business.

Proposed Investment Limits

    The Board believes that removing the practical constraint of the 
dollar limit on such investments by keying the limits solely to a 
percentage of the investor's tier 1 capital may be appropriate for 
well-capitalized and well-managed bank holding companies. The Board 
proposes to limit any liberalization in this area to subsidiaries of 
holding companies because it is concerned that, in view of the risk of 
loss inherent in venture capital investments and their low liquidity, 
these activities may be more appropriately conducted outside the bank 
ownership chain. In proposing this approach, the Board is aware that, 
even in the existing regulatory environment, much of the current 
venture capital activity abroad is conducted through subsidiaries of 
the holding company. Thus, there appear to be no major operational or 
competitive considerations that would weigh in favor of expanding the 
authority of Edge subsidiaries to engage in this activity. However, if 
appropriate diversification and aggregate limits were established, the 
Board considers that some expansion of the ability of holding company 
subsidiaries to engage in this activity, using shareholder funds, would 
not present undue risks to the affiliated U.S. bank and would enhance 
the ability of U.S. banking organizations to compete in the provision 
of banking and financial services abroad.

[[Page 68430]]

    For these reasons, the Board proposes to establish limits for 
portfolio investments made by subsidiaries of well-capitalized and 
well-managed bank holding companies of 2 percent of the holding 
company's tier 1 capital for an individual investment (in order to 
assure diversification of these potentially volatile and illiquid 
investments), and an aggregate limit of 25 percent of the holding 
company's tier 1 capital for all such investments. In determining 
compliance with the individual limit, shares in such companies held in 
the trading account by the investor and any of its affiliates would be 
included.
    For all other investors (i.e., Edge corporation and foreign bank 
subsidiaries of member banks, and subsidiaries of bank holding 
companies that are adequately capitalized but fail to meet the well-
capitalized and well-managed standards), the Board proposes limits on 
investments in any one organization of $25 million; larger investments 
would continue to be eligible for approval on a case-by-case basis. An 
aggregate limit on such investments, when taken together with other 
positions in equity securities held in the dealing account, also would 
be imposed consistent with the aggregate dealing limits discussed 
above, namely, 25 percent of tier 1 capital for subsidiaries of holding 
companies and, for Edge or foreign bank subsidiaries, the lesser of 5 
percent of the parent bank's tier 1 capital or 25 percent of the Edge's 
tier 1 capital.
    The Board seeks comment on these proposals, including regarding the 
relative risk of portfolio investments and whether there is a need for 
competitive reasons for foreign subsidiaries of banks also to have 
expanded authority in relation to such investments.

Limits on Voting Shares in Target Company

    At present, portfolio investments are limited to less than 20 
percent of a company's voting shares. At the time this limit was 
adopted by the Board, the equity method of accounting was used for 
investments of 20 percent or more of a company's voting shares and the 
cost method of accounting was used for investments under this level. 
Venture capital investments, however, now may be reported at fair value 
irrespective of the percentage of ownership, with changes in fair value 
recognized in income and correspondingly in tier 1 capital. In light of 
these developments, the Board considers that the current limit of less 
than 20 percent of voting shares has lost its original purpose.
    In these circumstances, the Board proposes permitting investors to 
make noncontrolling venture capital investments in up to 24.9 percent 
of a company's voting shares in recognition of this fact. The proposed 
limit on voting shares would be set at less than 25 percent in order to 
provide further assurance of the noncontrolling nature of the 
investment. The Board is concerned that at levels above 25 percent of 
voting shares, both other investors and foreign authorities may view 
the bank holding company as a controlling investor, with implicit 
responsibilities to support the company or with liability for 
industrial accidents. As at present, these investments also would be 
permissible only if the investor in fact does not control the company 
in which the investment is made. Thus, the investor may not control a 
majority of the board of directors or have a disproportionate 
representation on the board; it may not have a management contract with 
the company or exercise veto power over its actions; nor may the 
investor use other means to control the operations of the company.

``Incidental'' Activities in the United States

    As a result of limitations in the Federal Reserve Act and the BHC 
Act, U.S. banking organizations are prohibited from investing in more 
than 5 percent of the voting shares of foreign companies that engage in 
impermissible activities in the United States other than those 
activities that are an incident to their international or foreign 
business.<SUP>16</SUP> The Board previously has taken the view that 
such permissible incidental activities in the United States are limited 
to those activities that the Board has determined are permissible for 
Edge corporations to conduct in the United States.<SUP>17</SUP>
---------------------------------------------------------------------------

    \16\ In particular, the FRA prohibits investments in companies 
engaging in ``the general business of buying or selling goods, 
wares, merchandise or commodities in the United States.'' 12 U.S.C. 
section 615. Section 4(c)(13) investments under the BHC Act are 
limited only by a requirement that the company do ``no business in 
the United States except as incident to its international or foreign 
business.''
    \17\ See 12 CFR 211.4(e).
---------------------------------------------------------------------------

    However, as noted above, companies in which portfolio investments 
are made generally are engaged in industrial or commercial activities, 
which are not permissible activities for Edge corporations. 
Consequently, under Regulation K at present, if a portfolio investment 
company decides to engage in activities in the United States, the U.S. 
banking organization is forced to sell the portfolio investment even if 
market considerations would not warrant selling the shares at that 
time. This is despite the fact that the U.S. banking organization, by 
reason of the mandatory noncontrolling nature of portfolio investments, 
is unlikely to be in a position to influence any decision regarding 
entry into the U.S. market. The Board is aware that, with the 
increasing globalization of economies around the world, this situation 
may become more common in the future.
    The Board considers that these changes in circumstance may warrant 
a limited change in the interpretation of what constitutes activities 
in the United States that are ``incidental'' to international or 
foreign activities in order to provide some relief for U.S. banking 
organizations making portfolio investments abroad. Given the minority 
nature of the portfolio investments and the significant changes in 
international markets, the Board considers that, consistent with the 
Federal Reserve Act and the BHC Act, portfolio investment companies 
that derive no more than 10 percent of their total revenue in the 
United States may be considered to be engaged only in business that is 
an incident to their international or foreign business and therefore 
may be held for an appropriate investment period consistent with the 
nature of venture capital activities. In reaching this view, the Board 
has taken into account the particular nature of portfolio investments. 
Most portfolio investments are venture capital investments that are 
intended to be sold after a period of time. They are not intended to be 
permanent holdings of the banking organization. In addition, the 
preponderance of the value of the portfolio investment is derived from 
its foreign business.
    The Board seeks comment on this proposed change. The Board also 
seeks comment regarding what an appropriate period for divestiture 
would be for investments that exceed the proposed U.S. revenue limits, 
as well as whether a time limit should be placed on the period for 
holding these types of portfolio investments in view of their 
supposedly medium-term nature.

Insurance Activities

    Regulation K currently permits bank holding companies to own 
foreign companies that underwrite and reinsure life and related types 
of insurance outside the United States. The Board requests comment on 
whether the reinsuring by a foreign subsidiary of a bank holding 
company of annuities or life insurance policies sold to U.S. persons is 
an activity that should be considered to fall within this authority.

[[Page 68431]]

This issue has been raised recently by several bank holding companies. 
Under one proposal, an offshore insurance subsidiary, which has no U.S. 
office, would reinsure certain annuities sold in the United States to 
U.S. residents. These annuities would be underwritten by a U.S. 
insurance company unaffiliated with the bank holding company, and sold 
by various insurance agencies, including those affiliated with the bank 
holding company. The U.S. insurance company would cede a portion of the 
portfolio of annuities sold to the bank holding company's customers to 
the insurance company's foreign affiliate and the offshore insurance 
subsidiary of the bank holding company would enter into a retrocession 
agreement with that foreign company to reinsure no more than 50 percent 
of the portfolio of annuities sold to the bank holding company's 
customers. The offshore insurance subsidiary of the bank holding 
company would not have any contact with the annuity purchasers and 
would assume no liability to them. Moreover, the offshore insurance 
subsidiary would have no reinsurance liability to the U.S. insurance 
company, but only to the foreign affiliate of the U.S. insurance 
company.
    The Board does not consider that an offshore insurance subsidiary 
of a bank holding company under Regulation K may sell policies directly 
into the United States. It appears, however, that the relevant statutes 
could permit a bank holding company, through its Regulation K 
subsidiary, to reinsure all or a portion of the risk of policies or 
annuities sold in the United States by U.S. affiliates of the bank 
holding company or unrelated parties. A question is presented, however, 
regarding whether the fact that the reinsurance takes place offshore is 
sufficient evidence that the activity is conducted outside the United 
States. On this view, any U.S. aspects of the activity would be 
considered merely an incident to the permissible offshore reinsurance 
activity. Alternatively, the fact that the risk to be reinsured is in 
the United States could cause the activity to be considered located in 
the United States, particularly given the significant involvement of 
the bank holding company's U.S. affiliates. In view of what appears to 
be increasing interest in this activity, the Board requests comment on 
these matters.

Debt/Equity Swaps

    Regulation K currently permits banking organizations to swap 
certain developing country debt for equity interests in companies of 
any type. The debt/equity swap authority was established in 1987. Under 
this authority, the Board granted its general consent for investors to 
invest up to one percent of their tier 1 capital in up to 40 percent of 
the shares, including voting shares, of private sector companies in 
eligible countries. These foreign investment provisions are more 
liberal than provided elsewhere in Regulation K. Eligible countries 
were defined as countries that have rescheduled their debt since 1980, 
or any country the Board deemed to be eligible.<SUP>18</SUP>
---------------------------------------------------------------------------

    \18\ Fifty-one countries reached debt relief agreements with 
commercial banks during the period January 1980-December 1995.
---------------------------------------------------------------------------

    The debt/equity swap authority was viewed by the Board at that time 
as adding to the menu of options available to banking organizations for 
managing large amounts of sovereign developing country debt that was 
nonperforming and illiquid.<SUP>19</SUP> In considering ways in which 
banking organizations could deal with these debt problems, the Board 
adopted an approach analogous to foreclosure on debts previously 
contracted (``DPC'') by private parties and extended the DPC concept to 
permit an exchange of sovereign debt for any equity assets, private or 
public, in the country. Such an investment had to be held through the 
bank holding company, unless the Board specifically permitted it to be 
held through the bank or a bank subsidiary.
---------------------------------------------------------------------------

    \19\ The only significant alternatives at that time were 
establishing provisions for the bad debts or writing the debts off 
and accepting the losses.
---------------------------------------------------------------------------

    There is now a well developed secondary market in developing 
country debt. The vast bulk of developing country problem debt has been 
repackaged in the form of long-term Brady bonds, mostly denominated in 
U.S. dollars and fully collateralized as to principal by U.S. 
government bonds. Many banking organizations actively trade these 
instruments in the secondary market.
    Due to the development of the secondary markets for emerging market 
debt, U.S. banks now have the same options with regard to many of these 
assets as they have with other bank assets--namely, they can hold the 
asset with a view toward collecting at maturity or sell the asset for 
cash to invest in other bank eligible assets. Indeed, the sovereign 
debt of most of the historically ``eligible countries'' is no longer 
illiquid, and those eligible countries that account for the vast share 
of rescheduled debt have largely regularized their relations with 
commercial banks.
    Accordingly, the Board proposes that the term ``eligible country'' 
be redefined so that only countries with currently impaired sovereign 
debt (i.e., debt for which an allocated transfer risk reserve would be 
required under the International Lending Supervision Act and for which 
there is no liquid market) would be eligible for investments through 
debt/equity swaps under Regulation K. This proposal would redirect this 
special authority to the asset quality problem it was originally 
intended to help resolve. In connection with this change, the Board 
also proposes that existing holdings of such investments would be 
grandfathered, subject to the existing time period for divestiture of 
such investments (i.e., generally 10 years from the date of 
acquisition).
    Comment is requested regarding these proposed changes. The Board 
also seeks comment on whether, alternatively, this exception to the 
limitations on investments by banking organizations in non-financial 
fitness is no longer needed and should be deleted in its entirety.

Streamlining Application Procedures

General Consent Limits

    While existing Regulation K procedures have proved effective in 
maintaining the safety and soundness of U.S. banks' international 
operations, they have become increasingly complex over the years. For 
example, under prior notice procedures, the Board has reviewed all 
foreign investments made by banking organizations above a de minimis 
level as a principal mechanism for overseeing the safety and soundness 
of the investing organization. In view of relatively recent shift in 
emphasis to supervision based upon risk management capabilities, the 
Board believes that prior review of relatively small investments is no 
longer useful as a fundamental supervisory tool, especially where the 
investor is well capitalized and well managed. Accordingly, the Board 
proposes that only significant investments, as determined solely on the 
basis of the investor's capital, would be subject to prior review by 
the Board, provided that the investors are well capitalized 
<SUP>20</SUP> and

[[Page 68432]]

well managed.<SUP>21</SUP> The proposed changes to the general consent 
procedures attempt to balance safety and soundness considerations with 
the objective of enhancing the ability of U.S. banking organizations to 
compete with foreign banks overseas.
---------------------------------------------------------------------------

    \20\ A bank holding company is considered well capitalized if, 
on a consolidated basis, it maintains total and tier 1 risk-based 
capital ratios of at least 10 percent and 6 percent, respectively. 
Further, the bank holding company may not be subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive. In the case of an insured depository institution, well 
capitalized means that the institution maintains at least the 
capital levels required to be well capitalized under the capital 
adequacy regulations or guidelines applicable to the institution 
that have been adopted under section 38 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o). The Board proposes that an Edge or 
agreement corporation would be considered well capitalized if it 
maintains total and tier 1 capital ratios of 10 and 6 percent, 
respectively.
    \21\ A bank holding company or insured depository institution is 
considered well managed if, at it most recent inspection or 
examination or subsequent review, the holding company or institution 
received at least a satisfactory composite rating and at least a 
satisfactory rating for management and for compliance, if such a 
rating is given. Under the standards adopted by the Board in 
connection with the December 1995 expansion of general consent 
authority in Regulation K, an Edge or agreement corporation will be 
considered to be well managed for these purposes if it has received 
a composite rating of 1 or 2 at its most recent examination or 
review and it is not subject to any supervisory enforcement action.
---------------------------------------------------------------------------

Limits on Investments in One Company

    Historically, all general consent investments under Regulation K 
were subject to absolute dollar limits. Currently, the general consent 
limit for most investments is $25 million. However, as a result of 
amendments to Regulation K implemented in December 1995, certain 
investments by strongly capitalized and well-managed banks are subject 
to Board review only to the extent they exceed a percentage of the 
investor's capital.
    The Board proposes expanding upon this approach by eliminating the 
absolute dollar limits on foreign investments permissible under general 
consent authority for well-capitalized and well-managed investors (with 
the exception of those on venture capital investments made by the 
bank). Under the proposal, general consent limits for all investors 
(bank holding companies, banks, and Edge corporations) would be based 
solely on a percentage of their tier 1 capital.<SUP>22</SUP>
---------------------------------------------------------------------------

    \22\ If the Edge corporation were making the investment, then 
the Edge corporation, the member bank, and the bank holding company 
would be required to meet the well-capitalized and well-managed 
tests. If the member bank were making the investment, then the bank 
and the bank holding company would be required to meet the tests.
---------------------------------------------------------------------------

    The limits on individual investments made under general consent 
authority would vary according to the investor (bank holding company, 
bank, or Edge corporation) and the type of entity in which the 
investment is made. For well-capitalized and well-managed investors, 
the Board proposes the following percentage limits.

          General Consent Limits on Investment in a Subsidiary          
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Bank holding company           10 percent of tier 1 capital of the bank 
 subsidiaries.                  holding company.                        
Bank subsidiaries............  The lesser of 2 percent of tier 1 capital
                                of the bank or 10 percent of tier 1     
                                capital of the bank subsidiary.         
------------------------------------------------------------------------


         General Consent Limits on Investment in a Joint Venture        
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Bank holding company           5 percent of tier 1 capital of the bank  
 subsidiaries.                  holding company.                        
Bank subsidiaries............  The lesser of 1 percent of tier 1 capital
                                of the Bank or 5 percent of tier 1      
                                capital of the Bank subsidiary.         
------------------------------------------------------------------------

    The proposed limits are intended to reflect the risk involved in 
the type of investment. A higher percentage of capital would be 
permitted in the case of an investment in a subsidiary as opposed to an 
investment in a joint venture because the latter is considered to carry 
a greater risk of loss. Thus, with joint ventures, investors acquire 
less than full control, and the record on such investments has shown 
that they experience a higher rate of loss. As a result, most U.S. 
banks do not now make sizeable joint venture investments. In light of 
these considerations, the Board believes that lower general consent 
limits may be appropriate for joint venture investments.
    For investors that fail to meet the well-capitalized or well-
managed standards, the Board proposes the following limits. Individual 
investments under general consent authority would be limited to the 
lesser of $25 million or 5 percent of tier 1 capital in the case of an 
investor that is a bank holding company, or 1 percent of tier 1 capital 
if the investor is a member bank. Limits on individual investments for 
an Edge corporation would be $25 million or the lesser of 1 percent of 
the parent bank's tier 1 capital or 5 percent of the Edge's tier 1 
capital. The Board proposes, however, that authority would be delegated 
to the Director of Banking Supervision and Regulation to approve higher 
investment limits on a case-by-case basis or as part of an investment 
program as described above.
    The Board seeks comment on these proposed limits, as well as 
whether general consent limits should be established for investments in 
joint ventures that are lower than the limits on investments in 
subsidiaries. The Board notes that these limits reflect only the 
investments that may be made under general consent authority; larger 
investments may continue to be made with 30 days' prior notice.

Aggregate Limits

    The above limits are intended to address the fact that individual 
foreign investments above a certain size may be a source of potential 
concern, and therefore prior review of such investments should be 
required. In addition, the Board is also concerned with any rapid 
increase in an organization's foreign investments overall, made without 
prior review. Accordingly, it is proposed that when the cumulative 
investments made under general consent reach a certain amount over a 
given period, new or additional investments would become subject to 
prior review. Investments by all affiliates of a bank holding company 
would be taken into account in determining compliance of the holding 
company with the aggregate limits; investments of subsidiaries of a 
bank or of an Edge, respectively, would be aggregated in determining 
compliance with their limits. Under the proposed liberalized general 
consent procedures, the new aggregate limit for all investments during 
any 12-month period for investors meeting the well-capitalized and 
well-managed tests would be:


Bank holding companies.......  20 percent of tier 1 capital.            

[[Page 68433]]

                                                                        
Bank subsidiaries............  The lesser of 10 percent of tier 1       
                                capital of the bank or 50 percent of the
                                bank subsidiary's tier 1 capital.       
                                                                        

    The Board considers that, because the bank would have the exposure 
on a consolidated basis for investments by either the bank or the Edge, 
these investments should have a combined aggregate limit. However, the 
Board proposes that this limit could be waived, in whole or in part by 
the Director of the Division of Banking Supervision and Regulation, 
under delegated authority, based upon a review of the financial 
strength of the investor and its investment strategy and business 
plans.
    For bank holding companies, banks or Edge corporations that are 
adequately capitalized but do not meet the well-capitalized and well-
managed standards, the Board proposes that the aggregate limits on all 
investments made under authority of general consent in any 12-month 
period would be half that applicable to well-capitalized and well-
managed organizations (i.e., 10 percent of tier 1 capital for bank 
holding companies, 5 percent of tier 1 capital for banks, and, for Edge 
corporations, the lesser of 5 percent of the parent bank's tier 1 
capital or 10 percent of the Edge's tier 1 capital).

Application of Limits to the Edge Corporation

    The Board notes that an argument can be made that, in cases where 
the investment is made by the Edge corporation, the well-capitalized 
and well-managed tests should be based on a review of the parent bank, 
not the Edge corporation. In considering these proposals, the Board 
believes that the well-capitalized and well-managed tests for the Edge 
corporation itself should be retained as one of the bases for 
determining limits applicable to general consent investments. This 
approach would help to ensure the safety and soundness of the Edge 
corporation in its own right and is consistent with the statutory (and 
supervisory) rationale underlying Edge corporations. As discussed 
above, Congress limited the amount of capital that banks could invest 
in Edge corporations, which in turn could invest in activities 
otherwise prohibited to banks that were perceived to be higher risk. 
Congress also subjected Edge corporations to regulation and examination 
by the Federal Reserve. For these reasons, the Board considers that 
Edge corporations should themselves be operating satisfactorily and not 
be a source of potential weakness to the U.S. parent bank. The Board 
therefore is proposing limits that are tied to the condition of the 
Edge. The Board seeks comment on this approach generally.

Preclearance of Investment Program

    The Board proposes to establish a procedure that would permit U.S. 
banking organizations to obtain preclearance of an investment program 
even though one or more of the investments would be in excess of the 
individual or aggregate general consent investment limits and would be 
made over a period of time longer than one year. The Board believes 
such a procedure would be useful to banking organizations that may wish 
to engage in a specific investment program with respect to an 
individual company, a market segment, a region, or worldwide. Providing 
a preclearance mechanism would serve to ensure that the regulatory 
process would not impede the organization's ability to pursue its 
business plans.
    For example, an organization that is well managed and well 
capitalized might contemplate bidding on a large privatization that 
would require the organization to commit in advance to making an 
investment in excess of the general consent limit if selected. 
Obtaining preclearance would enable the organization to make such a 
commitment. The Board proposes that the preclearance authority would be 
delegated to the Director of the Division of Banking Supervision and 
Regulation.
    Comment is requested on whether such a preclearance program would 
be useful to U.S. banking organizations and whether it should be 
available to all banking organizations.

Authorization to Invest More Than Ten Percent of a Bank's Capital in 
its Edge and Agreement Corporation Subsidiaries

    Prior to September 30, 1996, section 25A of the Federal Reserve Act 
prohibited member banks from investing more than 10 percent of capital 
and surplus in the stock of Edge and agreement corporation 
subsidiaries. With the enactment of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996 on September 30, 1996, member banks may 
now invest, with the Board's prior approval, up to 20 percent of 
capital and surplus in the stock of such subsidiaries.
    The Board may not approve the investment of more than 10 percent of 
capital and surplus in the stock of Edge and agreement corporation 
subsidiaries unless the Board determines that the investment of an 
additional amount by the bank would not be unsafe or unsound. As 
discussed above, due to the accumulation of retained earnings in Edge 
corporations, some U.S. banking organizations now have over 20 percent 
of the member bank's consolidated capital resident in Edge corporation 
subsidiaries.
    Accordingly, the Board proposes to implement the new statutory 
provision by adding to Regulation K an application requirement to 
obtain the Board's approval of an increase in invested capital in the 
stock of Edge and agreement corporations above 10 percent of the parent 
bank's capital, as well as a general description of the types of 
considerations that would be taken into account in reaching a decision 
on such an application. Criteria that the Board considers would be 
appropriate to take into account would include: the composition of the 
assets of the bank's Edge and agreement corporations; the total capital 
invested by the bank in its Edge and agreement corporations when 
combined with retained earnings of the Edge and agreement corporations, 
as a percentage of the bank's capital; whether the bank, bank holding 
company, and Edge and agreement corporations are well capitalized and 
well managed; and whether the bank is adequately capitalized after 
deconsolidating and deducting the aggregate investment in and assets of 
all Edge or agreement corporations and all foreign bank subsidiaries.
    The Board seeks comment on whether the above criteria are 
appropriate in determining whether investments of up to 20 percent of 
the parent bank's capital and surplus in Edge and agreement corporation 
subsidiaries would not be unsafe or unsound. Additionally, the Board 
seeks comment on whether only the well-capitalized and well-managed 
criteria should apply where the total Edge and agreement corporation 
capital (including retained earnings) on a pro forma basis would not 
exceed 20 percent of the bank's capital.

Other Revisions to Subpart A

Harmonization of Regulation K With Other Regulatory Changes

    As a result of the substantial liberalizations made in the recent 
revisions to other Board regulations, particularly Regulation Y, 
certain activities on the laundry list of

[[Page 68434]]

permissible activities in Regulation K are now more restrictive than 
those authorized domestically. As noted above, Regulation K 
traditionally has permitted U.S. banking organizations to conduct a 
wider range of financial activities abroad than may be permitted 
domestically in order to compete more effectively abroad. Accordingly, 
in addition to the expanded activities discussed above, the Board 
proposes removing certain restrictions on the laundry list of 
permissible activities to reflect recent liberalizations in other 
regulations.

Leasing Activities

    Regulation K currently requires that leasing activities conducted 
under authority of Regulation K serve as the functional equivalent of 
an extension of credit to the lessee. The Regulation Y revisions 
removed that limitation with respect to high residual value leasing. 
Accordingly, Regulation K would be interpreted consistent with this 
authority.

Swaps Activities

    The Regulation K proposal would also remove the requirement that 
commodity-related swaps must provide an option for cash settlement that 
must be exercised upon settlement. Regulation Y now authorizes 
investment as principal in commodity derivatives where the contract 
either: (i) Requires cash settlement, or (ii) allows for assignment, 
termination or offset prior to expiration and reasonable efforts are 
made to avoid delivery. The Regulation K restriction would be relaxed 
to the same extent.

Data Processing

    No changes are proposed to the provision authorizing data 
processing. The Board notes, however, that this authority extends only 
to the processing of information and does not authorize general 
manufacture of hardware for such services.

Loans to Officers at Foreign Branches

    Regulation K currently places certain restrictions on mortgage 
loans to officers of foreign branches. However, the Board has 
liberalized its Regulation O, which governs loans to executive 
officers, such that the provisions in Regulation K now are more 
restrictive. The more restrictive provision in Regulation K would be 
eliminated.

Changes With Respect to Edge and Agreement Corporations

    The Board proposes adding provisions to Regulation K that would 
outline procedures under which Edge and agreement corporations could be 
liquidated on a voluntary basis.

Liquidation Procedures

    The Board is proposing to provide procedures for the liquidation of 
Edge corporations and to clarify certain matters regarding the 
appointment of receivers for Edge corporations. Under paragraph 17 of 
the Edge Act (12 U.S.C. 623), an Edge corporation may go into voluntary 
liquidation by a vote of its shareholders owning two-thirds of its 
stock. Staff proposes to add a new Sec. 211.13 to Regulation K that 
would provide for 45 day's prior notice to the Board of an Edge 
corporation's intent to dissolve. This notice would create greater 
certainty as to the date that the Edge corporation would cease business 
and permit the Board to take any necessary supervisory actions. Under 
paragraph 18 of the Edge Act (12 U.S.C. 624), the Board is authorized 
to appoint a receiver for an Edge corporation if it determines that the 
corporation is insolvent. The proposal would specify the grounds for 
determining that an Edge corporation is insolvent and clarify the 
powers of the receiver.

Additional Areas of Liberalization

    The Board believes there are other areas that should be liberalized 
in order to reduce regulatory burden and enable U.S. banking 
organizations to compete more effectively with foreign banks.

Authorizing Foreign Branches of Operating Subsidiaries of Member Banks

    The Board proposes clarifying that a member bank may establish 
foreign branches through its operating subsidiaries with the Board's 
approval, provided that the foreign branches of the operating 
subsidiary would engage only in activities that are permissible 
directly for the member bank parent. <SUP>23</SUP>
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    \23\  The establishment of foreign branches of operating 
subsidiaries would be subject to the prior notice and general 
consent provisions of Regulation K.
---------------------------------------------------------------------------

    The Board has previously approved the establishment of foreign 
branches by an operating subsidiary of a member bank. The Board 
determined that the ability of an operating subsidiary to establish 
foreign branches is incidental to the member bank's authority to 
establish such branches, subject to the condition stated above. 
Accordingly, this proposed addition would codify the Board's 
determination and allow other member banks to establish foreign 
branches of operating subsidiaries on the same basis as outlined above.

FCM Activities

    Regulation K currently states that investors must seek prior Board 
approval for futures commission merchant (FCM) activities conducted on 
any exchange or clearing house that requires members to guarantee or 
otherwise contract to cover losses suffered by other members (a mutual 
exchange). This requirement has been eliminated for subsidiaries of 
bank holding companies, due to the revision of Regulation Y. The Board 
also seeks comment on whether to eliminate the requirement for prior 
notice where: (i) the activity is conducted through a separately 
incorporated subsidiary of the bank;<SUP>24</SUP> and (ii) the parent 
bank does not provide a guarantee or otherwise become liable to the 
exchange or clearing house for an amount in excess of the applicable 
general consent limits.<SUP>25</SUP> The Board believes that in these 
circumstances the potential exposure of the parent bank to a mutual 
exchange or clearing house would be sufficiently limited, such that 
prior approval would no longer be necessary. Eliminating the 
requirement for prior review of these activities would reduce the prior 
notice and application requirements associated with FCM activities.
---------------------------------------------------------------------------

    \24\ If the investment is made through an Edge corporation, the 
investment in the subsidiary would be limited to no more than 2 
percent of the parent bank's tier 1 capital.
    \25\ This proposal is generally consistent with the FCM 
requirements under Regulation Y, except that it would place a limit 
on the amount of exposure to the exchange or clearing house, tied to 
the bank's tier 1 capital.
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Additional Delegation of Authority

    The Board proposes delegating additional authority to the Director 
of the Division of Banking Supervision and Regulation in order to 
decrease processing periods in appropriate circumstances. Under the 
proposal, authority would be delegated in the areas of: (1) Indicating 
no objection to the establishment of foreign branches by prior notice; 
(2) authorizing a banking organization to exceed its aggregate general 
consent investment limits based upon the financial and managerial 
strength of the organization and the soundness of its investment 
strategy and future plans; and (3) allowing organizations that are not 
well-capitalized and well-managed to invest under a reduced general 
consent limit in appropriate circumstances.

Subpart B: Foreign Banking Organizations

    Subpart B of Regulation K governs the U.S. activities of foreign 
banking

[[Page 68435]]

organizations. It implements the IBA and provisions of the BHC Act that 
affect foreign banks.
    This proposed revision of Subpart B seeks to eliminate unnecessary 
regulatory burden, increase transparency, and streamline the 
application/notice process for foreign banks operating in the United 
States based on the Board's recent experience with foreign bank 
applications. In addition, the proposal implements certain application 
related provisions of the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 (the 1996 Act).
    If adopted, the proposal would liberalize the standards under which 
certain foreign banking organizations qualify for exemptions from the 
nonbanking prohibitions of section 4 of the BHC Act. Comment is also 
being requested on a change in the scope of an existing exemption that 
would better conform the exemption to the policy of national treatment.
    The proposal also implements several provisions of the Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994 (the Interstate 
Act) that affect foreign banks. Finally, several technical changes to 
various other provisions in Subpart B are being proposed.

Streamlining the Regulatory Process

    The Board is required to approve the establishment by foreign banks 
of branches, agencies, commercial lending companies, and representative 
offices in the United States. This authority is contained in the 
Foreign Bank Supervision Enhancement Act of 1991 (FBSEA), which amended 
the IBA, and was intended to close perceived gaps in the supervision 
and regulation of foreign banks. Prior to FBSEA, there was no federal 
approval required for the establishment of most types of direct U.S. 
offices of foreign banks nor were uniform standards applicable to these 
offices.
    In the six years since the enactment of FBSEA, the Board has gained 
substantial experience with the issues presented by applications by 
foreign banks to establish direct offices. The proposed revisions would 
streamline the applications process based on experience gained over 
this period. In addition, the proposal implements new discretionary 
authority and time limits contained in the 1996 Act.

Adoption of Single Supervision Standard for Approval of Representative 
Offices

    Under FBSEA, in order to approve an application by a foreign bank 
to establish a branch, agency, or commercial lending company, the Board 
generally is required to determine, among other things, that the 
applicant bank, and any parent bank, are subject to comprehensive 
supervision or regulation on a consolidated basis by their home country 
authorities (the consolidated comprehensive supervision or CCS 
determination <SUP>26</SUP>). A lesser supervision standard, however, 
applies under FBSEA to representative office applications. While the 
Board is required to ``take into account'' home country supervision in 
evaluating an application by a foreign bank to establish a 
representative office, a CCS determination is not required to approve 
such an application. The law simply requires the Board to consider the 
extent to which applicant bank is subject to CCS. A lesser standard 
applies because representative offices do not conduct a banking 
business, such as taking deposits or making loans, and therefore 
present less risk to U.S. customers and markets than do branches or 
agencies.
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    \26\ As discussed later in the summary, the 1996 Act amended 
FBSEA to allow the Board, under certain conditions, to approve an 
application if the bank is not subject to CCS.
---------------------------------------------------------------------------

    Regulation K currently restates the statutory ``take into account'' 
standard but does not define a minimum supervision standard that a 
foreign bank must meet in order to establish a representative office. 
Instead, the Board has developed standards in the context of specific 
cases. To date, the Board has used two different supervision standards 
in approving applications by foreign banks to establish representative 
offices.<SUP>27</SUP> Under the first standard, the Board has permitted 
a foreign bank to establish a representative office able to exercise 
all powers available under applicable law and regulation on the basis 
of a finding that the home country supervisors exercise a significant 
degree of supervision over the bank.<SUP>28</SUP> The second standard 
is more flexible. In cases in which a foreign bank has committed to 
limit the scope of activities of its proposed representative office to 
those posing only the most minimal risk to U.S. customers and markets 
(such as by agreeing not to solicit deposits from retail customers or 
possibly any customers), the Board has approved the establishment of 
the office on the basis of a finding that the foreign bank is subject 
to a supervisory framework that is consistent with approval of the 
application, taking into account the limited activities of the proposed 
office and the operating record of the bank.<SUP>29</SUP>
---------------------------------------------------------------------------

    \27\ Wherever the record submitted by an applicant in a 
representative office case is sufficient to support a CCS finding, 
the Board generally has do so. See, e.g., Caisse Nationale de Credit 
Agricole, 81 Fed. Res. Bull. 1055 (1995). The two representative 
office standards have been applied in those cases where the record 
is not sufficient to support a CCS finding.
    \28\ See, e.g., Citizens National Bank, 79 Fed. Res. Bull. 805 
(1993).
    \29\ See, e.g., Promstroybank of Russia, 82 Fed. Res. Bull. 599 
(1996).
---------------------------------------------------------------------------

    Based on experience in dealing with representative office 
applications, the Board believes that the existence of two standards 
can be confusing and is unnecessary, particularly in light of the 
generally minimal risk presented to U.S. customers or markets by 
representative offices. Consequently, the Board is proposing that 
Sec. 211.24(d)(2) of Regulation K be amended to establish only one 
flexible standard. Under the proposal, assuming all other factors were 
consistent with approval, the Board could approve an application to 
establish a representative office if it were able to make a finding 
that the applicant bank was subject to a supervisory framework that is 
consistent with the activities of the proposed office, taking into 
account the nature of such activities and the operating record of the 
applicant.
    The record necessary to support the required finding would depend 
on the nature of the activities the applicant proposed to conduct in 
the representative office. Approval of a representative office that 
could conduct all permissible activities would require a record 
demonstrating that the applicable supervisory framework was consistent 
with level of risk presented by such activities. If the proposal is 
adopted, the Board expects that most applicants would be able to 
conduct all permissible activities. In those instances in which the 
Board had particular concerns regarding the consistency of the 
applicant's home country supervision with the proposed activities of 
the office, however, the applicant could commit to restrict the 
activities. A less comprehensive record would be required where the 
applicant has committed to limit the activities of the office to those 
posing minimal risk to U.S. customers.
    The Board intends that the publishing of a single flexible standard 
will, in most cases, simplify the application process. The Board 
requests comment on the elimination of the significant degree of 
supervision standard and adoption of the proposed single standard.

Reduced Filing Requirements for the Establishment of U.S. Offices

    A major thrust of the proposed revisions is reduction of burden in 
the

[[Page 68436]]

application process by streamlining existing application procedures for 
the establishment of new U.S. offices of foreign banks. Under the 
current Subpart B, the establishment by a foreign bank of a U.S. 
branch, agency, commercial lending company subsidiary, or 
representative office generally requires the Board's specific approval. 
Once the Board has approved the establishment of a foreign bank's first 
office under the standards set out in FBSEA, additional offices with 
the same or lesser powers may be approved by the Reserve Banks under 
delegated authority.<SUP>30</SUP> Prior notice and general consent 
procedures are currently available for the establishment of certain 
kinds of representative offices. The Board is now proposing that 
additional types of applications be processed under prior notice and 
general consent procedures.
---------------------------------------------------------------------------

    \30\ See 12 CFR 265.11(d)(11).
---------------------------------------------------------------------------

Prior Notice Available After First CCS Determination

    The proposal would amend Sec. 211.24(a) to provide that any foreign 
bank which the Board has determined to be subject to CCS in a prior 
application under FBSEA may establish additional branches, agencies, 
commercial lending company subsidiaries, and representative offices 
pursuant to a 45 day prior notice procedure. This time frame would 
allow for review of whether any material changes had occurred with 
respect to home country supervision, a determination of whether the 
bank continues to meet capital requirements, and a review of any other 
relevant factors. If this proposal is adopted, the current delegation 
to the Reserve Banks for such applications would be deleted as no 
longer necessary. This procedure would also be available even if the 
CCS determination had been made in connection with an application for 
an office with lesser powers than the office the foreign bank seeks to 
establish.

Prior Notice Available for Representative Offices Established by 
Foreign Banks Subject to the BHC Act or Previously Approved to 
Establish a Representative Office Under FBSEA

    Many foreign banks have a U.S. banking presence and therefore are 
subject to the provisions of the BHC Act, but have not received a CCS 
determination under FBSEA. The proposal also seeks to reduce the burden 
on such banks applying to establish representative offices. If a 
foreign bank is subject to the provisions of the BHC Act through 
ownership of a bank or commercial lending company or operation of a 
branch or agency, it is already subject to supervision and oversight 
through the Board's Foreign Banking Organization (FBO) program. Through 
the FBO program, the Board gains knowledge of the bank, its policies 
and procedures, and a general view on home country supervision. In 
these instances, the Board believes that an expedited procedure may be 
adopted for the establishment of representative offices by these banks, 
even where the foreign bank had not previously been reviewed under the 
standards of FBSEA.
    In addition, the proposal would permit the establishment by prior 
notice of additional representative offices by any foreign bank not 
subject to the BHC Act but previously approved by the Board to 
establish a representative office, regardless of the type of 
supervision finding made by the Board in the prior case. Such 
applications are currently delegated to the Reserve Banks. The Board 
sees no reason to continue to require full application from such banks. 
The Board is proposing that Sec. 211.24(a) be amended to permit banks 
in these two categories to use the 45-day prior notice procedure for 
opening a representative office, rather than requiring them to use the 
application procedure.

New General Consent Authority

    The proposal would permit the establishment by general consent of a 
representative office by a foreign bank that is both subject to the BHC 
Act and has been previously determined by the Board to be subject to 
CCS. Establishment of a representative office by such a foreign bank is 
currently subject to the prior notice procedure. The proposal is based 
on an assessment that a foreign bank that is subject to supervision 
under the FBO program and has been judged subject to CCS should 
generally qualify to establish a representative office.
    Finally, the Board is proposing that a foreign bank that is subject 
to the BHC Act could establish a regional administrative office by 
general consent, whether or not the Board had determined the bank to be 
subject to CCS. Regional administrative offices currently can be 
established using the prior notice procedure.

Suspension of Prior Notice and General Consent Procedures

    The proposal also provides that the Board, upon notice, may modify 
or suspend the prior notice and general consent procedures described 
above for any foreign bank. For example, modification or suspension of 
these procedures might be appropriate if the composite rating of the 
foreign bank's combined U.S. operations was less than satisfactory 
<SUP>31</SUP> or if the foreign bank were subject to supervisory 
action. In general, the Board envisions that these procedures would be 
available for the establishment of offices by foreign banks only where 
the establishment does not present material issues.
---------------------------------------------------------------------------

    \31\ See 12 CFR 225.2(s) (definition of ``well-managed'' foreign 
banking organization).
---------------------------------------------------------------------------

    These proposals should reduce the burden and delay associated with 
the establishment of new U.S. offices by certain categories of foreign 
banks without compromising the Board's ability to make the 
determinations necessary in connection with the establishment of such 
offices.

After-the-Fact Approvals

    In implementing FBSEA in 1993, the Board recognized that it would 
be impractical to require prior approval for the establishment of 
foreign bank offices acquired in certain types of overseas 
transactions, such as a merger of two foreign banks, and provided for 
an after-the-fact approval in such cases. The regulation currently 
requires the foreign banks involved to commit to file an application to 
retain the acquired U.S. office as soon as possible after the 
occurrence of such transactions.
    Since the enactment of FBSEA, a number of applicants using the 
after-the-fact procedure have chosen to wind down and close acquired 
offices or consolidate them with existing offices, in each case within 
a reasonable time frame. In most instances, no regulatory purpose was 
served by requiring the filing of an application. The regulation 
currently does not address this possibility. The proposal would amend 
the rules to contemplate both after-the-fact applications to retain, as 
well as decisions to wind-down and close, U.S. offices acquired in a 
transaction eligible for the after-the fact approval process. Where the 
foreign bank chooses to close the acquired U.S. office, the Board could 
impose appropriate conditions on the U.S. operations until the winding-
down is completed.

Implementation of the 1996 Act

    As noted above, FBSEA generally requires the Board to determine 
that a foreign bank applicant is subject to CCS in order to approve the 
establishment of a branch, agency, or commercial lending company. The 
1996 Act gave the Board discretion to approve the establishment of such 
offices by a foreign bank where the application record is insufficient 
to support a finding that the bank is

[[Page 68437]]

subject to CCS, provided the Board finds that the home country 
supervisor is actively working to establish arrangements for the 
consolidated supervision of the bank, and all other factors are 
consistent with approval. This discretion gives the Board flexibility 
to approve applications on an exceptional basis where the home country 
authorities are making progress in upgrading the bank supervisory 
regime but the record may not yet be sufficient to support a full CCS 
finding. The Board has stated that this authority should be viewed as a 
limited exception to the general requirement relating to 
CCS.<SUP>32</SUP> The statutory standards are included in the proposed 
revision.
---------------------------------------------------------------------------

    \32\ The Board first exercised its discretion under the 1996 Act 
when it approved an application by a Korean bank to establish a 
state-licensed branch in New York City. See Housing & Commercial 
Bank, 83 Fed. Res. Bull. 935 (1997).
---------------------------------------------------------------------------

    The proposal also would incorporate into Regulation K the statutory 
time limits in the 1996 Act for Board action on applications for 
branches, agencies, and commercial lending companies. The 1996 Act 
provided that the Board must act on such an application within 180 days 
of its receipt. The time period may be extended once for an additional 
180 days, provided notice of the extension and the reasons for it are 
provided to the applicant and the licensing authority; the applicant 
may also waive the time periods. Although the regulation will reflect 
these statutory time periods, the Board proposes to maintain existing 
internal time schedules that would require faster processing where 
possible.

New Discretionary Factor

    In light of the increasing attention being paid to the problem of 
money laundering, the Board currently requests that foreign banks 
applying to establish U.S. offices provide information on the measures 
taken to prevent the bank from being used to launder money, the legal 
regime to prevent money laundering in the home country, and the extent 
of the home country's participation in multilateral efforts to combat 
money laundering. The Board considers this information in reaching its 
decision on applications. In light of this practice, the proposed 
revision includes as a new discretionary standard for the establishment 
of U.S. offices by foreign banks that the Board may consider the 
adequacy of measures for the prevention of money laundering.

Qualifications of Foreign Banks for Nonbank Exemptions

Changes to the QFBO Test

    Regulation K implements statutory exemptions from the BHC Act for 
certain activities of foreign banks. These exemptions are available to 
qualifying foreign banking organizations (QFBOs) and are found in 
sections 2(h) and 4(c)(9) of the BHC Act. Section 2(h) allows a foreign 
company principally engaged in banking business outside the United 
States to own foreign affiliates that engage in impermissible 
nonfinancial activities in the United States, subject to certain 
requirements. These include that the foreign affiliate must derive most 
of its business from outside the United States and it may engage in the 
United States only in the same lines of business it conducts outside 
the United States. Section 4(c)(9) allows the Board to grant foreign 
companies an exemption from the nonbank activity restrictions of the 
BHC Act where the exemption would not be substantially at variance with 
the BHC Act and would be in the public interest. Under this exemption, 
the Board has exempted, among other things, all foreign activities of 
QFBOs from the nonbanking prohibitions of the BHC Act.
    In order to qualify as a QFBO, a foreign banking organization must 
demonstrate that more than half of its business is banking and more 
than half of its banking business is outside the United States. Banking 
business is defined to include the activities permissible for a U.S. 
banking organization to conduct, directly or indirectly, outside of the 
United States.<SUP>33</SUP> Under the current regulations, however, 
such activities can be counted as banking business for the purposes of 
the QFBO test only if they are conducted in the foreign bank ownership 
chain; that is, by the foreign bank or a subsidiary of the foreign 
bank. Activities conducted by a parent holding company or sister 
affiliate do not count toward qualification.
---------------------------------------------------------------------------

    \33\ These activities include, in addition to traditional 
banking activities, underwriting various types of insurance (credit 
life, life, annuity, pension fund-related, and other types of 
insurance where the associated risks are actuarially predictable); 
underwriting, distributing, and dealing in debt and equity 
securities outside the United States; providing data processing, 
investment advisory, and management consulting services; and 
organizing, sponsoring, and managing a mutual fund.
---------------------------------------------------------------------------

Removal of the Banking Chain Requirement From One Prong of the QFBO 
Test

    In connection with the 1991 revisions to Regulation K, a number of 
commenters suggested that the Board eliminate the requirement that 
banking activities be conducted in the bank ownership chain. The Board 
did not adopt this suggestion in 1991 because it was concerned that to 
do so could have allowed a foreign financial conglomerate with no 
substantial commercial bank to conduct full-scope banking operations in 
the United States. The Board determined that the intent of the BHC Act 
was to grant exemptions only to those foreign organizations that were 
substantially engaged in commercial banking.
    The Board has reconsidered the QFBO test in light of this 
background and believes that the test can be liberalized without 
extending the BHC Act exemptions to foreign firms that are not engaged 
substantially in commercial banking. As noted above, the QFBO test has 
two prongs: first, more than half of the organization's activities must 
be banking, and second, more than half its banking business must be 
outside the United States. Under the proposed revision, the requirement 
that all activities must be conducted under the bank ownership chain to 
count as ``banking'' would be eliminated from the first prong. By 
eliminating the banking chain requirement for this prong of the test, a 
foreign banking organization that has substantial life insurance 
activities outside of the banking chain would be able to count such 
activities toward meeting this prong of the QFBO test. The Board 
understands that, in at least some recent instances where foreign 
banking organizations failed the current QFBO test, these organizations 
would have been able to pass the test under the proposed re-
formulation.
    The banking chain requirement has not been eliminated, however, for 
purposes of determining whether a foreign banking organization's 
banking operations outside of the United States are larger than those 
in the United States. Eliminating the banking chain requirement for 
this part of the test would enable a foreign organization engaged 
primarily in certain financial activities, such as life insurance, 
outside of the United States to meet the QFBO test even if its U.S. 
commercial banking operations were larger than the commercial banking 
operations of its foreign bank or banks. The exemptions under sections 
2(h) and 4(c)(9) of the BHC Act, which this section of

[[Page 68438]]

Regulation K implements, are intended to limit the extraterritorial 
effect of the BHC Act on foreign banks and to prevent foreign financial 
companies that own U.S. banks from obtaining competitive advantages. 
Accordingly, the proposal retains the banking chain requirement for 
this prong of the QFBO test. The Board believes that this approach 
would give appropriate flexibility to foreign banking organizations 
that operate under different economic and regulatory environments while 
still addressing the intent of the BHC Act to give exemptions only to 
true foreign banks that conduct more banking business outside the 
United States than in the United States.

Request for Comments With Respect to the Expansion of the Activities 
That May be Counted as Banking

    The QFBO test in Regulation K permits foreign banking organizations 
to count only those assets, revenues, or net income related to 
activities which are permissible for a U.S. banking organization to 
conduct outside of the United States. Under the current test, a 
predominantly financial organization that engages to a significant 
extent in activities not permissible for a U.S. bank abroad--for 
example, property and casualty insurance--could fail to meet the QFBO 
test.
    In formulating the QFBO test, the Board has sought to balance the 
potentially competing goals of avoiding the extraterritorial 
application of U.S. law on the one hand and ensuring competitive 
equality with U.S. banking organizations on the other. In this regard, 
the Board does not intend the QFBO exemptions to permit foreign 
commercial and industrial firms to conduct a commercial banking 
business in the United States. This view, however, is not necessarily 
inconsistent with granting the QFBO exemptions to a foreign banking 
organization that is engaged to a significant extent in financial 
activities not permissible for a U.S. bank abroad. For this reason, the 
Board is requesting comment with respect to whether and how to expand 
the list of activities that would be considered banking for purposes of 
the QFBO test.
    Comment is requested on both of these proposals and on any other 
issues arising under the QFBO rules.

Applications for Special Determination of Eligibility for QFBO 
Treatment

    Regulation K permits a foreign banking organization that ceases to 
qualify as a QFBO to request a special determination of eligibility. 
The proposal would permit a foreign banking organization that has 
applied for a specific determination of eligibility to continue to 
conduct its business as if it were a QFBO, except with respect to 
making investments in U.S. companies under section 2(h) of the BHC Act 
for which Board consent would be required. The proposal reflects the 
approach taken in a prior case considered by the Board.

Comment Requested on Limiting the Ability of Foreign Banks to Conduct 
Unregulated Activities Abroad Through U.S. Companies in the Interests 
of National Treatment

    Regulation K currently exempts from the BHC Act any activity 
conducted by a QFBO outside the United States. There appears to be a 
growing trend by foreign banks under this exemption toward using U.S. 
companies operating under section 4(c)(8) of the BHC Act to hold 
foreign subsidiaries that such foreign banks regard as unrestricted in 
their activities.
    Under the BHC Act, a U.S. bank holding company may own foreign 
subsidiaries only under the authority of Regulation K, which sets 
limits on the activities that can be conducted in such subsidiaries. In 
the past, in response to inquiries, Board staff has provided advice 
that the activities of foreign subsidiaries of section 4(c)(8) 
companies owned by foreign banking organizations should be operated 
subject to these same limitations. Nonetheless, it appears that some 
foreign banking organizations have interpreted the general exemption in 
Regulation K for all non-U.S. activities of foreign banking 
organizations as also extending to the foreign subsidiaries of section 
4(c)(8) companies. The question is raised of whether this provides an 
unfair competitive advantage to foreign banks in using and marketing 
the name and operations of the regulated U.S. company.
    Given the fact that the foreign activities of a QFBO are exempt 
under Regulation K, the Board recognizes the ability to own a foreign 
subsidiary through a section 4(c)(8) company may not be viewed as a 
material competitive advantage for foreign banks. Even if the ownership 
of impermissible foreign subsidiaries through section 4(c)(8) companies 
were to be prohibited, a foreign bank could comply simply by moving the 
ownership from the U.S. company to a true foreign subsidiary.
    The purpose of the exemption in Regulation K, however, was to 
permit foreign banking organizations to conduct their non-U.S. 
activities outside the scope of U.S. regulation because there was no 
U.S. interest served by regulating such activities. The Board, however, 
does have a regulatory interest in section 4(c)(8) companies. The 
exemption was not intended to allow U.S. companies regulated under 
section 4(c)(8) of the BHC Act and owned by foreign banking 
organizations to engage in unrestricted foreign activities. 
Accordingly, the Board is requesting comment on limiting the 
availability of the exemption in Regulation K to activities conducted 
by true foreign subsidiaries of foreign banks, and preventing the use 
of such exemption by foreign-owned but U.S.-regulated companies such as 
those operating under section 4(c)(8).

Implementation of New Interstate Rules

    In addition to application procedures and rules on nonbanking 
activities, Regulation K implements the restrictions on interstate 
operations of foreign banks provided in the IBA and the BHC Act. The 
Interstate Act amended the IBA and the BHC Act to remove geographic 
restrictions on interstate acquisitions of banks by foreign banks, 
permitted foreign banks to branch interstate by merger and de novo on 
the same basis as domestic banks with the same home state as the 
foreign bank, and modified the definition of a foreign bank's home 
state for purposes of interstate branching. The Interstate Act became 
fully effective in June 1997.
    In May 1996, the Board published a final rule to implement certain 
of the changes made by the Interstate Act. The rule required certain 
foreign banks to select a home state for the first time, or have a home 
state designated by the Board, removed obsolete provisions of 
Regulation K that restricted the ability of a foreign bank to effect 
major bank mergers through U.S. subsidiary banks located outside the 
foreign bank's home state, and deleted certain other obsolete rules 
governing home state selection.
    This proposal would implement and interpret certain other changes 
made by the Interstate Act. The proposal would permit foreign banks to 
make additional changes in home state under certain circumstances and 
clarify the extent to which a foreign bank changing its home state is 
required to conform its existing network of bank subsidiaries and 
banking offices. In addition, the proposal sets forth the additional 
standards for approval of applications by foreign banks to establish 
interstate branches. It also would clarify that the ``upgrade'' of 
agencies and limited branches to full branches requires Board approval 
and that the Board will approve such upgrades (absent a merger

[[Page 68439]]

transaction) only if the host state has enacted laws permitting de novo 
interstate branching. Finally, the proposal deletes the Board's home 
state attribution rule, which provides that a foreign bank (or other 
company) and all other foreign banks which it controls must have the 
same home state.

Changes of Home State

    In 1980, the Board allowed foreign banks a single change of home 
state as a compromise between the need for comparable treatment with 
domestic banks and Congress' intent, in adopting the IBA, that foreign 
banks be allowed some flexibility to change home state. The basic 
framework for interstate banking, however, has changed substantially 
since 1980, when domestic banks generally could not branch interstate 
and rarely, if ever, could change home states. Domestic and foreign 
banks may now branch into other states either de novo or by merger in 
certain circumstances; interstate branching by merger between banks is 
now possible in all states other than Montana and Texas, and de novo 
interstate branching is permitted in 13 states. As a result, many 
domestic banks with interstate branches now have significant 
opportunities to change home state, although these opportunities are 
not available to all banks under all circumstances.
    In light of these changes, the proposal gives foreign banks 
additional opportunities to change home state in a way that affords 
comparable treatment to foreign and domestic banks. The proposal would 
retain the ability of foreign banks under current rules to change their 
home state once by filing a notice with the Board. Changes made by 
foreign banks prior to the entry into effect of the proposed amendments 
would count toward this one-time limit. The proposal would also 
establish a new procedure for foreign banks to change home state an 
unlimited number of times, by applying for the prior approval of the 
Board for each such change. A foreign bank applying to change its home 
state under the new procedure would be required to show that a domestic 
bank with the same home state would be able to make the same change.
    The new procedure advances the policy of national treatment 
underlying the IBA by allowing foreign banks to take advantage of 
changes in laws concerning interstate branching in order to change home 
state, when and to the extent those laws make it possible for domestic 
banks to change home state as well. The new procedure also seeks to 
prevent foreign banks from gaining an unfair competitive advantage over 
domestic banks by changing home state in circumstances where a domestic 
bank would be unable to do so. Although the Interstate Act made it 
possible for domestic banks to change home state in some cases, there 
are other cases where such changes in home state may be difficult or 
impossible. Accordingly, the new procedure would allow foreign banks to 
change home state only in cases where a domestic bank could effect the 
same change.
    The Board would have discretion to grant the request of a foreign 
bank to change home state under the new proposed procedure. In 
evaluating these applications, the Board would consider whether the 
proposed change of home state would be consistent with competitive 
equity between foreign and domestic banks. Relevant factors in this 
regard include the degree to which a national or state bank would be 
able to make the same change of home state while retaining its existing 
operations outside the new home state.
    Changes in home state would generally have no impact on which 
Reserve Bank will supervise the operations of a foreign bank nor on 
which Reserve Bank will receive a foreign bank's reports and 
applications.

Conforming U.S. Operations Upon Change in Home State

    Regulation K currently requires a foreign bank that changes its 
home state to conform its banking operations outside the new home state 
to what would have been permissible at the time of the bank's original 
home state selection. The requirement, adopted in 1980, implemented 
section 5 of the IBA which sought to prevent foreign banks from using a 
home state change to acquire and maintain subsidiary banks or branches 
in more than one state in circumstances where a domestic bank or bank 
holding company would be unable to do so.
    The Interstate Act liberalized the rules on interstate branches and 
eliminated the geographic restrictions on the purchases of banks by 
domestic bank holding companies and foreign banks under the BHC Act and 
the IBA. Consequently, the Board is proposing that the provisions on 
conforming operations upon a foreign bank's change of home state be 
revised to reflect changes made by the Interstate Act. For example, 
with respect to subsidiary banks, a foreign bank would no longer be 
required to divest a subsidiary bank outside its new home state; the 
Interstate Act authorizes interstate acquisitions of bank subsidiaries.
    With respect to conforming branches outside the foreign bank's new 
home state, the proposed amendment would reflect the liberalized 
interstate branching rules applicable to foreign and domestic banks as 
a result of the Interstate Act. A foreign bank changing its home state 
would be permitted to retain all branches which the foreign bank could 
establish (under current law) if it already had its new home state. 
This relaxation is appropriate given that domestic, as well as foreign 
banks, now have significant opportunities to establish and retain 
interstate branches.
    The proposal would not change the current rule which allows a 
foreign bank to retain branches grandfathered under the IBA, and 
limited branches (that is, branches that ``limit'' their deposit-taking 
to only those deposits that an Edge corporation may accept).

Additional Standards for Interstate Offices

    The proposal also contains the additional standards required by the 
Interstate Act for approval by the Board of the establishment by a 
foreign bank of branches located outside of the bank's home state. 
These standards are designed to insure that foreign banks seeking to 
establish interstate branches meet requirements comparable to those 
imposed on domestic banks seeking to operate interstate.

Upgrading of Agencies and Limited Branches to Full Branches

    Section 5 of the IBA, as amended by the Interstate Act, allows a 
foreign bank to establish full branches outside its home state only if 
a domestic bank with the same home state could establish branches in 
the same host state under the Interstate Act. The Interstate Act allows 
interstate branching by merger with an existing bank or branch (the 
merger provisions) or through de novo branching (the de novo 
provisions). The merger provisions further distinguish between 
interstate mergers of entire banks and interstate acquisition of 
individual branches.
    Some foreign bank trade groups have argued that a foreign bank with 
interstate offices, including agencies and limited branches, should be 
permitted to convert such agencies and limited branches outside the 
home state into full-service branches. The argument is based on the 
fact that domestic banking organizations can consolidate their existing 
interstate subsidiary banks and establish interstate branches through 
the merger provisions. Accordingly, the argument goes, in order to 
provide national treatment, foreign banks should be able to

[[Page 68440]]

``consolidate'' their own existing interstate operations into full-
service branches.
    The Board has several concerns with this argument. In an interstate 
merger of bank subsidiaries, different legal entities are merged into 
one; operations are retained as branches of the surviving bank. In the 
case of a foreign bank's interstate network of offices, each office is 
already part of one legal entity; there is no merger. Moreover, in an 
interstate merger transaction, all existing subsidiary banks would 
generally have full deposit-taking authority; the merger does not 
increase the ability of the merged entities to take deposits. In the 
case of foreign banks, however, many of the interstate offices do not 
have full deposit powers <SUP>34</SUP> and granting the request would 
allow foreign banks substantially to increase their deposit powers. 
Finally, unlike foreign banks, domestic banks did not have the 
opportunity to establish agencies and limited branches outside their 
home states prior to enactment of the Interstate Act. One possible 
issue is whether the existing networks of such interstate offices of 
foreign banks, established at a time when such interstate offices were 
unavailable to domestic banks, would give foreign banks an unfair 
advantage over domestic banks if the Board decides that such offices 
can be upgraded to full branches under the merger 
provisions.<SUP>35</SUP>
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    \34\ Limited branches may take only Edge-type deposits; agencies 
may accept only foreign-source deposits.
    \35\ It could be argued that the ability of foreign banks to 
maintain agency, limited branch, and representative office networks 
outside their home states since 1978 gave foreign banks a slight 
competitive advantage, and that foreign banks wishing to upgrade 
their out-of-home-state offices should be allowed to do so only if a 
domestic bank could open a de novo branch under the Interstate Act.
---------------------------------------------------------------------------

    On balance, the Board believes it should approve upgrades of 
agencies and limited branches to full branches only if the host state 
permits de novo interstate branching. Comment is being requested on 
whether foreign banks wishing to upgrade their out-of-home-state 
offices should be permitted to do so only if a domestic bank with the 
same home state as the foreign bank could open a de novo branch, or 
whether there are other circumstances in which a foreign bank should be 
permitted to upgrade its offices.
    In connection with this issue, the Board is proposing a change in 
the current definition of ``change in status'' in Regulation K. 
Regulation K requires the prior approval of the Board under the FBSEA 
for any ``change in the status'' of a U.S. office. The current 
definition of change in status in Regulation K does not expressly 
include upgrades from limited to full branches because foreign banks 
generally were unable to effect such upgrades without changing home 
state until the Interstate Act gave foreign banks the ability to 
establish full branches on an interstate basis.
    As discussed above, upgrading a limited branch of a foreign bank to 
a full branch implicates policy concerns similar to those raised by 
changes in the status of an office requiring prior Board approval under 
FBSEA. Thus, the Board proposes to expand the definition of ``change in 
status'' to include upgrades from a limited branch to a full branch, 
such that prior approval of the Board under FBSEA would be necessary 
for such upgrades. Where a foreign bank proposes to upgrade a limited 
branch to a full branch outside its home state, the prior approval of 
the Board under the interstate branching provisions of section 5 of the 
IBA also would be required as a result of this rule change.

Home State Attribution Rule Deleted

    Regulation K currently provides that a foreign banking organization 
and all its affiliates are entitled to only one home state. This would 
be true even if the foreign banking organization owned several 
different foreign banks with operations in the United States.
    At the time the rule was adopted, domestic banks generally could 
not branch into states other than the ones in which they were located, 
nor could bank holding companies generally acquire banks outside their 
home state. In that context, the Regulation K provision was structured 
to prevent affiliated groups of foreign banks from gaining an unfair 
advantage over domestic banks by having each of the affiliated foreign 
banks select a different home state. Having done so, the foreign banks 
would be able to open and operate branches in more than one state. The 
rule sought to prevent this by stating that a foreign banking 
organization and any foreign bank that it controls would be entitled to 
only one home state.
    The Interstate Act has substantially changed the rules on 
interstate expansion since this provision was originally adopted. Under 
current law, a bank holding company may own many banks in different 
states; each of these banks is entitled to its own home state 
regardless of the home states of its affiliates. Consequently, the 
Board proposes that Regulation K be amended to eliminate the 
requirement that a foreign bank and all its affiliates are entitled to 
only one home state. The proposal would preserve national treatment for 
foreign banks and would not put U.S. banking organizations at any 
competitive disadvantage.<SUP>36</SUP>
---------------------------------------------------------------------------

    \36\ Section 5 of the IBA provides that a foreign bank may not 
establish a branch ``directly or indirectly'' outside its home 
state. Staff does not believe that this provision affects the 
ability of several foreign bank affiliates to maintain different 
home states. Rather, in light of Congress's intent to provide 
foreign banks with national treatment in interstate expansion, staff 
believes this prohibition on ``indirect'' establishment of branches 
refers to preventing one foreign bank from acting as the branch of 
another foreign bank, without the latter having met the requirements 
of the IBA, including section 5.
---------------------------------------------------------------------------

    The Board requests comment on the specific proposals with respect 
to the Interstate Act as well as any other comments on appropriate or 
desirable changes.

Additional Matters

Temporary Additional Office Location

    From time to time over the past six years, the Board has received 
requests from foreign banks that desire to have an additional temporary 
location, usually as an interim measure before moving into new office 
space that can accommodate the entire staff of the branch or agency. 
These requests typically occur when the office is expanding into new 
areas or otherwise adding staff. The Board is proposing that prior 
approval under FBSEA would not be required where a foreign bank 
temporarily, for a period not to exceed 12 months, relocates part of 
the staff of a branch or agency pending movement of the entire office 
to a new location as long as there is not direct public access with 
respect to any branch or agency function. Any foreign bank taking 
advantage of this authority would be required to advise the Board prior 
to the relocation, make certain commitments, and provide periodic 
information, as requested.

Changes to Definition Section

    The revision makes certain technical changes in the definition 
section of Subpart B, including in the definitions of ``appropriate 
Federal Reserve Bank,'' ``foreign banking organization,'' and 
``regional administrative office.''

Conforming Changes to Termination Provisions

    The Board proposes to amend the provisions of Subpart B dealing 
with termination of a U.S. office of a foreign bank to add as a grounds 
for termination a finding that the home country supervisor of a foreign 
bank is not making demonstrable progress in establishing arrangements 
for the comprehensive supervision or

[[Page 68441]]

regulation of such foreign bank on a consolidated basis.

Permissible U.S. Securities Activities for Foreign Banking Organization

    Subpart B currently provides that a foreign banking organization 
may not own or control shares of a foreign company that directly 
underwrites, sells or distributes, or that owns or controls more than 
five percent of the shares of a company that underwrites, sells or 
distributes, securities in the United States, except to the extent 
permitted bank holding companies. The current five percent limitation 
is intended to limit any competitive advantage the foreign banking 
organization might have by virtue of owning a larger interest in an 
impermissible U.S. securities company then is permitted to a U.S. bank 
holding company. Based on recent experience, the Board is proposing 
that the five percent limit be raised to ten percent. In the Board's 
view, a less than ten percent ownership interest would not generally 
permit the foreign banking organization to exert a significant 
influence over a securities company in order to gain a competitive 
advantage over U.S. bank holding companies.

New Delegations

    Staff is proposing adding several new delegations related to 
Subpart B of Regulation K to the Board's delegation rules. The 
following authority would be delegated to the Director of the Division 
of Banking Supervision and Regulation:
    <bullet> Together with the appropriate Federal Reserve Bank, 
authority to waive or suspend the prior notice period in connection 
with the establishment of any particular new foreign bank office in the 
United States or to require that an application be filed in lieu of a 
prior notice;
    <bullet> Authority to suspend a particular foreign banking 
organization's ability to establish additional offices by general 
consent or prior notice would also be delegated to the Director of the 
Division of Banking Supervision and Regulation.
    <bullet> Authority to determine that the temporary operation by a 
foreign bank of a second location of an existing office does not 
constitute the establishment of a new office.
    The following authority would be delegated to the General Counsel.
    <bullet> Authority not to require an application in the event of a 
merger or acquisition transaction involving two foreign banks that 
would otherwise qualify for after-the-fact approval where the foreign 
bank in question commits promptly to wind down the acquired U.S. 
operations; and
    <bullet> Authority to approve routine requests for exemptive 
authority under section 4(c)(9) of the BHC Act.

Reduction of Reporting Requirements

    Foreign banking organizations currently are required to report 
certain acquisitions of shares in companies engaged in activities in 
the United States on a quarterly basis. The Board is proposing that 
such reports be required only on an annual basis.

Subpart C: Export Trading Companies

    Subpart C of the Regulation K sets out the rules governing 
investments and participation in export trading companies (ETCs) by 
bank holding companies and other eligible investors.
    ETCs are companies in which bank holding companies and certain 
other eligible investors may invest for the purpose of promoting U.S. 
exports. Currently, an eligible investor must give the Board 60 days 
prior written notice of an investment of any amount in an ETC. To ease 
regulatory burden, the Board is proposing a general consent procedure 
whereby an eligible investor that is well capitalized and well managed 
may invest in an ETC without submitting prior notice. An eligible 
investor that makes such an investment would have to provide certain 
information to the Board in a post-investment notice. The terms well 
capitalized and well managed would have the same meanings as in the 
Board's Regulation Y.
    The Board is also proposing that eligible investors be able, under 
general-consent authority, to reinvest an amount equal to dividends 
received from the ETC in the prior year and to acquire an ETC from an 
affiliate at net asset value. Both provisions are based on the general-
consent provisions of subpart A.
    The proposed revision of subpart C would also move all defined 
terms into a new definitions section; remove an obsolete provision 
relating to the calculation of an ETC's revenues; and make certain 
minor, technical amendments.

Request for Comment

    The Board seeks comment on all of these proposals, including any 
changes not noted above but that are set forth in the draft 
regulations.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an 
initial regulatory flexibility analysis with any notice of proposed 
rulemaking. A description of the reasons why the action by the agency 
is being considered and a statement of the objectives of, and the legal 
basis for, the proposed rule are contained in the supplementary 
information above. The overall effect of the proposed rule would be to 
reduce regulatory burden. The rule should not have a significant 
economic impact on a substantial number of small business entities 
consistent with the spirit and purpose of the Regulatory Flexibility 
Act.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.) and its implementing regulation (5 CFR 1320, app. A.1), 
the Board reviewed the proposed rule under the authority delegated to 
the Board by the Office of Management and Budget (OMB). The Federal 
Reserve may not conduct or sponsor, and an organization is not required 
to respond to, an information collection unless the Board displays a 
currently valid OMB control number. The Board's OMB control numbers for 
the collections revised by this proposal are 7100-0107 (the 
International Applications and Prior Notifications under Subparts A and 
C of Regulation K; FR K-1), 7100-0110 (the Notification Required 
Pursuant to Section 211.23(h) of Regulation K on Acquisitions by 
Foreign Banking Organizations; FR 4002), and 7100-0284 (the 
International Applications and Prior Notifications under Subpart B of 
Regulation K; FR K-2).
    The collections of information that are proposed to be revised by 
this rulemaking are authorized by sections 25 and 25A of the Federal 
Reserve Act (12 U.S.C. 601-604a, 611-631), sections 4(c)(13), 4(c)(14), 
and 5(c) of the BHC Act (12 U.S.C. 1843(c)(13), 1843(c)(14), 1844(c)), 
and sections 7, 8(a), and 10 of the IBA (12 U.S.C. 3105, 3106(a), 
3107). These information collections are required to evidence 
compliance with the requirements of Regulation K. The respondents are 
for-profit financial institutions, including small businesses.
    The current estimated annual burden for the 7100-0107 is 440 hours. 
The proposed rule would result in an estimated 25 percent reduction in 
the number of applications filed. The proposal would permit well-
capitalized and well-managed U.S. banking organizations making 
investments pursuant to general consent authority to file an 
abbreviated post-investment notice with the Board. This notice would 
take the place of the requirements relating to prior notice or 
application to the Board that would be required under existing 
Regulation K procedures before any such investment could be made. The 
current estimated annual burden for the 7100-0110 is 80

[[Page 68442]]

hours. It is estimated that the proposed rule would reduce the burden 
by 50 percent due to a decrease in the frequency of reports to be filed 
for certain foreign banking organizations. The current estimated annual 
burden for the 7100-0284 is 1,000 hours. It is estimated that the 
proposed rule would reduce the burden by 10 percent due to a decrease 
in the average number of hours required to complete an application. The 
Board estimates there would be no cost burden in addition to the annual 
hour burden.
    For the 7100-0107 and the 7100-0284, the applying organization has 
the opportunity to request confidentiality for information that it 
believes will qualify for an exemption under the Freedom of Information 
Act (5 U.S.C. 552(b)). For the 7100-0110, the information may be deemed 
confidential if the respondent requests confidential treatment and is 
able to demonstrate the need for confidentiality under one or more of 
the exemptions provided by FOIA (5 U.S.C. 552(b)).
    Comments are invited on: a. whether the proposed revised 
collections of information are necessary for the proper performance of 
the Federal Reserve's functions, including whether the information has 
practical utility; b. the accuracy of the Federal Reserve's estimate of 
the burden of the proposed revised information collections, including 
the cost of compliance; c. ways to enhance the quality, utility, and 
clarity of the information to be collected; and d. ways to minimize the 
burden of information collection on respondents, including through the 
use of automated collection techniques or other forms of information 
technology. Comments on the collections of information should be sent 
to Mary M. McLaughlin, Chief, Financial Reports Section, Division of 
Research and Statistics, Mail Stop 97, Board of Governors of the 
Federal Reserve System, Washington, DC 20551, with copies of such 
comments to be sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-00107, 7100-0110, or 7100-0284), Washington, DC 
20503.

List of Subjects

12 CFR Part 211

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

12 CFR Part 265

    Authority delegations (Government agencies), Banks, banking, 
Federal Reserve System.
    For the reasons set out in the preamble, the Board of Governors 
proposes to amend 12 CFR parts 211 and 265 as set forth below:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for part 211 continues to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 
3101 et seq., 3109 et seq.

    2. Subparts A, B, and C (consisting of Secs. 211.1 through 211.34) 
are revised to read as follows:
Subpart A--International Operations of U.S. Banking Organizations
Sec.
211.1  Authority, purpose, and scope.
211.2  Definitions.
211.3  Foreign branches of U.S. banking organizations.
211.4  Permissible investments and activities of foreign branches of 
member banks.
211.5  Edge and agreement corporations.
211.6  Permissible activities of Edge and agreement corporations in 
the United States.
211.7  Investments and activities abroad.
211.8  Investment procedures.
211.9  Permissible activities abroad.
211.10  Lending limits and capital requirements.
211.11  Supervision and reporting.
211.12  Reports of crimes and suspected crimes.
211.13  Liquidation of Edge and agreement corporations.

Subpart B--Foreign Banking Organizations

211.20  Authority, purpose, and scope.
211.21  Definitions.
211.22  Interstate banking operations of foreign banking 
organizations.
211.23  Nonbanking activities of foreign banking organizations.
211.24  Approval of offices of foreign banks; procedures for 
applications; standards for approval; representative office 
activities and standards for approval; preservation of existing 
authority.
211.25  Termination of offices of foreign banks.
211.26  Examination of offices and affiliates of foreign banks.
211.27  Disclosure of supervisory information to foreign 
supervisors.
211.28  Provisions applicable to branches and agencies: limitation 
on loans to one borrower.
211.29  Applications by state branches and state agencies to conduct 
activities not permissible for federal branches.
211.30  Criteria for evaluating U.S. operations of foreign banks not 
subject to consolidated supervision.

Subpart C--Export Trading Companies

211.31  Authority, purpose, and scope.
211.32  Definitions.
211.33  Investments and extensions of credit.
211.34  Procedures for filing and processing notices.

Subpart A--International Operations of U.S. Banking Organizations


Sec. 211.1  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Federal 
Reserve Act (FRA) (12 U.S.C. 221 et seq.); the Bank Holding Company Act 
of 1956 (BHC Act) (12 U.S.C. 1841 et seq.); and the International 
Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
    (b) Purpose. This subpart sets out rules governing the 
international and foreign activities of U.S. banking organizations, 
including procedures for establishing foreign branches and Edge and 
agreement corporations to engage in international banking, and for 
investments in foreign organizations.
    (c) Scope. This subpart applies to:
    (1) Corporations organized under section 25A of the FRA (12 U.S.C. 
611-631) (Edge corporations);
    (2) Corporations having an agreement or undertaking with the Board 
under section 25 of the FRA (12 U.S.C. 601-604a), (agreement 
corporations);
    (3) Member banks with respect to their foreign branches and 
investments in foreign banks under section 25 of the FRA (12 U.S.C. 
601-604a); <SUP>1</SUP> and
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    \1\ Section 25 of the FRA (12 U.S.C. 601-604a), which refers to 
national banking associations, also applies to state member banks of 
the Federal Reserve System by virtue of section 9 of the FRA (12 
U.S.C. 321).
---------------------------------------------------------------------------

    (4) Bank holding companies with respect to the exemption from the 
nonbanking prohibitions of the BHC Act afforded by section 4(c)(13) of 
that act (12 U.S.C. 1843(c)(13)).


Sec. 211.2  Definitions.

    Unless otherwise specified, for the purposes of this subpart:
    (a) An affiliate of an organization means:
    (1) Any entity of which the organization is a direct or indirect 
subsidiary; or
    (2) Any direct or indirect subsidiary of the organization or such 
entity.
    (b) Capital Adequacy Guidelines means the ``Capital Adequacy 
Guidelines for State Member Banks: Risk-Based Measure'' (12 CFR part 
208, app. A) and the ``Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure'' (12 CFR part 225, app. A).
    (c) Capital and surplus means, unless otherwise provided in this 
part:
    (1) Tier 1 and tier 2 capital included in an organization's risk-
based capital

[[Page 68443]]

(under the Capital Adequacy Guidelines); and
    (2) The balance of allowance for loan and lease losses not included 
in an organization's tier 2 capital for calculation of risk-based 
capital, based on the organization's most recent consolidated Report of 
Condition and Income.
    (d) Directly or indirectly, when used in reference to activities or 
investments of an organization, means activities or investments of the 
organization or of any subsidiary of the organization.
    (e) Eligible country means any country:
    (1) For which an allocated transfer risk reserve is required 
pursuant to Sec. 211.43 and that has restructured its sovereign debt 
held by foreign creditors; and
    (2) Any other country that the Board deems to be eligible.
    (f) An Edge corporation is engaged in banking if it is ordinarily 
engaged in the business of accepting deposits in the United States from 
nonaffiliated persons.
    (g) Engaged in business or engaged in activities in the United 
States means maintaining and operating an office (other than a 
representative office) or subsidiary in the United States.
    (h) Equity means an ownership interest in an organization, whether 
through:
    (1) Voting or nonvoting shares;
    (2) General or limited partnership interests;
    (3) Any other form of interest conferring ownership rights, 
including warrants, debt, or any other interests that are convertible 
into shares or other ownership rights in the organization; or
    (4) Loans that provide rights to participate in the profits of an 
organization, unless the investor receives a determination that such 
loans should not be considered equity in the circumstances of the 
particular investment.
    (i) Foreign or foreign country refers to one or more foreign 
nations, and includes the overseas territories, dependencies, and 
insular possessions of those nations and of the United States, and the 
Commonwealth of Puerto Rico.
    (j) Foreign bank means an organization that:
    (1) Is organized under the laws of a foreign country;
    (2) Engages in the business of banking;
    (3) Is recognized as a bank by the bank supervisory or monetary 
authority of the country of its organization or principal banking 
operations;
    (4) Receives deposits to a substantial extent in the regular course 
of its business; and
    (5) Has the power to accept demand deposits.
    (k) Foreign branch means an office of an organization (other than a 
representative office) that is located outside the country where the 
organization is legally established, at which a banking or financing 
business is conducted.
    (l) Foreign person means an office or establishment located outside 
the United States, or an individual residing outside the United States.
    (m) Investment means:
    (1) The ownership or control of equity;
    (2) Binding commitments to acquire equity;
    (3) Contributions to the capital and surplus of an organization; or
    (4) The holding of an organization's subordinated debt when the 
investor and the investor's affiliates hold more than 5 percent of the 
equity of the organization.
    (n) Investor means an Edge corporation, agreement corporation, bank 
holding company, or member bank.
    (o) Joint venture means an organization that has 25 percent or more 
of its voting shares held directly or indirectly by the investor or by 
an affiliate of the investor, but which is not a subsidiary of the 
investor.
    (p) Loans and extensions of credit means all direct and indirect 
advances of funds to a person made on the basis of any obligation of 
that person to repay the funds.
    (q) Organization means a corporation, government, partnership, 
association, or any other entity.
    (r) Person means an individual or an organization.
    (s) Portfolio investment means an investment in an organization 
other than a subsidiary or joint venture.
    (t) Representative office means an office that:
    (1) Engages solely in representational and administrative functions 
(such as soliciting new business or acting as liaison between the 
organization's head office and customers in the United States); and
    (2) Does not have authority to make any business decision (other 
than decisions relating to its premises or personnel) for the account 
of the organization it represents, including contracting for any 
deposit or deposit-like liability on behalf of the organization.
    (u) Subsidiary means an organization that has more than 50 percent 
of its voting shares held directly or indirectly, or that is otherwise 
controlled or capable of being controlled, by the investor or an 
affiliate of the investor under any authority. Among other 
circumstances, an investor is considered to control an organization if:
    (1) The investor or an affiliate is a general partner of the 
organization; or
    (2) If the investor and its affiliates directly or indirectly own 
or control more than 50 percent of the equity of the organization.
    (v) Tier 1 capital has the same meaning as provided under the 
Capital Adequacy Guidelines.
    (w) Well capitalized means:
    (1) In relation to a parent member or insured bank, that the 
standards set out in Sec. 208.33(b)(1) of Regulation H (12 CFR 
208.33(b)(1)) are satisfied;
    (2) In relation to a bank holding company, that the standards set 
out in Sec. 225.2(r)(1) of Regulation Y (12 CFR 225.2(r)(1)) are 
satisfied; and
    (3) In relation to an Edge or agreement corporation, that it has 
tier 1 and total risk-based capital ratios of 6.0 and 10.0 percent, 
respectively, or greater.
    (x) Well managed means that the Edge or agreement corporation, any 
parent insured bank, and the bank holding company have received a 
composite rating of 1 or 2 at their most recent examination or review 
and are not subject to any supervisory enforcement action.


Sec. 211.3  Foreign branches of U.S. banking organizations.

    (a) General.--(1) Definition of banking organization. For purposes 
of this section, a banking organization is defined as a member bank and 
its affiliates.
    (2) A banking organization is considered to be operating a branch 
in a foreign country if it has an affiliate that is a member bank, Edge 
or agreement corporation, or foreign bank that operates an office 
(other than a representative office) in that country.
    (3) For purposes of this subpart, a foreign office of an operating 
subsidiary of a member bank shall be treated as a foreign branch of the 
member bank and may engage only in activities permissible for a branch 
of a member bank.
    (4) At any time upon notice, the Board may modify or suspend 
branching authority conferred by this section with respect to any 
banking organization.
    (b)(1) Establishment of foreign branches. (i) Foreign branches may 
be established by any member bank having capital and surplus of 
$1,000,000 or more, an Edge corporation, an agreement corporation, any 
subsidiary

[[Page 68444]]

the shares of which are held directly by the member bank, or any other 
subsidiary held pursuant to this subpart.
    (ii) The Board grants its general consent under section 25 of the 
FRA (12 U.S.C. 601-604a) for a member bank to establish a branch in the 
Commonwealth of Puerto Rico and the overseas territories, dependencies, 
and insular possessions of the United States.
    (2) Prior notice. Unless otherwise provided in this section, the 
establishment of a foreign branch requires 30 days' prior written 
notice to the Board.
    (3) Branching into additional foreign countries. After giving the 
Board 12 days' prior written notice, a banking organization that 
operates branches in two or more foreign countries may establish a 
branch in an additional foreign country.
    (4) Additional branches within a foreign country. No prior notice 
is required to establish additional branches in any foreign country 
where the banking organization operates one or more branches.
    (5) Branching by nonbanking organizations. No prior notice is 
required for an organization that is not an Edge or agreement 
corporation, member bank, or foreign bank to establish branches within 
a foreign country or in additional foreign countries.
    (6) Expiration of branching authority. Authority to establish 
branches, when granted following prior written notice to the Board, 
shall expire one year from the earliest date on which the authority 
could have been exercised, unless extended by the Board.
    (7) Reporting. Any banking organization that opens, closes, or 
relocates a branch shall report such change in a manner prescribed by 
the Board.
    (8) Reserves of foreign branches of member banks. Member banks 
shall maintain reserves against foreign branch deposits when required 
by Regulation D (12 CFR part 204).


Sec. 211.4  Permissible investments and activities of foreign branches 
of member banks.

    In addition to its general banking powers, and to the extent 
consistent with its charter, a foreign branch of a member bank may 
engage in the following activities, so far as usual in connection with 
the business of banking in the country where it transacts business:
    (a) Guarantees. Guarantee debts, or otherwise agree to make 
payments on the occurrence of readily ascertainable events,<SUP>2</SUP> 
if the guarantee or agreement specifies a maximum monetary liability; 
but, except to the extent that the member bank is fully secured, it may 
not have liabilities outstanding for any person on account of such 
guarantees or agreements which, when aggregated with other unsecured 
obligations of the same person, exceed the limit contained in section 
5200(a)(1) of the Revised Statutes (12 U.S.C. 84) for loans and 
extensions of credit;
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    \2\ Readily ascertainable events include, but are not limited 
to, nonpayment of taxes, rentals, customs duties, or costs of 
transport and loss or nonconformance of shipping documents.
---------------------------------------------------------------------------

    (b) Government obligations. (1) Underwrite, distribute, buy, sell, 
and hold obligations of:
    (i) The national government of any country rated as investment 
grade by at least two established international rating agencies;
    (ii) An agency or instrumentality of such national government where 
supported by the taxing authority, guarantee, or full faith and credit 
of that government; and
    (iii) The national government and the political subdivisions of the 
country in which the branch is located;
    (2) No member bank, under authority of this paragraph (b), may hold 
or be under commitment with respect to, such obligations for its own 
account in relation to any one country in an amount exceeding the 
greater of:
    (i) 10 percent of its tier 1 capital; or
    (ii) 10 percent of the total deposits of the bank's branches in 
that country on the preceding year-end call report date (or the date of 
acquisition of the branch, in the case of a branch that has not been so 
reported);
    (c) Other investments. (1) Invest in:
    (i) The securities of the central bank, clearinghouses, 
governmental entities other than those authorized under paragraph 
(b)(1) of this section, and government-sponsored development banks of 
the country in which the foreign branch is located;
    (ii) Other debt securities eligible to meet local reserve or 
similar requirements; and
    (iii) Shares of automated electronic-payments networks, 
professional societies, schools, and the like necessary to the business 
of the branch.
    (2) The total investments of a bank's branches in a country under 
this paragraph (c) (exclusive of securities held as required by the law 
of that country or as authorized under section 5136 of the Revised 
Statutes (12 U.S.C. 24, Seventh) may not exceed 1 percent of the total 
deposits of the bank's branches in that country on the preceding year-
end call report date (or on the date of acquisition of the branch, in 
the case of a branch that has not so reported);
    (d) Real estate loans. Take liens or other encumbrances on foreign 
real estate in connection with its extensions of credit, whether or not 
of first priority and whether or not the real estate has been improved;
    (e) Insurance. Act as insurance agent or broker;
    (f) Employee benefits program. Pay to an employee of the branch, as 
part of an employee benefits program, a greater rate of interest than 
that paid to other depositors of the branch;
    (g) Repurchase agreements. Engage in repurchase agreements 
involving securities and commodities that are the functional 
equivalents of extensions of credit;
    (h) Investment in subsidiaries. With the Board's prior approval, 
acquire all of the shares of a company (except where local law requires 
other investors to hold directors' qualifying shares or similar types 
of instruments) that engages solely in activities:
    (1) In which the member bank is permitted to engage; or
    (2) That are incidental to the activities of the foreign branch; 
and
    (i) Other activities. With the Board's prior approval, engage in 
other activities that the Board determines are usual in connection with 
the transaction of the business of banking in the places where the 
member bank's branches transact business.


Sec. 211.5  Edge and agreement corporations.

    (a) Organization. (1) Board authority. The Board shall have the 
authority to approve:
    (i) The establishment of Edge corporations; and
    (ii) Investments in Edge and agreement corporations.
    (2) Permit. A proposed Edge corporation shall become a body 
corporate when the Board issues a permit approving its proposed name, 
articles of association, and organization certificate.
    (3) Name. The name shall include international, foreign, overseas, 
or a similar word, but may not resemble the name of another 
organization to an extent that might mislead or deceive the public.
    (4) Federal Register notice. The Board shall publish in the Federal 
Register notice of any proposal to organize an Edge corporation and 
shall give interested persons an opportunity to express their views on 
the proposal.
    (5) Factors considered by Board. The factors considered by the 
Board in

[[Page 68445]]

acting on a proposal to organize an Edge corporation include:
    (i) The financial condition and history of the applicant;
    (ii) The general character of its management;
    (iii) The convenience and needs of the community to be served with 
respect to international banking and financing services; and
    (iv) The effects of the proposal on competition.
    (6) Authority to commence business. After the Board issues a 
permit, the Edge corporation may elect officers and otherwise complete 
its organization, invest in obligations of the U.S. government, and 
maintain deposits with depository institutions, but it may not exercise 
any other powers until at least 25 percent of the authorized capital 
stock specified in the articles of association has been paid in cash, 
and each shareholder has paid in cash at least 25 percent of that 
shareholder's stock subscription.
    (7) Expiration of unexercised authority. Unexercised authority to 
commence business as an Edge corporation shall expire one year after 
issuance of the permit, unless the Board extends the period.
    (8) Amendments to articles of association. No amendment to the 
articles of association shall become effective until approved by the 
Board.
    (9) Shareholders' meeting. An Edge corporation shall provide in its 
bylaws that:
    (i) A shareholders' meeting shall be convened at the request of the 
Board within five days after the Board gives notice of the request to 
the Edge corporation;
    (ii) Any shareholder or group of shareholders that owns or controls 
25 percent or more of the shares of the Edge corporation shall attend 
such a meeting in person or by proxy; and
    (iii) Failure by a shareholder or authorized representative to 
attend such meeting in person or by proxy may result in removal or 
barring of such shareholder or representative from further 
participation in the management or affairs of the Edge corporation.
    (b) Nature and ownership of shares--(1) Shares. Shares of stock in 
an Edge corporation may not include no-par-value shares and shall be 
issued and transferred only on its books and in compliance with section 
25A of the FRA (12 U.S.C. 611 et seq.) and this subpart.
    (2) Contents of share certificates. The share certificates of an 
Edge corporation shall:
    (i) Name and describe each class of shares, indicating its 
character and any unusual attributes, such as preferred status or lack 
of voting rights; and
    (ii) Conspicuously set forth the substance of:
    (A) Any limitations upon the rights of ownership and transfer of 
shares imposed by section 25A of the FRA (12 U.S.C. 611 et seq.); and
    (B) Any rules that the Edge corporation prescribes in its bylaws to 
ensure compliance with this paragraph (b).
    (3) Change in status of shareholder. Any change in status of a 
shareholder that causes a violation of section 25A of the FRA (12 
U.S.C. 611 et seq.) shall be reported to the Board as soon as possible, 
and the Edge corporation shall take such action as the Board may 
direct.
    (c) Ownership of Edge corporations by foreign institutions--(1) 
Prior Board approval. One or more foreign or foreign-controlled 
domestic institutions referred to in section 25A(11) of the FRA (12 
U.S.C. 619) may apply for the Board's prior approval to acquire 
directly or indirectly a majority of the shares of the capital stock of 
an Edge corporation.
    (2) Conditions and requirements. Such an institution shall:
    (i) Provide the Board information related to its financial 
condition and activities and such other information as the Board may 
require;
    (ii) Ensure that any transaction by an Edge corporation with an 
affiliate <SUP>3</SUP> is on substantially the same terms, including 
interest rates and collateral, as those prevailing at the same time for 
comparable transactions by the Edge corporation with nonaffiliated 
persons, and does not involve more than the normal risk of repayment or 
present other unfavorable features;
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    \3\ For purposes of this paragraph (c)(2)(ii), affiliate means 
any organization that would be an affiliate under section 23A of the 
FRA (12 U.S.C. 371c) if the Edge corporation were a member bank.
---------------------------------------------------------------------------

    (iii) Ensure that the Edge corporation will not provide funding on 
a continual or substantial basis to any affiliate or office of the 
foreign institution through transactions that would be inconsistent 
with the international and foreign business purposes for which Edge 
corporations are organized; and
    (iv) Invest no more than 10 percent of the institution's capital 
and surplus in the aggregate amount of stock held in all Edge and 
agreement corporations (or, with the Board's prior approval, up to 20 
percent of the investor's capital and surplus).
    (3) Foreign institutions not subject to the BHC Act. In the case of 
a foreign institution not subject to section 4 of the BHC Act (12 
U.S.C. 1843), that institution shall:
    (i) Comply with any conditions that the Board may impose that are 
necessary to prevent undue concentration of resources, decreased or 
unfair competition, conflicts of interest, or unsound banking practices 
in the United States; and
    (ii) Give the Board 30 days' prior written notice before engaging 
in any nonbanking activity in the United States, or making any initial 
or additional investments in another organization, that would require 
prior Board approval or notice by an organization subject to section 4 
of the BHC Act (12 U.S.C. 1843); in connection with such notice, the 
Board may impose conditions necessary to prevent adverse effects that 
may result from such activity or investment.
    (d) Change in control. --(1) Prior notice. (i) Any person shall 
give the Board 60 days' prior written notice before acquiring, directly 
or indirectly, 25 percent or more of the voting shares, or otherwise 
acquiring control, of an Edge corporation.
    (ii) The Board may extend the 60-day period for an additional 30 
days by notifying the acquiring party.
    (iii) A notice under this paragraph (d) need not be filed where a 
change in control is effected through a transaction requiring the 
Board's approval under section 3 of the BHC Act (12 U.S.C. 1842).
    (2) Board review. In reviewing a notice filed under this paragraph 
(d), the Board shall consider the factors set forth in paragraph (a)(5) 
of this section, and may disapprove a notice or impose any conditions 
that it finds necessary to assure the safe and sound operation of the 
Edge corporation, to assure the international character of its 
operation, and to prevent adverse effects, such as decreased or unfair 
competition, conflicts of interest, or undue concentration of 
resources.
    (e) Domestic branches. --(1) Prior notice. (i) An Edge corporation 
may establish branches in the United States 30 days after the Edge 
corporation has given notice to its Reserve Bank, unless the Edge 
corporation is notified to the contrary within that time.
    (ii) The notice to the Reserve Bank shall include a copy of the 
notice of the proposal published in a newspaper of general circulation 
in the communities to be served by the branch.
    (iii) The newspaper notice may appear no earlier than 90 calendar 
days prior to submission of notice of the proposal to the Reserve Bank. 
The newspaper notice shall provide an opportunity for the public to 
give

[[Page 68446]]

written comment on the proposal to the appropriate Federal Reserve Bank 
for at least 30 days after the date of publication.
    (2) Factors considered by Board. The factors considered in acting 
upon a proposal to establish a branch are enumerated in paragraph 
(a)(5) of this section.
    (3) Expiration of authority. Authority to establish a branch under 
prior notice shall expire one year from the earliest date on which that 
authority could have been exercised, unless the Board extends the 
period.
    (f) Agreement corporations. --(1) General. With the prior approval 
of the Board, a member bank or bank holding company may invest in a 
federally or state-chartered corporation that has entered into an 
agreement or undertaking with the Board that it will not exercise any 
power that is impermissible for an Edge corporation under this subpart.
    (2) Factors considered by Board. The factors considered in acting 
upon a proposal to establish an agreement corporation are enumerated in 
paragraph (a)(5) of this section.
    (g) Reserve requirements and interest rate limitations. The 
deposits of an Edge or agreement corporation are subject to Regulations 
D and Q (12 CFR parts 204 and 217) in the same manner and to the same 
extent as if the Edge or agreement corporation were a member bank.
    (h) Liquid funds. Funds of an Edge or agreement corporation that 
are not currently employed in its international or foreign business, if 
held or invested in the United States, shall be in the form of:
    (1) Cash;
    (2) Deposits with depository institutions, as described in 
Regulation D (12 CFR part 204), and other Edge and agreement 
corporations;
    (3) Money-market instruments (including repurchase agreements with 
respect to such instruments), such as banker's acceptances, federal 
funds sold, and commercial paper; and
    (4) Short- or long-term obligations of, or fully guaranteed by, 
federal, state, and local governments and their instrumentalities.


Sec. 211.6  Permissible activities of Edge and agreement corporations 
in the United States.

    Activities incidental to international or foreign business. An Edge 
corporation may engage, directly or indirectly, in activities in the 
United States that are permitted by section 25A(6) of the FRA (12 
U.S.C. 615) and are incidental to international or foreign business, 
and in such other activities as the Board determines are incidental to 
international or foreign business. The following activities will 
ordinarily be considered incidental to an Edge corporation's 
international or foreign business:
    (a) Deposits from foreign governments and foreign persons. An Edge 
corporation may receive in the United States transaction accounts, 
savings, and time deposits (including issuing negotiable certificates 
of deposits) from foreign governments and their agencies and 
instrumentalities, and from foreign persons.
    (b) Deposits from other persons. An Edge corporation may receive 
from any other person in the United States transaction accounts, 
savings, and time deposits (including issuing negotiable certificates 
of deposit) if such deposits:
    (1) Are to be transmitted abroad;
    (2) Consist of funds to be used for payment of obligations to the 
Edge corporation or collateral securing such obligations;
    (3) Consist of the proceeds of collections abroad that are to be 
used to pay for exported or imported goods or for other costs of 
exporting or importing or that are to be periodically transferred to 
the depositor's account at another financial institution;
    (4) Consist of the proceeds of extensions of credit by the Edge 
corporation;
    (5) Represent compensation to the Edge corporation for extensions 
of credit or services to the customer;
    (6) Are received from Edge or agreement corporations, foreign 
banks, and other depository institutions (as described in Regulation D 
(12 CFR part 204)); or
    (7) Are received from an organization that by its charter, license, 
or enabling law is limited to business that is of an international 
character, including foreign sales corporations, as defined in 26 
U.S.C. 922; transportation organizations engaged exclusively in the 
international transportation of passengers or in the movement of goods, 
wares, commodities, or merchandise in international or foreign 
commerce; and export trading companies established under subpart C of 
this part.
    (c) Borrowings. An Edge corporation may:
    (1) Borrow from offices of other Edge and agreement corporations, 
foreign banks, and depository institutions (as described in Regulation 
D (12 CFR part 204));
    (2) Issue obligations to the United States or any of its agencies 
or instrumentalities;
    (3) Incur indebtedness from a transfer of direct obligations of, or 
obligations that are fully guaranteed as to principal and interest by, 
the United States or any agency or instrumentality thereof that the 
Edge corporation is obligated to repurchase; and
    (4) Issue long-term subordinated debt that does not qualify as a 
deposit under Regulation D (12 CFR part 204).
    (d) Credit activities. An Edge corporation may:
    (1) Finance the following:
    (i) Contracts, projects, or activities performed substantially 
abroad;
    (ii) The importation into or exportation from the United States of 
goods, whether direct or through brokers or other intermediaries;
    (iii) The domestic shipment or temporary storage of goods being 
imported or exported (or accumulated for export); and
    (iv) The assembly or repackaging of goods imported or to be 
exported;
    (2) Finance the costs of production of goods and services for which 
export orders have been received or which are identifiable as being 
directly for export;
    (3) Assume or acquire participations in extensions of credit, or 
acquire obligations arising from transactions the Edge corporation 
could have financed including acquisition of obligations of foreign 
governments;
    (4) Guarantee debts, or otherwise agree to make payments on the 
occurrence of readily ascertainable events (including, but not limited 
to, events such as nonpayment of taxes, rentals, customs duties, or 
cost of transport and loss or nonconformance of shipping documents), so 
long as the guarantee or agreement specifies the maximum monetary 
liability thereunder and is related to a type of transaction described 
in paragraphs (d)(1) and (2) of this section; and
    (5) Provide credit and other banking services for domestic and 
foreign purposes to foreign governments and their agencies and 
instrumentalities; foreign persons; and organizations of the type 
described in paragraph (b)(7) of this section.
    (e) Payments and collections. An Edge corporation may receive 
checks, bills, drafts, acceptances, notes, bonds, coupons, and other 
instruments for collection abroad, and collect such instruments in the 
United States for a customer abroad; and may transmit and receive wire 
transfers of funds and securities for depositors.
    (f) Foreign exchange. An Edge corporation may engage in foreign 
exchange activities.
    (g) Fiduciary and investment advisory activities. An Edge 
corporation may:
    (1) Hold securities in safekeeping for, or buy and sell securities 
upon the order

[[Page 68447]]

and for the account and risk of, a person, provided such services for 
U.S. persons are with respect to foreign securities only;
    (2) Act as paying agent for securities issued by foreign 
governments or other entities organized under foreign law;
    (3) Act as trustee, registrar, conversion agent, or paying agent 
with respect to any class of securities issued to finance foreign 
activities and distributed solely outside the United States;
    (4) Make private placements of participations in its investments 
and extensions of credit; however, except to the extent permissible for 
member banks under section 5136 of the Revised Statutes (12 U.S.C. 
24(Seventh)), no Edge corporation may otherwise engage in the business 
of underwriting, distributing, or buying or selling securities in the 
United States;
    (5) Act as investment or financial adviser by providing portfolio 
investment advice and portfolio management with respect to securities, 
other financial instruments, real-property interests and other 
investment assets, <SUP>4</SUP> and by providing advice on mergers and 
acquisitions, provided such services for U.S. persons are with respect 
to foreign assets only; and
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    \4\  For purposes of this section, management of an investment 
portfolio does not include operational management of real property, 
or industrial or commercial assets.
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    (6) Provide general economic information and advice, general 
economic statistical forecasting services, and industry studies, 
provided such services for U.S. persons shall be with respect to 
foreign economies and industries only.
    (h) Banking services for employees. Provide banking services, 
including deposit services, to the officers and employees of the Edge 
corporation and its affiliates; however, extensions of credit to such 
persons shall be subject to the restrictions of Regulation O (12 CFR 
part 215) as if the Edge corporation were a member bank.
    (i) Other activities. With the Board's prior approval, engage in 
other activities in the United States that the Board determines are 
incidental to the international or foreign business of Edge 
corporations.


Sec. 211.7  Investments and activities abroad.

    (a) General policy. Activities abroad, whether conducted directly 
or indirectly, shall be confined to activities of a banking or 
financial nature and those that are necessary to carry on such 
activities. In doing so, investors <SUP>5</SUP> shall at all times act 
in accordance with high standards of banking or financial prudence, 
having due regard for diversification of risks, suitable liquidity, and 
adequacy of capital. Subject to these considerations and the other 
provisions of this section, it is the Board's policy to allow 
activities abroad to be organized and operated as best meets corporate 
policies.
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    \5\ For purposes of this section and Secs. 211.8 and 211.9, a 
direct subsidiary of a member bank is deemed to be an investor.
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    (b) Direct investments by member banks. A member bank's direct 
investments under section 25 of the FRA (12 U.S.C. 601 et seq.) shall 
be limited to:
    (1) Foreign banks;
    (2) Domestic or foreign organizations formed for the sole purpose 
of holding shares of a foreign bank;
    (3) Foreign organizations formed for the sole purpose of performing 
nominee, fiduciary, or other banking services incidental to the 
activities of a foreign branch or foreign bank affiliate of the member 
bank; and
    (4) Subsidiaries established pursuant to Sec. 211.4(h).
    (c) Eligible investments. Subject to the limitations set out in 
paragraphs (b) and (d) of this section, an investor may directly or 
indirectly:
    (1) Investment in subsidiary. Invest in a subsidiary that engages 
solely in activities listed in Sec. 211.9, or in such other activities 
as the Board has determined in the circumstances of a particular case 
are permissible; provided that, in the case of an acquisition of a 
going concern, existing activities that are not otherwise permissible 
for a subsidiary may account for not more than 5 percent of either the 
consolidated assets or revenues of the acquired organization;
    (2) Investment in joint venture. Invest in a joint venture, 
provided that, unless otherwise permitted by the Board, not more than 
10 percent of the joint venture's consolidated assets or revenues are 
attributable to activities not listed in Sec. 211.9; and
    (3) Portfolio investments. Make portfolio investments in an 
organization, provided that:
    (i) Individual limits. The total direct and indirect portfolio 
investments by the investor and its affiliates in an organization 
engaged in activities that are not permissible for joint ventures do 
not exceed:
    (A) 40 percent of the total equity of the organization, when 
combined with shares in the organization held in trading or dealing 
accounts pursuant to Sec. 211.9(a)(15), and shares in the organization 
held under any other authority; and
    (B) Where the investor is a well capitalized and well managed bank 
holding company, 2 percent of the investor's tier 1 capital in any one 
organization; or
    (C) For any other investor, amounts permissible under 
Sec. 211.8(c)(2);
    (ii) Aggregate limits. The total direct and indirect portfolio 
investments by the investor and its affiliates in all organizations 
engaged in activities that are not permissible for joint ventures (when 
combined with shares held under any authority other than 
Sec. 211.9(a)(15) <SUP>6</SUP>) shall not exceed:
---------------------------------------------------------------------------

    \6\ For investors that are not well capitalized and well 
managed, shares held in trading or dealing accounts pursuant to 
Sec. 211.9(a)(15) shall be included in calculating these limits.
---------------------------------------------------------------------------

    (A) 25 percent of the investor's tier 1 capital, where the investor 
is a bank holding company; or
    (B) For any other investor, the lesser of 5 percent of the member 
bank's tier 1 capital or 25 percent of the investor's capital;
    (iii) Loans and extensions of credit. Any loans and extensions of 
credit made by an investor or its affiliates to the organization are on 
substantially the same terms, including interest rates and collateral, 
as those prevailing at the same time for comparable transactions 
between the investor or its affiliates and nonaffiliated persons; and
    (iv) Protecting shareholder rights. Nothing in this paragraph 
(c)(3) shall prohibit an investor from otherwise exercising rights it 
may have as shareholder to protect the value of its investment.
    (d) Investment limit. In calculating the amount that may be 
invested in any organization under this section and Secs. 211.8 and 
211.9, there shall be included any unpaid amount for which the investor 
is liable and any investments in the same organization held by 
affiliates under any authority.
    (e) Divestiture. An investor shall dispose of an investment 
promptly (unless the Board authorizes retention) if:
    (1) The organization invested in:
    (i) Engages in impermissible activities to an extent not permitted 
under paragraph (c) of this section; or
    (ii) Engages directly or indirectly in other business in the United 
States that is not permitted to an Edge corporation in the United 
States, provided that an investor may:
    (A) Retain portfolio investments in companies that derive no more 
than 10 percent of their total revenue from activities in the United 
States; and
    (B) Hold up to 5 percent of the shares of a foreign company that 
engages directly or indirectly in business in the United States that is 
not permitted to an Edge corporation; or

[[Page 68448]]

    (2) After notice and opportunity for hearing, the investor is 
advised by the Board that such investment is inappropriate under the 
FRA, the BHC Act, or this subpart.
    (f) Debts previously contracted. Shares or other ownership 
interests acquired to prevent a loss upon a debt previously contracted 
in good faith are not subject to the limitations or procedures of this 
section, provided that such interests shall be disposed of promptly but 
in no event later than two years after their acquisition, unless the 
Board authorizes retention for a longer period.
    (g) Investments made through debt-for-equity conversions--(1) 
Permissible investments. A bank holding company may make investments 
through the conversion of sovereign- or private-debt obligations of an 
eligible country, either through direct exchange of the debt 
obligations for the investment, or by a payment for the debt in local 
currency, the proceeds of which, including an additional cash 
investment not exceeding in the aggregate more than 10 percent of the 
fair value of the debt obligations being converted as part of such 
investment, are used to purchase the following investments:
    (i) Public-sector companies. A bank holding company may acquire up 
to and including 100 percent of the shares of (or other ownership 
interests in) any foreign company located in an eligible country, if 
the shares are acquired from the government of the eligible country or 
from its agencies or instrumentalities.
    (ii) Private-sector companies. A bank holding company may acquire 
up to and including 40 percent of the shares, including voting shares, 
of (or other ownership interests in) any other foreign company located 
in an eligible country subject to the following conditions:
    (A) A bank holding company may acquire more than 25 percent of the 
voting shares of the foreign company only if another shareholder or 
group of shareholders unaffiliated with the bank holding company holds 
a larger block of voting shares of the company;
    (B) The bank holding company and its affiliates may not lend or 
otherwise extend credit to the foreign company in amounts greater than 
50 percent of the total loans and extensions of credit to the foreign 
company; and
    (C) The bank holding company's representation on the board of 
directors or on management committees of the foreign company may be no 
more than proportional to its shareholding in the foreign company.
    (2) Investments by bank subsidiary of bank holding company. Upon 
application, the Board may permit an indirect investment to be made 
pursuant to this paragraph (g) through an insured bank subsidiary of 
the bank holding company, where the bank holding company demonstrates 
that such ownership is consistent with the purposes of the FRA. In 
granting its consent, the Board may impose such conditions as it deems 
necessary or appropriate to prevent adverse effects, including 
prohibiting loans from the bank to the company in which the investment 
is made.
    (3) Divestiture--(i) Time limits for divestiture. A bank holding 
company shall divest the shares of, or other ownership interests in, 
any company acquired pursuant to this paragraph (g) within the longer 
of:
    (A) Ten years from the date of acquisition of the investment, 
except that the Board may extend such period if, in the Board's 
judgment, such an extension would not be detrimental to the public 
interest; or
    (B) Two years from the date on which the bank holding company is 
permitted to repatriate in full the investment in the foreign company.
    (ii) Maximum retention period. Notwithstanding the provisions of 
paragraph (g)(3)(i) of this section:
    (A) Divestiture shall occur within 15 years of the date of 
acquisition of the shares of, or other ownership interests in, any 
company acquired pursuant to this paragraph (g); and
    (B) A bank holding company may retain such shares or ownership 
interests if such retention is otherwise permissible at the time 
required for divestiture.
    (iii) Report to Board. The bank holding company shall report to the 
Board on its plans for divesting an investment made under this 
paragraph (g) two years prior to the final date for divestiture, in a 
manner to be prescribed by the Board.
    (iv) Other conditions requiring divestiture. All investments made 
pursuant to this paragraph (g) are subject to paragraph (e) of this 
section requiring prompt divestiture (unless the Board upon application 
authorizes retention), if the company invested in engages in 
impermissible business in the United States that exceeds in the 
aggregate 10 percent of the company's consolidated assets or revenues 
calculated on an annual basis; provided that such company may not 
engage in activities in the United States that consist of banking or 
financial operations (as defined in Sec. 211.23(f)(5)(iii)(B)), or 
types of activities permitted by regulation or order under section 
4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), except under regulations 
of the Board or with the prior approval of the Board.
    (4) Investment procedures. --(i) General consent. Subject to the 
other limitations of this paragraph (g), the Board grants its general 
consent for investments made under this paragraph (g) if the total 
amount invested does not exceed the greater of $25 million or 1 percent 
of the tier 1 capital of the investor.
    (ii) All other investments shall be made in accordance with the 
procedures of Sec. 211.8(f) and (g), requiring prior notice or specific 
consent.
    (5) Conditions. --(i) Name. Any company acquired pursuant to this 
paragraph (g) shall not bear a name similar to the name of the 
acquiring bank holding company or any of its affiliates.
    (ii) Confidentiality. Neither the bank holding company nor its 
affiliates shall provide to any company acquired pursuant to this 
paragraph (g) any confidential business information or other 
information concerning customers that are engaged in the same or 
related lines of business as the company.


Sec. 211.8  Investment procedures.

    (a) General provisions. <SUP>7</SUP> Direct and indirect 
investments shall be made in accordance with the general-consent, 
limited general-consent, prior-notice, or specific-consent procedures 
contained in this section.
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    \7\ When necessary, the provisions of this section relating to 
general consent and prior notice constitute the Board's approval 
under section 25A(Eighth) of the FRA (12 U.S.C. 616) for investments 
in excess of the limitations therein based on capital and surplus.
---------------------------------------------------------------------------

    (1) Minimum capital adequacy standards. Except as the Board may 
otherwise determine, in order for an investor to make investments 
pursuant to the procedures set out in this section, the investor, the 
bank holding company, and the member bank shall be in compliance with 
applicable minimum standards for capital adequacy set out in the 
Capital Adequacy Guidelines; provided that, if the investor is an Edge 
or agreement corporation, the minimum capital required is total and 
tier 1 capital ratios of 8 percent and 4 percent, respectively.
    (2) Composite rating. Except as the Board may otherwise determine, 
in order for an investor to make investments under the general-consent 
or limited general-consent procedures of paragraphs (b) and (c) of this 
section, the investor and any parent insured bank must have received a 
composite rating of at least 2 at the most recent examination.

[[Page 68449]]

    (3) Board's authority to modify or suspend procedures. The Board, 
at any time upon notice, may modify or suspend the procedures contained 
in this section with respect to any investor or with respect to the 
acquisition of shares of organizations engaged in particular kinds of 
activities.
    (4) Long-range investment plan. Any investor may submit to the 
Board for its specific consent a long-range investment plan. Any plan 
so approved shall be subject to the other procedures of this section 
only to the extent determined necessary by the Board to assure safety 
and soundness of the operations of the investor and its affiliates.
    (5) Prior specific consent for initial investment. An investor 
shall apply for and receive the prior specific consent of the Board for 
its initial investment under this subpart in its first subsidiary or 
joint venture, unless an affiliate previously has received approval to 
make such an investment.
    (6) Expiration of investment authority. Authority to make 
investments granted under prior-notice or specific-consent procedures 
shall expire one year from the earliest date on which the authority 
could have been exercised, unless the Board determines a longer period 
shall apply.
    (7) Conditional approval. The Board may impose such conditions on 
authority granted by it under this section as it deems necessary, and 
may require termination of any activities conducted under authority of 
this subpart if an investor is unable to provide information on its 
activities or those of its affiliates that the Board deems necessary to 
determine and enforce compliance with U.S. banking laws.
    (b) General consent. The Board grants its general consent for a 
well capitalized and well managed investor to make investments, subject 
to the following:
    (1) Well capitalized and well managed investor. In order to qualify 
for making investments under authority of this paragraph (b), both 
before and immediately after the proposed investment, the investor, any 
parent insured bank, and any parent bank holding company shall be well 
capitalized and well managed.
    (2) Investment in subsidiaries. In the case of an investment in a 
subsidiary, the total amount invested in such subsidiary (in one 
transaction or a series of transactions) does not exceed:
    (i) 10 percent of the investor's tier 1 capital, where the investor 
is a bank holding company; or
    (ii) 2 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) For any other investor, the lesser of 2 percent of the tier 1 
capital of any parent insured bank or 10 percent of the investor's tier 
1 capital.
    (3) Investment in joint ventures. In the case of an investment in a 
joint venture, the total amount invested in such joint venture (in one 
transaction or a series of transactions) does not exceed:
    (i) 5 percent of the investor's tier 1 capital, where the investor 
is a bank holding company; or
    (ii) 1 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 1 percent of the tier 1 capital of any parent 
insured bank or 5 percent of the investor's tier 1 capital, for any 
other investor.
    (4) Portfolio investments. A bank holding company may make 
portfolio investments conforming to the limits set out in 
Sec. 211.7(c)(3).
    (5) Aggregate investment limits.--(i) Investment limits. All 
investments made, directly or indirectly, during the previous 12-month 
period under authority of this section, when aggregated with the 
proposed investment, shall not exceed:
    (A) In the case of a bank holding company, 20 percent of the 
investor's tier 1 capital;
    (B) In the case of a member bank, 10 percent of the investor's tier 
1 capital; or
    (C) In the case of any other investor, the lesser of 10 percent of 
the tier 1 capital of any parent insured bank or 50 percent of the tier 
1 capital of the investor.
    (ii) Downstream investments. In determining compliance with the 
aggregate limits set out in this paragraph (b), an investment by an 
investor in a subsidiary shall be counted only once, notwithstanding 
that such subsidiary may, within 12 months of the date of making the 
investment, downstream all or any part of such investment to another 
subsidiary.
    (6) Aggregating shares held in dealing accounts. In determining 
compliance with the limits set out in this paragraph (b), an investor 
shall combine the value of all shares of an organization held in 
trading or dealing accounts under Sec. 211.9(a)(15) with investments in 
the same organization.
    (c) Limited general consent. The Board grants its general consent 
for an investor that is not well capitalized and well managed to make:
    (1) Individual limit for investment in subsidiary or joint venture. 
Any investment in a subsidiary or joint venture, if the total amount 
invested (in one transaction or in a series of transactions) does not 
exceed the lesser of $25 million or:
    (i) 5 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (ii) 1 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 1 percent of any parent insured bank's tier 1 
capital or 5 percent of the investor's tier 1 capital, for any other 
investor.
    (2) Individual limit for portfolio investment. The Board grants its 
general consent for any investor not eligible to make portfolio 
investments under Sec. 211.7(c)(3)(i)(B) to make such investments 
subject to the limits set out in paragraph (c)(1) of this section.
    (3) Aggregate limit. The amount of general-consent investments made 
by any investor subject to this section during the previous 12-month 
period, when aggregated with the proposed investment, shall not exceed:
    (i) 10 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (ii) 5 percent of the investor's tier 1 capital, where the investor 
is a member bank; and
    (iii) The lesser of 5 percent of any parent insured bank's capital 
or 25 percent of the investor's capital, for any other investor.
    (d) Other eligible investments under general consent. In addition 
to the authority granted under paragraphs (b) and (c) of this section, 
the Board grants its general consent for any investor to make the 
following investments:
    (1) Investment in organization equal to cash dividends. Any 
investment in an organization in an amount equal to cash dividends 
received from that organization during the preceding 12 calendar 
months; and
    (2) Investment acquired from affiliate. Any investment that is 
acquired from an affiliate at net asset value or through a contribution 
of shares.
    (e) Investments ineligible for general consent. The following 
investments may not be made under authority of paragraphs (b) and (c) 
this section:
    (1) Investment in a general partnership or unlimited liability 
company; and
    (2) Investment in a foreign bank if:
    (i) After the investment, the foreign bank would be an affiliate of 
a member bank; and
    (ii) The foreign bank is located in a country in which the member 
bank and its affiliates have no existing banking presence.
    (f) Notices relating to general-consent investments. Notice of 
investments made pursuant to general-consent

[[Page 68450]]

authority under this section shall be provided to the Board by the end 
of the month following the month in which any such investment is made. 
The investor shall provide the Board with the following information 
relating to the investment:
    (1) If the investment is in a joint venture, the respective 
responsibilities of the parties to the joint venture; and
    (2) Where the investment is made in an organization that incurred a 
loss in the last year, a description of the reasons for the loss and 
the steps taken to address the problem.
    (g) Prior notice. An investment that does not qualify for general 
consent under paragraph (b), (c), or (d) of this section may be made 
after the investor has given the Board 30 days' prior written notice, 
such notice period to commence at the time the notice is received, 
provided that:
    (1) The Board may waive the 30-day period if it finds the full 
period is not required for consideration of the proposed investment, or 
that immediate action is required by the circumstances presented; and
    (2) The Board may suspend the 30-day period or act on the 
investment under the Board's specific-consent procedures.
    (h) Specific consent. Any investment that does not qualify for 
either the general-consent or the prior-notice procedure may not be 
consummated without the specific consent of the Board.


Sec. 211.9  Permissible activities abroad.

    (a) Activities usual in connection with banking. The Board has 
determined that the following activities are usual in connection with 
the transaction of banking or other financial operations abroad:
    (1) Commercial and other banking activities;
    (2) Financing, including commercial financing, consumer financing, 
mortgage banking, and factoring;
    (3) Leasing real or personal property, or acting as agent, broker, 
or advisor in leasing real or personal property, if the lease serves as 
the functional equivalent of an extension of credit to the lessee of 
the property;
    (4) Acting as fiduciary;
    (5) Underwriting credit life insurance and credit accident and 
health insurance;
    (6) Performing services for other direct or indirect operations of 
a U.S. banking organization, including representative functions, sale 
of long-term debt, name-saving, holding assets acquired to prevent loss 
on a debt previously contracted in good faith, and other activities 
that are permissible domestically for a bank holding company under 
sections 4(a)(2)(A) and 4(c)(1)(C) of the BHC Act (12 U.S.C. 
1843(a)(2)(A), (c)(1)(C));
    (7) Holding the premises of a branch of an Edge corporation or 
member bank or the premises of a direct or indirect subsidiary, or 
holding or leasing the residence of an officer or employee of a branch 
or subsidiary;
    (8) Providing investment, financial, or economic advisory services;
    (9) General insurance agency and brokerage;
    (10) Data processing;
    (11) Organizing, sponsoring, and managing a mutual fund, if the 
fund's shares are not sold or distributed in the United States or to 
U.S. residents and the fund does not exercise managerial control over 
the firms in which it invests;
    (12) Performing management consulting services, if such services, 
when rendered with respect to the U.S. market, shall be restricted to 
the initial entry;
    (13) Underwriting, distributing, and dealing in debt securities 
outside the United States;
    (14) Underwriting and distributing equity securities outside the 
United States as follows:
    (i) An investor that is well capitalized and well managed may 
underwrite equity securities, provided that commitments by an investor 
and its affiliates for the shares of a single organization do not, in 
the aggregate, exceed:
    (A) 15 percent of the bank holding company's tier 1 capital, where 
the investor is a subsidiary of a bank holding company (but not a 
subsidiary of an insured bank); or
    (B) The lesser of 3 percent of any parent insured bank's tier 1 
capital or 15 percent of the investor's tier 1 capital, for any other 
investor; and
    (ii) An investor that is not well capitalized and well managed may 
underwrite equity securities, provided that commitments by the investor 
and its affiliates for the shares of an organization do not, in the 
aggregate, exceed $60 million; and
    (iii) For purposes of determining compliance with the limitations 
of this paragraph (a)(14), the investor may subtract portions of an 
underwriting that are covered by binding commitments obtained by the 
investor or its affiliates from sub-underwriters or other purchasers;
    (15) Dealing in equity securities outside the United States as 
follows:
    (i) Well capitalized and well managed investor. An investor that is 
well capitalized and well managed may deal in the shares of an 
organization, subject to the following:
    (A) Limit on shares of a single issuer. Shares of an organization 
held in all trading or dealing accounts by the investor and its 
affiliates, when combined with all other equity interests in the 
organization held under any authority and shares held pursuant to 
Sec. 211.7(c)(3), do not, in the aggregate, exceed:
    (1) 10 percent of the bank holding company's tier 1 capital, where 
the investor is a subsidiary of a bank holding company (but not a 
subsidiary of an insured bank); or
    (2) The lesser of 2 percent of any parent insured bank's tier 1 
capital or 10 percent of the tier 1 capital of the investor, for any 
other investor; and
    (B) Aggregate dealing limit. Shares of all organizations held in 
all dealing or trading accounts under this subpart by an investor and 
its affiliates, when combined with all other equity interests in such 
organizations held under any other authority and shares held pursuant 
to Sec. 211.7(c)(3), may not exceed:
    (1) 50 percent of the bank holding company's tier 1 capital, where 
the investor is a subsidiary of a bank holding company (but not a 
subsidiary of an insured bank); or
    (2) The lesser of 10 percent of any parent insured bank's tier 1 
capital or 50 percent of the tier 1 capital of the investor, for any 
other investor.
    (ii) Other investors. An investor that is not well capitalized and 
well managed may deal in the shares of an organization, subject to the 
following:
    (A) Limit on shares of a single issuer. Shares of an organization 
held in all trading or dealing accounts by the investor and its 
affiliates, when combined with all other equity interests in the 
organization held under any authority and shares held pursuant to 
Sec. 211.7(c)(3), do not, in the aggregate, exceed $30 million for any 
investor; and
    (B) Aggregate dealing limit. Shares of all organizations held in 
all dealing or trading accounts under this subpart by an investor and 
its affiliates, when combined with all other equity interests in such 
organizations held under any other authority and shares held pursuant 
to Sec. 211.7(c)(3), may not exceed:
    (1) 25 percent of the bank holding company's tier 1 capital, where 
the investor is a subsidiary of a bank holding company (but not a 
subsidiary of an insured bank); or
    (2) The lesser of 5 percent of any parent insured bank's tier 1 
capital or 25

[[Page 68451]]

percent of the tier 1 capital of the investor, for any other investor.
    (iii) Determining compliance with limits. (A) Netting. (1) For 
purposes of determining compliance with the limitations of this 
paragraph (a)(15), the investor may use an internal hedging model that 
nets long and short positions in the same security, and offsets 
positions in a security by futures, forwards, options, and similar 
instruments referenced to the same security; and
    (2) For purposes of determining compliance with the aggregate 
dealing limits of paragraphs (a)(15)(i)(B) and (a)(15)(ii)(B) of this 
section, the investor may use an internal hedging model that offsets 
its long positions in equity securities by futures, forwards, options, 
and similar instruments, on a portfolio basis;
    (B) Underwriting commitments. Any shares acquired pursuant to an 
underwriting commitment for up to 90 days after the payment date for 
such underwriting shall not be subject to the percentage limitations of 
paragraphs (a)(15)(i) and (ii) of this section or the investment 
provisions of Secs. 211.7 and 211.8.
    (iv) Authority to deal in shares of U.S. organization. The 
authority to deal in shares under paragraphs (a)(15)(i) and (ii) of 
this section includes the authority to deal in the shares of a U.S. 
organization:
    (A) With respect to foreign persons only; and
    (B) Subject to the limitations on owning or controlling shares of a 
company in section 4 of the BHC Act (12 U.S.C. 1843) and Regulation Y 
(12 CFR part 225).
    (v) Report to senior management. Any shares held in trading or 
dealing accounts for longer than 90 days shall be reported to the 
senior management of the investor;
    (16) Operating a travel agency, but only in connection with 
financial services offered abroad by the investor or others;
    (17) Underwriting life, annuity, pension fund-related, and other 
types of insurance, where the associated risks have been previously 
determined by the Board to be actuarially predictable, provided that:
    (i) Investments in, and loans and extensions of credit (other than 
loans and extensions of credit fully secured in accordance with the 
requirements of section 23A of the FRA (12 U.S.C. 371c), or with such 
other standards as the Board may require) to, the company by the 
investor or its affiliates are deducted from the capital of the 
investor;
    (ii) 50 percent of such capital deduction shall be from tier 1 
capital; and
    (iii) Activities conducted directly or indirectly by a subsidiary 
of a U.S. insured bank are excluded from the authority of this 
paragraph (a)(17), unless authorized by the Board;
    (18) Providing futures commission merchant services (including 
clearing without executing and executing without clearing) for 
nonaffiliated persons with respect to futures and options on futures 
contracts for financial and nonfinancial commodities, provided that 
prior notice under Sec. 211.8(g) shall be provided to the Board before 
any subsidiaries of a member bank operating pursuant to this subpart 
may join a mutual exchange or clearinghouse, unless the potential 
liability of the investor to the exchange, clearinghouse, or other 
members of the exchange, as the case may be, is legally limited by the 
rules of the exchange or clearinghouse to an amount that does not 
exceed applicable general-consent limits under Sec. 211.8;
    (19) Acting as principal or agent in commodity-swap transactions in 
relation to:
    (i) Swaps on a cash-settled basis for any commodity, provided that 
the investor's portfolio of swaps contracts is hedged in a manner 
consistent with safe and sound banking practices; and
    (ii) Contracts that require physical delivery of a commodity, 
provided that such contracts are entered into solely for the purpose of 
hedging the investor's position in the underlying commodity or 
derivative contracts based on the commodity.
    (b) Regulation Y activities. An investor may engage in activities 
that the Board has determined in Sec. 225.25(b) of Regulation Y (12 CFR 
225.25(b)) are closely related to banking under section 4(c)(8) of the 
BHC Act (12 U.S.C. 1843(c)(8)).
    (c) Specific approval. With the Board's specific approval, an 
investor may engage in other activities that the Board determines are 
usual in connection with the transaction of the business of banking or 
other financial operations abroad and are consistent with the FRA or 
the BHC Act.


Sec. 211.10  Lending limits and capital requirements.

    (a) Acceptances of Edge corporations.--(1) Limitations. An Edge 
corporation shall be and remain fully secured for acceptances of the 
types described in section 13(7) of the FRA (12 U.S.C. 372), as 
follows:
    (i) All acceptances outstanding in excess of 200 percent of its 
tier 1 capital; and
    (ii) All acceptances outstanding for any one person in excess of 10 
percent of its tier 1 capital.
    (2) Exceptions. These limitations do not apply if the excess 
represents the international shipment of goods, and the Edge 
corporation is:
    (i) Fully covered by primary obligations to reimburse it that are 
guaranteed by banks or bankers; or
    (ii) Covered by participation agreements from other banks, as 
described in 12 CFR 250.165.
    (b) Loans and extensions of credit to one person. (1) Loans and 
extensions of credit defined. Loans and extensions of credit has the 
meaning set forth in Sec. 211.2(p) <SUP>8</SUP> and, for purposes of 
this paragraph (b), also include:
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    \8\  In the case of a foreign government, these include loans 
and extensions of credit to the foreign government's departments or 
agencies deriving their current funds principally from general tax 
revenues. In the case of a partnership or firm, these include loans 
and extensions of credit to its members and, in the case of a 
corporation, these include loans and extensions of credit to the 
corporation's affiliates, where the affiliate incurs the liability 
for the benefit of the corporation.
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    (i) Acceptances outstanding that are not of the types described in 
section 13(7) of the FRA (12 U.S.C. 372);
    (ii) Any liability of the lender to advance funds to or on behalf 
of a person pursuant to a guarantee, standby letter of credit, or 
similar agreements;
    (iii) Investments in the securities of another organization, except 
where the organization is a subsidiary; and
    (iv) Any underwriting commitments to an issuer of securities, where 
no binding commitments have been secured from subunderwriters or other 
purchasers.
    (2) Limitations. Except as the Board may otherwise specify:
    (i) The total loans and extensions of credit outstanding to any 
person by an Edge corporation engaged in banking, and its direct or 
indirect subsidiaries, may not exceed 15 percent of the Edge 
corporation's tier 1 capital; <SUP>9</SUP> and
---------------------------------------------------------------------------

    \9\  For purposes of this paragraph (b), subsidiary includes 
subsidiaries controlled by the Edge corporation, but does not 
include companies otherwise controlled by affiliates of the Edge 
corporation.
---------------------------------------------------------------------------

    (ii) The total loans and extensions of credit to any person by a 
foreign bank or Edge corporation subsidiary of a member bank, and by 
majority-owned subsidiaries of a foreign bank or Edge corporation, when 
combined with the total loans and extensions of credit to the same 
person by the member bank and its majority-owned subsidiaries, may not 
exceed the member bank's

[[Page 68452]]

limitation on loans and extensions of credit to one person.
    (3) Exceptions. The limitations of paragraph (b)(2) of this section 
do not apply to:
    (i) Deposits with banks and federal funds sold;
    (ii) Bills or drafts drawn in good faith against actual goods and 
on which two or more unrelated parties are liable;
    (iii) Any banker's acceptance, of the kind described in section 
13(7) of the FRA (12 U.S.C. 372), that is issued and outstanding;
    (iv) Obligations to the extent secured by cash collateral or by 
bonds, notes, certificates of indebtedness, or Treasury bills of the 
United States;
    (v) Loans and extensions of credit that are covered by bona fide 
participation agreements; and
    (vi) Obligations to the extent supported by the full faith and 
credit of the following:
    (A) The United States or any of its departments, agencies, 
establishments, or wholly owned corporations (including obligations, to 
the extent insured against foreign political and credit risks by the 
Export-Import Bank of the United States or the Foreign Credit Insurance 
Association), the International Bank for Reconstruction and 
Development, the International Finance Corporation, the International 
Development Association, the Inter-American Development Bank, the 
African Development Bank, the Asian Development Bank; or the European 
Bank for Reconstruction and Development;
    (B) Any organization, if at least 25 percent of such an obligation 
or of the total credit is also supported by the full faith and credit 
of, or participated in by, any institution designated in paragraph 
(b)(3)(vi)(A) of this section in such manner that default to the lender 
would necessarily include default to that entity. The total loans and 
extensions of credit under this paragraph (b)(3)(vi)(B) to any person 
shall at no time exceed 100 percent of the tier 1 capital of the Edge 
corporation.
    (c) Capitalization. (1) An Edge corporation shall at all times be 
capitalized in an amount that is adequate in relation to the scope and 
character of its activities.
    (2) In the case of an Edge corporation engaged in banking, the 
minimum ratio of qualifying total capital to risk-weighted assets, as 
determined under the Capital Adequacy Guidelines, shall not be less 
than 10 percent, of which at least 50 percent shall consist of tier 1 
capital; provided that for purposes of this paragraph (c), no 
limitation shall apply on the inclusion of subordinated debt that 
qualifies as tier 2 capital under the Capital Adequacy Guidelines.


Sec. 211.11  Supervision and reporting.

    (a) Supervision--(1) Foreign branches and subsidiaries. U.S. 
banking organizations conducting international operations under this 
subpart shall supervise and administer their foreign branches and 
subsidiaries in such a manner as to ensure that their operations 
conform to high standards of banking and financial prudence.
    (i) Effective systems of records, controls, and reports shall be 
maintained to keep management informed of their activities and 
condition.
    (ii) Such systems shall provide, in particular, information on risk 
assets, exposure to market risk, liquidity management, operations, 
internal controls, legal and operational risk, and conformance to 
management policies.
    (iii) Reports on risk assets shall be sufficient to permit an 
appraisal of credit quality and assessment of exposure to loss, and, 
for this purpose, provide full information on the condition of material 
borrowers.
    (iv) Reports on operations and controls shall include internal and 
external audits of the branch or subsidiary.
    (2) Joint ventures. Investors shall maintain sufficient information 
with respect to joint ventures to keep informed of their activities and 
condition. Such information shall include audits and other reports on 
financial performance, risk exposure, management policies, operations, 
and controls. Complete information shall be maintained on all 
transactions with the joint venture by the investor and its affiliates.
    (3) Availability of reports and information to examiners. The 
reports specified in paragraphs (a) (1) and (2) of this section and any 
other information deemed necessary to determine compliance with U.S. 
banking law shall be made available to examiners of the appropriate 
bank supervisory agencies.
    (b) Examinations. Examiners appointed by the Board shall examine 
each Edge corporation once a year. An Edge corporation shall make 
available to examiners information sufficient to assess its condition 
and operations and the condition and activities of any organization 
whose shares it holds.
    (c) Reports--(1) Reports of condition. Each Edge corporation shall 
make reports of condition to the Board at such times and in such form 
as the Board may prescribe. The Board may require that statements of 
condition or other reports be published or made available for public 
inspection.
    (2) Foreign operations. Edge and agreement corporations, member 
banks, and bank holding companies shall file such reports on their 
foreign operations as the Board may require.
    (3) Acquisition or disposition of shares. Member banks, Edge and 
agreement corporations, and bank holding companies shall report, in a 
manner prescribed by the Board, any acquisition or disposition of 
shares.
    (d) Filing and processing procedures. (1) Unless otherwise directed 
by the Board, applications, notices, and reports required by this part 
shall be filed with the Federal Reserve Bank of the District in which 
the parent bank or bank holding company is located or, if none, the 
Reserve Bank of the District in which the applying or reporting 
institution is located. Instructions and forms for applications, 
notices, and reports are available from the Reserve Banks.
    (2) The Board shall act on an application under this subpart within 
60 calendar days after the Reserve Bank has received the application, 
unless the Board notifies the investor that the 60-day period is being 
extended and states the reasons for the extension.


Sec. 211.12  Reports of crimes and suspected crimes.

    An Edge or agreement corporation, or any branch or subsidiary 
thereof, shall file a suspicious-activity report in accordance with the 
provisions of Sec. 208.62 of Regulation H (12 CFR 208.62).


Sec. 211.13  Liquidation of Edge and agreement corporations.

    (a) Voluntary dissolution--(1) Prior notice. An Edge or agreement 
corporation desiring voluntarily to discontinue normal business and 
dissolve, shall provide the Board with 45 days' prior written notice of 
its intent to do so.
    (2) Waiver of notice period. The Board may waive the 45-day period 
if it finds that immediate action is required by the circumstances 
presented.
    (b) Involuntary dissolution--(1) Grounds for determining 
insolvency. The Board may appoint a receiver for an Edge corporation if 
the Board determines that:
    (i) The corporation's assets are less than the corporation's 
obligations;
    (ii) The corporation has been unable, or is likely to be unable, to 
pay the corporation's obligations as they fall due in the normal course 
of business;
    (iii) The corporation has incurred, or is likely to incur, losses 
that will deplete

[[Page 68453]]

all or substantially all of the corporation's capital, and there is no 
reasonable prospect for recapitalization; or
    (iv) The corporation is otherwise insolvent.
    (2) Powers of receiver. A receiver appointed by the Board for an 
Edge corporation shall have the same rights, privileges, powers, and 
authority with respect to the corporation and the corporation's assets 
as a receiver of a national bank may exercise with respect to a 
national bank and its assets, provided that the assets of the 
corporation subject to the laws of a foreign country shall be dealt 
with in accordance with the terms of such laws.

Subpart B--Foreign Banking Organizations


Sec. 211.20  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Bank 
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.) and the 
International Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
    (b) Purpose and scope. This subpart is in furtherance of the 
purposes of the BHC Act and the IBA. It applies to foreign banks and 
foreign banking organizations with respect to:
    (1) The limitations on interstate banking under section 5 of the 
IBA (12 U.S.C. 3103);
    (2) The exemptions from the nonbanking prohibitions of the BHC Act 
and the IBA afforded by sections 2(h) and 4(c)(9) of the BHC Act (12 
U.S.C. 1841(h), 1843(c)(9));
    (3) Board approval of the establishment of an office of a foreign 
bank in the United States under sections 7(d) and 10(a) of the IBA (12 
U.S.C. 3105(d), 3107(a));
    (4) The termination by the Board of a foreign bank's representative 
office, state branch, state agency, or commercial lending company 
subsidiary under sections 7(e) and 10(b) of the IBA (12 U.S.C. 3105(e), 
3107(b)), and the transmission of a recommendation to the Comptroller 
to terminate a federal branch or federal agency under section 7(e)(5) 
of the IBA (12 U.S.C. 3105(e)(5));
    (5) The examination of an office or affiliate of a foreign bank in 
the United States as provided in sections 7(c) and 10(c) of the IBA (12 
U.S.C. 3105(c), 3107(c));
    (6) The disclosure of supervisory information to a foreign 
supervisor under section 15 of the IBA (12 U.S.C. 3109);
    (7) The limitations on loans to one borrower by state branches and 
state agencies of a foreign bank under section 7(h)(2) of the IBA (12 
U.S.C. 3105(h)(2));
    (8) The limitation of a state branch and a state agency to 
conducting only activities that are permissible for a federal branch 
under section (7)(h)(1) of the IBA (12 U.S.C. 3105(h)(1)); and
    (9) The deposit insurance requirement for retail deposit taking by 
a foreign bank under section 6 of the IBA (12 U.S.C. 3104).
    (c) Additional requirements. Compliance by a foreign bank with the 
requirements of this subpart and the laws administered and enforced by 
the Board does not relieve the foreign bank of responsibility to comply 
with the laws and regulations administered by the licensing authority.


Sec. 211.21  Definitions.

    The definitions contained in Secs. 211.1 and 211.2 apply to this 
subpart, except as a term is otherwise defined in this section:
    (a) Affiliate of a foreign bank or of a parent of a foreign bank 
means any company that controls, is controlled by, or is under common 
control with, the foreign bank or the parent of the foreign bank.
    (b) Agency means any place of business of a foreign bank, located 
in any state, at which credit balances are maintained, checks are paid, 
money is lent, or, to the extent not prohibited by state or federal 
law, deposits are accepted from a person or entity that is not a 
citizen or resident of the United States. Obligations shall not be 
considered credit balances unless they are:
    (1) Incidental to, or arise out of the exercise of, other lawful 
banking powers;
    (2) To serve a specific purpose;
    (3) Not solicited from the general public;
    (4) Not used to pay routine operating expenses in the United States 
such as salaries, rent, or taxes;
    (5) Withdrawn within a reasonable period of time after the specific 
purpose for which they were placed has been accomplished; and
    (6) Drawn upon in a manner reasonable in relation to the size and 
nature of the account.
    (c)(1) Appropriate Federal Reserve Bank means, unless the Board 
designates a different Federal Reserve Bank:
    (i) For a foreign banking organization, the Reserve Bank assigned 
to the foreign banking organization in Sec. 225.3(b)(2) of Regulation Y 
(12 CFR 225.3(b)(2));
    (ii) For a foreign bank that is not a foreign banking organization 
and proposes to establish an office, an Edge corporation, or an 
agreement corporation, the Reserve Bank of the Federal Reserve District 
in which the foreign bank proposes to establish such office or 
corporation; and
    (iii) In all other cases, the Reserve Bank designated by the Board.
    (2) The appropriate Federal Reserve Bank need not be the Reserve 
Bank of the Federal Reserve District in which the foreign bank's home 
state is located.
    (d) Banking subsidiary, with respect to a specified foreign bank, 
means a bank that is a subsidiary as the terms bank and subsidiary are 
defined in section 2 of the BHC Act (12 U.S.C. 1841).
    (e) Branch means any place of business of a foreign bank, located 
in any state, at which deposits are received, and that is not an 
agency, as that term is defined in paragraph (b) of this section.
    (f) Change the status of an office means to convert a 
representative office into a branch or agency, or an agency or limited 
branch into a branch, but does not include renewal of the license of an 
existing office.
    (g) Commercial lending company means any organization, other than a 
bank or an organization operating under section 25 of the Federal 
Reserve Act (FRA) (12 U.S.C. 601-604a), organized under the laws of any 
state, that maintains credit balances permissible for an agency, and 
engages in the business of making commercial loans. Commercial lending 
company includes any company chartered under article XII of the banking 
law of the State of New York.
    (h) Comptroller means the Office of the Comptroller of the 
Currency.
    (i) Control has the same meaning as in section 2(a) of the BHC Act 
(12 U.S.C. 1841(a)), and the terms controlled and controlling shall be 
construed consistently with the term control.
    (j) Domestic branch means any place of business of a foreign bank, 
located in any state, that may accept domestic deposits and deposits 
that are incidental to or for the purpose of carrying out transactions 
in foreign countries.
    (k) A foreign bank engages directly in the business of banking 
outside the United States if the foreign bank engages directly in 
banking activities usual in connection with the business of banking in 
the countries where it is organized or operating.
    (l) To establish means:
    (1) To open and conduct business through an office;
    (2) To acquire directly, through merger, consolidation, or similar 
transaction with another foreign bank,

[[Page 68454]]

the operations of an office that is open and conducting business;
    (3) To acquire an office through the acquisition of a foreign bank 
subsidiary that will cease to operate in the same corporate form 
following the acquisition;
    (4) To change the status of an office; or
    (5) To relocate an office from one state to another.
    (m) Federal agency, federal branch, state agency, and state branch 
have the same meanings as in section 1 of the IBA (12 U.S.C. 3101).
    (n) Foreign bank means an organization that is organized under the 
laws of a foreign country and that engages directly in the business of 
banking outside the United States. The term foreign bank does not 
include a central bank of a foreign country that does not engage or 
seek to engage in a commercial banking business in the United States 
through an office.
    (o) Foreign banking organization means a foreign bank, as defined 
in section 1(b)(7) of the IBA (12 U.S.C. 3101(7)), that:
    (1) Operates a branch, agency, or commercial lending company 
subsidiary in the United States;
    (2) Controls a bank in the United States;
    (3) Controls an Edge corporation acquired after March 5, 1987; or
    (4) Controls any company of which the foreign bank or its affiliate 
is a subsidiary.
    (p) Home country, with respect to a foreign bank, means the country 
in which the foreign bank is chartered or incorporated.
    (q) Home country supervisor, with respect to a foreign bank, means 
the governmental entity or entities in the foreign bank's home country 
with responsibility for the supervision and regulation of the foreign 
bank.
    (r) Licensing authority means:
    (1) The relevant state supervisor, with respect to an application 
to establish a state branch, state agency, commercial lending company, 
or representative office of a foreign bank; or
    (2) The Comptroller, with respect to an application to establish a 
federal branch or federal agency.
    (s) Limited branch means a branch of a foreign bank that enters 
into an agreement with the Board to limit its liabilities to those that 
would be permissible for an Edge corporation.
    (t) Office or office of a foreign bank means any branch, agency, 
representative office, or commercial lending company subsidiary of a 
foreign bank in the United States.
    (u) A parent of a foreign bank means a company of which the foreign 
bank is a subsidiary. An immediate parent of a foreign bank is a 
company of which the foreign bank is a direct subsidiary. An ultimate 
parent of a foreign bank is a parent of the foreign bank that is not 
the subsidiary of any other company.
    (v) Regional administrative office means a representative office 
that:
    (1) Is established by a foreign bank that operates two or more 
branches, agencies, commercial lending companies, or banks in the 
United States;
    (2) Is located in the same city as one or more of the foreign 
bank's branches, agencies, commercial lending companies, or banks in 
the United States;
    (3) Manages, supervises, or coordinates the operations of the 
foreign bank or its affiliates, if any, in a particular geographic area 
that includes the United States or a region thereof, including by 
exercising credit approval authority in that area pursuant to written 
standards, credit policies, and procedures established by the foreign 
bank; and
    (4) Does not solicit business from actual or potential customers of 
the foreign bank or its affiliates.
    (w) Relevant state supervisor means the state entity that is 
authorized to supervise and regulate a state branch, state agency, 
commercial lending company, or representative office.
    (x) Representative office means any place of business of a foreign 
bank, located in any state, that is not a branch, agency, or subsidiary 
of the foreign bank.
    (y) State means any state of the United States or the District of 
Columbia.
    (z) Subsidiary means any organization that:
    (1) Has 25 percent or more of its voting shares directly or 
indirectly owned, controlled, or held with the power to vote by a 
company, including a foreign bank or foreign banking organization; and
    (2) Is otherwise controlled, or capable of being controlled, by a 
foreign bank or foreign banking organization.


Sec. 211.22  Interstate banking operations of foreign banking 
organizations.

    (a) Determination of home state. (1) A foreign bank that, as of 
December 10, 1997, had declared a home state or had a home state 
determined pursuant to the law and regulations in effect prior to that 
date shall have that state as its home state.
    (2) A foreign bank that has any branches, agencies, commercial 
lending company subsidiaries, or subsidiary banks in one state, and has 
no such offices or subsidiaries in any other states, shall have as its 
home state the state in which such offices or subsidiaries are located.
    (b) Change of home state--(1) Prior notice. A foreign bank may 
change its home state once, if it files 30 days' prior notice of the 
proposed change with the Board.
    (2) Application to change home state. (i) A foreign bank, in 
addition to changing its home state by filing prior notice under 
paragraph (b)(1) of this section, may apply to the Board to change its 
home state, upon showing that a national bank or state-chartered bank 
with the same home state as the foreign bank would be permitted to 
change its home state to the new home state proposed by the foreign 
bank.
    (ii) A foreign bank may apply to the Board for such permission one 
or more times.
    (iii) In determining whether to grant the request of a foreign bank 
to change its home state, the Board shall consider whether the proposed 
change is consistent with competitive equity between foreign and 
domestic banks.
    (3) Effect of change in home state. The home state of a foreign 
bank and any change in its home state by a foreign bank shall not 
affect which Federal Reserve Bank or Reserve Banks supervise the 
operations of the foreign bank, and shall not affect the obligation of 
the foreign bank to file required reports and applications with the 
appropriate Federal Reserve Bank.
    (4) Conforming branches to new home state. Upon any change in home 
state by a foreign bank under paragraph (b)(1) or (b)(2) of this 
section, the domestic branches of the foreign bank established in 
reliance on any previous home state of the foreign bank shall be 
conformed to those which a foreign bank with the new home state could 
permissibly establish as of the date of such change.
    (c) 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 Regulation H (12 CFR 208.28).


Sec. 211.23  Nonbanking activities of foreign banking organizations.

    (a) [Reserved]
    (b) Qualifying foreign banking organizations. Unless specifically 
made eligible for the exemptions by the Board, a foreign banking 
organization shall qualify for the exemptions afforded by this section 
only if, disregarding its United States banking, more than half of its 
worldwide business is banking; and more than half of its banking 
business

[[Page 68455]]

is outside the United States.<SUP>10</SUP> In order to qualify, a 
foreign banking organization shall:
---------------------------------------------------------------------------

    \10\ None of the assets, revenues, or net income, whether held 
or derived directly or indirectly, of a subsidiary bank, branch, 
agency, commercial lending company, or other company engaged in the 
business of banking in the United States (including any territory of 
the United States, Puerto Rico, Guam, American Samoa, or the Virgin 
Islands) shall be considered held or derived from the business of 
banking ``outside the United States''.
---------------------------------------------------------------------------

    (1) Meet at least two of the following requirements:
    (i) Banking assets held outside the United States exceed total 
worldwide nonbanking assets;
    (ii) Revenues derived from the business of banking outside the 
United States exceed total revenues derived from its worldwide 
nonbanking business; or
    (iii) Net income derived from the business of banking outside the 
United States exceeds total net income derived from its worldwide 
nonbanking business; and
    (2) Meet at least two of the following requirements:
    (i) Banking assets held outside the United States exceed banking 
assets held in the United States;
    (ii) Revenues derived from the business of banking outside the 
United States exceed revenues derived from the business of banking in 
the United States; or
    (iii) Net income derived from the business of banking outside the 
United States exceeds net income derived from the business of banking 
in the United States.
    (c) Determining assets, revenues, and net income. (1)(i) For 
purposes of paragraph (b) of this section, the total assets, revenues, 
and net income of an organization may be determined on a consolidated 
or combined basis.
    (ii) The foreign banking organization shall include assets, 
revenues, and net income of companies in which it owns 50 percent or 
more of the voting shares when determining total assets, revenues, and 
net income.
    (iii) The foreign banking organization may include assets, 
revenues, and net income of companies in which it owns 25 percent or 
more of the voting shares, if all such companies within the 
organization are included.
    (2) Assets devoted to, or revenues or net income derived from, 
activities listed in Sec. 211.9(a) shall be considered banking assets, 
or revenues or net income derived from the banking business, when 
conducted within the foreign banking organization for purposes of 
paragraph (b)(1) of this section, and when conducted within the foreign 
banking organization by a foreign bank or its subsidiaries for purposes 
of paragraph (b)(2) of this section.
    (d) Loss of eligibility for exemptions--(1) Failure to meet 
qualifying test. A foreign banking organization that qualified under 
paragraph (b) of this section shall cease to be eligible for the 
exemptions of this section if it fails to meet the requirements of 
paragraph (b) of this section for two consecutive years, as reflected 
in its annual reports (FR Y-7) filed with the Board.
    (2)(i) Continuing activities and investments. A foreign banking 
organization that ceases to be eligible for the exemptions of this 
section may continue to engage in activities or retain investments 
commenced or acquired prior to the end of the first fiscal year for 
which its annual report reflects nonconformance with paragraph (b) of 
this section.
    (ii) Termination or divestiture. Activities commenced or 
investments made after that date shall be terminated or divested within 
three months of the filing of the second annual report, or at such time 
as the Board may determine upon request by the foreign banking 
organization to extend the period, unless the Board grants consent to 
continue the activity or retain the investment under paragraph (e) of 
this section.
    (3) Request for specific determination of eligibility. (i) A 
foreign banking organization that ceases to qualify under paragraph (b) 
of this section, or an affiliate of such foreign banking organization, 
that requests a specific determination of eligibility under paragraph 
(e) of this section may, prior to the Board's determination on 
eligibility, continue to engage in activities and make investments 
under the provisions of paragraphs (f) (1), (2), (3), and (4) of this 
section.
    (ii) The Board may grant consent for the foreign banking 
organization or its affiliate to make investments under paragraph 
(f)(5) of this section.
    (e) Specific determination of eligibility for nonqualifying foreign 
banking organizations--(1) Application. (i) A foreign banking 
organization that does not qualify under paragraph (b) of this section 
for the exemptions afforded by this section, or that has lost its 
eligibility for the exemptions under paragraph (d) of this section, may 
apply to the Board for a specific determination of eligibility for the 
exemptions.
    (ii) A foreign banking organization may apply for a specific 
determination prior to the time it ceases to be eligible for the 
exemptions afforded by this section.
    (2) Factors considered by Board. In determining whether eligibility 
for the exemptions would be consistent with the purposes of the BHC Act 
and in the public interest, the Board shall consider:
    (i) The history and the financial and managerial resources of the 
foreign banking organization;
    (ii) The amount of its business in the United States;
    (iii) The amount, type, and location of its nonbanking activities, 
including whether such activities may be conducted by U.S. banks or 
bank holding companies;
    (iv) Whether eligibility of the foreign banking organization would 
result in undue concentration of resources, decreased or unfair 
competition, conflicts of interests, or unsound banking practices; and
    (v) The extent to which the foreign banking organization is subject 
to comprehensive supervision or regulation on a consolidated basis.
    (3) Conditions and limitations. The Board may impose any conditions 
and limitations on a determination of eligibility, including 
requirements to cease activities or dispose of investments.
    (4) Eligibility not granted. Determinations of eligibility 
generally would not be granted where:
    (i) A majority of the business of the foreign banking organization 
derives from commercial or industrial activities; or
    (ii) The U.S. banking business of the organization is larger than 
the non-U.S. banking business conducted directly by the foreign bank or 
banks of the organization.
    (f) Permissible activities and investments. A foreign banking 
organization that qualifies under paragraph (b) of this section may:
    (1) Engage in activities of any kind outside the United States;
    (2) Engage directly in activities in the United States that are 
incidental to its activities outside the United States;
    (3) Own or control voting shares of any company that is not 
engaged, directly or indirectly, in any activities in the United 
States, other than those that are incidental to the international or 
foreign business of such company;
    (4) Own or control voting shares of any company in a fiduciary 
capacity under circumstances that would entitle such shareholding to an 
exemption under section 4(c)(4) of the BHC Act (12 U.S.C. 1843(c)(4)) 
if the shares were held or acquired by a bank;
    (5) Own or control voting shares of a foreign company that is 
engaged directly or indirectly in business in the United States other 
than that which is

[[Page 68456]]

incidental to its international or foreign business, subject to the 
following limitations:
    (i) More than 50 percent of the foreign company's consolidated 
assets shall be located, and consolidated revenues derived from, 
outside the United States; provided that, if the foreign company fails 
to meet the requirements of this paragraph (f)(5)(i) for two 
consecutive years (as reflected in annual reports (FR Y-7) filed with 
the Board by the foreign banking organization), the foreign company 
shall be divested or its activities terminated within one year of the 
filing of the second consecutive annual report that reflects 
nonconformance with the requirements of this paragraph (f)(5)(i), 
unless the Board grants consent to retain the investment under 
paragraph (g) of this section;
    (ii) The foreign company shall not directly underwrite, sell, or 
distribute, nor own or control more than 10 percent of the voting 
shares of a company that underwrites, sells, or distributes securities 
in the United States, except to the extent permitted bank holding 
companies;
    (iii) If the foreign company is a subsidiary of the foreign banking 
organization, the foreign company must be, or must control, an 
operating company, and its direct or indirect activities in the United 
States shall be subject to the following limitations:
    (A) The foreign company's activities in the United States shall be 
the same kind of activities, or related to the activities, engaged in 
directly or indirectly by the foreign company abroad, as measured by 
the ``establishment'' categories of the Standard Industrial 
Classification (SIC). An activity in the United States shall be 
considered related to an activity outside the United States if it 
consists of supply, distribution, or sales in furtherance of the 
activity;
    (B) The foreign company may engage in activities in the United 
States that consist of banking, securities, insurance, or other 
financial operations, or types of activities permitted by regulation or 
order under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), only 
under regulations of the Board or with the prior approval of the Board, 
subject of the following:
    (1) Activities within Division H (Finance, Insurance, and Real 
Estate) of the SIC shall be considered banking or financial operations 
for this purpose, with the exception of acting as operators of 
nonresidential buildings (SIC 6512), operators of apartment buildings 
(SIC 6513), operators of dwellings other than apartment buildings (SIC 
6514), and operators of residential mobile home sites (SIC 6515); and 
operating title abstract offices (SIC 6541); and
    (2) The following activities shall be considered financial 
activities and may be engaged in only with the approval of the Board 
under paragraph (g) of this section: credit reporting services (SIC 
7323); computer and data processing services (SIC 7371, 7372, 7373, 
7374, 7375, 7376, 7377, 7378, and 7379); armored car services (SIC 
7381); management consulting (SIC 8732, 8741, 8742, and 8748); certain 
rental and leasing activities (SIC 4741, 7352, 7353, 7359, 7513, 7514, 
7515, and 7519); accounting, auditing, and bookkeeping services (SIC 
8721); courier services (SIC 4215 and 4513); and arrangement of 
passenger transportation (SIC 4724, 4725, and 4729).
    (g) Exemptions under section 4(c)(9) of the BHC Act. A foreign 
banking organization that is of the opinion that other activities or 
investments may, in particular circumstances, meet the conditions for 
an exemption under section 4(c)(9) of the BHC Act (12 U.S.C. 
1843(c)(9)) may apply to the Board for such a determination by 
submitting to the appropriate Federal Reserve Bank a letter setting 
forth the basis for that opinion.
    (h) Reports. (1) The foreign banking organization shall inform the 
Board through the organization's appropriate Federal Reserve Bank, 
within 30 days after the close of each calendar year, of all shares of 
companies engaged, directly or indirectly, in activities in the United 
States that were acquired during the calendar year under the authority 
of this section.
    (2) The foreign banking organization also shall report any direct 
activities in the United States commenced during each calendar quarter 
by a foreign subsidiary of the foreign banking organization. This 
information shall (unless previously furnished) include a brief 
description of the nature and scope of each company's business in the 
United States, including the 4-digit SIC numbers of the activities in 
which the company engages. Such information shall also include the 4-
digit SIC numbers of the immediate parent of any U.S. company acquired, 
together with a statement of total assets and revenues of the immediate 
parent.
    (i) Availability of information. If any information required under 
this section is unknown and not reasonably available to the foreign 
banking organization (either because obtaining it would involve 
unreasonable effort or expense, or because it rests exclusively within 
the knowledge of a company that is not controlled by the organization) 
the organization shall:
    (1) Give such information on the subject as it possesses or can 
reasonably acquire, together with the sources thereof; and
    (2) Include a statement showing that unreasonable effort or expense 
would be involved, or indicating that the company whose shares were 
acquired is not controlled by the organization, and stating the result 
of a request for information.


Sec. 211.24  Approval of offices of foreign banks; procedures for 
applications; standards for approval; representative office activities 
and standards for approval; preservation of existing authority.

    (a) Board approval of offices of foreign banks--(1) Prior Board 
approval of branches, agencies, commercial lending companies, or 
representative offices of foreign banks. (i) Except as otherwise 
provided in paragraphs (a)(2) and (a)(3) of this section, a foreign 
bank shall obtain the approval of the Board before it:
    (A) Establishes a branch, agency, commercial lending company 
subsidiary, or representative office in the United States; or
    (B) Acquires ownership or control of a commercial lending company 
subsidiary.
    (2) Prior notice for certain offices. (i) After providing 45 days' 
prior written notice to the Board, a foreign bank may establish:
    (A) An additional office (other than a domestic branch) outside the 
home state of the foreign bank, provided that the Board has previously 
determined the foreign bank to be subject to comprehensive supervision 
or regulation on a consolidated basis by its home country supervisor 
(comprehensive consolidated supervision or CCS); or
    (B) A representative office, if:
    (1) The Board has not yet determined the foreign bank to be subject 
to CCS, but the foreign bank is subject to the BHC Act, either directly 
or through section 8(a) of the IBA (12 U.S.C. 3106(a));
    (2) The Board previously has approved, by order, an application by 
the foreign bank to establish a representative office.
    (ii) The Board may waive the 45-day notice period if it finds that 
immediate action is required by the circumstances presented. The notice 
period shall commence at the time the notice is received by the 
appropriate Federal Reserve Bank. The Board may suspend the period or 
require Board approval prior to the establishment of such office

[[Page 68457]]

if the notification raises significant policy or supervisory concerns.
    (3) General consent for certain representative offices. (i) The 
Board grants its general consent for a foreign bank that is subject to 
the BHC Act, either directly or through section 8(a) of the IBA (12 
U.S.C. 3106(a)), to establish:
    (A) A representative office, but only if the Board has previously 
determined that the foreign bank proposing to establish a 
representative office is subject to CCS;
    (B) A regional administrative office; or
    (C) An office that solely engages in limited administrative 
functions (such as separately maintaining back-office support systems) 
that:
    (1) Are clearly defined;
    (2) Are performed in connection with the U.S. banking activities of 
the foreign bank; and
    (3) Do not involve contact or liaison with customers or potential 
customers, beyond incidental contact with existing customers relating 
to administrative matters (such as verification or correction of 
account information).
    (ii) A foreign bank must notify the Board in writing within 30 days 
of establishing an office under the general-consent provisions in this 
paragraph (a)(3).
    (4) Suspension of general-consent or prior-notice procedures. The 
Board may, at any time, upon notice, modify or suspend the prior-notice 
and general-consent procedures in paragraphs (a)(2) and (3) of this 
section for any foreign bank with respect to the establishment by such 
foreign bank of any U.S. office of such foreign bank.
    (5) Temporary offices. The Board may, in its discretion, determine 
that a foreign bank that is well managed as defined in Sec. 225.2(s) of 
Regulation Y (12 CFR 225.2(s)) has not established an office if the 
foreign bank temporarily operates, for a period not to exceed 12 
months, a second location in the same city of an existing branch or 
agency due to an expansion of the permissible activities of such 
existing office or an increase in personnel of such office that cannot 
be accommodated in the physical space of the existing office. The 
foreign bank must provide reasonable advance notice of its intent 
temporarily to utilize a second location and commit, in writing, to 
operate only a single location for the office at the end of the 12-
month period.
    (6) After-the-fact Board approval. Where a foreign bank proposes to 
establish an office in the United States through the acquisition of, or 
merger or consolidation with, another foreign bank with an office in 
the United States, the Board may, in its discretion, allow the 
acquisition, merger, or consolidation to proceed before an application 
to establish the office has been filed or acted upon under this section 
if:
    (i) The foreign bank or banks resulting from the acquisition, 
merger, or consolidation, will not directly or indirectly own or 
control more than 5 percent of any class of the voting securities of, 
or control, a U.S. bank;
    (ii) The Board is given reasonable advance notice of the proposed 
acquisition, merger, or consolidation; and
    (iii) Prior to consummation of the acquisition, merger, or 
consolidation, each foreign bank, as appropriate, commits in writing 
either:
    (A) To comply with the procedures for an application under this 
section within a reasonable period of time; to engage in no new 
business, or otherwise to expand its U.S. activities until the 
disposition of the application; and to abide by the Board's decision on 
the application, including, if necessary, a decision to terminate the 
activities of any such U.S. office, as the Board or the Comptroller may 
require; or
    (B) Promptly to wind-down and close the office, the establishment 
of which would have required an application under this section; and to 
engage in no new business or otherwise to expand its U.S. activities 
prior to the closure of such office.
    (7) Notice of change in ownership or control or conversion of 
existing office or establishment of representative office under 
general-consent authority. A foreign bank with a U.S. office shall 
notify the Board in writing within 10 days of the occurrence of any of 
the following events:
    (i) A change in the foreign bank's ownership or control, where the 
foreign bank is acquired or controlled by another foreign bank or 
company and the acquired foreign bank with a U.S. office continues to 
operate in the same corporate form as prior to the change in ownership 
or control;
    (ii) The conversion of a branch to an agency or representative 
office; an agency to a representative office; or a branch or agency 
from a federal to a state license, or a state to a federal license; or
    (iii) The establishment of a representative office under general-
consent authority.
    (8) Transactions subject to approval under Regulation Y. Subpart B 
of Regulation Y (12 CFR 225.11-225.17) governs the acquisition by a 
foreign banking organization of direct or indirect ownership or control 
of any voting securities of a bank or bank holding company in the 
United States if the acquisition results in the foreign banking 
organization's ownership or control of more than 5 percent of any class 
of voting securities of a U.S. bank or bank holding company, including 
through acquisition of a foreign bank or foreign banking organization 
that owns or controls more than 5 percent of any class of the voting 
securities of a U.S. bank or bank holding company.
    (b) Procedures for application--(1) Filing application. An 
application for the Board's approval pursuant to this section shall be 
filed in the manner prescribed by the Board.
    (2) Publication requirement--(i) Newspaper notice. Except with 
respect to a proposed transaction where more extensive notice is 
required by statute or as otherwise provided in paragraphs (b)(2)(ii) 
and (iii) of this section, an applicant or notificant under this 
section shall publish a notice in a newspaper of general circulation in 
the community in which the applicant or notificant proposes to engage 
in business.
    (ii) Contents of notice. The newspaper notice shall:
    (A) State that an application or notice is being filed as of the 
date of the newspaper notice; and
    (B) Provide the name of the applicant or notificant, the subject 
matter of the application or notice, the place where comments should be 
sent, and the date by which comments are due, pursuant to paragraph 
(b)(3) of this section.
    (iii) Copy of notice with application. The applicant or notificant 
shall furnish with its application or notice to the Board a copy of the 
newspaper notice, the date of its publication, and the name and address 
of the newspaper in which it was published.
    (iv) Exception. The Board may modify the publication requirement of 
paragraphs (b)(2)(i) and (ii) of this section in appropriate 
circumstances.
    (v) Federal branch or federal agency. In the case of an application 
or notice to establish a federal branch or federal agency, compliance 
with the publication procedures of the Comptroller shall satisfy the 
publication requirement of this section. Comments regarding the 
application or notice should be sent to the Board and the Comptroller.
    (3) Written comments. (i) Within 30 days after publication, as 
required in paragraph (b)(2) of this section, any person may submit to 
the Board written comments and data on an application or notice.
    (ii) The Board may extend the 30-day comment period if the Board 
determines that additional relevant information is likely to be 
provided by interested

[[Page 68458]]

persons, or if other extenuating circumstances exist.
    (4) Board action on application--(i) Time limits. (A) The Board 
shall act on an application from a foreign bank to establish a branch, 
agency, or commercial lending company subsidiary within 180 calendar 
days after the receipt of the application.
    (B) The Board may extend for an additional 180 calendar days the 
period within which to take final action, after providing notice of and 
reasons for the extension to the applicant and the licensing authority.
    (C) The time periods set forth in this paragraph (b)(4)(i) may be 
waived by the applicant.
    (ii) Additional information. The Board may request any information 
in addition to that supplied in the application when the Board believes 
that the information is necessary for its decision, and may deny an 
application if it does not receive the information requested from the 
applicant or its home country supervisor in sufficient time to permit 
adequate evaluation of the information within the time periods set 
forth in paragraph (b)(4)(i) of this section.
    (5) Coordination with other regulators. Upon receipt of an 
application by a foreign bank under this section, the Board shall 
promptly notify, consult with, and consider the views of the licensing 
authority.
    (c) Standards for approval of U.S. offices of foreign banks--(1) 
Mandatory standards--(i) General. As specified in section 7(d) of the 
IBA (12 U.S.C. 3105(d)), the Board may not approve an application to 
establish a branch or an agency, or to establish or acquire ownership 
or control of a commercial lending company, unless it determines that:
    (A) Each of the foreign bank and any parent foreign bank engages 
directly in the business of banking outside the United States and, 
except as provided in paragraph (c)(1)(iii) of this section, is subject 
to comprehensive supervision or regulation on a consolidated basis by 
its home country supervisor; and
    (B) The foreign bank has furnished to the Board the information 
that the Board requires in order to assess the application adequately.
    (ii) Basis for determining comprehensive consolidated supervision. 
In determining whether a foreign bank and any parent foreign bank is 
subject to CCS, the Board shall determine whether the foreign bank is 
supervised or regulated in such a manner that its home country 
supervisor receives sufficient information on the worldwide operations 
of the foreign bank (including the relationships of the bank to any 
affiliate) to assess the foreign bank's overall financial condition and 
compliance with law and regulation. In making such a determination, the 
Board shall assess, among other factors, the extent to which the home 
country supervisor:
    (A) Ensures that the foreign bank has adequate procedures for 
monitoring and controlling its activities worldwide;
    (B) Obtains information on the condition of the foreign bank and 
its subsidiaries and offices outside the home country through regular 
reports of examination, audit reports, or otherwise;
    (C) Obtains information on the dealings and relationship between 
the foreign bank and its affiliates, both foreign and domestic;
    (D) Receives from the foreign bank financial reports that are 
consolidated on a worldwide basis, or comparable information that 
permits analysis of the foreign bank's financial condition on a 
worldwide, consolidated basis;
    (E) Evaluates prudential standards, such as capital adequacy and 
risk asset exposure, on a worldwide basis.
    (iii) Determination of comprehensive consolidated supervision not 
required in certain circumstances. (A) If the Board is unable to find, 
under paragraph (c)(1)(i) of this section, that a foreign bank is 
subject to comprehensive consolidated supervision, the Board may, 
nevertheless, approve an application by the foreign bank if:
    (1) The home country supervisor is actively working to establish 
arrangements for the consolidated supervision of such bank; and
    (2) All other factors are consistent with approval.
    (B) In deciding whether to use its discretion under this paragraph 
(c)(1)(iii), the Board also shall consider whether the foreign bank has 
adopted and implemented procedures to combat money laundering. The 
Board also may take into account whether the home country supervisor is 
developing a legal regime to address money laundering or is 
participating in multilateral efforts to combat money laundering. In 
approving an application under this paragraph (c)(1)(iii), the Board, 
after requesting and taking into consideration the views of the 
licensing authority, may impose any conditions or restrictions relating 
to the activities or business operations of the proposed branch, 
agency, or commercial lending company subsidiary, including 
restrictions on sources of funding. The Board shall coordinate with the 
licensing authority in the implementation of such conditions or 
restrictions.
    (2) Additional mandatory standards for certain interstate 
applications. As specified in section 5(a)(3) of the IBA (12 U.S.C. 
3103(a)(3)), the Board may not approve an application by a foreign bank 
to establish a branch, other than a limited branch, outside the home 
state of the foreign bank under section 5(a)(1) or (2) of the IBA (12 
U.S.C. 3103(a)(1), (2)) unless the Board:
    (i) Determines that the foreign bank's financial resources, 
including the capital level of the bank, are equivalent to those 
required for a domestic bank to be approved for branching under section 
5155 of the Revised Statutes (12 U.S.C. 36) and section 44 of the 
Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1831u);
    (ii) Consults with the Department of the Treasury regarding capital 
equivalency;
    (iii) Applies the standards specified in section 7(d) of the IBA 
(12 U.S.C. 3105(d)) and this paragraph (c);
    (iv) Applies the same requirements and conditions to which an 
application by a domestic bank for an interstate merger is subject 
under section 44(b)(1), (3), and (4) of the FDIA (12 U.S.C. 
1831u(b)(1), (3), (4)); and
    (v) In the case of an application to establish a branch through a 
change in status of an agency or limited branch, the establishment and 
operation of the branch would be permitted:
    (A) In the case of a federal branch, under section 5155 of the 
Revised Statutes (12 U.S.C. 36(g)) (relating to de novo branching), if 
the foreign bank were a national bank whose home state (as defined in 
section 5155 of the Revised Statutes (12 U.S.C. 36(g))) is the same 
state as the home state of the foreign bank; or
    (B) In the case of a state branch, under section 18(d)(4) of the 
FDIA (12 U.S.C. 1828(d)(4)) (relating to de novo branching), if the 
foreign bank were a state-chartered bank whose home state (as defined 
in section 18(d)(4) of the FDIA (12 U.S.C. 1828(d)(4))) is the same 
state as the home state of the foreign bank.
    (3) Discretionary standards. In acting on any application under 
this subpart, the Board may take into account:
    (i) Consent of home country supervisor. Whether the home country 
supervisor of the foreign bank has consented to the proposed 
establishment of the branch, agency, or commercial lending company 
subsidiary;
    (ii) Financial resources. The financial resources of the foreign 
bank (including the foreign bank's capital position, projected capital 
position, profitability, level of indebtedness, and future

[[Page 68459]]

prospects) and the condition of any U.S. office of the foreign bank;
    (iii) Managerial resources. The managerial resources of the foreign 
bank, including the competence, experience, and integrity of the 
officers and directors; the integrity of its principal shareholders; 
management's experience and capacity to engage in international 
banking; and the record of the foreign bank and its management of 
complying with laws and regulations, and of fulfilling any commitments 
to, and any conditions imposed by, the Board in connection with any 
prior application;
    (iv) Sharing information with supervisors. Whether the foreign 
bank's home country supervisor and the home country supervisor of any 
parent of the foreign bank share material information regarding the 
operations of the foreign bank with other supervisory authorities;
    (v) Assurances to Board. (A) Whether the foreign bank has provided 
the Board with adequate assurances that information will be made 
available to the Board on the operations or activities of the foreign 
bank and any of its affiliates that the Board deems necessary to 
determine and enforce compliance with the IBA, the BHC Act, and other 
applicable federal banking statutes.
    (B) These assurances shall include a statement from the foreign 
bank describing the laws that would restrict the foreign bank or any of 
its parents from providing information to the Board;
    (vi) Measures for prevention of money laundering. Whether the 
foreign bank has adopted and implemented procedures to combat money 
laundering, whether there is a legal regime in place in the home 
country to address money laundering, and whether the home country is 
participating in multilateral efforts to combat money laundering; and
    (vii) Compliance with U.S. law. Whether the foreign bank and its 
U.S. affiliates are in compliance with applicable U.S. law, and whether 
the applicant has established adequate controls and procedures in each 
of its offices to ensure continuing compliance with U.S. law, including 
controls directed to detection of money laundering and other unsafe or 
unsound banking practices.
    (4) Additional discretionary factors. The Board may consider the 
needs of the community and the history of operation of the foreign bank 
and its relative size in its home country, provided that the size of 
the foreign bank is not the sole factor in determining whether an 
office of a foreign bank should be approved.
    (5) Board conditions on approval. The Board may impose any 
conditions on its approval as it deems necessary, including a condition 
which may permit future termination by the Board of any activities or, 
in the case of a federal branch or a federal agency, by the 
Comptroller, based on the inability of the foreign bank to provide 
information on its activities or those of its affiliates that the Board 
deems necessary to determine and enforce compliance with U.S. banking 
laws.
    (d) Representative offices--(1) Permissible activities. A 
representative office may engage in:
    (i) Representational and administrative functions. Representational 
and administrative functions in connection with the banking activities 
of the foreign bank, which may include soliciting new business for the 
foreign bank; conducting research; acting as liaison between the 
foreign bank's head office and customers in the United States; 
performing any of the activities described in 12 CFR 250.141; or 
performing back-office functions; but shall not include contracting for 
any deposit or deposit-like liability, lending money, or engaging in 
any other banking activity for the foreign bank; and
    (ii) Other functions. Other functions for or on behalf of the 
foreign bank or its affiliates, such as operating as a regional 
administrative office of the foreign bank, but only to the extent that 
these other functions are not banking activities and are not prohibited 
by applicable federal or state law, or by ruling or order of the Board.
    (2) Standards for approval of representative offices. As specified 
in section 10(a)(2) of the IBA (12 U.S.C. 3107(a)(2)), in acting on the 
application of a foreign bank to establish a representative office, the 
Board shall take into account, to the extent it deems appropriate, the 
standards for approval set out in paragraph (c) of this section. The 
standard regarding supervision by the foreign bank's home country 
supervisor (as set out in paragraph (c)(1)(i)(A) of this section) will 
be met, in the case of a representative office application, if the 
Board makes a finding that the applicant bank is subject to a 
supervisory framework that is consistent with the activities of the 
proposed representative office, taking into account the nature of such 
activities and the operating record of the applicant.
    (3) Special-purpose foreign government-owned banks. A foreign 
government owned organization engaged in banking activities in its home 
country that are not commercial in nature may apply to the Board for a 
determination that the organization is not a foreign bank for purposes 
of this section. A written request setting forth the basis for such a 
determination may be submitted to the Reserve Bank of the District in 
which the foreign organization's representative office is located in 
the United States, or to the Board, in the case of a proposed 
establishment of a representative office. The Board shall review and 
act upon each request on a case-by-case basis.
    (4) Additional requirements. The Board may impose any additional 
requirements that it determines to be necessary to carry out the 
purposes of the IBA.
    (e) Preservation of existing authority. Nothing in this subpart 
shall be construed to relieve any foreign bank or foreign banking 
organization from any otherwise applicable requirement of federal or 
state law, including any applicable licensing requirement.
    (f) Reports of crimes and suspected crimes. Except for a federal 
branch or a federal agency or a state branch that is insured by the 
Federal Deposit Insurance Corporation (FDIC), a branch, agency, or 
representative office of a foreign bank operating in the United States 
shall file a suspicious activity report in accordance with the 
provisions of Sec. 208.20 of Regulation H (12 CFR 208.20).


Sec. 211.25  Termination of offices of foreign banks.

    (a) Grounds for termination--(1) General. Under sections 7(e) and 
10(b) of the IBA (12 U.S.C. 3105(d), 3107(b)), the Board may order a 
foreign bank to terminate the activities of its representative office, 
state branch, state agency, or commercial lending company subsidiary if 
the Board finds that:
    (i) The foreign bank is not subject to comprehensive consolidated 
supervision in accordance with Sec. 211.24(c)(1), and the home country 
supervisor is not making demonstrable progress in establishing 
arrangements for the consolidated supervision of the foreign bank; or
    (ii) Both of the following criteria are met:
    (A) There is reasonable cause to believe that the foreign bank, or 
any of its affiliates, has committed a violation of law or engaged in 
an unsafe or unsound banking practice in the United States; and
    (B) As a result of such violation or practice, the continued 
operation of the foreign bank's representative office, state branch, 
state agency, or commercial lending company

[[Page 68460]]

subsidiary would not be consistent with the public interest, or with 
the purposes of the IBA, the BHC Act, or the FDIA.
    (2) Additional ground. The Board also may enforce any condition 
imposed in connection with an order issued under Sec. 211.24.
    (b) Factor. In making its findings under this section, the Board 
may take into account the needs of the community, the history of 
operation of the foreign bank, and its relative size in its home 
country, provided that the size of the foreign bank shall not be the 
sole determining factor in a decision to terminate an office.
    (c) Consultation with relevant state supervisor. Except in the case 
of termination pursuant to the expedited procedure in paragraph (d)(3) 
of this section, the Board shall request and consider the views of the 
relevant state supervisor before issuing an order terminating the 
activities of a state branch, state agency, representative office, or 
commercial lending company subsidiary under this section.
    (d) Termination procedures.--(1) Notice and hearing. Except as 
otherwise provided in paragraph (d)(3) of this section, an order issued 
under paragraph (a)(1) of this section shall be issued only after 
notice to the relevant state supervisor and the foreign bank and after 
an opportunity for a hearing.
    (2) Procedures for hearing. Hearings under this section shall be 
conducted pursuant to the Board's Rules of Practice for Hearings (12 
CFR part 263).
    (3) Expedited procedure. The Board may act without providing an 
opportunity for a hearing, if it determines that expeditious action is 
necessary in order to protect the public interest. When the Board finds 
that it is necessary to act without providing an opportunity for a 
hearing, the Board, solely in its discretion, may:
    (i) Provide the foreign bank that is the subject of the termination 
order with notice of the intended termination order;
    (ii) Grant the foreign bank an opportunity to present a written 
submission opposing issuance of the order; or
    (iii) Take any other action designed to provide the foreign bank 
with notice and an opportunity to present its views concerning the 
order.
    (e) Termination of federal branch or federal agency. The Board may 
transmit to the Comptroller a recommendation that the license of a 
federal branch or federal agency be terminated if the Board has 
reasonable cause to believe that the foreign bank or any affiliate of 
the foreign bank has engaged in conduct for which the activities of a 
state branch or state agency may be terminated pursuant to this 
section.
    (f) Voluntary termination. A foreign bank shall notify the Board at 
least 30 days prior to terminating the activities of any office. Notice 
pursuant to this paragraph (f) is in addition to, and does not satisfy, 
any other federal or state requirements relating to the termination of 
an office or the requirement for prior notice of the closing of a 
branch, pursuant to section 39 of the FDIA (12 U.S.C. 1831p).


Sec. 211.26  Examination of offices and affiliates of foreign banks.

    (a) Conduct of examinations--(1) Examination of branches, agencies, 
commercial lending companies, and affiliates. The Board may examine:
    (i) Any branch or agency of a foreign bank;
    (ii) Any commercial lending company or bank controlled by one or 
more foreign banks, or one or more foreign companies that control a 
foreign bank; and
    (iii) Any other office or affiliate of a foreign bank conducting 
business in any state.
    (2) Examination of representative offices. The Board may examine 
any representative office in the manner and with the frequency it deems 
appropriate.
    (b) Coordination of examinations. To the extent possible, the Board 
shall coordinate its examinations of the U.S. offices and U.S. 
affiliates of a foreign bank with the licensing authority and, in the 
case of an insured branch, the FDIC, including through simultaneous 
examinations of the U.S. offices and U.S. affiliates of a foreign bank.
    (c) Annual on-site examinations. Unless otherwise specified, each 
branch, agency, or commercial lending company subsidiary of a foreign 
bank shall be examined on-site at least once during each 12-month 
period (beginning on the date the most recent examination of the office 
ended) by:
    (1) The Board;
    (2) The FDIC, if the branch of the foreign bank accepts or 
maintains insured deposits;
    (3) The Comptroller, in the case of a federal branch or federal 
agency; or
    (4) The relevant state supervisor, in the case of a state branch or 
state agency.


Sec. 211.27  Disclosure of supervisory information to foreign 
supervisors.

    (a) Disclosure by Board. The Board may disclose information 
obtained in the course of exercising its supervisory or examination 
authority to a foreign bank regulatory or supervisory authority, if the 
Board determines that disclosure is appropriate for bank supervisory or 
regulatory purposes and will not prejudice the interests of the United 
States.
    (b) Confidentiality. Before making any disclosure of information 
pursuant to paragraph (a) of this section, the Board shall obtain, to 
the extent necessary, the agreement of the foreign bank regulatory or 
supervisory authority to maintain the confidentiality of such 
information to the extent possible under applicable law.


Sec. 211.28  Provisions applicable to branches and agencies: limitation 
on loans to one borrower.

    (a) Limitation on loans to one borrower. Except as provided in 
paragraph (b) of this section, the total loans and extensions of credit 
by all the state branches and state agencies of a foreign bank 
outstanding to a single borrower at one time shall be aggregated with 
the total loans and extensions of credit by all federal branches and 
federal agencies of the same foreign bank outstanding to such borrower 
at the time; and shall be subject to the limitations and other 
provisions of section 5200 of the Revised Statutes (12 U.S.C. 84), and 
the regulations promulgated thereunder, in the same manner that 
extensions of credit by a federal branch or federal agency are subject 
to section 4(b) of the IBA (12 U.S.C. 3102(b)) as if such state 
branches and state agencies were federal branches and federal agencies.
    (b) Preexisting loans and extensions of credit. Any loans or 
extensions of credit to a single borrower that were originated prior to 
December 19, 1991, by a state branch or state agency of the same 
foreign bank and that, when aggregated with loans and extensions of 
credit by all other branches and agencies of the foreign bank, exceed 
the limits set forth in paragraph (a) of this section, may be brought 
into compliance with such limitations through routine repayment, 
provided that any new loans or extensions of credit (including renewals 
of existing unfunded credit lines, or extensions of the maturities of 
existing loans) to the same borrower shall comply with the limits set 
forth in paragraph (a) of this section.


Sec. 211.29  Applications by state branches and state agencies to 
conduct activities not permissible for federal branches.

    (a) Scope. A state branch or state agency shall file with the Board 
a prior written application for permission to engage in or continue to 
engage in any type of activity that:
    (1) Is not permissible for a federal branch, pursuant to statute, 
regulation,

[[Page 68461]]

official bulletin or circular, or order or interpretation issued in 
writing by the Comptroller; or
    (2) Is rendered impermissible due to a subsequent change in 
statute, regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction.
    (b) Exceptions. No application shall be required by a state branch 
or state agency to conduct any activity that is otherwise permissible 
under applicable state and federal law or regulation and that:
    (1) Has been determined by the FDIC, pursuant to 12 CFR 
362.4(c)(3)(i)-(c)(3)(ii)(A), not to present a significant risk to the 
affected deposit insurance fund;
    (2) Is permissible for a federal branch, but the Comptroller 
imposes a quantitative limitation on the conduct of such activity by 
the federal branch;
    (3) Is conducted as agent rather than as principal, provided that 
the activity is one that could be conducted by a state-chartered bank 
headquartered in the same state in which the branch or agency is 
licensed; or
    (4) Any other activity that the Board has determined may be 
conducted by any state branch or state agency of a foreign bank without 
further application to the Board.
    (c) Contents of application. An application submitted pursuant to 
paragraph (a) of this section shall be in letter form and shall contain 
the following information:
    (1) A brief description of the activity, including the manner in 
which it will be conducted, and an estimate of the expected dollar 
volume associated with the activity;
    (2) An analysis of the impact of the proposed activity on the 
condition of the U.S. operations of the foreign bank in general, and of 
the branch or agency in particular, including a copy, if available, of 
any feasibility study, management plan, financial projections, business 
plan, or similar document concerning the conduct of the activity;
    (3) A resolution by the applicant's board of directors or, if a 
resolution is not required pursuant to the applicant's organizational 
documents, evidence of approval by senior management, authorizing the 
conduct of such activity and the filing of this application;
    (4) If the activity is to be conducted by a state branch insured by 
the FDIC, statements by the applicant:
    (i) Of whether or not it is in compliance with 12 CFR 346.19 
(Pledge of Assets) and 12 CFR 346.20 (Asset Maintenance);
    (ii) That it has complied with all requirements of the FDIC 
concerning an application to conduct the activity and the status of the 
application, including a copy of the FDIC's disposition of such 
application, if available; and
    (iii) Explaining why the activity will pose no significant risk to 
the deposit insurance fund; and
    (5) Any other information that the Reserve Bank deems appropriate.
    (d) Factors considered in determination. (1) The Board shall 
consider the following factors in determining whether a proposed 
activity is consistent with sound banking practice:
    (i) The types of risks, if any, the activity poses to the U.S. 
operations of the foreign banking organization in general, and the 
branch or agency in particular;
    (ii) If the activity poses any such risks, the magnitude of each 
risk; and
    (iii) If a risk is not de minimis, the actual or proposed 
procedures to control and minimize the risk.
    (2) Each of the factors set forth in paragraph (d)(1) of this 
section shall be evaluated in light of the financial condition of the 
foreign bank in general and the branch or agency in particular and the 
volume of the activity.
    (e) Application procedures. Applications pursuant to this section 
shall be filed with the appropriate Federal Reserve Bank. An 
application shall not be deemed complete until it contains all the 
information requested by the Reserve Bank and has been accepted. 
Approval of such an application may be conditioned on the applicant's 
agreement to conduct the activity subject to specific conditions or 
limitations.
    (f) Divestiture or cessation. (1) If an application for permission 
to continue to conduct an activity is not approved by the Board or, if 
applicable, the FDIC, the applicant shall submit a detailed written 
plan of divestiture or cessation of the activity to the appropriate 
Federal Reserve Bank within 60 days of the disapproval.
    (i) The divestiture or cessation plan shall describe in detail the 
manner in which the applicant will divest itself of or cease the 
activity, and shall include a projected timetable describing how long 
the divestiture or cessation is expected to take.
    (ii) Divestiture or cessation shall be complete within one year 
from the date of the disapproval, or within such shorter period of time 
as the Board shall direct.
    (2) If a foreign bank operating a state branch or state agency 
chooses not to apply to the Board for permission to continue to conduct 
an activity that is not permissible for a federal branch, or which is 
rendered impermissible due to a subsequent change in statute, 
regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction, the 
foreign bank shall submit a written plan of divestiture or cessation, 
in conformance with paragraph (f)(1) of this section within 60 days of 
the effective date of this part or of such change or decision.


Sec. 211.30  Criteria for evaluating U.S. operations of foreign banks 
not subject to consolidated supervision.

    (a) Development and publication of criteria. Pursuant to the 
Foreign Bank Supervision Enhancement Act, Pub. L. 102-242, 105 Stat. 
2286 (1991), the Board shall develop and publish criteria to be used in 
evaluating the operations of any foreign bank in the United States that 
the Board has determined is not subject to comprehensive consolidated 
supervision.
    (b) Criteria considered by Board. Following a determination by the 
Board that, having taken into account the standards set forth in 
Sec. 211.24(c)(1), a foreign bank is not subject to CCS, the Board 
shall consider the following criteria in determining whether the 
foreign bank's U.S. operations should be permitted to continue and, if 
so, whether any supervisory constraints should be placed upon the bank 
in connection with those operations:
    (1) The proportion of the foreign bank's total assets and total 
liabilities that are located or booked in its home country, as well as 
the distribution and location of its assets and liabilities that are 
located or booked elsewhere;
    (2) The extent to which the operations and assets of the foreign 
bank and any affiliates are subject to supervision by its home country 
supervisor;
    (3) Whether the home country supervisor of such foreign bank is 
actively working to establish arrangements for comprehensive 
consolidated supervision of the bank, and whether demonstrable progress 
is being made;
    (4) Whether the foreign bank has effective and reliable systems of 
internal controls and management information and reporting, which 
enable its management properly to oversee its worldwide operations;
    (5) Whether the foreign bank's home country supervisor has any 
objection to the bank continuing to operate in the United States;
    (6) Whether the foreign bank's home country supervisor and the home 
country supervisor of any parent of the

[[Page 68462]]

foreign bank share material information regarding the operations of the 
foreign bank with other supervisory authorities;
    (7) The relationship of the U.S. operations to the other operations 
of the foreign bank, including whether the foreign bank maintains funds 
in its U.S. offices that are in excess of amounts due to its U.S. 
offices from the foreign bank's non-U.S. offices;
    (8) The soundness of the foreign bank's overall financial 
condition;
    (9) The managerial resources of the foreign bank, including the 
competence, experience, and integrity of the officers and directors, 
and the integrity of its principal shareholders;
    (10) The scope and frequency of external audits of the foreign 
bank;
    (11) The operating record of the foreign bank generally and its 
role in the banking system in its home country;
    (12) The foreign bank's record of compliance with relevant laws, as 
well as the adequacy of its anti-money-laundering controls and 
procedures, in respect of its worldwide operations;
    (13) The operating record of the U.S. offices of the foreign bank;
    (14) The views and recommendations of the Comptroller or the 
relevant state supervisors in those states in which the foreign bank 
has operations, as appropriate;
    (15) Whether the foreign bank, if requested, has provided the Board 
with adequate assurances that such information will be made available 
on the operations or activities of the foreign bank and any of its 
affiliates as the Board deems necessary to determine and enforce 
compliance with the IBA, the BHC Act, and other U.S. banking statutes; 
and
    (16) Any other information relevant to the safety and soundness of 
the U.S. operations of the foreign bank.
    (c) Restrictions on U.S. operations.--(1) Terms of agreement. Any 
foreign bank that the Board determines is not subject to CCS may be 
required to enter into an agreement to conduct its U.S. operations 
subject to such restrictions as the Board, having considered the 
criteria set forth in paragraph (b) of this section, determines to be 
appropriate in order to ensure the safety and soundness of its U.S. 
operations.
    (2) Failure to enter into or comply with agreement. A foreign bank 
that is required by the Board to enter into an agreement pursuant to 
paragraph (c)(1) of this section and either fails to do so, or fails to 
comply with the terms of such agreement, may be subject to:
    (i) Enforcement action, in order to ensure safe and sound banking 
operations, under 12 U.S.C. 1818; or
    (ii) Termination or a recommendation for termination of its U.S. 
operations, under Sec. 211.25 (a) and (e) and section (7)(e) of the IBA 
(12 U.S.C. 3105(e)).

Subpart C--Export Trading Companies


Sec. 211.31  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Bank 
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.), the 
Bank Export Services Act (title II, Pub. L. 97-290, 96 Stat. 1235 
(1982)) (BESA), and the Export Trading Company Act Amendments of 1988 
(title III, Pub. L. 100-418, 102 Stat. 1384 (1988)) (ETC Act 
Amendments).
    (b) Purpose and scope. This subpart is in furtherance of the 
purposes of the BHC Act, the BESA, and the ETC Act Amendments, the 
latter two statutes being designed to increase U.S. exports by 
encouraging investments and participation in export trading companies 
by bank holding companies and the specified investors. The provisions 
of this subpart apply to eligible investors as defined in this subpart.


Sec. 211.32  Definitions.

    The definitions in Secs. 211.1 and 211.2 apply to this subpart, 
subject to the following:
    (a) Appropriate Federal Reserve Bank has the same meaning as in 
Sec. 211.21(c).
    (b) Bank has the same meaning as in section 2(c) of the BHC Act (12 
U.S.C. 1841(c)).
    (c) Company has the same meaning as in section 2(b) of the BHC Act 
(12 U.S.C. 1841(b)).
    (d) Eligible investors means:
    (1) Bank holding companies, as defined in section 2(a) of the BHC 
Act (12 U.S.C. 1841(a));
    (2) Edge and agreement corporations that are subsidiaries of bank 
holding companies but are not subsidiaries of banks;
    (3) Banker's banks, as described in section 4(c)(14)(F)(iii) of the 
BHC Act (12 U.S.C. 1843(c)(14)(F)(iii)); and
    (4) Foreign banking organizations, as defined in Sec. 211.21(o).
    (e) Export trading company means a company that is exclusively 
engaged in activities related to international trade and, by engaging 
in one or more export trade services, derives:
    (1) At least one-third of its revenues in each consecutive four-
year period from the export of, or from facilitating the export of, 
goods and services produced in the United States by persons other than 
the export trading company or its subsidiaries; and
    (2) More revenues in each four-year period from export activities 
as described in paragraph (e)(1) of this section than it derives from 
the import, or facilitating the import, into the United States of goods 
or services produced outside the United States. The four-year period 
within which to calculate revenues derived from its activities under 
this section shall be deemed to have commenced with the first fiscal 
year after the respective export trading company has been in operation 
for two years.
    (f) Revenues shall include net sales revenues from exporting, 
importing, or third-party trade in goods by the export trading company 
for its own account and gross revenues derived from all other 
activities of the export trading company.
    (g) Subsidiary has the same meaning as in section 2(d) of the BHC 
Act (12 U.S.C. 1841(d)).
    (h) Well capitalized has the same meaning as in Sec. 225.2(r) of 
Regulation Y (12 CFR 225.2(r)).
    (i) Well managed has the same meaning as in Sec. 225.2(s) of 
Regulation Y (12 CFR 225.2(s)).


Sec. 211.33  Investments and extensions of credit.

    (a) Amount of investments. In accordance with the procedures of 
Sec. 211.34, an eligible investor may invest no more than 5 percent of 
its consolidated capital and surplus in one or more export trading 
companies, except that an Edge or agreement corporation not engaged in 
banking may invest as much as 25 percent of its consolidated capital 
and surplus but no more than 5 percent of the consolidated capital and 
surplus of its parent bank holding company.
    (b) Extensions of credit--(1) Amount. An eligible investor in an 
export trading company or companies may extend credit directly or 
indirectly to the export trading company or companies in a total amount 
that at no time exceeds 10 percent of the investor's consolidated 
capital and surplus.
    (2) Terms. (i) An eligible investor in an export trading company 
may not extend credit directly or indirectly to the export trading 
company or any of its customers or to any other investor holding 10 
percent or more of the shares of the export trading company on terms 
more favorable than those afforded similar borrowers in similar 
circumstances, and such extensions of credit shall not involve more 
than the normal risk of repayment or present other unfavorable 
features.
    (ii) For the purposes of this section, an investor in an export 
trading

[[Page 68463]]

company includes any affiliate of the investor.
    (3) Collateral requirements. Covered transactions between a bank 
and an affiliated export trading company in which a bank holding 
company has invested pursuant to this subpart are subject to the 
collateral requirements of section 23A of the Federal Reserve Act (12 
U.S.C. 371c), except where a bank issues a letter of credit or advances 
funds to an affiliated export trading company solely to finance the 
purchase of goods for which:
    (i) The export trading company has a bona fide contract for the 
subsequent sale of the goods; and
    (ii) The bank has a security interest in the goods or in the 
proceeds from their sale at least equal in value to the letter of 
credit or the advance.


Sec. 211.34  Procedures for filing and processing notices.

    (a) General policy. Direct and indirect investments by eligible 
investors in export trading companies shall be made in accordance with 
the general consent or prior notice procedures contained in this 
section. The Board may at any time, upon notice, modify or suspend the 
general-consent procedures with respect to any eligible investor.
    (b) General consent--(1) Eligibility for general consent. Subject 
to the other limitations of this subpart, the Board grants its general 
consent for any investment an export trading company:
    (i) If the eligible investor is well capitalized and well managed;
    (ii) In an amount equal to cash dividends received from that export 
trading company during the preceding 12 calendar months; or
    (iii) That is acquired from an affiliate at net asset value or 
through a contribution of shares.
    (2) Post-investment notice. By the end of the month following the 
month in which the investment is made, the investor shall provide the 
Board with the following information:
    (i) The amount of the investment and the source of the funds with 
which the investment was made; and
    (ii) In the case of an initial investment, a description of the 
activities in which the export trading company proposes to engage and 
projections for the export trading company for the first year following 
the investment.
    (c) Filing notice--(1) Prior notice. An eligible investor shall 
give the Board 60 days' prior written notice of any investment in an 
export trading company that does not qualify under the general consent 
procedure.
    (2) Notice of change of activities. (i) An eligible investor shall 
give the Board 60 days' prior written notice of changes in the 
activities of an export trading company that is a subsidiary of the 
investor if the export trading company expands its activities beyond 
those described in the initial notice to include:
    (A) Taking title to goods where the export trading company does not 
have a firm order for the sale of those goods;
    (B) Product research and design;
    (C) Product modification; or
    (D) Activities not specifically covered by the list of activities 
contained in section 4(c)(14)(F)(ii) of the BHC Act (12 U.S.C. 
1843(c)(14)(F)(ii)).
    (ii) Such an expansion of activities shall be regarded as a 
proposed investment under this subpart.
    (d) Time period for Board action. (1) A proposed investment that 
has not been disapproved by the Board may be made 60 days after the 
appropriate Federal Reserve Bank accepts the notice for processing. A 
proposed investment may be made before the expiration of the 60-day 
period if the Board notifies the investor in writing of its intention 
not to disapprove the investment.
    (2) The Board may extend the 60-day period for an additional 30 
days if the Board determines that the investor has not furnished all 
necessary information or that any material information furnished is 
substantially inaccurate. The Board may disapprove an investment if the 
necessary information is provided within a time insufficient to allow 
the Board reasonably to consider the information received.
    (3) Within three days of a decision to disapprove an investment, 
the Board shall notify the investor in writing and state the reasons 
for the disapproval.
    (e) Time period for investment. An investment in an export trading 
company that has not been disapproved shall be made within one year 
from the date of the notice not to disapprove, unless the time period 
is extended by the Board or by the appropriate Federal Reserve Bank.

PART 265--RULES REGARDING DELEGATION OF AUTHORITY

    1. The authority citation for part 265 would continue to read as 
follows:

    Authority: 12 U.S.C. 248 (i) and (k).

    2. Paragraph (f) of Sec. 265.6 would be revised to read as follows:


Sec. 265.6  Functions delegated to General Counsel.

* * * * *
    (f) International banking--(1) After-the-fact applications. With 
the concurrence of the Board's Director of the Division of Banking 
Supervision and Regulation, to grant a request by a foreign bank to 
establish a branch, agency, commercial lending company, or 
representative office through certain acquisitions, mergers, 
consolidations, or similar transactions, in conjunction with which:
    (i) The foreign bank would be required to file an after-the-fact 
application for the Board's approval under Sec. 211.24(a)(6) of 
Regulation K (12 CFR 211.24(a)(6)); or
    (ii) The General Counsel may waive the requirement for an after-
the-fact application if:
    (A) The surviving foreign bank commits to wind down the U.S. 
operations of the acquired foreign bank; and
    (B) The merger or consolidation raises no significant policy or 
supervisory issues.
    (2) To modify the requirement that a foreign bank that has 
submitted an application or notice to establish a branch, agency, 
commercial lending company, or representative office pursuant to 
Sec. 211.24(a)(6) of Regulation K (12 CFR 211.24(a)(6)) shall publish 
notice of the application or notice in a newspaper of general 
circulation in the community in which the applicant or notificant 
proposes to engage in business, as provided in Sec. 211.24(b)(2) of 
Regulation K (12 CFR 211.24(b)(2)).
    (3) With the concurrence of the Board's Director of the Division of 
Banking Supervision and Regulation, to grant a request for an exemption 
under section 4(c)(9) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(9)), provided that the request raises no significant policy or 
supervisory issues that the Board has not already considered.
* * * * *
    3. Section 265.7 would be amended as follows:
    a. Paragraph (d)(4) would be revised; and
    b. New paragraphs (d)(9), (d)(10), and (d)(11) would be added.
    The revision and additions would read as follows:


Sec. 265.7  Functions delegated to Director of Division of Banking 
Supervision and Regulation.

* * * * *
    (d) * * *
    (4) Authority under general-consent and prior-notice procedures. 
(i) With regard to a prior notice to establish a branch in a foreign 
country under Sec. 211.3 of Regulation K (12 CFR 211.3):
    (A) To waive the notice period;
    (B) To suspend the notice period;
    (C) To determine not to object to the notice; or

[[Page 68464]]

    (D) To require the notificant to file an application for the 
Board's specific consent.
    (ii) With regard to a prior notice to make an investment under 
Sec. 211.8(g) of Regulation K (12 CFR 211.8(g)):
    (A) To waive the notice period;
    (B) To suspend the notice period; or
    (C) To require the notificant to file an application for the 
Board's specific consent.
    (iii) With regard to a prior notice of a foreign bank to establish 
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR 
211.24(a)(2)(i)):
    (A) To waive the notice period;
    (B) To suspend the notice period; or
    (C) To require the notificant to file an application for the 
Board's specific consent.
    (iv) To suspend the ability:
    (A) Of a foreign banking organization to establish an office under 
the prior-notice procedures in Sec. 211.24(a)(2)(i) of Regulation K (12 
CFR 211.24(a)(2)(i)) or the general-consent procedures in 
Sec. 211.24(a)(3) of Regulation K (12 CFR 211.24(a)(3));
    (B) Of a U.S. banking organization to establish a foreign branch 
under the prior-notice or general-consent procedures in Sec. 211.3(b) 
of Regulation K (12 CFR 211.3(b));
    (C) Of an investor to make investments under the general-consent or 
prior-notice procedures in Sec. 211.8 of Regulation K (12 CFR 211.8); 
and
    (D) Of an eligible investor to make an investment in an export 
trading company under the general-consent procedures in Sec. 211.34(b) 
of Regulation K (12 CFR 211.34(b)).
* * * * *
    (9) Allowing use of general-consent procedures. To allow an 
investor that is not well capitalized and well managed to make 
investments under the general-consent procedures in Sec. 211.8 or 
211.34(b) of Regulation K (12 CFR 211.8 or 211.34(b)), provided that:
    (i) The investor has implemented measures to become well 
capitalized and well managed;
    (ii) Granting such authority raises no significant policy or 
supervisory concerns; and
    (iii) Authority granted by the Director under this paragraph (d)(9) 
expires after one year, but may be renewed.
    (10) Exceeding general-consent investment limits. To allow an 
investor to exceed the general-consent investment limits under 
Sec. 211.8 of Regulation K (12 CFR 211.8), provided that:
    (i) The investor demonstrates adequate financial and managerial 
strength;
    (ii) The investor's investment strategy is not unsafe or unsound;
    (iii) Granting such authority raises no significant policy or 
supervisory concerns; and
    (iv) Authority granted by the Director under this paragraph (d)(10) 
expires after one year, but may be renewed.
    (11) Approval of temporary U.S. offices. To allow a foreign bank to 
operate a temporary office in the United States, pursuant to 
Sec. 211.24 of Regulation K (12 CFR 211.24), provided that:
    (i) There is no direct public access to such office, with respect 
to any branch or agency function; and
    (ii) The proposal raises no significant policy or supervisory 
issues.
* * * * *
    4. Section 265.11 would be amended as follows:
    a. Paragraph (d)(8) would be revised; and
    b. Paragraph (d)(11) would be removed.
    The revision would read as follows:


Sec. 265.11  Functions delegated to Federal Reserve Banks.

* * * * *
    (d) * * *
    (8) Authority under prior-notice procedures. (i) With regard to a 
prior notice to make an investment under Sec. 211.8(g) of Regulation K 
(12 CFR 211.8(g)):
    (A) To suspend the notice period; or
    (B) To require the notificant to file an application for the 
Board's specific consent.
    (ii) With regard to a prior notice of a foreign bank to establish 
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR 
211.24(a)(2)(i)):
    (A) To suspend the notice period; or
    (B) To require that the foreign bank file an application for the 
Board's specific consent.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, December 17, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-33411 Filed 12-30-97; 8:45 am]
BILLING CODE 6210-01-P