68424 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

1The 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.

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.

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 § 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.1

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 foreignowned 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.
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 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 crossborder 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. Afterthe-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 afterthe-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.
68426 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

2An 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.

3Any 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.

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 2 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 subunderwriters 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.

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,3 the

limit is 100 percent of the Edge’s tier 1

capital.4

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.
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68427

5Arguably, 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 wellcapitalized.

6The Board proposes that existing dollar limits

would be retained for companies that are not wellcapitalized and well-managed.

7The 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.

8As 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.

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 wellcapitalized 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.5

Accordingly, the Board proposes to

amend Regulation K in relation to those

banking organizations that are wellcapitalized 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 wellmanaged organizations, the Board

proposes applicable limits to be

determined as follows.6 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.

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.7 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.

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.8 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.

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 wellmanaged 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 wellcapitalized 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 wellmanaged 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
68428 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

9The 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.

10As at present, shares held as an investment

pursuant to Subpart A also would be included in

calculating the applicable aggregate limits.

11Currently these limits are normally applied on

a gross basis.

12The 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.

13Currently, 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.

14The Board also seeks comment on allowing

netting of underwriting exposures.

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 wellcapitalized and well-managed.9

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 wellmanaged 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.10

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.

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).11 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.12 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.13 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. 14

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,
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68429

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.

between organizations that are wellcapitalized and those that are not;

—The proposed netting authority

should be available to organizations

that are not well-capitalized or wellmanaged;

—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. 15

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.

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.
68430 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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.’’

17See 12 CFR 211.4(e).

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 wellmanaged 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.16

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.17

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.
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68431

18Fifty-one countries reached debt relief

agreements with commercial banks during the

period January 1980–December 1995.

19The only significant alternatives at that time

were establishing provisions for the bad debts or

writing the debts off and accepting the losses.

20A 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

Continued

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.18

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.19 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.

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 20 and
68432 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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.

21A 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.

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 wellmanaged tests. If the member bank were making the

investment, then the bank and the bank holding

company would be required to meet the tests.

well managed.21 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.

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.22

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 wellcapitalized and well-managed investors,

the Board proposes the following

percentage limits.

GENERAL CONSENT LIMITS ON INVESTMENT IN A SUBSIDIARY

Bank holding company subsidiaries ................... 10 percent of tier 1 capital of the bank 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 subsidiaries ................... 5 percent of tier 1 capital of the bank 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-bycase 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 wellcapitalized and well-managed tests

would be:

Bank holding companies ................................... 20 percent of tier 1 capital.
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 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 wellcapitalized 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 wellmanaged 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
68434 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

23 The establishment of foreign branches of

operating subsidiaries would be subject to the prior

notice and general consent provisions of Regulation

K.

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.

25This 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.

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

§ 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. 23

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;24 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.25 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.

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 wellcapitalized 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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68435

26As 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.

27Wherever 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.

28See, e.g., Citizens National Bank, 79 Fed. Res.

Bull. 805 (1993).

29See, e.g., Promstroybank of Russia, 82 Fed. Res.

Bull. 599 (1996).

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 26). 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.

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.27 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.28 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.29

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 § 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
68436 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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

31See 12 CFR 225.2(s) (definition of ‘‘wellmanaged’’ foreign banking organization).

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.30 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.

Prior Notice Available After First CCS

Determination

The proposal would amend

§ 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

§ 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 31 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.

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 afterthe-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 afterthe-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-thefact 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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68437

32The 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).

33These 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.

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.32 The statutory standards are

included in the proposed revision.

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.33 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.

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
68438 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 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 deposittaking 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
68440 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

34Limited 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.

36Section 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.

‘‘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 34 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.35

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-homestate 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.36

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

• 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;

• 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.

• 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.

• 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

• 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 postinvestment 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 generalconsent 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
68442 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

1Section 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).

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

§§ 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

§ 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); 1 and

(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)).

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

§ 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 depositlike 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 § 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

§ 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.

§ 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
68444 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

2Readily 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.

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).

§ 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,2 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;

(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 electronicpayments 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.

§ 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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68445

3For 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.

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-parvalue 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 3 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;

(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
68446 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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.

§ 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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68447

4 For purposes of this section, management of an

investment portfolio does not include operational

management of real property, or industrial or

commercial assets.

5For purposes of this section and §§ 211.8 and

211.9, a direct subsidiary of a member bank is

deemed to be an investor.

6For investors that are not well capitalized and

well managed, shares held in trading or dealing

accounts pursuant to § 211.9(a)(15) shall be

included in calculating these limits.

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, realproperty interests and other investment

assets, 4 and by providing advice on

mergers and acquisitions, provided such

services for U.S. persons are with

respect to foreign assets only; and

(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.

§ 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 5 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.

(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 § 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 § 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 § 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

§ 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 § 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 § 211.9(a)(15) 6)

shall not exceed:

(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

§§ 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
68448 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

7When 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.

(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 debtfor-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

§ 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 § 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.

§ 211.8 Investment procedures.

(a) General provisions. 7 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.

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

§ 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

§ 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
68450 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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.

§ 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 longterm 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

§ 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 § 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

§ 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 § 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
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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.

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.

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 §§ 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

§ 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 § 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 § 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.

§ 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

§ 211.2(p) 8 and, for purposes of this

paragraph (b), also include:

(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; 9 and

(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
68452 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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 InterAmerican 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 riskweighted 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.

§ 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.

§ 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

§ 208.62 of Regulation H (12 CFR

208.62).

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

§ 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.

§ 211.21 Definitions.

The definitions contained in §§ 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 § 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,
68454 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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.

§ 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 § 208.28 of Regulation H (12 CFR

208.28).

§ 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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 68455

10None 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’’.

is outside the United States.10 In order

to qualify, a foreign banking

organization shall:

(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 § 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
68456 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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.

§ 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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules 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 generalconsent 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 generalconsent 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 § 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 generalconsent 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
68458 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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
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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 § 208.20 of Regulation H (12 CFR

208.20).

§ 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

§ 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
68460 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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

§ 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).

§ 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.

§ 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.

§ 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.

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

§ 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 § 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
68462 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

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-moneylaundering 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 § 211.25 (a) and (e) and section

(7)(e) of the IBA (12 U.S.C. 3105(e)).

Subpart C—Export Trading Companies

§ 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.

§ 211.32 Definitions.

The definitions in §§ 211.1 and 211.2

apply to this subpart, subject to the

following:

(a) Appropriate Federal Reserve Bank

has the same meaning as in § 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 § 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 § 225.2(r) of Regulation Y

(12 CFR 225.2(r)).

(i) Well managed has the same

meaning as in § 225.2(s) of Regulation Y

(12 CFR 225.2(s)).

§ 211.33 Investments and extensions of

credit.

(a) Amount of investments. In

accordance with the procedures of

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

§ 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 § 265.6 would be

revised to read as follows:

§ 265.6 Functions delegated to General

Counsel.

* * * * *

(f) International banking—(1) Afterthe-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 § 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 § 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 § 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:

§ 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

§ 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
68464 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Proposed Rules

(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 § 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 § 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 priornotice procedures in § 211.24(a)(2)(i) of

Regulation K (12 CFR 211.24(a)(2)(i)) or

the general-consent procedures in

§ 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 § 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 § 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 § 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 generalconsent procedures in § 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 § 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 § 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:

§ 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

§ 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 § 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