[Federal Register Volume 60, Number 249 (Thursday, December 28, 1995)]
[Rules and Regulations]
[Pages 67050-67054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31362]



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FEDERAL RESERVE SYSTEM

12 CFR Part 211

[Regulation K; Docket No. R-0896]


International Operations of United States Banking Organizations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: This final rule amends Subpart A of Regulation K 
(International Operations of U.S. Banking Organizations) to provide 
expanded general consent authority for investments in foreign companies 
by 

[[Page 67051]]
U.S. banking organizations that are strongly capitalized and well 
managed. This expanded authority is designed to permit U.S. banking 
organizations meeting these requirements to make larger investments 
without the need for prior approval or review. Certain investments or 
activities, however, are not eligible for the expanded authority. The 
final rule requires an investor making use of the expanded authority to 
provide the Board with certain information after an investment has been 
made. In addition, for those investments requiring prior notice to the 
Board, the rule would streamline the processing of such notices.

EFFECTIVE DATE: December 21, 1995.

FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General 
Counsel (202/452-3786), Sandra L. Richardson, Managing Senior Counsel 
(202/452-6406), Jonathan D. Stoloff, Senior Attorney (202/452-3269), or 
Andres L. Navarrete, Attorney (202/452-2300), Legal Division; William 
A. Ryback, Associate Director (202/452-2722), Michael G. Martinson, 
Assistant Director (202/452-2798), or Betsy Cross, Manager (202/452-
2574), Division of Banking Supervision and Regulation, Board of 
Governors of the Federal Reserve System. For the users of 
Telecommunication Device for the Deaf (TDD) only, please contact 
Dorothea Thompson (202/452-3544), Board of Governors of the Federal 
Reserve System, 20th and C Streets, N.W., Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: Subpart A of the Board's Regulation K sets 
out the rules governing the foreign activities of U.S. banking 
organizations, including procedures for making investments in foreign 
banking and non-banking organizations. Under section 211.5(c), all such 
investments, whether made directly or indirectly, are required to be 
made in accordance with the general consent, prior notice, or specific 
consent procedures contained in that paragraph. 12 CFR 211.5(c). No 
prior notice or application is required for any investment that falls 
within the general consent authority. Such authority at present is 
limited to investments where the total amount invested in any one 
organization, in one transaction or a series of transactions, does not 
exceed the lesser of $25 million or 5 percent of the investor's Tier 1 
capital where the investor is a member bank, bank holding company, or 
Edge corporation engaged in banking.<SUP>1

    \1\ In the case of an Edge corporation not engaged in banking, 
the relevant general consent limit is the lesser of $25 million or 
25 percent of its Tier 1 capital.
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    On September 25, 1995, the Board requested public comment on a 
proposed rule that would expand the general consent authority for 
strongly capitalized and well-managed banking organizations. 60 FR 
49350. The expanded general consent authority (expanded authority) was 
intended to reduce the burden associated with obtaining approval for 
such investments for U.S. banking organizations meeting these 
requirements. The comment period ended on October 30, 1995. The Board 
received nine public comments on the proposal. Comments were submitted 
by six banking organizations and three trade associations. The Board 
has considered the comments and, as a result of its further review, has 
made several changes to address these comments in the final rule.
    The final rule removes the current $25 million cap on general 
consent investments, which is currently the binding constraint on such 
investment in almost all cases, and instead ties the expanded general 
consent limits to the capital of the investor. An aggregate limit on 
investments made in any 12-month period under the expanded authority is 
established. The final rule also specifies the nature of investments 
eligible for the expanded authority, as well as the types of activities 
that may be conducted by the organization in which the investment is to 
be made. Comments received regarding each of these areas are discussed 
below.
Investor Eligibility for Expanded General Consent
    The final rule limits the expanded general consent authority to 
those investors that are strongly capitalized and well managed. The 
expanded authority is available for investments by member banks, bank 
holding companies, Edge corporations that are not engaged in banking, 
and agreement corporations. The expanded authority is available only 
where the investor, its parent member bank, if any, and the bank 
holding company are strongly capitalized and well managed, as those 
terms are defined by the Board. Strongly capitalized, in relation to 
member banks, is defined with reference to the definition of ``well 
capitalized'' set out in the prompt corrective action standards, which 
requires, at a minimum, a 6 percent tier 1 and 10 percent total risk-
based capital ratio and a leverage ratio of 5 percent.<SUP>2 12 CFR 
208.33(b)(1). Edge or agreement corporations and bank holding companies 
are required to have a total risk-based capital ratio of 10 percent or 
more in order to be considered strongly capitalized for purposes of the 
expanded authority.

    \2\ The member bank also may not be subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific 
capital level for any capital measure. 12 CFR 208.33(b)(1).
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    One commenter asked for clarification with respect to the 
applicability of the capital tests, maintaining that the capital 
requirement should apply only to the investor and entities that control 
the investor. Section 211.5(c)(2)(i)(F) of the proposed rule indicates 
that this is in fact the requirement.
    Another commenter pointed out that risk-based capital ratios have 
not been applicable previously to Edge corporations not engaged in 
banking. The Board notes this comment but considers that calculating 
such a ratio would not impose an undue burden on those investors 
seeking to utilize the expanded authority.
    The definition of well managed included in the proposed rule 
provided that, in order to be considered well managed, the Edge or 
agreement corporation, its parent member bank, if any, and the bank 
holding company must each have received a composite rating of at least 
1 or 2, with no component below 3, at its most recent examination or 
review. Comments submitted advocated relying solely upon the composite 
rating for purposes of the ``well managed'' definition. The final rule 
incorporates this change. However, an additional element also has been 
incorporated in the definition to clarify that any investor that is 
under a formal supervisory action would be ineligible to take advantage 
of the expanded authority. The Board believes the existence of any such 
supervisory action would be indicative of managerial deficiencies such 
that the expanded authority should not be available.
Individual Investment Limit
    Limits were proposed on the expanded authority that were tied to 
the level of capital of the investor. For Edge or agreement 
corporations, the relevant limits were proposed to be no more than the 
lesser of 20 percent of the Edge or agreement corporation's tier 1 
capital or 2 percent of the tier 1 capital of its parent member bank. 
For member banks and bank holding companies, the proposed limit was no 
more than 2 percent of tier 1 capital.
    One commenter proposed that the limit be raised to at least 2.5 
percent of total capital. Several commenters noted that the existing 
general consent authority in Regulation K sets the limit at 5 percent 
of tier 1 capital, and advocated retention of the higher limit. 

[[Page 67052]]

The Board notes, however, that the current limit is expressed as the 
lesser of $25 million or 5 percent of tier 1 capital; the $25 million 
limit on general consent investments has proved to be the constraining 
factor, particularly for U.S. banking organizations that would meet the 
strongly capitalized standard. The Board believes that a general 
consent limit of 5 percent of tier 1 capital, in the absence of an 
absolute dollar cap, would be too high even for organizations that are 
strongly capitalized and well managed because an initial capital 
investment in, for example, a subsidiary, may be leveraged many times 
resulting in a potential total exposure far in excess of the initial 5% 
of capital. The Board has therefore decided to retain the proposed 2 
percent limit in the final rule.
    In response to a comment seeking clarification that the existing 
authorization for general consent investments will continue to be 
available, the Board notes that the expanded authority is parallel 
authority for making investments by banking organizations that meet the 
strongly capitalized and well managed standards. As is clear from 
section 211.5(c)(2)(i)(B) and (C) of Regulation K, however, the limits 
on investment in any one organization apply on a cumulative basis over 
time and include investments made under the existing as well as the 
expanded authority.
    Several commenters argued that expanded authority should be 
available for additional investments in existing subsidiaries. The 
Board notes that, as indicated in section 211.5(c)(2)(iv)(D) of the 
final rule, using the expanded authority for making additional 
investments in existing subsidiaries and joint ventures is permissible 
under the terms of the final rule, subject to the investment limits and 
the other investment restrictions.

Aggregate Investment Limit

    The proposed rule provided for an overall aggregate investment 
limit on all investments made during the previous 12-month period under 
the existing and the expanded authority. Under this limit, all such 
investments, when aggregated with the proposed investment, may not 
exceed the lesser of 50 percent of the Edge or agreement corporation's 
total capital or 5 percent of the parent member bank's total capital, 
in the case of an Edge or agreement corporation, or 5 percent of its 
total capital, in the case of a member bank or a bank holding company. 
A number of commenters supported the Board's position that the 
aggregate limits apply only to general consent investments and not to 
investments made pursuant to prior notice or specific consent.
    However, one commenter argued that investments made under existing 
general consent authority should not count toward the aggregate limit 
because once the aggregate limit is reached, prior notice would be 
required for small investments representing little risk to the 
investor. The Board agrees that the additional regulatory burden 
associated with including investments made under the existing general 
consent authority in calculating the aggregate limits outweighs any 
supervisory benefits. Accordingly, the aggregate limit shall apply only 
to investments made under the expanded general consent authority.
    The proposal also provided that, in determining compliance with the 
aggregate limits and in order to avoid double counting of investments, 
an investment in a subsidiary shall be counted only once 
notwithstanding that such subsidiary may, within the next 12 months, 
downstream all or part of such investment to another subsidiary. 
Several commenters argued for a longer time period in which to make 
downstream investments or that no time limit should be imposed. The 
Board believes the 12 month time limit should be retained as it strikes 
an appropriate balance between easing regulatory burden and maintaining 
adequate oversight, given that the condition of a banking organization 
may change over time. Supervisory views regarding downstreaming 
investments also may change over time in light of changed 
circumstances.
    One commenter argued that downstream investments should not be 
subject to the individual investment limits as well as the aggregate 
investment limits. However, the Board believes that supervisory 
concerns regarding the need to monitor diversification of investments 
in view of any changed circumstances relating to the investor means 
that the limits on investments in one organization should include 
downstream investments.
    Finally, a commenter argued that restructurings (through the 
contribution of an investment from one affiliate to another) should 
also be encompassed within the same exclusion as that provided for 
downstream investments. The Board notes in response to this comment 
that Regulation K already provides general consent authority for 
transfers among affiliates at net asset value.

Eligible Investments

    The proposal limited the types of investments eligible for the 
expanded authority, as well as the types of activities that may be 
conducted by the organization in which the investment is to be made. 
Ineligible investments included an investor's initial entry into a 
foreign country, the establishment or acquisition of an initial 
subsidiary bank in a foreign country, investments in general 
partnerships or unlimited liability companies, and an acquisition of 
shares or assets of a corporation that is not an affiliate of the 
investor. Exclusion of the latter type of acquisition was intended to 
limit the expanded authority to investments in de novo subsidiaries 
(including subsequent investments in such subsidiaries) by excluding 
the acquisition of going concerns.
    Commenters requested clarification as to whether additional 
investments made in existing subsidiaries and joint ventures would be 
eligible investments under the expanded authority. The final rule 
authorizes investments in existing subsidiaries and joint ventures, 
provided they meet the remaining criteria for eligible investments and 
the criteria for eligible activities.
    Several commenters opposed the proposal's exclusion of initial 
acquisitions of going concerns from the expanded investment authority. 
However, the Board continues to believe such exclusion is appropriate 
in light of the potential additional risk associated with such 
investments. These risks are greater than simply the amount of capital 
invested, extending also, for example, to the value and quality of the 
acquired organization's assets. The Board therefore considers that 
prior notice of such an investment is appropriate.
    Several commenters argued that the acquisition or establishment of 
an initial bank subsidiary in a foreign country should be permissible 
without prior notice to the Board where the investor already has a 
branch in that country. The Board believes that such a change may be 
inconsistent with its responsibility as home country supervisor under 
the Minimum Standards for Supervision of Internationally Active Banks 
established by the Basle Supervisors Committee, in those cases where 
the Board has not previously approved or reviewed the establishment of 
a significant subsidiary bank in that country. The Minimum Standards 
contemplate that the home country supervisor should specifically 
authorize any outward expansion by a bank, both to inform the home 
country 

[[Page 67053]]
supervisor of the intention of the bank to operate in another country 
and to provide the host supervisor with the comfort that the home 
supervisor does not object to the expansion and takes responsibility 
for the supervision of the branch or subsidiary bank. Consequently, the 
Board believes it is appropriate to retain the prior notice requirement 
for establishment of an initial subsidiary bank in another country 
under the expanded authority.

Post-investment Notice

    The proposal required an investor making use of the expanded 
authority to provide the Board with a post-investment notice within 10 
business days of making the investment. However, the Board requested 
comment on whether the requirements relating to the post-investment 
notice could be incorporated into existing reporting requirements.
    Several commenters argued the post-investment notice would be 
unnecessary and inconsistent with the goal of reducing regulatory 
burden, particularly since investors are required to report 
acquisitions of shares in foreign organizations on an existing Federal 
Reserve form (F.R. 2064) by the end of the month following the month in 
which the investment was made. Commenters maintained that the Board 
already has sufficient information to monitor investments in foreign 
subsidiaries through existing reporting and examination authority. 
Based upon the comments, the Board has decided to eliminate the 10 
business day notice requirement. However, the Board has determined that 
certain limited additional information that is not at present provided 
in the FR 2064 is required to be submitted; such information may be 
submitted on the same schedule as the FR 2064, namely, by the end of 
the month following the month in which the investment was made.
    The Board agrees with those commenters who argued that additional 
information should be limited to cover specific areas of potential 
risks regarding investments made under the expanded general consent 
authority and accordingly has narrowed the information that would be 
required to be submitted following exercise of the expanded authority. 
More specifically, the information that would be required under the 
final rule is limited to: the respective responsibilities of the 
parties if the investment is a joint venture; one year projections for 
the organization in which the investment is made; and, where the 
investment is to redress a loss, a description of the reasons for the 
loss and the steps taken to address the problem. This would provide to 
the Board the minimum information necessary to monitor any additional 
risks posed by such investments.
    One commenter requested clarification as to whether or not the 
post-investment notice is intended to cover investments made pursuant 
to the existing general consent authority, which would make the 
proposal more restrictive than the present requirements for general 
consent investments. The Board notes that the post-investment notice 
would be required only in relation to investments made under the 
expanded authority.
    In response to another comment, the Board wishes to clarify that 
investments in newly established companies are not precluded by the 
restriction on the acquisition of shares or assets of an organization 
that is not an affiliate or joint venture of the investor.

Processing Procedures

    The final rule incorporates the change in processing procedures 
indicating that the 45 day period commences upon receipt of the notice 
or application to invest in a foreign company. Commenters generally 
supported this change in processing procedures.
    Finally, one commenter noted generally that Regulation K is a 
technically difficult regulation and expressed concern that the 
proposed revisions, by incorporating additional technical language, 
would have the side effect of further diminishing the readability of 
the regulation. The Board notes that the five year review of Regulation 
K mandated by the International Banking Act of 1978 is now underway. 
Ways in which Regulation K may be simplified will be considered during 
the course of that review.

Regulatory Flexibility Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. 
L. 96-354, 5 U.S.C. 601 et seq.), the Board certifies that this final 
rule will not have a significant economic impact on a substantial 
number of small entities that are subject to the regulation.
    Pursuant to 5 U.S.C. 553(d), this amendment to Regulation K will 
become effective immediately. This final rule grants an exemption for 
certain U.S. banking organizations, and therefore the Board waives the 
30 day general requirement for publication of a substantive rule.

Paperwork Reduction Act Analysis

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed 
the rule under the authority delegated to the Board by the Office of 
Management and Budget.
    The collection of information requirements in this regulation are 
found in 12 CFR 211.5(c). The submission of this information is 
mandatory under sections 25 and 25A of the Federal Reserve Act (12 
U.S.C. 601-604(a) and 611-631) and sections 4(c)(13), 4(c)(14), and 
5(c) of the Bank Holding Company Act (12 U.S.C. 1843(c)(13), 
1843(c)(14) and 1844(c)) to evidence compliance with the requirements 
of Regulation K. The Federal Reserve uses the information to monitor 
the international operations of U.S. banking organizations, and to 
fulfill its supervisory responsibilities under Regulation K. The 
respondents are banks, bank holding companies, and Edge and agreement 
corporations.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, this information collection unless it 
displays a currently valid OMB control number. The OMB control number 
is 7100-0107.
    No comments specifically addressing the estimate burden were 
received.
    The Federal Reserve estimates that, based on 1995 data, 10 
responses per year will be filed by U.S. banking organizations under 
the expanded general consent authority. Currently, the investments that 
will be permitted under expanded general consent require prior 
notification on the form for International Applications and Prior 
Notifications under Subparts A and C of Regulation K (FR K-1; OMB No. 
7100-0107). The estimated burden for each prior notification can range 
from 1 to 10 hours, depending on its complexity. Under the revised 
rule, an investor will no longer submit information prior to the 
investment; instead, it will submit limited information regarding 
specific areas of potential risks of the investment after the 
investment is made. The volume of this information will vary depending 
on the type of investment; the annual burden per respondent is 
estimated to be .5 hours, on average. Based on an hourly cost of $20, 
the annual cost to the public is estimated to be $100. There are no 
start up costs or capital costs.
    The information collected is not deemed confidential. The applying 
organization has the opportunity to request confidentiality for 
information that it believes will qualify for a Freedom of Information 
Act exemption.
    Send comments regarding the burden estimate, or any other aspect of 
this collection of information, including suggestions for reducing the 
burden, to: 

[[Page 67054]]
Secretary, Board of Governors of the Federal Reserve System, 20th and C 
Streets, N.W., Washington, DC 20551; and to the Office of Management 
and Budget, Paperwork Reduction Project (7100-0107), Washington, DC 
20503.

List of Subjects in 12 CFR Part 211

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

    For the reasons set out in the preamble, the Board of Governors 
amends 12 CFR Part 211 as set forth below:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for Part 211 is revised to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et 
seq., 3901 et seq.

    2. Section 211.2 is amended by redesignating paragraphs (u) and (v) 
as paragraphs (v) and (w), respectively, and by adding new paragraphs 
(u) and (x) to read as follows:


Sec. 211.2  Definitions.

* * * * *
    (u) Strongly capitalized means:
    (1) In relation to a parent member bank, that the standards set out 
in 12 CFR 208.33(b)(1) are satisfied; and
    (2) In relation to an Edge or Agreement corporation or a bank 
holding company, that it has a total risk-based capital ratio of 10.0 
percent or greater.
* * * * *
    (x) Well managed means that the Edge or Agreement corporation, its 
parent member bank, if any, and the bank holding company have each 
received a composite rating of 1 or 2 at its most recent examination or 
review and are not subject to any supervisory enforcement action.
    3. Section 211.5 is amended by:
    a. Redesignating paragraphs (c)(2) and (c)(3) as paragraphs (c)(3) 
and (c)(4) respectively and by adding a new paragraph (c)(2); and
    b. In newly designated paragraph (c)(3), by removing the word 
``accepted'' in the third sentence and adding in its place the word 
``received''.
    The addition reads as follows:


Sec. 211.5  Investments and activities abroad.

* * * * *
    (c) * * *
* * * * *
    (2)(i) Expanded general consent for de novo investments. 
Notwithstanding the amount limitations of paragraph (c)(1) of this 
section, but subject to the other limitations of this section, the 
Board grants expanded general consent authority for investments in an 
organization by an investor that is strongly capitalized and well 
managed if:
    (A) The activities of the organization are limited to activities in 
which a national bank may engage directly or in which a subsidiary may 
engage under paragraph (d) of this section;
    (B) In the case of an investor that is an Edge corporation that is 
not engaged in banking or an Agreement corporation, the total amount 
invested in such organization (in one transaction or a series of 
transactions) does not exceed the lesser of 20 percent of the 
investor's Tier 1 capital or 2 percent of the Tier 1 capital of the 
parent member bank;
    (C) In the case of a bank holding company or member bank investor, 
the total amount invested in such organization (in one transaction or a 
series of transactions) directly or indirectly does not exceed 2 
percent of the investor's Tier 1 capital;
    (D) All investments made, directly or indirectly, by an Edge 
corporation not engaged in banking or an Agreement corporation during 
the previous 12-month period under paragraph (c)(2) of this section, 
when aggregated with the proposed investment, would not exceed the 
lesser of 50 percent of the total capital of the Edge or Agreement 
corporation, or 5 percent of the total capital of the parent member 
bank;
    (E) All investments made, directly or indirectly, by a member bank 
or a bank holding company during the previous 12-month period under 
paragraph (c)(2) of this section, when aggregated with the proposed 
investment, would not exceed 5 percent of its total capital; and
    (F) Both before and immediately after the proposed investment the 
investor, its parent member bank, if any, and any parent bank holding 
company are strongly capitalized and well managed.
    (ii) Determining aggregate investment limits. For purposes of 
determining compliance with the aggregate investment limits set out in 
paragraphs (c)(2)(i)(D) and (E) of this section, 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.
    (iii) Additional investments. An investor that makes investments 
under paragraph (c)(2)(i) of this section may also make additional 
investments in an organization under the standards set forth in 
paragraphs (c)(1)(ii), (c)(1)(iii) and (c)(1)(iv) of this section.
    (iv) Ineligible investments. The following investments are not 
eligible for the general consent under paragraph (c)(2)(i) of this 
section:
    (A) An investment in a foreign country where the investor does not 
have an affiliate or a branch;
    (B) The establishment or acquisition of an initial subsidiary bank 
in a foreign country;
    (C) Investments in general partnerships or unlimited liability 
companies; and
    (D) An acquisition of shares or assets of an organization that is 
not an affiliate or joint venture of the investor.
    (v) 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 relating to the investment:
    (A) If the investment is in a joint venture, the respective 
responsibilities of the parties to the joint venture;
    (B) Projections for the organization in which the investment is 
made for the first year following the investment; and
    (C) 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.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, December 21, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-31362 Filed 12-27-95; 8:45 am]
BILLING CODE 6210-01-P