Source: https://www.federalregister.gov/documents/2005/04/06/05-6295/international-banking
Timestamp: 2018-02-17 20:03:42
Document Index: 363539780

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Federal Register :: International Banking
A Rule by the Federal Deposit Insurance Corporation on 04/06/2005
These revisions are effective July 1, 2005.
70 FR 17549
17549-17572 (24 pages)
05-6295
II. International Banking Procedural, Capital Maintenance, Assessment Rules
III. Foreign Banking and Investment by Insured State Nonmember Banks
IV. Foreign Banks
V. Deposit Insurance for Wholesale U.S. Branches of Foreign Banks
IX. Plain Language Requirement
Subpart A—Foreign Banking and Investment by Insured State Nonmember Banks
https://www.federalregister.gov/d/05-6295 https://www.federalregister.gov/d/05-6295
Start Preamble Start Printed Page 17550
The FDIC is amending its international banking regulations in subpart J of part 303 and revising subparts A and B of part 347. The amendments reorganize, clarify, and revise subparts A and B of part 347, and address various issues raised as part of the FDIC's ongoing effort under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (12 U.S.C. 3311). Included in the revisions are amendments that address relocation of insured U.S. branches of foreign banks within and outside the state where such branches are presently located, adoption of a risk-based asset pledge requirement for insured U.S. branches of foreign banks, and information and examination requirements for foreign banks that own branches or depository institution subsidiaries seeking FDIC deposit insurance. The FDIC has also decided to maintain its existing position concerning the availability of FDIC deposit insurance for wholesale U.S. branches of foreign banks.
John Di Clemente, Chief, International Section, Division of Supervision and Consumer Protection, (202) 898-3540 or jdiclemente@fdic.gov or Rodney D. Ray, Counsel, Legal Division, (202) 898-3556 or rray@fdic.gov, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
On July 19, 2004, the FDIC issued a notice of proposed rulemaking (“NPR”) in the Federal Register, with a 60 day comment period, regarding proposed amendments to its international banking regulations contained in subpart J of part 303, subpart B of part 325, subpart A of part 327, and subparts A and B of part 347 of title 12 of the Code of Federal Regulations. (69 FR 43060).
The proposed amendments were intended to accomplish various goals. These included implementation of the “plain language” requirement contained in section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809); addressing certain regulatory burden issues raised in public comments as part of the FDIC's ongoing burden reduction effort under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA)(12 U.S.C. 3311); maintaining parity with Regulation K, which was amended by the Board of Governors of the Federal Reserve System (“FRB”) in October, 2001; and updating and enhancing the FDIC's supervisory processes by revising existing rules and proposing certain new rules. In addition, although no amendments were proposed regarding the topics, the FDIC requested comments on whether deposits in wholesale U.S. branches of foreign banks should be insured by the FDIC and whether the accounting regulations contained in subpart C of part 347 should be revised.
The comment period closed on September 17, 2004. Comments were received from the American Bankers Association (“ABA”), the Institute for International Bankers (“IIB”), and the Conference of State Bank Supervisors (“CSBS”) regarding issues addressed in the NPR. In addition, at the IIB's request, FDIC staff met with representatives of the IIB and representatives of its constituent foreign banks regarding the IIB's EGRPRA suggestions and issues addressed in its comment letter.[1] No comments were received regarding subpart C of part 347 and, therefore, none of the rules in that subpart are being amended in the final rule.
A discussion of the comments and changes to the proposal that are being adopted in this final rule are presented below.
Subpart J of part 303 contains the FDIC application procedures that implement the international banking regulations in part 347, subparts A and B. Although the NPR contained several amendments to the subpart J regulations, most of them consisted of technical amendments because of the substantial restructuring being proposed for the regulations in part 347. There were no comments on those amendments and the FDIC is adopting them as proposed.
In addition to the technical amendments, the FDIC proposed to amend section 303.184, which addresses moving an insured branch of a foreign bank (“grandfathered branch”),[2] by specifying that expedited processing could be provided for applications involving intrastate relocations of eligible grandfathered branches. This amendment was added to address concerns expressed by the IIB that grandfathered branches would be precluded from moving or relocating from their existing locations if their proposed relocations were made subject to the “immediate neighborhood” geographic relocation requirement applied to proposed branch relocations of state nonmember banks in section 303.41(b). In their comments, the ABA and IIB expressed support for the proposed amendment but the IIB indicated that it assumed that the FDIC would subject a proposed interstate relocation to standard processing and requested that the FDIC clarify this point in the final rule. The FDIC has considered the IIB request and has added a new paragraph (e) to section 303.184 to address standard processing of applications to relocate a grandfathered state branch to another state. In doing so, the FDIC believes it is appropriate to address a state licensing issue raised by the IIB comment letter and to ensure that the rule will only be utilized for legitimate relocations of existing grandfathered state branches and not simply to recharacterize the establishment of a new foreign branch in another state as a “move” or “relocation” of a grandfathered state branch to avoid compliance with the subsidiary requirement contained in section 6(d) of the IBA. Therefore, under section 303.184, as revised by this final rule, in addition to satisfying the criteria contained in paragraph (d), a foreign bank proposing to relocate a grandfathered state branch to another state without affecting its grandfathered status will be required, under paragraph (e), to comply with any applicable state laws and regulations of the states affected by the proposed relocation. In addition, because the foreign bank will be relocating its whole grandfathered branch operation from one state to another (not creating an additional out-of-state branch of the grandfathered branch, which would not be allowed), the existing license of the branch in the state from which it is moving may need to be surrendered or cancelled and a Start Printed Page 17551new license obtained in the state to which the branch is relocating. To avoid a “break” in the existence of the grandfathered branch, which may create an issue regarding compliance with the subsidiary requirement contained in section 6(d) of the IBA, the rule also specifies that the foreign bank must obtain any required regulatory approvals from the appropriate state licensing authority of the state to which the insured branch proposes to relocate before relocating the existing branch operations and surrendering its existing license to the appropriate state licensing authority of the state from which the branch is relocating.
In addition to the amendments proposed in subpart J of part 303, the FDIC also proposed revisions to sections 325.103 and 327.4, regarding capital maintenance and the annual assessment rate, respectively, for insured U.S. branches of foreign banks. The amendments were proposed to conform those sections with proposed amendments to the FDIC's asset pledge and asset maintenance requirements contained in subpart B of part 347. Because the FDIC has decided to maintain the existing quarterly calculation methodology for asset maintenance in the final rule, for the reasons discussed subsequently in connection with section 347.210, the reference to the “insured branch's daily third-party liabilities” has been eliminated in the final rule.
Subpart A of part 347 primarily addresses branching, investments, and permissible activities of state nonmember banks in foreign countries. The FDIC proposed various amendments in the NPR that reorganized the existing sections in the subpart and clarified their coverage. For example, the FDIC proposed to divide particularly complex sections, such as existing section 347.104 into sections 347.104 through 347.110, which are less complex sections but accomplish a similar result. The FDIC also proposed to move and consolidate existing sections based on the subject matter addressed to make the requirements easier to locate and understand. For example, existing sections 347.103, addressing foreign branch powers and FDIC consent requirements, and 347.108, addressing FDIC consent requirements for foreign investments, were made sections 347.115 (permissible activities for foreign branches), and 347.117 (general consent for foreign branches and investments), 347.118 (expedited processing for foreign branches and investments, and 347.119 (specific consent). The discussion that follows is provided to explain a few of the more significant amendments to the subpart.
The FDIC proposed to revise existing sections 347.103 and 347.104 in the NPR to better address the interplay between the FDIC's part 362 and part 347. This revision was accomplished in two ways. First we separated the substance of existing section 347.104(f), dealing with direct and indirect investments in foreign organizations, into section 347.104 in the proposed rule.[3] Second, we created “permissible activities” sections for state nonmember banks and their subsidiaries in section 347.105(b) out of existing section 347.104(a)-(b) and for foreign branches of state nonmember banks in section 347.115(a)-(g) out of existing section 347.103(a). In addition, the order and list of activities authorized for state nonmember banks and their subsidiaries and foreign branches of state nonmember banks were revised to more closely track the order of the activities listed as permissible for member banks and their subsidiaries or foreign branches of member banks under the corresponding provision in Regulation K. This revision will make the comparison easier between activities authorized under subpart A of part 347 and those authorized under Regulation K for branches of member banks or member banks and their subsidiaries. The FDIC also added paragraph (d) to proposed section 347.105 and paragraph (h) to proposed section 347.115, for clarification, to generally address when activities, other than those authorized by the respective sections, may be authorized by specific consent under part 347 or when authorization for the activities must be obtained under part 362 as well as subpart A of part 347.
The ABA commented on the proposed amendment to section 347.115, including another FDIC proposal adopting the same definition of “investment grade” that had been adopted by the FRB and the OCC. In its comment, the ABA noted that the adoption of the same approach to “investment grade” was a substantive improvement, which it supported. It also expressed support for the addition of section 347.115(h), discussed above.
The FDIC also proposed to amend its authorization for “general consent” in two ways. The first way was to allow insured state nonmember banks to branch into a foreign country under general consent in circumstances covered by proposed section 347.117(a)(1)(ii) or (iii). This change would allow an eligible state nonmember bank to establish additional branches in a country in which the bank's holding company operates a foreign bank subsidiary, or in which an affiliated bank or Edge or Agreement corporation operates one or more foreign branches or foreign bank subsidiaries and allow for an after-the-fact notification to the FDIC in those circumstances, rather than requiring prior approval under expedited processing, as is presently required under section 347.103(c)(1). The second way was to grant general consent to invest in a foreign organization, under proposed section 347.117(b)(2), when at least one insured state nonmember bank operates a foreign branch in the relevant foreign country where the organization will be located because of the FDIC's familiarity with the banking laws and practices of that country. The ABA commented on this amendment and expressed support for the proposed change in general consent for foreign branches. Start Printed Page 17552
Although the FDIC received no comments on the proposed revision for foreign investments, an additional clarification to proposed section 347.117(b)(2) is included in this final rule. As indicated in the discussion contained in the NPR, when the FDIC amended its foreign banking regulations in 1998, it declined to adopt a suggestion that the FDIC grant general consent to invest in a foreign organization when at least one insured state nonmember bank operates a foreign branch in the relevant foreign country. This was due to concerns that “nameplate” branches being operated in foreign countries might fall within the scope of the authorization. In the discussion of the proposed amendment in the NPR, the FDIC indicated that it believed most nameplate branches would be operated in jurisdictions where authority to invest in foreign organizations by general consent would be inapplicable under section 347.119(a). Although the FDIC believes the discussion in the NPR was correct, it is concerned that the standard may be somewhat imprecise. Therefore, the text contained in section 347.117(b)(2) has been revised in the final rule to clearly indicate that the existence of a “shell branch” (a term that the FDIC intends to be synonymous with the term “nameplate branch”) in a foreign country will not provide a basis for investment by general consent under section 347.117(b).
Finally, the proposal contained a new section 347.122, which was intended to enhance the FDIC's existing supervisory authority. The section recognizes that the FDIC may, under section 18(d)(2) and 18(l) of the FDI Act, condition the authority granted under subpart A as it considers appropriate and provide for termination of activities or divestiture of investments permitted under the subpart, after giving the bank notice and a reasonable opportunity to be heard, if a bank is unable or fails to comply with the requirements of the subpart or any conditions imposed by the FDIC regarding transactions under the subpart. The only comment on the section was submitted by the ABA, which expressed no opposition to the new section.
After considering the proposed amendments contained in the NPR and the comments submitted thereon, except as otherwise stated above, the FDIC is adopting all of the amendments to subpart A of part 347 in this final rule as they were proposed.
The existing rules in part 347, subpart B primarily implement provisions of the FDI Act and International Banking Act concerning insured and noninsured U.S. branches of foreign banks. The FDIC proposed reorganizing the subpart by grouping the existing sections that were applicable to insured State and Federal branches at the beginning of the subpart, followed by the sections applicable to only State branches. In addition to several minor revisions to the existing sections, the FDIC also proposed more substantive amendments. These included revising its existing rules to update its foreign examination and information rule and applying them to U.S. banking subsidiaries of foreign banks, addressing how a grandfathered branch could be transferred to a new foreign bank owner and retain the branch's grandfathered status, adopting a risk-based approach for its asset pledge rule, and revising its asset maintenance rule to compute asset maintenance requirements based on a daily calculation of the third-party assets and liabilities. Finally, the FDIC proposed a new rule to facilitate cross-border supervision of insured U.S. branches of foreign banks and insured U.S. bank subsidiaries by providing for the sharing of supervisory information between the FDIC and foreign bank regulatory or supervisory authorities and addressing the confidentiality of such information. These more substantive amendments are discussed in greater detail below.
Section 347.208 of the FDIC's existing rules addresses foreign bank agreements with the FDIC to be examined and provide information. The regulation implements section 10(b) of the FDI Act (12 U.S.C. 1820(b)) and was initially issued in 1979. Although the regulation addresses foreign banks applying for deposit insurance for U.S. branches, it does not address deposit insurance applications of U.S. depository institution subsidiaries of foreign banks.[4]
To update the rule and enhance the FDIC's supervisory authority, the FDIC proposed to redesignate the rule as section 347.204 and substantially amend it to make it more useful. As envisioned in the proposal, the amended rule would have addressed several issues. It would have made the rule applicable to U.S. depository institution subsidiaries, as well as U.S. branches, of a foreign bank seeking deposit insurance from the FDIC. It also would have required the foreign bank to provide the FDIC with a written commitment (including the foreign bank's consent to U.S. court jurisdiction and designation of agent for service of process, acceptable to the FDIC) to:
Permit examination of the foreign bank and affiliates located outside the U.S.;
Provide information regarding the foreign bank and affiliates located outside the U.S.; and
Permit examination and provide information regarding the offices and affiliates of the foreign bank that are located in the U.S.
In addition, the proposal would have allowed the FDIC to waive the foreign examination provision if the FRB had determined that the foreign bank was subject to comprehensive consolidated supervision (“CCS”). It also would have allowed for the FDIC, in its discretion and subject to the requirements specified in the regulation, to waive some or all of the commitment requirements imposed by the section in lieu of requiring its own separate commitment from the foreign bank.
There were two comments on proposed section 347.204. The ABA expressed support for the proposed amendments to the section. The IIB expressed concerns, however, about what it viewed as exertion of “extraterritorial” examination authority over non-U.S. offices and affiliates of foreign banks. The IIB also asserted that the proposal would reverse the FDIC's longstanding position, dating back to 1979, when the original rule was adopted, when the FDIC recognized that despite its broad statutory authority to conduct such examinations, home country laws typically would prohibit the FDIC from doing so. Therefore, the IIB observed, the FDIC adopted a compromise under which it asserted examination authority only over U.S. branches and affiliates and required an agreement to provide information concerning operations of non-U.S. offices and affiliates. The IIB also felt that the proposed foreign examination provision was largely unnecessary because the proposed rule contained waiver authority for foreign banks that had been determined to be subject to CCS. It noted that section 3 of the Bank Holding Company Act (12 U.S.C. 1842) required a finding of comprehensive consolidated supervision by the FRB before a foreign bank could acquire or establish a U.S. commercial bank subsidiary and that the acquisition by a foreign bank of control of a savings Start Printed Page 17553association was subject to a CCS determination by the OTS.
The FDIC has reviewed and considered the comments on proposed section 347.204, as well as the information and an examination requirement contained in existing section 347.208, and has decided to make several revisions to section 347.204 in the final rule.
Although the IIB did not specifically reference the 1979 statement mentioned in its comment, the FDIC believes that the reference was to a comment contained in the preamble to the proposed rule for the FDIC's initial foreign banking regulations. In that notice, the FDIC observed:
The FDIC is aware that most foreign banks would be prohibited, or at least restricted, by law or policy of the country of the bank's domicile from providing such a commitment. Were the FDIC to require a commitment allowing the FDIC to conduct a full examination of the bank, it is probable that no foreign bank could operate an insured branch. This result clearly is not intended. Thus, the FDIC proposes that a foreign bank agree to provide the FDIC with information regarding the affairs of the bank and its affiliates which are located outside the United States. As to activities within the United States, the bank shall agree to allow the FDIC to examine the affairs of the bank and its affiliates. 44 FR 23869, 23871 (April 23, 1979).
The FDIC believes that this conservative approach may have been prudent in the context of foreign banks seeking deposit insurance for U.S. branches in the late 1970s but that the approach has become somewhat outdated and the rule should be more reflective of the supervisory structure that is currently in existence. In this regard, it is noted that the underlying statutory provision in the FDI Act and the initial regulation preceded the failure of the Bank of Credit and Commerce International (“BCCI”) in the early 1990s, which had an impact on certain insured depository institutions in the United States that had undisclosed relationships with BCCI. The underlying statutory provision and initial regulation also preceded the enactment of statutory amendments to the IBA, Bank Holding Company Act, and Home Owners Loan Act, as part of the Foreign Bank Supervision and Enforcement Act of 1991,[5] that require comprehensive consolidated supervision determinations in certain circumstances by the appropriate Federal banking agency under those statutes, including the initial acquisition of control or establishment of a U.S. bank, savings association, branch, agency, or representative office. Because the appropriate Federal banking agencies consider, as part of their CCS determination, whether the foreign bank's home country supervisor receives sufficient information on the worldwide operations of the foreign bank to assess its overall financial condition and compliance with laws and regulations, as specified in 12 CFR 211.24(c)(ii), the FDIC believes acceptable commitments and assurances of cooperation by the foreign bank, coupled with appropriate supervisory coordination and communication with the home country regulator may be sufficient to satisfy the examination commitment for a foreign bank and its affiliates outside the U.S. Thus, a CCS determination from the appropriate Federal banking agency should reduce the need for foreign examination commitments. Therefore, the section has been rewritten to eliminate the foreign examination commitment requirement as a prerequisite for obtaining consideration of a deposit insurance application if the foreign bank has been determined to be subject to CCS by the appropriate Federal banking agency.[6]
The FDIC has also revised the final rule to eliminate the waiver provisions contained in paragraph (b) of the proposal. The first waiver provision concerned the foreign examination commitment, which is no longer addressed in paragraph (a) of the final rule. In addition, the other waiver provision, regarding waivers for commitments provided to other Federal banking agencies, has been deleted. Although the latter provision was intended to avoid the appearance of duplication, the FDIC is concerned that such waivers may create the potential for uncertainty regarding the FDIC's authority under the commitments. Thus the FDIC believes the potential enforcement difficulties attendant to such waivers outweigh the potential benefits of such waiver authority.
The FDIC also has revised the consent to jurisdiction and designation of agent provisions in the final rule to clarify those provisions by eliminating the “court” and “process” references. The FDIC presently requires that foreign owners of insured depository institutions, including foreign banks, provide consents to personal jurisdiction that are acceptable to the FDIC; however, the consents are not limited merely to court proceedings.[7] Thus, the consent to jurisdiction and designation of agent provisions have been revised in the final rule to avoid giving the erroneous impression that consents to jurisdiction and designations of agents that are limited to consent to jurisdiction of the U.S. courts and service of process in court proceedings will be acceptable to the FDIC.
Section 347.204(b)(3) of the proposal has also been made paragraph (b) in the final rule and revised. Because the FDIC believes that an acceptable consent to U.S. jurisdiction and designation of agent for service are essential components needed to obtain binding commitments from the foreign bank, the final rule clarifies that the consent to jurisdiction and designation of agent for service (and any limitations on the FDIC's ability to utilize them) will be considered together with the commitments provided by the foreign bank. Additionally, as revised by the final rule, the section recognizes that the FDIC also has discretion to consider any additional commitments or assurances by the foreign bank, including that it will cooperate and assist the FDIC, including, without limitation, by seeking to obtain waivers and exemptions from applicable confidentiality or secrecy restrictions or requirements to enable the foreign bank or its affiliates to make such information available to the FDIC.
Therefore, the FDIC is adopting section 347.204, as revised in this final rule, for application to deposit insurance applications of U.S. branches and depository institution subsidiaries of foreign banks.
Another issue addressed in the proposal was an amendment contained in proposed section 347.206(d), concerning the transferability of grandfathered branches to new foreign banks. As indicated in the proposal, section 347.206 of the proposal is largely derived from existing section 347.204(a)-(c) and implements section 6(d) of the IBA (12 U.S.C. 3104(d)).[8]
As part of the EGRPRA process the IIB requested that the FDIC adopt an interpretation of section 6(d) that would Start Printed Page 17554allow the grandfathered branch status of an insured U.S. branch of a foreign bank to survive the sale or transfer of the branch from one foreign bank to another foreign bank. As indicated in the proposal, the IIB's view was that because the availability of the grandfather exception appears to be conditioned upon a single exception (that the branch was insured as of December 19, 1991), it was inconsistent with the plain meaning of the statute to include an additional condition (that is, the branch was not transferred after December 19, 1991). The IIB also observed that other grandfather provisions enacted by Congress in the same statute expressly state that those grandfather rights terminate upon a change in control. Therefore, the absence of such a provision in the grandfathered branch exception, it was argued, indicates that Congress did not intend that an insured branch would lose its grandfathered status upon its sale or transfer. Additionally, the IIB observed that permitting transfers of grandfathered branches would provide an option for other foreign banks that would like to establish FDIC-insured branches but are constrained from doing so by the subsidiary requirement in section 6(d) of the IBA. Finally, it was observed that depositors would not lose the protections of deposit insurance solely as a result of the sale or transfer of an insured branch.
Having considered these points in the proposal, the FDIC observed that it had narrowly construed the exception in the past and that a broad reading of the grandfather exception requested would be at odds with the distinct preference Congress stated in section 6(d) of the IBA of making foreign banks desiring to engage in new domestic retail deposit activities requiring deposit insurance after December 19, 1991 do so through insured banking subsidiaries. The FDIC also noted that it was a well recognized rule of statutory construction that in ascertaining the plain meaning of a statute it is appropriate to look to the particular statutory language at issue, as well as the language and design of the statute as a whole. By reading the statute as a whole, rather than merely focusing on the precise language of the grandfathered branch exception, the proposed broad reading of the exception was contrary to the direction Congress provided in section 6(a) of the IBA, regarding implementation of the section, because purchasers of grandfathered branches could avoid forming and capitalizing banking subsidiaries to engage in domestic retail deposit activity in the U.S., rather than following the same process required for domestic banks of establishing and capitalizing a distinct corporate entity and applying for deposit insurance.
The FDIC recognized, however, that its existing regulations did not address this issue and that there may be other situations, such as certain merger and acquisition transactions, that are not designed or motivated by the desire to obtain access to the domestic retail deposit market and avoid compliance with the subsidiary requirement in section 6(d) of the IBA, where the grandfathered status of an insured branch should remain intact. Therefore, the FDIC proposed to address the issue by providing in section 347.206(d) of the proposal that in certain circumstances, such as certain merger and acquisition transactions, which are not designed or motivated by the desire to obtain access to the domestic retail deposit market and avoid compliance with the subsidiary requirement in section 6(d) of the IBA, the grandfathered status of an insured branch should remain intact following the transaction.
The FDIC received comments from the ABA and IIB on the proposed amendment. The ABA indicated that it did not oppose the amendment, noting that it appeared to state explicitly what has been considered to be the law implicitly. The IIB, however, reiterated its previously expressed view that there was adequate legal authority for the FDIC to permit, rather than prohibit, the transferability of an insured branch to another foreign bank without the loss of its grandfathered status. It also suggested that permitting the grandfathered status of the remaining 12 FDIC-insured branches to survive a transfer of the branch would not be fundamentally inconsistent with the 1991 Congressional determination that foreign banks seeking to engage in new domestic retail activity do so through subsidiaries rather than branches.
As indicated earlier, the IIB's legal and policy arguments on the transferability issue were submitted prior to the issuance of the proposal and were considered and discussed in the proposal. Although the FDIC recognizes that it might be possible to make legal and policy arguments supporting the IIB's proposed broad reading of the grandfather exception, the FDIC continues to believe that the exception should be construed narrowly, since it is contrary to Congress' general direction that foreign banks only engage in retail deposit taking after December 19, 1991, through banking subsidiaries with deposit insurance and that the statute not be construed to provide foreign banks with a competitive advantage over domestic banks.
The IIB also noted that requiring a specific proper motivation in a merger and acquisition might even call into question the survival of grandfathered status following a change in control of the foreign parent bank. It suggested, regardless of the FDIC's treatment of the broader transferability issue, that the FDIC clarify that changes in control of the foreign parent bank will not terminate the grandfathered status of existing insured branches.
The FDIC believes that it may be problematic to make a general statement such as that requested by the IIB in the context of a rulemaking proceeding. The FDIC believes that a change in ownership of a foreign bank that owns an insured branch may affect the FDIC's interest in the insured institution and that the FDIC should have an opportunity to evaluate the transaction before it is finalized. Therefore, since the universe of grandfathered insured branches of foreign banks is very limited, the FDIC believes that it is more appropriate for a foreign bank considering this type of transaction to discuss its planned structure with FDIC staff to evaluate whether the grandfathered status of the branch will remain intact following the proposed change in control of the existing foreign bank owner.
Therefore, for the reasons previously stated, the FDIC is adopting section 347.206, as proposed, in the final rule.
The FDIC also proposed to add a new section 347.207 to the subpart to facilitate cross-border supervision of insured U.S. branches and banking subsidiaries of foreign banks by providing for the sharing of supervisory information between the FDIC and foreign bank regulatory or supervisory authorities. As indicated in the proposal, the section was patterned after section 15 of the IBA (12 U.S.C. 3109) and 12 CFR 211.27. It also addressed the confidentiality of such information, based upon the FDIC's interpretation of section 8(v) of the FDI Act (12 U.S.C. 1818(v)), by providing that the disclosure or transfer of such information to a foreign bank regulatory or supervisory authority will not waive any privilege applicable to such information. The ABA's comment indicated that it supported the addition of the provision and it is being adopted in the final rule without further amendment.
In amendments contained in section 347.209 of the proposal, the FDIC proposed to revise the 5 percent asset pledge requirement, contained in existing section 347.210, to make it Start Printed Page 17555more risk-focused and take into consideration characteristics that may be unique to each insured branch. As discussed in the proposal, under the amended rule, the asset pledge requirement would be determined in a manner similar to the approach the FDIC has taken with its risk-based deposit insurance assessment system. In addition, any newly insured branch would be subject to at least a 5 percent asset pledge requirement throughout the first three years of its operations as an insured branch.[9] After the first three years of operations as an insured branch, the asset pledge amount would be adjusted by taking into consideration the percentage of assets maintained by the insured branch, pursuant to section 347.210, and the supervisory information relative to the branch at issue. It was also envisioned that the most recent ROCA rating[10] for the insured branch will be a focal point of such supervisory information but, as with the risk-based premium system, the FDIC could also consider other supervisory information that it considered appropriate to fully evaluate the potential risk posed by the insured branch in determining the supervisory subgroup assignment for the branch. The appropriate percentage of assets required to be pledged would then be determined based on the supervisory risk subgroup assigned and the asset maintenance level applicable to the branch. The amended section would generally permit the asset pledge to be lowered to not less than 2 percent of third-party liabilities for insured branches that were perceived to pose a lower potential risk and up to 8 percent of liabilities for insured branches that were perceived to pose a higher potential risk to the deposit insurance fund. In addition, the FDIC's ability to require a higher percentage of pledged assets in appropriate circumstances would remain unchanged.
The FDIC also proposed amendments to the “eligible collateral” portion of the rule to specify that “negotiable” certificates of deposit (“CDs”) with waivers of offset from their issuers, but not non-negotiable CDs with waivers of offset from their issuers, and U.S. Treasury bills would be considered eligible collateral under the rule.
All of the commenters discussed the proposed amendments to this rule. The CSBS observed that the asset pledge and asset maintenance requirements were extremely important and valuable supervisory tools. It also observed that, while the role of the state asset pledge and asset maintenance requirements is paramount for the protection of creditors of uninsured branches, in the unique situation where retail deposits are insured by the FDIC, the major objective is the protection of depositors and that certain states had taken the initiative to avoid the imposition of double asset pledge requirements by exempting FDIC insured branches from state asset pledge requirements. Therefore, given the unique situation posed by insured branches of foreign banks and lack of effect on state prerogatives, the CSBS indicated that it did not object to the proposed amendments to the FDIC asset pledge and maintenance rules.
The ABA expressed general support for the amendments but suggested that additional financial instruments be added to the eligible collateral list in the rule. The ABA observed that the list of assets that foreign banks may pledge under the existing rule includes certain negotiable CDs and bankers acceptances issued by state and national banks, but does not include the same types of instruments issued by state and federal savings associations. The ABA also observed that eligible collateral, under the existing rule, includes notes issued by banks and bank holding companies but not savings associations and thrift holding companies. The ABA believed that there was no reason to distinguish between banks, savings associations, and their respective corporate parents in this manner, since financial instruments provided by these other issuers also would provide the same protection from the FDIC.
The IIB supported adoption of a risk-based asset pledge requirement but believed the proposed two percent minimum pledge amount should be eliminated in favor of either (i) a completely risk-based requirement or (ii) a smaller minimum. The IIB also disagreed with the FDIC's proposal to amend the eligible collateral requirement to require negotiable CDs with waivers of offset because of the practical burdens associated with requiring grandfathered branches to substitute negotiable CDs with waivers of offset for non-negotiable CDs with waivers of offset. It also observed that non-negotiable CDs with waivers of offset had been considered acceptable collateral for over 20 years.
The FDIC has considered the comments and is making certain amendments to section 347.209 in the final rule. The FDIC asset pledge requirement was established to provide the FDIC deposit insurance funds protection against losses on insured deposit claims by depositors of U.S. branches of foreign banks. While the FDIC is aware that the level of assets required to be pledged to the FDIC by a foreign bank may have an economic impact on the foreign bank, the FDIC's paramount interests are maintaining and protecting the resources of the deposit insurance funds that it administers and honoring its deposit insurance obligations to depositors of insured U.S. branches of foreign banks. Inherent in the asset pledge requirement, regardless of asset maintenance requirements imposed on U.S. branches, is the possibility that those U.S. branch assets may not be sufficient to pay the claims of domestic creditors, including the FDIC. Therefore, the FDIC believes that the proposed risk-based approach, including the two percent minimum requirement, represents the best compromise between the interest of the FDIC in assuring that the deposit insurance funds that it administers are protected and the financial interests of foreign banks in the pledged assets.
For similar reasons, although the FDIC may have allowed non-negotiable CDs to be treated as eligible collateral in the past, the FDIC is concerned that considering non-negotiable certificates of deposit as the equivalent of negotiable certificates of deposit, for asset pledge purposes, fails to take into consideration the potentially decreased value of non-negotiable certificates of deposit in the event of a forced sale, which is precisely the time the FDIC would be most concerned about their value, because of their non-negotiability. Therefore, except as provided in the final rule, the FDIC is adopting the proposal to allow only negotiable CDs with waivers of offset to be treated as eligible collateral for purposes of section 347.209. A limited exception is provided in the final rule, however, to treat non-negotiable CDs that insured branches have pledged on March 18, 2005 as eligible collateral until those certificates of deposit mature according to the original terms of their existing deposit agreements.[11] Finally, Start Printed Page 17556the FDIC agrees with the ABA's recommendation concerning other types of eligible collateral and the final rule has been amended to include those additional types of financial instruments.
The FDIC also proposed various amendments relating to the asset maintenance calculation for insured branches, in section 347.210 of the proposal, including a revision that would have required insured branches to maintain eligible assets at a ratio of not less than 106 percent of the insured branch's daily third-party liabilities, rather than based upon the preceding quarter's average book value of the insured branch's liabilities. The amendment was proposed to avoid potential anomalies that could be caused by using liability information from the preceding quarter, such as instances where grandfathered branches that were winding down their operations needed to calculate their asset maintenance on a daily basis to maintain compliance with the rule.
Two of the commenters addressed this revision. The ABA expressed support for the amendment. The IIB, however, suggested that the mere change of the longstanding quarterly calculation method would impose systems and other burdens on insured branches that it felt could be avoided by the FDIC continuing to resolve such situations on a case-by-case basis. The IIB also suggested that the FDIC might consider a specific modification to the existing asset maintenance requirement for branches that are winding down their operations.
The FDIC has considered the comments, as well as the IIB's representations to FDIC staff that it is less difficult to calculate asset maintenance, based on fixed liability numbers, than based on the daily assets and liabilities of a branch, which can fluctuate, and has decided to retain the substance of the asset maintenance requirements specified in existing section 347.211(a). In doing so, the FDIC notes that the daily calculation method specified in the existing rule may be used to address situations where the quarterly calculation method is considered inappropriate from a supervisory perspective. This authority may be utilized, in the FDIC's discretion, in instances where the current third-party liabilities of a branch decline or increase substantially in relation to the average book value of the branch's third-party liabilities for the preceding quarter. In addition, appropriate conforming changes are also being made in the final rule to section 347.210(d), based on revisions being made to paragraph (a).
There were no public comments on the proposed amendments to subpart B, other than those discussed above, and they are being adopted in the final rule, with the revisions previously discussed.
The FDIC included a request for comments in the NPR concerning whether the FDIC should revise its existing views regarding the availability of FDIC insurance for wholesale U.S. branches of foreign banks.
As explained in the NPR, the IIB expressed the view that some foreign banks with U.S. wholesale branches (i.e., branches that are not engaged in domestic retail deposit activities that require FDIC insurance) may be interested in obtaining deposit insurance but that certain statements the FDIC made in the context of a 1998 final rule may have had the effect of discouraging international banks from applying for “optional” deposit insurance and that the FDIC should not continue to discourage this effort.
In that 1998 final rule (63 FR 17056), which accompanied the issuance of the FDIC's existing foreign banking rules in 1998, the FDIC observed that because section 5(b) of the FDI Act (12 U.S.C. 1815(b)), addressing deposit insurance applications for U.S. branches of foreign banks, had not been repealed, it arguably may be possible for a U.S. branch of a foreign bank that does not engage in domestic retail deposit activity to seek deposit insurance from the FDIC. The FDIC also observed, however, that as a practical matter, it did not foresee many circumstances in which it could be appropriate for the FDIC's Board of Directors to approve such an application, but that the elimination of the optional insurance rule would not affect a foreign bank's ability to argue that it may make such an application under section 5(b) of the FDI Act. Finally, the FDIC noted that the FDIC Board of Directors would have to determine whether to actually accept and approve such an application, based on its review of the facts and circumstances involved, in addition to the pertinent legal and policy considerations.
Among the arguments the IIB advanced to support an expanded view of the availability of deposit insurance for wholesale branches were:
A “plain meaning” construction of section 5(b) permits “any branch”—including a wholesale branch—to become insured;
Congress expressly prohibited foreign banks from obtaining FDIC insurance for branches “engaged in domestic retail deposit activities” but did not remove the statutory provisions authorizing foreign banks to apply for deposit insurance for wholesale branches;
The FDIC's approach ignores significant changes in regulatory practices and structures that have occurred since 1991 with regard to foreign banks; broader acceptance of the principle of “investor choice;” and rejection of a broader policy to force foreign banks to operate in the U.S. only through subsidiaries;
Wholesale depositors often seek the benefits of FDIC insurance—even though the full amount of their deposits may not be insured. The ability to offer these benefits through a U.S. branch would provide a benefit to customers and increase a foreign bank's funding options;
Optional FDIC insurance is likely to be attractive primarily to foreign banks already operating FDIC-insured branches and subsidiaries in the U.S. and to a relatively small number of other foreign banks, especially those seeking to serve particular ethnic markets. As a result, a more liberal policy likely would have a minimal effect on the deposit insurance fund; and
Permitting wholesale branches to obtain deposit insurance is consistent with the business model that has been followed by some major U.S. banks that have retained insurance while focusing on wholesale markets.
Some of the arguments and observations countering the IIB's arguments were:
Difficulty in reconciling the idea that Congress imposed the subsidiary requirement with regard to domestic retail deposit activity requiring deposit insurance for the protection of the FDIC with the implicit assumption that Congress did not believe such protection of the FDIC was needed with regard to wholesale branches of foreign banks because the first $100,000 of customer deposits in a wholesale branch would be insured to the same extent as deposits maintained in any other FDIC insured depository institution;
Unlike bank subsidiaries, branches function as an integral part of the foreign bank itself and do not have their own independent board of directors. Thus, the directors of a foreign bank are not usually subject to the U.S. Start Printed Page 17557jurisdiction, and domestic branch personnel essential to explaining certain transactions could be transferred beyond the reach of U.S. authorities;
Essential records could also be difficult to reach if they are kept at the head office or at branches in other countries;
A U.S. branch could be subjected to requirements under foreign laws or to political or economic decisions of a foreign government which conflict with domestic bank regulatory policies;
Operating through a branch, as opposed to subsidiary structure, allows foreign banks the ability to engage in transactions with the home office without significant operational restrictions that might otherwise be applied to transactions with affiliates of insured U.S. banks; and
Due to the operating relationship of a branch to its home office and dependence on the home office for financial support, the insolvency of a foreign bank with a multinational branch structure will result in the insolvency of the branches and this may pose complicated and time-consuming issues regarding the resolution of the branch that could more likely be avoided in situations involving banking subsidiaries.
The FDIC received two comments concerning this section. The CSBS expressed support for the view that “optional insurance” is not specifically authorized by statute. The IIB indicated that it continued to believe that the FDIC's concerns, such as those regarding the potential impact on the FDIC insurance fund, were misplaced or could be adequately addressed by other means. The IIB also requested that no action be taken on its request to allow it to continue to explore ways to address the FDIC's concerns.
As the FDIC has indicated above, there are arguments that can be made for providing deposit insurance coverage to wholesale U.S. branches of foreign banks, as well as compelling arguments that can be made against providing such coverage. Therefore, the FDIC has decided to maintain its previously stated position that, as a practical matter, it does not foresee many circumstances in which it could be appropriate for the FDIC's Board of Directors to approve such an application and that the FDIC Board of Directors would have to determine whether to actually accept and approve such an application, based on its review of the facts and circumstances involved, in addition to the pertinent legal and policy considerations.
In accordance with the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the FDIC may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The FDIC has two OMB-approved information collections (3064-0125, Foreign Branching and Investment by Insured State Nonmember Banks, and 3064-0114, Foreign Banks) that cover the paperwork burden associated with subparts A and B of part 347. The information collections in 3064-0125 consist of applications related to establishing and closing a foreign branch; applications related to acquiring stock of a foreign organization; and records and reports which a nonmember bank must maintain once it has established a foreign branch or foreign organization. The information collections in 3064-0114 consist of applications to operate as a noninsured state-licensed branch of a foreign bank; applications from an insured state-licensed branch of a foreign bank to conduct activities which are not permissible for a federally-licensed branch; internal recordkeeping by insured branches of foreign banks; and reporting requirements related to an insured branch's pledge of assets to the FDIC. This proposal to amend part 347, subparts A and B will not result in any change in the current estimated paperwork burden associated with the regulation, therefore no submission has been made to OMB under the Paperwork Reduction Act.
Under the Regulatory Flexibility Act (RFA), an agency must either prepare a Final Regulatory Flexibility Analysis (FRFA) for a final rule or certify that the final rule will not have a significant economic impact on a substantial number of small entities. See 5 U.S.C. 604, 605(b). For purposes of the analysis or certification, financial institutions with assets of $150 million or less are considered “small entities.” The FDIC has reviewed the impact of this final rule on small banks and, for the reasons provided below, certifies that the final rule will not have a significant economic impact on a substantial number of small entities.
The final rule makes primarily technical revisions to update, reorganize, and clarify the existing rules in subpart A of part 347 and subpart J of part 303. Subpart J of part 303 contains the procedural rules that implement part 347. The rules in subpart A of part 347 address issues related to the international activities and investments of insured state nonmember banks. In general, they implement the FDIC's statutory authority under section 18(d)(2) of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1828(d)(2)), regarding branches of insured state nonmember banks in foreign countries, and section 18(l) of the FDI Act, regarding insured state nonmember bank investments in foreign entities. As of September 30, 2004, there were approximately 4,800 state nonmember commercial banks, but fewer than 40 of those institutions report having foreign offices. Available information indicates that state nonmember banks with foreign investments or foreign branches are not small entities.
The final rule also makes revisions to update, reorganize, and clarify the existing rules in subpart B of part 347, as well as additional revisions and amendments that address supervisory issues. The rules in subpart B of part 347 principally address issues related to insured and noninsured U.S. branches of foreign banks under section 6 of the International Banking Act (IBA) (12 U.S.C. 3104). As of December 31, 2004, there were approximately 199 U.S. branches of foreign banks, including 12 insured branches. Of this number, there were approximately 90 U.S. branches of foreign banks that appear to qualify as small entities, including 6 insured branches. The 12 insured branches are presently subject to the FDIC's asset pledge requirement, which is revised in section 347.209 of the final rule. Although the revision of the asset pledge requirement to implement a risk-based approach may result in an increase in the amount of assets pledged for insured branches with low supervisory ratings, the FDIC does not believe this will affect the insured branches that qualify as small entities. Other revisions to the rules affecting noninsured branches are not substantive and, thus, should have no significant economic impact on noninsured branches that qualify as small entities.
The FDIC has determined that the final rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, enacted as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 (Pub. L. 105-277, 112 Stat. 2681). Start Printed Page 17558
Section 722 of the Gramm-Leach-Bliley Act (GLBA) (12 U.S.C. 4809), requires banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The proposed rule requested comments on how the rule might be changed to reflect the requirements of GLBA. No GLBA comments were received.
The Office of Management and Budget has determined that the final rule is not a “major rule” within the meaning of the relevant sections of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) (5 U.S.C. 801 et seq.). As required by SBREFA, the FDIC will file the appropriate reports with Congress and the General Accounting Office so that the final rule may be reviewed.
For the reasons set forth above and under the authority of
Authority: 12 U.S.C. 378, 1813, 1815, 1817, 1818, 1819 (Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1, 1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.
2. Revise § 303.182 to read as follows:
§ 303.182
(a) Notice procedures for general consent. Notice in the form of a letter from an eligible depository institution establishing or relocating a foreign branch pursuant to § 347.117(a) of this chapter must be provided to the appropriate FDIC office no later than 30 days after taking such action. The notice must include the location of the foreign branch, including a street address, and a statement that the foreign branch has not been located on a site on the World Heritage List or on the foreign country's equivalent of the National Register of Historic Places (National Register), in accordance with section 402 of the National Historic Preservation Act Amendments of 1980 (NHPA Amendments Act) (16 U.S.C. 470a-2). The FDIC will provide written acknowledgment of receipt of the notice.
(b) Filing procedures for other branch establishments—(1) Where to file. An applicant seeking to establish a foreign branch other than under § 347.117(a) of this chapter shall submit an application to the appropriate FDIC office.
(ii) Details concerning any involvement in the proposal by an insider of the applicant, as defined in § 303.2(u) of this part, including any financial arrangements relating to fees, the acquisition of property, leasing of property, and construction contracts;
(iv) A brief description of the proposed activities of the branch and, to the extent any of the proposed activities are not authorized by § 347.115 of this chapter, the applicant's reasons why they should be approved.
(c) Processing—(1) Expedited processing for eligible depository institutions. An application filed under § 347.118(a) of this chapter by an eligible depository institution as defined in § 303.2(r) of this part seeking to establish a foreign branch by expedited processing will be acknowledged in writing by the FDIC and will receive expedited processing, unless the applicant is notified in writing to the contrary and provided with the basis for that decision. The FDIC may remove the application from expedited processing for any of the reasons set forth in § 303.11(c)(2) of this part. Absent such removal, an application processed under expedited processing is deemed approved 45 days after receipt of a substantially complete application by the FDIC, or on such earlier date authorized by the FDIC in writing.
(d) Closing. Notices of branch closing under § 347.121 of this chapter, in the form of a letter including the name, location, and date of closing of the closed branch, shall be filed with the appropriate FDIC office no later than 30 days after the branch is closed.
3. Amend § 303.183 by revising the section heading and paragraphs (a), (b)(1), and (c)(1) to read as follows:
§ 303.183
Investment by insured state nonmember banks in foreign organization.
(a) Notice procedures for general consent. Notice in the form of a letter from an eligible depository institution making direct or indirect investments in a foreign organization pursuant to § 347.117(b) of this chapter shall be provided to the appropriate FDIC office no later than 30 days after taking such action. The FDIC will provide written acknowledgment of receipt of the notice.
(b) Filing procedures for other investments—(1) Where to file. An applicant seeking to make a foreign investment other than under § 347.117(b) of this chapter shall submit an application to the appropriate FDIC office.
(c) Processing—(1) Expedited processing for eligible depository institutions. An application filed under § 347.118(b) of this chapter by an eligible depository institution as defined in § 303.2(r) of this part seeking to make direct or indirect investments in a foreign organization will be acknowledged in writing by the FDIC and will receive expedited processing, unless the applicant is notified in writing to the contrary and provided with the basis for that decision. The FDIC may remove the application from expedited processing for any of the reasons set forth in § 303.11(c)(2) of this Start Printed Page 17559part. Absent such removal, an application processed under expedited processing is deemed approved 45 days after receipt of a substantially complete application by the FDIC, or on such earlier date authorized by the FDIC in writing.
4. Amend § 303.184 to revise paragraph (b)(1) and add paragraph (e) to read as follows:
(b) Processing—(1) Expedited processing for eligible insured branches. An application filed by an eligible insured branch as defined in § 303.181(c) of this part will be acknowledged in writing by the FDIC and will receive expedited processing if the applicant is proposing to move within the same state, unless the applicant is notified to the contrary and provided with the basis for that decision. The FDIC may remove an application from expedited processing for any of the reasons set forth in § 303.11(c)(2) of this part. Absent such removal, an application processed under expedited processing will be deemed approved on the latest of the following:
5. Amend § 303.186 to revise the section heading and paragraph (a)(1) to read as follows:
§ 303.186
(a) Filing procedures— (1) Where to file. An application by a foreign bank for consent to operate as a noninsured state branch, as permitted by § 347.215(b) of this chapter, shall be submitted in writing to the appropriate FDIC office.
6. Amend § 303.187 to revise the section heading and paragraphs (a)(1), (a)(2)(iv) and (b)(1) to read as follows:
§ 303.187
Approval for an insured state branch of a foreign bank to conduct activities not permissible for federal branches.
(a) Filing procedures—(1) Where to file. An application by an insured state branch seeking approval to conduct activities not permissible for a federal branch, as required by § 347.212(a) of this chapter, shall be submitted in writing to the appropriate FDIC office.
(b) Divestiture or cessation—(1) Where To file. Divestiture plans necessitated by a change in law or other authority, as required by § 347.212(e) of this chapter, shall be submitted in writing to the appropriate FDIC office.
8. Amend § 325.103 to revise paragraph (c) to read as follows:
§ 325.103
(c) Capital categories for insured branches of foreign banks. For purposes of the provisions of section 38 and this subpart, an insured branch of a foreign bank shall be deemed to be:
(i) Maintains the pledge of assets required under § 347.209 of this chapter; and
(ii) Maintains the eligible assets prescribed under § 347.210 of this chapter at 108 percent or more of the preceding quarter's average book value of the insured branch's third-party liabilities; and
(B) The FDIC to pledge additional assets pursuant to § 347.209 of this chapter or to maintain a higher ratio of eligible assets pursuant to § 347.210 of this chapter.
(ii) Maintains the eligible assets prescribed under § 347.210 of this chapter at 106 percent or more of the preceding quarter's average book value of the insured branch's third-party liabilities; and
(i) Fails to maintain the pledge of assets required under § 347.209 of this chapter; or
(ii) Fails to maintain the eligible assets prescribed under § 347.210 of this chapter at 106 percent or more of the preceding quarter's average book value of the insured branch's third-party liabilities.
(4) Significantly undercapitalized if it fails to maintain the eligible assets prescribed under § 347.210 of this chapter at 104 percent or more of the preceding quarter's average book value of the insured branch's third-party liabilities.
(5) Critically undercapitalized if it fails to maintain the eligible assets prescribed under § 347.210 of this chapter at 102 percent or more of the preceding quarter's average book value of the insured branch's third-party liabilities.
9. The authority citation for part 327 continues to read as follows:
10. In § 327.4, revise paragraphs (a)(1)(i)(B)(
Annual assessment rate.
(1) Maintains the pledge of assets required under § 347.209 of this chapter; and
(2) Maintains the eligible assets prescribed under § 347.210 of this chapter at 108 percent or more of the average book value of the insured branch's third-party liabilities for the quarter ending on the report date specified in paragraph (a)(1) of this section.
(2) Maintains the eligible assets prescribed under § 347.210 of this chapter at 106 percent or more of the average book value of the insured branch's third-party liabilities for the quarter ending on the report date specified in paragraph (a)(1) of this section; and
11. Revise part 347 to read as follows:
Effect of state law on actions taken under this subpart.
Insured state nonmember bank investment in foreign organizations.
Limitations on indirect investments in nonfinancial organizations.
Restrictions applicable to activities by a foreign organization in the United States.
Recordkeeping and supervision of the foreign activities of insured state nonmember banks.
Computation of investment amounts.
Requirements for insured state nonmember bank to close a foreign branch.
Limitations applicable to the authority provided in this subpart.
Deposit insurance required for all branches of foreign banks engaged in domestic retail deposit activity in the same state.
Commitment to be examined and provide information.
Assessment base deductions by insured branch.
FDIC approval to conduct activities that are not permissible for federal branches.
Branch established under section 5 of the International Banking Act.
Depositor notification.
Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103, 3104, 3105, 3108, 3109; Title IX, Pub. L. 98—181, 97 Stat. 1153.
§ 347.101
(d) Eligible insured state nonmember bank means an eligible depository institution as defined in § 303.2(r) of this chapter.
(1) Is recognized as a bank by the bank supervisory or monetary authority of the country of its organization or the Start Printed Page 17561country in which its principal banking operations are located;
(m) Insured state nonmember bank or bank means a state bank, as defined by § 3(a)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(a)(2)), whose deposits are insured by the FDIC and that is not a member of the Federal Reserve System.
(o) Investment grade means a security that is rated in one of the four highest categories by:
(2) One NRSRO if the security is rated by only one NRSRO.
(u) Tier 1 capital means Tier 1 capital as defined in § 325.2 of this chapter.
(v) Well capitalized means well capitalized as defined in § 325.103 of this chapter.
§ 347.103
§ 347.104
(b) Investment in other foreign organizations. A bank may only: (1) acquire and retain equity interests in foreign organizations, other than foreign banks or foreign banking organizations in amounts of 50 percent or less of the foreign organization's voting equity interests, if the equity interest is held through a domestic or foreign subsidiary; and
§ 347.105
(c) Limitation on activities authorized under Regulation Y. If a bank relies solely on the cross-reference to Start Printed Page 17562Regulation Y contained in paragraph (b)(17) of this section as authority to engage in an activity, compliance with any attendant restrictions on the activity that are contained in 12 CFR 225.28(b) is required.
§ 347.106
Going concerns. If a bank acquires an equity interest in a foreign organization that is a going concern, no more than 5 percent of either the consolidated assets or revenues of the foreign organization may be attributable to activities that are not permissible under § 347.105(b).
§ 347.107
(a) Joint ventures. If a bank, directly or indirectly, acquires or holds an equity interest in a foreign organization that is a joint venture, and the bank or its affiliates do not control the foreign organization, no more than 10 percent of either the consolidated assets or revenues of the foreign organization may be attributable to activities that are not permissible under § 347.105(b).
(1) No more than 10 percent of either the consolidated assets or revenues of the foreign organization may be attributable to activities that are not permissible under § 347.105(b); and
§ 347.109
(a) A bank may, through a subsidiary authorized by §§ 347.105 or 347.106, or an Edge corporation if also authorized by the FRB, acquire and hold equity interests in foreign organizations that are not foreign banks or foreign banking organizations and that engage generally in activities beyond those listed in § 347.105(b), subject to the following:
§ 347.110
References in §§ 347.107, 347.108, and 347.109 to equity interests of foreign organizations held by an affiliate of a bank include equity interests held in connection with an underwriting or for distribution or dealing by an affiliate permitted to do so by §§ 362.8 or 362.18 of this chapter or section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)).
§ 347.111
A bank that holds an equity interest in one or more foreign organizations which underwrite, deal, or distribute equity securities outside the United States as authorized by § 347.105(b)(14) is subject to the following limitations:
(ii) Any equity securities of the entity held under the authority of §§ 347.105 through 347.109 or 12 CFR 211.10 for purposes other than distribution or dealing must be included in this limit; and
(2) Must be included in calculating the general consent limits under § 347.117(b)(3) if the bank relies on the general consent provisions as authority to acquire equity interests of the same foreign entity for investment or trading.
(c) Additional distribution and dealing limits. With the exception of equity securities acquired pursuant to any underwriting commitment extending up to 90 days after the payment date for the underwriting, equity securities of a single entity held for distribution or dealing by all Start Printed Page 17563affiliates of the bank (this includes shares held in connection with an underwriting or for distribution or dealing by an affiliate permitted to do so by §§ 362.8 or 362.18 of this chapter or section 4(c)(8) of the Bank Holding Company Act), combined with any equity interests held for investment or trading purposes by all affiliates of the bank, must conform to the limits of §§ 347.105 through 347.109.
(1) All equity interests of foreign organizations held for investment or trading under § 347.109 or by an affiliate of the bank under the corresponding paragraph of 12 CFR 211.10.
§ 347.112
(a) If a bank acquires or retains an equity interest in a foreign organization that acts as a futures commission merchant pursuant to § 347.105(b)(16), the foreign organization may not be a member of an exchange or clearing association that requires members to guarantee or otherwise contract to cover losses suffered by other members unless the:
(2) Bank has obtained the prior approval of the FDIC under § 347.120(d).
§ 347.113
§ 347.114
§ 347.115
(2) Underwrite, distribute and deal, invest in or trade obligations [1] rated as investment grade of:
(iii) Shares of automated electronic payment networks, professional Start Printed Page 17564societies, schools, and similar entities necessary to the business of the branch.
(2) Aggregate local investments (other than those required by the law of the foreign country or permissible under section 5136 of the Revised Statutes (12 U.S.C. 24 (Seventh)) by all the bank's branches in a single foreign country must not exceed 1 percent of the total deposits in all the bank's branches in that country as reported in the preceding year-end Report of Income and Condition (Call Report): [2]
§ 347.116
§ 347.117
(2) In any instance where the bank and its affiliates will hold 20 percent or more of the foreign organization's voting equity interests or control the foreign organization, at least one state nonmember bank has a foreign bank subsidiary or foreign branch (other than a shell branch) in the country where the foreign organization will be located; [3] and
§ 347.118
(a) Expedited processing of branch applications. An eligible bank may establish a foreign branch conducting activities authorized by § 347.115 in an additional foreign country, after complying with the expedited processing requirements contained in § 303.182(b) and (c)(1), if any of the following are located in two or more foreign countries:
(b) Expedited processing of applications for investment in foreign organizations. An investment that does not qualify for general consent but is otherwise in conformity with the limits and requirements of this subpart may be made 45 days after an eligible bank files a substantially complete application with the FDIC in compliance with the expedited processing requirements contained in § 303.183(b) and (c)(1), or within such earlier time as authorized by the FDIC.
§ 347.119
(a) Limitation on access to supervisory information in foreign country.
(1) Applicable law or practice in the foreign country where the foreign organization or foreign branch would be located would limit the FDIC's access to information for supervisory purposes; and
(d) Specific consent. Direct or indirect investments in or activities of foreign organizations by banks, the establishment of foreign branches or issues regarding the types or amounts of activity that can be engaged in by foreign branches, which are not authorized under §§ 347.117 or 347.118 require prior review and specific consent of the FDIC.
§ 347.120
In computing the amount that may be invested in any foreign organization under §§ 347.117 through 347.119, any investments held by an affiliate of a bank must be included.
§ 347.121
A bank must comply with the written notification requirement contained in § 303.182(d) when it closes a foreign branch.
§ 347.122
§ 347.201
(b) This subpart implements the insured branch asset pledge and examination commitment requirement for foreign banks in the FDI Act. It also implements the deposit insurance, permissible activity, and cross-border cooperation provisions of the IBA regarding the FDIC. Sections 347.203-347.211 apply to state and federal branches whose deposits are insured. Sections 347.204 and 347.207 are applicable to depository institution subsidiaries of a foreign bank. Section 347.212 applies to insured state branches and §§ 347.213-347.216 apply to state branches whose deposits are not insured by the FDIC.
(b) Branch means any office or place of business of a foreign bank located in any state of the United States at which deposits are received. The term does not include any office or place of business deemed by the state licensing authority or the Comptroller of the Currency to be an agency.
(c) Deposit has the same meaning as that term in section 3(l) of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)).
(d) Depository means any insured state bank, national bank, or insured branch.
(e) Domestic retail deposit activity means the acceptance by a federal or state branch of any initial deposit of less than $100,000.
(f) Federal branch means a branch of a foreign bank established and operating under the provisions of section 4 of the International Banking Act of 1978 (12 U.S.C. 3102).
(g) Foreign bank means any company organized under the laws of a foreign country, any territory of the United States, Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands, which engages in the business of banking. The term includes foreign commercial banks, foreign merchant banks and other foreign institutions that engage in banking Start Printed Page 17566activities usual in connection with the business of banking in the countries where such foreign institutions are organized and operating. Except as otherwise specifically provided by the Federal Deposit Insurance Corporation, banks organized under the laws of a foreign country, any territory of the United States, Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands which are insured banks other than by reason of having an insured branch are not considered to be foreign banks for purposes of §§ 347.204, 347.205, 347.209, and 347.210.
(h) Foreign business means any entity including, but not limited to, a corporation, partnership, sole proprietorship, association, foundation or trust, which is organized under the laws of a foreign country or any United States entity which is owned or controlled by an entity which is organized under the laws of a foreign country or a foreign national.
(i) Foreign country means any country other than the United States and includes any colony, dependency or possession of any such country.
(j) FRB means the Board of Governors of the Federal Reserve System.
(k) Home state of a foreign bank means the state so determined by the election of the foreign bank, or in default of such election, by the Board of Governors of the Federal Reserve System.
(l) Immediate family member of a natural person means the spouse, father, mother, brother, sister, son or daughter of that natural person.
(m) Initial deposit means the first deposit transaction between a depositor and the branch where there is no existing deposit relationship. The initial deposit may be placed into different deposit accounts or into different kinds of deposit accounts, such as demand, savings or time. Deposit accounts that are held by a depositor in the same right and capacity may be added together for the purposes of determining the dollar amount of the initial deposit.
(n) Insured bank means any bank, including a foreign bank with an insured branch, the deposits of which are insured in accordance with the provisions of the Federal Deposit Insurance Act.
(o) Insured branch means a branch of a foreign bank any deposits of which branch are insured in accordance with the provisions of the Federal Deposit Insurance Act.
(p) Large United States business means any entity including, but not limited to, a corporation, partnership, sole proprietorship, association, foundation or trust which is organized under the laws of the United States or any state thereof, and:
(q) A majority owned subsidiary means a company the voting stock of which is more than 50 percent owned or controlled by another company.
(r) Noninsured branch means a branch of a foreign bank deposits of which branch are not insured in accordance with the provisions of the Federal Deposit Insurance Act.
(s) OCC means the Office of the Comptroller of the Currency.
(t) Person means an individual, bank, corporation, partnership, trust, association, foundation, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity.
(u) Significant risk to the deposit insurance fund shall be understood to be present whenever there is a high probability that the Bank Insurance Fund administered by the FDIC may suffer a loss.
(v) State means any state of the United States or the District of Columbia.
(w) State branch means a branch of a foreign bank established and operating under the laws of any state.
(x) Wholly owned subsidiary means a company the voting stock of which is 100 percent owned or controlled by another company except for a nominal number of directors' shares.
§ 347.203
§ 347.204
(c) The foreign bank's commitments, consent to U.S. jurisdiction, and designation of agent for service shall be signed by an officer of the foreign bank who has been so authorized by the foreign bank's board of directors and in all instances will be executed in a manner acceptable to the FDIC and shall be included with the branch or Start Printed Page 17567depository institution application for insurance. Any documents that are not in English shall be accompanied by an English translation.
§ 347.205
(c) Grandfathered insured branches. Domestic retail deposit accounts with balances of less than $100,000 that require deposit insurance protection may be accepted or maintained in an insured branch of a foreign bank only if such branch was an insured branch on December 19, 1991.
§ 347.207
§ 347.208
(b) Amount of assets to be pledged. (1) For a newly insured branch, a foreign bank must pledge assets equal to at least 5 percent of the liabilities of the branch, based on the branch's projection of its liabilities at the end of each of the first three years of operations. For all other insured branches, a foreign bank must pledge assets equal to the appropriate percentage applicable to the insured branch, as determined by reference to the risk-based assessment schedule contained in this paragraph, of the insured branch's average liabilities for the last 30 days of the most recent calendar quarter.[4]
(3) Supervisory risk factors. For purposes of this section, within each asset maintenance group, each institution will be assigned to one of three subgroups based on consideration by the FDIC of supervisory evaluations provided by the primary federal regulator for the insured branch. The supervisory evaluations include the results of examination findings by the primary federal regulator, as well as other information the primary federal regulator determines to be relevant. In addition, the FDIC will take into consideration such other information (such as state examination findings, if appropriate) as it determines to be relevant to the financial condition and the risk posed to the deposit insurance fund. The three supervisory subgroups are: Start Printed Page 17568
(d) Assets that may be pledged. Subject to the right of the FDIC to require substitution, a foreign bank may pledge any of the kinds of assets listed in this paragraph (d); such assets must be denominated in United States dollars. A foreign bank shall be deemed to have pledged any such assets for the benefit of the FDIC or its designee at such time as any such asset is placed with the depository, as follows:
(1)(i) Negotiable certificates of deposit that are payable in the United States and that are issued by any state bank, national bank, state or federal savings association, or branch of a foreign bank which has executed a valid waiver of offset agreement or similar debt instruments that are payable in the United States and that are issued by any agency of a foreign bank which has executed a valid waiver of offset agreement; provided, that the maturity of any certificate or issuance is not greater than one year; and provided further, that the issuing branch or agency of a foreign bank is not an affiliate of the pledging bank or from the same country as the pledging bank's domicile;
(ii) Non-negotiable certificates of deposit, subject to the terms specified in paragraph (d)(1)(i) of this section other than the requirement of negotiability, that were pledged as collateral to the FDIC on March 18, 2005, until maturity according to the original terms of the existing deposit agreement.
(2) Treasury bills, interest bearing bonds, notes, debentures, or other direct obligations of or obligations fully guaranteed as to principal and interest by the United States or any agency or instrumentality thereof;
(3) Commercial paper that is rated P-1 or P-2, or their equivalent by a nationally recognized rating service; provided, that any conflict in a rating shall be resolved in favor of the lower rating;
(4) Banker's acceptances that are payable in the United States and that are issued by any state bank, national bank, state or federal savings association, or branch or agency of a foreign bank; provided, that the maturity of any acceptance is not greater than 180 days; and provided further, that the branch or agency issuing the acceptance is not an affiliate of the pledging bank or from the same country as the pledging bank's domicile;
(5) General obligations of any state of the United States, or any county or municipality of any state of the United States, or any agency, instrumentality, or political subdivision of the foregoing or any obligation guaranteed by a state of the United States or any county or municipality of any state of the United States; provided, that such obligations have a credit rating within the top two rating bands of a nationally recognized rating service (with any conflict in a rating resolved in favor of the lower rating);
(6) Obligations of the African Development Bank, Asian Development Bank, Inter-American Development Bank, and the International Bank for Reconstruction and Development;
(7) Notes issued by bank and thrift holding companies, banks, or savings associations organized under the laws of the United States or any state thereof or notes issued by United States branches or agencies of foreign banks, provided, that the notes have a credit rating within the top two rating bands of a nationally recognized rating service (with any conflict in a rating resolved in favor of the lower rating) and that they are payable in the United States, and provided further, that the issuer is not an affiliate of the foreign bank pledging the note; or
(8) Any other asset determined by the FDIC to be acceptable.
(ii) The FDIC has not by written notification to the foreign bank, a copy of which shall be provided to the depository, suspended or terminated the foreign bank's right of substitution. Start Printed Page 17569
§ 347.210
(a) An insured branch of a foreign bank shall maintain on a daily basis Start Printed Page 17570eligible assets in an amount not less than 106 percent of the preceding quarter's average book value of the insured branch's liabilities or, in the case of a newly-established insured branch, the estimated book value of its liabilities at the end of the first full quarter of operation, exclusive of liabilities due to the foreign bank's head office, other branches, agencies, offices, or wholly owned subsidiaries. The Director of the Division of Supervision and Consumer Protection or his designee may impose a computation of total liabilities on a daily basis in those instances where it is found necessary for supervisory purposes. The FDIC Board of Directors, after consulting with the insured branch's primary regulator, may require that a higher ratio of eligible assets be maintained if the financial condition of the insured branch warrants such action. Among the factors which will be considered in requiring a higher ratio of eligible assets are the concentration of risk to any one borrower or group of related borrowers, the concentration of transfer risk to any one country, including the country in which the foreign bank's head office is located or any other factor the FDIC determines is relevant. Eligible assets shall be payable in United States dollars.
(i) Any of the individual components of the ROCA supervisory rating of an insured branch is rated “3” or worse; Start Printed Page 17571
§ 347.212
(b) Exceptions. If the FDIC has already determined, pursuant to part 362 of this chapter, “Activities and Investment of Insured State Banks,” that an activity does not present a significant risk to the affected deposit insurance fund, no application is required under paragraph (a) of this section for a foreign bank operating an insured branch to engage or continue to engage in the same activity.
(d) Conditions of approval. (1) Approval of such an application required by paragraph (a) of this section may be conditioned on the agreement by the foreign bank and its insured state branch to conduct the activity subject to specific limitations, which may include pledging of assets in excess of the asset pledge and asset maintenance requirements contained in §§ 347.209 and 347.210.
(1) The branch only accepts initial deposits in an amount of $100,000 or greater; or
(2) The branch meets the criteria set forth in §§ 347.214 or 347.215.
§ 347.214
(a) Deposit activities not requiring insurance. A state branch will not be considered to be engaged in domestic retail deposit activity that requires the foreign bank parent to establish an insured U.S. bank subsidiary if the state branch accepts initial deposits only in an amount of less than $100,000 that are derived solely from the following:
(C) The branch may exclude deposits in the branch of other offices, branches, Start Printed Page 17572agencies or wholly owned subsidiaries of the bank to determine its average deposits;
(b) Application for an exemption. (1) Whenever a foreign bank proposes to accept at a state branch initial deposits of less than $100,000 and such deposits are not otherwise exempted under paragraph (a) of this section, the foreign bank may apply to the FDIC for consent to operate the branch as a noninsured branch. The Board of Directors may exempt the branch from the insurance requirement if the branch is not engaged in domestic retail deposit activities requiring insurance protection. The Board of Directors will consider the size and nature of depositors and deposit accounts, the importance of maintaining and improving the availability of credit to all sectors of the United States economy, including the international trade finance sector of the United States economy, whether the exemption would give the foreign bank an unfair competitive advantage over United States banking organizations, and any other relevant factors in making this determination.
(2) Procedures for applications under this section are set out in § 303.186.
§ 347.216
Any state branch that is exempt from the insurance requirement pursuant to § 347.215 shall:
1. A meeting summary and list of participants is available on the FDIC's Web page at http://www.fdic.gov/​regulations/​laws/​federal/​04cMEETING.html.
2. A grandfathered branch of a foreign bank is a U.S. branch of a foreign bank that obtained FDIC deposit insurance prior to December 19, 1991 and is authorized to accept or maintain domestic retail deposit accounts pursuant to section 6(d)(2) of the International Banking Act (“IBA”)(12 U.S.C. 3104(d)(2)).
3. Like existing section 347.104(f), section 347.104 recognizes that the FDIC's treatment of direct and indirect investments by state nonmember banks in foreign organizations differs from the treatment such investments are provided in Regulation K for member banks. This is because of differences in the underlying statutory provisions governing member and state nonmember banks. Unlike member banks, whose investments are constrained by the language of section 25 of the Federal Reserve Act (12 U.S.C. 601), section 18(l) of the FDI Act permits state nonmember banks to invest in foreign “banks and other entities,” to the extent authorized by state law. Thus, considering the legislative history of section 18(l), and the language of the statute, the FDIC has interpreted section 18(l) as not restricting the types of foreign organizations in which a state nonmember bank can invest.
The ability of insured state nonmember banks to invest in other types of foreign organizations, however, raises issues under section 24 of the FDI Act (12 U.S.C. 1831a) and part 362 because national banks are unable to invest directly in nonbank foreign organizations. Section 24 prohibits an insured state nonmember bank from acquiring an equity investment that a national bank is not permitted to acquire. Such an investment may be made under section 24, subject to FDIC approval, however, if the investment is made through a majority-owned subsidiary of the bank. It may also be made if a company becomes majority-owned by the bank as a result of the investment and the “as principal” activities of the company are ones in which a subsidiary of a national bank could engage. Ownership of more than 50 percent of the equity in a nonbank foreign organization makes that organization a majority-owned subsidiary and, thus, no section 24 analysis is required because such a subsidiary is authorized only to engage in the same activities that the FRB has authorized for subsidiaries of member banks (and thus national banks) under Regulation K. In addition, while it is unnecessary for insured state nonmember bank investments of 50 percent or less of the equity of a nonbank foreign organization to be held through an intermediate foreign bank subsidiary or Edge subsidiary as required under Regulation K, those investments are required to be held through some form of U.S. or foreign majority-owned subsidiary in order to comply with the requirements of section 24 and part 362.
4. The statute requires a foreign bank, in connection with obtaining deposit insurance for a branch or depository institution subsidiary, to submit a binding written commitment to the FDIC to permit any examination of the affairs of any affiliate of the branch or depository institution subsidiary to the extent necessary to determine: (1) the relationship between the depository institution and the affiliate and (2) the effect of such relationship on such depository institution.
5. Pub. L. 102-242, 105 Stat. 2236, 2286 (1991).
6. In the event that the FDIC receives an application for deposit insurance for a U.S. banking subsidiary of a foreign bank that has not been determined to be subject to CCS by an appropriate Federal banking agency, the FDIC expects the foreign bank to provide the commitments required by section 347.204 and it may also require the foreign bank to provide the FDIC such additional commitments and assurances as the FDIC considers necessary under the circumstances.
7. The consents to jurisdiction and designation of agent that the FDIC presently uses also include consent to agency jurisdiction and investigations for various supervisory and enforcement purposes.
8. Section 6(d) of the IBA allows any insured branches that were accepting or maintaining domestic retail deposit accounts on December 19, 1991, to continue to operate as “grandfathered” insured branches conducting domestic retail deposit activities.
9. The asset pledge requirement of newly insured branches has been revised in the final rule to provide that the pledge will be based on the branch's projection of its liabilities at the end of each year during the first three years of its operations. This revision is intended to avoid requiring a newly insured branch to pledge assets based on its third year projected liabilities, which will likely reflect its largest liability balance, during its first and second years of operations, when its projected liabilities will presumably be lower.
10. The ROCA system represents the rating of risk management, operational controls, compliance, and asset quality of a Foreign Banking Organization's U.S. operations.
11. The FDIC recognizes that obtaining waivers of offset from issuers of negotiable certificates of deposit may make the pledge of certificates of deposit less attractive to foreign banks but there are several other types of financial instruments specified in the rule, besides certificates of deposit, that can be pledged by foreign banks to meet the collateral requirements.
1. If the obligation is an equity interest, it must be held through a subsidiary of the foreign branch and the insured state nonmember bank must meet its minimum capital requirements.
2. If a branch has recently been acquired by the bank and the branch was not previously required to file a Call Report, branch deposits as of the acquisition date must be used.
3. A list of these countries can be obtained from the FDIC's Internet Web Site at http://www.fdic.gov.
4. This average must be computed by using the sum of the close of business figures for the 30 calendar days of the most recent calendar quarter, ending with and including the last day of the calendar quarter, divided by 30. For days on which the branch is closed, however, balances from the previous business day are to be used in determining its average liabilities. In determining its average liabilities, the insured branch may exclude liabilities to other offices, agencies, branches, and wholly owned subsidiaries of the foreign bank. The value of the pledged assets must be computed based on the lesser of the principal amount (par value) or market value of such assets at the time of the original pledge and thereafter as of the last day of the most recent calendar quarter.
[FR Doc. 05-6295 Filed 4-5-05; 8:45 am]