[Federal Register Volume 59, Number 101 (Thursday, May 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12718]


[[Page Unknown]]

[Federal Register: May 26, 1994]


                                                   VOL. 59, NO. 101

                                             Thursday, May 26, 1994
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12 CFR Part 208

[Regulation H; Docket No. R-0838]
 

Membership of State Banking Institutions in the Federal Reserve 
System

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is proposing to amend Regulation H to implement 
section 6(b) of the Depository Institutions Disaster Relief Act of 
1992, which authorizes state member banks to make investments designed 
primarily to promote the public welfare to the extent permissible under 
state law and subject to regulation by the Board. The proposed 
amendment would permit state member banks to make certain public 
welfare investments without specific Board approval and other public 
welfare investments with specific approval. The proposed rule also 
addresses the procedural aspects of these investments.

DATES: Comments must be submitted on or before July 22, 1994.

ADDRESSES: Comments, which should refer to Docket No. R-0838, may be 
mailed to the Board of Governors of the Federal Reserve System, 20th 
and C Streets, NW., Washington, DC 20551, Attention: Mr. William W. 
Wiles, Secretary; or may be delivered to Room B-2223 between 8:45 a.m. 
and 5:15 p.m. All comments received at the above address will be made 
available to the public, and may be inspected at the Freedom of 
Information Office, Room B-1122 between 8:45 a.m. and 5:00 p.m.

FOR FURTHER INFORMATION CONTACT: Manley Williams, Attorney (202/736-
5565), Legal Division; Sandra Braunstein, Program Manager for Community 
Affairs, (202/452-3378), Division of Consumer and Community Affairs; 
Larry Cunningham, Senior Financial Analyst (202/452-2701), Division of 
Banking Supervision and Regulation, Board of Governors of the Federal 
Reserve System. For the hearing impaired only, Telecommunications 
Device for the Deaf (TDD), Dorothea Thompson (202/452-3544), Board of 
Governors of the Federal Reserve System, Washington, DC 20551.

SUPPLEMENTARY INFORMATION: Section 6(b) of the Depository Institutions 
Disaster Relief Act of 1992 added paragraph 23 to section 9 of the 
Federal Reserve Act, 12 U.S.C. 338a. Section 6(b) removes the 
restriction on the ability of state member banks to purchase, sell, 
underwrite, and hold investment securities provided that the investment 
is designed primarily to promote the public welfare and that the 
investment meets certain other criteria. Specifically, the investment 
must not violate state law or expose the bank to unlimited liability. 
The aggregate of the bank's public welfare investments must not exceed 
the sum of five percent of the bank's capital stock actually paid in 
and unimpaired and five percent of its unimpaired surplus fund. The 
Board may waive this limit by order, on a case-by-case basis, however, 
and permit a bank to make investments in an amount not exceeding the 
sum of ten percent of the capital stock actually paid in and unimpaired 
and ten percent of the unimpaired surplus fund of the bank. Finally, 
the Board must limit a bank's investments in any one project.
    In the past, requests by state member banks to make public welfare 
investments have been dealt with on a case-by-case basis. To reflect 
section 6(b)'s amendment of the Federal Reserve Act and to facilitate 
public welfare investments under that section, the Board is publishing 
for comment an amendment to Regulation H to be incorporated in a new 
section entitled Community Development and Public Welfare Investments. 
This amendment would permit, in many cases, public welfare investments 
without Board approval.

Core Public Welfare Investments

    The proposed rule identifies classes of public welfare investments 
that do not require Board approval, leaving less common investments and 
investments of more than five percent of a bank's capital subject to 
case-by-case review. The proposed rule's classification seeks to 
distinguish public welfare investments from entrepreneurial 
investments--section 6(b) merely states that public welfare investments 
include investments designed primarily to promote the welfare of low- 
and moderate-income communities or families. Under the proposed rule, a 
state member bank may invest, without Board approval, only in a 
corporation, limited partnership, or other entity established solely to 
engage in the following activities: low- and moderate-income housing; 
nonresidential real-estate development in a low- or moderate-income 
area if that real-estate is used primarily by low- and moderate-income 
persons; job training or placement for low- and moderate-income 
persons; small business development in a low- or moderate-income area; 
technical assistance and credit counseling to benefit community 
development; and job creation in a low- or moderate-income area for 
low- and moderate-income persons. The Board is particularly interested 
in comments on whether the test for low- and moderate-income housing 
should be based on whether a majority of the units are occupied by low- 
and moderate-income persons or on other Federal programs such as the 
low income housing credit in section 42 of the Internal Revenue Code.
    In defining low- and moderate-income persons and low- or moderate-
income area, the proposed rule uses definitions that will permit a 
state member bank to look to readily obtainable data. Specifically, the 
proposed rule uses the Department of Housing and Urban Development's 
Chapter 69 Community Development definition of low- and moderate-income 
persons. Similarly, low- or moderate-income area is defined as an area 
in which the median family income is less than eighty percent of the 
median family income of the Metropolitan Statistical Area, or, for non-
metropolitan areas, the state. Finally, the proposed rule uses the 
Small Business Administration's definition of small business.

Substantive Requirements

    The proposed rule contains a number of substantive requirements 
based on section 6(b). Specifically, the investment must not violate 
state law or expose the bank to unlimited liability. In addition, 
without Board approval, a state member bank's aggregate public welfare 
investments must not exceed the sum of 5 percent of the bank's capital 
stock actually paid in and unimpaired and 5 percent of the bank's 
unimpaired surplus fund. The Board has previously determined that 
undivided profits may be considered part of the capital stock and 
surplus of a state member bank (12 CFR 250.152). Accordingly, the 
proposed rule limits aggregate public welfare investments without Board 
approval to up to five percent of the capital stock and surplus of the 
state member bank.
    Section 6(b) also requires that the Board limit investments by a 
state member bank in any one public welfare investment. Investment of 
up to two percent of the bank's capital and surplus would not threaten 
the safety or soundness of a well-run adequately-capitalized bank. In 
addition, previous community development investments by state member 
banks have not approached this ceiling. Accordingly, the proposed rule 
limits a state member bank to investing not more than two percent of 
its capital and surplus in a single investment without Board approval.
    The proposed rule also establishes certain non-statutory 
substantive requirements for state member banks seeking to make public 
welfare investments without Board approval. Specifically, the bank must 
be at least adequately capitalized and rated a composite CAMEL ``1'' or 
``2'', and the bank must not be subject to any written agreement, cease 
and desist order, capital directive, or prompt corrective action 
directive issued by the Board or a Federal Reserve Bank acting under 
delegated authority. These requirements help to ensure that the 
investment is consistent with the safe and sound operation of the bank.

Procedural Requirements

    The proposed rule sets forth four procedural requirements. First, 
to keep Federal Reserve Banks apprised of public welfare investments, 
within 30 days after making a public welfare investment, a state member 
bank must advise its Reserve Bank of the amount of the investment and 
the identity of the corporation, limited partnership, or other entity 
in which the investment is made. Second, a bank seeking to make an 
investment that falls outside of the investments specified in the 
proposed rule must receive Board approval. In no event may aggregate 
investments exceed ten percent of the bank's capital stock and surplus. 
Third, if a public welfare investment entered into under the proposed 
rule ceases to meet the statutory requirements or any requirements 
established by the Board in granting approval, the bank must divest 
itself of the investment to the extent that the investment ceases to 
meet those requirements.\1\ Finally, if a preexisting public welfare 
investment meets the requirements for investments which do not need 
Board approval, or if the Board approved the investment, the bank need 
only notify its Reserve Bank of the investment within sixty days after 
the effective date of the final rule. For other preexisting public 
welfare investments, the bank should apply to the Board for approval of 
the investment within one year after the final rule's effective date.
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    \1\ This divestiture is governed by the same requirements as 
divestitures of interests acquired by a lending subsidiary of a bank 
holding company or a bank holding company itself in satisfaction of 
a debt previously contracted.
    Divestiture is not required if the investment ceases to meet the 
non-statutory requirements concerning capital, CAMEL ratings, and 
enforcement actions.
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Bank Holding Company Investments

    In the event that the Board adopts a final rule permitting state 
member banks to make the proposed public welfare investments discussed 
above, the Board will consider revising its interpretation of 
Regulation Y to permit the same class of investments to be made by bank 
holding companies. If revised accordingly, a bank holding company could 
apply to make those investments under the existing expedited notice 
procedures.
    To deal with proposed public welfare investments by state member 
banks during the pendency of the proposed rule, the Board has delegated 
to the Director of the Division of Bank Supervision and Regulation, in 
consultation with the General Counsel and the Director of the Division 
of Consumer and Community Affairs, the authority to approve investments 
that meet the requirements of the proposed rule.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. 
L. 96-354, 5 U.S.C. 601 et seq.), the Board certifies that the proposed 
amendment will not have a significant economic impact on a substantial 
number of small entities, and that any impact on those entities should 
be positive. The proposed amendments will reduce the regulatory burden 
for many state member banks by permitting them to make certain 
investments that had previously required Board approval, and will have 
no effect in other cases.

List of Subjects in 12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Currency, Federal Reserve System, Reporting and 
recordkeeping requirements, Securities.
    For the reasons set forth in the preamble, the Board is proposing 
to amend 12 CFR part 208 as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. l(b), l(g), l(i), 78b, 
78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318.
    2. Section 208.21 is added to subpart A to read as follows:

Sec. 208.21  Community development and public welfare investments.

    (a) Definitions-- (1) Low- or moderate-income area means:
    (i) One or more census tracts in a Metropolitan Statistical Area 
where the median family income adjusted for family size in each census 
tract is less than eighty percent of the median family income adjusted 
for family size of the Metropolitan Statistical Area; or
    (ii) If not in a Metropolitan Statistical Area, one or more census 
tracts or block-numbered areas where the median family income adjusted 
for family size in each census tract or block-numbered area is less 
than eighty percent of the median family income adjusted for family 
size of the State.
    (2) Low- and moderate-income persons has the same meaning as low- 
and moderate-income persons as defined in 42 U.S.C. 5302a(20)(A).
    (3) Small business means a business that meets the size eligibility 
standards of 13 CFR 121.802(a)(2).
    (b) Investments that do not require prior Board approval. 
Notwithstanding the provisions of R.S. 5136, 12 U.S.C. 24 (Seventh) 
made applicable to State member banks by paragraph 20 of section 9 of 
the Federal Reserve Act (12 U.S.C. 335), a State member bank may make 
an investment, without prior Board approval, if the following 
conditions are met:
    (1) The investment is in a corporation, limited partnership, or 
other entity:
    (i) Where the Board has determined that an investment in that 
entity is a public welfare investment under paragraph 23 of section 9 
of the Federal Reserve Act (12 U.S.C. 338a), or a community development 
investment under Regulation Y (12 CFR 225.25(b)(6)); or
    (ii) Where that entity engages solely in one or more of the 
following community development activities:
    (A) Investing in, developing, rehabilitating, managing, selling, or 
renting residential property if a majority of the units will be 
occupied by low- and moderate-income persons;
    (B) Investing in, developing, rehabilitating, managing, selling, or 
renting nonresidential real property or other assets located in a low- 
or moderate-income area and to be used primarily by low- and moderate-
income persons;
    (C) Investing in one or more small businesses located in a low- or 
moderate-income area to stimulate economic development;
    (D) Investing in, developing, or otherwise assisting job training 
or placement facilities or programs that will be used primarily by low- 
and moderate-income persons;
    (E) Investing in an entity located in a low- or moderate-income 
area if that entity creates long-term employment opportunities, a 
majority of which (based on full time equivalent positions) will be 
held by low- and moderate-income persons; and
    (F) Providing technical assistance, credit counseling, research, 
and program development assistance to low- and moderate-income persons, 
small businesses, or nonprofit corporations to help achieve community 
development;
    (2) The investment is permitted by State law;
    (3) The investment will not expose the bank to liability beyond the 
amount of the investment;
    (4) The investment does not exceed the sum of two percent of the 
bank's capital stock and surplus as defined under 12 CFR 250.162;
    (5) The aggregate of all such investments of the bank does not 
exceed the sum of five percent of its capital stock and surplus as 
defined under 12 CFR 250.162;
    (6) The bank is well capitalized or adequately capitalized under 
Sec.  208.33(b)(1) and (2);
    (7) The bank received a composite CAMEL rating of ``1'' or ``2'' 
under the Uniform Financial Institutions Rating System as of its most 
recent examination; and
    (8) The bank is not subject to any written agreement, cease and 
desist order, capital directive, or prompt corrective action directive 
issued by the Board or a Federal Reserve Bank.
    (c) Notice. Not more than 30 days after making an investment under 
paragraph (b) of this section, the bank shall advise its Federal 
Reserve Bank of the investment, including the amount of the investment 
and the identity of the entity in which the investment is made.
    (d) Investments requiring Board approval. With prior Board 
approval, a State member bank may make public welfare investments under 
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a), 
other than those specified in paragraph (b) of this section.
    (e) Divestiture of investments. A bank shall divest itself of an 
investment made under paragraph (b), (d) or (f) of this section to the 
extent that the investment exceeds the scope of, or ceases to meet, the 
requirements of paragraphs (b)(1) through (5), or paragraph (d) of this 
section. The divestiture shall be made in the manner specified in 
Regulation Y (12 CFR 225.140) for interests acquired by a lending 
subsidiary of a bank holding company or the bank holding company itself 
in satisfaction of a debt previously contracted.
    (f) Preexisting investments. (1) For ongoing investments made prior 
to [the final rule's effective date] that are covered by paragraph (b) 
of this section, a State member bank shall notify its Federal Reserve 
Bank of the investment not more than sixty days after [the final rule's 
effective date].
    (2) For other ongoing investments made prior to [the final rule's 
effective date], a State member bank shall request Board approval not 
more than one year after [the final rule's effective date].

    By order of the Board of Governors of the Federal Reserve 
System, May 19, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-12718 Filed 5-25-94; 8;45 am]
BILLING CODE 6210-01-F