[Federal Register Volume 59, Number 212 (Thursday, November 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27121]


[[Page Unknown]]

[Federal Register: November 3, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 211

[Regulation K; Docket No. R-0793]

 

International Banking Operations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board or 
Federal Reserve) amends its Regulation K concerning the permissible 
activities of state-licensed branches and agencies of foreign banks. 
Section 202(a) of the Federal Deposit Insurance Corporation Improvement 
Act of 1991 (FDICIA or Act) provides that after December 19, 1992, a 
state-licensed branch or agency of a foreign bank may not engage in any 
activity that is not permissible for a federal branch of a foreign bank 
unless the Board has determined that the activity is consistent with 
sound banking practice, and in the case of an insured branch, the 
Federal Deposit Insurance Corporation (FDIC) has determined that the 
activity would pose no significant risk to the affected deposit 
insurance fund. This amendment to Regulation K sets forth the 
application procedures which state-licensed branches and agencies of 
foreign banks will be required to follow in order to request the 
Board's permission to engage in or continue to engage in an activity 
which is not permissible for a federal branch of a foreign bank and the 
requirements of divestiture and cessation plans. Insured branches are 
also required to seek the approval of the FDIC to engage in or to 
continue to engage in such an activity. The final rule also amends 
Regulation K to clarify that no application will be required in 
connection with the conversion by a foreign bank of its federally-
licensed branch or agency into a state-licensed branch or agency.

EFFECTIVE DATE: This regulation is effective on January 1, 1995, except 
for Sec. 211.21(e) which is effective December 5, 1994.

FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General 
Counsel (202/452-3786), Ann E. Misback, Managing Senior Counsel (202/
452-3788), John W. Rogers, Attorney (202/452-2798); Michael G. 
Martinson, Assistant Director (202/452-3640), Division of Banking 
Supervision and Regulation, Board of Governors of the Federal Reserve 
System. For the hearing impaired only, Telecommunication Device for the 
Deaf [TDD], Dorothea Thompson (202/452-3544), Board of Governors of the 
Federal Reserve System, 20th and C Streets, N.W., Washington, D.C. 
20551.

SUPPLEMENTARY INFORMATION: Section 202 of the Act amended section 7 of 
the International Banking Act (IBA) by adding several new subsections 
concerning the establishment and termination of foreign bank branches 
in the United States. New subsection 7(h) of the IBA provides that:

    (1) IN GENERAL.-- After the end of the 1-year period beginning 
on the date of enactment of the [Act] a State branch or State agency 
may not engage in any type of activity that is not permissible for a 
Federal branch unless--
    (A) the [Federal Reserve] Board has determined that such 
activity is consistent with sound banking practice; and
    (B) in the case of an insured branch, the Federal Deposit 
Insurance Corporation has determined that the activity would pose no 
significant risk to the deposit insurance fund.

12 U.S.C. 3105(h)(1).
    In order to implement this provision, the Board issued a proposed 
rule on January 6, 1993, with a request for public comment. (58 FR 
513). In taking this action, the Board stated that it would consider 
revisions to the proposed rule as appropriate and on the basis of the 
comments received. The comment period ended on March 5, 1993. The Board 
indicated that it would accept and process applications under the 
statute during the pendency of the rulemaking. No applications have 
been received.
    The proposed rule required a foreign bank operating a state-
licensed branch or agency in the United States, which desires to engage 
in or continue to engage in an activity that is not permissible for a 
federal branch, pursuant to statute, regulation or order or 
interpretation issued by the Office of the Comptroller of the Currency 
(OCC), to file an application in letter form to the Board for 
permission to conduct or to continue to conduct such activity. The 
proposed regulation set forth the required contents of the application 
and a procedure for divestiture or cessation of impermissible 
activities not approved by the Board.
    The Board specifically requested comment on several items, 
including the contents of the application, whether prior notice rather 
than an application might be appropriate for certain classes of 
activities, and whether the conduct of activities permitted by the OCC 
pursuant to informal rather than formal interpretation, opinion or 
advice should require the filing of an application.
    In addition, the Board requested comment on another provision of 
Regulation K which requires that a foreign bank wishing to convert from 
a federal branch or agency license to a state branch or agency license 
file for approval to do so with the Board.
    The Board received four public comments on the regulation. Comments 
were submitted by a state banking supervisor, an association of state 
banking supervisors, a trade association and a law firm. The commenters 
generally were supportive of the approach taken in the proposed rule. 
The comments focused on whether an activity-based approach rather than 
a bank-based approach would be preferable, whether the conduct of 
activities permitted by the OCC pursuant to informal rather than formal 
interpretation, opinion or advice should require an application and 
whether an application would be required to conduct an activity that 
the OCC permitted but only subject to quantitative restrictions. The 
commenters uniformly stated that no application should be required to 
convert from a federal branch or agency license to a state branch or 
agency license.
    On March 2, 1993, the FDIC issued its own proposed regulation 
implementing section 7(h) of the IBA. See 58 FR 11992. The Board has 
consulted with the FDIC concerning the response to its proposed rule. 
Both the Board and the FDIC have attempted to make their final rules as 
consistent with one another as possible and thereby to reduce the 
burden that might be imposed on applicants. A description of the final 
rule and an analysis of the relevant comments follows.

Determining if an Activity is Permissible for a Federal Branch

    The commenters generally stated that no application should be 
required from a state-licensed branch or agency for the conduct of an 
activity that is permitted for a federal branch pursuant to 
interpretation, opinion or advice issued in writing by the OCC or its 
staff, as well as by statute, regulation official bulletin, circular or 
order. The commenters argued that a stricter requirement would result 
in a competitive disadvantage to state licensed offices and thereby 
would be inconsistent with the intent of the statute. The Board agrees 
with that argument. Accordingly, the conduct of activities permitted 
for a federal branch pursuant to interpretation, opinion or advice 
issued in writing by the OCC or its staff would not require an 
application, so long as such interpretation, opinion or advice is still 
considered valid, i.e., it has not been overruled by the OCC or found 
invalid by a court of competent jurisdiction. In addition, because 
national banks and federal branches may rely on a written opinion of 
counsel that an activity is permissible under the National Bank Act or 
other applicable statutes, in the Board's view, it would be appropriate 
to permit state-licensed branches and agencies also to rely on such 
opinions, provided the opinion of counsel is based on a reasoned 
analysis of applicable statutes, regulations, official bulletins, 
circular, orders, or interpretations, opinions or advice of the OCC or 
its staff. The Board plans to consult with the OCC when questions arise 
as to the permissibility of any particular activity. Insured branches 
of foreign banks also should consult with the FDIC as to the 
permissibility of particular activities.

Bank Approach Versus Activity Approach

    The Board's proposed rule took a bank-based approach to 
implementing the statute; that is, an application was required from 
each bank wishing to conduct or continue to conduct an activity not 
permissible for a national bank. The comments suggested that the Board 
instead take an activity based approach, at least with respect to 
activities which the commenters believed presented minimal risk. One 
commenter suggested that the Board entertain applications from industry 
trade groups with respect to the conduct of such activities.
    The Board has determined that a combination of the two approaches 
is the appropriate way to proceed and has modified the proposed rule 
accordingly. As described in further detail below, the final rule 
provides that certain categories of activities are consistent with 
sound banking practice and that no application should be required to 
conduct such activities. The fact that the Board's prior consent is not 
required does not preclude the Board from taking any appropriate action 
within its authority with respect to such activities if the facts and 
circumstances warrant such action.

Application Not Required in Certain Instances

    The first category of activities exempted from the application 
requirement are certain activities already determined by the FDIC not 
to pose a significant risk to the Bank Insurance Fund pursuant to 
Sec. 362.4(c)(3) of the FDIC's regulations (12 CFR part 362). The Board 
has determined not to require an application under this part for the 
conduct of any such activity that the FDIC would permit an insured 
state bank to conduct directly, provided the activity is permissible 
for the branch or agency under applicable state law and any other 
applicable federal law or regulation. The Board believes the conduct of 
these activities, with proper controls, is consistent with safe and 
sound banking. As set forth in 12 CFR 362.4(c)(3)(i)-(ii)(A), the 
exempted activities include guarantee activities and activities found 
by the Board by regulation or order to be closely related to banking. 
In addition, the Board has determined to exempt from the application 
requirement any activity conducted as agent rather than as principal, 
provided that the activity is one that could be conducted by a state-
chartered bank headquartered in the same state as the branch or agency 
is licensed. Of course, all activities of the branches and agencies 
remain subject to examination. If any particular activity is found to 
be improperly conducted, the Board retains enforcement authority to 
require conformance to safety and soundness requirements.
    Finally, like the proposed rule, the final rule provides that an 
application under this section normally shall not be required where an 
activity is permissible to a federal branch but the OCC imposes a 
quantitative restriction on the conduct of such activity by the federal 
branch. The commenters were supportive of this exemption. The Board 
believes appropriate quantitative restrictions can be addressed on a 
case- by-case basis as part of the ongoing supervisory process.

Contents of Application

    Section 211.29(b) of the proposed regulation provided that the 
application shall be in letter form and shall contain certain 
information, including among other things, a description of the 
activity in which the branch or agency desires to engage or in which it 
is already engaged, the foreign bank's financial condition, the assets 
and liabilities of the branch or agency, the projected effect of the 
proposed activity on the financial condition of the foreign bank and 
the branch or agency, and in the case of an application by a state-
licensed insured branch, a statement of why the proposed activity will 
pose no significant risk to the deposit insurance fund.
    The commenters suggested that applicants not be required to provide 
information already available to the Federal Reserve through its 
general examination and supervisory process. Accordingly, the Board has 
deleted from the final rule the requirement to provide certain 
financial information. The Board may request such information in 
individual cases if the information in its possession is either out of 
date or otherwise deemed insufficient.
    The Board and the FDIC have consulted concerning the type of 
information which each agency will need in order to make an informed 
judgment and have agreed on a common list of information in order that 
applicants will need to prepare only one application which, in the case 
of insured branches, may be submitted to both agencies. It is 
contemplated that the Board and the FDIC will review such applications 
simultaneously.

Standards To Be Examined

    Section 211.29(d) of the final rule sets forth the standards that 
the Board will examine in order to determine whether a particular 
activity is consistent with sound banking practice. These factors are:
     What types of risks, if any, the activity poses to the 
U.S. operations of the foreign banking organization;
     If the activity poses any such risks, the magnitude of 
each risk; and
     If a risk is not de minimis, the actual or proposed 
procedures to control and minimize such risk.

Each of these factors shall be evaluated in light of the ability of the 
foreign bank to provide financial and managerial support to the branch 
or agency, the performance record of the foreign bank in general and 
the branch or agency in particular, and the volume of the proposed 
activity. The Board may also determine that a particular activity, 
after consideration of the above factors and subject to any conditions 
or limits imposed by the Board, may be conducted by any other state-
licensed branch or agency without further application to the Board.
    This section remains unchanged from the proposed rule.

Cessation or Divestiture

    In the event that a state branch or agency is required to cease 
conducting an activity pursuant to the final regulation, Sec. 211.29(f) 
sets forth the guidelines that must be followed to divest or cease the 
impermissible activity. Generally, this section provides that the state 
branch or agency shall submit a written plan of divestiture or 
cessation within 60 days of (1) being notified by the Board or the FDIC 
that an application to continue to conduct the activity has been 
denied, (2) the effective date of the regulation in the event that the 
foreign bank elects not to apply for permission to continue to conduct 
the activity, and (3) any change in statute, regulation, order or OCC 
interpretation that renders the activity impermissible. Divestiture or 
cessation shall be completed within one year, or sooner if the Board so 
directs. The Board requested comment on whether or not this period of 
time should be longer or shorter.
    No comments were received on this portion of the proposed rule. 
Accordingly, no substantive changes were made.

Conversion From Federal to State License

    As suggested by the commenters, the Board has determined not to 
require an application under the Foreign Bank Supervision Enhancement 
Act in connection with the conversion of: (1) a federally-licensed 
branch to a state licensed-branch; or (2) a federally licensed-agency 
to a state-licensed agency. Applications are not considered necessary 
in light of the fact that state-licensed branches and agencies must 
restrict their activities to those permissible for a federal branch or 
receive the Board's approval to engage in the activity. Section 24 of 
Regulation K will be amended accordingly.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), it is certified that this final rule will not have 
a significant impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and record-keeping requirements.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
part 211 as set forth below:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

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

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 1843 et 
seq., 3101 et seq., 3901 et seq.

    2. In Sec. 211.21, paragraph (e) is revised to read as follows:


Sec. 211.21  Definitions.

* * * * *
    (e) Change the status of an office means convert a representative 
office into a branch or agency, or an agency into a branch, but does 
not include renewal of the license of an existing office.
* * * * *
    3. In Sec. 211.29, the text is added to read as follows:


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

    (a) Scope. A state-licensed branch or agency shall file with the 
Board a prior written application for permission to engage in or 
continue to engage in any type of activity that:
    (1) Is not permissible for a federal branch, pursuant to statute, 
regulation, official bulletin or circular, or order or interpretation 
issued in writing by the Office of the Comptroller of the Currency; or
    (2) Is rendered impermissible due to a subsequent change in 
statute, regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction.
    (b) Exceptions. No application shall be required by a state-
licensed branch or agency to conduct any activity that is otherwise 
permissible under applicable state and federal law or regulation and 
that:
    (1) Has been determined by the FDIC pursuant to 12 CFR 
362.4(c)(3)(i)-(c)(3)(ii)(A) not to present a significant risk to the 
affected deposit insurance fund;
    (2) Is permissible for a federally-licensed branch but the OCC 
imposes a quantitative limitation on the conduct of such activity by 
the federal branch;
    (3) Is conducted as agent rather than as principal, provided that 
the activity is one that could be conducted by a state-chartered bank 
headquartered in the same state in which the branch or agency is 
licensed; or
    (4) Any other activity that the Board has determined may be 
conducted by any state-licensed branch or agency of a foreign bank 
without further application to the Board.
    (c) Contents of application. An application submitted pursuant to 
paragraph (a) of this section shall be in letter form and shall contain 
the following information:
    (1) A brief description of the activity, including the manner in 
which it will be conducted and an estimate of the expected dollar 
volume associated with the activity;
    (2) An analysis of the impact of the proposed activity on the 
condition of the U.S. operations of the foreign bank in general and of 
the branch or agency in particular, including a copy, if available, of 
any feasibility study, management plan, financial projections, business 
plan, or similar document concerning the conduct of the activity;
    (3) A resolution by the applicant's board of directors or, if a 
resolution is not required pursuant to the applicant's organizational 
documents, evidence of approval by senior management, authorizing the 
conduct of such activity and the filing of this application;
    (4) If the activity is to be conducted by a state-licensed insured 
branch, a statement by the applicant of whether or not it is in 
compliance with 12 CFR 346.19 and 346.20, Pledge of Assets and Asset 
Maintenance, respectively;
    (5) If the activity is to be conducted by a state-licensed insured 
branch, statements by the applicant:
    (i) That it has complied with all requirements of the Federal 
Deposit Insurance Corporation concerning an application to conduct the 
activity and the status of the application, including a copy of the 
FDIC's disposition of such application, if available; and
    (ii) Explaining why the activity will pose no significant risk to 
the deposit insurance fund; and
    (6) Any other information that the Reserve Bank deems appropriate.
    (d) Factors considered in determination. (1) The Board shall 
consider the following factors in determining whether a proposed 
activity is consistent with sound banking practice:

    (i) The types of risks, if any, the activity poses to the U.S. 
operations of the foreign banking organization in general and the 
branch or agency in particular;
    (ii) If the activity poses any such risks, the magnitude of each 
risk; and
    (iii) If a risk is not de minimis, the actual or proposed 
procedures to control and minimize the risk.

    (2) Each of the factors set forth in paragraph (d)(1) of this 
section, shall be evaluated in light of the financial condition of the 
foreign bank in general and the branch or agency in particular and the 
volume of the activity.
    (e) Application procedures. Applications pursuant to this section 
shall be filed with the responsible Reserve Bank for the foreign bank. 
An application shall not be deemed complete until it contains all the 
information requested by the Reserve Bank and has been accepted. 
Approval of such an application may be conditioned on the applicant's 
agreement to conduct the activity subject to specific conditions or 
limitations.
    (f) Divestiture or cessation. (1) In the event that an applicant's 
application for permission to continue to conduct an activity is not 
approved by the Board or, if applicable, the FDIC, the applicant shall 
submit a detailed written plan of divestiture or cessation of the 
activity to the responsible Reserve Bank within 60 days of the 
disapproval. The divestiture or cessation plan shall describe in detail 
the manner in which the applicant will divest itself of or cease the 
activity and shall include a projected timetable describing how long 
the divestiture or cessation is expected to take. Divestitures or 
cessation shall be complete within one year from the date of the 
disapproval, or within such shorter period of time as the Board shall 
direct.
    (2) In the event that a foreign bank operating a state branch or 
agency chooses not to apply to the Board for permission to continue to 
conduct an activity that is not permissible for a federal branch or 
which is rendered impermissible due to a subsequent change in statute, 
regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction, the 
foreign bank shall submit a written plan of divestiture or cessation, 
in conformance with paragraph (f)(1), of this section within 60 days of 
January 1, 1995 or of such change or decision.

    By order of the Board of Governors of the Federal Reserve 
System, October 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-27121 Filed 11-2-94; 8:45 am]
BILLING CODE 6210-01-P