[Federal Register Volume 60, Number 185 (Monday, September 25, 1995)]
[Proposed Rules]
[Pages 49350-49353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23670]



 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 60, No. 185 / Monday, September 25, 1995 / 
Proposed Rules  

[[Page 49350]]


FEDERAL RESERVE SYSTEM

12 CFR Part 211

[Regulation K; Docket No. R-0896]


International Operations of United States Banking Operations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is publishing for comment proposed amendments to 
Subpart A of Regulation K (International Operations of U.S. Banking 
Operations). The amendments provide additional general consent 
authority for de novo investments in foreign companies by U.S. banking 
organizations that are strongly capitalized and well managed. This 
expanded general consent authority is designed to permit U.S. banking 
organizations meeting these requirements to make certain investments 
without the need for prior approval or review. In order to strike a 
reasonable balance, however, between reduced regulatory burden and 
continued Board oversight, the amendments would impose aggregate limits 
on the total amount of general consent investments that may be made in 
the course of a year. In addition, certain investments or activities 
would not be eligible for the expanded authority. The proposed rule 
would require an investor making use of the expanded authority to 
provide the Board with a post-investment notice. In addition, for those 
investments requiring prior notice to the Board, the proposed rule 
would streamline the processing of such notices.

DATES: Comments must be submitted by October 30, 1995.

ADDRESSES: Comments should refer to Docket No. R-0896, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. 
Comments also may be delivered to Room B-2222 of the Eccles Building 
between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard station in 
the Eccles Building courtyard on 20th Street NW., (between Constitution 
Avenue and C Street) at any time. Comments received will be available 
for inspection in Room MP-500 of the Martin Building between 9 a.m. and 
5 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding the availability of information.

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

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

    \1\ In the case of an Edge corporation not engaged in banking, 
the relevant general consent limit is the lesser of $25 million or 
25 percent of its Tier 1 capital.
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    The Board has reviewed the general consent authority in light of 
the amount and nature of the investments that required prior review 
because they exceeded the general consent dollar limits. The Board has 
concluded that the current general consent authority may be safely 
expanded for U.S. banking organizations that are strongly capitalized 
and well managed. This expanded general consent authority is intended 
to reduce the burden associated with obtaining approval for such 
investments for U.S. banking organizations meeting these requirements.
    The constraining limit in the general consent authority that 
triggers the requirement of prior notice often has been the $25 million 
cap. The Board seeks comment on a rule that, in order to reduce burden 
on applicants, would add additional general consent authority for U.S. 
banking organizations that are strongly capitalized and well managed by 
removing the absolute dollar limit and linking the general consent 
limits solely to percentages of capital.

Proposed Rule

    The proposed rule would streamline the Board's notice requirement 
under Subpart A of Regulation K by increasing the limit on investments 
that may be made abroad without providing prior notice to the Board. 
This liberalization would be available in relation to certain de novo 
investments and for additional investments in existing subsidiaries and 
joint ventures by investors that have demonstrated strong capital and 
management. This expanded general consent authority also is intended to 
reduce the burden associated with obtaining approval for such 
investments for U.S. banking organizations meeting the strongly-
capitalized and well-managed standards. The Board seeks comment on each 
of the requirements or limitations discussed below.

Strongly-Capitalized and Well-Managed Requirement

    The expanded general consent authority would be available for 
investments by member banks, bank holding companies, Edge corporations 
that are not engaged in banking, and agreement corporations. The 
expanded authority would only be available where the investor, its 
parent member bank, if any, and the bank holding company are strongly 
capitalized and well managed, as those terms are defined by the Board. 
``Strongly capitalized,'' in relation to 

[[Page 49351]]
member banks, is defined with reference to the definition of ``well 
capitalized'' set out in the prompt corrective action standards, which 
requires, at a minimum, a 6 percent Tier 1 and 10 percent total risk-
based capital ratio and a leverage ratio of 5 percent.2 12 CFR 
208.33(b)(1). For purposes of Regulation K, Edge or agreement 
corporations and bank holding companies would be required to have a 
total risk-based capital ratio of 10 percent or more in order to be 
considered strongly capitalized for purposes of the expanded authority. 
A definition of ``well managed'' is also included in the proposed rule, 
which provides that, in order to be considered well managed, the Edge 
or agreement corporation, its parent member bank, if any, and the bank 
holding company must each have received a composite rating of at least 
1 or 2, with no component below 3, at its most recent examination or 
review.

    \2\ The member bank also may not be subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific 
capital level for any capital measure. 12 CFR 208.33(b)(1).
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Expanded Authority for General Consent Investments

    The new proposed limits for the expanded general consent authority 
would be tied to the capital of the investor. With regard to limits on 
investments in any one company by Edge corporations not engaged in 
banking or agreement corporations that meet the requirements discussed 
above, the Board proposes that the limits should be changed to the 
lesser of 20 percent of the Edge or agreement corporation's Tier 1 
capital or 2 percent of the Tier 1 capital of the member bank.3 So 
long as the 2 percent limit is not exceeded by its parent, Edge 
corporations not engaged in banking will be permitted to invest up to 
20 percent of their capital. This higher limit is authorized because 
such Edge corporations do not take deposits in the United States or own 
U.S. depository institutions. Any financial effect on the parent bank 
would be constrained by the 2 percent limit.

    \3\  The proposed 20 percent limit of the Edge's Tier 1 capital 
derives from the constraint imposed by section 25A of the Federal 
Reserve Act, which prohibits any investment in excess of 10 percent 
of the subscribing bank's capital in Edge and agreement 
corporations.
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    A limit of 2 percent of the Tier 1 capital of a member bank appears 
to strike a reasonable balance between two objectives: permitting an 
organization considered to be strongly capitalized and well managed to 
make investments that management considers to be appropriate with a 
minimum of regulatory interference, and requiring prior review for 
investments involving a high percentage of capital. The latter 
investments may cause supervisory concern because an initial capital 
investment can be leveraged many times.
    The proposed rule also sets an overall aggregate limit on all 
investments made during the previous 12-month period under the existing 
and the expanded general consent authority. All such investments made 
by an Edge corporation not engaged in banking or an agreement 
corporation, when aggregated with the proposed investment, would not be 
permitted to exceed the lesser of 50 percent of the Edge or agreement 
corporation's total capital or 5 percent of the parent member bank's 
total capital. An overall aggregate limit of 5 percent of their total 
capital would apply to investments by member banks and bank holding 
companies. These limits again were selected in an effort to strike a 
reasonable balance between giving such entities credit for their 
strongly-capitalized and well-managed status, in the form of reduced 
regulatory burden, but maintaining the requirement for, at a minimum, 
prior notice to the Board once the overall level of foreign investments 
may give rise to supervisory concern.
    The proposal provides, however, that in determining compliance with 
these aggregate limits, an investment in a subsidiary shall be counted 
only once notwithstanding that such subsidiary may, within the next 12 
months, downstream all or part of such investment to another 
subsidiary. This change is designed to avoid double counting and simply 
recognizes that often, especially for tax purposes, investments are 
downstreamed from one subsidiary to another in a banking group--an 
event that, so long as the investors are strongly capitalized and well 
managed, generally would not raise supervisory concerns. It would, 
however, significantly reduce the burden upon investors that meet the 
requirements for the expanded authority by removing the need for prior 
notices to the Board for transactions that really constitute the 
movement of funds within the banking group.

Additional Investments

    The proposed rule also confirms that strongly-capitalized and well-
managed investors making investments under the expanded general consent 
authority may also make additional investments in subsidiaries and 
joint ventures under the standards set out in the existing general 
consent authority. 12 CFR 211.5(c)(1)(ii-iv). Thus, once the expanded 
general consent authority for initial investments has been exhausted in 
respect of one organization, additional investments may be made 
consistent with the provisions of Sec. 211.5(c)(1).

Eligible Investments

    The proposed rule establishes the nature of investments eligible 
for the expanded general consent authority, as well as the types of 
activities that may be conducted by the organization in which the 
investment is to be made. Subject to certain exceptions, the rule would 
permit investments in any activities either permissible for 
subsidiaries under Regulation K or permissible for national banks to 
engage in directly. Ineligible investments are limited to an investor's 
initial entry into a foreign country, the establishment or acquisition 
of an initial subsidiary bank in a foreign country, investments in 
general partnerships or unlimited liability companies, and an 
acquisition of shares or assets of a corporation that is not an 
affiliate of the investor. Retention of specific approval authority 
over establishment of new foreign bank offices and outward expansion of 
banking institutions is consistent with the minimum standards for 
consolidated supervision of the Basle Committee on Banking Supervision.
    Exclusion of the acquisitions is intended to limit the expanded 
authority to investments in de novo subsidiaries (including subsequent 
investments in such subsidiaries) by excluding the acquisition of going 
concerns (unless already held by an affiliate). The risks associated 
with such acquisitions are considered to be greater than the amount of 
capital invested (extending also, for example, to the value of the 
company's assets).
    The Board seeks comment on the exclusion of these investments from 
the expanded general consent authority. In particular, the Board seeks 
comment on whether additional investments in companies acquired as 
going concerns also should be eligible for the expanded authority.

Post-Investment Notice Requirement

    The proposed rule would require an investor making use of the 
expanded authority to provide the Board with a post-investment notice 
within 10 days of making the investment. The notice would require 
provision of certain minimal information for purposes of supervising 
the banking organizations making use of the expanded authority, 
including a description of the investment, the terms and sources of 

[[Page 49352]]
funding, the entities involved, and, where the investment is to redress 
a loss, a description of the reasons for the loss and the steps taken 
to address the problem. The Board solicits comment regarding this 
requirement generally, the information to be submitted in any such 
notice, and ways in which such a post-investment notice may be 
coordinated with existing reporting requirements.

Simultaneous Review

    The proposal would amend the Board's current procedures for 
processing prior notices and applications under Subpart A of Regulation 
K. Specifically, under Sec. 211.5(c)(2), the Board has 45 days to 
object to any investment that is the subject of a prior notice and the 
45-day period commences on the day that the prior notice is accepted by 
the relevant Reserve Bank. The proposed rule would amend the regulation 
to provide that the 45-day period starts on the date of the Reserve 
Bank's receipt of the prior notice. This change is expected to 
accelerate the processing of such notices, reduce the number of 
information requests that applicants must answer, and more generally 
reduce the regulatory burden associated with sequential review. Under 
the proposed rule, however, the Board would continue to have the 
ability to modify or suspend the general consent and prior notice 
procedures. The Board also proposes to extend this treatment to the 
processing of applications under Regulation K.

Request for Comment

    The Board requests comments on all aspects of the rule discussed 
above. In addition, comments are requested regarding other ways in 
which the provisions of Subpart A of Regulation K might be streamlined 
or rendered less burdensome, either in terms of U.S. banking 
organizations that meet strongly-capitalized and well-managed 
standards, or more generally.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an 
initial regulatory flexibility analysis with any notice of proposed 
rulemaking. A description of the reasons why the action by the agency 
is being considered and a statement of the objectives of, and the legal 
basis for, the proposed rule are contained in the supplementary 
information above. The overall effect of the proposed rule would be to 
reduce regulatory burden. The rule should not have a significant 
economic impact on a substantial number of small business entities 
consistent with the spirit and purpose of the Regulatory Flexibility 
Act.

Paperwork Reduction Act and Regulatory Burden

    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) also requires 
that the federal banking agencies must consider the administrative 
burdens and benefits of any new regulation that imposes additional 
requirements on insured depository institutions. The Board does not 
consider that the proposed rule would impose additional requirements on 
insured depository institutions, nor would it increase the regulatory 
paperwork burden of banking organizations pursuant to the provisions of 
the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). To the contrary, 
the proposed rule would reduce regulatory burden for U.S. banking 
organizations that are strongly capitalized and well managed. The 
current annual burden for these application and notification 
requirements is estimated to be 440 hours. The proposed amendments 
could reduce the burden estimate by as much as half.
    Although the proposal would require U.S. banking organizations 
making investments pursuant to the expanded general consent authority 
to file an abbreviated post-investment notice with the Board, this 
notice would take the place of the requirements relating to prior 
notice or application to the Board for prior approval that would be 
required under existing Regulation K procedures before any such 
investment could be made.

List of Subjects in 12 CFR Part 211

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

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

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

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

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

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


Sec. 211.2  Definitions.

* * * * *
    (u) Strongly capitalized means:
    (1) In relation to a parent member bank, that the standards set out 
in 12 CFR 208.33(b)(1) are satisfied; and
    (2) In relation to an Edge or Agreement corporation or a bank 
holding company, that it has a total risk-based capital ratio of 10.0 
percent or greater.
* * * * *
    (x) Well managed means that the Edge or Agreement corporation, its 
parent member bank, if any, and the bank holding company have each 
received a composite rating of at least 1 or 2, with no component below 
3, at its most recent examination or review.
    3. Section 211.5 is amended by:
    a. Redesignating paragraphs (c) (2) and (3) as paragraphs (c) (3) 
and (4) respectively;
    b. By adding a new paragraph (c)(2); and
    c. In newly designated paragraph(c)(3), by removing the word 
``accepted'' in the third sentence and adding in its place the word 
``received''.
    The addition reads as follows:


Sec. 211.5  Investments and activities abroad.

* * * * *
    (c) * * *
* * * * *
    (2)(i) Additional general consent for de novo investments. 
Notwithstanding the amount limitations of paragraph (c)(1) of this 
section, but subject to the other limitations of this section, the 
Board grants additional general consent authority for investments in an 
organization by an investor that is strongly capitalized and well 
managed if:
    (A) The activities of the organization are limited to activities in 
which a national bank may engage directly or in which a subsidiary may 
engage under Sec. 211.5(d);
    (B) In the case of an investor that is an Edge corporation that is 
not engaged in banking or agreement corporation, the total amount 
invested in such organization (in one transaction or a series of 
transactions) does not exceed the lesser of the investor's 20 percent 
of the Tier 1 capital or 2 percent of the Tier 1 capital of the parent 
member bank;
    (C) In the case of a bank holding company or member bank investor, 
the total amount invested in such organization (in one transaction or a 
series of transactions) directly or indirectly does not exceed 2 
percent of the investor's Tier 1 capital;
    (D) All investments made by an Edge corporation not engaged in 
banking or 

[[Page 49353]]
an agreement corporation during the previous 12-month period under 
paragraph (c)(1) and (c)(2) of this section, when aggregated with the 
proposed investment, would not exceed the lesser of 50 percent of the 
total capital of the Edge or agreement corporation, or 5 percent of the 
total capital of the parent member bank;
    (E) All investments made by a member bank or a bank holding company 
during the previous 12-month period under paragraph (c)(1) and (c)(2) 
of this section without providing prior notice to or obtaining the 
consent of the Board, when aggregated with the proposed investment, 
would not exceed 5 percent of its total capital; and
    (F) Both before and immediately after the proposed investment the 
investor, its parent member bank, if any, and the bank holding company 
are strongly capitalized and well managed.
    (ii) Determining aggregate investment limits. For purposes of 
determining compliance with the aggregate investment limits set out in 
paragraph (c)(2)(i) (D) and (E) of this section, an investment by an 
investor in a subsidiary shall be counted only once notwithstanding 
that such subsidiary may, within 12 months of the date of making the 
investment, downstream all or any part of such investment to another 
subsidiary.
    (iii) Additional investments. An investor that makes investments 
under paragraph (c)(2)(i) of this section may also make additional 
investments in an organization under the standards set forth in 
paragraphs (c)(1)(ii), (c)(1)(iii) and (c)(1)(iv) of this section.
    (iv) Ineligible investments. The following investments are not 
eligible for the general consent under paragraph (c)(2)(i) of this 
section:
    (A) The initial entry into a foreign country;
    (B) The establishment or acquisition of an initial subsidiary bank 
in a foreign country;
    (C) Investments in general partnerships or unlimited liability 
companies; and
    (D) An acquisition of shares or assets of an organization that is 
not an affiliate of the investor.
    (v) Post-investment notice. Within 10 business days of making the 
investment, the investor shall provide the Board with a notice setting 
out all material information relating to the investment, including:
    (A) A description of the investment and the activities to be 
conducted;
    (B) The identity of all entities involved in the investment, 
including any downstream investment, and, if the investment is in a 
joint venture, the respective responsibilities of the parties to the 
joint venture;
    (C) A description of the terms and sources of funds for the 
transaction and projections for the organization in which the 
investment is made for the first year following the investment; and
    (D) In the case of additional investments, an explanation of the 
reasons for the investment and, where the investment is made in an 
organization that incurred a loss in the last year, a description of 
the reasons for the loss and the steps taken to address the problem.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, September 20, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-23670 Filed 9-22-95; 8:45 a.m.]
BILLING CODE 6210-01-P