[Federal Register Volume 60, Number 249 (Thursday, December 28, 1995)]
[Rules and Regulations]
[Pages 67050-67054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31362]
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FEDERAL RESERVE SYSTEM
12 CFR Part 211
[Regulation K; Docket No. R-0896]
International Operations of United States Banking Organizations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: This final rule amends Subpart A of Regulation K
(International Operations of U.S. Banking Organizations) to provide
expanded general consent authority for investments in foreign companies
by
[[Page 67051]]
U.S. banking organizations that are strongly capitalized and well
managed. This expanded authority is designed to permit U.S. banking
organizations meeting these requirements to make larger investments
without the need for prior approval or review. Certain investments or
activities, however, are not eligible for the expanded authority. The
final rule requires an investor making use of the expanded authority to
provide the Board with certain information after an investment has been
made. In addition, for those investments requiring prior notice to the
Board, the rule would streamline the processing of such notices.
EFFECTIVE DATE: December 21, 1995.
FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General
Counsel (202/452-3786), Sandra L. Richardson, Managing Senior Counsel
(202/452-6406), Jonathan D. Stoloff, Senior Attorney (202/452-3269), or
Andres L. Navarrete, Attorney (202/452-2300), Legal Division; William
A. Ryback, Associate Director (202/452-2722), Michael G. Martinson,
Assistant Director (202/452-2798), or Betsy Cross, Manager (202/452-
2574), Division of Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System. For the users of
Telecommunication Device for the Deaf (TDD) only, please contact
Dorothea Thompson (202/452-3544), Board of Governors of the Federal
Reserve System, 20th and C Streets, N.W., Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION: Subpart A of the Board's Regulation K sets
out the rules governing the foreign activities of U.S. banking
organizations, including procedures for making investments in foreign
banking and non-banking organizations. Under section 211.5(c), all such
investments, whether made directly or indirectly, are required to be
made in accordance with the general consent, prior notice, or specific
consent procedures contained in that paragraph. 12 CFR 211.5(c). No
prior notice or application is required for any investment that falls
within the general consent authority. Such authority at present is
limited to investments where the total amount invested in any one
organization, in one transaction or a series of transactions, does not
exceed the lesser of $25 million or 5 percent of the investor's Tier 1
capital where the investor is a member bank, bank holding company, or
Edge corporation engaged in banking.1
\1\ In the case of an Edge corporation not engaged in banking,
the relevant general consent limit is the lesser of $25 million or
25 percent of its Tier 1 capital.
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On September 25, 1995, the Board requested public comment on a
proposed rule that would expand the general consent authority for
strongly capitalized and well-managed banking organizations. 60 FR
49350. The expanded general consent authority (expanded authority) was
intended to reduce the burden associated with obtaining approval for
such investments for U.S. banking organizations meeting these
requirements. The comment period ended on October 30, 1995. The Board
received nine public comments on the proposal. Comments were submitted
by six banking organizations and three trade associations. The Board
has considered the comments and, as a result of its further review, has
made several changes to address these comments in the final rule.
The final rule removes the current $25 million cap on general
consent investments, which is currently the binding constraint on such
investment in almost all cases, and instead ties the expanded general
consent limits to the capital of the investor. An aggregate limit on
investments made in any 12-month period under the expanded authority is
established. The final rule also specifies the nature of investments
eligible for the expanded authority, as well as the types of activities
that may be conducted by the organization in which the investment is to
be made. Comments received regarding each of these areas are discussed
below.
Investor Eligibility for Expanded General Consent
The final rule limits the expanded general consent authority to
those investors that are strongly capitalized and well managed. The
expanded authority is available for investments by member banks, bank
holding companies, Edge corporations that are not engaged in banking,
and agreement corporations. The expanded authority is available only
where the investor, its parent member bank, if any, and the bank
holding company are strongly capitalized and well managed, as those
terms are defined by the Board. Strongly capitalized, in relation to
member banks, is defined with reference to the definition of ``well
capitalized'' set out in the prompt corrective action standards, which
requires, at a minimum, a 6 percent tier 1 and 10 percent total risk-
based capital ratio and a leverage ratio of 5 percent.2 12 CFR
208.33(b)(1). Edge or agreement corporations and bank holding companies
are required to have a total risk-based capital ratio of 10 percent or
more in order to be considered strongly capitalized for purposes of the
expanded authority.
\2\ The member bank also may not be subject to any written
agreement, order, capital directive, or prompt corrective action
directive issued by the Board to meet and maintain a specific
capital level for any capital measure. 12 CFR 208.33(b)(1).
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One commenter asked for clarification with respect to the
applicability of the capital tests, maintaining that the capital
requirement should apply only to the investor and entities that control
the investor. Section 211.5(c)(2)(i)(F) of the proposed rule indicates
that this is in fact the requirement.
Another commenter pointed out that risk-based capital ratios have
not been applicable previously to Edge corporations not engaged in
banking. The Board notes this comment but considers that calculating
such a ratio would not impose an undue burden on those investors
seeking to utilize the expanded authority.
The definition of well managed included in the proposed rule
provided that, in order to be considered well managed, the Edge or
agreement corporation, its parent member bank, if any, and the bank
holding company must each have received a composite rating of at least
1 or 2, with no component below 3, at its most recent examination or
review. Comments submitted advocated relying solely upon the composite
rating for purposes of the ``well managed'' definition. The final rule
incorporates this change. However, an additional element also has been
incorporated in the definition to clarify that any investor that is
under a formal supervisory action would be ineligible to take advantage
of the expanded authority. The Board believes the existence of any such
supervisory action would be indicative of managerial deficiencies such
that the expanded authority should not be available.
Individual Investment Limit
Limits were proposed on the expanded authority that were tied to
the level of capital of the investor. For Edge or agreement
corporations, the relevant limits were proposed to be no more than the
lesser of 20 percent of the Edge or agreement corporation's tier 1
capital or 2 percent of the tier 1 capital of its parent member bank.
For member banks and bank holding companies, the proposed limit was no
more than 2 percent of tier 1 capital.
One commenter proposed that the limit be raised to at least 2.5
percent of total capital. Several commenters noted that the existing
general consent authority in Regulation K sets the limit at 5 percent
of tier 1 capital, and advocated retention of the higher limit.
[[Page 67052]]
The Board notes, however, that the current limit is expressed as the
lesser of $25 million or 5 percent of tier 1 capital; the $25 million
limit on general consent investments has proved to be the constraining
factor, particularly for U.S. banking organizations that would meet the
strongly capitalized standard. The Board believes that a general
consent limit of 5 percent of tier 1 capital, in the absence of an
absolute dollar cap, would be too high even for organizations that are
strongly capitalized and well managed because an initial capital
investment in, for example, a subsidiary, may be leveraged many times
resulting in a potential total exposure far in excess of the initial 5%
of capital. The Board has therefore decided to retain the proposed 2
percent limit in the final rule.
In response to a comment seeking clarification that the existing
authorization for general consent investments will continue to be
available, the Board notes that the expanded authority is parallel
authority for making investments by banking organizations that meet the
strongly capitalized and well managed standards. As is clear from
section 211.5(c)(2)(i)(B) and (C) of Regulation K, however, the limits
on investment in any one organization apply on a cumulative basis over
time and include investments made under the existing as well as the
expanded authority.
Several commenters argued that expanded authority should be
available for additional investments in existing subsidiaries. The
Board notes that, as indicated in section 211.5(c)(2)(iv)(D) of the
final rule, using the expanded authority for making additional
investments in existing subsidiaries and joint ventures is permissible
under the terms of the final rule, subject to the investment limits and
the other investment restrictions.
Aggregate Investment Limit
The proposed rule provided for an overall aggregate investment
limit on all investments made during the previous 12-month period under
the existing and the expanded authority. Under this limit, all such
investments, when aggregated with the proposed investment, may not
exceed the lesser of 50 percent of the Edge or agreement corporation's
total capital or 5 percent of the parent member bank's total capital,
in the case of an Edge or agreement corporation, or 5 percent of its
total capital, in the case of a member bank or a bank holding company.
A number of commenters supported the Board's position that the
aggregate limits apply only to general consent investments and not to
investments made pursuant to prior notice or specific consent.
However, one commenter argued that investments made under existing
general consent authority should not count toward the aggregate limit
because once the aggregate limit is reached, prior notice would be
required for small investments representing little risk to the
investor. The Board agrees that the additional regulatory burden
associated with including investments made under the existing general
consent authority in calculating the aggregate limits outweighs any
supervisory benefits. Accordingly, the aggregate limit shall apply only
to investments made under the expanded general consent authority.
The proposal also provided that, in determining compliance with the
aggregate limits and in order to avoid double counting of investments,
an investment in a subsidiary shall be counted only once
notwithstanding that such subsidiary may, within the next 12 months,
downstream all or part of such investment to another subsidiary.
Several commenters argued for a longer time period in which to make
downstream investments or that no time limit should be imposed. The
Board believes the 12 month time limit should be retained as it strikes
an appropriate balance between easing regulatory burden and maintaining
adequate oversight, given that the condition of a banking organization
may change over time. Supervisory views regarding downstreaming
investments also may change over time in light of changed
circumstances.
One commenter argued that downstream investments should not be
subject to the individual investment limits as well as the aggregate
investment limits. However, the Board believes that supervisory
concerns regarding the need to monitor diversification of investments
in view of any changed circumstances relating to the investor means
that the limits on investments in one organization should include
downstream investments.
Finally, a commenter argued that restructurings (through the
contribution of an investment from one affiliate to another) should
also be encompassed within the same exclusion as that provided for
downstream investments. The Board notes in response to this comment
that Regulation K already provides general consent authority for
transfers among affiliates at net asset value.
Eligible Investments
The proposal limited the types of investments eligible for the
expanded authority, as well as the types of activities that may be
conducted by the organization in which the investment is to be made.
Ineligible investments included an investor's initial entry into a
foreign country, the establishment or acquisition of an initial
subsidiary bank in a foreign country, investments in general
partnerships or unlimited liability companies, and an acquisition of
shares or assets of a corporation that is not an affiliate of the
investor. Exclusion of the latter type of acquisition was intended to
limit the expanded authority to investments in de novo subsidiaries
(including subsequent investments in such subsidiaries) by excluding
the acquisition of going concerns.
Commenters requested clarification as to whether additional
investments made in existing subsidiaries and joint ventures would be
eligible investments under the expanded authority. The final rule
authorizes investments in existing subsidiaries and joint ventures,
provided they meet the remaining criteria for eligible investments and
the criteria for eligible activities.
Several commenters opposed the proposal's exclusion of initial
acquisitions of going concerns from the expanded investment authority.
However, the Board continues to believe such exclusion is appropriate
in light of the potential additional risk associated with such
investments. These risks are greater than simply the amount of capital
invested, extending also, for example, to the value and quality of the
acquired organization's assets. The Board therefore considers that
prior notice of such an investment is appropriate.
Several commenters argued that the acquisition or establishment of
an initial bank subsidiary in a foreign country should be permissible
without prior notice to the Board where the investor already has a
branch in that country. The Board believes that such a change may be
inconsistent with its responsibility as home country supervisor under
the Minimum Standards for Supervision of Internationally Active Banks
established by the Basle Supervisors Committee, in those cases where
the Board has not previously approved or reviewed the establishment of
a significant subsidiary bank in that country. The Minimum Standards
contemplate that the home country supervisor should specifically
authorize any outward expansion by a bank, both to inform the home
country
[[Page 67053]]
supervisor of the intention of the bank to operate in another country
and to provide the host supervisor with the comfort that the home
supervisor does not object to the expansion and takes responsibility
for the supervision of the branch or subsidiary bank. Consequently, the
Board believes it is appropriate to retain the prior notice requirement
for establishment of an initial subsidiary bank in another country
under the expanded authority.
Post-investment Notice
The proposal required an investor making use of the expanded
authority to provide the Board with a post-investment notice within 10
business days of making the investment. However, the Board requested
comment on whether the requirements relating to the post-investment
notice could be incorporated into existing reporting requirements.
Several commenters argued the post-investment notice would be
unnecessary and inconsistent with the goal of reducing regulatory
burden, particularly since investors are required to report
acquisitions of shares in foreign organizations on an existing Federal
Reserve form (F.R. 2064) by the end of the month following the month in
which the investment was made. Commenters maintained that the Board
already has sufficient information to monitor investments in foreign
subsidiaries through existing reporting and examination authority.
Based upon the comments, the Board has decided to eliminate the 10
business day notice requirement. However, the Board has determined that
certain limited additional information that is not at present provided
in the FR 2064 is required to be submitted; such information may be
submitted on the same schedule as the FR 2064, namely, by the end of
the month following the month in which the investment was made.
The Board agrees with those commenters who argued that additional
information should be limited to cover specific areas of potential
risks regarding investments made under the expanded general consent
authority and accordingly has narrowed the information that would be
required to be submitted following exercise of the expanded authority.
More specifically, the information that would be required under the
final rule is limited to: the respective responsibilities of the
parties if the investment is a joint venture; one year projections for
the organization in which the investment is made; and, where the
investment is to redress a loss, a description of the reasons for the
loss and the steps taken to address the problem. This would provide to
the Board the minimum information necessary to monitor any additional
risks posed by such investments.
One commenter requested clarification as to whether or not the
post-investment notice is intended to cover investments made pursuant
to the existing general consent authority, which would make the
proposal more restrictive than the present requirements for general
consent investments. The Board notes that the post-investment notice
would be required only in relation to investments made under the
expanded authority.
In response to another comment, the Board wishes to clarify that
investments in newly established companies are not precluded by the
restriction on the acquisition of shares or assets of an organization
that is not an affiliate or joint venture of the investor.
Processing Procedures
The final rule incorporates the change in processing procedures
indicating that the 45 day period commences upon receipt of the notice
or application to invest in a foreign company. Commenters generally
supported this change in processing procedures.
Finally, one commenter noted generally that Regulation K is a
technically difficult regulation and expressed concern that the
proposed revisions, by incorporating additional technical language,
would have the side effect of further diminishing the readability of
the regulation. The Board notes that the five year review of Regulation
K mandated by the International Banking Act of 1978 is now underway.
Ways in which Regulation K may be simplified will be considered during
the course of that review.
Regulatory Flexibility Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), the Board certifies that this final
rule will not have a significant economic impact on a substantial
number of small entities that are subject to the regulation.
Pursuant to 5 U.S.C. 553(d), this amendment to Regulation K will
become effective immediately. This final rule grants an exemption for
certain U.S. banking organizations, and therefore the Board waives the
30 day general requirement for publication of a substantive rule.
Paperwork Reduction Act Analysis
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed
the rule under the authority delegated to the Board by the Office of
Management and Budget.
The collection of information requirements in this regulation are
found in 12 CFR 211.5(c). The submission of this information is
mandatory under sections 25 and 25A of the Federal Reserve Act (12
U.S.C. 601-604(a) and 611-631) and sections 4(c)(13), 4(c)(14), and
5(c) of the Bank Holding Company Act (12 U.S.C. 1843(c)(13),
1843(c)(14) and 1844(c)) to evidence compliance with the requirements
of Regulation K. The Federal Reserve uses the information to monitor
the international operations of U.S. banking organizations, and to
fulfill its supervisory responsibilities under Regulation K. The
respondents are banks, bank holding companies, and Edge and agreement
corporations.
The Federal Reserve may not conduct or sponsor, and an organization
is not required to respond to, this information collection unless it
displays a currently valid OMB control number. The OMB control number
is 7100-0107.
No comments specifically addressing the estimate burden were
received.
The Federal Reserve estimates that, based on 1995 data, 10
responses per year will be filed by U.S. banking organizations under
the expanded general consent authority. Currently, the investments that
will be permitted under expanded general consent require prior
notification on the form for International Applications and Prior
Notifications under Subparts A and C of Regulation K (FR K-1; OMB No.
7100-0107). The estimated burden for each prior notification can range
from 1 to 10 hours, depending on its complexity. Under the revised
rule, an investor will no longer submit information prior to the
investment; instead, it will submit limited information regarding
specific areas of potential risks of the investment after the
investment is made. The volume of this information will vary depending
on the type of investment; the annual burden per respondent is
estimated to be .5 hours, on average. Based on an hourly cost of $20,
the annual cost to the public is estimated to be $100. There are no
start up costs or capital costs.
The information collected is not deemed confidential. The applying
organization has the opportunity to request confidentiality for
information that it believes will qualify for a Freedom of Information
Act exemption.
Send comments regarding the burden estimate, or any other aspect of
this collection of information, including suggestions for reducing the
burden, to:
[[Page 67054]]
Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets, N.W., Washington, DC 20551; and to the Office of Management
and Budget, Paperwork Reduction Project (7100-0107), Washington, DC
20503.
List of Subjects in 12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, the Board of Governors
amends 12 CFR Part 211 as set forth below:
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for Part 211 is revised to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et
seq., 3901 et seq.
2. Section 211.2 is amended by redesignating paragraphs (u) and (v)
as paragraphs (v) and (w), respectively, and by adding new paragraphs
(u) and (x) to read as follows:
Sec. 211.2 Definitions.
* * * * *
(u) Strongly capitalized means:
(1) In relation to a parent member bank, that the standards set out
in 12 CFR 208.33(b)(1) are satisfied; and
(2) In relation to an Edge or Agreement corporation or a bank
holding company, that it has a total risk-based capital ratio of 10.0
percent or greater.
* * * * *
(x) Well managed means that the Edge or Agreement corporation, its
parent member bank, if any, and the bank holding company have each
received a composite rating of 1 or 2 at its most recent examination or
review and are not subject to any supervisory enforcement action.
3. Section 211.5 is amended by:
a. Redesignating paragraphs (c)(2) and (c)(3) as paragraphs (c)(3)
and (c)(4) respectively and by adding a new paragraph (c)(2); and
b. In newly designated paragraph (c)(3), by removing the word
``accepted'' in the third sentence and adding in its place the word
``received''.
The addition reads as follows:
Sec. 211.5 Investments and activities abroad.
* * * * *
(c) * * *
* * * * *
(2)(i) Expanded general consent for de novo investments.
Notwithstanding the amount limitations of paragraph (c)(1) of this
section, but subject to the other limitations of this section, the
Board grants expanded general consent authority for investments in an
organization by an investor that is strongly capitalized and well
managed if:
(A) The activities of the organization are limited to activities in
which a national bank may engage directly or in which a subsidiary may
engage under paragraph (d) of this section;
(B) In the case of an investor that is an Edge corporation that is
not engaged in banking or an Agreement corporation, the total amount
invested in such organization (in one transaction or a series of
transactions) does not exceed the lesser of 20 percent of the
investor's Tier 1 capital or 2 percent of the Tier 1 capital of the
parent member bank;
(C) In the case of a bank holding company or member bank investor,
the total amount invested in such organization (in one transaction or a
series of transactions) directly or indirectly does not exceed 2
percent of the investor's Tier 1 capital;
(D) All investments made, directly or indirectly, by an Edge
corporation not engaged in banking or an Agreement corporation during
the previous 12-month period under paragraph (c)(2) of this section,
when aggregated with the proposed investment, would not exceed the
lesser of 50 percent of the total capital of the Edge or Agreement
corporation, or 5 percent of the total capital of the parent member
bank;
(E) All investments made, directly or indirectly, by a member bank
or a bank holding company during the previous 12-month period under
paragraph (c)(2) of this section, when aggregated with the proposed
investment, would not exceed 5 percent of its total capital; and
(F) Both before and immediately after the proposed investment the
investor, its parent member bank, if any, and any parent bank holding
company are strongly capitalized and well managed.
(ii) Determining aggregate investment limits. For purposes of
determining compliance with the aggregate investment limits set out in
paragraphs (c)(2)(i)(D) and (E) of this section, an investment by an
investor in a subsidiary shall be counted only once notwithstanding
that such subsidiary may, within 12 months of the date of making the
investment, downstream all or any part of such investment to another
subsidiary.
(iii) Additional investments. An investor that makes investments
under paragraph (c)(2)(i) of this section may also make additional
investments in an organization under the standards set forth in
paragraphs (c)(1)(ii), (c)(1)(iii) and (c)(1)(iv) of this section.
(iv) Ineligible investments. The following investments are not
eligible for the general consent under paragraph (c)(2)(i) of this
section:
(A) An investment in a foreign country where the investor does not
have an affiliate or a branch;
(B) The establishment or acquisition of an initial subsidiary bank
in a foreign country;
(C) Investments in general partnerships or unlimited liability
companies; and
(D) An acquisition of shares or assets of an organization that is
not an affiliate or joint venture of the investor.
(v) Post-investment notice. By the end of the month following the
month in which the investment is made, the investor shall provide the
Board with the following information relating to the investment:
(A) If the investment is in a joint venture, the respective
responsibilities of the parties to the joint venture;
(B) Projections for the organization in which the investment is
made for the first year following the investment; and
(C) Where the investment is made in an organization that incurred a
loss in the last year, a description of the reasons for the loss and
the steps taken to address the problem.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, December 21, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-31362 Filed 12-27-95; 8:45 am]
BILLING CODE 6210-01-P