[Federal Register Volume 65, Number 179 (Thursday, September 14, 2000)]
[Proposed Rules]
[Pages 55464-55466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23464]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 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. 65, No. 179 / Thursday, September 14, 2000 / 
Proposed Rules  

[[Page 55464]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741


Requirements for Insurance

AGENCY: National Credit Union Administration (NCUA).

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: NCUA is soliciting public comment on whether NCUA should 
insure state-chartered credit unions that branch outside the United 
States and, if so, to what extent NCUA should regulate that activity. 
Information from interested parties will assist NCUA in determining 
whether to issue a proposed rule.

DATES: The NCUA must receive comments on or before November 13, 2000.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428, or you may fax comments 
to (703) 518-6319. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff 
Attorney, Division of Operations, Office of General Counsel, at the 
above address or telephone: (703) 518-6540 or Lynn McLaughlin, Program 
Officer, Office of Examination and Insurance, at the above address or 
telephone: (703) 518-6360.

SUPPLEMENTARY INFORMATION: This advanced notice of proposed rulemaking 
addresses the safety and soundness implications of state-chartered 
credit unions branching outside the United States, when authorized by 
state statute, to serve members and member groups, including foreign 
nationals, outside the United States. The key issues raised in this 
document include NCUA Board policy considerations, legal issues, 
supervision and examination considerations, options for insuring 
foreign branches of state-chartered credit unions and options for 
restricting insurance coverage for state-chartered credit unions 
operating foreign branches. The NCUA Board is also interested in 
receiving comment from federal credit unions and state-chartered credit 
unions that cannot or do not intend to branch overseas concerning the 
implications of the National Credit Union Share Insurance Fund (NCUSIF) 
covering any potential insurance losses by credit unions engaged in 
this activity.

A. Background

    NCUA allows a federal credit union (FCU) to serve foreign nationals 
within its field of membership wherever they reside provided the FCU 
has the requisite ability, resources, and management expertise. NCUA 
regulations, however, impose restrictions on this activity as described 
below.
    An FCU can serve foreign nationals outside of the United States 
only if it has submitted a business plan to its NCUA Regional Office 
and received written approval from the regional director. Regional 
directors have the authority to limit the types of services offered to 
foreign nationals residing overseas if safety and soundness concerns 
exist. FCUs are permitted to establish service facilities (branches) 
outside the United States only if the facility is located on a United 
States military installation or at a United States embassy. In those 
cases, the credit unions are considered to be on United States 
territory and, therefore, subject to United States laws and NCUA's 
regulatory authority. NCUA Board policy prohibits the establishment of 
an FCU branch for the primary purpose of serving citizens of a foreign 
nation. (See NCUA's Chartering and Field of Membership Manual, Chapter 
1, Section XII.)
    While the FCU Act and NCUA's rule limit FCUs in serving foreign 
nationals, they do not limit state-chartered credit unions, which may 
have broader authority to serve foreign nationals under state law. It 
is NCUA's understanding that some states either permit foreign 
branching for state chartered credit unions or are considering 
legislation to provide this authority. While actual foreign branching 
is not prevalent at this time, it is appropriate to address regulatory 
and supervisory concerns before the practice becomes widespread.

B. Legal Issues; Federal Reserve Act Requirements for Foreign 
Accounts and Federal Deposit Insurance Requirements

    If NCUA insures member accounts in foreign branches, there will be 
a number of legal issues to be addressed. A credit union operating in a 
foreign country is under the jurisdiction of the host country's laws. 
Those laws may conflict with the Federal Credit Union Act and NCUA's 
Rules and Regulations. There is also a question of whether NCUA could 
adequately exercise its liquidation powers when placing a credit union 
into conservatorship or liquidation based upon the unique nature of a 
host country's laws.
    The Federal Reserve Board's Regulation K sets forth many of the 
requirements for U.S. banks operating overseas. 12 CFR 211. They 
include:
     Foreign branches of U.S. banking organizations must have 
at least $1 million in capital and surplus.
     Additional appropriated reserves may be required depending 
on risk.
     There are limits on lending as a percentage of capital.
     The establishment of a foreign branch requires the prior 
approval of the Federal Reserve Board.
    The Federal Deposit Insurance Corporation reviews the insurance 
application for each branch located outside the United States. When 
reviewing an insurance application for foreign banks or foreign 
branches, FDIC must consider:
    (1) The financial history and condition of the bank,
    (2) The adequacy of its capital structure,
    (3) Its future earnings prospects,
    (4) The general character and fitness of its management, including 
but not limited to the management of the branch proposed to be insured,
    (5) The risk presented to the Bank Insurance Fund or the Savings 
Association Insurance Fund,
    (6) The convenience and needs of the community to be served by the 
branch,
    (7) Whether or not its corporate powers, insofar as they will be 
exercised through the proposed insured branch, are consistent with the 
purposes of this Act, and
    (8) The probable adequacy and reliability of information supplied 
and

[[Page 55465]]

to be supplied by the bank to the Corporation to enable it to carry out 
its functions under this Act.

12 U.S.C. 1815(b). This review is similar to NCUA's review of an 
insurance application under the Federal Credit Union Act. 12 U.S.C. 
1781(c)(1).
    Bank and thrift deposits held outside the United States are not 
insured unless the financial institution has an express agreement with 
the depositor. The term ``deposit'' is defined to exclude:

    [A]ny obligation of a depository institution which is carried on 
the books and records of an office of such bank or savings 
association located outside of any State, unless: (i) Such 
obligation would be a deposit if it were carried on the books and 
records of the depository institution, and would be payable at, an 
office located in any State; and (ii) the contract evidencing the 
obligation provides by express terms, and not by implication, for 
payment at an office of the depository institution located in any 
State.

12 U.S.C. 1813(l)(5)(A). An account in a foreign branch of an FDIC-
insured branch is a ``deposit'', and therefore insured, only if it 
meets the above definition. It is NCUA's understanding that the general 
practice in the banking industry is to establish accounts in foreign 
branches as uninsured accounts.
    There is no comparable definition of deposit or share account in 
the Act or NCUA's regulations that provides a credit union with the 
ability to choose whether a foreign share account is federally-insured. 
Therefore, without a regulatory change, if a state-chartered federally-
insured credit union opens a branch office outside the United States, 
the member share accounts at that branch would be federally-insured.

C. Regulatory and Supervisory Issues Related to the National Credit 
Union Share Insurance Fund

    Section 201(c)(1) of the FCU Act (12 U.S.C. 1781(c)(1)) authorizes 
NCUA to determine insurability of accounts of federally-insured state-
chartered credit unions. Section 201(c)(1) states, in part, that the 
NCUA Board shall disapprove the application of any credit union for 
insurance of its member accounts if it finds that:

    [I]nsurance of its member accounts would otherwise involve undue 
risk to the fund, or that its powers and purposes are inconsistent 
with the promotion of thrift among its members and the creation of a 
source of credit for provident or productive purposes.

    Insuring foreign national member accounts in state-chartered credit 
union branches established outside of the U.S. will present challenging 
supervisory problems. A key area of concern will be the enforcement of 
NCUA's liquidation and conservatorship powers.
    NCUA has previously encountered some difficulties liquidating 
credit unions with offices located outside of the 50 states. Some of 
the challenges encountered by NCUA included problems in the collection 
of loans, difficulty in finding local counsel to do collection work and 
fraud investigations, problems in securing assistance from the local 
taxing authority and lack of the necessary enforcement powers to pursue 
NCUA's legal rights.
    Supervisory issues regarding branches located outside the United 
States could include increased costs to NCUA in hiring additional staff 
and educating existing examiners about the unique problems associated 
with supervision of a foreign branch. Examiners and credit union 
management will need to understand the laws of the foreign country 
where they are operating to ensure compliance with tax 
responsibilities, consumer compliance laws, employment laws, capital 
requirements, and other requirements of foreign laws. In addition, 
problems may arise with on-site management of a foreign branch, who may 
be recruited from the host country. NCUA may not be able to obtain 
adequate information on the manager's background, experience, and 
expertise. This may present problems because NCUA needs this 
information to approve appointments and changes in officials for newly 
chartered credit unions or credit unions in troubled condition. 12 CFR 
701.14. Other practical problems of supervising foreign operations 
include loan collection, currency conversion, licensing requirements, 
and obtaining permission of the host country's regulators.
    NCUA and state supervisory authorities (SSAs) will encounter 
numerous examination issues if state-chartered credit unions engage in 
foreign branching. Although it is difficult to foretell how the variety 
of accounting practices and standards will be handled in a foreign 
branch, it would seem likely the accounting standards in that country 
will prevail. If so, because those standards may contain a possible 
different assessment of full and fair disclosure, the domestic credit 
union will have to include a financial analysis of the risk to the 
NCUSIF presented by foreign branch operations. To reduce this risk, 
NCUA may want to consider requiring an opinion audit of credit unions 
with foreign branches. While not insurmountable, other issues will also 
have to be addressed such as examination standards for credit unions 
with foreign operations, examination completion and supervision 
responsibility, 5300 report collection and resolution of disputes 
between NCUA, the SSA, and foreign regulators.
    Along with supervision and examination issues, there are safety and 
soundness considerations when a credit union becomes involved in 
foreign branching. Since the branch is located on foreign territory, 
NCUA and the SSA have no authority to insulate the branch from the 
impact of foreign law. These laws, when applied to situations such as 
collection of delinquent loans, collateralization and repossession of 
loans in general, and liquidation of a failing branch, may present a 
higher risk to the NCUSIF than that of a stateside credit union. 
Fluctuating exchange rates caused by maintaining shares in foreign 
currency will also present an ongoing challenge to credit unions and 
the NCUSIF.
    To address some of these issues, NCUA may want to consider the FDIC 
model of higher capital requirements, for credit unions involved in 
foreign branching. NCUA may also want to consider a different method of 
evaluation of the allowance for loan losses, to take into account the 
additional risk of managing loan collection in foreign countries.
    Whether a credit union can obtain adequate bond coverage for 
foreign operations must also be evaluated. Fidelity bond coverage is 
required of all federally-insured credit unions pursuant to Section 
741.201 of NCUA's Regulations.

D. NCUA Board Options for Insuring Foreign Branches of State-
Chartered Credit Unions

    The NCUA Board is considering numerous options to address the 
issues identified above. One option is to only permit federally-insured 
state chartered credit unions to serve foreign nationals in their field 
of membership, on the same terms currently permitted for federal credit 
unions. That is, foreign nationals in the field of membership could be 
served pursuant to an approved business plan, with branches being 
limited to U.S embassies and U.S. military installations. Another 
option is to insure state chartered credit unions that operate foreign 
branches, but with regulatory limitations designed to mitigate risk to 
the NCUSIF. The following are among the limitations that might be 
considered:
     Allow foreign branches for the purpose of serving 
employees of U.S. or international organizations in the credit unions 
field of membership, but prohibit select employee group expansions or 
other expansion based on the foreign branch;

[[Page 55466]]

     Provide that accounts at foreign branches are not insured, 
or to provide an option as to whether they are insured;
     Require a separate application for insurance for foreign 
branch operations with factors to be considered enumerated in NCUA's 
regulations;
     Limit the amount of total loans, issued at a foreign 
branch, in relation to insured and uninsured shares;
     Require specific, minimum capital amounts based on the 
size of the loan portfolio and require mandatory charge-offs of loans 
greater than 120 days past due; and
     Limit the amount of loans to foreign nationals outside the 
United States to the uninsured deposits at the foreign branch. 
Uninsured shares would act as the primary offset for loan loses after 
capital reserved for the branch is depleted.
    The above-noted items are presented as examples of options that the 
NCUA Board may consider. The NCUA Board welcomes other suggestions from 
credit unions and other interested parties.

    By the National Credit Union Administration Board on September 
7, 2000.
Becky Baker,
Secretary of the Board.
[FR Doc. 00-23464 Filed 9-13-00; 8:45 am]
BILLING CODE 7535-01-U