[Federal Register Volume 66, Number 23 (Friday, February 2, 2001)]
[Rules and Regulations]
[Pages 8748-8750]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-2732]


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FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R-1066]

DEPARTMENT OF THE TREASURY

12 CFR Part 1501

RIN 1505-AA77


Office of the Under Secretary for Domestic Finance; Financial 
Subsidiaries

AGENCIES: The Board of Governors of the Federal Reserve System (Board) 
and the Department of the Treasury (Treasury).

ACTION: Final rule.

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SUMMARY: Section 121 of the Gramm-Leach-Bliley Act (GLBA) permits a 
national bank or state member bank that is among the second 50 largest 
insured banks to own or control a financial subsidiary only if the bank 
meets either the eligible debt requirement set forth in section 121 of 
the Act or alternative criteria established jointly by the Board and 
Treasury. On March 14, 2000, the Board and Treasury adopted and 
requested public comment on an interim rule establishing this 
alternative criteria. The interim rule provided that a national or 
state member bank meets the alternative criteria if the bank has a 
current long-term issuer credit rating from a nationally recognized 
statistical rating organization that is within the three highest 
investment grade rating categories used by the organization. After 
reviewing public comments, the Board and Treasury are adopting a final 
rule that is substantively identical to the interim rule.

DATES: The final rule is effective March 5, 2001.

FOR FURTHER INFORMATION CONTACT: Board of Governors: Kieran J. Fallon, 
Senior Counsel, Legal Division (202/452-5270); or Mark S. Carey, Senior 
Economist, Division of Research & Statistics (202/452-2784); Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, NW., Washington, DC 20551.
    Department of the Treasury: Matthew Green, Senior Financial Analyst 
(202/622-2740); or Gary W. Sutton, Senior Banking Counsel (202/622-
1976); U.S. Department of the Treasury, 1500 Pennsylvania Avenue, NW., 
Washington, DC 20220.

SUPPLEMENTARY INFORMATION:

Background

    Section 121 of the GLBA (Pub. L. 106-102, 113 Stat. 1338) 
authorizes national banks and state member banks to acquire control of, 
or hold an interest in, a new type of subsidiary called a ``financial 
subsidiary.'' A financial subsidiary may, with certain exceptions, 
engage in activities that have been determined to be financial in 
nature or incidental to financial activities in accordance with the 
GLBA, and in other activities that the parent bank is permitted to 
conduct directly.
    In order for a national bank or state member bank to control, or 
hold an interest in, a financial subsidiary, the bank and each of its 
depository institution affiliates must be ``well-capitalized'' and 
``well-managed,'' as those terms are defined in the GLBA. The aggregate 
consolidated total assets of all financial subsidiaries of the bank 
also may not exceed the lesser of 45 percent of the consolidated total 
assets of the parent bank or $50 billion. (The $50 billion limit is to 
be adjusted according to an indexing mechanism established in a 
separate regulation to be issued jointly by the Board and Treasury.) In 
addition, in order to acquire control of a financial subsidiary, the 
bank and each of its insured depository institution affiliates must 
have received a ``satisfactory'' or better rating at its most recent 
examination under the Community Reinvestment Act.
    Furthermore, if the bank is one of the 50 largest insured banks, as 
determined by the bank's consolidated total assets at the end of the 
most recent calendar year, the bank must have at least one issue of 
outstanding eligible debt that is rated in one of the three highest 
rating categories by a nationally recognized statistical rating 
organization (debt rating requirement). If the bank is one of the 
second 50 largest insured banks, the bank must meet either this debt 
rating requirement or an alternative criteria that the Board and the 
Secretary of the Treasury jointly determine by regulation to be 
comparable to and consistent with the purpose of the rating 
requirement.\1\
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    \1\ A bank does not have to satisfy the debt rating requirement 
or the alternative criteria established by this rule if the bank's 
financial subsidiaries engage in the newly authorized financial 
activities solely as agent and not as principal.
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    The interim rule provided that a national bank or state member bank 
within the second 50 largest insured banks satisfies the alternative 
criteria if the bank has a current long-term issuer credit rating from 
a nationally recognized statistical rating organization that is within 
the three highest investment grade rating categories used by the rating 
organization (see 65 FR 15050). The interim rule defined a long-term 
issuer credit rating as a written opinion issued by a nationally 
recognized statistical ratings organization that assesses the bank's 
overall capacity and willingness to pay on a timely basis its 
unsecured, dollar-denominated financial obligations maturing in not 
less than one year.
    The Board and Treasury received two comments from the public on the 
interim rule. One comment, which was filed by a trade association for 
banking institutions, supported the actions taken by the Board and 
Treasury and concurred that the long-term issuer credit rating 
requirement established by the interim rule is comparable to and 
consistent with the eligible debt requirement established by section 
121 of the GLBA. The other comment, which was filed on behalf of a 
state member bank, suggested that the Board and Treasury rely on a 
bank's examination rating, rather than a rating assigned by an 
independent ratings agency, for determining whether a bank is eligible 
to own or control a financial subsidiary.

Description of Final Rule

    After reviewing public comments, the Board and Treasury have 
adopted a final rule that is substantially identical to the interim 
rule. A national or state member bank meets the requirements of the 
final rule if the bank has a current long-term issuer credit rating 
from a nationally recognized statistical rating organization that is 
within the three highest investment grade rating categories used by the 
organization. An issuer credit rating is one that assesses the bank's 
overall capacity and willingness to pay on a timely basis its unsecured 
financial obligations. Thus, an issuer credit rating differs from a 
debt rating in that it does not assess the bank's ability and

[[Page 8749]]

willingness to make payments on any individual class or issue of debt, 
nor does it reflect priority or preference in payment among financial 
obligations.
    The issuer credit rating must be assigned to the national or state 
member bank that controls or holds an interest in the financial 
subsidiary. Issuer credit ratings that are assigned to a subsidiary or 
affiliate of the parent bank, such as a subsidiary engaged in 
derivatives activities, do not meet the rule's requirements. 
Furthermore, ratings organizations may issue long-term or short-term 
issuer credit ratings for the same bank and separate ratings for 
dollar-denominated and foreign currency-denominated obligations. Only 
long-term issuer credit ratings for dollar-denominated obligations 
satisfy the requirements of the rule. An issuer credit rating is long-
term if it reflects an assessment of the bank's ability over a period 
of not less than one year to fulfill its financial obligations on a 
timely basis.
    The Board and Treasury have reviewed the ratings and rating 
categories used by nationally recognized statistical rating 
organizations in the United States. The Board and Treasury believe that 
the following ratings assigned by the indicated rating agencies 
currently meet the requirements of the rule, provided that they assess 
the parent bank's ability and willingness to meet its financial 
obligations denominated in U.S. dollars.

------------------------------------------------------------------------
     Rating organization         Type of rating            Rating
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Standard & Poor's...........  Issuer credit rating  AAA, AA or A.
                               (including a
                               Counterparty credit
                               rating).
Moody's.....................  Issuer credit rating  Aaa, Aa or A.
Fitch.......................  International credit  AAA, AA or A.
                               rating.
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    Standard & Poor's and Fitch may modify their AA or A ratings with 
the addition of a plus (+) or minus (-) sign to show relative standing 
within these rating categories. Any rating from A minus to AAA would 
satisfy the long-term issuer credit rating requirement; an A minus 
would constitute the lowest acceptable rating in the case of Standard & 
Poor's and Fitch. Moody's top three investment grade categories for 
long-term issuer credit ratings are Aaa, Aa, or A, with Aaa denoting 
the highest rating. Moody's applies numerical modifiers of 1, 2 and 3 
in the Aa and A rating categories, with 3 denoting the lowest end of 
the letter-rating modifiers. Any rating from A-3 to Aaa would satisfy 
the long-term issuer credit rating requirement; a rating of A-3 would 
be the lowest acceptable rating in the case of Moody's.
    The long-term issuer credit rating assigned large banks generally 
is identical to the rating given the bank's senior long-term unsecured 
debt, where such rated debt exists. Furthermore, representatives of 
rating organizations have indicated that the rating given to a specific 
long-term unsecured financial obligation of an issuer is anchored to 
the issuer's long-term issuer credit rating because the latter rating 
exemplifies the issuer's fundamental creditworthiness over the long-
term. For these reasons, the Board and Treasury believe that long-term 
issuer credit ratings that meet the requirements of the rule are 
comparable to, and consistent with, the debt rating requirement of 
section 121.
    The Board and Treasury intend to monitor the criteria used by 
Standard & Poor's, Moody's and Fitch in assigning ratings to ensure 
that the ratings and rating categories listed above remain comparable 
to, and consistent with, the debt rating requirement of section 121. In 
addition, the Board and Treasury will monitor developments in the 
ratings industry to see whether additional types of ratings assigned by 
the rating organizations listed above or by other rating organizations 
may in the future be determined to be comparable to, and consistent 
with, the debt rating requirement of section 121. The Board and 
Treasury may modify the listing of ratings that meet the requirements 
of the rule as appropriate.

Regulatory Flexibility Act Analysis

    The rule applies only to national banks and state member banks that 
are within the second 50 largest insured banks. Accordingly, the final 
rule is not expected to have a significant economic impact on a 
substantial number of small entities, as defined in the Regulatory 
Flexibility Act (5 U.S.C. 601 et. seq.).

Executive Order 12866 Determination

    The Department of the Treasury has determined that the rule does 
not constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

List of Subjects

12 CFR Part 208

    Administrative practice and procedure, Federal Reserve System, 
Banks.

12 CFR Part 1501

    Administrative practice and procedure, National banks, Reporting 
and recordkeeping requirements.

Federal Reserve System

12 CFR Chapter II

    For the reasons set forth in the preamble, the Board of Governors 
of the Federal Reserve System amends part 208 of Chapter II, Title 12 
of the Code of Federal Regulations as follows:

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

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

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d), 1823(j), 
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1835a, 1882, 2901-
2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 
78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 
U.S.C. 4012a, 4104a, 4104b, 4106 and 4128.

    2. Section 208.71(c) is revised to read as follows:


Sec. 208.71  What are the requirements to invest in or control a 
financial subsidiary?

* * * * *
    (c) Alternative requirement. A state member bank satisfies the 
alternative criteria referenced in paragraph (b)(1)(ii) of this section 
if the bank has a current long-term issuer credit rating from at least 
one nationally recognized statistical rating organization that is 
within the three highest investment grade rating categories used by the 
organization.
    3. Section 208.77(e) is revised to read as follows:


Sec. 208.77  Definitions.

* * * * *
    (e) Long-term issuer credit rating. The term ``long-term issuer 
credit rating'' means a written opinion issued by a nationally 
recognized statistical rating organization of the bank's overall 
capacity and willingness to pay on a timely basis its unsecured, 
dollar-

[[Page 8750]]

denominated financial obligations maturing in not less than one year.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, January 19, 2001.
Jennifer J. Johnson,
Secretary of the Board.

Department of the Treasury

12 CFR Chapter XV

Authority and Issuance

    For the reasons set forth in the preamble, the Department of the 
Treasury amends part 1501 of Chapter XV of Title 12 of the Code of 
Federal Regulations as follows:

PART 1501--FINANCIAL SUBSIDIARIES

    1. The authority citation for part 1501 continues to read as 
follows:

    Authority: Section 5136A of the Revised Statutes of the United 
States (12 U.S.C. 24a).

    2. Section 1501.3 is amended to read as follows:


Sec. 1501.3  Comparable ratings requirement for national banks among 
the second 50 largest insured banks.

    (a) Scope and purpose. Section 5136A of the Revised Statutes 
permits a national bank that is within the second 50 largest insured 
banks to own or control a financial subsidiary only if, among other 
requirements, the bank satisfies the eligible debt requirement set 
forth in section 5136A or an alternative criteria jointly established 
by the Secretary of the Treasury and the Board of Governors of the 
Federal Reserve System. This section establishes the alternative 
criteria that a national bank among the second 50 largest insured banks 
may meet, which criteria is comparable to and consistent with the 
purposes of the eligible debt requirement established by section 5136A.
    (b) Alternative criteria. A national bank satisfies the alternative 
criteria referenced in Section 5136A(a)(2)(E) of the Revised Statutes 
(12 U.S.C. 24a) and 12 CFR 5.39(g)(3) if the bank has a current long-
term issuer credit rating from at least one nationally recognized 
statistical rating organization that is within the three highest 
investment grade rating categories used by the organization.
    (c) Definition of long-term issuer credit rating. A ``long-term 
issuer credit rating'' is a written opinion issued by a nationally 
recognized statistical rating organization of the bank's overall 
capacity and willingness to pay on a timely basis its unsecured, 
dollar-denominated financial obligations maturing in not less than one 
year.

    Dated: January 18, 2001.
Gregory A. Baer,
Assistant Secretary for Financial Institutions, Department of the 
Treasury.
[FR Doc. 01-2732 Filed 2-1-01; 8:45 am]
BILLING CODE 6210-01-P; 4810-25-P