[Federal Register Volume 66, Number 159 (Thursday, August 16, 2001)]
[Rules and Regulations]
[Pages 42929-42937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20656]



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  Federal Register / Vol. 66, No. 159 / Thursday, August 16, 2001 / 
Rules and Regulations  

[[Page 42929]]



FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R-1064]


Membership of State Banking Institutions in the Federal Reserve 
System: Financial Subsidiaries

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board has adopted a final rule implementing the financial 
subsidiary provisions of the Gramm-Leach-Bliley Act for state member 
banks. The Gramm-Leach-Bliley Act authorizes state member banks that 
comply with the requirements of the rule to control, or hold an 
interest in, a financial subsidiary which may conduct certain financial 
activities that are not permissible for the parent bank to conduct 
directly. The final rule is substantially similar to the interim rule 
that the Board adopted in March 2000.

DATES: The final rule is effective on September 17, 2001.

FOR FURTHER INFORMATION CONTACT: Kieran J. Fallon, Senior Counsel (202/
452-5270), Michael J. O'Rourke, Counsel (202/452-3288), Legal Division; 
Betsy Cross, Deputy Associate Director (202/452-2574), Division of 
Banking Supervision and Regulation; Board of Governors of the Federal 
Reserve System, 20th Street and Constitution Avenue, NW., Washington, 
DC 20551.

SUPPLEMENTARY INFORMATION:

Background

    Section 121 of the Gramm-Leach-Bliley Act (GLB Act) (Pub. L. 106-
102; 113 Stat. 1373-82) authorizes qualifying state member banks to own 
or control a new type of subsidiary--referred to as a financial 
subsidiary. A financial subsidiary may engage in activities that have 
been determined to be financial in nature or incidental to financial 
activities under the GLB Act, including general insurance agency 
activities in any location and travel agency activities. In addition, a 
financial subsidiary may engage in underwriting, dealing in and making 
a market in all types of securities--activities previously prohibited 
for subsidiaries of state member banks by the Glass-Steagall Act. A 
financial subsidiary of a state member bank also may conduct any 
activity that the bank is permitted to conduct directly.
    The GLB Act prohibits financial subsidiaries from engaging in 
certain types of activities. As a general matter, a financial 
subsidiary may not engage as principal in underwriting insurance, 
providing or issuing annuities, real estate development or real estate 
investment, and merchant banking and insurance company investment 
activities.
    In March 2000, the Board adopted and requested comment on an 
interim rule that implemented the financial subsidiary provisions of 
the GLB Act for state member banks (65 FR 14810). The interim rule set 
forth the criteria that a state member bank and its depository 
institution affiliates must meet for the bank to own or control a 
financial subsidiary; the activities that a financial subsidiary may 
and may not conduct; the procedures that a state member bank must 
follow to establish a financial subsidiary; and the procedures and 
restrictions that would apply if a state member bank or any of its 
depository institution affiliates ceased to continue to meet the 
requirements of the rule. The interim rule paralleled the rule adopted 
by the Office of the Comptroller of the Currency (OCC) governing 
financial subsidiaries of national banks. (See  65 FR 12905.)
    The Board received three comments from the public on the interim 
rule, each of which was submitted by a trade association for the 
banking industry. All commenters supported the interim rule and one 
commenter noted that the interim rule was conveniently formatted and 
easy to understand. Commenters also asked that the Board modify the 
rule in minor respects or address issues suggested by the commenter. 
For example, one commenter suggested that the Board make available a 
list of the newly authorized financial activities that may be conducted 
by a financial subsidiary. Another commenter requested that the Board 
further streamline the 15-day prior notice process established by the 
interim rule for obtaining the Federal Reserve System's approval to 
establish a financial subsidiary or commence a new financial activity 
through an existing financial subsidiary.
    In addition, one commenter urged the Board and the other Federal 
banking agencies to closely monitor financial subsidiaries of banks to 
ensure that these newly authorized entities do not threaten the safety 
and soundness of affiliated depository institutions. Another commenter 
asserted that the Board should allow a state member bank that has 
received a less-than-satisfactory management rating or rating under the 
Community Reinvestment Act (12 U.S.C. 2901 et seq.) (CRA) to request 
that a follow-up examination occur expeditiously and, thereby, permit 
the bank the opportunity to quickly restore its compliance with the 
rule's criteria.
    The Board has carefully reviewed the comments received on the 
interim rule. As described further below, the Board has modified 
certain provisions of the interim rule in light of these comments and 
the Federal Reserve System's experience in administering the interim 
rule since March 2000. The final rule remains substantially similar to 
the Board's interim rule and the financial subsidiary rule adopted by 
the OCC.

Description of Final Rule

    The final rule, like the interim rule, permits qualifying state 
member banks to control, or hold an interest in, a new type of 
subsidiary, referred to as a ``financial subsidiary.'' A financial 
subsidiary is defined as any company that is controlled by one or more 
insured depository institutions, but does not include (1) a subsidiary 
that the state member bank is specifically authorized to hold by the 
express terms of a Federal statute (other than section 9 of the Federal 
Reserve Act), such as an Edge Act subsidiary held under section 25 of 
the Federal Reserve Act, or (2) a subsidiary that engages only in 
activities that the parent bank may conduct directly and that are 
conducted on the same terms and conditions that govern the conduct of 
the activity by the state member bank. As discussed further below, a 
financial subsidiary of a bank may only engage in activities

[[Page 42930]]

permissible for the parent bank and certain other financial activities. 
The final rule clarifies that a financial subsidiary includes any of 
its direct or indirect subsidiaries.
    The authority for a state member bank to own or control a financial 
subsidiary is in addition to the existing authority of state member 
banks to establish operations subsidiaries, which are subsidiaries that 
engage only in activities that the parent bank may conduct directly and 
that are conducted on the same terms and conditions that govern the 
conduct of these activities by the bank. See 12 CFR 250.141. State 
member banks may continue to retain and establish new operations 
subsidiaries permitted under state law and the Board's interpretations 
without complying with the requirements of this rule.\1\
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    \1\ The Board recently determined that a state member bank may, 
consistent with Federal law and 12 CFR 250.141, acquire less than 
100 percent of the shares of an operations subsidiary so long as the 
bank controls the subsidiary within the meaning of the Bank Holding 
Company Act. See Letter from Jennifer J. Johnson, Secretary of the 
Board, to Ronald C. Mayer, The Chase Manhattan Bank, dated August 
16, 2000.
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Section 208.71--What Are the Requirements To Invest in or Control a 
Financial Subsidiary?

    Under the GLB Act, a state member bank may control, or hold an 
interest in, a financial subsidiary only if certain criteria are met. 
Section 208.71 of the rule sets forth these criteria.

Capital and Management Requirements

    First, the state member bank and each of its depository institution 
affiliates must be well capitalized and well managed. An insured 
depository institution is well capitalized if it meets or exceeds the 
capital levels designated as ``well capitalized'' by the institution's 
appropriate Federal banking agency under section 38 of the Federal 
Deposit Insurance Act (12 U.S.C. 1831o) (FDI Act). The final rule 
provides that an uninsured depository institution will be considered 
``well capitalized'' if it has and maintains at least the capital 
levels its appropriate Federal banking agency has established under 
section 38 of the FDI Act for an insured depository institution to be 
well capitalized.\2\
    Well managed is defined by reference to the achievement of specific 
examination ratings.\3\ The FDI Act allows the appropriate Federal 
banking agency for a depository institution to use an examination 
conducted by a state banking agency in lieu of a Federal examination if 
the state examination meets the criteria set forth in section 10(d) of 
the FDI Act (12 U.S.C. 1820(d)). Accordingly, the final rule allows a 
depository institution to be deemed ``well managed'' on the basis of a 
qualifying state examination.\4\ The final rule continues to provide 
that a depository institution that has not been examined will be 
considered well managed if its appropriate Federal banking agency 
determines that the institution's managerial resources are 
satisfactory.
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    \2\ See 12 CFR 208.77(g)(2).
    \3\ See 12 CFR 208.77(h).
    \4\ See 12 CFR 208.77(h)(1).
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    In the course of administering the interim rule, questions have 
arisen concerning whether a well managed depository institution would 
retain its well managed status if it merged with another depository 
institution. The final rule clarifies that a depository institution 
that results from the merger of two or more well managed depository 
institutions will be considered well managed unless the appropriate 
Federal banking agency for the resulting institution determines 
otherwise. However, where a merger involves an institution that is not 
well managed, the managerial status of the combined organization likely 
will depend on the facts and circumstances of the particular case. 
Accordingly, the final rule provides that a depository institution 
resulting from the merger of a well managed institution with an 
institution that is not well managed or that has not been examined will 
be considered well managed if the appropriate Federal banking agency 
determines that the resulting institution is well managed.

Asset Limitation

    Under the GLB Act and the rule, the aggregate consolidated total 
assets of the bank's financial subsidiaries may not exceed the lesser 
of 45 percent of the bank's consolidated total assets or $50 billion. 
The GLB Act requires the Board and the Secretary of the Treasury to 
establish a mechanism for indexing the $50 billion limit.\5\
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    \5\ See 12 U.S.C. 24a(a)(6).
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Debt Rating or Alternative Requirement for Large Banks

    If the state member bank is one of the largest 100 insured banks, 
the bank must have at least one issue of outstanding eligible debt that 
is currently rated in one of the three highest investment grade rating 
categories by a nationally recognized statistical rating organization. 
Eligible debt refers to unsecured debt that has an initial maturity of 
more than 360 days. The debt must be issued and outstanding, may not be 
supported by any form of credit enhancement, and may not be held in 
whole or in any significant part by affiliates or insiders of the bank 
or by any other person acting on behalf of or with funds from the bank 
or an affiliate.
    If the state member bank is one of the second 50 largest insured 
banks, the GLB Act allows the bank to meet this debt rating requirement 
or an alternative criteria established jointly by the Board and the 
Secretary of the Treasury by regulation. The final rule includes the 
alternative criteria established by the Board and the Secretary of the 
Treasury (see 66 FR 8748). A bank meets this alternative criteria if 
the bank has a current long-term issuer credit rating (as defined in 
Sec. 208.77(f) of the rule) from at least one nationally recognized 
statistical rating organization that is within the three highest 
investment grade rating categories used by the organization.\6\ The 
debt rating and alternative criteria do not apply to a large bank if 
its financial subsidiaries do not engage in any newly authorized 
financial activity as principal.
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    \6\ See 66 FR 8748 for a discussion of the types of ratings that 
qualify as a long-term issuer credit rating.
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Notice to Federal Reserve

    Finally, the state member bank must obtain the Federal Reserve's 
approval to acquire control of, or an interest in, the financial 
subsidiary using the streamlined notice procedures set forth in 
Sec. 208.76 of the rule. The state member bank also must obtain any 
necessary approvals from its state supervisory authority.

Section 208.72--What Activities May a Financial Subsidiary Conduct?

    A financial subsidiary of a state member bank may conduct only 
three types of activities.
    First, a financial subsidiary may engage in activities that section 
4(k)(4) of the Bank Holding Company Act of 1956 (BHC Act) defines by 
statute to be financial in nature or incidental to a financial activity 
and permissible for a financial holding company. These activities are 
listed in Sec. 225.86(a), (b) and (c) of the Board's Regulation Y (12 
CFR 225.86(a), (b) and (c)) and include securities underwriting and 
dealing, selling insurance as agent, and operating a travel agency in 
connection with the offering of other financial services.
    Second, a financial subsidiary may engage in activities that the 
Secretary of the Treasury, in consultation with the Board, determines 
to be financial in nature or incidental to financial activities and 
permissible for financial

[[Page 42931]]

subsidiaries of national banks pursuant to section 5136A(b) of the 
Revised Statutes of the United States (12 U.S.C. 24a(b)). These 
activities currently are listed in 12 CFR 1501.2 of the Treasury 
Department's rules.\7\
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    \7\ See 66 FR 257. A financial subsidiary may not engage in 
activities that the Board determines are complementary to a 
financial activity and permissible for financial holding companies 
under section 4(k)(1) of the BHC Act (12 U.S.C. 1843(k)(1)). 
Similarly, a financial subsidiary may not engage in activities that 
the Board determines are financial in nature or incidental to 
financial activities under section 4(k) of the BHC Act unless the 
Secretary of the Treasury also finds that such activities are 
financial in nature or incidental to financial activities and 
permissible for financial subsidiaries under 12 U.S.C. 24a(b).
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    Third, a financial subsidiary of a state member bank may engage in 
activities that the bank is permitted to engage in directly, subject to 
the same terms and conditions that govern the conduct of the activity 
by the state member bank.
    As required by the GLB Act, the rule prohibits a financial 
subsidiary of a state member bank from engaging as principal in 
insurance underwriting (except to the extent permitted under state law 
and the GLB Act), providing or issuing annuities, real estate 
investment or development (except to the extent expressly authorized by 
applicable state and Federal law), and merchant banking and insurance 
company investment activities permitted for financial holding companies 
under sections 4(k)(4)(H) or (I) of the BHC Act.
    As noted above, one commenter requested that the Board make 
available a list of the financial activities that a financial 
subsidiary may conduct. The Board expects to issue shortly a list of 
the newly authorized financial activities permissible for a financial 
subsidiary. This list, which may be obtained from the Reserve Banks, 
will not identify activities that a state member bank may be permitted 
to engage in directly and that would, therefore, also be permissible 
for a financial subsidiary of the bank.

Section 208.73--What Additional Restrictions Are Applicable to State 
Member Banks With Financial Subsidiaries?

    The GLB Act requires that a state member bank that owns or controls 
a financial subsidiary comply with a number of prudential safeguards. 
Section 208.73 of the rule implements these requirements.
    For purposes of determining its compliance with all applicable 
regulatory capital standards, the state member bank must ``de-
consolidate'' the assets and liabilities of its financial subsidiaries 
from those of the bank and then deduct the aggregate amount of its 
equity investment (including retained earnings) in all financial 
subsidiaries from the bank's capital and assets. The final rule 
clarifies how to make the capital adjustments required by the GLB Act. 
Specifically, the bank must deduct (i) 50 percent of the aggregate 
amount of its equity investment (including retained earnings) in all 
financial subsidiaries from both the bank's Tier 1 capital and Tier 2 
capital for purposes of determining its risk-based capital ratios, (ii) 
50 percent of the aggregate amount of its equity investment (including 
retained earnings) in all financial subsidiaries from the bank's Tier 1 
capital for purposes of determining its leverage ratio, and (iii) 100 
percent of the aggregate amount of its equity investment (including 
retained earnings) in all financial subsidiaries from its tangible 
equity for purposes of determining its tangible equity capital 
ratio.\8\ In addition, the bank must deduct the entire amount of its 
equity investment (including retained earnings) in all financial 
subsidiaries from the bank's risk-weighted assets, average total assets 
and total assets for purposes of determining its risk-based, leverage 
and tangible capital ratios, respectively.
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    \8\ See 12 CFR part 208 Appendix A (risk-based ratios) and 
Appendix B (leverage ratio); 12 CFR 208.43(b)(5) (tangible equity 
ratio). The rule provides that, if the deduction from Tier 2 capital 
exceeds the bank's Tier 2 capital, any excess must be deducted from 
the bank's Tier 1 capital for purposes of determining its risk-based 
capital ratios.
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    The bank must meet all applicable capital requirements--including 
the well capitalized requirement of Sec. 208.71 and the capital levels 
established by the Board under section 38 of the FDI Act--after these 
adjustments. In addition, although the GLB Act requires a bank to ``de-
consolidate'' the assets and liabilities of any financial subsidiary 
for regulatory capital purposes, a financial subsidiary remains a 
subsidiary of a state member bank and the Board will continue to review 
the operations and financial and managerial resources of the bank on a 
consolidated basis as part of the supervisory process. The Board may 
take appropriate supervisory action if the Board believes that the 
bank, either on a fully consolidated basis or on a basis that de-
consolidates the bank's financial subsidiaries, does not have the 
appropriate financial and managerial resources (including capital 
resources and risk management controls) to conduct its direct or 
indirect activities in a safe and sound manner.
    The rule also requires that the state member bank establish and 
maintain policies and procedures to manage the financial and 
operational risks arising from its ownership of a financial subsidiary 
and preserve the bank's separate corporate identity. A financial 
subsidiary also is considered a subsidiary of a bank holding company 
(and not a subsidiary of a bank) for purposes of the anti-tying 
prohibitions of the Bank Holding Company Act Amendments of 1970.
    In addition, the rule specifies that a financial subsidiary of a 
state member bank is considered an affiliate (and not a subsidiary) of 
the bank for purposes of sections 23A and 23B of the Federal Reserve 
Act, and includes the GLB Act's special provisions governing the 
application of section 23A to investments in, and extensions of credit 
to, a financial subsidiary. The Board recently requested comment on a 
new rule (Regulation W) that would implement all aspects of sections 
23A and 23B of the Federal Reserve Act, including the provisions of 
sections 23A and 23B that relate to financial subsidiaries of banks.\9\ 
Proposed Regulation W addresses, among other things, the definition of 
a ``financial subsidiary'' for purposes of sections 23A and 23B, how to 
value a bank's investment in a financial subsidiary for purposes of 
section 23A, and when extensions of credit by an affiliate of a state 
member bank to a financial subsidiary of the bank will be considered an 
extension of credit by the bank itself under the GLB Act's special 
anti-evasion rules applicable to financial subsidiaries.\10\ The Board 
may make modifications to this rule as appropriate in connection with 
the adoption of a final Regulation W.
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    \9\ See 66 FR 24186.
    \10\ See id. at 24194 and 24204.
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Section 208.74--What Happens If the State Member Bank or a Depository 
Institution Affiliate Fails To Continue To Meet Certain Requirements?

    The Board will give notice to a state member bank that owns or 
controls a financial subsidiary if the Board finds that the state 
member bank or any of its depository institution affiliates fails to 
continue to be well capitalized and well managed, that the assets of 
the bank's financial subsidiaries exceed the asset limitation imposed 
on financial subsidiaries, or that the state member bank has failed to 
comply with the operational safeguards required by the rule.
    To assist the Board in enforcing the requirements of the GLB Act, 
the final rule continues to require that a state member bank notify the 
appropriate

[[Page 42932]]

Reserve Bank if the bank becomes aware that any of its depository 
institution affiliates has ceased to be well capitalized and well 
managed. The final rule provides that the bank must submit this notice 
within 15 calendar days of becoming aware of the change in the 
affiliate's capital or managerial status, and that the notice must 
identify the relevant depository institution affiliate and the area(s) 
of noncompliance.
    If a state member bank receives a notice from the Board that it is 
not in compliance with the rule's requirements, the bank must execute 
an agreement with the Board to bring itself back into compliance with 
the requirements of the rule. The agreement must explain the actions 
the bank will take to correct the areas of noncompliance and when such 
actions will be taken and provide any other information the Board may 
require. If the notice relates to a depository institution affiliate, 
the affiliate must execute an agreement with its appropriate Federal 
banking agency to restore itself to well capitalized and well managed 
status. The Board and the appropriate Federal banking agency may impose 
conditions on the direct or indirect activities of the state member 
bank or depository institution affiliate, respectively, until the 
institution restores its compliance with the rule's requirements. If 
the deficiencies are not corrected within 180 days (or such longer 
period as the Board may permit), the Board may require the state member 
bank to divest its financial subsidiaries.
    If a state member bank that is one of the largest 100 insured banks 
fails to continue to meet the debt rating requirement or alternative 
criteria of Sec. 208.71(b), if applicable, the state member bank may 
not acquire any additional equity capital (including debt qualifying as 
capital) of the financial subsidiary until the bank once again meets 
these requirements.

Section 208.75--What Happens if the State Member Bank or Any of Its 
Insured Depository Institution Affiliates Receives Less Than a 
``Satisfactory'' CRA Rating?

    The GLB Act requires the Board to prohibit a state member bank from 
acquiring control of a financial subsidiary, or commencing any 
additional activity or acquiring control of any company through an 
existing financial subsidiary, if the bank or any insured depository 
institution affiliate has received less than a ``satisfactory'' rating 
from its appropriate Federal banking agency at its most recent 
examination under the CRA.\11\ Section 208.75 includes these 
prohibitions. The rule clarifies that, if this prohibition is in 
effect, the financial subsidiary may not acquire control of another 
company by acquiring substantially all of the assets of the company. 
The rule also provides that any prohibition under Sec. 208.75 does not 
affect the ability of a financial subsidiary to commence any additional 
activity, or acquire control of a company engaged only in activities, 
that the state member bank is permitted to engage in directly. The 
terms of the GLB Act require the Board to apply the prohibitions in 
Sec. 208.75 if the state member bank ``or any of its insured depository 
institution affiliates has received in its most recent examination 
under the [CRA] a rating of less than `satisfactory record of meeting 
community credit needs'.''\12\ The Board recently considered how a 
parallel provision in the GLB Act should apply to a financial holding 
company that acquires an insured depository institution with a less-
than-satisfactory CRA rating. The Board concluded, based on the Act's 
language and purposes, that the activity prohibitions would apply to a 
financial holding company only when an insured depository institution 
receives a less-than-satisfactory CRA rating while it is a subsidiary 
of the financial holding company.\13\ For the same reasons discussed in 
that rulemaking, the Board believes that the parallel restrictions in 
the GLB Act and Sec. 208.75 concerning financial subsidiaries apply 
only if the state member bank has a less-than-satisfactory CRA rating 
or an insured depository affiliate of the bank receives a less-than-
satisfactory CRA rating while it is an affiliate of the state member 
bank. If a state member bank becomes affiliated with an insured 
depository institution that, at the time of the affiliation, has a 
less-than-satisfactory CRA rating, the institution must achieve at 
least a ``satisfactory'' CRA rating in its first CRA examination after 
becoming affiliated with the state member bank or the prohibitions in 
Sec. 208.75 would apply to the state member bank and its financial 
subsidiaries.
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    \11\ See 12 U.S.C. 1843 (l)(2); 12 U.S.C. 24a(a)(7).
    \12\ See 12 U.S.C. 1843(l)(2).
    \13\ See 66 FR 400, 404 (Jan. 3, 2001).
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    The GLB Act's CRA prohibitions apply only if the state member bank 
or any of its insured depository institution affiliates has received 
less than a ``satisfactory'' CRA rating at its most recent examination 
under the CRA. Accordingly, the CRA rating requirement does not apply 
to special purpose banks that are not subject to CRA examination under 
the Federal banking agencies' CRA regulations,\14\ or to de novo 
insured depository institutions that have not yet received (and are not 
the successor of an institution that has received) a CRA rating.
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    \14\ See 12 CFR 228.11(c)(3).
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    One commenter recommended that the Board allow a state member bank 
that has received a less-than-satisfactory management or CRA rating to 
request that a follow-up examination occur on an expedited basis. For 
many banks, the Board's rules and procedures already provide for a 
shorter safety and soundness and CRA examination cycle if the bank has 
received a less-than-satisfactory rating.\15\ In addition, a Reserve 
Bank may, on request, move forward the scheduled date of a bank's next 
examination where such action is appropriate and consistent with 
available resources.
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    \15\ See, e.g. 12 CFR 208.64.
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Section 208.76--What Federal Reserve Approvals Are Necessary for 
Financial Subsidiaries?

    The final rule retains the streamlined notice procedures included 
in the interim rule for state member banks to engage in newly 
authorized financial activities through a financial subsidiary. A state 
member bank must file a notice with the appropriate Reserve Bank prior 
to acquiring control of, or an interest in, a financial subsidiary, or 
engaging in an additional financial activity through an existing 
financial subsidiary. A notice is not required for a financial 
subsidiary to engage in an additional activity that the parent state 
member bank is permitted to conduct directly. The notice must provide 
basic information on the financial subsidiary and its existing and 
proposed activities and include a certification that the state member 
bank and its depository institution affiliates meet the requirements of 
the GLB Act and the rule. The final rule also provides that a notice 
must provide the capital ratios for the bank and its depository 
institution affiliates. The Board has found that the capital data 
available to a banking organization at times differs from the data 
available to the Board, and that requiring the filing organization to 
include this data in a notice assists in ensuring that the organization 
meets the relevant capital levels required by statute.
    If the notice relates to the initial affiliation of the state 
member bank with a company engaged in insurance activities, the notice 
also must describe the company's insurance activities and identify the 
states where the company

[[Page 42933]]

holds an insurance license. The Board will use this information in 
fulfilling its obligations to consult with the relevant state insurance 
authorities under section 307(c) of the GLB Act (15 U.S.C. 6716(c)).
    The rule provides that a notice will be deemed approved on the 
fifteenth day after receipt by the appropriate Reserve Bank of an 
informationally complete submission unless, prior to that time, the 
notice is disapproved or the bank is notified that additional time to 
review the notice is needed. In addition, the appropriate Reserve Bank 
may approve the notice prior to the expiration of the 15-day period by 
informing the bank in writing of such action. For purposes of 
calculating the 15-day review period, the day on which an 
informationally complete notice is received is considered day zero.
    The Board believes that this streamlined 15-day notice procedure 
provides state member banks with the ability to respond quickly to 
market conditions while, at the same time, providing the Board adequate 
time to verify that the bank meets applicable statutory criteria. 
Accordingly, the Board has not adopted a procedure that would allow a 
state member bank to acquire a financial subsidiary (or commence a new 
financial activity through an existing financial subsidiary) 
immediately upon the filing of a notice with the Federal Reserve.
    The GLB Act permits a state member bank to acquire an interest in 
or control a financial subsidiary if it meets the criteria and 
requirements set forth in the rule. The Board, however, retains its 
general supervisory authority for state member banks and may restrict 
or limit the activities of, or the acquisition or ownership of a 
subsidiary by, a state member bank if the Board finds the bank does not 
have the appropriate financial and managerial resources to conduct the 
activities or acquire or retain ownership of the company.

II. Regulatory Flexibility Analysis

    In accordance with section 4(a) of the Regulatory Flexibility Act 
(5 U.S.C. 604(a)), the Board must publish a final regulatory 
flexibility analysis with this rulemaking. The rule implements the new 
authority granted by the GLB Act to state member banks to acquire 
financial subsidiaries. Because the rule authorizes state member banks 
to acquire this new type of subsidiary, and thereby engage in new 
activities, the rule does not place any additional burden on state 
member banks and should, in fact, enhance the overall efficiency and 
flexibility of state member banks. The GLB Act makes this new authority 
available to all state member banks, provided the bank meets the 
qualifying criteria established by the Act. Accordingly, the rule 
applies to all state member banks, regardless of size. As of December 
31, 2000, there were 991 state member banks, of which 593 had total 
assets of less than $150 million. The rule permits a state member bank 
to take advantage of this new authority by following a streamlined 
notice procedure, which should impose minimal burdens on small banking 
organizations.

III. Paperwork Reduction Act

    The Board previously has reviewed, under the authority delegated to 
the Board by the Office of Management and Budget (OMB), the collection 
of information requirements of the final rule in accordance with 
section 3506 of the Paperwork Reduction Act of 1995 (44 U.S.C. Ch. 35; 
5 CFR 1320 Appendix A.1). See 66 FR 29325. The OMB control number for 
this rule is 7100-0292. The Federal Reserve may not conduct or sponsor, 
and an organization is not required to respond to, any information 
collection unless the Board has displayed a currently valid OMB control 
number.
    The Federal Reserve has a continuing interest in the public's 
opinions of our collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, NW., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0292), 
Washington, DC 20503.

IV. Administrative Procedure Act

    The provisions of the rule are effective on September 17, 2001, on 
a final basis. The interim rule became effective, on an interim basis, 
on March 11, 2000, in order to allow state member banks to immediately 
take advantage of the new authority granted by the GLB Act to own or 
control financial subsidiaries. This new statutory authority became 
effective on March 11, 2000. Pursuant to the Administrative Procedure 
Act (5 U.S.C. 553), the Board requested comments on all aspects of the 
interim rule and has amended the rule as appropriate after reviewing 
the comments received.

V. Use of ``Plain Language''

    Section 722 of the GLB Act requires the Board to use ``plain 
language'' in all proposed and final rules published after January 1, 
2000. The Board invited comment on whether the interim rule was written 
in ``plain language'' and how to make the interim rule easier to 
understand. Commenters stated that the interim rule was effectively 
organized and easy to understand. The final rule is substantially 
similar to the interim rule and the Board believes the final rule is 
written plainly and clearly.

List of Subjects in 12 CFR Part 208

    Accounting, Agriculture, Banks, Banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, Title 12, Chapter II, 
Part 208 of the Code of Federal Regulations is amended as follows:

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

    1. The authority citation for Part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 24, 24a, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 
1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1835a, 
1843(l)(2), 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. Subpart G is revised to read as follows:
Subpart G--Financial Subsidiaries of State Member Banks
208.71   What are the requirements to invest in or control a 
financial subsidiary?
208.72   What activities may a financial subsidiary conduct?
207.73   What additional provisions are applicable to state member 
banks with financial subsidiaries?
208.74   What happens if the state member bank or a depository 
institution affiliate fails to continue to meet certain 
requirements?
208.75   What happens if the state member bank or any of its insured 
depository institution affiliates receives less than a 
``satisfactory'' CRA rating?
208.76   What Federal Reserve approvals are necessary for financial 
subsidiaries?
208.77   Definitions.

[[Page 42934]]

Subpart G--Financial Subsidiaries of State Member Banks


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

    (a) In general. A state member bank may control, or hold an 
interest in, a financial subsidiary only if:
    (1) The state member bank and each depository institution affiliate 
of the state member bank are well capitalized and well managed;
    (2) The aggregate consolidated total assets of all financial 
subsidiaries of the state member bank do not exceed the lesser of:
    (i) 45 percent of the consolidated total assets of the parent bank; 
or
    (ii) $50 billion, which dollar amount shall be adjusted according 
to an indexing mechanism jointly established by the Board and the 
Secretary of the Treasury;
    (3) The state member bank, if it is one of the largest 100 insured 
banks (based on consolidated total assets as of the end of the previous 
calendar year), meets the debt rating or alternative requirement of 
paragraph (b) of this section, if applicable; and
    (4) The Board or the appropriate Reserve Bank has approved the bank 
to acquire the interest in or control the financial subsidiary under 
Sec. 208.76.
    (b) Debt rating or alternative requirement for 100 largest insured 
banks.--(1) General. A state member bank meets the debt rating or 
alternative requirement of this paragraph (b) if:
    (i) The bank has at least one issue of eligible debt outstanding 
that is currently rated in one of the three highest investment grade 
rating categories by a nationally recognized statistical rating 
organization; or
    (ii) If the bank is one of the second 50 largest insured banks 
(based on consolidated total assets as of the end of the previous 
calendar year), 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.
    (2) Financial subsidiaries engaged in financial activities only as 
agent. This paragraph (b) does not apply to a state member bank if the 
financial subsidiaries of the bank engage in financial activities 
described in Sec. 208.72(a)(1) and (2) only in an agency capacity and 
not directly or indirectly as principal.


Sec. 208.72  What activities may a financial subsidiary conduct?

    (a) Authorized activities. A financial subsidiary of a state member 
bank may engage in only the following activities:
    (1) Any financial activity listed in Sec. 225.86(a), (b), or (c) of 
the Board's Regulation Y (12 CFR 225.86(a), (b), or (c));
    (2) Any activity that the Secretary of the Treasury, in 
consultation with the Board, has determined to be financial in nature 
or incidental to a financial activity and permissible for financial 
subsidiaries pursuant to Section 5136A(b) of the Revised Statutes of 
the United States (12 U.S.C. 24a(b)); and
    (3) Any activity that the state member bank is permitted to engage 
in directly (subject to the same terms and conditions that govern the 
conduct of the activity by the state member bank).
    (b) Impermissible activities. Notwithstanding paragraph (a) of this 
section, a financial subsidiary may not engage as principal in the 
following activities:
    (1) Insuring, guaranteeing, or indemnifying against loss, harm, 
damage, illness, disability or death (except to the extent permitted 
under applicable state law and section 302 or 303(c) of the Gramm-
Leach-Bliley Act (15 U.S.C. 6712 or 6713(c));
    (2) Providing or issuing annuities the income of which is subject 
to tax treatment under section 72 of the Internal Revenue Code of 1986 
(26 U.S.C. 72);
    (3) Real estate development or real estate investment, unless 
otherwise expressly authorized by applicable state and Federal law; and
    (4) Any merchant banking or insurance company investment activity 
permitted for financial holding companies by section 4(k)(4)(H) or (I) 
of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H) and (I)).


Sec. 208.73  What additional provisions are applicable to state member 
banks with financial subsidiaries?

    (a) Capital deduction required. A state member bank that controls 
or holds an interest in a financial subsidiary must comply with the 
following rules in determining its compliance with applicable 
regulatory capital standards (including the well capitalized standard 
of Sec. 208.71(a)(1)):
    (1) The bank must not consolidate the assets and liabilities of any 
financial subsidiary with those of the bank.
    (2) For purposes of determining the bank's risk-based capital 
ratios under Appendix A of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from both the bank's Tier 1 capital and Tier 2 capital; 
and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's risk-weighted assets.
    (3) For purposes of determining the bank's leverage capital ratio 
under Appendix B of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from the bank's Tier 1 capital; and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's average total assets.
    (4) For purposes of determining the bank's ratio of tangible equity 
to total assets under Sec. 208.43(b)(5), the bank must deduct the 
entire amount of the bank's outstanding equity investment (including 
retained earnings) in all financial subsidiaries from the bank's 
tangible equity and total assets.
    (5) If the deduction from Tier 2 capital required by paragraph 
(a)(2)(i) of this section exceeds the bank's Tier 2 capital, any excess 
must be deducted from the bank's Tier 1 capital.
    (b) Financial statement disclosure of capital deduction. Any 
published financial statement of a state member bank that controls or 
holds an interest in a financial subsidiary must, in addition to 
providing information prepared in accordance with generally accepted 
accounting principles, separately present financial information for the 
bank reflecting the capital deduction and adjustments required by 
paragraph (a) of this section.
    (c) Safeguards for the bank. A state member bank that establishes, 
controls or holds an interest in a financial subsidiary must:
    (1) Establish and maintain procedures for identifying and managing 
financial and operational risks within the state member bank and the 
financial subsidiary that adequately protect the state member bank from 
such risks; and
    (2) Establish and maintain reasonable policies and procedures to 
preserve the separate corporate identity and limited liability of the 
state member bank and the financial subsidiary.
    (d) Application of Sections 23A and 23B of the Federal Reserve Act. 
For purposes of sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1):
    (1) A financial subsidiary of a state member bank shall be deemed 
an affiliate, and not a subsidiary, of the bank;

[[Page 42935]]

    (2) The restrictions contained in section 23A(a)(1)(A) of the 
Federal Reserve Act (12 U.S.C. 371c(a)(1)(A)) shall not apply with 
respect to covered transactions between the bank and any individual 
financial subsidiary of the bank;
    (3) The bank's investment in a financial subsidiary shall not 
include retained earnings of the financial subsidiary;
    (4) Any purchase of, or investment in, the securities of a 
financial subsidiary by an affiliate of the bank will be considered to 
be a purchase of, or investment in, such securities by the bank; and
    (5) Any extension of credit by an affiliate of the bank to a 
financial subsidiary of the bank will be considered to be an extension 
of credit by the bank to the financial subsidiary if the Board 
determines that such treatment is necessary or appropriate to prevent 
evasions of the Federal Reserve Act and the Gramm-Leach-Bliley Act.
    (e) Application of anti-tying prohibitions. A financial subsidiary 
of a state member bank shall be deemed a subsidiary of a bank holding 
company and not a subsidiary of the bank for purposes of the anti-tying 
prohibitions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971 et seq.).


Sec. 208.74  What happens if the state member bank or a depository 
institution affiliate fails to continue to meet certain requirements?

    (a) Qualifications and safeguards. The following procedures apply 
to a state member bank that controls or holds an interest in a 
financial subsidiary.
    (1) Notice by Board. If the Board finds that a state member bank or 
any of its depository institution affiliates fails to continue to be 
well capitalized and well managed, or the state member bank is not in 
compliance with the asset limitation set forth in Sec. 208.71(a)(2) or 
the safeguards set forth in Sec. 208.73(c), the Board will notify the 
state member bank in writing and identify the areas of noncompliance. 
The Board may provide this notice at any time before or after receiving 
notice from the state member bank under paragraph (a)(2) of this 
section.
    (2) Notification by state member bank. A state member bank must 
notify the appropriate Reserve Bank in writing within 15 calendar days 
of becoming aware that any depository institution affiliate of the bank 
has ceased to be well capitalized or well managed. The notification 
must identify the depository institution affiliate and the area(s) of 
noncompliance.
    (3) Execution of agreement. Within 45 days after receiving a notice 
from the Board under paragraph (a)(1) of this section, or such 
additional period of time as the Board may permit, the:
    (i) State member bank must execute an agreement acceptable to the 
Board to comply with all applicable capital, management, asset and 
safeguard requirements; and
    (ii) Any relevant depository institution affiliate of the state 
member bank must execute an agreement acceptable to its appropriate 
Federal banking agency to comply with all applicable capital and 
management requirements.
    (4) Agreement requirements. Any agreement required by paragraph 
(a)(3)(i) of this section must:
    (i) Explain the specific actions that the state member bank will 
take to correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken; and
    (iii) Provide any other information the Board may require.
    (5) Imposition of limits. Until the Board determines that the 
conditions described in the notice under paragraph (a)(1) of this 
section are corrected:
    (i) The Board may impose any limitations on the conduct or 
activities of the state member bank or any subsidiary of the bank as 
the Board determines to be appropriate under the circumstances and 
consistent with the purposes of section 121 of the Gramm-Leach-Bliley 
Act, including requiring the Board's prior approval for any financial 
subsidiary of the bank to acquire any company or engage in any 
additional activity; and
    (ii) The appropriate Federal banking agency for any relevant 
depository institution affiliate may impose any limitations on the 
conduct or activities of the depository institution or any subsidiary 
of that institution as the agency determines to be appropriate under 
the circumstances and consistent with the purposes of section 121 of 
the Gramm-Leach-Bliley Act.
    (6) Divestiture. The Board may require a state member bank to 
divest control of any financial subsidiary if the conditions described 
in a notice under paragraph (a)(1) of this section are not corrected 
within 180 days of receipt of the notice or such additional period of 
time as the Board may permit. Any divestiture must be completed in 
accordance with any terms and conditions established by the Board.
    (7) Consultation. The Board will consult with all relevant Federal 
and state regulatory authorities in taking any action under this 
paragraph (a).
    (b) Debt rating or alternative requirement. If a state member bank 
does not continue to meet any applicable debt rating or alternative 
requirement of Sec. 208.71(b), the bank may not, directly or through a 
subsidiary, purchase or acquire any additional equity capital of any 
financial subsidiary until the bank restores its compliance with the 
requirements of that section. For purposes of this paragraph (b), the 
term ``equity capital'' includes, in addition to any equity instrument, 
any debt instrument issued by the financial subsidiary if the debt 
instrument qualifies as capital of the subsidiary under any Federal or 
state law, regulation or interpretation applicable to the subsidiary.


Sec. 208.75  What happens if the state member bank or any of its 
insured depository institution affiliates receives less than a 
``satisfactory'' CRA rating?

    (a) Limits on establishment of financial subsidiaries and expansion 
of existing financial subsidiaries. If a state member bank, or any 
insured depository institution affiliate of the bank, has received less 
than a ``satisfactory'' rating in meeting community credit needs in its 
most recent examination under the Community Reinvestment Act of 1977 
(12 U.S.C. 2901 et seq.):
    (1) The state member bank may not, directly or indirectly, acquire 
control of any financial subsidiary; and
    (2) Any financial subsidiary controlled by the state member bank 
may not commence any additional activity or acquire control, including 
all or substantially all of the assets, of any company.
    (b) Exception for certain activities. The prohibition in paragraph 
(a)(2) of this section does not apply to any activity, or to the 
acquisition of control of any company that is engaged only in 
activities, that the state member bank is permitted to conduct directly 
and that are conducted on the same terms and conditions that govern the 
conduct of the activity by the state member bank.
    (c) Duration of prohibitions. The prohibitions described in 
paragraph (a) of this section shall continue in effect until such time 
as the state member bank and each insured depository institution 
affiliate of the state member bank has achieved at least a 
``satisfactory'' rating in meeting community credit needs in its most 
recent examination under the Community Reinvestment Act.


Sec. 208.76  What Federal Reserve approvals are necessary for financial 
subsidiaries?

    (a) Notice requirements. (1) A state member bank may not acquire 
control

[[Page 42936]]

of, or an interest in, a financial subsidiary unless it files a notice 
(in letter form, with enclosures) with the appropriate Reserve Bank.
    (2) A state member bank may not engage in any additional activity 
pursuant to Sec. 208.72(a)(1) or (2) through an existing financial 
subsidiary unless the state member bank files a notice (in letter form, 
with enclosures) with the appropriate Reserve Bank.
    (b) Contents of Notice. Any notice required by paragraph (a) of 
this section must:
    (1) In the case of a notice filed under paragraph (a)(1) of this 
section, describe the transaction(s) through which the bank proposes to 
acquire control of, or an interest in, the financial subsidiary;
    (2) Provide the name and head office address of the financial 
subsidiary;
    (3) Provide a description of the current and proposed activities of 
the financial subsidiary and the specific authority permitting each 
activity;
    (4) Provide the capital ratios as of the close of the previous 
calendar quarter for all relevant capital measures, as defined in 
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o), for 
the bank and each of its depository institution affiliates;
    (5) Certify that the bank and each of its depository institution 
affiliates was well capitalized at the close of the previous calendar 
quarter and is well capitalized as of the date the bank files its 
notice;
    (6) Certify that the bank and each of its depository institution 
affiliates is well managed as of the date the bank files its notice;
    (7) Certify that the bank meets the debt rating or alternative 
requirement of Sec. 208.71(b), if applicable; and
    (8) Certify that the bank and its financial subsidiaries are in 
compliance with the asset limit set forth in Sec. 208.71(a)(2) both 
before the proposal and on a pro forma basis.
    (c) Insurance activities. (1) If a notice filed under paragraph (a) 
of this section relates to the initial affiliation of the bank with a 
company engaged in insurance activities, the notice must describe the 
type of insurance activity that the company is engaged in or plans to 
conduct and identify each state where the company holds an insurance 
license and the state insurance regulatory authority that issued the 
license.
    (2) The appropriate Reserve Bank will send a copy of any notice 
described in paragraph (c)(1) of this section to the appropriate state 
insurance regulatory authorities and provide such authorities with an 
opportunity to comment on the proposal.
    (d) Approval procedures. A notice filed with the appropriate 
Reserve Bank under paragraph (a) of this section will be deemed 
approved on the fifteenth day after receipt of a complete notice by the 
appropriate Reserve Bank, unless prior to that date the Board or the 
appropriate Reserve Bank notifies the bank that the notice is approved, 
that the notice will require additional review, or that the bank does 
not meet the requirements of this subpart. Any notification of early 
approval of a notice must be in writing.


Sec. 208.77  Definitions.

    The following definitions shall apply for purposes of this subpart:
    (a) Affiliate, Company, Control, and Subsidiary. The terms 
``affiliate'', ``company'', ``control'', and ``subsidiary'' have the 
meanings given those terms in section 2 of the Bank Holding Company Act 
of 1956 (12 U.S.C. 1841).
    (b) Appropriate Federal Banking Agency, Depository Institution, 
Insured Bank and Insured Depository Institution. The terms 
``appropriate Federal banking agency'', ``depository institution'', 
``insured bank'' and ``insured depository institution'' have the 
meanings given those terms in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813).
    (c) Capital-related definitions.
    (1) The terms ``Tier 1 capital'', ``tangible equity'', ``risk-
weighted assets'' and ``total assets'' have the meanings given those 
terms in Sec. 208.41 of this part.
    (2) The terms ``Tier 2 capital'' and ``average total assets'' have 
the meanings given those terms in Appendix A and Appendix B of this 
part, respectively.
    (d) Eligible Debt. The term ``eligible debt'' means unsecured debt 
with an initial maturity of more than 360 days that:
    (1) Is not supported by any form of credit enhancement, including a 
guarantee or standby letter of credit; and
    (2) Is not held in whole or in any significant part by any 
affiliate, officer, director, principal shareholder, or employee of the 
bank or any other person acting on behalf of or with funds from the 
bank or an affiliate of the bank.
    (e) Financial Subsidiary--(1) In general. The term ``financial 
subsidiary'' means any company that is controlled by one or more 
insured depository institutions other than:
    (i) A subsidiary that engages only in activities that the state 
member bank is permitted to engage in directly and that are conducted 
on the same terms and conditions that govern the conduct of the 
activities by the state member bank; or
    (ii) A subsidiary that the state member bank is specifically 
authorized by the express terms of a Federal statute (other than 
section 9 of the Federal Reserve Act (12 U.S.C. 335)), and not by 
implication or interpretation, to control, such as by section 25 or 25A 
of the Federal Reserve Act (12 U.S.C. 601-604a, 611-631) or the Bank 
Service Company Act (12 U.S.C. 1861 et seq.).
    (2) Subsidiaries of financial subsidiaries. A financial subsidiary 
includes any company that is directly or indirectly controlled by the 
financial subsidiary.
    (f) 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-denominated financial obligations maturing in not less than one 
year.
    (g) Well Capitalized--(1) Insured depository institutions. An 
insured depository institution is ``well capitalized'' if it has and 
maintains at least the capital levels required to be well capitalized 
under the capital adequacy regulations or guidelines adopted by the 
institution's appropriate Federal banking agency under section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o).
    (2) Uninsured depository institutions. A depository institution the 
deposits of which are not insured by the Federal Deposit Insurance 
Corporation is ``well capitalized'' if the institution has and 
maintains at least the capital levels required for an insured 
depository institution to be well capitalized.
    (h) Well Managed--(1) In general. The term ``well managed'' means:
    (i) Unless otherwise determined in writing by the appropriate 
Federal banking agency, the institution has received a composite rating 
of 1 or 2 under the Uniform Financial Institutions Rating System (or an 
equivalent rating under an equivalent rating system) and at least a 
rating of 2 for management (if such rating is given) in connection with 
its most recent examination or subsequent review by the institution's 
appropriate Federal banking agency (or the appropriate state banking 
agency in an examination described in section 10(d) of the Federal 
Deposit Insurance Act (12 U.S.C. 1820(d)); or
    (ii) In the case of any depository institution that has not been 
examined by its appropriate Federal banking agency or been subject to 
an examination by its appropriate state

[[Page 42937]]

banking agency that meets the requirements of section 10(d) of the 
Federal Deposit Insurance Act (18 U.S.C. 1820(d)), the existence and 
use of managerial resources that the appropriate Federal banking agency 
determines are satisfactory.
    (2) Merged depository institutions--(i) Merger involving well 
managed institutions. A depository institution that results from the 
merger of two or more depository institutions that are well managed 
will be considered to be well managed unless the appropriate Federal 
banking agency for the resulting depository institution determines 
otherwise.
    (ii) Merger involving a poorly rated institution. A depository 
institution that results from the merger of a well managed depository 
institution with one or more depository institutions that are not well 
managed or that have not been examined shall be considered to be well 
managed if the appropriate Federal banking agency for the resulting 
depository institution determines that the institution is well managed.

    By order of the Board of Governors of the Federal Reserve 
System, August 13, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-20656 Filed 8-15-01; 8:45 am]
BILLING CODE 6210-01-P