[Federal Register Volume 66, Number 208 (Friday, October 26, 2001)]
[Rules and Regulations]
[Pages 54346-54398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26513]



[[Page 54345]]

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Part II





Federal Reserve System





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12 CFR Parts 211 and 265



International Banking Operations; Rules Regarding Delegation of 
Authority and International Lending Supervision; Final Rule and 
Proposed Rule

  Federal Register / Vol. 66, No. 208 / Friday, October 26, 2001 / 
Rules and Regulations  

[[Page 54346]]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 211 and 265

[Regulation K; Docket No. R-0994]


International Banking Operations; Rules Regarding Delegation of 
Authority

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: Consistent with section 303 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (the Regulatory 
Improvement Act), the Federal Reserve Act, and the International 
Banking Act of 1978 (the IBA), the Board has reviewed Regulation K, 
which governs international banking operations, and is amending 
subparts A, B, and C. A proposed rule to amend subpart D of Regulation 
K is being published in this same issue of the Federal Register.
    Subpart A of Regulation K governs the foreign investments and 
activities of all member banks (national banks as well as state member 
banks), Edge and agreement corporations, and bank holding companies. 
The amendments streamline foreign branching procedures for U.S. banking 
organizations, authorize expanded activities in foreign branches of 
U.S. banks, and implement recent statutory changes authorizing a bank 
to invest up to 20 percent of capital and surplus in Edge corporations. 
Changes also have been made to the provisions governing permissible 
foreign activities of U.S. banking organizations, including securities 
activities, and investments by U.S. banking organizations under the 
general consent procedures.
    Subpart B of Regulation K (Foreign Banking Organizations) governs 
the U.S. activities of foreign banking organizations. The amendments 
include revisions aimed at streamlining the applications procedures 
applicable to foreign banks seeking to expand operations in the United 
States, changes to provisions regarding the qualification of foreign 
banking organizations for exemption from the nonbanking prohibitions of 
section 4 of the Bank Holding Company Act (the BHC Act), and 
implementation of provisions of the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994 (the Interstate Act) that affect 
foreign banks.
    In addition, there are a number of technical and clarifying 
amendments to subparts A and B, as well as subpart C, which deals with 
export trading companies. There are also certain amendments to the 
Board's Rules Regarding Delegation of Authority.

EFFECTIVE DATE: November 26, 2001.

FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General 
Counsel (202/452-3786), regarding all subparts: Jon Stoloff, Senior 
Counsel (202/452-3269), or Alison MacDonald, Counsel (202/452-3236), 
regarding Subpart A; Ann Misback, Assistant General Counsel (202/452-
3788), Janet Crossen, Senior Counsel (202/452-3281), or Melinda 
Milenkovich, Counsel (202/452-3274), regarding Subparts B and C; Legal 
Division; or Michael G. Martinson, Associate Director (202/452-2798), 
or Betsy Cross, Deputy Associate Director (202/452-2574), regarding all 
subparts; Division of Banking Supervision and Regulation. For users of 
Telecommunications Device for the Deaf (TDD) only, please contact 202/
263-4869.

SUPPLEMENTARY INFORMATION:

Subpart A: International Operations of U.S. Banking Organizations

Statutory Framework

    The Board is issuing amendments to Regulation K that will eliminate 
unnecessary regulatory burden, increase transparency, and streamline 
the approval process for U.S. banking organizations seeking to expand 
their operations abroad. The Federal Reserve Act, as amended by the 
IBA, requires the Board to review its regulations issued under section 
25A of the Federal Reserve Act (the Edge Act) at least once every five 
years and make any changes necessary to ensure that the purposes of the 
Edge Act are being served in light of prevailing economic conditions 
and banking practices.\1\ The Board has reviewed the provisions of 
Subpart A, which govern the operations of Edge corporations, with this 
statutory mandate in mind.
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    \1\ The Board last issued final revisions to Subpart A of 
Regulation K in December 1995, at which time the investment 
authority for strongly capitalized and well-managed U.S. banking 
organizations was expanded significantly.
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    Edge corporations are international banking and financial vehicles 
through which U.S. banking organizations offer international banking or 
other foreign financial services and through which they compete with 
similar foreign-owned institutions in the United States and abroad. The 
purposes of the Edge Act, which amended the Federal Reserve Act in 
1919, include enabling U.S. banking organizations to compete 
effectively with foreign-owned institutions; providing the means to 
finance international trade, especially U.S. exports; fostering the 
participation of regional and smaller U.S. banks in providing 
international banking and financing services to U.S. business and 
agriculture; and stimulating competition in the provision of 
international banking and financing services throughout the United 
States.
    Congress, in enacting this legislation, recognized that U.S. banks 
needed vehicles that could exercise wider financial powers abroad than 
were permitted domestically in order to be competitive internationally 
and to serve the international needs of U.S. firms. At the same time, 
the Edge Act places limits on U.S. banks' exposure to these broader 
foreign activities, by limiting the amount that U.S. banks may invest 
in Edge corporations, establishing a number of statutory safety and 
soundness constraints, and granting the Board wide discretion in 
determining what activities should be permissible for such entities. In 
exercising its authority in this area, the Board is required by the IBA 
to implement the objectives of the Edge Act consistent with supervisory 
standards relating to the safety and soundness of U.S. banking 
organizations.
    In December 1997, following a comprehensive review of the 
regulation, the Board requested public comment on proposed revisions to 
Regulation K (62 FR 68423) (the '97 Proposal). The Board received 28 
comments from outside the Federal Reserve System on the proposed 
Subpart A revisions. Comments were received from twelve U.S. banks or 
bank holding companies; one Edge corporation; one bank-owned insurance 
agency; and thirteen trade associations. The Board also received 
comments from one state bank supervisory agency.
    Subsequent to the Board issuing the '97 Proposal, financial 
modernization legislation was enacted. The Gramm-Leach-Bliley Act (Pub. 
L. 106-102, 113 Stat. 1338 (1999) (GLB or the GLB Act) was enacted on 
November 12, 1999. Many of the activities the Board had proposed to 
liberalize in the '97 Proposal are covered under the expanded authority 
available to financial holding companies (FHCs) under GLB. More 
specifically, under GLB, a bank holding company (BHC) that elects to 
become an FHC may engage in a broad range of financial activities, 
including securities underwriting and dealing, insurance sales and 
underwriting, and merchant banking.
    Final action on the '97 Proposal was deferred pending 
implementation of the expanded authority available under GLB. The Board 
has issued a number of rules implementing GLB authority, including, for 
example, those governing

[[Page 54347]]

FHC elections and activities (66 FR 400, Jan. 3, 2001), real estate 
brokerage activities by FHCs (66 FR 307, Jan. 3, 2001), merchant 
banking activities (66 FR 8466, Jan. 31, 2001), the capital treatment 
of nonfinancial equity investments (66 FR 10212, Feb. 14, 2001), 
transactions between banks and their affiliates (66 FR 24186, May 11, 
2001), and financial subsidiaries of state member banks (66 FR 42929, 
Aug. 16, 2001).
    The Board has now reviewed its '97 Proposal in light of the 
significantly changed landscape in relation to provision of financial 
services post-GLB, as well as all comments filed on the '97 Proposal. 
The Board has concluded that a few of the changes proposed in 1997 that 
would have allowed expansion of activities now authorized under GLB no 
longer are appropriate, primarily those relating to equity dealing, 
portfolio investment, and insurance activities. However, consistent 
with the '97 Proposal, the Board has concluded that a number of 
provisions relating to foreign activities of U.S. banking organizations 
should be amended, including changes that would: (1) Expand permissible 
government bond trading by foreign branches of member banks; (2) 
streamline procedures for establishment of foreign branches by U.S. 
banking organizations; (3) expand permissible equity underwriting 
activities abroad for well-capitalized and well-managed U.S. banking 
organizations; (4) expand general consent authority for well-
capitalized and well-managed U.S. banking organizations; (5) amend the 
debt/equity swaps authority to reflect changes in circumstances of 
eligible countries; and (6) implement the statutory provision allowing 
member banks to invest, with the Board's approval, up to 20 percent of 
capital and surplus in the stock of Edge and agreement corporations. 
Additional technical and clarifying amendments were also made. These 
changes to Regulation K, and the comments received on the '97 Proposal, 
are discussed below.
    The Board also indicated in the '97 Proposal that it had not 
identified any changes to the permissible U.S. activities of Edge 
corporations that appeared necessary or appropriate to fulfill the 
purposes of the Edge Act, but sought comment on whether there was a 
need for any such changes. One commenter urged the Board to permit Edge 
corporations to provide incidental services generating insignificant 
revenues in the United States to U.S. persons affiliated with a foreign 
person or a foreign organization that is principally engaged in foreign 
business. The Board does not believe this change is necessary or 
appropriate or otherwise consistent with the purposes of the Edge Act.

Expansion of Government Bond Trading by Foreign Branches

    Section 25 of the Federal Reserve Act permits the Board to 
authorize foreign branches of member banks to conduct abroad activities 
that are not permitted domestically. However, the statute states that 
the Board shall not ``except to such limited extent as the Board may 
deem necessary with respect to securities issued by any `foreign state' 
* * * authorize a foreign branch to engage or participate, directly or 
indirectly, in the business of underwriting, selling, or distributing 
securities.''
    Given the statutory language, the Board, to date, has only 
permitted foreign branches to underwrite and sell obligations of (i) 
the national government of the country in which the branch is located, 
(ii) an agency or instrumentality of the national government where 
supported by the taxing authority, guarantee, or full faith and credit 
of the national government, and (iii) a political subdivision of the 
country. This was determined to be appropriate on the basis that it is 
often necessary in the ordinary course of banking business for a branch 
to participate in the selling of the bonds of the host country.
    In recent years, U.S. banking organizations have become more active 
in trading and underwriting foreign government securities. 
Increasingly, such business, where possible, is being conducted in the 
foreign branches of U.S. banks. Centralizing trading for all or for 
certain groups of countries in a single branch can be desirable to 
facilitate management and funding of this business. For example, a 
banking organization might wish to centralize government securities 
trading for all countries in the European Union in one European branch.
    For these reasons, the Board proposed that banks be permitted to 
underwrite and deal through their foreign branches in obligations of 
governments other than the host government, provided that the 
obligations are of investment grade and the business is otherwise 
subject to sound banking practices and prudential regulations. The 
Board considered the requirement that the obligations must be 
investment grade would limit cross-border transfer risk to the bank 
because trading of government securities giving rise to such risk would 
be required to be conducted either directly through a local branch that 
is funded locally or through a subsidiary, instead of through the bank. 
The Board also proposed to retain the existing authority of foreign 
branches of member banks to underwrite and deal in host government 
bonds regardless of whether they are investment grade. The Board sought 
comment on these proposals, as well as on what ratings should be 
considered to be investment grade for these purposes.
    Commenters expressed general support for the Board's proposal. Some 
commenters suggested that the Board treat any government obligation, 
investment grade or otherwise, of any country or, alternatively, any 
country in which a bank has a foreign branch, as eligible to be 
underwritten and traded in branches located outside of that country. 
Other commenters argued that safety and soundness is enhanced by having 
centralized underwriting and dealing of all government securities, 
since the local branch which has authority to engage in non-investment 
grade underwriting and dealing may not have the appropriate experience 
to manage such operations.
    The Board continues to believe the investment grade requirement for 
obligations of governments other than the host government is 
appropriate for the reason set out in the proposal, namely, limitation 
of cross-border transfer risk to the bank. Non-investment grade 
government securities issued by foreign governments other than the host 
government are more likely to give rise to such risks. For this reason, 
the Board continues to be of the view that trading of non-investment 
grade securities should be conducted either directly through a local 
branch that is funded locally or through a subsidiary, instead of 
through the bank. Accordingly, in the final rule, the Board has 
retained the investment grade requirement for obligations of 
governments other than the host government.
    A few commenters recommended that the Board permit foreign branches 
of U.S. banks to underwrite and deal in investment grade obligations of 
all political subdivisions, and of agencies and instrumentalities 
whether or not backed by the national government. After further 
consideration, the Board has determined that it is appropriate to adopt 
this suggestion at least in part, so long as all such obligations are 
investment grade. As at present, obligations of agencies and 
instrumentalities will be required to be supported by the taxing 
authority, guarantee, or full faith and credit of the national 
government.
    Commenters also requested that foreign branches be permitted to

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underwrite and deal in all securities guaranteed by a foreign 
government. The Board notes that the authority granted in section 25 of 
the Federal Reserve Act in relation to this activity is with respect to 
securities ``issued by `foreign state','' and declines to adopt this 
change.
    With respect to the Board's request for comment on which ratings 
should be considered to be investment grade for these purposes, 
commenters urged the Board to adopt the definition of ``investment 
grade'' set out in the Office of the Comptroller of the Currency's 
(OCC) investment securities regulation. 12 CFR 1.2(d). The OCC defines 
the term to mean a security that is rated in one of the four highest 
rating categories by two or more ``nationally recognized statistical 
rating organizations'' (NRSROs) as designated by the Securities and 
Exchange Commission (SEC), or one such agency if the security has been 
rated by only one NRSRO. The Board considers this definition to be 
appropriate for purposes of this activity of foreign branches of U.S. 
banks; accordingly, that definition is incorporated into the final 
rule.
    A few commenters also urged the Board to adopt a procedure that 
would permit the addition of agencies to the list of permissible rating 
agencies beyond those that have been approved by the SEC because of 
concern that a rating by a NRSRO may not be available for some foreign 
government securities. The Board is not inclined to adopt such a 
procedure at this time in view of the number of NRSROs that rate 
foreign government securities. Board staff should be consulted if any 
issues arise in relation to application of the ``investment grade'' 
requirement. If it appears that additional guidance is warranted, the 
Board will consider the matter further.
    Comments also suggested that securities that are not speculative in 
nature and are deemed by the investor to be the credit equivalent of a 
security that is rated investment grade should be considered 
``investment grade'' under this provision of Regulation K. The Board 
believes that such an approach would essentially mean that there would 
be no requirement that the obligations be investment grade and rejects 
it for this reason. Finally, commenters sought clarification as to 
whether the limits applicable to government obligations, whether as a 
percentage of capital or of local deposits, may be calculated on a net 
basis rather than a gross basis. The limits applicable to government 
obligations under this section may be calculated on a net basis, 
provided that the banking organization otherwise has received no 
objection to its internal models being employed for purposes of 
compliance with these limits.

Foreign Branching

    The Board's responsibilities as home country supervisor under the 
Minimum Standards for the Supervision of International Banking Groups 
and their Cross-border Establishments issued by the Basle Committee on 
Banking Supervision (the Minimum Standards) call for its specific 
authorization of a U.S. banking organization's outward expansion. 
Outward expansion for these purposes means the initial establishment of 
a banking presence in a country by the bank or any affiliate.
    Regulation K currently requires the specific consent of the Board 
for the establishment of branches by a member bank, an Edge or 
agreement corporation, or a foreign bank subsidiary in its first two 
foreign countries. The Board proposed to amend Regulation K to require 
only 30 days' prior notice to the Board before establishment of 
branches in the first two countries, on the basis that such a 
requirement also would fulfill the Board's responsibilities under the 
Minimum Standards. The Board also proposed that 30 days' prior notice 
would be required, consistent with the Minimum Standards, if the 
initial banking presence abroad would be in the form of a subsidiary 
bank; such notice would be required even if the amount to be invested 
were below the general consent limits.
    Under Regulation K at present, no prior Board approval is required 
for a banking entity to establish additional branches in any foreign 
country where it already operates one or more branches. However, a 
banking entity must give the Board prior notice before establishing a 
branch in a foreign country where it has no branches even though a 
banking affiliate operates a branch in that country.
    The Board proposed to liberalize Regulation K such that if any of 
the member banks, their Edge or agreement corporation subsidiaries, or 
a foreign bank subsidiary (whether a subsidiary of the bank or of the 
bank holding company) already has a branch in a particular foreign 
country, a banking affiliate would be authorized to branch there 
without prior notice to the board. After-the-fact notice, however, 
would still be required.
    The Board also proposed that the 45 days' prior notice currently 
required in order to branch into additional countries where there is no 
affiliated banking presence (after the organization has branches 
engaged in banking in two foreign countries) should be reduced to 12 
business days. In taking this approach, the foreign branching 
establishments of the entire banking organization would be taken into 
account in determining whether the banking entity would be subject to 
the 30 day or 12 day prior notice procedure. Where a U.S. banking 
organization as a whole already operates foreign branches of banking 
entities in two countries, any banking affiliate would be able to open 
a branch in a country where such organization has no banking presence, 
pursuant to the 12 days' prior notice procedure.
    Finally, currently under Regulation K, nonbanking subsidiaries may 
branch into any country in which any affiliate has a branch without 
prior notice, but a 45-day prior notice must be submitted to establish 
a branch in a country where no affiliate has a presence. The Board 
proposed permitting nonbanking subsidiaries held pursuant to Regulation 
K to establish foreign branches without prior review, subject only to 
an after-the-fact notice requirement.
    The Board sought comment on these proposed changes, including in 
particular whether the proposed modified notice periods would 
sufficiently accommodate foreign expansion plans. Commenters supported 
the Board's proposed changes. Accordingly, the Board is adopting the 
foreign branching provisions as proposed. The Board wishes to clarify 
that filing Form FR 2058 fulfills the after-the-fact notice 
requirements of the foreign branching provisions. Additionally, the 
Board notes that the streamlined procedures for establishment of 
foreign branches are not limited to well-capitalized, well-managed 
institutions. However, the Board retains the authority to suspend 
general consent authority in whole or in part should circumstances 
warrant.

Permissible Activities of Foreign Subsidiaries of U.S. Banking 
Organizations

    One aspect of bank regulation to which the Federal Reserve 
subscribes is the fostering of a level competitive playing field for 
financial intermediaries. Thus, in the United States, the Board has 
advocated that expansion by banking organizations into nonbanking 
activities should generally occur through the bank holding company and 
not the bank. Banks in the United States benefit from the implicit 
support of the national government and its sovereign credit rating 
through federal deposit insurance, Federal Reserve discount window 
access, and final riskless settlement of payment

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system transactions. Extension of this system would make the existing 
playing field in the United States unlevel for nonbank competitors and 
create unnecessary distortions in competition.
    The same principle applies to U.S. banking organizations abroad. 
Other nations have chosen to allow their banks to engage in a broad 
array of financial activities, especially investment banking 
activities, thereby extending to these activities the implicit support 
of their governments. In those markets, U.S. banking organizations 
would be at a disadvantage if unable to offer their customers an 
equivalent range of key services with the convenience and efficiency of 
their local bank competitors. In many of these markets, banks are the 
only significant providers of capital markets services. Independent 
securities firms are not generally substantial competitors in these 
markets, both for historical reasons and because they may be unable to 
compete effectively with banks that have the explicit and implicit 
support of their governments.
    Congress has recognized the existence of conflicting policy 
objectives and competitive pressures faced by U.S. banking 
organizations operating abroad and through legislation has struck a 
balance. In relation to the United States, Congress in enacting GLB 
demonstrated a strong preference that expanded nonbanking financial 
activities be conducted in a structure that does not involve the 
federal bank subsidy. Expanded activities authorized by GLB are 
required to be conducted either in nonbank subsidiaries of a financial 
holding company or in a financial subsidiary of a bank, which would be 
subject to the restrictions on funding by a parent bank set out in 
sections 23A and 23B of the Federal Reserve Act. In relation to 
competitive pressures arising from abroad, Congress preserved the 
Board's authority under the Edge Act to permit Edge corporations, which 
may be owned by U.S. banks, to engage in a wider range of activities 
outside the United States than permitted to U.S. banks domestically, 
where such powers are considered necessary to enable them to compete 
effectively with similar foreign-owned institutions in the United 
States and abroad and liberalization otherwise is consistent with 
safety and soundness considerations. Congress, in enacting the Edge 
Act, recognized that U.S. banks in some circumstances may need vehicles 
that could exercise broader financial powers abroad in order to remain 
competitive internationally and to serve the needs of U.S. firms. 
Congress granted the Board similar broad discretion to allow bank 
holding companies to engage in activities outside the United States.
    In exercising its statutory authority under the Edge Act, the Board 
has sought to balance the need for U.S. banking organizations to be 
competitive abroad with the public interest in assuring the safety and 
soundness of the banks, protecting the deposit insurance fund, and 
limiting the extension of the federal safety net. In adopting final 
revisions to Regulation K, the Board has sought to grant expanded 
authority only in relation to those activities where: (i) The existing 
restrictions of Regulation K appear to result in a competitive harm to 
the ability of an Edge corporation to provide financial services 
necessary to attract and retain customers; and (ii) requiring the 
activities to be conducted outside the bank chain of ownership appears 
to compromise significantly the competitive position of U.S. banking 
organizations. The Board has concluded that equity underwriting is one 
such activity, and the expansion of authority proposed in 1997 with 
regard to this activity has been adopted, as discussed further below. 
The Board has concluded, however, that liberalization set out in the 
'97 Proposal in relation to other activities, such as equity dealing, 
venture capital investments and insurance activities, should not be 
adopted at this time in light of the passage of GLB. These latter 
activities appear to be able to be conducted competitively outside the 
bank chain of ownership under authority granted in GLB.

Two-Tier Capital Test for Edge Corporations

    As the Board noted in the '97 Proposal, tying applicable limits to 
the capital of the parent bank is particularly important for 
subsidiaries of Edge corporations. Congress has limited a member bank's 
investment in Edge and agreement corporations to 20 percent of the 
bank's capital.\2\ However, for various reasons, Edge corporations 
historically have tended to retain their earnings rather than 
dividending them to the parent bank. In some cases due to such retained 
earnings, the capital of a bank's Edge and agreement corporations may 
be in excess of 20 percent of the parent bank's consolidated capital, 
even though its investment in the Edge subject to the above-referenced 
statutory limit is below 20 percent.
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    \2\ The Edge Act prohibited member banks from investing more 
than 10 percent of their capital and surplus in the capital stock of 
Edge and agreement corporations. In September 1996, congress amended 
this limit to permit investments in excess of 10 percent of capital 
and surplus with the specific approval of the Board, provided the 
amount invested shall not exceed 20 percent of capital and surplus 
of the bank. See The Economic Growth and Regulatory Paperwork 
Reduction Act (EGRPRA), Pub. L. 104-208, sec. 2307 (12 U.S.C. 618).
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    In these circumstances, the Board considered that the capital of an 
Edge corporation that is in excess of 20 percent of the parent bank's 
consolidated capital, when retained earnings are counted, generally 
should be excluded for purposes of determining applicable limits for 
activities of the Edge and its subsidiaries. Accordingly, the Board 
proposed that Edge and agreement corporations, as well as foreign bank 
subsidiaries of member banks (which are treated as Edge corporations 
for purposes of their limits), would be subject to two limits, one tied 
to a percentage of the Edge corporation's tier 1 capital and the other 
tied to a percentage of the parent bank's tier 1 capital. Limits tied 
to the parent bank's capital would be 20 percent of the limits 
otherwise applicable to Edge corporations, and the lower limit would be 
binding. For example, if a limit proposed for a given activity of an 
Edge corporation is 10 percent of the Edge corporation's capital but 
the Edge corporation's capital is in excess of 20 percent of the bank's 
total capital, the binding limit for the Edge corporation would be two 
percent of the parent bank's tier 1 capital. For those U.S. banks that 
do not have significant levels of retained earnings at the Edge, the 
binding limit more than likely would be the separate limit tied to the 
Edge corporation's capital.
    The Board considered that this approach would be consistent with 
the intent underlying the provisions of the Edge Act limiting the total 
amount of capital a bank may invest in Edge corporations. This approach 
effectively would place a cap on the percentage of total bank capital 
that could be placed at risk through activities or investments not 
otherwise permitted to the bank directly, regardless of the capital 
level of the Edge corporation. This approach also would reduce any 
regulatory incentive to retain earnings at the Edge because any 
regulatory benefit from such retained earnings, in terms of expanded 
limits on activities abroad, would be denied.
    The Board proposed that all limits applicable to Edge corporations 
under the '97 Proposal would proceed on this basis. Comment was 
requested on these proposals and whether any other approach might 
achieve similar objectives.
    One commenter opposed the Board's proposal to impose a two-tier 
capital test on Edge corporations, arguing that the proposal penalized 
organizations that achieve strong earnings in a

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subsidiary of a bank rather than a subsidiary of the holding company. 
It further maintained that the limitation on the amount a bank can 
invest in an Edge corporation creates a practical limit on the risk to 
the bank's own capital. Therefore, it argued the Board should look only 
at the capital of the Edge corporation in setting limits as a 
percentage of capital. The Board continues to believe this two-tier 
approach is consistent with the intent underlying provisions of the 
Edge Act that limit the total amount of capital a bank may invest in 
Edge corporations. The Board notes that, due to the accumulation of 
large amounts of retained earnings in Edge corporations, the limitation 
on the amount a bank can invest in an Edge corporation may not limit 
the overall risk to the bank's consolidated capital.
    Two other commenters argued the Board should look only at the 
capital of the parent bank in setting limits under the Edge 
corporation. The Board believes, however, that activity limits for Edge 
corporations should be tied to the capital of both the Edge corporation 
and the parent member bank, in order to ensure that Edge corporations 
are not a source of potential weakness to the U.S. parent bank.

Securities Activities

Current Restrictions on Securities Activities

    Foreign subsidiaries of U.S. banking organizations have been 
permitted broad authority to underwrite and deal in debt securities for 
over 25 years, subject to the provision that the securities must be 
included with loans for purposes of compliance with the parent bank's 
lending limit. No separate dollar limits have been placed on 
underwriting and dealing in debt securities.
    Since 1979, Regulation K also has specifically authorized foreign 
subsidiaries of both U.S. banks and bank holding companies to 
underwrite and deal in equity securities outside the United States, 
subject to certain limitations and restrictions. These activities were 
determined to be permissible, within the applicable limits, on two 
bases. First, it became clear that it was necessary for U.S. banking 
organizations to be able to engage in these activities abroad, if they 
were to compete successfully with foreign banks in the provision of 
services to foreign customers. Indeed, for some time, virtually all the 
major foreign competitors of U.S. banking organizations have been 
foreign banks that conduct equity securities activities either directly 
in the bank or in a subsidiary of the bank. Thus, consistent with the 
purposes underlying the Edge Act and the BHC Act, there is clear 
statutory authority for U.S. banking organizations to engage in these 
activities through subsidiaries abroad. Second, in any event, the 
provisions of the Glass-Steagall Act did not apply extra-territorially 
to the operations of foreign subsidiaries of U.S. banking 
organizations.
    While equity underwriting and dealing have been permissible 
activities for U.S. banking organizations' foreign subsidiaries for 
some time, as noted above, the level of such activity is subject to 
limits under Regulation K. Restrictions currently applied to equity 
securities underwriting and dealing activities under Regulation K 
include the following.
    Underwriting limits--Through a foreign subsidiary, an investor \3\ 
may underwrite equity securities in amounts up to the lesser of $60 
million or 25 percent of its tier 1 capital. These limits do not 
include amounts covered by binding commitments from sub-underwriters or 
other purchasers. If the underwriting is done in a subsidiary of the 
member bank, the amount of the uncovered underwriting must be included 
in computing the bank's single borrower lending limit with respect to 
the issuer.
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    \3\ An investor for these purposes means an Edge corporation, 
agreement corporation, bank holding company, member bank and any 
foreign bank owned directly by a member bank.
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    Dealing limits--Through a foreign subsidiary, an investor may hold 
a dealing position in the equity securities of any one issuer in 
amounts up to the lesser of $30 million or 10 percent of its tier 1 
capital. An investor must include any shares of a company held in an 
affiliate's dealing account in determining compliance with any 
percentage limits placed on ownership of that company.
    Aggregate limit--There is an aggregate limit on the total amount of 
equity securities that may be held in investment and dealing accounts, 
aggregating all shares held by subsidiaries: for a bank holding 
company, the limit is 25 percent of tier 1 capital; for an Edge 
corporation,\4\ the limit is 100 percent of the Edge's tier 1 
capital.\5\
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    \4\ Any foreign bank directly owned by a U.S. bank is treated as 
an Edge corporation for purposes of its limits.
    \5\ Investments in companies must be added to any shares of such 
companies held in the dealing account for purposes of this limit.
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    Prior review--Banking organizations must submit to a review of 
their foreign securities operations prior to engaging in foreign equity 
securities activities to the extent of these limits. They may also seek 
Board approval for higher underwriting limits, subject to certain 
conditions.

Revisions of Equity Securities Authority

Equity Underwriting

'97 Proposal

    Although, as discussed above, the existing limits on underwriting 
equity securities in Regulation K are expressed both in terms of 
percentages of tier 1 capital of the investor and absolute dollar 
limits, as a practical matter it has been the dollar limits that have 
constrained the extent to which U.S. banking organizations may engage 
in these activities through their foreign subsidiaries. In the '97 
Proposal, the Board noted the $60 million limit on underwriting equity 
securities significantly impedes the ability of U.S. banking 
organizations to compete for this business in foreign markets, where 
securities underwriting is a service routinely offered by local banks. 
At the same time, the risks associated with the activity suggest that 
such a stringent limit is not required for safety and soundness 
purposes for well-capitalized and well-managed banking organizations. 
While initial underwriting commitments may involve large sums, in most 
cases by the time the underwriting goes to market, large portions of 
the exposure have been passed on to sub-underwriters or presold. Thus, 
in most cases, the initial underwriting commitment substantially 
overstates the risk being assumed.
    In order to reduce further these constraints, the Board proposed in 
1997 to replace the dollar limits for underwriting activity with limits 
based solely on percentages of the investor's tier 1 capital for well-
capitalized and well-managed organizations. The Board considered that, 
if a banking organization is well-capitalized and well-managed, tying 
the underwriting limits solely to capital levels would have the benefit 
of more closely linking the limits to the ability of the company to 
support the activity. It would also provide U.S. banking organizations 
with greater flexibility in responding to changing market conditions, 
because the amount of capital devoted to an activity is, after meeting 
regulatory constraints, determined by the firm.
    Accordingly, the Board proposed to amend Regulation K in relation 
to those banking organizations that are well-capitalized and well-
managed by removing the existing dollar limits applicable to equity 
underwriting

[[Page 54351]]

activities, and instead providing that such activities would be limited 
to percentages of the investor's tier 1 capital. For well-capitalized 
and well-managed organizations, the Board proposed applicable limits to 
be determined as follows.\6\ In relation to securities activities of 
subsidiaries of bank holding companies, their limits would be 
determined by reference to percentages of the tier 1 capital of the 
holding company. The Board proposed that limits applicable to such 
activities undertaken by subsidiaries of Edge and agreement 
corporations, as well as foreign banks that may be direct subsidiaries 
of member banks, would be determined by reference to the tier 1 capital 
of the parent bank as well as to the tier 1 capital of the bank 
subsidiary. More specifically, limits for underwriting exposure to a 
single company would be established at 15 percent of the bank holding 
company's tier 1 capital for its subsidiaries and, for subsidiaries of 
Edge corporations, the lesser of three percent of tier 1 capital of the 
bank or 15 percent of the tier 1 capital of the Edge.
---------------------------------------------------------------------------

    \6\ The Board proposed that existing dollar limits would be 
retained for companies that are not well-capitalized and well-
managed.
---------------------------------------------------------------------------

    Under the '97 Proposal, these limits on underwriting exposure to a 
single company would be applied on an aggregate basis. A bank holding 
company's limit would include all underwriting exposure to one issuer 
by all of the holding company's direct and indirect subsidiaries, 
including exposures held through its bank subsidiaries. The bank's and 
Edge's limits would include all exposures held by their respective 
subsidiaries. The Board proposed, however, that this expanded 
underwriting authority would be available to U.S. banking organizations 
only if each of the bank holding company, bank, and Edge or agreement 
corporation qualify as well-capitalized and well-managed.\7\
---------------------------------------------------------------------------

    \7\ The Board proposed that what, if any, action should be taken 
in relation to banking organizations' limits if they ceased to be 
well-capitalized and well-managed would be addressed on a case-by-
case basis through supervisory action.
---------------------------------------------------------------------------

    For organizations that fail to meet the well-capitalized and well-
managed criteria, the Board proposed that the existing dollar limits 
(i.e., $60 million) on commitments by an investor and its affiliates 
for the shares of an organization would be retained.
    The Board proposed that, in order to engage in such activities, all 
banking organizations would be required to implement internal systems 
and controls adequate to ensure proper risk management. Controls would 
have to be in place to assure that underwriting positions do not result 
in violations of limits on securities held in the trading account or 
exceed the parent bank's lending limits when the underwriting positions 
are combined with other credit exposures. Sanctions (such as temporary 
suspension of underwriting authority) may be imposed for violations of 
such limits.

Final Rule on Equity Underwriting Limits.

    The Board continues to believe that there is a strong competitive 
need for liberalization of the $60 million Regulation K limit on equity 
underwriting. Subsidiaries of Edge corporations have been able to gain 
some underwriting business through obtaining commitments in advance 
from subunderwriters in order to reduce their own exposure to $60 
million, but the limit clearly is a material constraint. Underwriting 
abroad continues to be a business that is conducted by local banking 
firms and does not lend itself readily to cross-border activity, thus 
requiring foreign subsidiaries of U.S. banks to compete with much 
larger local competitors.
    Further, as noted above, the risks associated with equity 
underwriting activities suggest that stringent limits are not required 
for safety and soundness purposes for well-capitalized and well-managed 
banking organizations. Although the percentage limits proposed in the 
'97 Proposal would significantly increase the amount of underwriting 
authorized under Regulation K, underwriting is a shorter term activity 
than, e.g., dealing. Moreover, under Regulation K, positions undertaken 
in connection with an underwriting and unplaced after 90 days must be 
moved to the dealing account and counted against the dealing limit. 
Consequently, the exposure of the banking organization to the activity 
is minimized.
    Commenters strongly supported the Board's proposed liberalization 
of the equity underwriting limits, and made a few additional 
suggestions. One commenter recommended that the proposed underwriting 
limits be doubled. Another expressed concern that the proposed limits 
might result in some Edge corporations having less underwriting 
authority than the existing $60 million limit. Some commenters also 
objected to the disparity between the limits proposed for BHC and bank 
subsidiaries.
    The Board does not believe further expansion of the underwriting 
limits beyond those proposed is warranted, particularly given that 
portions of an underwriting that are covered by binding commitments 
obtained from subunderwriters or other purchasers are not counted in 
determining compliance with the limits. U.S. banking organizations 
wishing to engage in underwriting equity securities in amounts larger 
than those permitted under Regulation K may do so by qualifying for GLB 
authority. The Board also continues to believe it is appropriate to tie 
the expanded limits to the investor's capital. If the underwriting 
limit resulting from an Edge's capital is considered to be too low, it 
is of course open to the organization to increase its capital and 
thereby increase its limit.\8\
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    \8\ Commenters recommended that banking organizations also 
should be able to net underwriting exposures for purposes of 
determining compliance with the limits. As a practical matter, 
Regulation K presently essentially authorizes netting for these 
purposes given that, where the underwriter is covered by binding 
commitments from subunderwriters or other purchasers, such 
commitments are excluded in determining compliance with the limits. 
Compliance with the limits will continue to proceed on this basis. 
The Board does not believe a persuasive case has been made for any 
additional netting authority in relation to equity underwriting at 
this time.
---------------------------------------------------------------------------

    Commenters also suggested that the existing additional Regulation K 
underwriting authority, whereby an organization may request the Board's 
approval to exceed the $60 million underwriting limit so long as the 
excess amount is deducted from capital and the organization would 
remain strongly capitalized after such deduction, also should be 
extended to the expanded limits. The Board does not believe it is 
appropriate to retain this authority in view of the significant 
increase in the underwriting limits that would be otherwise authorized 
under the expanded limits. Moreover, because the limits are determined 
by reference to capital, banking organizations seeking greater 
underwriting authority may expand their limits by increasing their 
capital.
    For these reasons, the Board is adopting the expanded underwriting 
limits for well-capitalized and well-managed banking organizations set 
out in the '97 Proposal essentially without change. As proposed, the 
limits would apply to all underwriting exposures held under authority 
of Regulation K by the relevant entity and all of its subsidiaries 
(e.g., a BHC's limit would include all underwriting exposures to one 
issuer by all of the holding company's direct and indirect 
subsidiaries, including exposures held through its bank subsidiaries, 
and a

[[Page 54352]]

bank subsidiary's limits would include all exposures held by its 
subsidiaries).\9\
---------------------------------------------------------------------------

    \9\ Additional comments relevant to the Board's final action on 
equity underwriting authority also were submitted with regard to the 
Board's proposed criteria for determining whether banking 
organizations would be considered to be well-capitalized and well-
managed for purposes of the expanded authority, as well as with 
regard to the two-tiered capital test for Edge corporations for 
purposes of determining eligibility. Each of these issues is 
discussed separately.
---------------------------------------------------------------------------

Equity Dealing

'97 Proposal

    The Board also proposed for comment liberalization of dealing 
activities for well-capitalized and well-managed banking organizations. 
As with underwriting limits, the proposed expansion of dealing limits 
would have been based on percentages of capital of the organization 
and, thus, on the ability of the organization to accommodate risk. The 
Board also noted its belief that dealing activities presented somewhat 
greater risk of loss than underwriting, which resulted in somewhat more 
restrictive limits being proposed for dealing activities relative to 
underwriting activities.
    For well-capitalized and well-managed organizations, the Board 
proposed to remove the current dollar limits and revise the existing 
percentage of capital limits as follows. First, in order to provide 
diversification in the trading account, the Board proposed a limit on 
holdings of any one stock in the trading account of 10 percent of the 
tier 1 capital of the bank holding company for its subsidiaries and, 
for subsidiaries of an Edge corporation, the lesser of two percent of 
the bank's tier 1 capital or 10 percent of the Edge corporation's tier 
1 capital.
    Second, the Board proposed an aggregate limit applicable to all 
holdings of equities in the trading accounts of all direct and indirect 
subsidiaries authorized pursuant to Subpart A.\10\ Without such an 
aggregate ceiling, the Board was concerned that a banking organization 
could have excessive exposure to movements in equity markets. The Board 
proposed aggregate limits of 50 percent of the bank holding company's 
tier 1 capital for its subsidiaries and, in the case of an Edge's 
subsidiaries, the lesser of 10 percent of the tier 1 capital of the 
bank or 50 percent of the Edge's tier 1 capital.
---------------------------------------------------------------------------

    \10\ As at present, shares held as an investment pursuant to 
Subpart A also would be included in determining compliance with the 
applicable aggregate limits.
---------------------------------------------------------------------------

    The Board proposed that the limits on equity dealing would apply to 
net positions across legal vehicles held, directly or indirectly, by 
the regulated entity to which the limit applied (that is, the bank 
holding company, the bank or the Edge corporation). Long equity 
positions in a single stock could be netted against short positions in 
the same stock and against derivatives referenced to the same 
stock.\11\ For purposes of the aggregate limits, all physical and 
derivative long positions could be netted against physical and 
derivative short positions. It was further proposed that, for purposes 
of measuring compliance with these limits, banks would be permitted to 
use internal models to calculate the value of derivative positions used 
to offset exposures and net dealing positions in individual stocks, as 
well as the value of total net equity holdings in the trading 
account.\12\ The Board considered that the adequacy of such models is 
subject to review during the exam process, and proposed that no special 
review would be required for their use in connection with the proposed 
limits on dealing activities.
---------------------------------------------------------------------------

    \11\ The Board also proposed that a basket of stocks, 
specifically segregated by the banking organization as an offset to 
a position in a stock index derivative product, as computed by the 
bank's internal model, may be netted as a whole against the stock 
index.
    \12\ Currently, the use of internal models in computing net 
positions in stocks is subject to prior Board review and the 
limitation that no net long position in a security shall be deemed 
to have been reduced through netting by more than 75 percent.
---------------------------------------------------------------------------

    For organizations that failed to satisfy the well-capitalized and 
well-managed criteria, the Board proposed to retain the existing dollar 
limit on individual shares held in the trading account (i.e., $30 
million), which would be calculated in the same manner as at present. 
As noted, it is generally the dollar limits that currently constrain 
organizations in their ability to conduct these activities. This is 
because, at present, only the largest banking organizations are engaged 
in these activities. The Board noted, however, that in the future a 
relatively small organization may seek to enter these lines of business 
and, for it, exposures of $30 or $60 million may be large relative to 
its capital. The Board therefore also sought comment on whether, in 
addition to dollar limits, limits based on percentage of capital also 
should be adopted for organizations that are not well-capitalized and 
well-managed in order to address the relative exposure of such 
organizations to these activities.
    In addition, for organizations that are not well-capitalized and 
well-managed, the Board also proposed an aggregate limit on shares held 
in the trading account, including all dealing positions and investments 
held pursuant to Regulation K authority, of 25 percent of the holding 
company's capital for its subsidiaries and, for subsidiaries of Edges 
and any foreign bank held directly by a member bank, the lesser of 5 
percent of the bank's tier 1 capital or 25 percent of the Edge's tier 1 
capital. These limits were proposed on the basis that they would be 
half of those applicable to organizations that were well-capitalized 
and well-managed.
    The Board also sought comment on whether, instead of imposing the 
limits discussed above in relation to equity underwriting and dealing 
activities by subsidiaries of well-capitalized and well-managed bank 
holding companies, it would be appropriate to lift all limits on these 
activities for such entities except for the limits on individual stocks 
held in the trading account discussed above (i.e., 10 percent of the 
holding company's tier 1 capital). The Board considered that, at a 
minimum, this limit should be imposed on holding companies in order to 
assure diversification in individual stock holdings. Under this 
alternative, banking organizations also would be required to implement 
internal systems and controls adequate to ensure proper risk management 
and that underwriting positions do not result in violations of limits 
on investments in any one company.

Developments Since the '97 Proposal

    Since the time the Board issued the '97 Proposal for public 
comment, the statutory and regulatory environment governing the equity 
dealing activities of U.S. banking organizations, as well as the market 
demand for such services, have changed significantly. One significant 
change noted above was the enactment and implementation of GLB. Under 
GLB, FHCs may engage in unlimited equity dealing activities. While the 
GLB Act did not make any revisions to the Edge Act, the Board believes 
that it demonstrates a Congressional intent that significant equity 
dealing activities should be conducted through FHC powers, absent a 
competitive need for U.S. banking organizations to engage in such 
activities through bank subsidiaries.
    A second important change since the '97 Proposal has been the 
dramatic growth in the equity markets over the past few years. The 
growth in demand in the U.S. market for equity securities since the 
early 1990s, growing acceptance of equity investments by European 
investors since the establishment of the Euro, and the global equity 
market volatility of the past several years have combined with advances 
in financial engineering to create significant customer demand for

[[Page 54353]]

equity derivative instruments. In particular, the wide variety of 
sophisticated investment strategies employed by institutional investors 
and hedge funds, as well as the increasing focus of financial 
institutions on providing high net worth private banking clients with 
sophisticated portfolio diversification, hedging, and stock option 
monetization services, have translated into increasing volumes of 
equity derivatives at global banking organizations. For example, from 
December 31, 1996 to December 31, 2000, the notional value of equity 
derivatives held by U.S. banking organizations has more than tripled to 
roughly $940 billion. In meeting this demand, institutions generally 
avoid taking significant net open equity positions and hedge their 
customer equity derivative transactions either with other equity 
derivatives or with physical securities.
    Finally, although, as noted above, GLB did not expand the authority 
of banks to acquire equity securities, the Office of the Comptroller of 
the Currency (OCC) determined last year that several national banks 
could take positions in equity securities solely to hedge bank 
permissible, customer-driven equity derivative transactions, as an 
activity incidental to the business of banking. The OCC imposed no 
quantitative limit on such equity positions, but rendered the banks' 
authority to take such positions subject to the following constraints:
    (a) The banks committed that they will use equities solely for 
hedging and not for speculative purposes;
    (b) The banks will not take anticipatory or maintain residual 
positions in equities except as necessary to the orderly establishment 
or unwinding of a hedging position;
    (c) The banks may not acquire equities for hedging purposes that 
constitute more than 5 percent of a class of stock of any issuer; and
    (d) Banks must obtain OCC supervisory approval prior to engaging in 
this activity in order to demonstrate that they have an appropriate 
risk management process in place.
    These developments, along with all comments received on the '97 
Proposal, have been taken into account by the Board in taking action on 
the final rule.

Final Rule on Equity Dealing Limits

Equity Securities Acquired To Hedge Equity Derivatives
    Existing Regulation K and the '97 Proposal both proceed generally 
on the basis that acquisition of shares of a company by a subsidiary of 
a U.S. bank must be authorized by and conform to limits established for 
dealing in shares of a single issuer and limits applicable to portfolio 
investments. In other words, both presume that all such acquisitions of 
equity securities must conform to Regulation K limits because, absent 
the authority of the Federal Reserve Act and Regulation K, such 
acquisitions of shares of nonfinancial companies would be impermissible 
for the bank and its subsidiaries. The OCC's recent determinations, 
however, render the Regulation K limits largely irrelevant for national 
banks with respect to their equity derivatives business.
    Regulation K, however, also presently authorizes for both 
subsidiaries of bank holding companies and subsidiaries of member banks 
abroad ``commercial and other banking activities'', which encompass all 
activities in which banks are permitted to engage in the United States. 
12 CFR 211.5(d)(1). Accordingly, the Board takes this opportunity to 
clarify that the effect of the determination that banks may take 
positions in equity securities solely to hedge bank permissible, 
customer-driven equity derivative transactions as an activity 
incidental to the business of banking is to render this activity 
``commercial or other banking activity'' for purposes of Regulation K. 
The consequence of this change is that, as an otherwise permissible 
banking activity, positions taken in equity securities for this purpose 
may be excluded in determining compliance with the separate Regulation 
K dealing limits, so long as taking such positions continues to be bank 
permissible and all constraints placed upon the conduct of this 
activity in determining its permissibility are observed, namely:
    (a) The equities are used solely for hedging and not for 
speculative purposes;
    (b) no anticipatory or residual positions in equities will be 
acquired or maintained, except as necessary to the orderly 
establishment or unwinding of a hedging position;
    (c) no equities may be acquired for hedging purposes that 
constitute more than 5 percent of a class of stock of any issuer; and
    (d) the banking organization has obtained approval from its primary 
federal regulator prior to engaging in such hedging practices in order 
to demonstrate that they have appropriate risk management processes in 
place.
    The Board is concerned, however, that the first two constraints 
imposed by the OCC on the conduct of this activity (specifically, 
requiring the equities to be used solely for hedging and not for 
speculative purposes, and limiting residual positions to those 
necessary to the orderly establishment or unwinding of a hedging 
position) are ambiguous and potentially difficult to apply, 
particularly in light of the generally integrated nature of equity 
derivatives business. Indeed, the Board notes that it is usually the 
case that, even where a bank seeks to fully hedge equity derivatives 
with physical securities, residual positions will arise. It also is not 
unusual for traders in this line of business to seek to maximize 
returns by taking a view on price movements of the underlying security 
at the same time as putting in place the hedges necessary to cover the 
unwanted portion of derivative exposures. For this reason, the Board 
has concluded that, where after full netting and offset of equity 
securities against derivatives any residual positions in a single 
issuer remain, the value of all such residual positions as calculated 
by the organization's internal models must be included in determining 
the organization's compliance with the dealing limit, as discussed 
further below.
    The Board notes that the effect of this clarification is to place 
the constraints of the Regulation K dealing limits on those activities 
involving the acquisition of equity securities that are not bank 
permissible. Any subsequent regulatory or legislative determination 
that acquiring equity securities to hedge bank permissible equity 
derivatives is not a bank permissible activity would have the effect of 
rendering all such positions subject again to the dealing limits.
Equity Dealing Limits
    Comments on the '97 Proposal generally supported the Board's 
proposed expansion of the equity dealing limits for well-capitalized, 
well-managed organizations.\13\ As noted above, however, in light of 
the enactment of the GLB Act expanding authority to engage in this 
activity, the

[[Page 54354]]

Board no longer believes it is appropriate to increase the equity 
dealing limits under Regulation K. Instead, the Board considers that 
GLB authority should be the vehicle for any significant increase in 
equity dealing authority for subsidiaries of bank holding companies and 
of banks, unless concerns regarding the ability of U.S. banking 
organizations to compete in the provision of financial services abroad 
otherwise support additional liberalization under Regulation K. The 
Board is of the view that no such concerns appear to be raised in 
relation to dealing activities such as market-making and proprietary 
trading.
---------------------------------------------------------------------------

    \13\ Some commenters argued that banking organizations should be 
able to exceed individual and aggregate dealing limits, provided the 
amount in excess of the limits was deducted from capital and, after 
deduction, the organization remained well-capitalized. Other 
commenters were concerned that the proposed limits tied to capital 
might actually result in a decrease in dealing authority, and 
recommended higher limits. Another commenter noted that the terms 
``shares'' and ``equity'' are both used in the '97 Proposal and 
recommended using ``shares'' to ensure that convertible debt and 
participating loans are not included in the limits. In view of its 
conclusions regarding the absence of justification for any 
significant expansion of dealing authority under Regulation K, the 
Board rejects these suggestions. The Board does wish to clarify that 
convertible debt prior to conversion and participating loans are not 
encompassed within the dealing limit.
---------------------------------------------------------------------------

    To the contrary, with respect to market-making, a limit of $30-40 
million per single issuer appears generally consistent with being able 
to make a market in a stock, which is necessary to being competitive in 
foreign securities markets. With respect to proprietary or speculative 
positions, the Board considers that this is not an area that should be 
the subject of liberalization under Regulation K. Any banking 
organization that wishes to take larger speculative positions than 
Regulation K allows can do so without limit in an FHC subsidiary or a 
financial subsidiary of the bank.
    Accordingly, the Board does not consider that there is sufficient 
justification at this time for any significant increase in the single 
issuer dealing limit. However, the Board believes it would be 
appropriate to make a small incremental increase in the equity dealing 
limit, raising it from $30 million to $40 million, in recognition of 
the increased experience of organizations engaged in this activity and 
the fact that the $30 million limit was adopted 10 years ago. This 
approach is consistent with the Board's action in the past.
    As noted above, all residual positions in equity securities of a 
single issuer resulting from bank-permissible equity derivatives 
business must be included in calculating compliance with the $40 
million limit. Additionally, while underwriting commitments and shares 
held for up to 90 days in connection with an underwriting would be 
excluded from these limits, positions unplaced after 90 days must be 
moved to the dealing account and counted against the dealing limit.
    Otherwise, the Board has determined that the existing dealing 
authority should remain essentially unchanged.\14\ This would include 
the existing 25 percent constraint on the availability of derivative 
hedges as a means of reducing net long positions in physical securities 
for purposes of compliance with the single issuer limit. More 
specifically, under existing Regulation K, even if an organization has 
full netting authority and its net long positions in physical 
securities of a single company are fully hedged by derivative 
instruments referenced to the same security, $.25 of each $1 in net 
long physical securities nevertheless continues to count toward the $30 
million single issuer limit. As at present, this additional limit or 
constraint will only apply to net long positions in physical securities 
after longs and shorts are netted, and additional derivative hedges may 
reduce net long positions in physical securities by up to 75 percent. 
The increase in dealing limit to $40 million will result in an overall 
cap on net long positions in physical securities of $160 million even 
where the positions are fully hedged. The Board has determined that, 
going forward, this additional constraint on dealing activity will only 
apply to net long positions in physical securities held under 
Regulation K dealing authority, not to physical securities acquired in 
connection with bank permissible hedging transactions.
---------------------------------------------------------------------------

    \14\ As discussed further below, however, the Board has adopted 
the expanded netting authority proposed in 1997 with a few minor 
changes.
---------------------------------------------------------------------------

Netting and Otherwise Determining Compliance With Dealing Limits
    The Board has determined that it should adopt one additional aspect 
of the '97 Proposal as it would apply to equity securities activities, 
namely, allowing netting based on internal models for purposes of 
determining compliance with the single issuer dealing limit. Comments 
submitted were overwhelmingly in support of the use of internal models 
for this purpose.
    Thus, consistent with the '97 Proposal, the equity dealing limit 
will apply to net positions across legal vehicles held, directly or 
indirectly, by the regulated entity to which the limit is applicable 
(that is, the bank holding company or the bank subsidiary). Long equity 
positions in a single stock may be netted against short positions in 
the same stock and against derivatives referenced to the same stock. 
Also consistent with the '97 Proposal, a basket of stocks, specifically 
segregated by the banking organization as an offset to a position in a 
stock index derivative product, as computed by the bank's internal 
model, may be netted as a whole against the stock index. For purposes 
of the aggregate equity limits, all physical and derivative long 
positions may be netted against physical and derivative short 
positions. Organizations may use their internal models to calculate the 
value of derivative positions used to offset exposures and net dealing 
positions in individual stocks, as well as the value of total net 
equity holdings in the trading account.
    For those banking organizations that wish to rely on netting based 
on their internal models for purposes of determining compliance with 
the dealing limits, the valuations generated by those models based upon 
current market values of the organization's residual positions in a 
single issuer will count toward the single issuer dealing limit. The 
Board considers it only appropriate that, if a banking organization 
uses its internal models for purposes of netting and valuing residual 
exposures in its equity derivatives line of business, it must use 
current market values (and not historical cost) for calculating 
compliance with the dealing limits under Regulation K for all of its 
equities lines of business. The organization may not ``mix and match'' 
the use of historical cost and mark-to-market valuations where internal 
models are used for these purposes.
    However, the Board notes that netting based on internal models is 
not the mandatory method of compliance with the dealing limit. In this 
regard, Regulation K dealing limits presently encompass only net long 
positions in physical securities, after netting long and short 
positions in the same security. As is presently the case, organizations 
not wishing to determine compliance with the dealing limits by netting 
and offsetting positions in physical securities against positions in 
derivatives referenced to the same security may continue to determine 
compliance with the $40 million dealing limit solely by reference to 
the historical cost of its net long physical positions.
    Commenters requested clarification of one aspect of the '97 
Proposal regarding netting, namely, whether positions in a single stock 
would qualify for netting so long as the hedge for the position is held 
directly or indirectly by the entity to which the limit applies (i.e., 
somewhere within the investor chain, but not necessarily in the same 
legal entity holding the related investment.) The Board confirms that 
netting of positions on this basis will be permissible. This approach 
reflects the market or economic risk of positions held by the entity on 
a consolidated basis.
    Finally, the '97 Proposal would have allowed netting based on a 
banking organization's internal models without prior Board approval. 
The Board continues to believe that prior approval

[[Page 54355]]

should not be required to engage in netting through the use of internal 
models for this purpose. After further consideration, however, the 
Board believes prior notice of an organization's intention to use its 
internal models for this purpose is appropriate so that the Board may 
object if it considers the models inadequate for any reason. Banking 
organizations that have previously received approval under Regulation K 
to engage in netting through the use of their internal models may 
continue to do so without additional notice to the Board.\15\
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    \15\ In response to comments, the Board notes that organizations 
would not be required to create a new model separate from existing 
internal models used for purposes of market risk assessment in order 
to engage in netting under Regulation K. Indeed, the Board would 
expect that organizations would use for this purpose the same 
internal models otherwise currently employed for purposes of risk 
management.
---------------------------------------------------------------------------

Authority To Engage in Equity Underwriting and Dealing Activities

    In the '97 Proposal, the Board noted that its approval currently is 
required to engage in underwriting and dealing in equity securities 
pursuant to Regulation K and sought comment on whether banking 
organizations that are well-capitalized and well-managed should be 
allowed to engage in equity securities activities at the proposed 
expanded levels without seeking prior Board approval. In response to 
this request, commenters urged allowing U.S. banking organizations 
meeting the well-capitalized, well-managed criteria to engage in the 
expanded activities without Board approval, particularly if the 
organization already has experience in such activities under Regulation 
Y or K.
    As discussed above, the Board has adopted the '97 Proposal with 
regard to expanded equity underwriting authority for organizations that 
are well-capitalized and well-managed, but has only increased the 
equity dealing authority from $30 to $40 million. The latter increase 
in authority will be available to all organizations regardless of 
whether they meet the well-capitalized, well-managed criteria. The 
Board has concluded that, in view of the significant liberalization in 
underwriting authority under Regulation K, all organizations that wish 
to engage in the expanded underwriting activities must first provide 30 
days' prior notice to the Board. With regard to the increased dealing 
authority, all organizations that wish to engage in dealing activities 
under the $40 million limit also must provide 30 days' prior notice to 
the Board, unless the organization already has received the Board's 
consent to engage in dealing activities under the $30 million limit. 
Organizations presently engaging in dealing activities under the $30 
million limit may avail themselves of the additional $10 million in 
dealing authority without prior notice to the Board.

Venture Capital Activities Through Portfolio Investments

Current Restrictions

    Regulation K currently allows U.S. banking organizations to make 
portfolio investments, that is, limited, noncontrolling investments in 
foreign commercial and industrial companies. This authority was adopted 
to enhance the competitiveness of U.S. banking organizations by 
increasing the range of financial services they may provide abroad. 
Many foreign financial institutions, including foreign banks, engage in 
venture capital activities, at times in connection with the provision 
of other financial services to the company.

'97 Proposal

    The Board proposed in the '97 Proposal that existing dollar limits 
on portfolio investments made by well-capitalized, well-managed bank 
holding companies under the Board's general consent authority would be 
replaced by limits tied solely to a percentage of the holding company's 
tier 1 capital. More specifically, such bank holding companies (and 
their nonbanking subsidiaries) would be permitted to invest up to 2 
percent of the holding company's tier 1 capital in any individual 
investment and would be subject to an aggregate limit of 25 percent of 
the holding company's tier 1 capital for all such investments. In 
determining compliance with the individual limit, shares in such 
companies held in the trading account by the investor and its 
affiliates under Regulation K would be included.
    For all other investors (i.e., Edge corporations, foreign bank 
subsidiaries of member banks, and bank holding companies that are 
adequately capitalized but fail to meet the well-capitalized and well-
managed standards), the Board proposed retaining limits of $25 million 
on investments in any one organization under general consent authority, 
although larger investments would continue to be eligible for prior 
notice or specific approval treatment on a case-by-case basis. An 
aggregate limit on such investments would be imposed. For bank holding 
company investors, that limit would be 25 percent of tier 1 capital, 
and for Edge or foreign bank investors, it would be the lesser of 5 
percent of the parent bank's tier 1 capital or 25 percent of the Edge's 
tier 1 capital.
    With respect to the limit on voting shares in the target company, 
the Board proposed that investors would be permitted to make 
noncontrolling investments in up to 24.9 percent of a company's voting 
shares. These investments would only be permissible if, as at present, 
the investor does not control the company in which the investment is 
made. Accordingly, the Board noted an investor may not: (i) Control a 
majority of the board of directors or have disproportionate 
representation on the board; (ii) have a management contract with the 
company or exercise veto power over its actions; or (iii) use any other 
means to control the operations of the company.
    The Board requested comment on all of the foregoing revisions to 
the portfolio investment authority. It specifically requested comment 
on the relative risk of portfolio investments and whether there is a 
competitive need for foreign subsidiaries of banks also to have 
expanded authority in relation to such investments.

Final Rule on Portfolio Investment Authority

    Comments submitted on this aspect of the Board's '97 Proposal 
strongly supported the liberalization proposed in relation to limits 
applicable to portfolio investments made by bank holding companies, as 
well as in relation to the proposed increase in permissible individual 
investments up to 24.9 percent of voting shares. Certain of the 
comments argued that the proposed liberalization for bank holding 
companies also should be extended to bank subsidiaries, and various 
clarifications were requested on the interaction between the proposed 
changes and the existing rule. Clarification of these matters is 
provided below.
    As discussed above, however, the major development in this area 
since the Board issued the '97 Proposal was enactment of the GLB Act, 
which authorizes FHCs to make merchant banking investments without 
regard to dollar limits or geographic restrictions. The Board notes 
that expanded merchant banking authority under GLB is only available to 
holding company subsidiaries; such authority may not be exercised in 
the bank chain.
    The Board has therefore reconsidered the '97 Proposal in the light 
of passage of GLB and has determined not to adopt

[[Page 54356]]

the proposal to increase the general consent limit and the permissible 
percentage of shares for portfolio investments. The Board considers 
that the GLB Act established the framework for engaging in merchant 
banking activities generally, and Regulation K should not establish an 
alternative framework for expansion of this activity absent a 
compelling competitive need. The Board does not believe that any such 
compelling competitive need has been demonstrated. Bank holding 
companies wishing to engage in merchant banking activities other than 
under the existing constraints of Regulation K should seek FHC status.

Investment Limits

    A number of additional comments were submitted that are also 
relevant to the operation of existing provisions of Regulation K in 
relation to portfolio investments. In particular, certain commenters 
suggested that investors should be permitted to make portfolio 
investment under Regulation K in excess of the $25 million general 
consent limit, so long as the amount in excess were deducted from 
capital. Other commenters suggested that organizations should be 
permitted to use netting for purposes of calculating compliance with 
portfolio investment limits. The Board considers that neither of these 
changes would be appropriate in view of the nature of portfolio 
investments and the availability of other authority for making such 
investments.
    A few commenters also requested clarification regarding whether the 
calculation of limits on portfolio investments will continue to be on 
an historical cost basis. One expressed the concern that an increase in 
the aggregate portfolio limit would be necessary if these investments 
would be valued at current market value, not historical cost. The Board 
considers that limits on portfolio investments should be calculated 
consistent with their treatment for capital purposes. More 
specifically, the amount of the investment subject to the Regulation K 
limit will equal the carrying value of the investment, or the value of 
the investment on the balance sheet, reduced by any unrealized gains on 
the investment that are reflected in the carrying value but are 
excluded from the organizations' tier 1 capital.
    Commenters also opposed combining portfolio investments with 
dealing positions, either for purposes of a single company limit or 
aggregate limit, noting that these activities have important 
differences and are managed through separate lines of business. They 
argued that portfolio investments generally are made with longer time 
horizons and tend to involve privately held companies, whereas dealing 
positions generally are taken for short periods of time and involve 
public companies. The Board considers these points to be well-founded. 
In view of these comments and the Board's determination not to adopt 
any significant liberalization either in relation to portfolio 
investments or dealing authority, the Board believes it is appropriate 
to amend the single company limits for purposes of portfolio 
investments and for equity dealing such that the limits will apply to 
each activity separately. However, the Board notes that all equity 
shares held in a single company, including those held in connection 
with dealing activity (but excluding underwriting commitments and 
shares held for up to 90 days pursuant to an underwriting), must be 
combined for purposes of determining compliance with the control 
limitations of: (i) section 4(c)(6) of the BHC Act (with respect to 
U.S. companies); and (ii) the voting and total equity limits for 
portfolio investments under Regulation K (with respect to foreign 
companies).
    Additionally, the Board is retaining an overall aggregate equity 
limit that will apply to all shares held under Regulation K portfolio 
investment and dealing authority, for the reasons discussed in the 
section below entitled ``Aggregate Equity Limits for Dealing and 
Portfolio Investments.''
    Finally, commenters recommended that the Board specifically 
grandfather any investments that might be rendered impermissible by 
revision to Regulation K, or include a phase-in period for divestiture 
of such investments. The Board notes that, in view of the fact that it 
is not diminishing in any way existing authority in relation to these 
investments, no issues relating to the need for grandfathering arise.

Percentage of Permissible Voting Shares

    Commenters expressed support for the `97 Proposal which would have 
increased the percentage of voting shares permissible for portfolio 
investments from 19.9 percent to 24.9 percent. A few commenters 
recommended higher levels of permissible voting shares, as well as 
increasing the 40 percent nonvoting equity limit, arguing that such 
increases would better enable U.S. banking organizations to compete 
with foreign financial institutions.
    As noted above, FHCs may now make investments in nonfinancial 
companies under merchant banking authority without limitation as to the 
percentage of voting or nonvoting shares held and without restriction 
geographically. Consequently, the Board believes it is no longer 
appropriate to alter in any way the existing Regulation K limits on 
voting and nonvoting shares of portfolio investment companies. U.S. 
banking organizations wishing to invest in nonfinancial companies 
outside the United States beyond the existing limits of Regulation K 
should do so through obtaining FHC status. In these circumstances, the 
existing Regulation K voting and nonvoting equity limits on qualifying 
portfolio investments do not appear to affect the ability of U.S. 
banking organizations to compete abroad.
    As noted above, portfolio investments are only permissible within 
these limits if the investor otherwise also does not control the 
company in which the investment is made. In this regard, several 
commenters urged the Board to clarify that restrictive and negative 
covenants, such as are commonly found in senior debt, also are 
permissible in connection with portfolio investments on the basis that 
they would not give the investor control over the company. The Board 
believes that such covenants may be permissible so long as their 
purpose is to protect the minority rights of the investor. However, 
such covenants may not be used as a means to obtain control over a 
portfolio investment by preventing the company from making normal 
business decisions. For example, the Board considers that it would be 
inconsistent with the mandatory noncontrolling nature of portfolio 
investments for investors to have the right to veto a company's choices 
for senior management positions. Should questions of this nature arise 
in connection with a proposed portfolio investment, banking 
organizations should seek the views of Board staff as to whether the 
proposed investment would qualify as a portfolio investment.
    In this regard, commenters suggested that the Board should adopt 
for Regulation K a process similar to that adopted in Regulation Y in 
relation to advisory opinions regarding the scope of financial 
activities. The Board has adopted this suggestion and will seek to 
respond to requests for advisory opinions under Regulation K within 45 
days of receipt of a complete written request, unless the request 
raises significant policy issues.
    Finally, another commenter sought clarification as to whether the 
proportionality test for directors should be measured against the 
investor's voting interest or economic interest, favoring the latter 
measure. The Board believes that an investor in a portfolio investment 
should have representation on the board proportionate to its voting

[[Page 54357]]

interest, and not economic interest, in the company. More specifically, 
in view of the restriction on voting shares held to 19.9 percent, the 
Board would expect that an investor would have no more than one 
director for every five seats on the board. In addition, an investor 
may not have a disproportionate participation on a board's executive 
committee.

``Incidental'' Activities in the United States

'97 Proposal

    In the '97 Proposal, the Board proposed one additional change 
related to portfolio investments, primarily to provide some relief to 
U.S. banking organizations with regard to the U.S. activities of their 
foreign portfolio investments. As a result of limitations in the 
Federal Reserve Act and the BHC Act, U.S. banking organizations are 
prohibited from investing in more than 5 percent of the voting shares 
of foreign companies that engage in impermissible activities in the 
United States other than those activities that are an incident to their 
international or foreign business.\16\ The Board previously has taken 
the view that such permissible incidental activities in the United 
States are limited to those activities that the Board has determined 
are permissible for Edge corporations to conduct in the United 
States.\17\
---------------------------------------------------------------------------

    \16\ In particular, the Federal Reserve Act prohibits 
investments in companies engaging in ``the general business of 
buying or selling goods, wares, merchandise or commodities in the 
United States.'' 12 U.S.C. 615. Section 4(c)(13) investments under 
the BHC Act are limited only by a requirement that the company do 
``no business in the United States except as incident to its 
international or foreign business.''
    \17\ See 12 CFR 211.4(e).
---------------------------------------------------------------------------

    However, as discussed above, companies in which portfolio 
investments are made generally are engaged in industrial or commercial 
activities, which are not permissible activities for Edge corporations. 
Consequently, under Regulation K at present, if a portfolio investment 
company decides to engage in activities in the United States, the U.S. 
banking organization is forced to sell its interest in the portfolio 
investment, even if market considerations are inconsistent with selling 
the shares at that time. This divestiture would be required despite the 
fact that the U.S. banking organization, by reason of the mandatory 
noncontrolling nature of portfolio investments, is unlikely to be in a 
position to influence the decision to enter the U.S. market. In the '97 
Proposal, the Board expressed the concern that, with the increasing 
globalization of economies around the world, this situation may become 
more common in the future.
    In order to address these changes in circumstances and in view of 
the minority nature of portfolio investments, the Board proposed that, 
consistent with the Federal Reserve Act and the BHC Act, investors may 
retain portfolio investment companies that derive no more than 10 
percent of their total revenue from activities in the United States 
that are not permissible for Edge corporations to conduct in the United 
States.
    In proposing this change, the Board noted the nature of portfolio 
investments. In particular, most portfolio investments are venture 
capital investments that are not intended to be permanent holdings of 
the banking organization and instead are intended to be sold after a 
period of time. In addition, the preponderance of the value of 
portfolio investments is derived from their foreign business.
    The Board invited comment on this proposed change. It also sought 
comment on what might be regarded as an appropriate period for 
divestiture of non-conforming investments, as well as on whether a time 
limit should be placed on the period for holding these types of 
investments in view of their supposedly medium-term nature.

Final Action

    Commenters strongly endorsed the Board's proposed change in 
interpretation of U.S. activities considered ``incidental'' to 
international or foreign activities for this purpose, although some 
comments recommended that Regulation K should allow portfolio companies 
to derive a larger percentage of their total revenues (e.g., 20 or 25 
percent) from activities in the United States. Some commenters 
recommended that the Board employ a percentage of total tangible assets 
test either in lieu of or as an alternative to the revenues test, 
suggesting that tangible assets are a more stable indicator of the 
extent of a company's business in the United States and are easier to 
measure.
    The Board adopts the change as set forth in the '97 Proposal. Thus, 
for purposes of determining whether a portfolio investment may continue 
to be held or must be divested, portfolio investment companies that 
derive no more than 10 percent of their total revenue in the United 
States may be considered to be engaged only in business that is an 
incident to their international or foreign business and therefore may 
continue to be held under portfolio investment authority. The Board 
continues to believe that the 10 percent revenue limit is appropriate 
to address globalization concerns and is consistent with the provisions 
of the Federal Reserve Act and the BHC Act. The Board further considers 
that the revenue test is a better indicator of the level of U.S. 
activity, rather than the amount of tangible assets in the United 
States which may be more susceptible to manipulation.
    A few commenters requested clarification of the operation of this 
limit. In response to these requests, the Board notes that revenue 
derived from activities in the United States in its view would include 
all revenue derived from activities performed in U.S. offices, but not 
business that may originate from the United States but is performed 
offshore. It is, of course, also the case that this revenue test would 
only be applied to U.S. activities of portfolio investments that are 
not otherwise permissible for Edge corporations to conduct in the 
United States.
    In response to the Board's request for comment on an appropriate 
divestiture period for investments that exceed the 10 percent revenue 
limit, a number of suggestions were made, including allowing U.S. 
revenues of up to 40 percent for up to five years. Other commenters 
variously suggested that the Board should adopt existing debts 
previously contracted (``DPC'') time periods for divestiture; allow 
some other specified period to divest (e.g., a six month period, with 
an opportunity for extensions of up to a total of two years); or 
establish divestiture deadlines on a case-by-case basis. The Board is 
retaining the current Regulation K requirement of a ``prompt'' 
divestiture of all nonqualifying portfolio investments, which allows 
for a case-by-case determination as to the appropriate period of time 
within which an impermissible investment must be divested.

Aggregate Equity Limits for Dealing and Portfolio Investments

    In the '97 Proposal, in view of the significant liberalization in 
authority proposed for bank holding companies in relation to portfolio 
investments, an aggregate limit on all portfolio investments was 
proposed. The Board also proposed an additional aggregate equity limit 
that would apply to all shares held as portfolio investments and in 
connection with dealing activities. The proposed aggregate limit for 
all such investments for banking organizations meeting the well-
capitalized and well-managed tests was:
    BHC Subsidiaries: 50 percent of tier 1 capital.

[[Page 54358]]

    Bank Subsidiaries: The lesser of 10 percent of tier 1 capital of 
the bank, or 50 percent of the bank subsidiary's tier 1 capital.
    Underwriting commitments and shares acquired pursuant to an 
underwriting commitment and held for less than 90 days were excluded 
from the proposed aggregate equity limit.\18\
---------------------------------------------------------------------------

    \18\ The Board also proposed aggregate limits for investors that 
do not meet the well-capitalized and well-managed standards of half 
that applicable to well-capitalized and well-managed organizations 
(i.e., 25 percent of tier 1 capital for bank holding company 
subsidiaries, and, for bank subsidiaries, the lesser of 5 percent of 
the parent bank's tier 1 capital or 25 percent of the bank 
subsidiary's tier 1 capital.
---------------------------------------------------------------------------

    Commenters opposed the aggregation of shares held as portfolio 
investments with those held in connection with dealing activity in 
determining compliance with this limit, again arguing that these are 
two separate lines of business that should not be aggregated. 
Commenters also opposed the proposed reduction in the combined 
aggregate limit for Edge corporation investors, from the current 100 
percent of tier 1 capital to 50 percent of tier 1 capital, 
notwithstanding the ability to net dealing positions and the exclusion 
of underwriting commitments and shares held for up to 90 days pursuant 
to an underwriting.
    In view of the fact that the Board has determined that it will not 
adopt the liberalization proposed in relation to portfolio investments, 
it has also decided not to adopt the separate limit on total portfolio 
investments for any given banking organization. In the absence of 
expanded authority in this area, no need arises for such a limit.
    However, consistent with the provisions of current Regulation K, 
the Board continues to believe that an aggregate equity limit is 
necessary with respect to all shares held under Regulation K (whether 
held under portfolio investment authority or in connection with dealing 
activity) in companies engaged in activities that would be 
impermissible for a subsidiary or a joint venture under Regulation K. 
Accordingly, the Board generally is adopting the aggregate limits on 
equity securities held under Regulation K previously proposed. 
Consistent with the '97 Proposal, underwriting commitments and shares 
held pursuant to an underwriting commitment for up to 90 days would be 
excluded from the aggregate equity limit.
    However, in light of comments received, the Board is not adopting 
the proposed reduction in the aggregate limit for investors that are 
subsidiaries of a member bank. Nevertheless, the Board continues to 
believe it is important to tie the aggregate limit for bank 
subsidiaries to the capital levels of both the member bank and the bank 
subsidiary investor. Accordingly, the aggregate equity limit for 
subsidiaries of banks will be the lesser of 20 percent of the tier 1 
capital of the member bank or 100 percent of the tier 1 capital of the 
bank subsidiary.\19\
---------------------------------------------------------------------------

    \19\ An additional comment recommended that the aggregate equity 
limit should be expressed as a percentage of assets, rather than as 
a percentage of tier 1 capital. The Board believes that tying the 
equity limit to tier 1 capital is a more appropriate restriction on 
the level of aggregate equity activities under Regulation K and 
therefore is not adopting this recommendation.
---------------------------------------------------------------------------

    Commenters also requested clarification on whether the aggregate 
equity limits include: (i) only equity securities held by the investor 
and its downstream subsidiaries or securities held by all its 
affiliates; and (ii) only shares held under the authority of Regulation 
K . The Board notes that, with respect to a particular investor, these 
limits will include all equity securities held by the investor and its 
downstream subsidiaries under Regulation K authority, whether arising 
in connection with portfolio investments or dealing activity.\20\ Thus, 
the aggregate equity limit will not include investments in joint 
ventures or subsidiaries under Regulation K, or merchant banking or any 
other investments made under authority other than Regulation K.
---------------------------------------------------------------------------

    \20\ The Board also notes that application of the dealing limit 
on shares held in a single issuer will also proceed on this same 
basis, except that shares held as a portfolio investment will not be 
included in determining compliance with the single company dealing 
limit as discussed above.
---------------------------------------------------------------------------

    One commenter recommended that the Board permit aggregate dealing 
positions to be calculated on a quarterly average and suggested a 
``preclearance'' program for additional authority beyond the regulatory 
limits. The Board considers that determining compliance with these 
limits on the basis of a quarterly average would be inappropriate and 
potentially be subject to considerable manipulation. As noted above, 
should an organization wish to engage in equity securities activities 
without limit it should do so under FHC status subject to the FHC 
qualifying criteria. For these reasons, the Board declines to adopt 
these proposals.

Insurance Activities

Reinsurance Proposal

    Section 211.5(d)(16) of Regulation K presently authorizes bank 
holding companies to own foreign companies that underwrite and reinsure 
life, annuity, pension-fund related, and other types of insurance, 
where the associated risks have been previously determined by the Board 
to be actuarially predictable. Prompted by the Board's consideration in 
1997 of a bank holding company's request, the Board requested comment 
on whether the reinsurance (via a retrocession agreement with an 
unaffiliated offshore reinsurer) by a foreign subsidiary of U.S. bank 
holding company of all or a portion of the risk of policies or 
annuities sold in the United States by U.S. affiliates of the bank 
holding company or unrelated parties could be considered to fall within 
this authority. It queried whether the fact that the risk to be 
reinsured is in the United States could cause the activity to be 
considered located in the United States, particularly given the 
potentially significant involvement of the bank holding company's U.S. 
affiliates.
    Several insurance trade associations opposed any expansion of 
authority in this area. They argued that the reinsurance activity 
necessarily would be domestic because of its complete dependence on 
U.S. insurance sales. In addition, they suggested the reinsurance 
activity would expose U.S. banks to unnecessary risk and conflicts of 
interests, be contrary to Board precedent, transfer regulatory scrutiny 
of domestically-originated risks from the state regulators to less 
rigorous and untested international regimes, and set the stage for U.S. 
banking organizations to underwrite and reinsure all types of insurance 
through foreign subsidiaries. Ultimately, they argued, any 
liberalization in this area should come from Congress, not the Board.
    Several U.S. banking trade associations and banking organizations 
expressed support for expanded authority as described in the '97 
Proposal. They emphasized that the proposal would only modestly extend 
an activity (i.e., underwriting and reinsuring life insurance abroad) 
long regarded as permissible by the Board. In addition, they maintained 
that the permissible U.S. insurance sales would be only an incidental, 
and not a primary, feature of an activity--reinsurance--having an 
essentially foreign character. They noted that many activities in which 
U.S. banking organizations are permitted to engage abroad are related 
to their U.S. activities (e.g., securities activities) and asserted 
that the relation in this instance between the reinsurance activity and 
the U.S. insurance sales similarly should not result in rejection of 
the proposed activity. These commenters also argued that the proposal 
would further the Edge Act's stated purpose of enhancing U.S.

[[Page 54359]]

banking organizations' competitiveness abroad.
    As noted above, the GLB Act was enacted subsequent to the issuance 
of the Board's reinsurance proposal. The GLB Act allows FHCs to conduct 
insurance activities on a worldwide basis and demonstrates a 
Congressional preference for conducting such activities through 
subsidiaries of FHCs. The Board does not believe, and the comments on 
the Board's proposal have not shown, that competitive concerns require 
U.S. banking organizations to proceed under Regulation K in the conduct 
of this activity rather than GLB authority. Accordingly, the Board 
declines to adopt the reinsurance proposal. As at present, however, a 
banking organization may seek the Board's specific consent to engage in 
insurance activities more expansive than those expressly authorized 
under the regulation.

Other Comments

    Supporters of the Board's reinsurance proposal urged the Board to 
liberalize Regulation K's insurance provisions further in several 
respects. First, they recommended that the Board eliminate the 
requirement that U.S. banks obtain Board approval before engaging in 
insurance activity through foreign subsidiaries, asserting that banking 
organizations should be given maximum flexibility to determine how to 
structure these activities. One commenter suggested that the Board 
replace the proposed prior approval requirement with a 30-day prior 
notice requirement. On balance, the Board believes it is appropriate to 
continue to require prior Board approval for such activities. Further, 
absent demonstration of a compelling need for competitive reasons, the 
Board expects insurance underwriting (other than credit life insurance 
and credit accident and health insurance) to be conducted through 
subsidiaries of the holding company, or otherwise under the expanded 
authority provided in GLB.
    The commenters also argued that U.S. banking organizations should 
not be required to deconsolidate and deduct investments in foreign 
insurance companies from the holding company's capital for capital 
adequacy purposes, arguing that such a requirement is inappropriate and 
disproportionate to the risks involved. The Board disagrees and 
declines to eliminate this requirement. The consolidation of insurance 
activities may result in overstated capital ratios because the risk-
based capital adequacy framework does not take into account traditional 
insurance risks. Although FHCs currently may consolidate their 
insurance companies for purposes of their capital ratios, for 
supervisory purposes their capital ratios also are analyzed after 
deconsolidation and deduction of such companies. Retaining the 
deconsolidation and deduction requirement in Regulation K also would be 
consistent with proposed revisions to the Basel Capital Accord.
    In addition, the commenters urged the Board to expand the types of 
insurance foreign subsidiaries of bank holding companies may underwrite 
and reinsure, to encompass all credit-related insurance (including 
insurance incidental to leasing activities or mortgage transactions, 
and motor vehicle comprehensive insurance in connection with car 
loans). In the Board's view, in light of passage of GLB, there should 
be no general expansion of permissible types of insurance underwriting 
under Regulation K. As at present, however, application may be made on 
a case-by-case basis for the Board's approval to engage in additional 
types of insurance activities usual in connection with the business of 
banking abroad.

Debt/Equity Swaps

    Regulation K currently permits banking organizations to swap 
certain developing country debt for equity interests in companies of 
any type. Established in 1987 to assist banking organizations in 
managing large amounts of nonperforming, illiquid sovereign debt, these 
foreign investment provisions are more liberal than Regulation K's 
other investment provisions. Under certain conditions set out in 
Regulation K, investors may invest under general consent authority up 
to one percent of their tier 1 capital in up to 40 percent of the 
shares, including voting shares, of private sector companies in 
eligible countries. Such an investment must be held through the bank 
holding company, unless the Board specifically permits it to be held 
through the bank or a bank subsidiary. Eligible countries are defined 
as those that have rescheduled their debt since 1980, or any country 
the Board deems to be eligible.
    Since the debt/equity swap provisions were introduced, a well 
developed secondary market in developing country debt has emerged. The 
vast bulk of developing country problem debt has been repackaged in the 
form of long-term Brady bonds, mostly denominated in U.S. dollars and 
fully collateralized as to principal by U.S. government bonds. Many 
banking organizations actively trade these instruments in the secondary 
market.
    Due to the development of the secondary markets for emerging market 
debt, U.S. banks now have the same options with regard to many of these 
assets as they have with other bank assets--namely, they can hold the 
asset with a view toward collecting at maturity or sell the asset for 
cash to invest in other bank eligible assets. Indeed, the sovereign 
debt of most of the historically ``eligible countries'' is no longer 
illiquid, and those eligible countries that account for the vast share 
of rescheduled debt have largely regularized their relations with 
commercial banks.
    In light of these changed circumstances and to redirect this 
special authority to the asset quality problem it was originally 
intended to help resolve, in the '97 Proposal the Board proposed to 
redefine the term ``eligible country.'' Under the proposed definition, 
only countries with currently impaired sovereign debt (i.e., debt for 
which an allocated transfer risk reserve would be required under the 
International Lending Supervision Act and for which there is no liquid 
market) would be eligible for investments through debt/equity swaps 
under Regulation K. Existing holdings of such investments would be 
grandfathered, subject to the existing divestiture periods applicable 
to such investments (i.e., generally, 10 years from the date of 
acquisition).
    The Board solicited comment on these proposed changes. It also 
sought comment on whether, alternatively, the debt/equity swap 
authority should be eliminated as obsolete.
    Several commenters supported the proposed changes. Only one comment 
opposed the change to the definition of an ``eligible country''. 
Another commenter urged the Board to extend the general consent 
authority for debt/equity swaps to such investments made by banks and 
bank subsidiaries. The Board continues to believe the additional 
authority granted under the debt/equity swap provisions should be 
limited to countries with currently impaired debt, in light of the 
developments described above and, accordingly, adopts the proposed 
change to the definition of an ``eligible country.'' The Board also 
considers that general consent authority for engaging in debt/equity 
swaps under the bank continues to be inappropriate. As at present, a 
bank or bank subsidiary may seek authority from the Board to hold such 
an investment on a case-by-case basis.

[[Page 54360]]

Streamlining Application Procedures

General Consent Limits

    The Board noted in the '97 Proposal that, although existing 
Regulation K procedures have proved effective in maintaining the safety 
and soundness of U.S. banks' international operations, they have become 
increasingly complex over the years. For example, under prior notice 
procedures, the Board has reviewed all foreign investments made by 
banking organizations above a de minimis level as a principal mechanism 
for overseeing the safety and soundness of the investing organization. 
In view of the shift in emphasis to supervision based upon risk 
management capabilities, the Board believes that prior review of 
relatively small investments is no longer useful as a fundamental 
supervisory tool, especially where the investor is well-capitalized and 
well-managed. Accordingly, the Board proposed that only significant 
investments, as determined solely on the basis of the investor's 
capital, would be subject to prior review by the Board, provided that 
the investors are well-capitalized and well-managed.\21\ The proposed 
changes to the general consent procedures attempt to balance safety and 
soundness considerations with the objective of enhancing the ability of 
U.S. banking organizations to compete with foreign banks overseas.
---------------------------------------------------------------------------

    \21\ The proposed definitions of well-managed and well-
capitalized for these purposes are discussed infra under the heading 
``Well-capitalized/Well-managed Standards.''
---------------------------------------------------------------------------

Limits on Investments in One Company

    Historically, all general consent investments under Regulation K 
were subject to absolute dollar limits. Currently, the general consent 
limit for most investments is $25 million. However, as a result of 
amendments to Regulation K implemented in December 1995, certain 
investments by strongly capitalized and well-managed banks are subject 
to Board review only to the extent they exceed a percentage of the 
investor's capital.
    In the '97 Proposal, the Board proposed expanding upon this 
approach by eliminating the absolute dollar limits on foreign 
investments permissible under general consent authority for well-
capitalized and well-managed investors (with the exception of those 
applicable to portfolio investments made under the bank). Under the 
proposal, general consent limits for all investors (bank holding 
companies, banks, and Edge corporations) would be based solely on a 
percentage of their tier 1 capital.\22\
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    \22\ Under the proposal, if the Edge corporation were making the 
investment, then the Edge corporation, the member bank, and the bank 
holding company would be required to meet the well-capitalized and 
well-managed tests. If the member bank were making the investment, 
then the bank and the bank holding company would be required to meet 
the tests.
---------------------------------------------------------------------------

    The limits on individual investments made under general consent 
authority would vary according to the investor (bank holding company, 
bank, or Edge corporation) and the type of entity in which the 
investment is made. For well-capitalized and well-managed investors, 
the Board proposed the following percentage limits.

General consent limits on investment in a subsidiary

    Bank holding company: 10 percent of tier 1 capital of the bank 
holding company.
    Bank: 2 percent of tier 1 capital of the bank.
    Bank subsidiaries: the lesser of 2 percent of tier 1 capital of the 
bank or 10 percent of tier 1 capital of the bank subsidiary.

General consent limits on investment in a joint venture

    Bank holding company: 5 percent of tier 1 capital of the bank 
holding company.
    Bank: 1 percent of tier 1 capital of the bank.
    Bank subsidiaries: the lesser of 1 percent of tier 1 capital of the 
bank or 5 percent of tier 1 capital of the bank subsidiary.
    These limits were proposed on the basis that they reflected the 
risk involved in the type of investment. A higher percentage of capital 
would be permitted in the case of an investment in a subsidiary as 
opposed to an investment in a joint venture because the latter is 
considered to carry a greater risk of loss. Thus, with joint ventures, 
investors acquire less than full control, and the record on such 
investments has shown that they experience a higher rate of loss. As a 
result, most U.S. banks do not now make sizeable joint venture 
investments. In light of these considerations, the Board believed that 
lower general consent limits may be appropriate for joint venture 
investments.
    For investors that fail to meet the well-capitalized or well-
managed standards, the Board proposed the following limits. Individual 
investments under general consent authority would be limited to the 
lesser of $25 million or 5 percent of tier 1 capital in the case of an 
investor that is a bank holding company, and the lesser of $25 million 
or 1 percent of tier 1 capital if the investor is a member bank. Limits 
on individual investments for an Edge corporation would be $25 million 
or the lesser of 1 percent of the parent bank's tier 1 capital or 5 
percent of the Edge's tier 1 capital. The Board also proposed, however, 
that authority would be delegated to the Director of Banking 
Supervision and Regulation to approve higher investment limits on a 
case-by-case basis or as part of an investment program as described 
further below.
    The Board sought comment on these proposed limits, noting that 
these limits would only cover investments made under general consent 
authority; larger investments may continue to be made with 30 days' 
prior notice. Noting that an argument could be made that, in cases 
involving investments by an Edge corporation, the well-capitalized and 
well-managed tests should be based on a review of the parent bank, not 
the Edge corporation, the Board also sought comment on the Board's 
proposal to impose limits tied to the condition of the Edge.
    Commenters expressed general support for the Board's percentage-of-
capital limits approach and proposal to reserve the greatest 
liberalization to well-capitalized and well-managed investors. Several, 
however, objected to the proposed general consent limits for bank 
subsidiaries, arguing that they will have the effect of reducing the 
general consent investment authority of some investors. Comments 
advanced a number of rationales for either retaining the existing 
limits, at least for well-capitalized and well-managed bank 
subsidiaries, or for increasing the proposed limits.
    The Board believes the proposed general consent limits for 
investments by bank subsidiaries are sufficient. The Board therefore is 
adopting the limits as proposed. Should investors desire increased 
general consent authority, they may increase capital levels at the bank 
and/or bank subsidiary level, as warranted. Additionally, as noted 
above, an investment in excess of the general consent limits may still 
be made following prior notice procedures or with the specific consent 
of the Board. In any event, the Board notes that, in most instances, 
the binding constraint is the member bank's capital.
    Two commenters, however, noted that the proposed general consent 
limits might be especially constraining for organizations whose Edge 
corporations are minimally capitalized. They recommended that the Board 
allow a well-capitalized, well-managed parent

[[Page 54361]]

bank to make de minimis general consent investments through its Edge 
corporation, even if that investment would be greater than otherwise 
would be allowed under the limits applicable to the Edge. The Board 
disagrees and continues to be of the view that it is important to 
retain the well-capitalized and well-managed tests for the Edge 
corporation itself as one of the bases for determining limits 
applicable to general consent investments. This approach will help to 
ensure the safety and soundness of Edge corporations in their own right 
and is consistent with the statutory (and supervisory) rationale 
underlying Edge corporations. As discussed above, Congress limited the 
amount of capital that banks could invest in Edge corporations, which 
in turn could invest in activities otherwise prohibited to banks that 
were perceived to be higher risk. Congress also subjected Edge 
corporations to regulation and examination by the Federal Reserve. For 
these reasons, the Board considers that Edge corporations should 
themselves be operating satisfactorily and not be a source of potential 
weakness to its parent bank. The Board therefore is adopting in final 
the proposed general consent limits that are tied to the condition of 
the Edge.
    In response to the Board's request for comment on the imposition of 
different general consent limits on investments in subsidiaries and 
joint ventures, two commenters maintained that imposing different 
limits on these investments is unjustified, arguing that the activities 
present similar risks. The Board disagrees and continues to be of the 
view stated in the '97 Proposal that investments in joint ventures 
involve greater risks than investments in subsidiaries. Consequently, 
the Board adopts the limits on investments in subsidiaries and joint 
ventures as proposed.
    Two commenters noted the lack of a general consent mechanism for 
incremental investments in a subsidiary or joint venture once the 
individual company investment limit is reached. They recommended the 
inclusion of such a provision to allow investors to make additional 
small investments quickly, without encumbering both the investor and 
the Board with a case-by-case regulatory review. They further suggested 
that such investments be excluded from the 12-month rolling aggregate 
general consent limits. The Board does not believe that these changes 
should be made to the proposal. As noted above, an investor may 
increase its investment limit by increasing its capital. Moreover, an 
investor that has reached its individual company investment limit may 
apply to the Director of the Division of Banking Supervision and 
Regulation for appropriate relief or may submit a long-range investment 
plan for preclearance, as discussed further below. Accordingly, the 
Board is retaining the requirement that investments beyond those 
permissible under general consent authority must be made under the 
prior notice procedures unless relief is otherwise granted.
    One commenter proposed allowing investors to carry forward and 
accumulate for five years unused investments of cash dividends, as is 
presently authorized under Regulation K. The Board believes that this 
provision is no longer necessary in light of the expansion of the 
general consent limits and the ability of investors to seek waivers or 
obtain preclearance of an investment program.
    Another commenter noted that the Board's proposal would render 
investments in general partnerships and unlimited liability companies 
in amounts of less than $25 million ineligible for the general consent 
provisions and recommended that the Board preserve the general consent 
status quo for such investments by well-capitalized, well-managed 
banking institutions. The final rule adopts this recommendation.
    Commenters also urged the Board to clarify that investments in 
single-purpose subsidiaries formed solely for the purpose of 
facilitating a specific financing transaction (e.g., special purpose 
corporations formed by Edge corporations engaged in specific leasing 
transactions with a single customer) would not be subject to the 
individual or aggregate general consent limits. The Board will continue 
to exclude such investments from the application or prior notice 
procedures provided the investment serves solely to finance a leasing 
transaction.

Aggregate Limits

    The limits on general consent investments in any one company are 
intended to address the fact that individual foreign investments above 
a certain size may be a source of potential concern, and therefore 
prior review of such investments should be required. In addition, the 
Board is also concerned with any rapid increase in an organization's 
foreign investments overall, made without prior review. Accordingly, in 
the '97 Proposal, the Board proposed that when the cumulative 
investments made under general consent reach a certain amount over a 
given period, new or additional investments would become subject to 
prior review. Investments by all affiliates of a bank holding company 
would be taken into account in determining compliance of the holding 
company with the aggregate limits; investments of subsidiaries of a 
bank or of an Edge, respectively, would be aggregated in determining 
compliance with their limits. Under the proposed liberalized general 
consent procedures, the new aggregate limit for all investments during 
any 12-month period for investors meeting the well-capitalized and 
well-managed tests would be:
    Bank holding companies: 20 percent of tier 1 capital.
    Bank: 10 percent of tier 1 capital of the bank.
    Bank subsidiaries: the lesser of 10 percent of tier 1 capital of 
the bank or 50 percent of the bank subsidiary's tier 1 capital.
    The Board considered that, because the bank would have the exposure 
on a consolidated basis for investments by either the bank or the Edge, 
these investments should have a combined aggregate limit. However, the 
Board proposed that this limit could be waived, in whole or in part, by 
the Director of the Division of Banking Supervision and Regulation 
under delegated authority, based upon a review of the financial 
strength of the investor and its investment strategy and business 
plans.
    For bank holding companies, banks or Edge corporations that are 
adequately capitalized but do not meet the well-capitalized and well-
managed standards, the Board proposed that the aggregate limits on all 
investments made under authority of general consent in any 12-month 
period would be half that applicable to well-capitalized and well-
managed organizations (i.e., 10 percent of tier 1 capital for bank 
holding companies, 5 percent of tier 1 capital for banks, and, for Edge 
corporations, the lesser of 5 percent of the parent bank's tier 1 
capital or 10 percent of the Edge's tier 1 capital). In determining 
compliance with the aggregate limits, investments under Regulation K by 
all subsidiaries of the investor would be taken into account.
    A number of comments were submitted regarding these provisions. 
Some argued that there should be separate rolling 12-month aggregate 
limits for portfolio investments and investments in subsidiaries and 
joint ventures. Other commenters objected to the inclusion of dealing 
positions in the rolling 12-month limits, and one argued that the 
percentage limits should be increased if portfolio investments and 
dealing activities are both included in

[[Page 54362]]

determining compliance with the limits. A few commenters also requested 
clarification of whether additional investments in a company equal to 
cash dividends from the company, investments acquired from an 
affiliate, and investments made under the prior notice and specific 
consent provisions would be included within the proposed rolling 12-
month aggregate limits. They recommended that the final regulation 
explicitly exclude these investments from the aggregate limits.
    As discussed above, the aggregate limits are designed to address 
concerns that a banking organization may use expanded general consent 
investment authority, including that available in relation to portfolio 
investments, to expand excessively within a short time period. The 
Board notes that these limits are set at fairly high levels as a 
percentage of tier 1 capital. In order to provide a meaningful 
constraint on excessively rapid growth, in the Board's view all amounts 
invested during the rolling 12-month period should be included in the 
aggregate limit. The Board does not consider that any action should be 
taken to exclude portfolio investments from other investments in 
subsidiaries and joint ventures for purposes of the aggregate general 
consent limit. After further consideration, however, the Board 
considers that shares acquired in connection with Regulation K dealing 
activity should be excluded from the rolling 12-month aggregate limit, 
in view of the important differences in the nature of dealing activity. 
Aside from this change, in view of the ability of a banking 
organization to increase its general consent limits by increasing 
capital, and the availability of other procedures for securing 
authority to make investments should the limits prove constraining 
(such as seeking a waiver of limits on a case-by-case basis or 
obtaining preclearance for an investment program), the Board adopts the 
proposed aggregate general consent limits.

Preclearance of Investment Program

    In connection with the foregoing, the Board also in 1997 proposed 
establishing a procedure that would allow U.S. banking organizations to 
obtain preclearance of an investment program, even though one or more 
of the investments would be in excess of the individual or aggregate 
general consent investment limits and would be made over a time period 
longer than one year. Preclearance authority would be delegated to the 
Director of Banking Supervision and Regulation, with the consent of the 
General Counsel. The Board solicited comment on whether such a program 
would be useful to U.S. banking organizations and whether it should be 
available to all banking organizations, including those organizations 
that are not well-capitalized and well-managed.
    In response to the Board's request for comment, several commenters 
recommended that the Board adopt the proposed preclearance investment 
program as enhancing U.S. banking organizations' international 
competitiveness. Commenters believed that the preclearance process 
should focus on the merits of the applicant, rather than the specifics 
of the investment program. They argued that, for the preclearance 
option to be effective, the regulatory review process must be rapid and 
must not impose excessively narrow parameters on the types of 
investments permitted.
    The Board is adopting the proposed preclearance program that would 
allow investors to seek authority to exceed the individual or rolling 
12-month aggregate general consent investment limits. Because of the 
differing foreign investment needs of U.S. banking organizations, the 
Board is not at this time placing specific limitations on the scope of 
the preclearance process, but rather will assess each proposal on a 
case-by-case basis. The Board believes this approach provides maximum 
flexibility and will increase the utility of the process to all 
investors. Any preclearance request should be in writing and should 
indicate: (i) The amount of preclearance authority sought; (ii) the 
period of time for which such authority is sought; (iii) the strategic 
plan detailing the reasons for seeking preclearance authority; (iv) 
whether the applicant satisfies the well-capitalized and well-managed 
criteria; and (v) capital projections based upon anticipated 
investments made under the preclearance authority.
    Commenters also recommended that investors be permitted to present 
their investment programs as prior notices, rather than as applications 
for specific consent. One commenter recommended that such authority be 
delegated to individual Reserve Banks, rather than to the Director of 
Banking Supervision and Regulation. In light of the fact that the 
preclearance process under Regulation K is new, the Board believes that 
it is important, at least initially, for these requests to be processed 
at the Board under specific consent. The procedures for obtaining 
preclearance authority will be reviewed after the Board gains 
experience with the process.

Authorization To Invest More Than Ten Percent of a Bank's Capital 
in Its Edge and Agreement Corporation Subsidiaries

    Under a September 1996 amendment to section 25A of the Federal 
Reserve Act, member banks may invest more than 10 percent and up to 20 
percent of capital and surplus in the stock of Edge and agreement 
corporation subsidiaries with the Board's prior approval. The Board may 
not approve such investments unless it determines that the investment 
of an additional amount by the bank would not be unsafe or unsound.
    The Board proposed to implement this provision by adding an 
application requirement to Regulation K for banks to obtain the Board's 
approval to invest in excess of 10 percent of a bank's capital in the 
stock of Edge and agreement corporations. The Board noted that it would 
take the following criteria into account in reaching a decision on such 
an application: (i) The composition of the assets of the bank's Edge 
and agreement corporations; (ii) the total capital invested by the bank 
in its Edge and agreement corporations when combined with retained 
earnings of the Edge and agreement corporations (including retained 
earnings of any foreign bank subsidiaries) as a percentage of the 
bank's capital; (iii) whether the bank, bank holding company, and Edge 
and agreement corporations are well-capitalized and well-managed; and 
(iv) whether the bank is adequately capitalized after deconsolidating 
and deducting the aggregate investment in and assets of all Edge or 
agreement corporations and all foreign bank subsidiaries.
    The Board invited comment on whether the enumerated criteria are 
appropriate for determining whether these investments are unsafe or 
unsound. Additionally, the Board sought comment on whether only the 
well-capitalized and well-managed criteria should apply in those 
instances in which the total Edge and agreement corporation capital 
(including retained earnings) on a pro forma basis would not exceed 20 
percent of the bank's capital. As discussed above, due to the 
accumulation of retained earnings in Edge corporations, some member 
banks now have over 20 percent of their consolidated capital in Edge 
corporations.
    Comments submitted generally supported this proposal. One commenter 
urged the Board to state that the evaluative criteria are not all-
inclusive, to permit the Board to consider other issues as they may 
arise

[[Page 54363]]

on a case-by-case basis. Another commenter recommended that the Board 
include among the criteria an evaluation of the reasons for the 
proposed capital increase. The Board believes these suggestions are 
implicit in the enumerated criteria. The Board therefore adopts the 
regulation as proposed, including applying only the well-capitalized 
and well-managed criteria in those instances in which the total Edge 
and agreement corporation capital (including retained earnings) on a 
pro forma basis would not exceed 20 percent of the bank's capital. 
While the Board expects the enumerated criteria will be sufficient in 
most circumstances, the Board may take into account additional criteria 
if necessary to fully evaluate a proposal and ensure safety and 
soundness of member banks.
    Finally, commenters recommended that a well-capitalized, well-
managed bank should not be required to obtain prior approval for these 
investments but, instead, should be subject only to a prior notice 
requirement in order to make such an investment. The Board considers, 
however, that the prior approval requirement should be maintained even 
for well-capitalized, well-managed banks in light of the significant 
amounts of retained earnings that may be held through Edge or agreement 
corporations.

Well-Capitalized/Well-Managed Standards

    As discussed above, the Board's '97 Proposal generally allowed 
well-capitalized and well-managed banking organizations to engage in 
expanded securities activities and to make larger general consent 
investments. The Board proposed criteria for determining whether 
banking organizations would be considered well-capitalized \23\ and 
well-managed.\24\ Whether an institution is well-capitalized and well-
managed also was proposed as a factor in the Board's determination 
regarding whether investments in Edge corporations greater than 10 
percent of a member bank's capital and surplus should be permitted.
    Commenters expressed widespread support for additional flexibility 
for well-capitalized, well-managed investors. However, they noted that 
the well-managed test under Regulation K differs from that for 
expedited action under Regulation Y by including a requirement that an 
institution not be subject to any supervisory enforcement action. They 
expressed concern that this provision would not provide the Board with 
sufficient flexibility to determine when an institution is not well-
managed, as some enforcement actions may involve matters that would not 
be considered material. Commenters also noted that the existence of 
supervisory enforcement actions could be reflected in either the 
management rating or the composite rating of an institution, and that 
such ratings may be changed at any time during an examination cycle. In 
response to these concerns, the Board is amending the proposed 
definition of well-managed to delete the reference to supervisory 
enforcement actions and, instead, to require that the organization's 
management rating must be at least satisfactory. Accordingly, a U.S. 
banking organization meets the well-managed definition if its composite 
and management ratings are at least satisfactory.
---------------------------------------------------------------------------

    \23\ Under the proposal, a bank holding company would be 
considered well-capitalized if, on a consolidated basis, it 
maintains total and tier 1 risk-based capital ratios of at least 10 
percent and 6 percent, respectively. In the case of an insured 
depository institution, well-capitalized means that the institution 
maintains at least the capital levels required to be well-
capitalized under the capital adequacy regulations or guidelines 
applicable to the institution that have been adopted under section 
38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o. The Board 
proposed that an Edge or agreement corporation would be considered 
well-capitalized if it maintains total and tier 1 capital ratios of 
10 and 6 percent, respectively.
    \24\ Under the proposal, a bank holding company or insured 
depository institution would be considered well-managed if, at its 
most recent inspection or examination or subsequent review, the 
holding company or institution received at least a satisfactory 
composite rating. The Board noted that, under standards adopted by 
the Board in connection with the December 1995 expansion of 
Regulation K's general consent authority, an Edge or agreement 
corporation would be considered to be well-managed for these 
purposes if it received a composite rating of 1 or 2 at its most 
recent examination or review and it is not subject to any 
supervisory enforcement action.
---------------------------------------------------------------------------

    Some commenters suggested that the Board should provide 
transitional periods and arrangements for institutions disqualified 
from well-capitalized and/or well-managed status to conform to the 
lower limits. Since the circumstances of disqualification may vary, the 
Board believes transitional periods and arrangements should be 
addressed on a case-by-case basis. Other commenters suggested that 
grandfathering should be available for institutions that no longer 
qualify as well-capitalized or well-managed, particularly where 
activities at issue are being conducted prudently and profitably and 
are not a factor in the failure to meet the eligibility tests. The 
Board does not believe grandfathering is appropriate in this context, 
as the well-capitalized, well-managed status of an institution is 
designed to mitigate the additional risks created by the expanded 
authority granted to such institutions. Moreover, the ability to 
conduct expanded activities should also be an incentive for achieving 
and maintaining well-capitalized, well-managed status.
    Several commenters objected to application of the well-capitalized 
test to Edge corporations. They argued that, since the capital of an 
Edge corporation is consolidated with that of the parent bank, an 
independent well-capitalized test for Edge corporations would not add 
to safety and soundness within the bank chain. They also maintained 
that an independent capital test for Edge corporations may encourage 
uneconomic booking decisions between the bank and the Edge corporation. 
The Board, however, continues to believe it is important to retain 
these tests with reference to both the Edge corporation and the member 
bank in order to be eligible for the expanded authority granted to 
well-capitalized institutions. As noted above, this approach would help 
to ensure the safety and soundness of the Edge corporation in its own 
right and is consistent with the statutory (and supervisory) rationale 
underlying Edge corporations. The Board considers that Edge 
corporations should themselves be operating satisfactorily and not be a 
source of potential weakness to the U.S. parent bank.

Other Revisions to Subpart A

Harmonization of Regulation K With Other Regulatory Changes

    The '97 Proposal noted that, as a result of liberalizations of 
other Board regulations, authority under Regulation K is now more 
restrictive than the authority available to engage in certain 
activities domestically. The Board proposed changes to address these 
disparities and has determined to adopt all such harmonizing changes.
Leasing Activities
    The Board proposed to interpret Regulation K's leasing provision 
consistent with a revision to Regulation Y's authority for BHCs, 
eliminating the requirement that leasing activities conducted under 
authority of Regulation K serve as the functional equivalent of an 
extension of credit to the lessee with respect to high residual value 
leasing. Commenters expressed support for this proposal and recommended 
that the change be made explicit in the text of the final rule. The 
Board is adopting this proposal, and a conforming change has been made 
to Regulation K. As required under Regulation Y, however, the estimated 
residual value of real property must be limited to 25 percent of the 
value of the property at the time of the initial lease,

[[Page 54364]]

to distinguish real property leasing from real estate development and 
investment activities.
Commodities Swaps Activities
    In light of changes to Regulation Y, the Board proposed to 
eliminate the requirement that commodity-related swaps must provide an 
option for cash settlement that must be exercised upon settlement. 
Comments generally supported this proposed revision, and the Board has 
adopted the change in final.
    Other commenters recommended that the commodities swaps provision 
be expanded to include activities relating to the trading, sale, or 
investment in commodities and underlying physical properties (and, 
hence, to make it fully consistent with the corresponding provision of 
Regulation Y). The Board rejects these additional changes at this time 
as inconsistent with section 25A of the Federal Reserve Act, 12 U.S.C. 
617, which prohibits Edge corporations from engaging in commerce or 
trade in commodities except as specifically provided therein.
Loans to Officers at Foreign Branches
    In the '97 Proposal, the Board noted that existing Regulation K 
imposes limits on mortgage loans to executive officers of foreign 
branches of member banks that are more restrictive than limits imposed 
under analogous provisions in Regulation O. The Board proposed to 
eliminate the Regulation K provision to address this disparity. None of 
the public commenters addressed this proposed change, and it is adopted 
as proposed. Accordingly, the limits in Regulation O apply with respect 
to such loans.
Data Processing Activities
    The Board expressly declined to alter or expand Regulation K's data 
processing provision. It noted, however, that this authority extends 
only to the processing of information and does not authorize the 
general manufacture of hardware for such services. Some commenters 
presumed that the activity of data processing pursuant to Regulation K 
is unrestricted rather than limited to banking, financial, or economic 
data to the extent such data processing is limited in Regulation Y.\25\ 
Moreover, some commenters read the language in the preamble to the 
proposed revisions to Regulation K to preclude the offering of hardware 
in connection with software that is designed and marketed for the 
processing of financial, banking, or economic data where the general 
purpose hardware does not constitute more than 30 percent of the cost 
of any packaged offering. The Board notes that an interpretation issued 
in 1999 clarified that the scope of the data processing authority of 
Regulation K is coextensive with the data processing authority of 
Regulation Y, absent Board authorization for additional activities. 64 
FR 58780, Nov. 1, 1999.
---------------------------------------------------------------------------

    \25\ Regulation Y allows up to 30 percent of data processing 
revenues to be derived from data processing that is not financial, 
banking, or economic in nature.
---------------------------------------------------------------------------

Additional Areas of Liberalization

Authorizing Foreign Branches of Operating Subsidiaries of Member Banks
    The Board proposed to codify prior Board determinations permitting 
member banks to establish foreign branches of domestic operating 
subsidiaries with the Board's approval (under the prior notice or 
general consent procedures, as appropriate), provided that those 
branches would engage only in activities directly permissible for the 
member bank parents. Commenters expressed support for this proposal, 
and the Board is adopting the revision as proposed.
FCM Activities
    The Board proposed to eliminate the requirement that an investor 
seek Board approval before acting as a futures commission merchant 
(FCM) for financial instruments, and on exchanges, not previously 
approved by the Board. The Board also proposed to eliminate the 
requirement that investors obtain prior Board approval for FCM 
activities conducted on any exchange or clearing house that requires 
members to guarantee or otherwise to contract to cover losses suffered 
by other members (i.e., a mutual exchange).\26\ The Board sought 
comment on whether the prior notice requirement should be eliminated 
where: (i) the activity is conducted through a separately incorporated 
subsidiary; and (ii) the parent bank does not provide a guarantee or 
otherwise become liable to the exchange or clearing house for an amount 
in excess of the applicable general consent limits. One commenter 
agreed that a prior notice requirement should not be imposed in these 
circumstances. The Board is adopting the revisions to the FCM authority 
under Regulation K as proposed.
---------------------------------------------------------------------------

    \26\ In this regard, Regulation Y has been revised to allow 
subsidiaries of BHCs to act as FCMs for futures contracts traded on 
an exchange provided the parent BHC does not provide a guarantee or 
otherwise become liable to the exchange or clearing association 
other than for proprietary trades.
---------------------------------------------------------------------------

Changes With Respect to Edge and Agreement Corporations: Voluntary 
Liquidation Procedures

    The Board proposed changes relating to the liquidation and 
receivership of Edge and agreement corporations, including adding 
provisions: (i) Providing for 45 days' prior notice to the Board of an 
Edge or agreement corporation's intent to dissolve; (ii) specifying the 
grounds for determining that an Edge corporation is insolvent; and 
(iii) specifying the powers of a receiver of an Edge corporation. One 
commenter expressed general support for the voluntary liquidation 
proposal, and this provision is adopted as proposed. In light of the 
recent amendment of the Edge Act's receivership provision, 12 U.S.C. 
624, the Board is not adopting the regulatory proposal with respect to 
receivership.

Additional Commenter Recommendations Under Subpart A

    Commenters urged the Board to revise Subpart A of Regulation K in 
the following respects not addressed by the Board's proposals.
Advisory Opinions Under Regulation K
    A commenter suggested that the Board harmonize Regulations Y and K 
further by establishing a procedure in Regulation K whereby questions 
arising under the regulation could be submitted by any person and the 
Board would issue an advisory opinion within 45 days. The Board agrees 
that this procedure would enhance regulatory transparency and 
facilitate regulatory compliance. As noted above in the section on 
portfolio investment authority, the Board is adopting the 
recommendation and including a procedure in the final rule under which 
advisory opinions may be requested on the scope of activities 
permissible under Regulation K. Board staff will endeavor to respond to 
any such requests within 45 days of receipt of all relevant 
information, provided the request does not raise significant 
supervisory issues.
Divestiture Period for Debts Previously Contracted (``DPC'') Assets
    Commenters recommended that the Board adopt the OCC's DPC 
divestiture rules, which provide for an initial holding period of up to 
five years, with an opportunity to extend for up to an additional 5 
years. Existing Regulation K, which the Board did not propose to amend, 
requires divestiture within two years after acquisition, unless the 
Board authorizes retention for a longer period. The Board believes the 
existing DPC divestiture period is adequate given that investors may 
request extensions of time

[[Page 54365]]

and therefore declines to adopt this proposal.
Changes to Capitalization Requirements for Edge Corporations
    Commenters recommended that the Board revise the provisions 
regarding the capitalization of Edge corporations to facilitate their 
clearing activities by either exempting sales of Fed funds to parent 
banks from the 10 percent capital adequacy guideline applicable to Edge 
corporations or eliminating the 10 percent capital limitation 
applicable to Edges. The Board does not believe this proposal is 
consistent with the safety and soundness concerns the capital adequacy 
guidelines for Edge corporations are designed to address. Accordingly, 
it declines to adopt this proposal.

Subpart B: Foreign Banking Organizations

    Subpart B of Regulation K governs the U.S. activities of foreign 
banking organizations. It implements the IBA and provisions of the BHC 
Act that affect foreign banks.
    This final rule for Subpart B seeks to eliminate unnecessary 
regulatory burden, increase transparency, and streamline the 
application/notice process for foreign banks operating in the United 
States based on the Board's recent experience with foreign bank 
applications. The final rule also would liberalize the standards under 
which certain foreign banking organizations qualify for exemptions from 
the nonbanking prohibitions of section 4 of the BHC Act.
    The rule also implements a number of statutory changes including 
certain application-related provisions of the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996 (the 1996 Act) and several 
provisions of the Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994 (the Interstate Act) and the Gramm Leach Bliley 
Act (the GLB Act) that affect foreign banks. The Board is also 
requesting comment on issues that arise in connection with the change 
in the definition of representative office made in the GLB Act. 
Finally, several technical changes to various other provisions in 
Subpart B are being adopted.

Streamlining the Regulatory Process

    The Board is required to approve the establishment by foreign banks 
of branches, agencies, commercial lending companies, and representative 
offices in the United States. This authority is contained in the 
Foreign Bank Supervision Enhancement Act of 1991 (FBSEA), which amended 
the IBA, and was intended to close perceived gaps in the supervision 
and regulation of foreign banks. Prior to FBSEA, there was no federal 
approval required for the establishment of most types of direct U.S. 
offices of foreign banks, nor were uniform standards applicable to 
these offices.
    In the ten years since the enactment of FBSEA, the Board has gained 
substantial experience with the issues presented by applications by 
foreign banks to establish direct offices. The revisions streamline the 
applications process based on experience gained over this period. In 
addition, the final rule implements new discretionary authority and 
time limits contained in the 1996 Act.

Adoption of a Single Standard for Representative Offices

    Under FBSEA, in order to approve an application by a foreign bank 
to establish a branch, agency or commercial lending company, the Board 
generally is required to determine, among other things, that the 
applicant bank, and any parent bank, are subject to comprehensive 
supervision on a consolidated basis by its home country authorities 
(the CCS determination).\27\ A lesser standard, however, applies under 
FBSEA to representative office applications. While the Board is 
required to ``take into account'' home country supervision in 
evaluating an application by a foreign bank to establish a 
representative office, a CCS determination is not required to approve 
such an application. The law simply requires the Board to consider the 
extent to which the applicant bank is subject to CCS. A lesser standard 
applies because representative offices do not conduct a banking 
business, such as taking deposits or making loans, and therefore 
present less risk to U.S. customers and markets than do branches or 
agencies.
---------------------------------------------------------------------------

    \27\ As discussed later, the law was amended in 1996 to allow 
the Board to approve an application if the bank is not subject to 
CCS under certain conditions.
---------------------------------------------------------------------------

    Regulation K currently restates the statutory ``take into account'' 
standard and does not define a minimum supervision standard that a 
foreign bank must meet in order to establish a representative office. 
Instead, the Board has developed standards in the context of specific 
cases. To date, the Board has used two different supervision standards 
in approving applications by foreign banks to establish representative 
offices.\28\
---------------------------------------------------------------------------

    \28\ Wherever the record submitted by an applicant in a 
representative office case is sufficient to support a CCS finding, 
the Board generally has done so. See, e.g., Caisse Nationale de 
Credit Agricole, 81 Fed. Res. Bull. 1055 (1995). The two 
representative office standards have been applied in those cases 
where the record is not sufficient to support a CCS finding.
---------------------------------------------------------------------------

    Under one, the Board has permitted a foreign bank to establish a 
representative office able to exercise all powers available under 
applicable law and regulation on the basis of a finding that the home 
country supervisors exercise a significant degree of supervision over 
the bank.\29\ Under the second, the Board has approved the 
establishment of the office on the basis of a finding that the foreign 
bank is subject to a supervisory framework that is consistent with 
approval of the application, taking into account any limits placed on 
the activities of the proposed office and the operating record of the 
bank.\30\
---------------------------------------------------------------------------

    \29\ See, e.g., Citizens National Bank, 79 Fed. Res. Bull. 805 
(1993).
    \30\ See. e.g., Promstroybank of Russia, 82 Fed. Res. Bull. 599 
(1966).
---------------------------------------------------------------------------

    Based on experience in dealing with representative office 
applications, the Board believes that the existence of two standards 
can be confusing and is unnecessary, particularly in light of the 
generally minimal risk presented to U.S. customers or markets by 
representative offices. Consequently, the Board proposed Regulation K 
be amended to establish only one flexible standard. Under the proposal, 
assuming all other factors were consistent with approval, the Board 
could approve an application to establish a representative office if it 
were able to make a finding that the applicant bank was subject to a 
supervisory framework that is consistent with the activities of the 
proposed office, taking into account the nature of such activities and 
the operating record of the applicant.
    The record necessary to support the required finding would depend 
on the nature of the activities the applicant proposed to conduct in 
the representative office and the level of home country supervision. 
The Board expects that most applicants would be able to conduct all 
permissible activities. In those instances in which the Board had 
particular concerns regarding the consistency of the applicant's home 
country supervision with the proposed activities of the office, the 
applicant could commit to restrict the activities. A less comprehensive 
record on home country supervision would be required where the 
applicant committed to limit the activities of the office to those 
posing minimal risk to the U.S. customers.

[[Page 54366]]

    Commenters generally supported this proposal and the Board is 
adopting the proposal as set forth above.

Reduced Filing Requirements for the Establishment of U.S. Offices

    A major thrust of the proposed revisions was reduction of burden in 
the application process by streamlining existing application procedures 
for the establishment of new U.S. offices of foreign banks. Under the 
current Subpart B, the establishment by a foreign bank of a U.S. 
branch, agency, commercial lending company subsidiary, or 
representative office generally requires the Board's specific approval. 
Once the Board has approved the establishment of a foreign bank's first 
office under the standards set out in FBSEA, additional offices with 
the same or lesser powers may be approved by the Reserve Banks under 
delegated authority. Prior notice and general consent procedures are 
currently available for the establishment of certain kinds of 
representative offices. The Board's proposed revisions would allow 
additional types of applications to be processed under prior notice and 
general consent procedures. The Board has determined to adopt the 
revisions as proposed. The specific instances in which additional prior 
notice and general consent authority will be available are discussed 
below.

Prior Notice Available for Additional Offices After First CCS 
Determination

    The Board proposed that any foreign bank which the Board has 
determined to be subject to CCS in a prior application or determination 
under FBSEA or the BHC Act may establish additional branches (other 
than interstate branches), agencies, commercial lending company 
subsidiaries, and representative offices pursuant to a 45 day prior 
notice procedure.\31\ This time frame would allow for review of whether 
any material changes had occurred with respect to home country 
supervision, a determination of whether the bank continues to meet 
capital requirements, and a review of any other relevant factors. The 
current delegation to the Reserve Banks for such applications would be 
deleted as no longer necessary.
---------------------------------------------------------------------------

    \31\ An editing error in the draft regulatory language 
unintentionally limited the types of offices eligible for the prior 
notice procedure. Commenters requested that the proposed 45-day 
prior notice provision be extended to the establishment of limited 
branches outside the foreign bank's home state. This was the intent 
of the proposal.
---------------------------------------------------------------------------

    Four commenters expressed support for the Board's proposal. In 
response to the comments submitted, the Board is adopting the proposal 
with language clarifying that the prior notice procedure ordinarily 
would be available for foreign banks with a CCS determination that seek 
to establish additional branches (other than interstate branches under 
section 5(a)(3) of the IBA (12 U.S.C. 3103(a)(3))), limited branches, 
agencies, commercial lending company subsidiaries, and representative 
offices.\32\
---------------------------------------------------------------------------

    \32\ As described further in the preamble, upgrades of limited 
branches and agencies outside the foreign bank's home state would be 
eligible for prior notice if other requirements were met. In 
response to a comment, the Board considered whether it might be 
possible to process under the 45-day notice procedure proposals to 
establish full interstate branches. Approval of full interstate 
branches requires consideration of factors in addition to those 
required to be considered in a normal FBSEA application, as well as 
consultation with the Department of the Treasury. For this reason, 
an application requirement is being retained for the establishment 
of full interstate branches under section 5(a)(3) of the IBA.
---------------------------------------------------------------------------

Prior Notice Available for Certain Representative Offices

    Many foreign banks have a U.S. banking presence and therefore are 
subject to the provisions of the BHC Act, but have not received a CCS 
determination. If a foreign bank is subject to the provisions of the 
BHC Act through ownership of a bank or commercial lending company or 
operation of a branch or agency, it is also subject to supervision and 
oversight through the Board's Foreign Banking Organization (FBO) 
program. Through the FBO program, the Board gains knowledge of the 
bank, its policies and procedures, and forms a general view on home 
country supervision. In these instances, the Board believes that an 
expedited procedure may be adopted for the establishment of 
representative offices by these banks, even where the foreign bank had 
not previously been reviewed under the standards of FBSEA.
    The Board proposed that these foreign banks be permitted to 
establish representative offices using a 45-day prior notice procedure. 
In addition, the Board also proposed to permit the establishment by 
prior notice of additional representative offices by any foreign bank 
not subject to the BHC Act but previously approved by the Board to 
establish a representative office, regardless of the type of 
supervision finding made by the Board in the prior case. Such 
applications are currently delegated to the Reserve Banks. The Board 
sees no reason to continue to require full applications from such 
banks. The Board proposed that banks in these two categories be 
permitted to use the 45-day prior notice procedure for opening a 
representative office, rather than requiring them to use the 
application procedure.
    Commenters generally supported this proposal. One commenter 
additionally requested that foreign banks that have been approved to 
establish branches and agencies under the limited exception to the CCS 
standard--which permits the Board to approve applications to establish 
branches and agencies if it is able to find, among other things, that 
the home country supervisor of the applicant bank is ``actively 
working'' toward achieving CCS--be permitted to use a 45 day prior 
notice procedure for additional offices with the same or lesser powers.
    The Board is adopting the proposed revisions. In addition, the 
Board is adopting the commenter's proposal to permit establishment by 
prior notice of representative offices, but not additional branches, 
agencies or commercial lending companies, by foreign banks previously 
approved under the ``actively working'' standard. This would be 
consistent with the Board's proposal.

New General Consent Authority

    The Board proposed to permit the establishment by general consent 
of a representative office by a foreign bank that is both subject to 
the BHC Act and has been previously determined by the Board to be 
subject to CCS. Establishment of a representative office by such a 
foreign bank is currently subject to the prior notice procedure. The 
proposal was based on an assessment that a foreign bank that is subject 
to supervision under the FBO program and has been judged subject to CCS 
should generally qualify to establish a representative office. The 
Board also proposed that a foreign bank that is subject to the BHC Act 
could establish a regional administrative office by general consent, 
whether or not the Board had determined the bank to be subject to CCS. 
Regional administrative offices currently can be established using the 
prior notice procedure. Commenters generally supported this proposal 
and the Board is adopting the revisions as proposed.
    One commenter requested that the general consent procedure also be 
available for additional offices with the same or lesser powers in a 
state in which the foreign bank already operates an office where the 
foreign bank is subject to the BHC Act and has a CCS determination. The 
Board does not believe it would be appropriate to adopt the commenter's 
proposal because the proposal implicitly assumes that a CCS 
determination would never need to be reconsidered. In addition, in 
connection with each branch and agency case, the

[[Page 54367]]

Board also must confirm that the foreign bank's capital meets the 
statutory requirements.

Suspension of Prior Notice and General Consent Procedures

    The proposed revisions also provided that the Board, upon notice, 
may modify or suspend the prior notice and general consent procedures 
described above for any foreign bank. For example, modification or 
suspension of these procedures might be appropriate if the composite 
rating of the foreign bank's combined U.S. operations was less than 
satisfactory,\33\ if the foreign bank were subject to supervisory 
action, or if questions were raised about the foreign bank's home 
country supervision or anti-money laundering policy and procedures. The 
proposal would ensure that any streamlining of the applications process 
would not compromise the Board's ability to make the determinations 
necessary in connection with the establishment of offices.
---------------------------------------------------------------------------

    \33\ See 12 CFR 225.2(s) (definition of ``well-managed'' foreign 
banking of such transactions organization).
---------------------------------------------------------------------------

    The proposed revision did not elicit specific comment and it is 
adopted as proposed.

After-the-Fact Approvals

    In implementing FBSEA in 1993, the Board recognized that it would 
be impractical to require prior approval for the establishment of 
foreign bank offices acquired in certain types of overseas 
transactions, such as a merger of two foreign banks, and provided for 
an after-the-fact approval in such cases. The regulation currently 
requires the foreign banks involved to commit to file an application to 
retain acquired U.S. offices as soon as possible after the occurrence 
of such transactions.
    Since the enactment of FBSEA, a number of applicants using the 
after-the-fact procedure have chosen to wind down and close acquired 
offices or consolidate them with existing offices, in each case within 
a reasonable time frame. In most instances, no regulatory purpose was 
served by requiring the filing of an application. The regulation 
currently does not address this possibility. The Board proposed to 
amend the rule to address both after-the-fact applications to retain, 
as well as decisions to wind-down and close, U.S. offices acquired in a 
transaction eligible for the after-the-fact approval process. Where the 
foreign bank chooses to close the acquired U.S. office, the Board 
generally would not require the filing of an application but could 
impose appropriate conditions on the U.S. operations until the winding-
down is completed.
    The proposed revision did not elicit specific comment and it is 
adopted as proposed.

Implementation of the 1996 Act

    As noted above, FBSEA generally requires the Board to determine 
that a foreign bank applicant is subject to CCS in order to approve the 
establishment of a branch, agency, or commercial lending company. The 
1996 Act gave the Board discretion to approve the establishment of such 
offices by a foreign bank where the application record is insufficient 
to support a finding that the bank is subject to CCS, provided the 
Board finds that the home country supervisor is actively working to 
establish arrangements for the consolidated supervision of the bank, 
and all other factors are consistent with approval. This discretion 
gives the Board flexibility to approve applications on an exceptional 
basis where the home country authorities are making progress in 
upgrading the bank supervisory regime but the record may not yet be 
sufficient to support a full CCS finding. The Board has stated that 
this authority should be viewed as a limited exception to the general 
requirement relating to CCS.\34\ The statutory standards are being 
included in the final rule.
---------------------------------------------------------------------------

    \34\ See Housing & Commercial Bank, 83 Fed. Res. Bull. 935 
(1997); National Bank of Egypt, 86 Fed. Res. Bull. 344 (2000); Banco 
de Bogota, 87 Fed. Res. Bull. 552 (2001).
---------------------------------------------------------------------------

    Two commenters expressed support for the Board's proposed revision.
    The Board has proposed to incorporate into Regulation K the 
statutory time limits in the 1996 Act for Board action on applications 
for branches, agencies, and commercial lending companies. The 1996 Act 
provided that the Board must act on such an application within 180 days 
of its receipt. The time period may be extended once for an additional 
180 days, provided notice of the extension and the reasons for it are 
provided to the applicant and the licensing authority; the applicant 
may also waive the time periods. Although the regulation will reflect 
these statutory time periods, the Board will maintain existing internal 
time schedules that would require faster processing where possible.

New Standard

    In light of the increasing attention being paid to the problem of 
money laundering, the Board currently requests that a foreign bank 
applying to establish U.S. offices provide information on the measures 
taken to prevent the bank from being used to launder money, the legal 
regime to prevent money laundering in the home country, and the extent 
of the home country's participation in multilateral efforts to combat 
money laundering. The Board considers this information in reaching its 
decision on applications. In light of this practice, the proposed 
revision included as a standard for the establishment of U.S. offices 
by foreign banks that the Board may consider the adequacy of measures 
for the prevention of money laundering.
    One commenter expressed support for this proposal and it is adopted 
as proposed.

Qualifications of Foreign Banks for Nonbank Exemptions

Changes to the QFBO Test

    Regulation K implements statutory exemptions from the BHC Act for 
certain activities of foreign banks. These exemptions are available to 
qualifying foreign banking organizations (QFBOs) and are found in 
sections 2(h) and 4(c)(9) of the BHC Act. Section 2(h) allows a foreign 
company principally engaged in banking business outside the United 
States to own foreign affiliates that engage in impermissible 
nonfinancial activities in the United States, subject to certain 
requirements. These include that the foreign affiliate must derive most 
of its business from outside the United States and it may engage in the 
United States only in the same lines of business it conducts outside 
the United States. Section 4(c)(9) allows the Board to grant foreign 
companies an exemption from the nonbank activity restrictions of the 
BHC Act where the exemption would not be substantially at variance with 
the BHC Act and would be in the public interest. Under this authority, 
the Board has exempted, among other things, all foreign activities of 
QFBOs from the nonbanking prohibitions of the BHC Act.
    In order to qualify as a QFBO, a foreign banking organization must 
demonstrate that more than half of its business is banking and more 
than half of its banking business is outside the United States. Banking 
business is defined to include the activities permissible for a U.S. 
banking organization to conduct, directly or indirectly, outside of the 
United States.\35\ Under the current regulations

[[Page 54368]]

such activities can be counted as banking business for the purposes of 
the QFBO test only if they are conducted in the foreign bank ownership 
chain; that is, by the foreign bank or a subsidiary of the foreign 
bank. Activities conducted by a parent holding company or sister 
affiliate do not count toward qualification.
---------------------------------------------------------------------------

    \35\ These activities include, in addition to traditional 
banking activities, underwriting various types of insurance (credit 
life, life, annuity, pension fund-related, and other types of 
insurance where the associated risks are actuarially predictable); 
underwriting, distributing, and dealing in debt and equity 
securities outside the United States; providing data processing, 
investment advisory, and management consulting services; and 
organizing, sponsoring, and managing a mutual fund.
---------------------------------------------------------------------------

Modification of Proposal To Remove the Banking Chain Requirement from 
One Prong of the QFBO Test

    The Board proposed liberalizing the QFBO test by removing the 
banking chain requirement from the prong of the QFBO test that measures 
whether more than half of a foreign banking organization's business is 
banking. By eliminating the banking chain requirement from that prong 
of the test, a foreign banking organization that has, for example, 
substantial life insurance activities outside of the banking chain 
would be able to count such activities toward meeting the QFBO test. 
The commenters supported this liberalization.
    When this proposal was made in 1997, the Board was aware of 
relatively few foreign banking organizations, primarily those engaged 
in insurance, that would have benefitted from such liberalization. 
Significantly, at that time, the BHC Act would have prevented such a 
foreign insurance company from conducting insurance activities in the 
United States. Accordingly, the proposed change was expected to have 
limited application and not to provide any significant competitive 
advantage for foreign banking organizations.
    The enactment of the Gramm-Leach-Bliley Act has changed the 
regulatory landscape and the consequences of the proposed QFBO test. 
The BHC Act is no longer a legal bar to companies that wish to engage 
in insurance and merchant banking activities in the United States, and 
a broader range of foreign companies may acquire foreign banks with 
U.S. activities than was possible in 1997. If the proposed test were 
adopted, a foreign insurance group that qualified as a financial 
holding company would be able to make commercial and industrial 
investments in the United States beyond those permissible under 
insurance or merchant banking authority even though a domestic 
insurance company with financial holding company status could not. In 
light of these changes, the Board has reconsidered its proposed change 
to the QFBO test and determined to adopt a modified form of the 1997 
proposal.
    The existing QFBO test has been retained and foreign banking 
organizations that are able to qualify under that test will continue to 
be eligible for all of the exemptions. A new provision will permit 
those foreign banking organizations that meet only the test proposed by 
the Board in 1997 nevertheless to be eligible for all of the exemptions 
other than the exemption for limited commercial and industrial 
activities provided under Sec. 211.23(f)(5)(iii).\36\ Such a foreign 
banking organization will, however, be eligible for the limited 
exemptions only if the foreign banking organization includes a foreign 
bank that could itself meet the current QFBO test.
---------------------------------------------------------------------------

    \36\ The exemption in Sec. 211.23(f)(5)(iii) implements section 
3(h)(2) of the BHC Act. Any foreign banking organization that 
qualifies as a financial holding company would be able to make 
merchant banking investments, and investments in connection with its 
insurance business, in the United States to the extent permitted for 
a financial holding company. The lack of eligibility for the 
exemption provided in Sec. 211.23(f)(5)(iii) would not negate or 
otherwise affect such authority.
---------------------------------------------------------------------------

    Although the foreign banking organization that is able to meet only 
the modified test generally would be limited in its ability to make 
investments under the exemption in section 2(h)(2) of the BHC Act, the 
Board considers that a foreign bank within the group should not be so 
limited. In this regard, the Board notes that, in enacting section 
2(h)(2), Congress recognized that banks in other countries have 
traditionally been permitted to make commercial and industrial 
investments. Accordingly, any foreign bank within such a group that 
itself is able to meet the current QFBO test by reference to its and 
its subsidiaries' assets, revenues and net income, will be eligible for 
all of the exemptions.
    Limiting the eligibility for exemptions in this way is consistent 
with the statutory language in section 2(h)(2) of the BHC Act, which 
provides that it applies to shares held by a foreign company that is 
``principally engaged in the banking business outside the United 
States.'' At the same time, modifying the test in this manner would 
limit the extraterritorial effect of the BHC Act on foreign firms, and 
would not penalize a consolidated group that engages mostly in 
activities permissible for a U.S. banking organization.

Applications for Special Determination of Eligibility for QFBO 
Treatment

    The Board recognizes that there may be types of ownership 
structures above foreign banks that would not meet even the modified 
QFBO test. It also is possible that foreign banking organizations that 
meet only the modified test might need limited relief for commercial 
and industrial activities in the United States. In addition, there may 
be foreign financial organizations that do not include a foreign bank 
and wish to acquire a U.S. bank. Such financial organizations would 
fail the QFBO test, and it is not possible to know the extent to which 
requiring such an organization to conform its worldwide operations to 
those permissible for a U.S. financial holding company would interfere, 
in particular, with its foreign business. The Board is prepared to 
consider requests beyond the current QFBO authority on a case-by-case 
basis. In considering such cases, the Board will take into account the 
principles of national treatment and equality of competitive 
opportunity and may grant exemptions that are not substantially at 
variance with the purposes of the BHC Act and are in the public 
interest.
    Regulation K currently permits a foreign banking organization that 
ceases to qualify as a QFBO to request a special determination of 
eligibility. That provision has been modified to give the Board greater 
flexibility to grant special determinations that will permit foreign 
banking organizations and foreign organizations that do not include 
foreign banks to be eligible for some or all of the exemptions in 
appropriate cases.
    The Board has also adopted the proposal made in 1997 that would 
permit a former QFBO that has applied for a specific determination of 
eligibility to continue to conduct its business as if it were a QFBO, 
except with respect to making investments in U.S. companies under 
section 2(h)(2) of the BHC Act for which Board consent would be 
required. The proposal reflects the approach taken in a prior case 
considered by the Board, and no comments were received on the proposal.

Other Comments on the QFBO Test

    The QFBO test in Regulation K permits foreign banking organizations 
to count in the measurement of ``banking'' only those assets, revenues, 
or net income related to activities that are permissible for a U.S. 
banking organization to conduct outside of the United States. The Board 
requested comment with respect to a possible expansion of the list of 
activities that would be considered banking for purposes of the QFBO 
test. Three commenters suggested some expansion in the list. Two 
proposed that the QFBO

[[Page 54369]]

test be expanded to include all financial activities which are usual in 
connection with the banking business in those countries in which the 
foreign banking organization is active. One proposed that the Board 
consider other activities on a case-by-case basis to reflect changes in 
foreign financial markets.
    To date, there have been very few cases in which a foreign banking 
organization failed the QFBO test because certain types of financial 
activities were not included on the list. In light of this, and in view 
of the modified QFBO test and the ability of the Board to make special 
determinations of eligibility for some or all of the QFBO exemptions, 
the Board has determined not to make any changes at this time to the 
list of activities that would be considered banking for purposes of the 
QFBO test.
    Two commenters suggested that the requirement that a QFBO conduct 
more banking than nonbanking activities is not required by the statute. 
These same commenters also proposed that even if that requirement is 
retained, the QFBO test should be revised to allow U.S. banking 
business to be included when calculating the extent of an 
organization's banking business. The Board has not adopted these 
proposals because they would be inconsistent with section 2(h)(2) of 
the BHC Act, which provides exemptions for foreign companies 
principally engaged in banking business outside the United States. 
Moreover, a U.S. nonfinancial company is not permitted to own a U.S. 
bank, and altering the test to permit a predominantly nonfinancial 
foreign group to engage in banking in the United States would be 
inconsistent with the principle of national treatment.

U.S. Activities of QFBOs

    Securities Activities. Subpart B currently provides that a foreign 
banking organization may not own or control shares of a foreign company 
that directly underwrites, sells or distributes, or that owns or 
controls more than 5 percent of the shares of a company that 
underwrites, sells or distributes, securities in the United States, 
except to the extent permitted bank holding companies. The Board 
proposed that the 5 percent limit be raised to 10 percent. Two 
commenters suggested that the limit be raised to 24.9 percent and one 
proposed that no change be made. The Board has determined to adopt the 
10 percent limit as proposed. The Board continues to hold the view 
expressed in the 1997 proposal that a foreign bank should not be able 
to exert a significant influence over such a securities firm. 
Investments above the 10 percent level would be permitted if the 
foreign bank met the requirements to be treated as a financial holding 
company under the GLB Act.
    Change in meaning of ``incidental''. Two commenters requested that 
the Board apply an expanded definition of ``incidental'' U.S. 
activities in Subpart B. Under the current rule in Regulation K, a QFBO 
is permitted to own up to 100 percent of a foreign company that 
conducts activities in the United States that are ``incidental'' to the 
foreign company's international or foreign business. The Board's 
longstanding interpretation, for purposes of both Subparts A and B of 
Regulation K, has been that such incidental activities in the United 
States are limited to those activities that the Board has determined 
are permissible for Edge corporations to conduct in the United States. 
The Board proposed changes to Subpart A governing foreign portfolio 
investments by U.S. banking organizations to expand the interpretation 
of ``incidental'' for such investments to permit U.S. banking 
organizations to hold foreign portfolio investments (maximum of 19.9 
percent of voting and 40 percent of total equity) that derive no more 
than 10 percent of their total consolidated revenue in the United 
States. The commenters proposed that the Board apply the same expanded 
definition of ``incidental'' U.S. activities to permit a QFBO to hold 
up to 100 percent of a foreign company with U.S. activities so long as 
those activities account for no more than 10 percent of the total 
consolidated revenue of the company.\37\ The change to Subpart A, which 
has been adopted, is intended to deal with investments in companies 
over which the U.S. banking organization has no control. The commenters 
are proposing liberalized treatment for investments by foreign banks 
where the foreign bank is in a position to prevent the company from 
entering the United States. There does not appear to be any public 
interest justification for the request and the Board has not adopted 
the commenters' proposal.
---------------------------------------------------------------------------

    \37\ Foreign banking organizations already have greater leeway 
than U.S. banking organizations with respect to their noncontrolling 
investments in foreign companies engaged in U.S. activities that are 
not ``incidental''. The U.S. assets of such foreign companies can 
account for up to 49.9 percent of total consolidated assets, and the 
foreign companies can derive up to 49.9 percent of their 
consolidated revenues from the United States. Accordingly, the 
commenters' proposal would only affect the foreign banking 
organization's ability to make controlling investments in foreign 
companies with U.S. activities.
---------------------------------------------------------------------------

Determining Extent of Non-U.S. operations

    Under Regulation K, a foreign bank may own or control voting shares 
of a foreign company that is engaged in business in the United States, 
subject to a number of restrictions. The first of these restrictions is 
that more than 50 percent of the foreign company's consolidated assets 
must be located, and consolidated revenues derived from, outside the 
United States. One commenter proposed that this assets plus revenues 
test be replaced with a requirement that more than 50 percent of the 
organization's business be outside the United States as measured by two 
out of three indicia: location of assets, derivation of revenues, and 
derivation of net income. There have been very few cases of an 
investment failing to comply with the assets/revenue test as currently 
applied, and the commenter gave no indication that any foreign bank has 
been harmed by it. The Board did not propose such a revision and, in 
the absence of an actual problem, has determined not to adopt it.

Increasing Amount of Equity in Noncontrolling Investments

    One commenter suggested increasing the equity interest limit on 
non-controlling portfolio investments made by QFBOs from 24.9 percent 
of voting stock and total equity to 24.9 percent of voting stock and 40 
percent of total equity to comport with limits applicable to U.S. 
banking organizations. Foreign banking organizations already are able 
to conduct a greater range of activities both in and outside the United 
States than are U.S. banking organizations. The analogy to portfolio 
investments of U.S. banking organizations is not valid; the new 
authority for U.S. organizations in this area is more limited than the 
existing authority for QFBOs. The Board does not consider that the 
additional authority proposed by this commenter for investments by 
foreign banking organizations is warranted.

Exception for Line-of-Business Requirement

    Section 2(h)(2) requires that the U.S. commercial and industrial 
holdings of a foreign banking organization be in the same general line 
of business as the foreign investor company, or in a business related 
to the business conducted outside the United States. Consistent with 
the intent of Congress when it adopted this provision, Regulation K 
uses the Standard Industrial Classification (SIC) system for 
determining the comparability of U.S. and foreign nonbanking 
activities. One

[[Page 54370]]

commenter noted that the provision does not permit any exceptions and 
suggested that the Board establish a procedure to permit a QFBO, when 
SIC establishment categories are not matching, to demonstrate on a 
case-by-case basis that the U.S. activities of a foreign subsidiary are 
nonetheless the same kind of activities, or related to the activities, 
engaged in directly or indirectly by the foreign subsidiary outside the 
United States.
    The Board is not aware of a significant number of cases where U.S. 
and foreign investments of QFBOs have not met the requirements of this 
provision and sees no reason to modify it at this time. However, in 
view of the fact that the SIC classification system is being replaced 
by the North American Industry Classification System, the Board will be 
reviewing the provision and may consider if a procedure to exempt 
investments that do not comply with the relevant classification system 
would be appropriate.
    This same commenter suggested that the Board review its reporting 
requirements to seek ways to address the difficulty of monitoring 
compliance with the requirements of section 211.23(f) of Regulation K 
within a complex, multi-tiered global organization. In the aftermath of 
the Gramm-Leach-Bliley Act, the Board is undertaking a review of 
reporting requirements for foreign banking organizations and is seeking 
to reduce burden where appropriate.

The Conduct of Unregulated Activities Abroad through U.S. Companies

    Pursuant to section 4(c)(9) of the BHC Act, Regulation K currently 
exempts from the BHC Act any activity conducted by a QFBO outside the 
United States. In 1997, the Board noted the growing trend by foreign 
banks to use this exemption to conduct unregulated activities abroad 
through foreign subsidiaries of U.S. companies operating under section 
4(c)(8) of the BHC Act. U.S. bank holding companies, in contrast, are 
not able to conduct unrestricted activities abroad through foreign 
subsidiaries of their section 4(c)(8) companies. Under the BHC Act, a 
U.S. bank holding company may own foreign subsidiaries only under the 
authority of Subpart A of Regulation K which set limits on the 
activities that can be conducted in such subsidiaries. The Board 
requested comment on whether it is consistent with the policy of 
national treatment to permit QFBOs to continue to use the exemption to 
conduct unrestricted activities abroad in foreign subsidiaries of 
companies regulation by the Board under section 4(c)(8).
    The commenters generally favored permitting foreign banks to have 
unrestricted 4(c)(9) foreign subsidiaries of 4(c)(8) companies. A 
number of commenters stated that a foreign banking organization should 
be permitted to organize its non-U.S. activities in the manner that 
best suits its business, and that the home country supervisor and not 
the Federal Reserve is regarded by the market as the supervisor of the 
activities of such foreign companies. None of the commenters expressed 
any views as to whether such practice may provide foreign banks with a 
competitive advantage over U.S. banking organizations in using and 
marketing the name and operations of the regulated U.S. company, but 
they did state that foreign banks could achieve the same benefits by 
establishing a foreign affiliate of the 4(c)(8) company with a similar 
or identical name.
    The Board has determined to take no action at this time to prevent 
the practice from continuing, but reserves the right to review any of 
these situations as the facts warrant and require a change in the 
relationship if the structure in fact results in competitive 
inequality.\38\
---------------------------------------------------------------------------

    \38\ The Board notes that material alterations in nonbanking 
activities carried on by a particular section 4(c)(8) company may 
require notice to the Board. 12 CFR 225.25(c)(3).
---------------------------------------------------------------------------

Implementation of New Interstate Rules

    In addition to application procedures and rules on nonbanking 
activities, Regulation K implements the restrictions on interstate 
operations of foreign banks provided in the IBA and the BHC Act. The 
Interstate Act amended the IBA and the BHC Act to remove geographic 
restrictions on interstate acquisitions of banks by foreign banks, 
permitted foreign banks to branch interstate by merger and de novo on 
the same basis as domestic banks with the same home state as the 
foreign bank, and modified the definition of a foreign bank's home 
state for purposes of interstate branching. The Interstate Act became 
fully effective in June 1997.
    In May 1996, the Board published a final rule to implement certain 
of the changes made by the Interstate Act. The rule required certain 
foreign banks to select a home state for the first time, or have a home 
state designated by the Board, removed obsolete provisions of 
Regulation K that restricted the ability of a foreign bank to effect 
major bank mergers through U.S. subsidiary banks located outside the 
foreign bank's home state, and deleted certain other obsolete rules 
governing home state selection.
    The Board's 1997 proposal sought to implement and interpret certain 
other changes made by the Interstate Act. The proposal would permit 
foreign banks to make additional changes in home state under certain 
circumstances and clarified the extent to which a foreign bank changing 
its home state would be required to conform its existing network of 
bank subsidiaries and banking offices.
    In addition, the proposal set forth the additional standards for 
approval of applications by foreign banks to establish interstate 
branches. It also clarified that the ``upgrade'' of agencies and 
limited branches to full branches required Board approval and that the 
Board would approve such upgrades (absent a merger transaction) only if 
the host state had enacted laws permitting de novo interstate 
branching. Finally, the proposal deleted the Board's home state 
attribution rule, which provides that a foreign bank (or other company) 
and all other foreign banks which it controls must have the same home 
state.
    The commenters were generally supportive of the Board's proposals 
in the interstate area. With the exception of the ``upgrades'' proposal 
which, as described below, has been mooted by subsequent legislation, 
the Board has adopted the changes as proposed.

Changes of Home State

    In 1980, the Board allowed foreign banks a single change of home 
state as a compromise between the need for comparable treatment with 
domestic banks and Congress' intent, in adopting the IBA, that foreign 
banks be allowed some flexibility to change home state. The basic 
framework for interstate banking, however, has changed substantially 
since 1980, when domestic banks generally could not branch interstate 
and rarely, if ever, could change home states. Domestic and foreign 
banks may now branch into other states either de novo or by merger in 
certain circumstances; interstate branching by merger between banks is 
now possible in all but one state (all states will allow interstate 
branching by merger as of year end 2001), and de novo interstate 
branching is permitted in 17 states. As a result, many domestic banks 
with interstate branches now have significant opportunities to change 
home state, although these opportunities are not available to all banks 
under all circumstances.
    In light of these changes, the Board proposed giving foreign banks 
additional opportunities to change home state in a way that affords

[[Page 54371]]

comparable treatment to foreign and domestic banks. The proposal 
retained the ability of foreign banks under current rules to change 
their home state once by filing a notice with the Board. Changes made 
by foreign banks prior to the entry into effect of the final rule would 
count toward this one-time limit. The proposal also established a new 
procedure for foreign banks to change home state an unlimited number of 
times, by applying for the prior approval of the Board for each such 
change. A foreign bank applying to change its home state under the new 
procedure would be required to show that a domestic bank with the same 
home state would be able to make the same change.
    The Board has adopted the change in home state provision as 
proposed. The commenters supported the provision but questioned the 
need for prior Board approval; instead they recommended a 45 day notice 
requirement. The Board has considered whether the issues presented by a 
request for an additional change of home state could be dealt with 
adequately during a 45 day prior notice period. The Board expects such 
changes to be comparatively rare. In addition, each such request 
presents unique facts. For these reasons, the Board has elected to 
retain the prior approval requirement set forth in the proposal. As the 
Board gains experience processing such requests, it may consider 
replacing the prior approval with a prior notice requirement.
    One of the commenters sought assurance that the Board would be 
flexible in interpreting the requirement that a foreign bank seeking to 
make an additional change of home state demonstrate that a domestic 
bank with the same home state would be able to make the same change. 
The Board believes the new procedure advances the policies of national 
treatment and equality of competitive opportunity underlying the IBA by 
allowing foreign banks to take advantage of changes in laws concerning 
interstate branching in order to change home state, when and to the 
extent those laws make it possible for similarly situated domestic 
banks to change home state. Although the Interstate Act made it 
possible for domestic banks to change home state in some cases, there 
are other cases where such a change in home state may be difficult or 
impossible. The new procedure also seeks to prevent foreign banks from 
gaining an unfair competitive advantage over domestic banks. 
Accordingly, the new procedure would allow foreign banks to change home 
state only in cases where a domestic bank could effect a comparable 
change.
    Changes in home state would generally have no impact on which 
Reserve Bank will supervise the operations of a foreign bank nor on 
which Reserve Bank will receive a foreign bank's reports and 
applications.

Conforming U.S. Operations Upon Change in Home State

    Regulation K currently requires a foreign bank that changes its 
home state to conform its banking operations outside the new home state 
to what would have been permissible at the time of the bank's original 
home state selection. The requirement, adopted in 1980, implemented 
section 5 of the IBA which sought to prevent foreign banks from using a 
home state change to acquire and maintain subsidiary banks or branches 
in more than one state in circumstances where a domestic bank or bank 
holding company would be unable to do so.
    The Interstate Act liberalized the rules on interstate branches and 
eliminated the geographic restrictions on the purchases of banks by 
domestic bank holding companies and foreign banks under the BHC Act and 
the IBA. Consequently, the Board proposed that the provisions on 
conforming operations upon a foreign bank's change of home state be 
revised to reflect changes made by the Interstate Act. For example, 
with respect to subsidiary banks, a foreign bank would no longer be 
required to divest a subsidiary bank outside its new home state; the 
Interstate Act authorizes interstate acquisitions of bank subsidiaries.
    With respect to conforming branches outside the foreign bank's new 
home state, the proposal reflected the liberalized interstate branching 
rules applicable to foreign and domestic banks as a result of the 
Interstate Act. A foreign bank changing its home state would be 
permitted to retain all branches which the foreign bank could establish 
(under current law) if it already had its new home state. This 
relaxation is appropriate given that domestic, as well as foreign 
banks, now have significant opportunities to establish and retain 
interstate branches.
    The commenters supported this proposal and the Board adopted it as 
proposed. One commenter was concerned, however, that a rigid 
interpretation of the limitation on retention of existing branch 
operations outside the new home state to only those branches that the 
foreign bank could establish under current law if it already had its 
new home state would severely limit changes of home state by banks with 
established, nongrandfathered operations in the old home state. The 
Board intends to apply the rule consistent with the scope of the 
changes to the interstate rules. The Board also notes that the GLB Act 
provides opportunities for banks to upgrade existing operations outside 
the home state. These opportunities should reduce the need for foreign 
banks to change home states.

Additional Standards for Interstate Offices

    The proposal also contained the additional standards required by 
the Interstate Act for approval by the Board of the establishment by a 
foreign bank of branches located outside of the bank's home state. 
These standards were designed to insure that foreign banks seeking to 
establish interstate branches meet requirements comparable to those 
imposed on domestic banks seeking to operate interstate. The Board 
received no comments on this aspect of the interstate proposal and has 
adopted it as proposed.

Upgrading of Agencies and Limited Branches to Full Branches

    Section 5 of the IBA, as amended by the Interstate Act, generally 
allows a foreign bank to establish full branches outside its home state 
only if a domestic bank with the same home state could establish 
branches in the same host state under the Interstate Act. The GLB Act 
contained a new exception to this general limitation. The new provision 
allows a foreign bank, with the Board's approval, to upgrade an 
existing agency or limited branch outside the bank's home state to a 
full service branch provided the state would permit the upgrade and the 
office has been is existence the minimum amount of time that the state 
requires for the acquisition of an interstate bank.
    In response to inquiries and requests from trade groups, the Board, 
in its 1997 proposal, stated its view that upgrades of existing 
agencies and limited branches outside of a foreign bank's home state 
constituted a ``change in status'' of an office requiring Board 
approval under FBSEA. In addition, the Board stated that such upgrades 
would be approved only in situations where the state in which the 
upgraded office was located permitted de novo branching.
    The Board's proposal elicited responses from three commenters, each 
of which urged liberalization and/or flexibility to some degree. The 
proposal and the comments received have been superseded to a 
significant degree by the GLB Act provision permitting upgrades. The 
new statutory provision confirmed that upgrades require Board approval

[[Page 54372]]

but made such upgrades more widely available than the Board had 
proposed. Upgrades may now be approved provided the state permits the 
upgrade and the office to be upgraded has been in existence in that 
state for the minimum amount of time (no more than 5 years) required 
for the acquisition of an interstate bank. The Board is amending its 
interstate rules to implement the GLB provision. Upgrades, like other 
branch proposals under FBSEA, generally require full applications. 
Prior notice may be available, as provided elsewhere in this final 
rule, if the foreign bank has previously received a CCS determination 
from the Board.

Home State Attribution Rule Deleted

    Regulation K currently provides that a foreign banking organization 
and all its affiliates are entitled to only one home state. This would 
be true even if the foreign banking organization owned several 
different foreign banks with operations in the United States.
    At the time the rule was adopted, domestic banks generally could 
not branch into states other than the ones in which they were located, 
nor could bank holding companies generally acquire banks outside their 
home state. In that context, the Regulation K provision was structured 
to prevent affiliated groups of foreign banks from gaining an unfair 
advantage over domestic banks by having each of the affiliated foreign 
banks select a different home state. Having done so, the foreign banks 
would be able to open and operate branches in more than one state. The 
rule sought to prevent this by stating that a foreign banking 
organization and any foreign bank that it controls would be entitled to 
only one home state.
    The Interstate Act has substantially changed the rules on 
interstate expansion since this provision was originally adopted. Under 
current law, a bank holding company may own many banks in different 
states; each of these banks is entitled to its own home state 
regardless of the home states of its affiliates. Consequently, in 1997 
the Board proposed that Regulation K be amended to eliminate the 
requirement that a foreign bank and all its affiliates are entitled to 
only one home state. The proposal would preserve national treatment for 
foreign banks and would not put U.S. banking organizations at any 
competitive disadvantage. The commenters supported the proposal, and 
the Board has adopted it.

Representative Offices

Definition of Representative Office

    The GLB Act amended the definition of representative office such 
that a subsidiary of a foreign bank may now be considered a 
representative office. The definition of representative office in 
Regulation K has been modified to conform with the change in law. The 
statutory amendment closed a potential ``loophole'' that made it 
possible for foreign banks to set up subsidiaries to engage in 
representative activities, thus avoiding both the FBSEA application 
process and ongoing supervision of such subsidiary as a representative 
office. However, the fact that subsidiaries can now be deemed to be 
representative offices raises new issues.
    The Board is aware of only a few cases in which banks sought to 
make use of this loophole and does not believe that there are 
significant current issues with respect to representative functions 
being conducted out of subsidiaries. It is possible that a foreign bank 
could attempt to evade the IBA's requirements by using a nonbank 
subsidiary; it would be difficult, however, to anticipate and try to 
prohibit all potential schemes. The Board thus is not proposing to 
amend Regulation K to clarify all situations in which a nonbank 
subsidiary or affiliate would be considered a representative office. 
Rather the Board is providing general guidance and seeks views on 
whether more explicit guidance is warranted.
    As a general matter, any subsidiary established for the purpose of 
acting as a representative office clearly would be a representative 
office. Similarly, a subsidiary would be considered to be a 
representative office when it holds itself out to the public as a 
representative of the foreign bank, acting on behalf of the foreign 
bank, even if the subsidiary engages in other nonbank business. In 
addition, an individual or a unit of a subsidiary that acts as a 
representative of a foreign bank from the location of the nonbank 
subsidiary would be treated as a representative office. An important 
limitation on this general approach is that a subsidiary generally 
would not be considered a representative office if it makes customer 
referrals or cross-markets the foreign bank's services in a manner that 
would be permissible for a nonbank affiliate of a U.S. bank.
    The Board is also interested in receiving views on whether a money 
transmitter subsidiary of a foreign bank should be prohibited from also 
engaging in representative functions or employing individuals who act 
as bank representatives. A money transmitter is a nonbank company that 
for a fee will send funds to persons outside the United States. Often, 
the funds are first transmitted to the affiliated foreign bank for the 
benefit of the ultimate recipient. A foreign bank is not entitled to 
use the money transmitter to engage in deposit-taking. If a 
representative office were combined with a money transmitter, it would 
be extremely difficult if not impossible to monitor or enforce 
compliance with this restriction. Customers could also be confused 
about the status of funds given to the money transmitter.

Registration of Existing Incorporated Representative Offices

    There may be some subsidiaries of foreign banks that will fall 
within the definition of ``representative office'' for the first time, 
and these subsidiaries will need to be identified. The Board has 
determined to impose a registration requirement similar to that imposed 
following the enactment of FBSEA, which subjected representative 
offices of foreign banks to Board approval requirements and supervision 
for the first time. All subsidiaries that are acting as representative 
offices will be required to complete a brief informational report. The 
form will be issued separately. Subsidiaries and affiliates of foreign 
banks that have been conducting representative functions on behalf of 
the foreign bank will be ``grandfathered'' and not required to apply to 
``re-establish'' a representative office.\39\
---------------------------------------------------------------------------

    \39\ The grandfathering would be effective as of the date of the 
proposal but only for those affiliates engaged in activities clearly 
permissible to conduct in combination with representative office 
functions. Thus, should the Board determine that representative 
functions may not be conducted in a money transmitter subsidiary, 
such activities would have to be discontinued.
---------------------------------------------------------------------------

Approval of Loans at a Representative Office

    Regulation K currently includes as permissible activities for a 
representative office those in which a ``loan production office'' of a 
state member bank may engage as set forth in a 1978 Board 
interpretation. The portion of the interpretation restricting loan 
approvals at such offices has been superceded, and loan origination 
facilities of state member banks may approve loans in certain 
circumstances. The Board considers that representative offices of 
foreign banks that are subject to the BHC Act, and thus subject to 
supervision in the United States, should be permitted to engage in the 
same activities as such facilities. The Board is

[[Page 54373]]

therefore amending Regulation K to remove the reference to the 
interpretation and clarify that representative offices may make credit 
decisions if (i) the foreign bank also operates one or more branches or 
agencies in the United States, (ii) the loans approved at the 
representative office are made by a U.S. branch or agency of the bank, 
and (iii) the loan proceeds are not disbursed in the representative 
office.

Additional Matters

Temporary Additional Office Location

    From time to time, the Board has received requests from foreign 
banks that desire to have an additional temporary location, usually as 
an interim measure before moving into new office space that can 
accommodate the entire staff of the branch or agency. The earliest 
inquiries were prompted by space constraints at the existing office and 
the need to relocate some employees until renovations could be 
completed at a new larger location. To accommodate such situations, the 
Board proposed a new provision in Regulation K permitting the Board, in 
its discretion, to determine that a well-managed foreign bank would not 
be considered to have established an office if certain conditions were 
met. Since the proposal was made, staff has received additional 
inquiries where the proposed relocation of employees would not fit 
within the provision as proposed. These more recent requests have 
involved mergers or consolidations of bank and nonbank entities within 
a banking group. The Board therefore, has adopted a broadened form of 
the provision to cover these additional types of temporary relocation 
situations. Any foreign bank taking advantage of this authority would 
be required to advise the Board prior to the relocation, make certain 
commitments,\40\ and provide periodic information, as requested. The 
Board generally would not make such determinations if the reason for 
the request is the bank's failure to file on a timely basis a notice or 
application for the additional office, and the bank could not maintain 
the temporary location for more than twelve months.
---------------------------------------------------------------------------

    \40\ As a general rule, the Board would require that there be no 
signs at any temporary location identifying it as an office of the 
bank, and that no client meetings take place at a temporary 
location.
---------------------------------------------------------------------------

Changes to Definition Section

    The revision makes certain technical changes in the definition 
section of Subpart B, including in the definitions of ``appropriate 
Federal Reserve Bank,'' ``change in status,'' ``foreign banking 
organization,'' ``regional administrative office,'' and 
``representative office.''

Conforming Changes To Termination Provisions

    The Board proposed to amend the provisions of Subpart B dealing 
with termination of a U.S. office of a foreign bank to add as a grounds 
for termination a finding that the home country supervisor of a foreign 
bank is not making demonstrable progress in establishing arrangements 
for the comprehensive supervision or regulation of such foreign bank on 
a consolidated basis. This change has been adopted.

Reduction of Reporting Requirements

    The Board proposed reducing the periodicity of reporting of all 
acquisitions of shares in companies engaged in business in the United 
States from quarterly to annually. Since the issuance of the proposal, 
the Board has reconsidered this issue in connection with the 
development and issuance of a new Form FR Y-10F. On this form, foreign 
banking organizations are required to report some of the investments 
covered by the old quarterly report on an event-generated basis. 
Remaining U.S. investments will be reportable only annually in 
connection with the FR Y-7. The final rule reflects the decisions on 
reporting made in connection with the issuance of the FR Y-10F.

Subpart C: Export Trading Companies

    Subpart C of Regulation K sets out the rules governing investments 
and participation in export trading companies (ETCs) by bank holding 
companies and other eligible investors. ETCs are companies in which 
bank holding companies and certain other eligible investors may invest 
for the purpose of promoting U.S. exports.
    Currently, an eligible investor must give the Board 60 days prior 
written notice of an investment of any amount in an ETC. The Board 
proposed adding a general consent provision under which an eligible 
investor that is well-capitalized and well-managed may invest in an ETC 
without prior notice. Such an investor would have to provide certain 
information to the Board in a post-investment notice. The terms well-
capitalized and well-managed, as used for this purpose, would have the 
same meanings as in the Board's Regulation Y.
    The Board further proposed allowing an eligible investor, also 
under general consent authority, to reinvest an amount equal to 
dividends received from the ETC in the prior year and to acquire an ETC 
from an affiliate at net asset value. Other proposed revisions included 
moving all defined terms into a new definitions section; removing an 
obsolete provision relating to the calculation of an ETC's revenues; 
and making certain minor, technical amendments.
    One commenter expressed general support for the Board's proposal. 
The Board is adopting the revisions as proposed.

Delegations of Authority

    The Board proposed additional and modified delegations of authority 
with respect to certain matters arising under Regulation K. Foremost, 
the Board proposed to delegate additional authority to the Director of 
the Division of Banking Supervision and Regulation with respect to 
foreign branching by member banks, general consent investments under 
Subpart A, and the general consent procedures of Subpart C. The Board 
also proposed to delegate to the Director and to the Reserve Banks 
additional authority with respect to prior notice investments and the 
establishment of prior notice U.S. offices by foreign banks. In 
addition, the Board proposed to delete as no longer necessary the 
delegation to the Reserve Banks to approve an application by a foreign 
bank to establish an additional U.S. office or a commercial lending 
company under certain circumstances. These proposals did not elicit 
negative comment, and they are adopted as proposed.
    The Board also is authorizing several additional delegations of 
authority, relating generally to the processing and approval of 
applications under all Subparts of Regulation K; investments in Edge 
and agreement corporation subsidiaries; amendments to Edge corporation 
charters; the establishment of agreement corporations; ``special-
purpose foreign government-owned bank'' determinations under section 
211.24(d)(3); the approval of requests arising under section 4(c)(9) of 
the BHC Act; and FHC elections by foreign banks. The delegations of 
authority and modifications to existing delegations authorized by this 
final rulemaking will be variously codified in Regulation K and the 
Board's Rules Regarding Delegation of Authority (12 CFR part 265).

Regulatory Flexibility Act

    The Board has reviewed the final rule in accordance with the 
Regulatory Flexibility Act. This final rule makes amendments to 
subparts A, B and C of Regulation K based upon a review of the 
regulation consistent with section 303 of

[[Page 54374]]

the Riegle Community Development and Regulatory Improvement Act of 1994 
(the Regulatory Improvement Act) and the International Banking Act of 
1978 (the IBA). The rule streamlines procedures for U.S. and foreign 
banking organizations, implements portions of the Interstate Act, 
EGRPRA and GLB, and authorizes expanded activities for U.S. banking 
organizations abroad. The overall effect of the final rule will be to 
reduce regulatory burden. Pursuant to the Regulatory Flexibility Act, 
the Board hereby certifies that the final rule will not have a 
significant economic impact on a substantial number of small business 
entities.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final rule under 
the authority delegated to the Board by the Office of Management and 
Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, an information collection 
unless the Board displays a currently valid OMB control number. The 
Board's OMB control numbers for the collections revised by this rule 
are 7100-0107 (the International Applications and Prior Notifications 
under Subparts A and C of Regulation K; FR K-1), 7100-0110 (the 
Notification Required Pursuant to Section 211.23(h) of Regulation K on 
Acquisitions by Foreign Banking Organizations; FR 4002), and 7100-0284 
(the International Applications and Prior Notifications under Subpart B 
of Regulation K; FR K-2).
    The collections of information that are revised by this rulemaking 
are found in 12 CFR 211.3, 211.5, 211.7, 211.9 through 211.11, 211.13, 
211.22 through 211.24, and 211.34. These information collections are 
required to evidence compliance with the requirements of Regulation K. 
The respondents are for-profit financial institutions, including small 
businesses.
    No comments specifically addressing the burden estimate were 
received. The current estimated annual burden for the 7100-0107 is 636 
hours. The final rule would result in an estimated 25 percent reduction 
in the number of applications filed. The final rule would permit 
strongly capitalized and well-managed U.S. banking organizations making 
investments pursuant to general consent authority to file an 
abbreviated post-investment notice with the Board. This notice would 
take the place of certain requirements for prior notices or 
applications to the Board before any such investment could be made. The 
current estimated annual burden for the 7100-0284 is 600 hours. It is 
estimated that the final rule would reduce the burden by 10 percent due 
to a decrease in the average number of hours required to complete an 
application. The Board expects to publish a separate notice to revise 
these two applications to comply with the final rule's reporting 
requirements. In the interim, institutions may submit any new 
information requested in this rule in a letter format. The current 
estimated annual burden for the 7100-0110 is 80 hours. The final rule 
eliminates the need for this separate information collection. Similar 
information is collected on the Annual Report of Foreign Banking 
Organizations (FR Y-7; OMB No. 7100-0125) and the Report of Changes in 
FBO Organizational Structure (FR Y-10F; OMB No. 7100-0297). The Board 
estimates there would be no cost burden in addition to the annual hour 
burden.
    For the 7100-0107 and the 7100-0284, the applying organization has 
the opportunity to request confidentiality for information that it 
believes will qualify for an FOIA exemption.
    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 (7100-0107 or 7100-
0284), Washington, DC 20503.

List of Subjects

12 CFR Part 211

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

12 CFR Part 265

    Authority delegations (Government agencies), Banks, banking, 
Federal Reserve System.


    For the reasons set out in the preamble, the Board of Governors 
amends 12 CFR parts 211 and 265 as set forth below:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

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

    Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 
3101 et seq., 3109 et seq.


    2. Subparts A, B, and C (consisting of Secs. 211.1 through 211.34) 
are revised to read as follows:

Subpart A--International Operations of U.S. Banking Organizations

Sec.
211.1  Authority, purpose, and scope.
211.2  Definitions.
211.3  Foreign branches of U.S. banking organizations.
211.4  Permissible investments and activities of foreign branches of 
member banks.
211.5  Edge and agreement corporations.
211.6  Permissible activities of Edge and agreement corporations in 
the United States.
211.7  Voluntary liquidation of Edge and agreement corporations.
211.8  Investments and activities abroad.
211.9  Investment procedures.
211.10  Permissible activities abroad.
211.11  Advisory opinions under Regulation K.
211.12  Lending limits and capital requirements.
211.13  Supervision and reporting.

Subpart B--Foreign Banking Organizations

211.20  Authority, purpose, and scope.
211.21  Definitions.
211.22  Interstate banking operations of foreign banking 
organizations.
211.23  Nonbanking activities of foreign banking organizations.
211.24  Approval of offices of foreign banks; procedures for 
applications; standards for approval; representative office 
activities and standards for approval; preservation of existing 
authority.
211.25  Termination of offices of foreign banks.
211.26  Examination of offices and affiliates of foreign banks.
211.27  Disclosure of supervisory information to foreign 
supervisors.
211.28  Provisions applicable to branches and agencies: limitation 
on loans to one borrower.
211.29  Applications by state branches and state agencies to conduct 
activities not permissible for federal branches.
211.30  Criteria for evaluating U.S. operations of foreign banks not 
subject to consolidated supervision.

Subpart C--Export Trading Companies

211.31  Authority, purpose, and scope.
211.32  Definitions.
211.33  Investments and extensions of credit.
211.34  Procedures for filing and processing notices.

[[Page 54375]]

Subpart A--International Operations of U.S. Banking Organizations


Sec. 211.1  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Federal 
Reserve Act (FRA) (12 U.S.C. 221 et seq.); the Bank Holding Company Act 
of 1956 (BHC Act) (12 U.S.C. 1841 et seq.); and the International 
Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
    (b) Purpose. This subpart sets out rules governing the 
international and foreign activities of U.S. banking organizations, 
including procedures for establishing foreign branches and Edge and 
agreement corporations to engage in international banking, and for 
investments in foreign organizations.
    (c) Scope. This subpart applies to:
    (1) Member banks with respect to their foreign branches and 
investments in foreign banks under section 25 of the FRA (12 U.S.C. 
601-604a);\1\ and
---------------------------------------------------------------------------

    \1\ Section 25 of the FRA (12 U.S.C. 601-604a), which refers to 
national banking associations, also applies to state member banks of 
the Federal Reserve System by virtue of section 9 of the FRA (12 
U.S.C. 321)
---------------------------------------------------------------------------

    (2) Corporations organized under section 25A of the FRA (12 U.S.C. 
611-631) (Edge corporations);
    (3) Corporations having an agreement or undertaking with the Board 
under section 25 of the FRA (12 U.S.C. 601-604a) (agreement 
corporations); and
    (4) Bank holding companies with respect to the exemption from the 
nonbanking prohibitions of the BHC Act afforded by section 4(c)(13) of 
that act (12 U.S.C. 1843(c)(13)).


Sec. 211.2  Definitions.

    Unless otherwise specified, for purposes of this subpart:
    (a) An affiliate of an organization means:
    (1) Any entity of which the organization is a direct or indirect 
subsidiary; or
    (2) Any direct or indirect subsidiary of the organization or such 
entity.
    (b) Capital Adequacy Guidelines means the ``Capital Adequacy 
Guidelines for State Member Banks: Risk-Based Measure'' (12 CFR part 
208, app. A) or the ``Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure'' (12 CFR part 225, app. A).
    (c) Capital and surplus means, unless otherwise provided in this 
part:
    (1) For organizations subject to the Capital Adequacy Guidelines:
    (i) Tier 1 and tier 2 capital included in an organization's risk-
based capital (under the Capital Adequacy Guidelines); and
    (ii) The balance of allowance for loan and lease losses not 
included in an organization's tier 2 capital for calculation of risk-
based capital, based on the organization's most recent consolidated 
Report of Condition and Income.
    (2) For all other organizations, paid-in and unimpaired capital and 
surplus, and includes undivided profits but does not include the 
proceeds of capital notes or debentures.
    (d) Directly or indirectly, when used in reference to activities or 
investments of an organization, means activities or investments of the 
organization or of any subsidiary of the organization.
    (e) Eligible country means any country:
    (1) For which an allocated transfer risk reserve is required 
pursuant to Sec. 211.43 of this part and that has restructured its 
sovereign debt held by foreign creditors; and
    (2) Any other country that the Board deems to be eligible.
    (f) An Edge corporation is engaged in banking if it is ordinarily 
engaged in the business of accepting deposits in the United States from 
nonaffiliated persons.
    (g) Engaged in business or engaged in activities in the United 
States means maintaining and operating an office (other than a 
representative office) or subsidiary in the United States.
    (h) Equity means an ownership interest in an organization, whether 
through:
    (1) Voting or nonvoting shares;
    (2) General or limited partnership interests;
    (3) Any other form of interest conferring ownership rights, 
including warrants, debt, or any other interests that are convertible 
into shares or other ownership rights in the organization; or
    (4) Loans that provide rights to participate in the profits of an 
organization, unless the investor receives a determination that such 
loans should not be considered equity in the circumstances of the 
particular investment.
    (i) Foreign or foreign country refers to one or more foreign 
nations, and includes the overseas territories, dependencies, and 
insular possessions of those nations and of the United States, and the 
Commonwealth of Puerto Rico.
    (j) Foreign bank means an organization that:
    (1) Is organized under the laws of a foreign country;
    (2) Engages in the business of banking;
    (3) Is recognized as a bank by the bank supervisory or monetary 
authority of the country of its organization or principal banking 
operations;
    (4) Receives deposits to a substantial extent in the regular course 
of its business; and
    (5) Has the power to accept demand deposits.
    (k) Foreign branch means an office of an organization (other than a 
representative office) that is located outside the country in which the 
organization is legally established and at which a banking or financing 
business is conducted.
    (l) Foreign person means an office or establishment located outside 
the United States, or an individual residing outside the United States.
    (m) Investment means:
    (1) The ownership or control of equity;
    (2) Binding commitments to acquire equity;
    (3) Contributions to the capital and surplus of an organization; or
    (4) The holding of an organization's subordinated debt when the 
investor and the investor's affiliates hold more than 5 percent of the 
equity of the organization.
    (n) Investment grade means a security that is rated in one of the 
four highest rating categories by:
    (1) Two or more NRSROs; or
    (2) One NRSRO if the security has been rated by only one NRSRO.
    (o) Investor means an Edge corporation, agreement corporation, bank 
holding company, or member bank.
    (p) Joint venture means an organization that has 20 percent or more 
of its voting shares held directly or indirectly by the investor or by 
an affiliate of the investor under any authority, but which is not a 
subsidiary of the investor or of an affiliate of the investor.
    (q) Loans and extensions of credit means all direct and indirect 
advances of funds to a person made on the basis of any obligation of 
that person to repay the funds.
    (r) NRSRO means a nationally recognized statistical rating 
organization as designated by the Securities and Exchange Commission.
    (s) Organization means a corporation, government, partnership, 
association, or any other entity.
    (t) Person means an individual or an organization.
    (u) Portfolio investment means an investment in an organization 
other than a subsidiary or joint venture.
    (v) Representative office means an office that:
    (1) Engages solely in representational and administrative functions 
(such as

[[Page 54376]]

soliciting new business or acting as liaison between the organization's 
head office and customers in the United States); and
    (2) Does not have authority to make any business decision (other 
than decisions relating to its premises or personnel) for the account 
of the organization it represents, including contracting for any 
deposit or deposit-like liability on behalf of the organization.
    (w) Subsidiary means an organization that has more than 50 percent 
of its voting shares held directly or indirectly, or that otherwise is 
controlled or capable of being controlled, by the investor or an 
affiliate of the investor under any authority. Among other 
circumstances, an investor is considered to control an organization if:
    (1) The investor or an affiliate is a general partner of the 
organization; or
    (2) The investor and its affiliates directly or indirectly own or 
control more than 50 percent of the equity of the organization.
    (x) Tier 1 capital has the same meaning as provided under the 
Capital Adequacy Guidelines.
    (y) Well capitalized means:
    (1) In relation to a parent member or insured bank, that the 
standards set out in Sec. 208.43(b)(1) of Regulation H (12 CFR 
208.43(b)(1)) are satisfied;
    (2) In relation to a bank holding company, that the standards set 
out in Sec. 225.2(r)(1) of Regulation Y (12 CFR 225.2(r)(1)) are 
satisfied; and
    (3) In relation to an Edge or agreement corporation, that it has 
tier 1 and total risk-based capital ratios of 6.0 and 10.0 percent, 
respectively, or greater.
    (z) Well managed means that the Edge or agreement corporation, any 
parent insured bank, and the bank holding company received a composite 
rating of 1 or 2, and at least a satisfactory rating for management if 
such a rating is given, at their most recent examination or review.


Sec. 211.3  Foreign branches of U.S. banking organizations.

    (a) General--(1) Definition of banking organization. For purposes 
of this section, a banking organization is defined as a member bank and 
its affiliates.
    (2) A banking organization is considered to be operating a branch 
in a foreign country if it has an affiliate that is a member bank, Edge 
or agreement corporation, or foreign bank that operates an office 
(other than a representative office) in that country.
    (3) For purposes of this subpart, a foreign office of an operating 
subsidiary of a member bank shall be treated as a foreign branch of the 
member bank and may engage only in activities permissible for a branch 
of a member bank.
    (4) At any time upon notice, the Board may modify or suspend 
branching authority conferred by this section with respect to any 
banking organization.
    (b) (1) Establishment of foreign branches. (i) Foreign branches may 
be established by any member bank having capital and surplus of 
$1,000,000 or more, an Edge corporation, an agreement corporation, any 
subsidiary the shares of which are held directly by the member bank, or 
any other subsidiary held pursuant to this subpart.
    (ii) The Board grants its general consent under section 25 of the 
FRA (12 U.S.C. 601-604a) for a member bank to establish a branch in the 
Commonwealth of Puerto Rico and the overseas territories, dependencies, 
and insular possessions of the United States.
    (2) Prior notice. Unless otherwise provided in this section, the 
establishment of a foreign branch requires 30 days' prior written 
notice to the Board.
    (3) Branching into additional foreign countries. After giving the 
Board 12 business days prior written notice, a banking organization 
that operates branches in two or more foreign countries may establish a 
branch in an additional foreign country.
    (4) Additional branches within a foreign country. No prior notice 
is required to establish additional branches in any foreign country 
where the banking organization operates one or more branches.
    (5) Branching by nonbanking affiliates. No prior notice is required 
for a nonbanking affiliate of a banking organization (i.e., an 
organization that is not a member bank, an Edge or agreement 
corporation, or foreign bank) to establish branches within a foreign 
country or in additional foreign countries.
    (6) Expiration of branching authority. Authority to establish 
branches, when granted following prior written notice to the Board, 
shall expire one year from the earliest date on which the authority 
could have been exercised, unless extended by the Board.
    (c) Reporting. Any banking organization that opens, closes, or 
relocates a branch shall report such change in a manner prescribed by 
the Board.
    (d) Reserves of foreign branches of member banks. Member banks 
shall maintain reserves against foreign branch deposits when required 
by Regulation D (12 CFR part 204).
    (e) Conditional approval; access to information. The Board may 
impose such conditions on authority granted by it under this section as 
it deems necessary, and may require termination of any activities 
conducted under authority of this section if a member bank is unable to 
provide information on its activities or those of its affiliates that 
the Board deems necessary to determine and enforce compliance with U.S. 
banking laws.


Sec. 211.4  Permissible activities and investments of foreign branches 
of member banks.

    (a) Permissible activities and investments. In addition to its 
general banking powers, and to the extent consistent with its charter, 
a foreign branch of a member bank may engage in the following 
activities and make the following investments, so far as is usual in 
connection with the business of banking in the country where it 
transacts business:
    (1) Guarantees. Guarantee debts, or otherwise agree to make 
payments on the occurrence of readily ascertainable events (including, 
but not limited to, nonpayment of taxes, rentals, customs duties, or 
costs of transport, and loss or nonconformance of shipping documents) 
if the guarantee or agreement specifies a maximum monetary liability; 
however, except to the extent that the member bank is fully secured, it 
may not have liabilities outstanding for any person on account of such 
guarantees or agreements which, when aggregated with other unsecured 
obligations of the same person, exceed the limit contained in section 
5200(a)(1) of the Revised Statutes (12 U.S.C. 84) for loans and 
extensions of credit;
    (2) Government obligations. (i) Underwrite, distribute, buy, sell, 
and hold obligations of:
    (A) The national government of the country where the branch is 
located and any political subdivision of that country;
    (B) An agency or instrumentality of the national government of the 
country where the branch is located where such obligations are 
supported by the taxing authority, guarantee, or full faith and credit 
of that government;
    (C) The national government or political subdivision of any 
country, where such obligations are rated investment grade; and
    (D) An agency or instrumentality of any national government where 
such obligations are rated investment grade and are supported by the 
taxing authority, guarantee or full faith and credit of that 
government.

[[Page 54377]]

    (ii) No member bank, under authority of this paragraph (a)(2), may 
hold, or be under commitment with respect to, such obligations for its 
own account in relation to any one country in an amount exceeding the 
greater of:
    (A) 10 percent of its tier 1 capital; or
    (B) 10 percent of the total deposits of the bank's branches in that 
country on the preceding year-end call report date (or the date of 
acquisition of the branch, in the case of a branch that has not been so 
reported);
    (3) Other investments. (i) Invest in:
    (A) The securities of the central bank, clearinghouses, 
governmental entities other than those authorized under paragraph 
(a)(2) of this section, and government-sponsored development banks of 
the country where the foreign branch is located;
    (B) Other debt securities eligible to meet local reserve or similar 
requirements; and
    (C) Shares of automated electronic-payments networks, professional 
societies, schools, and the like necessary to the business of the 
branch;
    (ii) The total investments of a bank's branches in a country under 
this paragraph (a)(3) (exclusive of securities held as required by the 
law of that country or as authorized under section 5136 of the Revised 
Statutes (12 U.S.C. 24, Seventh)) may not exceed 1 percent of the total 
deposits of the bank's branches in that country on the preceding year-
end call report date (or on the date of acquisition of the branch, in 
the case of a branch that has not been so reported);
    (4) Real estate loans. Take liens or other encumbrances on foreign 
real estate in connection with its extensions of credit, whether or not 
of first priority and whether or not the real estate has been improved;
    (5) Insurance. Act as insurance agent or broker;
    (6) Employee benefits program. Pay to an employee of the branch, as 
part of an employee benefits program, a greater rate of interest than 
that paid to other depositors of the branch;
    (7) Repurchase agreements. Engage in repurchase agreements 
involving securities and commodities that are the functional 
equivalents of extensions of credit;
    (8) Investment in subsidiaries. With the Board's prior approval, 
acquire all of the shares of a company (except where local law requires 
other investors to hold directors' qualifying shares or similar types 
of instruments) that engages solely in activities:
    (i) In which the member bank is permitted to engage; or
    (ii) That are incidental to the activities of the foreign branch.
    (b) Other activities. With the Board's prior approval, engage in 
other activities that the Board determines are usual in connection with 
the transaction of the business of banking in the places where the 
member bank's branches transact business.


Sec. 211.5  Edge and agreement corporations.

    (a) Board Authority. The Board shall have the authority to approve:
    (1) The establishment of Edge corporations;
    (2) Investments in agreement corporations; and
    (3) A member bank's proposal to invest more than 10 percent of its 
capital and surplus in the aggregate amount of stock held in all Edge 
and agreement corporations.
    (b) Organization of an Edge corporation--(1) Permit. A proposed 
Edge corporation shall become a body corporate when the Board issues a 
permit approving its proposed name, articles of association, and 
organization certificate.
    (2) Name. The name of the Edge corporation shall include 
international, foreign, overseas, or a similar word, but may not 
resemble the name of another organization to an extent that might 
mislead or deceive the public.
    (3) Federal Register notice. The Board shall publish in the Federal 
Register notice of any proposal to organize an Edge corporation and 
shall give interested persons an opportunity to express their views on 
the proposal.
    (4) Factors considered by Board. The factors considered by the 
Board in acting on a proposal to organize an Edge corporation include:
    (i) The financial condition and history of the applicant;
    (ii) The general character of its management;
    (iii) The convenience and needs of the community to be served with 
respect to international banking and financing services; and
    (iv) The effects of the proposal on competition.
    (5) Authority to commence business. After the Board issues a 
permit, the Edge corporation may elect officers and otherwise complete 
its organization, invest in obligations of the U.S. government, and 
maintain deposits with depository institutions, but it may not exercise 
any other powers until at least 25 percent of the authorized capital 
stock specified in the articles of association has been paid in cash, 
and each shareholder has paid in cash at least 25 percent of that 
shareholder's stock subscription.
    (6) Expiration of unexercised authority. Unexercised authority to 
commence business as an Edge corporation shall expire one year after 
issuance of the permit, unless the Board extends the period.
    (c) Other provisions regarding Edge corporations--(1) Amendments to 
articles of association. No amendment to the articles of association 
shall become effective until approved by the Board.
    (2) Shareholders' meeting. An Edge corporation shall provide in its 
bylaws that:
    (i) A shareholders' meeting shall be convened at the request of the 
Board within five business days after the Board gives notice of the 
request to the Edge corporation;
    (ii) Any shareholder or group of shareholders that owns or controls 
25 percent or more of the shares of the Edge corporation shall attend 
such a meeting in person or by proxy; and
    (iii) Failure by a shareholder or authorized representative to 
attend such meeting in person or by proxy may result in removal or 
barring of the shareholder or representative from further participation 
in the management or affairs of the Edge corporation.
    (3) Nature and ownership of shares--(i) Shares. Shares of stock in 
an Edge corporation may not include no-par-value shares and shall be 
issued and transferred only on its books and in compliance with section 
25A of the FRA (12 U.S.C. 611 et seq.) and this subpart.
    (ii) Contents of share certificates. The share certificates of an 
Edge corporation shall:
    (A) Name and describe each class of shares, indicating its 
character and any unusual attributes, such as preferred status or lack 
of voting rights; and
    (B) Conspicuously set forth the substance of:
    (1) Any limitations on the rights of ownership and transfer of 
shares imposed by section 25A of the FRA (12 U.S.C. 611 et seq.); and
    (2) Any rules that the Edge corporation prescribes in its bylaws to 
ensure compliance with this paragraph (c).
    (4) Change in status of shareholder. Any change in status of a 
shareholder that causes a violation of section 25A of the FRA (12 
U.S.C. 611 et seq.) shall be reported to the Board as soon as possible, 
and the Edge corporation shall take such action as the Board may 
direct.
    (d) Ownership of Edge corporations by foreign institutions--(1) 
Prior Board approval. One or more foreign or foreign-controlled 
domestic institutions referred to in section 25A(11) of the

[[Page 54378]]

FRA (12 U.S.C. 619) may apply for the Board's prior approval to 
acquire, directly or indirectly, a majority of the shares of the 
capital stock of an Edge corporation.
    (2) Conditions and requirements. Such an institution shall:
    (i) Provide the Board with information related to its financial 
condition and activities and such other information as the Board may 
require;
    (ii) Ensure that any transaction by an Edge corporation with an 
affiliate\2\ is on substantially the same terms, including interest 
rates and collateral, as those prevailing at the same time for 
comparable transactions by the Edge corporation with nonaffiliated 
persons, and does not involve more than the normal risk of repayment or 
present other unfavorable features;
---------------------------------------------------------------------------

    \2\ For purposes of this paragraph (d)(2), affiliate means any 
organization that would be an affiliate under section 23A of the FRA 
(12 U.S.C. 371c) if the Edge corporation were a member bank.
---------------------------------------------------------------------------

    (iii) Ensure that the Edge corporation will not provide funding on 
a continual or substantial basis to any affiliate or office of the 
foreign institution through transactions that would be inconsistent 
with the international and foreign business purposes for which Edge 
corporations are organized; and
    (iv) Comply with the limitation on aggregate investments in all 
Edge and agreement corporations set forth in paragraph (h) of this 
section.
    (3) Foreign institutions not subject to the BHC Act. In the case of 
a foreign institution not subject to section 4 of the BHC Act (12 
U.S.C. 1843), that institution shall:
    (i) Comply with any conditions that the Board may impose that are 
necessary to prevent undue concentration of resources, decreased or 
unfair competition, conflicts of interest, or unsound banking practices 
in the United States; and
    (ii) Give the Board 30 days' prior written notice before engaging 
in any nonbanking activity in the United States, or making any initial 
or additional investments in another organization, that would require 
prior Board approval or notice by an organization subject to section 4 
of the BHC Act (12 U.S.C. 1843); in connection with such notice, the 
Board may impose conditions necessary to prevent adverse effects that 
may result from such activity or investment.
    (e) Change in control of an Edge corporation--(1) Prior notice. (i) 
Any person shall give the Board 60 days' prior written notice before 
acquiring, directly or indirectly, 25 percent or more of the voting 
shares, or otherwise acquiring control, of an Edge corporation.
    (ii) The Board may extend the 60-day period for an additional 30 
days by notifying the acquiring party.
    (iii) A notice under this paragraph (e) need not be filed where a 
change in control is effected through a transaction requiring the 
Board's approval under section 3 of the BHC Act (12 U.S.C. 1842).
    (2) Board review. In reviewing a notice filed under this paragraph 
(e), the Board shall consider the factors set forth in paragraph (b)(4) 
of this section, and may disapprove a notice or impose any conditions 
that it finds necessary to assure the safe and sound operation of the 
Edge corporation, to assure the international character of its 
operation, and to prevent adverse effects, such as decreased or unfair 
competition, conflicts of interest, or undue concentration of 
resources.
    (f) Domestic branching by Edge corporations--(1) Prior notice. (i) 
An Edge corporation may establish branches in the United States 30 days 
after the Edge corporation has given written notice of its intention to 
do so to its Reserve Bank, unless the Edge corporation is notified to 
the contrary within that time.
    (ii) The notice to the Reserve Bank shall include a copy of the 
notice of the proposal published in a newspaper of general circulation 
in the communities to be served by the branch.
    (iii) The newspaper notice may appear no earlier than 90 calendar 
days prior to submission of notice of the proposal to the Reserve Bank. 
The newspaper notice shall provide an opportunity for the public to 
give written comment on the proposal to the appropriate Federal Reserve 
Bank for at least 30 days after the date of publication.
    (2) Factors considered. The factors considered in acting upon a 
proposal to establish a branch are enumerated in paragraph (b)(4) of 
this section.
    (3) Expiration of authority. Authority to establish a branch under 
prior notice shall expire one year from the earliest date on which that 
authority could have been exercised, unless the Board extends the 
period.
    (g) Agreement corporations--(1) General. With the prior approval of 
the Board, a member bank or bank holding company may invest in a 
federally or state-chartered corporation that has entered into an 
agreement or undertaking with the Board that it will not exercise any 
power that is impermissible for an Edge corporation under this subpart.
    (2) Factors considered by Board. The factors considered in acting 
upon a proposal to establish an agreement corporation are enumerated in 
paragraph (b)(4) of this section.
    (h) (1) Limitation on investment in Edge and agreement 
corporations. A member bank may invest up to 10 percent of its capital 
and surplus in the capital stock of Edge and agreement corporations or, 
with the prior approval of the Board, up to 20 percent of its capital 
and surplus in such stock.
    (2) Factors considered by Board. The factors considered by the 
Board in acting on a proposal under paragraph (h)(1) of this section 
shall include:
    (i) The composition of the assets of the bank's Edge and agreement 
corporations;
    (ii) The total capital invested by the bank in its Edge and 
agreement corporations when combined with retained earnings of the Edge 
and agreement corporations (including retained earnings of any foreign 
bank subsidiaries) as a percentage of the bank's capital;
    (iii) Whether the bank, bank holding company, and Edge and 
agreement corporations are well-capitalized and well-managed;
    (iv) Whether the bank is adequately capitalized after 
deconsolidating and deducting the aggregate investment in and assets of 
all Edge or agreement corporations and all foreign bank subsidiaries; 
and
    (v) Any other factor the Board deems relevant to the safety and 
soundness of the member bank.
    (i) Reserve requirements and interest rate limitations. The 
deposits of an Edge or agreement corporation are subject to Regulations 
D and Q (12 CFR parts 204 and 217) in the same manner and to the same 
extent as if the Edge or agreement corporation were a member bank.
    (j) Liquid funds. Funds of an Edge or agreement corporation that 
are not currently employed in its international or foreign business, if 
held or invested in the United States, shall be in the form of:
    (1) Cash;
    (2) Deposits with depository institutions, as described in 
Regulation D (12 CFR part 204), and other Edge and agreement 
corporations;
    (3) Money-market instruments (including repurchase agreements with 
respect to such instruments), such as bankers' acceptances, federal 
funds sold, and commercial paper; and
    (4) Short- or long-term obligations of, or fully guaranteed by, 
federal, state, and local governments and their instrumentalities.

[[Page 54379]]

    (k) Reports by Edge and agreement corporations of crimes and 
suspected crimes. An Edge or agreement corporation, or any branch or 
subsidiary thereof, shall file a suspicious-activity report in 
accordance with the provisions of Sec. 208.62 of Regulation H (12 CFR 
208.62).


Sec. 211.6  Permissible activities of Edge and agreement corporations 
in the United States.

    (a) Activities incidental to international or foreign business. An 
Edge or agreement corporation may engage, directly or indirectly, in 
activities in the United States that are permitted by section 25A(6) of 
the FRA (12 U.S.C. 615) and are incidental to international or foreign 
business, and in such other activities as the Board determines are 
incidental to international or foreign business. The following 
activities will ordinarily be considered incidental to an Edge or 
agreement corporation's international or foreign business:
    (1) Deposit-taking activities--(i) Deposits from foreign 
governments and foreign persons. An Edge or agreement corporation may 
receive in the United States transaction accounts, savings, and time 
deposits (including issuing negotiable certificates of deposits) from 
foreign governments and their agencies and instrumentalities, and from 
foreign persons.
    (ii) Deposits from other persons. An Edge or agreement corporation 
may receive from any other person in the United States transaction 
accounts, savings, and time deposits (including issuing negotiable 
certificates of deposit) if such deposits:
    (A) Are to be transmitted abroad;
    (B) Consist of funds to be used for payment of obligations to the 
Edge or agreement corporation or collateral securing such obligations;
    (C) Consist of the proceeds of collections abroad that are to be 
used to pay for exported or imported goods or for other costs of 
exporting or importing or that are to be periodically transferred to 
the depositor's account at another financial institution;
    (D) Consist of the proceeds of extensions of credit by the Edge or 
agreement corporation;
    (E) Represent compensation to the Edge or agreement corporation for 
extensions of credit or services to the customer;
    (F) Are received from Edge or agreement corporations, foreign 
banks, and other depository institutions (as described in Regulation D 
(12 CFR part 204)); or
    (G) Are received from an organization that by its charter, license, 
or enabling law is limited to business that is of an international 
character, including foreign sales corporations, as defined in 26 
U.S.C. 922; transportation organizations engaged exclusively in the 
international transportation of passengers or in the movement of goods, 
wares, commodities, or merchandise in international or foreign 
commerce; and export trading companies established under subpart C of 
this part.
    (2) Borrowings. An Edge or agreement corporation may:
    (i) Borrow from offices of other Edge and agreement corporations, 
foreign banks, and depository institutions (as described in Regulation 
D (12 CFR part 204));
    (ii) Issue obligations to the United States or any of its agencies 
or instrumentalities;
    (iii) Incur indebtedness from a transfer of direct obligations of, 
or obligations that are fully guaranteed as to principal and interest 
by, the United States or any agency or instrumentality thereof that the 
Edge or agreement corporation is obligated to repurchase; and
    (iv) Issue long-term subordinated debt that does not qualify as a 
deposit under Regulation D (12 CFR part 204).
    (3) Credit activities. An Edge or agreement corporation may:
    (i) Finance the following:
    (A) Contracts, projects, or activities performed substantially 
abroad;
    (B) The importation into or exportation from the United States of 
goods, whether direct or through brokers or other intermediaries;
    (C) The domestic shipment or temporary storage of goods being 
imported or exported (or accumulated for export); and
    (D) The assembly or repackaging of goods imported or to be 
exported;
    (ii) Finance the costs of production of goods and services for 
which export orders have been received or which are identifiable as 
being directly for export;
    (iii) Assume or acquire participations in extensions of credit, or 
acquire obligations arising from transactions the Edge or agreement 
corporation could have financed, including acquisition of obligations 
of foreign governments;
    (iv) Guarantee debts, or otherwise agree to make payments on the 
occurrence of readily ascertainable events (including, but not limited 
to, nonpayment of taxes, rentals, customs duties, or cost of transport, 
and loss or nonconformance of shipping documents), so long as the 
guarantee or agreement specifies the maximum monetary liability 
thereunder and is related to a type of transaction described in 
paragraphs (a)(3)(i) and (ii) of this section; and
    (v) Provide credit and other banking services for domestic and 
foreign purposes to foreign governments and their agencies and 
instrumentalities, foreign persons, and organizations of the type 
described in paragraph (a)(1)(ii)(G) of this section.
    (4) Payments and collections. An Edge or agreement corporation may 
receive checks, bills, drafts, acceptances, notes, bonds, coupons, and 
other instruments for collection abroad, and collect such instruments 
in the United States for a customer abroad; and may transmit and 
receive wire transfers of funds and securities for depositors.
    (5) Foreign exchange. An Edge or agreement corporation may engage 
in foreign exchange activities.
    (6) Fiduciary and investment advisory activities. An Edge or 
agreement corporation may:
    (i) Hold securities in safekeeping for, or buy and sell securities 
upon the order and for the account and risk of, a person, provided such 
services for U.S. persons are with respect to foreign securities only;
    (ii) Act as paying agent for securities issued by foreign 
governments or other entities organized under foreign law;
    (iii) Act as trustee, registrar, conversion agent, or paying agent 
with respect to any class of securities issued to finance foreign 
activities and distributed solely outside the United States;
    (iv) Make private placements of participations in its investments 
and extensions of credit; however, except to the extent permissible for 
member banks under section 5136 of the Revised Statutes (12 U.S.C. 
24(Seventh)), no Edge or agreement corporation otherwise may engage in 
the business of underwriting, distributing, or buying or selling 
securities in the United States;
    (v) Act as investment or financial adviser by providing portfolio 
investment advice and portfolio management with respect to securities, 
other financial instruments, real-property interests, and other 
investment assets,\3\ and by providing advice on mergers and 
acquisitions, provided such services for U.S. persons are with respect 
to foreign assets only; and
---------------------------------------------------------------------------

    \1\ For purposes of this section, management of an investment 
portfolio does not include operational management of real property, 
or industrial or commercial assets.
---------------------------------------------------------------------------

    (vi) Provide general economic information and advice, general 
economic statistical forecasting services, and industry studies, 
provided such

[[Page 54380]]

services for U.S. persons shall be with respect to foreign economies 
and industries only.
    (7) Banking services for employees. Provide banking services, 
including deposit services, to the officers and employees of the Edge 
or agreement corporation and its affiliates; however, extensions of 
credit to such persons shall be subject to the restrictions of 
Regulation O (12 CFR part 215) as if the Edge or agreement corporation 
were a member bank.
    (b) Other activities. With the Board's prior approval, an Edge or 
agreement corporation may engage, directly or indirectly, in other 
activities in the United States that the Board determines are 
incidental to their international or foreign business.


Sec. 211.7  Voluntary liquidation of Edge and agreement corporations.

    (a) Prior notice. An Edge or agreement corporation desiring 
voluntarily to discontinue normal business and dissolve, shall provide 
the Board with 45 days' prior written notice of its intent to do so.
    (b) Waiver of notice period. The Board may waive the 45-day period 
if it finds that immediate action is required by the circumstances 
presented.


Sec. 211.8  Investments and activities abroad.

    (a) General policy. Activities abroad, whether conducted directly 
or indirectly, shall be confined to activities of a banking or 
financial nature and those that are necessary to carry on such 
activities. In doing so, investors \4\ shall at all times act in 
accordance with high standards of banking or financial prudence, having 
due regard for diversification of risks, suitable liquidity, and 
adequacy of capital. Subject to these considerations and the other 
provisions of this section, it is the Board's policy to allow 
activities abroad to be organized and operated as best meets corporate 
policies.
---------------------------------------------------------------------------

    \4\ For purposes of this section and Secs. 211.9 and 211.10 of 
this part, a direct subsidiary of a member bank is deemed to be an 
investor.
---------------------------------------------------------------------------

    (b) Direct investments by member banks. A member bank's direct 
investments under section 25 of the FRA (12 U.S.C. 601 et seq.) shall 
be limited to:
    (1) Foreign banks;
    (2) Domestic or foreign organizations formed for the sole purpose 
of holding shares of a foreign bank;
    (3) Foreign organizations formed for the sole purpose of performing 
nominee, fiduciary, or other banking services incidental to the 
activities of a foreign branch or foreign bank affiliate of the member 
bank; and
    (4) Subsidiaries established pursuant to Sec. 211.4(a)(8) of this 
part.
    (c) Eligible investments. Subject to the limitations set out in 
paragraphs (b) and (d) of this section, an investor may, directly or 
indirectly:
    (1) Investment in subsidiary. Invest in a subsidiary that engages 
solely in activities listed in Sec. 211.10 of this part, or in such 
other activities as the Board has determined in the circumstances of a 
particular case are permissible; provided that, in the case of an 
acquisition of a going concern, existing activities that are not 
otherwise permissible for a subsidiary may account for not more than 5 
percent of either the consolidated assets or consolidated revenues of 
the acquired organization;
    (2) Investment in joint venture. Invest in a joint venture; 
provided that, unless otherwise permitted by the Board, not more than 
10 percent of the joint venture's consolidated assets or consolidated 
revenues are attributable to activities not listed in Sec. 211.10 of 
this part; and
    (3) Portfolio investments. Make portfolio investments in an 
organization, provided that:
    (i) Individual investment limits. The total direct and indirect 
portfolio investments by the investor and its affiliates in an 
organization engaged in activities that are not permissible for joint 
ventures, when combined with all other shares in the organization held 
under any other authority, do not exceed:
    (A) 40 percent of the total equity of the organization; or
    (B) 19.9 percent of the organization's voting shares.
    (ii) Loans and extensions of credit. Any loans and extensions of 
credit made by an investor or its affiliates to the organization are on 
substantially the same terms, including interest rates and collateral, 
as those prevailing at the same time for comparable transactions 
between the investor or its affiliates and nonaffiliated persons; and
    (iii) Protecting shareholder rights. Nothing in this paragraph 
(c)(3) shall prohibit an investor from otherwise exercising rights it 
may have as shareholder to protect the value of its investment, so long 
as the exercise of such rights does not result in the investor's direct 
or indirect control of the organization.
    (d) Investment limit. In calculating the amount that may be 
invested in any organization under this section and Secs. 211.9 and 
211.10 of this part, there shall be included any unpaid amount for 
which the investor is liable and any investments in the same 
organization held by affiliates under any authority.
    (e) Divestiture. An investor shall dispose of an investment 
promptly (unless the Board authorizes retention) if:
    (1) The organization invested in:
    (i) Engages in impermissible activities to an extent not permitted 
under paragraph (c) of this section; or
    (ii) Engages directly or indirectly in other business in the United 
States that is not permitted to an Edge corporation in the United 
States; provided that an investor may:
    (A) Retain portfolio investments in companies that derive no more 
than 10 percent of their total revenue from activities in the United 
States; and
    (B) Hold up to 5 percent of the shares of a foreign company that 
engages directly or indirectly in business in the United States that is 
not permitted to an Edge corporation; or
    (2) After notice and opportunity for hearing, the investor is 
advised by the Board that such investment is inappropriate under the 
FRA, the BHC Act, or this subpart.
    (f) Debts previously contracted. Shares or other ownership 
interests acquired to prevent a loss upon a debt previously contracted 
in good faith are not subject to the limitations or procedures of this 
section; provided that such interests shall be disposed of promptly but 
in no event later than two years after their acquisition, unless the 
Board authorizes retention for a longer period.
    (g) Investments made through debt-for-equity conversions.
    (1) Permissible investments. A bank holding company may make 
investments through the conversion of sovereign-or private-debt 
obligations of an eligible country, either through direct exchange of 
the debt obligations for the investment, or by a payment for the debt 
in local currency, the proceeds of which, including an additional cash 
investment not exceeding in the aggregate more than 10 percent of the 
fair value of the debt obligations being converted as part of such 
investment, are used to purchase the following investments:
    (i) Public-sector companies. A bank holding company may acquire up 
to and including 100 percent of the shares of (or other ownership 
interests in) any foreign company located in an eligible country, if 
the shares are acquired from the government of the eligible country or 
from its agencies or instrumentalities.
    (ii) Private-sector companies. A bank holding company may acquire 
up to and including 40 percent of the shares, including voting shares, 
of (or other ownership interests in) any other

[[Page 54381]]

foreign company located in an eligible country subject to the following 
conditions:
    (A) A bank holding company may acquire more than 25 percent of the 
voting shares of the foreign company only if another shareholder or 
group of shareholders unaffiliated with the bank holding company holds 
a larger block of voting shares of the company;
    (B) The bank holding company and its affiliates may not lend or 
otherwise extend credit to the foreign company in amounts greater than 
50 percent of the total loans and extensions of credit to the foreign 
company; and
    (C) The bank holding company's representation on the board of 
directors or on management committees of the foreign company may be no 
more than proportional to its shareholding in the foreign company.
    (2) Investments by bank subsidiary of bank holding company. Upon 
application, the Board may permit an indirect investment to be made 
pursuant to this paragraph (g) through an insured bank subsidiary of 
the bank holding company, where the bank holding company demonstrates 
that such ownership is consistent with the purposes of the FRA. In 
granting its consent, the Board may impose such conditions as it deems 
necessary or appropriate to prevent adverse effects, including 
prohibiting loans from the bank to the company in which the investment 
is made.
    (3) Divestiture--(i) Time limits for divestiture. A bank holding 
company shall divest the shares of, or other ownership interests in, 
any company acquired pursuant to this paragraph (g) within the longer 
of:
    (A) Ten years from the date of acquisition of the investment, 
except that the Board may extend such period if, in the Board's 
judgment, such an extension would not be detrimental to the public 
interest; or
    (B) Two years from the date on which the bank holding company is 
permitted to repatriate in full the investment in the foreign company.
    (ii) Maximum retention period. Notwithstanding the provisions of 
paragraph (g)(3)(i) of this section:
    (A) Divestiture shall occur within 15 years of the date of 
acquisition of the shares of, or other ownership interests in, any 
company acquired pursuant to this paragraph (g); and
    (B) A bank holding company may retain such shares or ownership 
interests if such retention is otherwise permissible at the time 
required for divestiture.
    (iii) Report to Board. The bank holding company shall report to the 
Board on its plans for divesting an investment made under this 
paragraph (g) two years prior to the final date for divestiture, in a 
manner to be prescribed by the Board.
    (iv) Other conditions requiring divestiture. All investments made 
pursuant to this paragraph (g) are subject to paragraph (e) of this 
section requiring prompt divestiture (unless the Board upon application 
authorizes retention), if the company invested in engages in 
impermissible business in the United States that exceeds in the 
aggregate 10 percent of the company's consolidated assets or revenues 
calculated on an annual basis; provided that such company may not 
engage in activities in the United States that consist of banking or 
financial operations (as defined in Sec. 211.23(f)(5)(iii)(B)) of this 
part, or types of activities permitted by regulation or order under 
section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), except under 
regulations of the Board or with the prior approval of the Board.
    (4) Investment procedures--(i) General consent. Subject to the 
other limitations of this paragraph (g), the Board grants its general 
consent for investments made under this paragraph (g) if the total 
amount invested does not exceed the greater of $25 million or 1 percent 
of the tier 1 capital of the investor.
    (ii) All other investments shall be made in accordance with the 
procedures of Sec. 211.9(f) and (g) of this part, requiring prior 
notice or specific consent.
    (5) Conditions--(i) Name. Any company acquired pursuant to this 
paragraph (g) shall not bear a name similar to the name of the 
acquiring bank holding company or any of its affiliates.
    (ii) Confidentiality. Neither the bank holding company nor its 
affiliates shall provide to any company acquired pursuant to this 
paragraph (g) any confidential business information or other 
information concerning customers that are engaged in the same or 
related lines of business as the company.


Sec. 211.9  Investment procedures.

    (a) General provisions.\5\ Direct and indirect investments shall be 
made in accordance with the general consent, limited general consent, 
prior notice, or specific consent procedures contained in this section.
---------------------------------------------------------------------------

    \5\ When necessary, the provisions of this section relating to 
general consent and prior notice constitute the Board's approval 
under section 25A(8) of the FRA (12 U.S.C. 616) for investments in 
excess of the limitations therein based on capital and surplus.
---------------------------------------------------------------------------

    (1) Minimum capital adequacy standards. Except as the Board may 
otherwise determine, in order for an investor to make investments 
pursuant to the procedures set out in this section, the investor, the 
bank holding company, and the member bank shall be in compliance with 
applicable minimum standards for capital adequacy set out in the 
Capital Adequacy Guidelines; provided that, if the investor is an Edge 
or agreement corporation, the minimum capital required is total and 
tier 1 capital ratios of 8 percent and 4 percent, respectively.
    (2) Composite rating. Except as the Board may otherwise determine, 
in order for an investor to make investments under the general consent 
or limited general consent procedures of paragraphs (b) and (c) of this 
section, the investor and any parent insured bank must have received a 
composite rating of at least 2 at the most recent examination.
    (3) Board's authority to modify or suspend procedures. The Board, 
at any time upon notice, may modify or suspend the procedures contained 
in this section with respect to any investor or with respect to the 
acquisition of shares of organizations engaged in particular kinds of 
activities.
    (4) Long-range investment plan. Any investor may submit to the 
Board for its specific consent a long-range investment plan. Any plan 
so approved shall be subject to the other procedures of this section 
only to the extent determined necessary by the Board to assure safety 
and soundness of the operations of the investor and its affiliates.
    (5) Prior specific consent for initial investment. An investor 
shall apply for and receive the prior specific consent of the Board for 
its initial investment under this subpart in its first subsidiary or 
joint venture, unless an affiliate previously has received approval to 
make such an investment.
    (6) Expiration of investment authority. Authority to make 
investments granted under prior notice or specific consent procedures 
shall expire one year from the earliest date on which the authority 
could have been exercised, unless the Board determines a longer period 
shall apply.
    (7) Conditional approval; Access to information. The Board may 
impose such conditions on authority granted by it under this section as 
it deems necessary, and may require termination of any activities 
conducted under authority of this subpart if an investor is unable to 
provide information on its activities or those of its affiliates that 
the

[[Page 54382]]

Board deems necessary to determine and enforce compliance with U.S. 
banking laws.
    (b) General consent. The Board grants its general consent for a 
well capitalized and well managed investor to make investments, subject 
to the following:
    (1) Well capitalized and well managed investor. In order to qualify 
for making investments under authority of this paragraph (b), both 
before and immediately after the proposed investment, the investor, any 
parent insured bank, and any parent bank holding company shall be well 
capitalized and well managed.
    (2) Individual limit for investment in subsidiary. In the case of 
an investment in a subsidiary, the total amount invested directly or 
indirectly in such subsidiary (in one transaction or a series of 
transactions) does not exceed:
    (i) 10 percent of the investor's tier 1 capital, where the investor 
is a bank holding company; or
    (ii) 2 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 2 percent of the tier 1 capital of any parent 
insured bank or 10 percent of the investor's tier 1 capital, for any 
other investor.
    (3) Individual limit for investment in joint venture. In the case 
of an investment in a joint venture, the total amount invested directly 
or indirectly in such joint venture (in one transaction or a series of 
transactions) does not exceed:
    (i) 5 percent of the investor's tier 1 capital, where the investor 
is a bank holding company; or
    (ii) 1 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 1 percent of the tier 1 capital of any parent 
insured bank or 5 percent of the investor's tier 1 capital, for any 
other investor.
    (4) Individual limit for portfolio investment. In the case of a 
portfolio investment, the total amount invested directly or indirectly 
in such company (in one transaction or a series of transactions) does 
not exceed the lesser of $25 million, or
    (i) 5 percent of the investor's tier 1 capital in the case of a 
bank holding company or its subsidiary, or Edge corporation engaged in 
banking; or
    (ii) 25 percent of the investor's tier 1 capital in the case of an 
Edge corporation not engaged in banking.
    (5) Investment in a general partnership or unlimited liability 
company. An investment in a general partnership or unlimited liability 
company may be made under authority of paragraph (b) of this section, 
subject to the limits set out in paragraph (c) of this section.
    (6) Aggregate investment limits--(i) Investment limits. All 
investments made, directly or indirectly, during the previous 12-month 
period under authority of this section, when aggregated with the 
proposed investment, shall not exceed:
    (A) 20 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (B) 10 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (C) The lesser of 10 percent of the tier 1 capital of any parent 
insured bank or 50 percent of the tier 1 capital of the investor, for 
any other investor.
    (ii) Downstream investments. In determining compliance with the 
aggregate limits set out in this paragraph (b), an investment by an 
investor in a subsidiary shall be counted only once, notwithstanding 
that such subsidiary may, within 12 months of the date of making the 
investment, downstream all or any part of such investment to another 
subsidiary.
    (7) Application of limits. In determining compliance with the 
limits set out in this paragraph (b), an investor is not required to 
combine the value of all shares of an organization held in trading or 
dealing accounts under Sec. 211.10(a)(15) of this part with investments 
in the same organization.
    (c) Limited general consent--(1) Individual limit. The Board grants 
its general consent for an investor that is not well capitalized and 
well managed to make an investment in a subsidiary or joint venture, or 
to make a portfolio investment, if the total amount invested directly 
or indirectly (in one transaction or in a series of transactions) does 
not exceed the lesser of $25 million or:
    (i) 5 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (ii) 1 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (iii) The lesser of 1 percent of any parent insured bank's tier 1 
capital or 5 percent of the investor's tier 1 capital, for any other 
investor.
    (2) Aggregate limit. The amount of general consent investments made 
by any investor directly or indirectly under authority of this 
paragraph (c) during the previous 12-month period, when aggregated with 
the proposed investment, shall not exceed:
    (i) 10 percent of the investor's tier 1 capital, where the investor 
is a bank holding company;
    (ii) 5 percent of the investor's tier 1 capital, where the investor 
is a member bank; and
    (iii) The lesser of 5 percent of any parent insured bank's tier 1 
capital or 25 percent of the investor's tier 1 capital, for any other 
investor.
    (3) Application of limits. In calculating compliance with the 
limits of this paragraph (c), the rules set forth in paragraphs 
(b)(6)(ii) and (b)(7) of this section shall apply.
    (d) Other eligible investments under general consent. In addition 
to the authority granted under paragraphs (b) and (c) of this section, 
the Board grants its general consent for any investor to make the 
following investments:
    (1) Investment in organization equal to cash dividends. Any 
investment in an organization in an amount equal to cash dividends 
received from that organization during the preceding 12 calendar 
months; and
    (2) Investment acquired from affiliate. Any investment that is 
acquired from an affiliate at net asset value or through a contribution 
of shares.
    (e) Investments ineligible for general consent. An investment in a 
foreign bank may not be made under authority of paragraphs (b) or (c) 
of this section if:
    (1) After the investment, the foreign bank would be an affiliate of 
a member bank; and
    (2) The foreign bank is located in a country in which the member 
bank and its affiliates have no existing banking presence.
    (f) Prior notice. An investment that does not qualify for general 
consent under paragraph (b), (c), or (d) of this section may be made 
after the investor has given the Board 30 days' prior written notice, 
such notice period to commence at the time the notice is received, 
provided that:
    (1) The Board may waive the 30-day period if it finds the full 
period is not required for consideration of the proposed investment, or 
that immediate action is required by the circumstances presented; and
    (2) The Board may suspend the 30-day period or act on the 
investment under the Board's specific consent procedures.
    (g) Specific consent. Any investment that does not qualify for 
either the general consent or the prior notice procedure may not be 
consummated without the specific consent of the Board.


Sec. 211.10  Permissible activities abroad.

    (a) Activities usual in connection with banking. The Board has 
determined that the following activities are usual in connection with 
the transaction of

[[Page 54383]]

banking or other financial operations abroad:
    (1) Commercial and other banking activities;
    (2) Financing, including commercial financing, consumer financing, 
mortgage banking, and factoring;
    (3) Leasing real or personal property, or acting as agent, broker, 
or advisor in leasing real or personal property consistent with the 
provisions of Regulation Y (12 CFR part 225);
    (4) Acting as fiduciary;
    (5) Underwriting credit life insurance and credit accident and 
health insurance;
    (6) Performing services for other direct or indirect operations of 
a U.S. banking organization, including representative functions, sale 
of long-term debt, name-saving, holding assets acquired to prevent loss 
on a debt previously contracted in good faith, and other activities 
that are permissible domestically for a bank holding company under 
sections 4(a)(2)(A) and 4(c)(1)(C) of the BHC Act (12 U.S.C. 
1843(a)(2)(A), (c)(1)(C));
    (7) Holding the premises of a branch of an Edge or agreement 
corporation or member bank or the premises of a direct or indirect 
subsidiary, or holding or leasing the residence of an officer or 
employee of a branch or subsidiary;
    (8) Providing investment, financial, or economic advisory services;
    (9) General insurance agency and brokerage;
    (10) Data processing;
    (11) Organizing, sponsoring, and managing a mutual fund, if the 
fund's shares are not sold or distributed in the United States or to 
U.S. residents and the fund does not exercise managerial control over 
the firms in which it invests;
    (12) Performing management consulting services, if such services, 
when rendered with respect to the U.S. market, shall be restricted to 
the initial entry;
    (13) Underwriting, distributing, and dealing in debt securities 
outside the United States;
    (14) Underwriting and distributing equity securities outside the 
United States as follows:
    (i) Limits for well-capitalized and well-managed investor--(A) 
General. After providing 30 days' prior written notice to the Board, an 
investor that is well capitalized and well managed may underwrite 
equity securities, provided that commitments by an investor and its 
subsidiaries for the shares of a single organization do not, in the 
aggregate, exceed:
    (1) 15 percent of the bank holding company's tier 1 capital, where 
the investor is a bank holding company;
    (2) 3 percent of the investor's tier 1 capital, where the investor 
is a member bank; or
    (3) The lesser of 3 percent of any parent insured bank's tier 1 
capital or 15 percent of the investor's tier 1 capital, for any other 
investor;
    (B) Qualifying criteria. An investor will be considered well-
capitalized and well-managed for purposes of paragraph (a)(14)(i) of 
this section only if each of the bank holding company, member bank, and 
Edge or agreement corporation qualify as well-capitalized and well-
managed.
    (ii) Limits for investor that is not well capitalized and well 
managed. After providing 30 days' prior written notice to the Board, an 
investor that is not well capitalized and well managed may underwrite 
equity securities, provided that commitments by the investor and its 
subsidiaries for the shares of an organization do not, in the 
aggregate, exceed $60 million; and
    (iii) Application of limits. For purposes of determining compliance 
with the limitations of this paragraph (a)(14), the investor may 
subtract portions of an underwriting that are covered by binding 
commitments obtained by the investor or its affiliates from sub-
underwriters or other purchasers;
    (15) Dealing in equity securities outside the United States as 
follows:
    (i) Grandfathered authority. By an investor, or an affiliate, that 
had commenced such activities prior to March 27, 1991, and subject to 
the limitations in effect at that time (See 12 CFR part 211, revised 
January 1, 1991); or
    (ii) Limit on shares of a single issuer. After providing 30 days' 
prior written notice to the Board, an investor may deal in the shares 
of an organization where the shares held in the trading or dealing 
accounts of an investor and its affiliates under authority of this 
paragraph (a)(15) do not in the aggregate exceed the lesser of:
    (A) $40 million; or
    (B) 10 percent of the investor's tier 1 capital;
    (iii) Aggregate equity limit. The total shares held directly and 
indirectly by the investor and its affiliates under authority of this 
paragraph (a)(15) and Sec. 211.8(c)(3) of this part in organizations 
engaged in activities that are not permissible for joint ventures do 
not exceed:
    (A) 25 percent of the bank holding company's tier 1 capital, where 
the investor is a bank holding company;
    (B) 20 percent of the investor's tier 1 capital, where the investor 
is a member bank; \6\ and
---------------------------------------------------------------------------

    \6\ For this purpose, a direct subsidiary of a member bank is 
deemed to be an investor.
---------------------------------------------------------------------------

    (C) The lesser of 20 percent of any parent insured bank's tier 1 
capital or 100 percent of the investor's tier 1 capital, for any other 
investor;
    (iv) Determining compliance with limits--(A) General. For purposes 
of determining compliance with all limits set out in this paragraph 
(a)(15):
    (1) Long and short positions in the same security may be netted; 
and
    (2) Except as provided in paragraph (a)(15)(iv)(B)(4) of this 
section, equity securities held in order to hedge bank permissible 
equity derivatives contracts shall not be included.
    (B) Use of internal hedging models. After providing 30 days' prior 
written notice to the Board the investor may use an internal hedging 
model that:
    (1) Nets long and short positions in the same security and offsets 
positions in a security by futures, forwards, options, and other 
similar instruments referenced to the same security, for purposes of 
determining compliance with the single issuer limits of paragraph 
(a)(15)(ii) of this section;\7\ and
---------------------------------------------------------------------------

    \7\ A basket of stocks, specifically segregated as an offset to 
a position in a stock index derivative product, as computed by the 
investor's internal model, may be offset against the stock index.
---------------------------------------------------------------------------

    (2) Offsets its long positions in equity securities by futures, 
forwards, options, and similar instruments, on a portfolio basis, and 
for purposes of determining compliance with the aggregate equity limits 
of paragraph (a)(15)(iii) of this section.
    (3) With respect to all equity securities held under authority of 
paragraph (a)(15) of this section, no net long position in a security 
shall be deemed to have been reduced by more than 75 percent through 
use of internal hedging models under this paragraph (a)(15)(iv)(B); and
    (4) With respect to equity securities acquired to hedge bank 
permissible equity derivatives contracts under authority of paragraph 
(a)(1) of this section, any residual position that remains in the 
securities of a single issuer after netting and offsetting of positions 
relating to the security under the investor's internal hedging models 
shall be included in calculating compliance with the limits of this 
paragraph (a)(15)(ii) and (iii).
    (C) Underwriting commitments. Any shares acquired pursuant to an 
underwriting commitment that are held for longer than 90 days after the 
payment date for such underwriting shall be subject to the limits set 
out in

[[Page 54384]]

paragraph (a)(15) of this section and the investment provisions of 
Secs. 211.8 and 211.9 of this part.
    (v) Authority to deal in shares of U.S. organization. The authority 
to deal in shares under paragraph (a)(15) of this section includes the 
authority to deal in the shares of a U.S. organization:
    (A) With respect to foreign persons only; and
    (B) Subject to the limitations on owning or controlling shares of a 
company in section 4(c)(6) of the BHC Act (12 U.S.C. 1843(c)(6)) and 
Regulation Y (12 CFR part 225).
    (vi) Report to senior management. Any shares held in trading or 
dealing accounts for longer than 90 days shall be reported to the 
senior management of the investor;
    (16) Operating a travel agency, but only in connection with 
financial services offered abroad by the investor or others;
    (17) Underwriting life, annuity, pension fund-related, and other 
types of insurance, where the associated risks have been previously 
determined by the Board to be actuarially predictable; provided that:
    (i) Investments in, and loans and extensions of credit (other than 
loans and extensions of credit fully secured in accordance with the 
requirements of section 23A of the FRA (12 U.S.C. 371c), or with such 
other standards as the Board may require) to, the company by the 
investor or its affiliates are deducted from the capital of the 
investor (with 50 percent of such capital deduction to be taken from 
tier 1 capital); and
    (ii) Activities conducted directly or indirectly by a subsidiary of 
a U.S. insured bank are excluded from the authority of this paragraph 
(a)(17), unless authorized by the Board;
    (18) Providing futures commission merchant services (including 
clearing without executing and executing without clearing) for 
nonaffiliated persons with respect to futures and options on futures 
contracts for financial and nonfinancial commodities; provided that 
prior notice under Sec. 211.9(f) of this part shall be provided to the 
Board before any subsidiaries of a member bank operating pursuant to 
this subpart may join a mutual exchange or clearinghouse, unless the 
potential liability of the investor to the exchange, clearinghouse, or 
other members of the exchange, as the case may be, is legally limited 
by the rules of the exchange or clearinghouse to an amount that does 
not exceed applicable general consent limits under Sec. 211.9 of this 
part;
    (19) Acting as principal or agent in commodity-swap transactions in 
relation to:
    (i) Swaps on a cash-settled basis for any commodity, provided that 
the investor's portfolio of swaps contracts is hedged in a manner 
consistent with safe and sound banking practices; and
    (ii) Contracts that require physical delivery of a commodity, 
provided that:
    (A) Such contracts are entered into solely for the purpose of 
hedging the investor's positions in the underlying commodity or 
derivative contracts based on the commodity;
    (B) The contract allows for assignment, termination or offset prior 
to expiration; and
    (C) Reasonable efforts are made to avoid delivery.
    (b) Regulation Y activities. An investor may engage in activities 
that the Board has determined in Sec. 225.28(b) of Regulation Y (12 CFR 
225.28(b)) are closely related to banking under section 4(c)(8) of the 
BHC Act (12 U.S.C. 1843(c)(8)).
    (c) Specific approval. With the Board's specific approval, an 
investor may engage in other activities that the Board determines are 
usual in connection with the transaction of the business of banking or 
other financial operations abroad and are consistent with the FRA or 
the BHC Act.


Sec. 211.11  Advisory opinions under Regulation K.

    (a) Request for advisory opinion. Any person may submit a request 
to the Board for an advisory opinion regarding the scope of activities 
permissible under any subpart of this part.
    (b) Form and content of the request. Any request for an advisory 
opinion under this section shall be:
    (1) Submitted in writing to the Board;
    (2) Contain a clear description of the proposed parameters of the 
activity, or the service or product, at issue; and
    (3) Contain a concise explanation of the grounds on which the 
submitter contends the activity is or should be considered by the Board 
to be permissible under this part.
    (c) Response to request. In response to a request received under 
this section, the Board shall:
    (1) Direct the submitter to provide such additional information as 
the Board may deem necessary to complete the record for a full 
consideration of the issue presented; and
    (2) Provide an advisory opinion within 45 days after the record on 
the request has been determined to be complete.


Sec. 211.12  Lending limits and capital requirements.

    (a) Acceptances of Edge corporations. (1) Limitations. An Edge 
corporation shall be and remain fully secured for acceptances of the 
types described in section 13(7) of the FRA (12 U.S.C. 372), as 
follows:
    (i) All acceptances outstanding in excess of 200 percent of its 
tier 1 capital; and
    (ii) All acceptances outstanding for any one person in excess of 10 
percent of its tier 1 capital.
    (2) Exceptions. These limitations do not apply if the excess 
represents the international shipment of goods, and the Edge 
corporation is:
    (i) Fully covered by primary obligations to reimburse it that are 
guaranteed by banks or bankers; or
    (ii) Covered by participation agreements from other banks, as 
described in 12 CFR 250.165.
    (b) Loans and extensions of credit to one person--(1) Loans and 
extensions of credit defined. Loans and extensions of credit has the 
meaning set forth in Sec. 211.2(q) of this part \8\ and, for purposes 
of this paragraph (b), also include:
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    \8\ In the case of a foreign government, these includes loans 
and extensions of credit to the foreign government's departments or 
agencies deriving their current funds principally from general tax 
revenues. In the case of a partnership or firm, these include loans 
and extensions of credit to its members and, in the case of a 
corporation, these include loans and extensions of credit to the 
corporation's affiliates, where the affiliate incurs the liability 
for the benefit of the corporation.
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    (i) Acceptances outstanding that are not of the types described in 
section 13(7) of the FRA (12 U.S.C. 372);
    (ii) Any liability of the lender to advance funds to or on behalf 
of a person pursuant to a guarantee, standby letter of credit, or 
similar agreements;
    (iii) Investments in the securities of another organization other 
than a subsidiary; and
    (iv) Any underwriting commitments to an issuer of securities, where 
no binding commitments have been secured from subunderwriters or other 
purchasers.
    (2) Limitations. Except as the Board may otherwise specify:
    (i) The total loans and extensions of credit outstanding to any 
person by an Edge corporation engaged in banking, and its direct or 
indirect subsidiaries, may not exceed 15 percent of the Edge 
corporation's tier 1 capital;\9\ and
---------------------------------------------------------------------------

    \9\ For purposes of this pargraph (b), subsidiaries includes 
subsidiaries controlled by the Edge corporation, but does not 
include companies otherwise controlled by affiliates of the Edge 
corporation.
---------------------------------------------------------------------------

    (ii) The total loans and extensions of credit to any person by a 
foreign bank or Edge corporation subsidiary of a member bank, and by 
majority-owned subsidiaries of a foreign bank or Edge corporation, when 
combined with the

[[Page 54385]]

total loans and extensions of credit to the same person by the member 
bank and its majority-owned subsidiaries, may not exceed the member 
bank's limitation on loans and extensions of credit to one person.
    (3) Exceptions. The limitations of paragraph (b)(2) of this section 
do not apply to:
    (i) Deposits with banks and federal funds sold;
    (ii) Bills or drafts drawn in good faith against actual goods and 
on which two or more unrelated parties are liable;
    (iii) Any banker's acceptance, of the kind described in section 
13(7) of the FRA (12 U.S.C. 372), that is issued and outstanding;
    (iv) Obligations to the extent secured by cash collateral or by 
bonds, notes, certificates of indebtedness, or Treasury bills of the 
United States;
    (v) Loans and extensions of credit that are covered by bona fide 
participation agreements; and
    (vi) Obligations to the extent supported by the full faith and 
credit of the following:
    (A) The United States or any of its departments, agencies, 
establishments, or wholly owned corporations (including obligations, to 
the extent insured against foreign political and credit risks by the 
Export-Import Bank of the United States or the Foreign Credit Insurance 
Association), the International Bank for Reconstruction and 
Development, the International Finance Corporation, the International 
Development Association, the Inter-American Development Bank, the 
African Development Bank, the Asian Development Bank, or the European 
Bank for Reconstruction and Development;
    (B) Any organization, if at least 25 percent of such an obligation 
or of the total credit is also supported by the full faith and credit 
of, or participated in by, any institution designated in paragraph 
(b)(3)(vi)(A) of this section in such manner that default to the lender 
would necessarily include default to that entity. The total loans and 
extensions of credit under this paragraph (b)(3)(vi)(B) to any person 
shall at no time exceed 100 percent of the tier 1 capital of the Edge 
corporation.
    (c) Capitalization. (1) An Edge corporation shall at all times be 
capitalized in an amount that is adequate in relation to the scope and 
character of its activities.
    (2) In the case of an Edge corporation engaged in banking, the 
minimum ratio of qualifying total capital to risk-weighted assets, as 
determined under the Capital Adequacy Guidelines, shall not be less 
than 10 percent, of which at least 50 percent shall consist of tier 1 
capital.
    (3) For purposes of this paragraph (c), no limitation shall apply 
on the inclusion of subordinated debt that qualifies as tier 2 capital 
under the Capital Adequacy Guidelines.


Sec. 211.13  Supervision and reporting.

    (a) Supervision. (1) Foreign branches and subsidiaries. U.S. 
banking organizations conducting international operations under this 
subpart shall supervise and administer their foreign branches and 
subsidiaries in such a manner as to ensure that their operations 
conform to high standards of banking and financial prudence.
    (i) Effective systems of records, controls, and reports shall be 
maintained to keep management informed of their activities and 
condition.
    (ii) Such systems shall provide, in particular, information on risk 
assets, exposure to market risk, liquidity management, operations, 
internal controls, legal and operational risk, and conformance to 
management policies.
    (iii) Reports on risk assets shall be sufficient to permit an 
appraisal of credit quality and assessment of exposure to loss, and, 
for this purpose, provide full information on the condition of material 
borrowers.
    (iv) Reports on operations and controls shall include internal and 
external audits of the branch or subsidiary.
    (2) Joint ventures. Investors shall maintain sufficient information 
with respect to joint ventures to keep informed of their activities and 
condition.
    (i) Such information shall include audits and other reports on 
financial performance, risk exposure, management policies, operations, 
and controls.
    (ii) Complete information shall be maintained on all transactions 
with the joint venture by the investor and its affiliates.
    (3) Availability of reports and information to examiners. The 
reports specified in paragraphs (a)(1) and (2) of this section and any 
other information deemed necessary to determine compliance with U.S. 
banking law shall be made available to examiners of the appropriate 
bank supervisory agencies.
    (b) Examinations. Examiners appointed by the Board shall examine 
each Edge corporation once a year. An Edge or agreement corporation 
shall make available to examiners information sufficient to assess its 
condition and operations and the condition and activities of any 
organization whose shares it holds.
    (c) Reports--(1) Reports of condition. Each Edge or agreement 
corporation shall make reports of condition to the Board at such times 
and in such form as the Board may prescribe. The Board may require that 
statements of condition or other reports be published or made available 
for public inspection.
    (2) Foreign operations. Edge and agreement corporations, member 
banks, and bank holding companies shall file such reports on their 
foreign operations as the Board may require.
    (3) Acquisition or disposition of shares. Member banks, Edge and 
agreement corporations, and bank holding companies shall report, in a 
manner prescribed by the Board, any acquisition or disposition of 
shares.
    (d) Filing and processing procedures--(1) Place of filing. Unless 
otherwise directed by the Board, applications, notices, and reports 
required by this part shall be filed with the Federal Reserve Bank of 
the District in which the parent bank or bank holding company is 
located or, if none, the Reserve Bank of the District in which the 
applying or reporting institution is located. Instructions and forms 
for applications, notices, and reports are available from the Reserve 
Banks.
    (2) Timing. The Board shall act on an application under this 
subpart within 60 calendar days after the Reserve Bank has received the 
application, unless the Board notifies the investor that the 60-day 
period is being extended and states the reasons for the extension.

Subpart B--Foreign Banking Organizations


Sec. 211.20  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Bank 
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.) and the 
International Banking Act of 1978 (IBA) (12 U.S.C. 3101 et seq.).
    (b) Purpose and scope. This subpart is in furtherance of the 
purposes of the BHC Act and the IBA. It applies to foreign banks and 
foreign banking organizations with respect to:
    (1) The limitations on interstate banking under section 5 of the 
IBA (12 U.S.C. 3103);
    (2) The exemptions from the nonbanking prohibitions of the BHC Act 
and the IBA afforded by sections 2(h) and 4(c)(9) of the BHC Act (12 
U.S.C. 1841(h), 1843(c)(9));

[[Page 54386]]

    (3) Board approval of the establishment of an office of a foreign 
bank in the United States under sections 7(d) and 10(a) of the IBA (12 
U.S.C. 3105(d), 3107(a));
    (4) The termination by the Board of a foreign bank's representative 
office, state branch, state agency, or commercial lending company 
subsidiary under sections 7(e) and 10(b) of the IBA (12 U.S.C. 3105(e), 
3107(b)), and the transmission of a recommendation to the Comptroller 
to terminate a federal branch or federal agency under section 7(e)(5) 
of the IBA (12 U.S.C. 3105(e)(5));
    (5) The examination of an office or affiliate of a foreign bank in 
the United States as provided in sections 7(c) and 10(c) of the IBA (12 
U.S.C. 3105(c), 3107(c));
    (6) The disclosure of supervisory information to a foreign 
supervisor under section 15 of the IBA (12 U.S.C. 3109);
    (7) The limitations on loans to one borrower by state branches and 
state agencies of a foreign bank under section 7(h)(2) of the IBA (12 
U.S.C. 3105(h)(2));
    (8) The limitation of a state branch and a state agency to 
conducting only activities that are permissible for a federal branch 
under section (7)(h)(1) of the IBA (12 U.S.C. 3105(h)(1)); and
    (9) The deposit insurance requirement for retail deposit taking by 
a foreign bank under section 6 of the IBA (12 U.S.C. 3104).
    (10) The management of shell branches (12 U.S.C. 3105(k)).
    (c) Additional requirements. Compliance by a foreign bank with the 
requirements of this subpart and the laws administered and enforced by 
the Board does not relieve the foreign bank of responsibility to comply 
with the laws and regulations administered by the licensing authority.


Sec. 211.21  Definitions.

    The definitions contained in Secs. 211.1 and 211.2 apply to this 
subpart, except as a term is otherwise defined in this section:
    (a) Affiliate of a foreign bank or of a parent of a foreign bank 
means any company that controls, is controlled by, or is under common 
control with, the foreign bank or the parent of the foreign bank.
    (b) Agency means any place of business of a foreign bank, located 
in any state, at which credit balances are maintained, checks are paid, 
money is lent, or, to the extent not prohibited by state or federal 
law, deposits are accepted from a person or entity that is not a 
citizen or resident of the United States. Obligations shall not be 
considered credit balances unless they are:
    (1) Incidental to, or arise out of the exercise of, other lawful 
banking powers;
    (2) To serve a specific purpose;
    (3) Not solicited from the general public;
    (4) Not used to pay routine operating expenses in the United States 
such as salaries, rent, or taxes;
    (5) Withdrawn within a reasonable period of time after the specific 
purpose for which they were placed has been accomplished; and
    (6) Drawn upon in a manner reasonable in relation to the size and 
nature of the account.
    (c)(1) Appropriate Federal Reserve Bank means, unless the Board 
designates a different Federal Reserve Bank:
    (i) For a foreign banking organization, the Reserve Bank assigned 
to the foreign banking organization in Sec. 225.3(b)(2) of Regulation Y 
(12 CFR 225.3(b)(2));
    (ii) For a foreign bank that is not a foreign banking organization 
and proposes to establish an office, an Edge corporation, or an 
agreement corporation, the Reserve Bank of the Federal Reserve District 
in which the foreign bank proposes to establish such office or 
corporation; and
    (iii) In all other cases, the Reserve Bank designated by the Board.
    (2) The appropriate Federal Reserve Bank need not be the Reserve 
Bank of the Federal Reserve District in which the foreign bank's home 
state is located.
    (d) Banking subsidiary, with respect to a specified foreign bank, 
means a bank that is a subsidiary as the terms bank and subsidiary are 
defined in section 2 of the BHC Act (12 U.S.C. 1841).
    (e) Branch means any place of business of a foreign bank, located 
in any state, at which deposits are received, and that is not an 
agency, as that term is defined in paragraph (b) of this section.
    (f) Change the status of an office means to convert a 
representative office into a branch or agency, or an agency or limited 
branch into a branch, but does not include renewal of the license of an 
existing office.
    (g) Commercial lending company means any organization, other than a 
bank or an organization operating under section 25 of the Federal 
Reserve Act (FRA) (12 U.S.C. 601-604a), organized under the laws of any 
state, that maintains credit balances permissible for an agency, and 
engages in the business of making commercial loans. Commercial lending 
company includes any company chartered under article XII of the banking 
law of the State of New York.
    (h) Comptroller means the Office of the Comptroller of the 
Currency.
    (i) Control has the same meaning as in section 2(a) of the BHC Act 
(12 U.S.C. 1841(a)), and the terms controlled and controlling shall be 
construed consistently with the term control.
    (j) Domestic branch means any place of business of a foreign bank, 
located in any state, that may accept domestic deposits and deposits 
that are incidental to or for the purpose of carrying out transactions 
in foreign countries.
    (k) A foreign bank engages directly in the business of banking 
outside the United States if the foreign bank engages directly in 
banking activities usual in connection with the business of banking in 
the countries where it is organized or operating.
    (l) To establish means:
    (1) To open and conduct business through an office;
    (2) To acquire directly, through merger, consolidation, or similar 
transaction with another foreign bank, the operations of an office that 
is open and conducting business;
    (3) To acquire an office through the acquisition of a foreign bank 
subsidiary that will cease to operate in the same corporate form 
following the acquisition;
    (4) To change the status of an office; or
    (5) To relocate an office from one state to another.
    (m) Federal agency, federal branch, state agency, and state branch 
have the same meanings as in section 1 of the IBA (12 U.S.C. 3101).
    (n) Foreign bank means an organization that is organized under the 
laws of a foreign country and that engages directly in the business of 
banking outside the United States. The term foreign bank does not 
include a central bank of a foreign country that does not engage or 
seek to engage in a commercial banking business in the United States 
through an office.
    (o) Foreign banking organization means:
    (1) A foreign bank, as defined in section 1(b)(7) of the IBA (12 
U.S.C. 3101(7)), that:
    (i) Operates a branch, agency, or commercial lending company 
subsidiary in the United States;
    (ii) Controls a bank in the United States; or
    (iii) Controls an Edge corporation acquired after March 5, 1987; 
and
    (2) Any company of which the foreign bank is a subsidiary.
    (p) Home country, with respect to a foreign bank, means the country 
in

[[Page 54387]]

which the foreign bank is chartered or incorporated.
    (q) Home country supervisor, with respect to a foreign bank, means 
the governmental entity or entities in the foreign bank's home country 
with responsibility for the supervision and regulation of the foreign 
bank.
    (r) Licensing authority means:
    (1) The relevant state supervisor, with respect to an application 
to establish a state branch, state agency, commercial lending company, 
or representative office of a foreign bank; or
    (2) The Comptroller, with respect to an application to establish a 
federal branch or federal agency.
    (s) Limited branch means a branch of a foreign bank that receives 
only such deposits as would be permitted for a corporation organized 
under section 25A of the Federal Reserve Act (12 U.S.C. 611-631).
    (t) Office or office of a foreign bank means any branch, agency, 
representative office, or commercial lending company subsidiary of a 
foreign bank in the United States.
    (u) A parent of a foreign bank means a company of which the foreign 
bank is a subsidiary. An immediate parent of a foreign bank is a 
company of which the foreign bank is a direct subsidiary. An ultimate 
parent of a foreign bank is a parent of the foreign bank that is not 
the subsidiary of any other company.
    (v) Regional administrative office means a representative office 
that:
    (1) Is established by a foreign bank that operates two or more 
branches, agencies, commercial lending companies, or banks in the 
United States;
    (2) Is located in the same city as one or more of the foreign 
bank's branches, agencies, commercial lending companies, or banks in 
the United States;
    (3) Manages, supervises, or coordinates the operations of the 
foreign bank or its affiliates, if any, in a particular geographic area 
that includes the United States or a region thereof, including by 
exercising credit approval authority in that area pursuant to written 
standards, credit policies, and procedures established by the foreign 
bank; and
    (4) Does not solicit business from actual or potential customers of 
the foreign bank or its affiliates.
    (w) Relevant state supervisor means the state entity that is 
authorized to supervise and regulate a state branch, state agency, 
commercial lending company, or representative office.
    (x) Representative office means any office of a foreign bank which 
is located in any state and is not a Federal branch, Federal agency, 
State branch, State agency, or commercial lending company subsidiary.
    (y) State means any state of the United States or the District of 
Columbia.
    (z) Subsidiary means any organization that:
    (1) Has 25 percent or more of its voting shares directly or 
indirectly owned, controlled, or held with the power to vote by a 
company, including a foreign bank or foreign banking organization; or
    (2) Is otherwise controlled, or capable of being controlled, by a 
foreign bank or foreign banking organization.


Sec. 211.22  Interstate banking operations of foreign banking 
organizations.

    (a) Determination of home state. (1) A foreign bank that, as of 
December 10, 1997, had declared a home state or had a home state 
determined pursuant to the law and regulations in effect prior to that 
date shall have that state as its home state.
    (2) A foreign bank that has any branches, agencies, commercial 
lending company subsidiaries, or subsidiary banks in one state, and has 
no such offices or subsidiaries in any other states, shall have as its 
home state the state in which such offices or subsidiaries are located.
    (b) Change of home state--(1) Prior notice. A foreign bank may 
change its home state once, if it files 30 days' prior notice of the 
proposed change with the Board.
    (2) Application to change home state. (i) A foreign bank, in 
addition to changing its home state by filing prior notice under 
paragraph (b)(1) of this section, may apply to the Board to change its 
home state, upon showing that a national bank or state-chartered bank 
with the same home state as the foreign bank would be permitted to 
change its home state to the new home state proposed by the foreign 
bank.
    (ii) A foreign bank may apply to the Board for such permission one 
or more times.
    (iii) In determining whether to grant the request of a foreign bank 
to change its home state, the Board shall consider whether the proposed 
change is consistent with competitive equity between foreign and 
domestic banks.
    (3) Effect of change in home state. The home state of a foreign 
bank and any change in its home state by a foreign bank shall not 
affect which Federal Reserve Bank or Reserve Banks supervise the 
operations of the foreign bank, and shall not affect the obligation of 
the foreign bank to file required reports and applications with the 
appropriate Federal Reserve Bank.
    (4) Conforming branches to new home state. Upon any change in home 
state by a foreign bank under paragraph (b)(1) or (b)(2) of this 
section, the domestic branches of the foreign bank established in 
reliance on any previous home state of the foreign bank shall be 
conformed to those which a foreign bank with the new home state could 
permissibly establish or operate as of the date of such change.
    (c) Prohibition against interstate deposit production offices. A 
covered interstate branch of a foreign bank may not be used as a 
deposit production office in accordance with the provisions in 
Sec. 208.7 of Regulation H (12 CFR 208.7).


Sec. 211.23  Nonbanking activities of foreign banking organizations.

    (a) Qualifying foreign banking organizations. Unless specifically 
made eligible for the exemptions by the Board, a foreign banking 
organization shall qualify for the exemptions afforded by this section 
only if, disregarding its United States banking, more than half of its 
worldwide business is banking; and more than half of its banking 
business is outside the United States.\10\ In order to qualify, a 
foreign banking organization shall:
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    \10\ None of the assets, revenues, or net income, whether held 
or derived directly or indirectly, of a subsidiary bank, branch, 
agency, commercial lending company, or other company engaged in the 
business of banking in the United States (including any territory of 
the United States, Puerto Rico, Guam, American Samoa, or the Virgin 
Islands) shall be considered held or derived from the business of 
banking ``outside the United States''.
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    (1) Meet at least two of the following requirements:
    (i) Banking assets held outside the United States exceed total 
worldwide nonbanking assets;
    (ii) Revenues derived from the business of banking outside the 
United States exceed total revenues derived from its worldwide 
nonbanking business; or
    (iii) Net income derived from the business of banking outside the 
United States exceeds total net income derived from its worldwide 
nonbanking business; and
    (2) Meet at least two of the following requirements:
    (i) Banking assets held outside the United States exceed banking 
assets held in the United States;
    (ii) Revenues derived from the business of banking outside the 
United States exceed revenues derived from the business of banking in 
the United States; or

[[Page 54388]]

    (iii) Net income derived from the business of banking outside the 
United States exceeds net income derived from the business of banking 
in the United States.
    (b) Determining assets, revenues, and net income. (1)(i) For 
purposes of paragraph (a) of this section, the total assets, revenues, 
and net income of an organization may be determined on a consolidated 
or combined basis.
    (ii) The foreign banking organization shall include assets, 
revenues, and net income of companies in which it owns 50 percent or 
more of the voting shares when determining total assets, revenues, and 
net income.
    (iii) The foreign banking organization may include assets, 
revenues, and net income of companies in which it owns 25 percent or 
more of the voting shares, if all such companies within the 
organization are included.
    (2) Assets devoted to, or revenues or net income derived from, 
activities listed in Sec. 211.10(a) shall be considered banking assets, 
or revenues or net income derived from the banking business, when 
conducted within the foreign banking organization by a foreign bank or 
its subsidiaries.
    (c) Limited exemptions available to foreign banking organizations 
in certain circumstances. The following shall apply where a foreign 
bank meets the requirements of paragraph (a) of this section but its 
ultimate parent does not:
    (1) Such foreign bank shall be entitled to the exemptions available 
to a qualifying foreign banking organization if its ultimate parent 
meets the requirements set forth in paragraph (a)(2) of this section 
and could meet the requirements in paragraph (a)(1) of this section but 
for the requirement in paragraph (b)(2) of this section that activities 
must be conducted by the foreign bank or its subsidiaries in order to 
be considered derived from the banking business;
    (2) An ultimate parent as described in paragraph (c)(1) of this 
section shall be eligible for the exemptions available to a qualifying 
foreign banking organization except for those provided in 
Sec. 211.23(f)(5)(iii).
    (d) Loss of eligibility for exemptions--(1) Failure to meet 
qualifying test. A foreign banking organization that qualified under 
paragraph (a) or (c) of this section shall cease to be eligible for the 
exemptions of this section if it fails to meet the requirements of 
paragraphs (a) or (c) of this section for two consecutive years, as 
reflected in its annual reports (FR Y-7) filed with the Board.
    (2) Continuing activities and investments. (i) A foreign banking 
organization that ceases to be eligible for the exemptions of this 
section may continue to engage in activities or retain investments 
commenced or acquired prior to the end of the first fiscal year for 
which its annual report reflects nonconformance with paragraph (a) or 
(c) of this section.
    (ii) Termination or divestiture. Activities commenced or 
investments made after that date shall be terminated or divested within 
three months of the filing of the second annual report, or at such time 
as the Board may determine upon request by the foreign banking 
organization to extend the period, unless the Board grants consent to 
continue the activity or retain the investment under paragraph (e) of 
this section.
    (3) Request for specific determination of eligibility. (i) A 
foreign banking organization that ceases to qualify under paragraph (a) 
or (c) of this section, or an affiliate of such foreign banking 
organization, that requests a specific determination of eligibility 
under paragraph (e) of this section may, prior to the Board's 
determination on eligibility, continue to engage in activities and make 
investments under the provisions of paragraphs (f)(1), (2), (3), and 
(4) of this section.
    (ii) The Board may grant consent for the foreign banking 
organization or its affiliate to make investments under paragraph 
(f)(5) of this section.
    (e) Specific determination of eligibility for organizations that do 
not qualify for the exemptions--(1) Application. (i) A foreign 
organization that is not a foreign banking organization or a foreign 
banking organization that does not qualify under paragraph (a) or (c) 
of this section for some or all of the exemptions afforded by this 
section, or that has lost its eligibility for the exemptions under 
paragraph (d) of this section, may apply to the Board for a specific 
determination of eligibility for some or all of the exemptions.
    (ii) A foreign banking organization may apply for a specific 
determination prior to the time it ceases to be eligible for the 
exemptions afforded by this section.
    (2) Factors considered by Board. In determining whether eligibility 
for the exemptions would be consistent with the purposes of the BHC Act 
and in the public interest, the Board shall consider:
    (i) The history and the financial and managerial resources of the 
foreign organization or foreign banking organization;
    (ii) The amount of its business in the United States;
    (iii) The amount, type, and location of its nonbanking activities, 
including whether such activities may be conducted by U.S. banks or 
bank holding companies;
    (iv) Whether eligibility of the foreign organization or foreign 
banking organization would result in undue concentration of resources, 
decreased or unfair competition, conflicts of interests, or unsound 
banking practices; and
    (v) The extent to which the foreign banking organization is subject 
to comprehensive supervision or regulation on a consolidated basis or 
the foreign organization is subject to oversight by regulatory 
authorities in its home country.
    (3) Conditions and limitations. The Board may impose any conditions 
and limitations on a determination of eligibility, including 
requirements to cease activities or dispose of investments.
    (4) Eligibility not granted. Determinations of eligibility 
generally would not be granted where a majority of the business of the 
foreign organization or foreign banking organization derives from 
commercial or industrial activities.
    (f) Permissible activities and investments. A foreign banking 
organization that qualifies under paragraph (a) of this section may:
    (1) Engage in activities of any kind outside the United States;
    (2) Engage directly in activities in the United States that are 
incidental to its activities outside the United States;
    (3) Own or control voting shares of any company that is not 
engaged, directly or indirectly, in any activities in the United 
States, other than those that are incidental to the international or 
foreign business of such company;
    (4) Own or control voting shares of any company in a fiduciary 
capacity under circumstances that would entitle such shareholding to an 
exemption under section 4(c)(4) of the BHC Act (12 U.S.C. 1843(c)(4)) 
if the shares were held or acquired by a bank;
    (5) Own or control voting shares of a foreign company that is 
engaged directly or indirectly in business in the United States other 
than that which is incidental to its international or foreign business, 
subject to the following limitations:
    (i) More than 50 percent of the foreign company's consolidated 
assets shall be located, and consolidated revenues derived from, 
outside the United States; provided that, if the foreign company fails 
to meet the requirements of this paragraph (f)(5)(i) for two 
consecutive years (as reflected in annual reports (FR Y-7) filed with 
the Board by the foreign banking organization), the foreign

[[Page 54389]]

company shall be divested or its activities terminated within one year 
of the filing of the second consecutive annual report that reflects 
nonconformance with the requirements of this paragraph (f)(5)(i), 
unless the Board grants consent to retain the investment under 
paragraph (g) of this section;
    (ii) The foreign company shall not directly underwrite, sell, or 
distribute, nor own or control more than 10 percent of the voting 
shares of a company that underwrites, sells, or distributes securities 
in the United States, except to the extent permitted bank holding 
companies;
    (iii) If the foreign company is a subsidiary of the foreign banking 
organization, the foreign company must be, or must control, an 
operating company, and its direct or indirect activities in the United 
States shall be subject to the following limitations:
    (A) The foreign company's activities in the United States shall be 
the same kind of activities, or related to the activities, engaged in 
directly or indirectly by the foreign company abroad, as measured by 
the ``establishment'' categories of the Standard Industrial 
Classification (SIC). An activity in the United States shall be 
considered related to an activity outside the United States if it 
consists of supply, distribution, or sales in furtherance of the 
activity;
    (B) The foreign company may engage in activities in the United 
States that consist of banking, securities, insurance, or other 
financial operations, or types of activities permitted by regulation or 
order under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)), only 
under regulations of the Board or with the prior approval of the Board, 
subject to the following;
    (1) Activities within Division H (Finance, Insurance, and Real 
Estate) of the SIC shall be considered banking or financial operations 
for this purpose, with the exception of acting as operators of 
nonresidential buildings (SIC 6512), operators of apartment buildings 
(SIC 6513), operators of dwellings other than apartment buildings (SIC 
6514), and operators of residential mobile home sites (SIC 6515); and 
operating title abstract offices (SIC 6541); and
    (2) The following activities shall be considered financial 
activities and may be engaged in only with the approval of the Board 
under paragraph (g) of this section: credit reporting services (SIC 
7323); computer and data processing services (SIC 7371, 7372, 7373, 
7374, 7375, 7376, 7377, 7378, and 7379); armored car services (SIC 
7381); management consulting (SIC 8732, 8741, 8742, and 8748); certain 
rental and leasing activities (SIC 4741, 7352, 7353, 7359, 7513, 7514, 
7515, and 7519); accounting, auditing, and bookkeeping services (SIC 
8721); courier services (SIC 4215 and 4513); and arrangement of 
passenger transportation (SIC 4724, 4725, and 4729).
    (g) Exemptions under section 4(c)(9) of the BHC Act. A foreign 
banking organization that is of the opinion that other activities or 
investments may, in particular circumstances, meet the conditions for 
an exemption under section 4(c)(9) of the BHC Act (12 U.S.C. 
1843(c)(9)) may apply to the Board for such a determination by 
submitting to the appropriate Federal Reserve Bank a letter setting 
forth the basis for that opinion.
    (h) Reports. The foreign banking organization shall report in a 
manner prescribed by the Board any direct activities in the United 
States by a foreign subsidiary of the foreign banking organization and 
the acquisition of all shares of companies engaged, directly or 
indirectly, in activities in the United States that were acquired under 
the authority of this section.
    (i) Availability of information. If any information required under 
this section is unknown and not reasonably available to the foreign 
banking organization (either because obtaining it would involve 
unreasonable effort or expense, or because it rests exclusively within 
the knowledge of a company that is not controlled by the organization) 
the organization shall:
    (1) Give such information on the subject as it possesses or can 
reasonably acquire, together with the sources thereof; and
    (2) Include a statement showing that unreasonable effort or expense 
would be involved, or indicating that the company whose shares were 
acquired is not controlled by the organization, and stating the result 
of a request for information.


Sec. 211.24  Approval of offices of foreign banks; procedures for 
applications; standards for approval; representative office activities 
and standards for approval; preservation of existing authority.

    (a) Board approval of offices of foreign banks--(1) Prior Board 
approval of branches, agencies, commercial lending companies, or 
representative offices of foreign banks. (i) Except as otherwise 
provided in paragraphs (a)(2) and (a)(3) of this section, a foreign 
bank shall obtain the approval of the Board before it:
    (A) Establishes a branch, agency, commercial lending company 
subsidiary, or representative office in the United States; or
    (B) Acquires ownership or control of a commercial lending company 
subsidiary.
    (2) Prior notice for certain offices. (i) After providing 45 days' 
prior written notice to the Board, a foreign bank may establish:
    (A) An additional office (other than a domestic branch outside the 
home state of the foreign bank established pursuant to section 5(a)(3) 
of the IBA (12 U.S.C. 3103(a)(3))), provided that the Board has 
previously determined the foreign bank to be subject to comprehensive 
supervision or regulation on a consolidated basis by its home country 
supervisor (comprehensive consolidated supervision or CCS); or
    (B) A representative office, if:
    (1) The Board has not yet determined the foreign bank to be subject 
to consolidated comprehensive supervision, but the foreign bank is 
subject to the BHC Act, either directly or through section 8(a) of the 
IBA (12 U.S.C. 3106(a)); or
    (2) The Board previously has approved an application by the foreign 
bank to establish a branch or agency pursuant to the standard set forth 
in paragraph (c)(1)(iii) of this section; or
    (3) The Board previously has approved an application by the foreign 
bank to establish a representative office.
    (ii) The Board may waive the 45-day notice period if it finds that 
immediate action is required by the circumstances presented. The notice 
period shall commence at the time the notice is received by the 
appropriate Federal Reserve Bank. The Board may suspend the period or 
require Board approval prior to the establishment of such office if the 
notification raises significant policy or supervisory concerns.
    (3) General consent for certain representative offices. (i) The 
Board grants its general consent for a foreign bank that is subject to 
the BHC Act, either directly or through section 8(a) of the IBA (12 
U.S.C. 3106(a)), to establish:
    (A) A representative office, but only if the Board has previously 
determined that the foreign bank proposing to establish a 
representative office is subject to consolidated comprehensive 
supervision;
    (B) A regional administrative office; or
    (C) An office that solely engages in limited administrative 
functions (such as separately maintaining back-office support systems) 
that:
    (1) Are clearly defined;
    (2) Are performed in connection with the U.S. banking activities of 
the foreign bank; and

[[Page 54390]]

    (3) Do not involve contact or liaison with customers or potential 
customers, beyond incidental contact with existing customers relating 
to administrative matters (such as verification or correction of 
account information).
    (4) Suspension of general consent or prior notice procedures. The 
Board may, at any time, upon notice, modify or suspend the prior notice 
and general consent procedures in paragraphs (a)(2) and (3) of this 
section for any foreign bank with respect to the establishment by such 
foreign bank of any U.S. office of such foreign bank.
    (5) Temporary offices. The Board may, in its discretion, determine 
that a foreign bank has not established an office if the foreign bank 
temporarily operates at one or more additional locations in the same 
city of an existing branch or agency due to renovations, an expansion 
of activities, a merger or consolidation of the operations of 
affiliated foreign banks or companies, or other similar circumstances. 
The foreign bank must provide reasonable advance notice of its intent 
temporarily to utilize additional locations, and the Board may impose 
such conditions in connection with its determination as it deems 
necessary.
    (6) After-the-fact Board approval. Where a foreign bank proposes to 
establish an office in the United States through the acquisition of, or 
merger or consolidation with, another foreign bank with an office in 
the United States, the Board may, in its discretion, allow the 
acquisition, merger, or consolidation to proceed before an application 
to establish the office has been filed or acted upon under this section 
if:
    (i) The foreign bank or banks resulting from the acquisition, 
merger, or consolidation, will not directly or indirectly own or 
control more than 5 percent of any class of the voting securities of, 
or control, a U.S. bank;
    (ii) The Board is given reasonable advance notice of the proposed 
acquisition, merger, or consolidation; and
    (iii) Prior to consummation of the acquisition, merger, or 
consolidation, each foreign bank, as appropriate, commits in writing 
either:
    (A) To comply with the procedures for an application under this 
section within a reasonable period of time; to engage in no new lines 
of business, or otherwise to expand its U.S. activities until the 
disposition of the application; and to abide by the Board's decision on 
the application, including, if necessary, a decision to terminate the 
activities of any such U.S. office, as the Board or the Comptroller may 
require; or
    (B) Promptly to wind-down and close any office, the establishment 
of which would have required an application under this section; and to 
engage in no new lines of business or otherwise to expand its U.S. 
activities prior to the closure of such office.
    (7) Notice of change in ownership or control or conversion of 
existing office or establishment of representative office under 
general-consent authority. A foreign bank with a U.S. office shall 
notify the Board in writing within 10 days of the occurrence of any of 
the following events:
    (i) A change in the foreign bank's ownership or control, where the 
foreign bank is acquired or controlled by another foreign bank or 
company and the acquired foreign bank with a U.S. office continues to 
operate in the same corporate form as prior to the change in ownership 
or control;
    (ii) The conversion of a branch to an agency or representative 
office; an agency to a representative office; or a branch or agency 
from a federal to a state license, or a state to a federal license; or
    (iii) The establishment of a representative office under general-
consent authority.
    (8) Transactions subject to approval under Regulation Y. Subpart B 
of Regulation Y (12 CFR 225.11-225.17) governs the acquisition by a 
foreign banking organization of direct or indirect ownership or control 
of any voting securities of a bank or bank holding company in the 
United States if the acquisition results in the foreign banking 
organization's ownership or control of more than 5 percent of any class 
of voting securities of a U.S. bank or bank holding company, including 
through acquisition of a foreign bank or foreign banking organization 
that owns or controls more than 5 percent of any class of the voting 
securities of a U.S. bank or bank holding company.
    (b) Procedures for application--(1) Filing application. An 
application for the Board's approval pursuant to this section shall be 
filed in the manner prescribed by the Board.
    (2) Publication requirement--(i) Newspaper notice. Except with 
respect to a proposed transaction where more extensive notice is 
required by statute or as otherwise provided in paragraphs (b)(2)(ii) 
and (iii) of this section, an applicant under this section shall 
publish a notice in a newspaper of general circulation in the community 
in which the applicant proposes to engage in business.
    (ii) Contents of notice. The newspaper notice shall:
    (A) State that an application is being filed as of the date of the 
newspaper notice; and
    (B) Provide the name of the applicant, the subject matter of the 
application, the place where comments should be sent, and the date by 
which comments are due, pursuant to paragraph (b)(3) of this section.
    (iii) Copy of notice with application. The applicant shall furnish 
with its application to the Board a copy of the newspaper notice, the 
date of its publication, and the name and address of the newspaper in 
which it was published.
    (iv) Exception. The Board may modify the publication requirement of 
paragraphs (b)(2)(i) and (ii) of this section in appropriate 
circumstances.
    (v) Federal branch or federal agency. In the case of an application 
to establish a federal branch or federal agency, compliance with the 
publication procedures of the Comptroller shall satisfy the publication 
requirement of this section. Comments regarding the application should 
be sent to the Board and the Comptroller.
    (3) Written comments. (i) Within 30 days after publication, as 
required in paragraph (b)(2) of this section, any person may submit to 
the Board written comments and data on an application.
    (ii) The Board may extend the 30-day comment period if the Board 
determines that additional relevant information is likely to be 
provided by interested persons, or if other extenuating circumstances 
exist.
    (4) Board action on application. (i) Time limits. (A) The Board 
shall act on an application from a foreign bank to establish a branch, 
agency, or commercial lending company subsidiary within 180 calendar 
days after the receipt of the application.
    (B) The Board may extend for an additional 180 calendar days the 
period within which to take final action, after providing notice of and 
reasons for the extension to the applicant and the licensing authority.
    (C) The time periods set forth in this paragraph (b)(4)(i) may be 
waived by the applicant.
    (ii) Additional information. The Board may request any information 
in addition to that supplied in the application when the Board believes 
that the information is necessary for its decision, and may deny an 
application if it does not receive the information requested from the 
applicant or its home country supervisor in sufficient time to permit 
adequate evaluation of the information within the time periods set 
forth in paragraph (b)(4)(i) of this section.

[[Page 54391]]

    (5) Coordination with other regulators. Upon receipt of an 
application by a foreign bank under this section, the Board shall 
promptly notify, consult with, and consider the views of the licensing 
authority.
    (c) Standards for approval of U.S. offices of foreign banks-- (1) 
Mandatory standards--(i) General. As specified in section 7(d) of the 
IBA (12 U.S.C. 3105(d)), the Board may not approve an application to 
establish a branch or an agency, or to establish or acquire ownership 
or control of a commercial lending company, unless it determines that:
    (A) Each of the foreign bank and any parent foreign bank engages 
directly in the business of banking outside the United States and, 
except as provided in paragraph (c)(1)(iii) of this section, is subject 
to comprehensive supervision or regulation on a consolidated basis by 
its home country supervisor; and
    (B) The foreign bank has furnished to the Board the information 
that the Board requires in order to assess the application adequately.
    (ii) Basis for determining comprehensive consolidated supervision. 
In determining whether a foreign bank and any parent foreign bank is 
subject to comprehensive consolidated supervision, the Board shall 
determine whether the foreign bank is supervised or regulated in such a 
manner that its home country supervisor receives sufficient information 
on the worldwide operations of the foreign bank (including the 
relationships of the bank to any affiliate) to assess the foreign 
bank's overall financial condition and compliance with law and 
regulation. In making such a determination, the Board shall assess, 
among other factors, the extent to which the home country supervisor:
    (A) Ensures that the foreign bank has adequate procedures for 
monitoring and controlling its activities worldwide;
    (B) Obtains information on the condition of the foreign bank and 
its subsidiaries and offices outside the home country through regular 
reports of examination, audit reports, or otherwise;
    (C) Obtains information on the dealings and relationship between 
the foreign bank and its affiliates, both foreign and domestic;
    (D) Receives from the foreign bank financial reports that are 
consolidated on a worldwide basis, or comparable information that 
permits analysis of the foreign bank's financial condition on a 
worldwide, consolidated basis;
    (E) Evaluates prudential standards, such as capital adequacy and 
risk asset exposure, on a worldwide basis.
    (iii) Determination of comprehensive consolidated supervision not 
required in certain circumstances. (A) If the Board is unable to find, 
under paragraph (c)(1)(i) of this section, that a foreign bank is 
subject to comprehensive consolidated supervision, the Board may, 
nevertheless, approve an application by the foreign bank if:
    (1) The home country supervisor is actively working to establish 
arrangements for the consolidated supervision of such bank; and
    (2) All other factors are consistent with approval.
    (B) In deciding whether to use its discretion under this paragraph 
(c)(1)(iii), the Board also shall consider whether the foreign bank has 
adopted and implemented procedures to combat money laundering. The 
Board also may take into account whether the home country supervisor is 
developing a legal regime to address money laundering or is 
participating in multilateral efforts to combat money laundering. In 
approving an application under this paragraph (c)(1)(iii), the Board, 
after requesting and taking into consideration the views of the 
licensing authority, may impose any conditions or restrictions relating 
to the activities or business operations of the proposed branch, 
agency, or commercial lending company subsidiary, including 
restrictions on sources of funding. The Board shall coordinate with the 
licensing authority in the implementation of such conditions or 
restrictions.
    (2) Additional standards. In acting on any application under this 
subpart, the Board may take into account:
    (i) Consent of home country supervisor. Whether the home country 
supervisor of the foreign bank has consented to the proposed 
establishment of the branch, agency, or commercial lending company 
subsidiary;
    (ii) Financial resources. The financial resources of the foreign 
bank (including the foreign bank's capital position, projected capital 
position, profitability, level of indebtedness, and future prospects) 
and the condition of any U.S. office of the foreign bank;
    (iii) Managerial resources. The managerial resources of the foreign 
bank, including the competence, experience, and integrity of the 
officers and directors; the integrity of its principal shareholders; 
management's experience and capacity to engage in international 
banking; and the record of the foreign bank and its management of 
complying with laws and regulations, and of fulfilling any commitments 
to, and any conditions imposed by, the Board in connection with any 
prior application;
    (iv) Sharing information with supervisors. Whether the foreign 
bank's home country supervisor and the home country supervisor of any 
parent of the foreign bank share material information regarding the 
operations of the foreign bank with other supervisory authorities;
    (v) Assurances to Board. (A) Whether the foreign bank has provided 
the Board with adequate assurances that information will be made 
available to the Board on the operations or activities of the foreign 
bank and any of its affiliates that the Board deems necessary to 
determine and enforce compliance with the IBA, the BHC Act, and other 
applicable federal banking statutes.
    (B) These assurances shall include a statement from the foreign 
bank describing the laws that would restrict the foreign bank or any of 
its parents from providing information to the Board;
    (vi) Measures for prevention of money laundering. Whether the 
foreign bank has adopted and implemented procedures to combat money 
laundering, whether there is a legal regime in place in the home 
country to address money laundering, and whether the home country is 
participating in multilateral efforts to combat money laundering;
    (vii) Compliance with U.S. law. Whether the foreign bank and its 
U.S. affiliates are in compliance with applicable U.S. law, and whether 
the applicant has established adequate controls and procedures in each 
of its offices to ensure continuing compliance with U.S. law, including 
controls directed to detection of money laundering and other unsafe or 
unsound banking practices; and (viii) The needs of the community and 
the history of operation of the foreign bank and its relative size in 
its home country, provided that the size of the foreign bank is not the 
sole factor in determining whether an office of a foreign bank should 
be approved.
    (3) Additional standards for certain interstate applications. (i) 
As specified in section 5(a)(3) of the IBA (12 U.S.C. 3103(a)(3)), the 
Board may not approve an application by a foreign bank to establish a 
branch, other than a limited branch, outside the home state of the 
foreign bank under section 5(a)(1) or (2) of the IBA (12 U.S.C. 
3103(a)(1), (2)) unless the Board:
    (A) Determines that the foreign bank's financial resources, 
including the capital level of the bank, are equivalent to those 
required for a domestic bank to

[[Page 54392]]

be approved for branching under section 5155 of the Revised Statutes 
(12 U.S.C. 36) and section 44 of the Federal Deposit Insurance Act 
(FDIA) (12 U.S.C. 1831u);
    (B) Consults with the Department of the Treasury regarding capital 
equivalency;
    (C) Applies the standards specified in section 7(d) of the IBA (12 
U.S.C. 3105(d)) and this paragraph (c); and
    (D) Applies the same requirements and conditions to which an 
application by a domestic bank for an interstate merger is subject 
under section 44(b)(1), (3), and (4) of the FDIA (12 U.S.C. 
1831u(b)(1), (3), (4)); and
    (ii) As specified in section 5(a)(7) of the IBA (12 U.S.C. 
3103(a)(7)), the Board may not approve an application to establish a 
branch through a change in status of an agency or limited branch 
outside the foreign bank's home state unless:
    (A) The establishment and operation of such branch is permitted by 
such state; and
    (B) Such agency or branch has been in operation in such state for a 
period of time that meets the state's minimum age requirement permitted 
under section 44(a)(5) of the Federal Deposit Insurance Act (12 U.S.C. 
183u(a)(5)).
    (4) Board conditions on approval. The Board may impose any 
conditions on its approval as it deems necessary, including a condition 
which may permit future termination by the Board of any activities or, 
in the case of a federal branch or a federal agency, by the 
Comptroller, based on the inability of the foreign bank to provide 
information on its activities or those of its affiliates that the Board 
deems necessary to determine and enforce compliance with U.S. banking 
laws.
    (d) Representative offices--(1) Permissible activities. A 
representative office may engage in:
    (i) Representational and administrative functions. Representational 
and administrative functions in connection with the banking activities 
of the foreign bank, which may include soliciting new business for the 
foreign bank; conducting research; acting as liaison between the 
foreign bank's head office and customers in the United States; 
performing preliminary and servicing steps in connection with lending; 
\11\ or performing back-office functions; but shall not include 
contracting for any deposit or deposit-like liability, lending money, 
or engaging in any other banking activity for the foreign bank;
---------------------------------------------------------------------------

    \11\ See 12 CFR 250.141(h) for activities that constitute 
preliminary and servicing steps.
---------------------------------------------------------------------------

    (ii) Credit approvals under certain circumstances. Making credit 
decisions if the foreign bank also operates one or more branches or 
agencies in the United States, the loans approved at the representative 
office are made by a U.S. office of the bank, and the loan proceeds are 
not disbursed in the representative office; and
    (iii) Other functions. Other functions for or on behalf of the 
foreign bank or its affiliates, such as operating as a regional 
administrative office of the foreign bank, but only to the extent that 
these other functions are not banking activities and are not prohibited 
by applicable federal or state law, or by ruling or order of the Board.
    (2) Standards for approval of representative offices. As specified 
in section 10(a)(2) of the IBA (12 U.S.C. 3107(a)(2)), in acting on the 
application of a foreign bank to establish a representative office, the 
Board shall take into account, to the extent it deems appropriate, the 
standards for approval set out in paragraph (c) of this section. The 
standard regarding supervision by the foreign bank's home country 
supervisor (as set out in paragraph (c)(1)(i)(A) of this section) will 
be met, in the case of a representative office application, if the 
Board makes a finding that the applicant bank is subject to a 
supervisory framework that is consistent with the activities of the 
proposed representative office, taking into account the nature of such 
activities and the operating record of the applicant.
    (3) Special-purpose foreign government-owned banks. A foreign 
government-owned organization engaged in banking activities in its home 
country that are not commercial in nature may apply to the Board for a 
determination that the organization is not a foreign bank for purposes 
of this section. A written request setting forth the basis for such a 
determination may be submitted to the Reserve Bank of the District in 
which the foreign organization's representative office is located in 
the United States, or to the Board, in the case of a proposed 
establishment of a representative office. The Board shall review and 
act upon each request on a case-by-case basis.
    (4) Additional requirements. The Board may impose any additional 
requirements that it determines to be necessary to carry out the 
purposes of the IBA.
    (e) Preservation of existing authority. Nothing in this subpart 
shall be construed to relieve any foreign bank or foreign banking 
organization from any otherwise applicable requirement of federal or 
state law, including any applicable licensing requirement.
    (f) Reports of crimes and suspected crimes. Except for a federal 
branch or a federal agency or a state branch that is insured by the 
Federal Deposit Insurance Corporation (FDIC), a branch, agency, or 
representative office of a foreign bank operating in the United States 
shall file a suspicious activity report in accordance with the 
provisions of Sec. 208.62 of Regulation H (12 CFR 208.62).
    (g) Management of shell branches. (1) A state-licensed branch or 
agency shall not manage, through an office of the foreign bank which is 
located outside the United States and is managed or controlled by such 
state-licensed branch or agency, any type of activity that a bank 
organized under the laws of the United States or any state is not 
permitted to manage at any branch or subsidiary of such bank which is 
located outside the United States.
    (2) For purposes of this paragraph (g), an office of a foreign bank 
located outside the United States is ``managed or controlled'' by a 
state-licensed branch or agency if a majority of the responsibility for 
business decisions, including but not limited to decisions with regard 
to lending or asset management or funding or liability management, or 
the responsibility for recordkeeping in respect of assets or 
liabilities for that non-U.S. office, resides at the state-licensed 
branch or agency.
    (3) The types of activities that a state-licensed branch or agency 
may manage through an office located outside the United States that it 
manage or controls include the types of activities authorized to a U.S. 
bank by state or federal charters, regulations issued by chartering or 
regulatory authorities, and other U.S. banking laws, including the 
Federal Reserve Act, and the implementing regulations, but U.S. 
procedural or quantitative requirements that may be applicable to the 
conduct of such activities by U.S. banks shall not apply.
    (h) Government securities sales practices. An uninsured state-
licensed branch or agency of a foreign bank that is required to give 
notice to the Board under section 15C of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-5) and the Department of the Treasury rules under 
section 15C (17 CFR 400.1(d) and part 401) shall be subject to the 
provisions of 12 CFR 208.37 to the same extent as a state member bank 
that is required to give such notice.
    (i) Protection of customer information. An uninsured state-licensed 
branch or

[[Page 54393]]

agency of a foreign bank shall comply with the Interagency Guidelines 
Establishing Standards for Safeguarding Customer Information prescribed 
pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15 
U.S.C. 6801 and 6805), set forth in appendix D-2 to part 208 of this 
chapter.


Sec. 211.25  Termination of offices of foreign banks.

    (a) Grounds for termination--(1) General. Under sections 7(e) and 
10(b) of the IBA (12 U.S.C. 3105(d), 3107(b)), the Board may order a 
foreign bank to terminate the activities of its representative office, 
state branch, state agency, or commercial lending company subsidiary if 
the Board finds that:
    (i) The foreign bank is not subject to comprehensive consolidated 
supervision in accordance with Sec. 211.24(c)(1), and the home country 
supervisor is not making demonstrable progress in establishing 
arrangements for the consolidated supervision of the foreign bank; or
    (ii) Both of the following criteria are met:
    (A) There is reasonable cause to believe that the foreign bank, or 
any of its affiliates, has committed a violation of law or engaged in 
an unsafe or unsound banking practice in the United States; and
    (B) As a result of such violation or practice, the continued 
operation of the foreign bank's representative office, state branch, 
state agency, or commercial lending company subsidiary would not be 
consistent with the public interest, or with the purposes of the IBA, 
the BHC Act, or the FDIA.
    (2) Additional ground. The Board also may enforce any condition 
imposed in connection with an order issued under Sec. 211.24.
    (b) Factor. In making its findings under this section, the Board 
may take into account the needs of the community, the history of 
operation of the foreign bank, and its relative size in its home 
country, provided that the size of the foreign bank shall not be the 
sole determining factor in a decision to terminate an office.
    (c) Consultation with relevant state supervisor. Except in the case 
of termination pursuant to the expedited procedure in paragraph (d)(3) 
of this section, the Board shall request and consider the views of the 
relevant state supervisor before issuing an order terminating the 
activities of a state branch, state agency, representative office, or 
commercial lending company subsidiary under this section.
    (d) Termination procedures--(1) Notice and hearing. Except as 
otherwise provided in paragraph (d)(3) of this section, an order issued 
under paragraph (a)(1) of this section shall be issued only after 
notice to the relevant state supervisor and the foreign bank and after 
an opportunity for a hearing.
    (2) Procedures for hearing. Hearings under this section shall be 
conducted pursuant to the Board's Rules of Practice for Hearings (12 
CFR part 263).
    (3) Expedited procedure. The Board may act without providing an 
opportunity for a hearing, if it determines that expeditious action is 
necessary in order to protect the public interest. When the Board finds 
that it is necessary to act without providing an opportunity for a 
hearing, the Board, solely in its discretion, may:
    (i) Provide the foreign bank that is the subject of the termination 
order with notice of the intended termination order;
    (ii) Grant the foreign bank an opportunity to present a written 
submission opposing issuance of the order; or
    (iii) Take any other action designed to provide the foreign bank 
with notice and an opportunity to present its views concerning the 
order.
    (e) Termination of federal branch or federal agency. The Board may 
transmit to the Comptroller a recommendation that the license of a 
federal branch or federal agency be terminated if the Board has 
reasonable cause to believe that the foreign bank or any affiliate of 
the foreign bank has engaged in conduct for which the activities of a 
state branch or state agency may be terminated pursuant to this 
section.
    (f) Voluntary termination. A foreign bank shall notify the Board at 
least 30 days prior to terminating the activities of any office. Notice 
pursuant to this paragraph (f) is in addition to, and does not satisfy, 
any other federal or state requirements relating to the termination of 
an office or the requirement for prior notice of the closing of a 
branch, pursuant to section 39 of the FDIA (12 U.S.C. 1831p).


Sec. 211.26  Examination of offices and affiliates of foreign banks.

    (a) Conduct of examinations--(1) Examination of branches, agencies, 
commercial lending companies, and affiliates. The Board may examine:
    (i) Any branch or agency of a foreign bank;
    (ii) Any commercial lending company or bank controlled by one or 
more foreign banks, or one or more foreign companies that control a 
foreign bank; and
    (iii) Any other office or affiliate of a foreign bank conducting 
business in any state.
    (2) Examination of representative offices. The Board may examine 
any representative office in the manner and with the frequency it deems 
appropriate.
    (b) Coordination of examinations. To the extent possible, the Board 
shall coordinate its examinations of the U.S. offices and U.S. 
affiliates of a foreign bank with the licensing authority and, in the 
case of an insured branch, the Federal Deposit Insurance Corporation 
(FDIC), including through simultaneous examinations of the U.S. offices 
and U.S. affiliates of a foreign bank.
    (c) Frequency of on-site examination--(1) General. Each branch or 
agency of a foreign bank shall be examined on-site at least once during 
each 12-month period (beginning on the date the most recent examination 
of the office ended) by--
    (i) The Board;
    (ii) The FDIC, if the branch of the foreign bank accepts or 
maintains insured deposits;
    (iii) The Comptroller, if the branch or agency of the foreign bank 
is licensed by the Comptroller; or
    (iv) The state supervisor, if the office of the foreign bank is 
licensed or chartered by the state.
    (2) 18-month cycle for certain small institutions--(i) Mandatory 
standards. The Board may conduct a full-scope, on-site examination at 
least once during each 18-month period, rather than each 12-month 
period as required in paragraph (c)(1) of this section, if the branch 
or agency--
    (A) Has total assets of $250 million or less;
    (B) Has received a composite ROCA supervisory rating (which rates 
risk management, operational controls, compliance, and asset quality) 
of 1 or 2 at its most recent examination;
    (C) Satisfies the requirement of either the following paragraph 
(c)(2)(i)(C)(1) or (2):
    (1) The foreign bank's most recently reported capital adequacy 
position consists of, or is equivalent to, tier 1 and total risk-based 
capital ratios of at least 6 percent and 10 percent, respectively, on a 
consolidated basis; or
    (2) The branch or agency has maintained on a daily basis, over the 
past three quarters, eligible assets in an amount not less than 108 
percent of the preceding quarter's average third-party liabilities 
(determined consistent with applicable federal and state law) and 
sufficient liquidity is currently available to meet its obligations to 
third parties;

[[Page 54394]]

    (D) Is not subject to a formal enforcement action or order by the 
Board, FDIC, or OCC; and
    (E) Has not experienced a change in control during the preceding 
12-month period in which a full-scope, on-site examination would have 
been required but for this section.
    (ii) Discretionary standards. In determining whether a branch or 
agency of a foreign bank that meets the standards of paragraph 
(c)(2)(i) of this section should not be eligible for an 18-month 
examination cycle pursuant to this paragraph (c)(2), the Board may 
consider additional factors, including whether--
    (A) Any of the individual components of the ROCA supervisory rating 
of a branch or agency of a foreign bank is rated ``3'' or worse;
    (B) The results of any off-site surveillance indicate a 
deterioration in the condition of the office;
    (C) The size, relative importance, and role of a particular office 
when reviewed in the context of the foreign bank's entire U.S. 
operations otherwise necessitate an annual examination; and
    (D) The condition of the foreign bank gives rise to such a need.
    (3) Authority to conduct more frequent examinations. Nothing in 
paragraphs (c)(1) and (2) of this section limits the authority of the 
Board to examine any U.S. branch or agency of a foreign bank as 
frequently as it deems necessary.


Sec. 211.27  Disclosure of supervisory information to foreign 
supervisors.

    (a) Disclosure by Board. The Board may disclose information 
obtained in the course of exercising its supervisory or examination 
authority to a foreign bank regulatory or supervisory authority, if the 
Board determines that disclosure is appropriate for bank supervisory or 
regulatory purposes and will not prejudice the interests of the United 
States.
    (b) Confidentiality. Before making any disclosure of information 
pursuant to paragraph (a) of this section, the Board shall obtain, to 
the extent necessary, the agreement of the foreign bank regulatory or 
supervisory authority to maintain the confidentiality of such 
information to the extent possible under applicable law.


Sec. 211.28  Provisions applicable to branches and agencies: limitation 
on loans to one borrower.

    (a) Limitation on loans to one borrower. Except as provided in 
paragraph (b) of this section, the total loans and extensions of credit 
by all the state branches and state agencies of a foreign bank 
outstanding to a single borrower at one time shall be aggregated with 
the total loans and extensions of credit by all federal branches and 
federal agencies of the same foreign bank outstanding to such borrower 
at the time; and shall be subject to the limitations and other 
provisions of section 5200 of the Revised Statutes (12 U.S.C. 84), and 
the regulations promulgated thereunder, in the same manner that 
extensions of credit by a federal branch or federal agency are subject 
to section 4(b) of the IBA (12 U.S.C. 3102(b)) as if such state 
branches and state agencies were federal branches and federal agencies.
    (b) Preexisting loans and extensions of credit. Any loans or 
extensions of credit to a single borrower that were originated prior to 
December 19, 1991, by a state branch or state agency of the same 
foreign bank and that, when aggregated with loans and extensions of 
credit by all other branches and agencies of the foreign bank, exceed 
the limits set forth in paragraph (a) of this section, may be brought 
into compliance with such limitations through routine repayment, 
provided that any new loans or extensions of credit (including renewals 
of existing unfunded credit lines, or extensions of the maturities of 
existing loans) to the same borrower shall comply with the limits set 
forth in paragraph (a) of this section.


Sec. 211.29  Applications by state branches and state agencies to 
conduct activities not permissible for federal branches.

    (a) Scope. A state branch or state agency shall file with the Board 
a prior written application for permission to engage in or continue to 
engage in any type of activity that:
    (1) Is not permissible for a federal branch, pursuant to statute, 
regulation, official bulletin or circular, or order or interpretation 
issued in writing by the Comptroller; or
    (2) Is rendered impermissible due to a subsequent change in 
statute, regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction.
    (b) Exceptions. No application shall be required by a state branch 
or state agency to conduct any activity that is otherwise permissible 
under applicable state and federal law or regulation and that:
    (1) Has been determined by the FDIC, pursuant to 12 CFR 
362.4(c)(3)(i) through (c)(3)(ii)(A), not to present a significant risk 
to the affected deposit insurance fund;
    (2) Is permissible for a federal branch, but the Comptroller 
imposes a quantitative limitation on the conduct of such activity by 
the federal branch;
    (3) Is conducted as agent rather than as principal, provided that 
the activity is one that could be conducted by a state-chartered bank 
headquartered in the same state in which the branch or agency is 
licensed; or
    (4) Any other activity that the Board has determined may be 
conducted by any state branch or state agency of a foreign bank without 
further application to the Board.
    (c) Contents of application. An application submitted pursuant to 
paragraph (a) of this section shall be in letter form and shall contain 
the following information:
    (1) A brief description of the activity, including the manner in 
which it will be conducted, and an estimate of the expected dollar 
volume associated with the activity;
    (2) An analysis of the impact of the proposed activity on the 
condition of the U.S. operations of the foreign bank in general, and of 
the branch or agency in particular, including a copy, if available, of 
any feasibility study, management plan, financial projections, business 
plan, or similar document concerning the conduct of the activity;
    (3) A resolution by the applicant's board of directors or, if a 
resolution is not required pursuant to the applicant's organizational 
documents, evidence of approval by senior management, authorizing the 
conduct of such activity and the filing of this application;
    (4) If the activity is to be conducted by a state branch insured by 
the FDIC, statements by the applicant:
    (i) Of whether or not it is in compliance with 12 CFR 346.19 
(Pledge of Assets) and 12 CFR 346.20 (Asset Maintenance);
    (ii) That it has complied with all requirements of the FDIC 
concerning an application to conduct the activity and the status of the 
application, including a copy of the FDIC's disposition of such 
application, if available; and
    (iii) Explaining why the activity will pose no significant risk to 
the deposit insurance fund; and
    (5) Any other information that the Reserve Bank deems appropriate.
    (d) Factors considered in determination. (1) The Board shall 
consider the following factors in determining whether a proposed 
activity is consistent with sound banking practice:
    (i) The types of risks, if any, the activity poses to the U.S. 
operations of the foreign banking organization in general, and the 
branch or agency in particular;

[[Page 54395]]

    (ii) If the activity poses any such risks, the magnitude of each 
risk; and
    (iii) If a risk is not de minimis, the actual or proposed 
procedures to control and minimize the risk.
    (2) Each of the factors set forth in paragraph (d)(1) of this 
section shall be evaluated in light of the financial condition of the 
foreign bank in general and the branch or agency in particular and the 
volume of the activity.
    (e) Application procedures. Applications pursuant to this section 
shall be filed with the appropriate Federal Reserve Bank. An 
application shall not be deemed complete until it contains all the 
information requested by the Reserve Bank and has been accepted. 
Approval of such an application may be conditioned on the applicant's 
agreement to conduct the activity subject to specific conditions or 
limitations.
    (f) Divestiture or cessation. (1) If an application for permission 
to continue to conduct an activity is not approved by the Board or, if 
applicable, the FDIC, the applicant shall submit a detailed written 
plan of divestiture or cessation of the activity to the appropriate 
Federal Reserve Bank within 60 days of the disapproval.
    (i) The divestiture or cessation plan shall describe in detail the 
manner in which the applicant will divest itself of or cease the 
activity, and shall include a projected timetable describing how long 
the divestiture or cessation is expected to take.
    (ii) Divestiture or cessation shall be complete within one year 
from the date of the disapproval, or within such shorter period of time 
as the Board shall direct.
    (2) If a foreign bank operating a state branch or state agency 
chooses not to apply to the Board for permission to continue to conduct 
an activity that is not permissible for a federal branch, or which is 
rendered impermissible due to a subsequent change in statute, 
regulation, official bulletin or circular, written order or 
interpretation, or decision of a court of competent jurisdiction, the 
foreign bank shall submit a written plan of divestiture or cessation, 
in conformance with paragraph (f)(1) of this section within 60 days of 
the effective date of this part or of such change or decision.


Sec. 211.30  Criteria for evaluating U.S. operations of foreign banks 
not subject to consolidated supervision.

    (a) Development and publication of criteria. Pursuant to the 
Foreign Bank Supervision Enhancement Act, Pub. L. 102-242, 105 Stat. 
2286 (1991), the Board shall develop and publish criteria to be used in 
evaluating the operations of any foreign bank in the United States that 
the Board has determined is not subject to comprehensive consolidated 
supervision.
    (b) Criteria considered by Board. Following a determination by the 
Board that, having taken into account the standards set forth in 
Sec. 211.24(c)(1), a foreign bank is not subject to CCS, the Board 
shall consider the following criteria in determining whether the 
foreign bank's U.S. operations should be permitted to continue and, if 
so, whether any supervisory constraints should be placed upon the bank 
in connection with those operations:
    (1) The proportion of the foreign bank's total assets and total 
liabilities that are located or booked in its home country, as well as 
the distribution and location of its assets and liabilities that are 
located or booked elsewhere;
    (2) The extent to which the operations and assets of the foreign 
bank and any affiliates are subject to supervision by its home country 
supervisor;
    (3) Whether the home country supervisor of such foreign bank is 
actively working to establish arrangements for comprehensive 
consolidated supervision of the bank, and whether demonstrable progress 
is being made;
    (4) Whether the foreign bank has effective and reliable systems of 
internal controls and management information and reporting, which 
enable its management properly to oversee its worldwide operations;
    (5) Whether the foreign bank's home country supervisor has any 
objection to the bank continuing to operate in the United States;
    (6) Whether the foreign bank's home country supervisor and the home 
country supervisor of any parent of the foreign bank share material 
information regarding the operations of the foreign bank with other 
supervisory authorities;
    (7) The relationship of the U.S. operations to the other operations 
of the foreign bank, including whether the foreign bank maintains funds 
in its U.S. offices that are in excess of amounts due to its U.S. 
offices from the foreign bank's non-U.S. offices;
    (8) The soundness of the foreign bank's overall financial 
condition;
    (9) The managerial resources of the foreign bank, including the 
competence, experience, and integrity of the officers and directors, 
and the integrity of its principal shareholders;
    (10) The scope and frequency of external audits of the foreign 
bank;
    (11) The operating record of the foreign bank generally and its 
role in the banking system in its home country;
    (12) The foreign bank's record of compliance with relevant laws, as 
well as the adequacy of its anti-money-laundering controls and 
procedures, in respect of its worldwide operations;
    (13) The operating record of the U.S. offices of the foreign bank;
    (14) The views and recommendations of the Comptroller or the 
relevant state supervisors in those states in which the foreign bank 
has operations, as appropriate;
    (15) Whether the foreign bank, if requested, has provided the Board 
with adequate assurances that such information will be made available 
on the operations or activities of the foreign bank and any of its 
affiliates as the Board deems necessary to determine and enforce 
compliance with the IBA, the BHC Act, and other U.S. banking statutes; 
and
    (16) Any other information relevant to the safety and soundness of 
the U.S. operations of the foreign bank.
    (c) Restrictions on U.S. operations--(1) Terms of agreement. Any 
foreign bank that the Board determines is not subject to CCS may be 
required to enter into an agreement to conduct its U.S. operations 
subject to such restrictions as the Board, having considered the 
criteria set forth in paragraph (b) of this section, determines to be 
appropriate in order to ensure the safety and soundness of its U.S. 
operations.
    (2) Failure to enter into or comply with agreement. A foreign bank 
that is required by the Board to enter into an agreement pursuant to 
paragraph (c)(1) of this section and either fails to do so, or fails to 
comply with the terms of such agreement, may be subject to:
    (i) Enforcement action, in order to ensure safe and sound banking 
operations, under 12 U.S.C. 1818; or
    (ii) Termination or a recommendation for termination of its U.S. 
operations, under Sec. 211.25(a) and (e) and section (7)(e) of the IBA 
(12 U.S.C. 3105(e)).

Subpart C--Export Trading Companies


Sec. 211.31  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (Board) under the authority of the Bank 
Holding Company Act of 1956 (BHC Act) (12 U.S.C. 1841 et seq.), the 
Bank Export Services Act (title II, Pub. L. 97-290, 96 Stat. 1235 
(1982)) (BESA), and the Export Trading Company Act Amendments of 1988 
(title III, Pub. L. 100-418, 102 Stat. 1384 (1988)) (ETC Act 
Amendments).
    (b) Purpose and scope. This subpart is in furtherance of the 
purposes of the BHC Act, the BESA, and the ETC Act Amendments, the 
latter two statutes

[[Page 54396]]

being designed to increase U.S. exports by encouraging investments and 
participation in export trading companies by bank holding companies and 
the specified investors. The provisions of this subpart apply to 
eligible investors as defined in this subpart.


Sec. 211.32  Definitions.

    The definitions in Secs. 211.1 and 211.2 of subpart A apply to this 
subpart, subject to the following:
    (a) Appropriate Federal Reserve Bank has the same meaning as in 
Sec. 211.21(c).
    (b) Bank has the same meaning as in section 2(c) of the BHC Act (12 
U.S.C. 1841(c)).
    (c) Company has the same meaning as in section 2(b) of the BHC Act 
(12 U.S.C. 1841(b)).
    (d) Eligible investors means:
    (1) Bank holding companies, as defined in section 2(a) of the BHC 
Act (12 U.S.C. 1841(a));
    (2) Edge and agreement corporations that are subsidiaries of bank 
holding companies but are not subsidiaries of banks;
    (3) Banker's banks, as described in section 4(c)(14)(F)(iii) of the 
BHC Act (12 U.S.C. 1843(c)(14)(F)(iii)); and
    (4) Foreign banking organizations, as defined in Sec. 211.21(o).
    (e) Export trading company means a company that is exclusively 
engaged in activities related to international trade and, by engaging 
in one or more export trade services, derives:
    (1) At least one-third of its revenues in each consecutive four-
year period from the export of, or from facilitating the export of, 
goods and services produced in the United States by persons other than 
the export trading company or its subsidiaries; and
    (2) More revenues in each four-year period from export activities 
as described in paragraph (e)(1) of this section than it derives from 
the import, or facilitating the import, into the United States of goods 
or services produced outside the United States. The four-year period 
within which to calculate revenues derived from its activities under 
this section shall be deemed to have commenced with the first fiscal 
year after the respective export trading company has been in operation 
for two years.
    (f) Revenues shall include net sales revenues from exporting, 
importing, or third-party trade in goods by the export trading company 
for its own account and gross revenues derived from all other 
activities of the export trading company.
    (g) Subsidiary has the same meaning as in section 2(d) of the BHC 
Act (12 U.S.C. 1841(d)).
    (h) Well capitalized has the same meaning as in Sec. 225.2(r) of 
Regulation Y (12 CFR 225.2(r)).
    (i) Well managed has the same meaning as in Sec. 225.2(s) of 
Regulation Y (12 CFR 225.2(s)).


Sec. 211.33  Investments and extensions of credit.

    (a) Amount of investments. In accordance with the procedures of 
Sec. 211.34, an eligible investor may invest no more than 5 percent of 
its consolidated capital and surplus in one or more export trading 
companies, except that an Edge or agreement corporation not engaged in 
banking may invest as much as 25 percent of its consolidated capital 
and surplus but no more than 5 percent of the consolidated capital and 
surplus of its parent bank holding company.
    (b) Extensions of credit--(1) Amount. An eligible investor in an 
export trading company or companies may extend credit directly or 
indirectly to the export trading company or companies in a total amount 
that at no time exceeds 10 percent of the investor's consolidated 
capital and surplus.
    (2) Terms. (i) An eligible investor in an export trading company 
may not extend credit directly or indirectly to the export trading 
company or any of its customers or to any other investor holding 10 
percent or more of the shares of the export trading company on terms 
more favorable than those afforded similar borrowers in similar 
circumstances, and such extensions of credit shall not involve more 
than the normal risk of repayment or present other unfavorable 
features.
    (ii) For the purposes of this section, an investor in an export 
trading company includes any affiliate of the investor.
    (3) Collateral requirements. Covered transactions between a bank 
and an affiliated export trading company in which a bank holding 
company has invested pursuant to this subpart are subject to the 
collateral requirements of section 23A of the Federal Reserve Act (12 
U.S.C. 371c), except where a bank issues a letter of credit or advances 
funds to an affiliated export trading company solely to finance the 
purchase of goods for which:
    (i) The export trading company has a bona fide contract for the 
subsequent sale of the goods; and
    (ii) The bank has a security interest in the goods or in the 
proceeds from their sale at least equal in value to the letter of 
credit or the advance.


Sec. 211.34  Procedures for filing and processing notices.

    (a) General policy. Direct and indirect investments by eligible 
investors in export trading companies shall be made in accordance with 
the general consent or prior notice procedures contained in this 
section. The Board may at any time, upon notice, modify or suspend the 
general-consent procedures with respect to any eligible investor.
    (b) General consent--(1) Eligibility for general consent. Subject 
to the other limitations of this subpart, the Board grants its general 
consent for any investment an export trading company:
    (i) If the eligible investor is well capitalized and well managed;
    (ii) In an amount equal to cash dividends received from that export 
trading company during the preceding 12 calendar months; or
    (iii) That is acquired from an affiliate at net asset value or 
through a contribution of shares.
    (2) Post-investment notice. By the end of the month following the 
month in which the investment is made, the investor shall provide the 
Board with the following information:
    (i) The amount of the investment and the source of the funds with 
which the investment was made; and
    (ii) In the case of an initial investment, a description of the 
activities in which the export trading company proposes to engage and 
projections for the export trading company for the first year following 
the investment.
    (c) Filing notice--(1) Prior notice. An eligible investor shall 
give the Board 60 days' prior written notice of any investment in an 
export trading company that does not qualify under the general consent 
procedure.
    (2) Notice of change of activities. (i) An eligible investor shall 
give the Board 60 days' prior written notice of changes in the 
activities of an export trading company that is a subsidiary of the 
investor if the export trading company expands its activities beyond 
those described in the initial notice to include:
    (A) Taking title to goods where the export trading company does not 
have a firm order for the sale of those goods;
    (B) Product research and design;
    (C) Product modification; or
    (D) Activities not specifically covered by the list of activities 
contained in section 4(c)(14)(F)(ii) of the BHC Act (12 U.S.C. 
1843(c)(14)(F)(ii)).
    (ii) Such an expansion of activities shall be regarded as a 
proposed investment under this subpart.
    (d) Time period for Board action. (1) A proposed investment that 
has not

[[Page 54397]]

been disapproved by the Board may be made 60 days after the appropriate 
Federal Reserve Bank accepts the notice for processing. A proposed 
investment may be made before the expiration of the 60-day period if 
the Board notifies the investor in writing of its intention not to 
disapprove the investment.
    (2) The Board may extend the 60-day period for an additional 30 
days if the Board determines that the investor has not furnished all 
necessary information or that any material information furnished is 
substantially inaccurate. The Board may disapprove an investment if the 
necessary information is provided within a time insufficient to allow 
the Board reasonably to consider the information received.
    (3) Within three days of a decision to disapprove an investment, 
the Board shall notify the investor in writing and state the reasons 
for the disapproval.
    (e) Time period for investment. An investment in an export trading 
company that has not been disapproved shall be made within one year 
from the date of the notice not to disapprove, unless the time period 
is extended by the Board or by the appropriate Federal Reserve Bank.

PART 265--RULES REGARDING DELEGATION OF AUTHORITY

    1. The authority citation for part 265 continues to read as 
follows:

    Authority: 12 U.S.C. 248(i) and (k).


    2. Section 265.5 is amended by adding a new paragraph (d)(3) to 
read as follows:


Sec. 265.5  Functions delegated to Secretary of the Board.

* * * * *
    (d) * * *
    (3) Investments in Edge and Agreement Corporations. To approve an 
application by a member bank to invest more than 10 percent of capital 
and surplus in Edge and agreement corporation subsidiaries.
* * * * *

    3. Section 265.6 is amended by revising paragraph (f) to read as 
follows:


Sec. 265.6  Functions delegated to General Counsel.

* * * * *
    (f) International banking--(1) After-the-fact applications. With 
the concurrence of the Board's Director of the Division of Banking 
Supervision and Regulation, to grant a request by a foreign bank to 
establish a branch, agency, commercial lending company, or 
representative office through certain acquisitions, mergers, 
consolidations, or similar transactions, in conjunction with which:
    (i) The foreign bank would be required to file an after-the-fact 
application for the Board's approval under Sec. 211.24(a)(6) of 
Regulation K (12 CFR 211.24(a)(6)); or
    (ii) The General Counsel may waive the requirement for an after-
the-fact application if:
    (A) The surviving foreign bank commits to wind down the U.S. 
operations of the acquired foreign bank; and
    (B) The merger or consolidation raises no significant policy or 
supervisory issues.
    (2) To modify the requirement that a foreign bank that has 
submitted an application or notice to establish a branch, agency, 
commercial lending company, or representative office pursuant to 
Sec. 211.24(a)(6) of Regulation K (12 CFR 211.24(a)(6)) shall publish 
notice of the application or notice in a newspaper of general 
circulation in the community in which the applicant or notificant 
proposes to engage in business, as provided in Sec. 211.24(b)(2) of 
Regulation K (12 CFR 211.24(b)(2)).
    (3) With the concurrence of the Board's Director of the Division of 
Banking Supervision and Regulation, to grant a request for an exemption 
under section 4(c)(9) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(9)), provided that the request raises no significant policy or 
supervisory issues that the Board has not already considered.
    (4) To return applications and notices filed under the 
International Banking Act for informational deficits.
    (5) To determine that an entity qualifies as a ``special-purpose 
foreign government-owned bank'' for purposes of Sec. 211.24(d)(3) (12 
CFR 211.24(d)(3)).
* * * * *

    4. Section 265.7 is amended by:
    a. Revising paragraph (d)(4); and
    b. Adding new paragraphs (d)(9), (d)(10), (d)(11), (d)(12), 
(d)(13), and (d)(14).
    The revision and additions read as follows:


Sec. 265.7  Functions delegated to Director of Division of Banking 
Supervision and Regulation.

* * * * *
    (d) * * *
    (4) Authority under general-consent and prior-notice procedures. 
(i) With regard to a prior notice to establish a branch in a foreign 
country under Sec. 211.3 of Regulation K (12 CFR 211.3):
    (A) To waive the notice period;
    (B) To suspend the notice period;
    (C) To determine not to object to the notice; or
    (D) To require the notificant to file an application for the 
Board's specific consent.
    (ii) With regard to a prior notice to make an investment under 
Sec. 211.9(f) of Regulation K (12 CFR 211.9(f)):
    (A) To waive the notice period;
    (B) To suspend the notice period; or
    (C) To require the notificant to file an application for the 
Board's specific consent.
    (iii) With regard to a prior notice of a foreign bank to establish 
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR 
211.24(a)(2)(i)):
    (A) To waive the notice period;
    (B) To suspend the notice period; or
    (C) To require the notificant to file an application for the 
Board's specific consent.
    (iv) To suspend the ability:
    (A) Of a foreign banking organization to establish an office under 
the prior-notice procedures in Sec. 211.24(a)(2)(i) of Regulation K (12 
CFR 211.24(a)(2)(i)) or the general-consent procedures in 
Sec. 211.24(a)(3) of Regulation K (12 CFR 211.24(a)(3));
    (B) Of a U.S. banking organization to establish a foreign branch 
under the prior-notice or general-consent procedures in Sec. 211.3(b) 
of Regulation K (12 CFR 211.3(b));
    (C) Of an investor to make investments under the general-consent or 
prior-notice procedures in Sec. 211.9 of Regulation K (12 CFR 211.9); 
and
    (D) Of an eligible investor to make an investment in an export 
trading company under the general-consent procedures in Sec. 211.34(b) 
of Regulation K (12 CFR 211.34(b)).
* * * * *
    (9) Allowing use of general-consent procedures. To allow an 
investor that is not well-capitalized and well-managed to make 
investments under the general-consent procedures in Sec. 211.9 or 
211.34(b) of Regulation K (12 CFR 211.9 or 211.34(b)), provided that:
    (i) The investor has implemented measures to become well-
capitalized and well-managed;
    (ii) Granting such authority raises no significant policy or 
supervisory concerns; and
    (iii) Authority granted by the Director under this paragraph (d)(9) 
expires after one year, but may be renewed.
    (10) Exceeding general-consent investment limits. To allow an 
investor to exceed the general-consent investment limits under 
Sec. 211.9 of Regulation K (12 CFR 211.9), provided that:
    (i) The investor demonstrates adequate financial and managerial 
strength;

[[Page 54398]]

    (ii) The investor's investment strategy is not unsafe or unsound;
    (iii) Granting such authority raises no significant policy or 
supervisory concerns; and
    (iv) Authority granted by the Director under this paragraph (d)(10) 
expires after one year, but may be renewed.
    (11) Approval of temporary U.S. offices. To allow a foreign bank to 
operate a temporary office in the United States, pursuant to 
Sec. 211.24 of Regulation K (12 CFR 211.24), provided that:
    (i) There is no direct public access to such office, with respect 
to any branch or agency function; and
    (ii) The proposal raises no significant policy or supervisory 
issues.
    (12) With the concurrence of the General Counsel, to approve 
applications, notices, exemption requests, waivers and suspensions, and 
other related matters under Regulation K (12 CFR part 211), where such 
matters do not raise any significant policy or supervisory issues.
    (13) With the concurrence of the General Counsel, to approve:
    (i) The establishment by a bank holding company or member bank of 
an agreement corporation under section 25 of the Federal Reserve Act; 
and
    (ii) Any initial investment associated with the establishment of 
such agreement corporation.
    (14) With the concurrence of the General Counsel, to determine that 
an election by a foreign bank to become or to be treated as a financial 
holding company is effective, provided that:
    (i) The foreign bank meets the criteria for becoming or being 
treated as a financial holding company; and
    (ii) The election raised no significant policy or supervisory 
issues.
* * * * *

    5. Section 265.11 is amended by:
    a. Revising paragraphs (d)(8) and (d)(11); and
    b. Adding a new paragraph (d)(12).
    The revisions and addition read as follows:


Sec. 265.11  Functions delegated to Federal Reserve Banks.

* * * * *
    (d) * * *
    (8) Authority under prior-notice procedures. (i) With regard to a 
prior notice to make an investment under Sec. 211.9(f) of Regulation K 
(12 CFR 211.9(f)):
    (A) To suspend the notice period; or
    (B) To require the notificant to file an application for the 
Board's specific consent.
    (ii) With regard to a prior notice of a foreign bank to establish 
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR 
211.24(a)(2)(i)):
    (A) To suspend the notice period; or
    (B) To require that the foreign bank file an application for the 
Board's specific consent.
* * * * *
    (11) Investments in Edge and agreement Corporation subsidiaries. To 
approve an application by a member bank to invest more than 10 percent 
of capital and surplus in Edge and agreement corporation subsidiaries.
    (12) Amendments to Edge corporation charters. To approve amendments 
to Edge corporation charters.

    By order of the Board of Governors of the Federal Reserve 
System, October 16, 2001.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 01-26513 Filed 10-25-01; 8:45 am]
BILLING CODE 6210-01-P