[Federal Register Volume 68, Number 6 (Thursday, January 9, 2003)]
[Rules and Regulations]
[Pages 1158-1161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-385]


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FEDERAL RESERVE SYSTEM

12 CFR Part 211

Regulation K; Docket No. R-1114


International Banking Operations; International Lending 
Supervision

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is amending its regulations relating to international lending by 
simplifying the discussion concerning the accounting for fees on 
international loans to make the regulation consistent with generally 
accepted accounting principles (GAAP).

EFFECTIVE DATE: February 10, 2003.

FOR FURTHER INFORMATION CONTACT: Michael G. Martinson, Associate 
Director (202/452-3640), Division of Banking Supervision and 
Regulation; or Ann Misback, Assistant General Counsel (202/452-3788), 
or Melinda Milenkovich, Counsel (202/452-3274), Legal Division, Board 
of Governors of the Federal Reserve System, 20th & Street, NW, 
Washington, DC 20551. For users of Telecommunications Device for the 
Deaf (``TDD'') only, contact 202/263-4869.

SUPPLEMENTARY INFORMATION: The International Lending Supervision Act of 
1983 (ILSA), 12 U.S.C. 3901, et seq., requires each federal banking 
agency to evaluate the foreign country exposure and transfer risk of 
banking institutions within its jurisdiction for use in examination and 
supervision of such institutions. To implement ILSA, the federal 
banking agencies, through the Interagency Country Exposure Review 
Committee (ICERC), assess and categorize countries on the basis of 
conditions that may lead to increased transfer risk. Transfer risk may 
arise due to the possibility that an asset of a banking institution 
cannot be serviced in the currency of payment because of a lack of, or 
restraints on, the availability of foreign exchange in the country of 
the obligor. Section 905(a) of ILSA directs each federal banking agency 
to require banking institutions within its jurisdiction to establish 
and maintain a special reserve whenever the agency determines that the 
quality of an institution's assets has been impaired by a protracted 
inability of public or private borrowers in a foreign country to make 
payments on their external indebtedness, or no definite prospects exist 
for the orderly restoration of debt service. 12 U.S.C. 3904(a). In 
keeping with the requirements of ILSA, on February 13, 1984, the Board, 
the Federal Deposit Insurance Corporation, and the Office of the 
Comptroller of the Currency (collectively, the federal banking 
agencies) issued a joint notice of final rulemaking requiring banking 
institutions to establish special reserves, the allocated transfer risk 
reserve (ATRR), against the risks presented in certain international 
assets. (49 FR 5594).
    ILSA also requires the federal banking agencies to promulgate 
regulations for accounting for fees charged by banking institutions in 
connection with international loans. Section 906(a) of ILSA (12 U.S.C. 
3905(a)) deals specifically with the restructuring of international 
loans to avoid excessive debt service burden on debtor countries. This 
section requires banking institutions, in connection with the 
restructuring of an international loan, to amortize any fee exceeding 
the administrative cost of the restructuring over the effective life of 
the loan. Section 906(b) of ILSA (12 U.S.C. 3905(b)) deals with all 
international loans and requires the federal banking agencies to 
promulgate regulations for accounting for agency, commitment, 
management and other fees in connection with such loans to assure that 
the appropriate portion of such fees is accrued in income over the 
effective life of each such loan.
    When ILSA was enacted in 1983 and the regulation on accounting for 
international loan fees was promulgated on March 29, 1984, Congress and 
the federal banking agencies considered that the application of the 
broad fee accounting principles for banks contained in GAAP were 
insufficient to accomplish adequate uniformity in accounting principles 
in this area. Accordingly, the Board's regulation provided a separate 
accounting treatment for each type of fee charged by banking 
institutions in connection with their international lending. Since that 
time, the Financial Accounting Standards Board (FASB) has revised the 
GAAP rules for fee accounting for international loans in a manner that 
accommodates the specific requirements of section 906 of ILSA. In order 
to reduce the regulatory burden on banking institutions, and simplify 
its regulations, the Board proposed to eliminate from Subpart D the 
requirements as to the particular accounting method to be followed in 
accounting for fees on international loans and require instead that 
institutions follow GAAP in accounting for such fees.
    No public comments were received concerning the Board's proposal 
and it is being adopted as proposed. In the event that the FASB changes 
the GAAP rules on fee accounting for international loans, the Board 
will reexamine its regulation in light of ILSA to assess the need for a 
revision to the regulation.

Regulatory Flexibility Act

    The Board has reviewed the final rule in accordance with the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This final rule 
revises accounting mechanisms for fees associated with international 
loans and harmonizes their treatment with accounting principles set 
forth in other regulations. Both the underlying regulation and the 
final rule primarily affect financial institutions engaged in 
significant international loan transactions, and the overall impact of 
the final rule will be to reduce regulatory burden. Accordingly, 
pursuant to 5 U.S.C.

[[Page 1159]]

605(b), 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 collections of information associated with this rulemaking are 
found in 12 CFR 211.43 and 211.44. This information is required to 
evidence compliance with the requirements of Regulation K and the 
International Lending Supervision Act. The respondents/recordkeepers 
are for-profit financial institutions, including small businesses.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, this information collection unless it 
displays a currently valid OMB control number. The information on the 
allocated transfer risk reserve requested in section 211.43 is 
collected in the Consolidated Reports of Condition and Income (FFIEC 
031 and 041; OMB No. 7100-0036), the Consolidated Financial Statements 
for Bank Holding Companies (FR Y-9C; OMB No. 7100-0128), and the Report 
of Condition for Edge and Agreement Corporations (FR 2886B; OMB No. 
7100-0086). The final rule would not change the burden associated with 
these reports. The information requested in section 211.44 on 
international assets is collected in the Country Exposure Reports 
(FFIEC 009/009a; OMB No. 7100-0035) and the burden for this report also 
remains unchanged.
    No comments specifically addressing the collections of information 
were received.
    The Federal Reserve has a continuing interest in the public's 
opinions of our collections of information. At any time, comments 
regarding any 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, N.W., 
Washington, DC 20551; and to the Office of Management and Budget, 
Paperwork Reduction Project (7100-0036, 7100-0128, 7100-0086 or 7100-
0035), Washington, DC 20503.

Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires each federal 
banking agency to use plain language in all proposed and final rules 
published after January 1, 2000. Toward this end, the Board used a 
variety of plain language techniques in drafting this amendment. The 
Board invited comments on how to make the changes proposed by this 
rulemaking easier to understand. No commenters addressed this issue. 
Accordingly, no changes were made to the proposed style or format.

List of Subjects in 12 CFR Part 211

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

    For the reasons set out in the preamble, the Board is amending 12 
CFR part 211 as follows:

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. Sections 211.41 through 211.45 are revised to read as follows:


Sec.  211.41   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 
International Lending Supervision Act of 1983 (Pub. L. 98-181, title 
IX, 97 Stat. 1153) (International Lending Supervision Act); the Federal 
Reserve Act (12 U.S.C. 221 et seq.) (FRA), and the Bank Holding Company 
Act of 1956, as amended (12 U.S.C. 1841 et seq.) (BHC Act).
    (b) Purpose and scope. This subpart is issued in furtherance of the 
purposes of the International Lending Supervision Act. It applies to 
State banks that are members of the Federal Reserve System (State 
member banks); corporations organized under section 25A of the FRA (12 
U.S.C. 611 through 631) (Edge Corporations); corporations operating 
subject to an agreement with the Board under section 25 of the FRA (12 
U.S.C. 601 through 604a) (Agreement Corporations); and bank holding 
companies (as defined in section 2 of the BHC Act (12 U.S.C. 1841(a)) 
but not including a bank holding company that is a foreign banking 
organization as defined in Sec.  211.21(o).


Sec.  211.42  Definitions.

    For the purposes of this subpart:
    (a) Administrative cost means those costs which are specifically 
identified with negotiating, processing and consummating the loan. 
These costs include, but are not necessarily limited to: legal fees; 
costs of preparing and processing loan documents; and an allocable 
portion of salaries and related benefits of employees engaged in the 
international lending function. No portion of supervisory and 
administrative expenses or other indirect expenses such as occupancy 
and other similar overhead costs shall be included.
    (b) Banking institution means a State member bank; bank holding 
company; Edge Corporation and Agreement Corporation engaged in banking. 
Banking institution does not include a foreign banking organization as 
defined in Sec.  211.21(o).
    (c) Federal banking agencies means the Board of Governors of the 
Federal Reserve System, the Comptroller of the Currency, and the 
Federal Deposit Insurance Corporation.
    (d) International assets means those assets required to be included 
in banking institutions' Country Exposure Report forms (FFIEC No. 009).
    (e) International loan means a loan as defined in the instructions 
to the Report of Condition and Income for the respective banking 
institution (FFIEC Nos. 031 and 041) and made to a foreign government, 
or to an individual, a corporation, or other entity not a citizen of, 
resident in, or organized or incorporated in the United States.
    (f) Restructured international loan means a loan that meets the 
following criteria:
    (1) The borrower is unable to service the existing loan according 
to its terms and is a resident of a foreign country in which there is a 
generalized inability of public and private sector obligors to meet 
their external debt obligations on a timely basis because of a lack of, 
or restraints on the availability of, needed foreign exchange in the 
country; and
    (2) The terms of the existing loan are amended to reduce stated 
interest or extend the schedule of payments; or
    (3) A new loan is made to, or for the benefit of, the borrower, 
enabling the borrower to service or refinance the existing debt.
    (g) Transfer risk means the possibility that an asset cannot be 
serviced in the currency of payment because of a lack of, or restraints 
on the availability of, needed foreign exchange in the country of the 
obligor.


Sec.  211.43   Allocated transfer risk reserve.

    (a) Establishment of Allocated Transfer Risk Reserve. A banking 
institution shall establish an allocated transfer risk reserve (ATRR) 
for specified international assets when required by the Board in 
accordance with this section.
    (b) Procedures and standards-(1) Joint agency determination. At 
least annually, the Federal banking agencies

[[Page 1160]]

shall determine jointly, based on the standards set forth in paragraph 
(b)(2) of this section, the following:
    (i) Which international assets subject to transfer risk warrant 
establishment of an ATRR;
    (ii) The amount of the ATRR for the specified assets; and
    (iii) Whether an ATRR established for specified assets may be 
reduced.
    (2) Standards for requiring ATRR-(i) Evaluation of assets. The 
Federal banking agencies shall apply the following criteria in 
determining whether an ATRR is required for particular international 
assets:
    (A) Whether the quality of a banking institution's assets has been 
impaired by a protracted inability of public or private obligors in a 
foreign country to make payments on their external indebtedness as 
indicated by such factors, among others, as whether:
    (1) Such obligors have failed to make full interest payments on 
external indebtedness; or
    (2) Such obligors have failed to comply with the terms of any 
restructured indebtedness; or
    (3) A foreign country has failed to comply with any International 
Monetary Fund or other suitable adjustment program; or
    (B) Whether no definite prospects exist for the orderly restoration 
of debt service.
    (ii) Determination of amount of ATRR. (A) In determining the amount 
of the ATRR, the Federal banking agencies shall consider:
    (1) The length of time the quality of the asset has been impaired;
    (2) Recent actions taken to restore debt service capability;
    (3) Prospects for restored asset quality; and
    (4) Such other factors as the Federal banking agencies may consider 
relevant to the quality of the asset.
    (B) The initial year's provision for the ATRR shall be ten percent 
of the principal amount of each specified international asset, or such 
greater or lesser percentage determined by the Federal banking 
agencies. Additional provision, if any, for the ATRR in subsequent 
years shall be fifteen percent of the principal amount of each 
specified international asset, or such greater or lesser percentage 
determined by the Federal banking agencies.
    (3) Board notification. Based on the joint agency determinations 
under paragraph (b)(1) of this section, the Board shall notify each 
banking institution holding assets subject to an ATRR:
    (i) Of the amount of the ATRR to be established by the institution 
for specified international assets; and
    (ii) That an ATRR established for specified assets may be reduced.
    (c) Accounting treatment of ATRR-(1) Charge to current income. A 
banking institution shall establish an ATRR by a charge to current 
income and the amounts so charged shall not be included in the banking 
institution's capital or surplus.
    (2) Separate accounting. A banking institution shall account for an 
ATRR separately from the Allowance for Loan and Lease Losses, and shall 
deduct the ATRR from ``gross loans and leases'' to arrive at ``net 
loans and leases.'' The ATRR must be established for each asset subject 
to the ATRR in the percentage amount specified.
    (3) Consolidation. A banking institution shall establish an ATRR, 
as required, on a consolidated basis. For banks, consolidation should 
be in accordance with the procedures and tests of significance set 
forth in the instructions for preparation of Consolidated Reports of 
Condition and Income (FFIEC 031 and 041). For bank holding companies, 
the consolidation shall be in accordance with the principles set forth 
in the ``Instructions to Consolidated Financial Statements for Bank 
Holding Companies'' (Form F.R. Y-9C). Edge and Agreement corporations 
engaged in banking shall report in accordance with instructions for 
preparation of the Report of Condition for Edge and Agreement 
Corporations (Form F.R. 2886b).
    (4) Alternative accounting treatment. A banking institution need 
not establish an ATRR if it writes down in the period in which the ATRR 
is required, or has written down in prior periods, the value of the 
specified international assets in the requisite amount for each such 
asset. For purposes of this paragraph, international assets may be 
written down by a charge to the Allowance for Loan and Lease Losses or 
a reduction in the principal amount of the asset by application of 
interest payments or other collections on the asset; provided, that 
only those international assets that may be charged to the Allowance 
for Loan and Lease Losses pursuant to generally accepted accounting 
principles may be written down by a charge to the Allowance for Loan 
and Lease Losses. However, the Allowance for Loan and Lease Losses must 
be replenished in such amount necessary to restore it to a level which 
adequately provides for the estimated losses inherent in the banking 
institution's loan portfolio.
    (5) Reduction of ATRR. A banking institution may reduce an ATRR 
when notified by the Board or, at any time, by writing down such amount 
of the international asset for which the ATRR was established.


Sec.  211.44  Reporting and disclosure of international assets.

    (a) Requirements. (1) Pursuant to section 907(a) of the 
International Lending Supervision Act of 1983 (Title IX, Pub. L. 98-
181, 97 Stat. 1153) (ILSA), a banking institution shall submit to the 
Board, at least quarterly, information regarding the amounts and 
composition of its holdings of international assets.
    (2) Pursuant to section 907(b) of ILSA, a banking institution shall 
submit to the Board information regarding concentrations in its 
holdings of international assets that are material in relation to total 
assets and to capital of the institution, such information to be made 
publicly available by the Board on request.
    (b) Procedures. The format, content and reporting and filing dates 
of the reports required under paragraph (a) of this section shall be 
determined jointly by the Federal banking agencies. The requirements to 
be prescribed by the Federal banking agencies may include changes to 
existing reporting forms (such as the Country Exposure Report, form 
FFIEC No. 009) or such other requirements as the Federal banking 
agencies deem appropriate. The Federal banking agencies also may 
determine to exempt from the requirements of paragraph (a) of this 
section banking institutions that, in the Federal banking agencies' 
judgment, have de minimis holdings of international assets.
    (c) Reservation of authority. Nothing contained in this rule shall 
preclude the Board from requiring from a banking institution such 
additional or more frequent information on the institution's holding of 
international assets as the Board may consider necessary.


Sec.  211.45  Accounting for fees on international loans.

    (a) Restrictions on fees for restructured international loans. No 
banking institution shall charge, in connection with the restructuring 
of an international loan, any fee exceeding the administrative cost of 
the restructuring unless it amortizes the amount of the fee exceeding 
the administrative cost over the effective life of the loan.
    (b) Accounting treatment. Subject to paragraph (a) of this section, 
banking institutions shall account for fees on international loans in 
accordance with generally accepted accounting principles.


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    By order of the Board of Governors of the Federal Reserve 
System, January 6, 2003.
Jennifer J. Johnson
Secretary of the Board
[FR Doc. 03-385 Filed 1-8-03; 8:45 am]
BILLING CODE 6210-01-S