K of Dallas/media/documents/banking/notices/2001/not0188.pdfInternational Banking Act of 1978 (the...

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the FederalReserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

Federal Reserve Bankof Dallas

DALLAS, TEXAS 75265-5906

l l ★ K

Notice 01-88

November 26, 2001

TO: The Chief Executive Officer of eachfinancial institution and others concernedin the Eleventh Federal Reserve District

SUBJECT

Final Rule on Regulation K(International Banking Operations); Amendments

to Rules Regarding Delegation of Authority

DETAILS

The Board of Governors of the Federal Reserve System has reviewed Regulation K,which governs international banking operations, and is amending subparts A, B, and C, effectiveNovember 26, 2001. A proposed rule to amend subpart D of Regulation K was issued in thisBank’s Notice 01-82 dated November 2, 2001. There are also certain amendments to the Board’sRules Regarding Delegation of Authority.

Subpart A of Regulation K governs the foreign investments and activities of allmember banks (national banks as well as state member banks), Edge and agreementcorporations, and bank holding companies. Subpart B governs the U.S. activities of foreignbanking organizations. Subpart C deals with export trading companies.

A copy of the Board’s notice as it appears on pages 54346–98, Vol. 66, No. 208 of the Federal Register dated October 26, 2001, can be found on our web site at http://www.dallasfed.org/banking/notices/2001/0188.pdf. Additionally, you may obtain a hard copy of the document by contacting the Public Affairs Department at (214) 922-5254.

MORE INFORMATION

For more information, please contact Dick Burda, Banking Supervision Department,(713) 652-1503. For additional copies of this Bank’s notice, contact the Public Affairs Depart-ment at (214) 922-5254 or access District Notices on our web site at http://www.dallasfed.org/banking/notices/index.html.

www.dallasfed.org/htm/pubs/pdfs/notices/2001/01-88.pdf

www.dallasfed.org/htm/pubs/pdfs/notices/2001/01-88.pdf

http://www.dallasfed.org/banking/notices/2001/0188.pdf

http://www.dallasfed.org/banking/notices/index.html.

Friday,

October 26, 2001

Part II

Federal ReserveSystem12 CFR Parts 211 and 265International Banking Operations; RulesRegarding Delegation of Authority andInternational Lending Supervision; FinalRule and Proposed Rule

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54346 Federal Register / Vol. 66, No. 208 / Friday, October 26, 2001 / Rules and Regulations

1 The Board last issued final revisions to SubpartA of Regulation K in December 1995, at which timethe investment authority for strongly capitalizedand well-managed U.S. banking organizations wasexpanded significantly.

FEDERAL RESERVE SYSTEM

12 CFR Parts 211 and 265

[Regulation K; Docket No. R–0994]

International Banking Operations;Rules Regarding Delegation ofAuthority

AGENCY: Board of Governors of theFederal Reserve System.ACTION: Final rule.

SUMMARY: Consistent with section 303 ofthe Riegle Community Development andRegulatory Improvement Act of 1994(the Regulatory Improvement Act), theFederal Reserve Act, and theInternational Banking Act of 1978 (theIBA), the Board has reviewed RegulationK, which governs international bankingoperations, and is amending subparts A,B, and C. A proposed rule to amendsubpart D of Regulation K is beingpublished in this same issue of theFederal Register.

Subpart A of Regulation K governs theforeign investments and activities of allmember banks (national banks as wellas state member banks), Edge andagreement corporations, and bankholding companies. The amendmentsstreamline foreign branching proceduresfor U.S. banking organizations,authorize expanded activities in foreignbranches of U.S. banks, and implementrecent statutory changes authorizing abank to invest up to 20 percent ofcapital and surplus in Edgecorporations. Changes also have beenmade to the provisions governingpermissible foreign activities of U.S.banking organizations, includingsecurities activities, and investments byU.S. banking organizations under thegeneral consent procedures.

Subpart B of Regulation K (ForeignBanking Organizations) governs the U.S.activities of foreign bankingorganizations. The amendments includerevisions aimed at streamlining theapplications procedures applicable toforeign banks seeking to expandoperations in the United States, changesto provisions regarding the qualificationof foreign banking organizations forexemption from the nonbankingprohibitions of section 4 of the BankHolding Company Act (the BHC Act),and implementation of provisions of theRiegle-Neal Interstate Banking andBranching Efficiency Act of 1994 (theInterstate Act) that affect foreign banks.

In addition, there are a number oftechnical and clarifying amendments tosubparts A and B, as well as subpart C,which deals with export tradingcompanies. There are also certain

amendments to the Board’s RulesRegarding Delegation of Authority.EFFECTIVE DATE: November 26, 2001.FOR FURTHER INFORMATION CONTACT:Kathleen M. O’Day, Associate GeneralCounsel (202/452–3786), regarding allsubparts: Jon Stoloff, Senior Counsel(202/452–3269), or Alison MacDonald,Counsel (202/452–3236), regardingSubpart A; Ann Misback, AssistantGeneral Counsel (202/452–3788), JanetCrossen, Senior Counsel (202/452–3281), or Melinda Milenkovich, Counsel(202/452–3274), regarding Subparts Band C; Legal Division; or Michael G.Martinson, Associate Director (202/452–2798), or Betsy Cross, Deputy AssociateDirector (202/452–2574), regarding allsubparts; Division of BankingSupervision and Regulation. For usersof Telecommunications Device for theDeaf (TDD) only, please contact 202/263–4869.SUPPLEMENTARY INFORMATION:

Subpart A: International Operations ofU.S. Banking Organizations

Statutory FrameworkThe Board is issuing amendments to

Regulation K that will eliminateunnecessary regulatory burden, increasetransparency, and streamline theapproval process for U.S. bankingorganizations seeking to expand theiroperations abroad. The Federal ReserveAct, as amended by the IBA, requiresthe Board to review its regulationsissued under section 25A of the FederalReserve Act (the Edge Act) at least onceevery five years and make any changesnecessary to ensure that the purposes ofthe Edge Act are being served in light ofprevailing economic conditions andbanking practices.1 The Board hasreviewed the provisions of Subpart A,which govern the operations of Edgecorporations, with this statutorymandate in mind.

Edge corporations are internationalbanking and financial vehicles throughwhich U.S. banking organizations offerinternational banking or other foreignfinancial services and through whichthey compete with similar foreign-owned institutions in the United Statesand abroad. The purposes of the EdgeAct, which amended the FederalReserve Act in 1919, include enablingU.S. banking organizations to competeeffectively with foreign-ownedinstitutions; providing the means tofinance international trade, especiallyU.S. exports; fostering the participation

of regional and smaller U.S. banks inproviding international banking andfinancing services to U.S. business andagriculture; and stimulating competitionin the provision of international bankingand financing services throughout theUnited States.

Congress, in enacting this legislation,recognized that U.S. banks neededvehicles that could exercise widerfinancial powers abroad than werepermitted domestically in order to becompetitive internationally and to servethe international needs of U.S. firms. Atthe same time, the Edge Act placeslimits on U.S. banks’ exposure to thesebroader foreign activities, by limitingthe amount that U.S. banks may investin Edge corporations, establishing anumber of statutory safety andsoundness constraints, and granting theBoard wide discretion in determiningwhat activities should be permissible forsuch entities. In exercising its authorityin this area, the Board is required by theIBA to implement the objectives of theEdge Act consistent with supervisorystandards relating to the safety andsoundness of U.S. bankingorganizations.

In December 1997, following acomprehensive review of the regulation,the Board requested public comment onproposed revisions to Regulation K (62FR 68423) (the ’97 Proposal). The Boardreceived 28 comments from outside theFederal Reserve System on the proposedSubpart A revisions. Comments werereceived from twelve U.S. banks or bankholding companies; one Edgecorporation; one bank-owned insuranceagency; and thirteen trade associations.The Board also received comments fromone state bank supervisory agency.

Subsequent to the Board issuing the’97 Proposal, financial modernizationlegislation was enacted. The Gramm-Leach-Bliley Act (Pub. L. 106–102, 113Stat. 1338 (1999) (GLB or the GLB Act)was enacted on November 12, 1999.Many of the activities the Board hadproposed to liberalize in the ’97Proposal are covered under theexpanded authority available tofinancial holding companies (FHCs)under GLB. More specifically, underGLB, a bank holding company (BHC)that elects to become an FHC mayengage in a broad range of financialactivities, including securitiesunderwriting and dealing, insurancesales and underwriting, and merchantbanking.

Final action on the ’97 Proposal wasdeferred pending implementation of theexpanded authority available underGLB. The Board has issued a number ofrules implementing GLB authority,including, for example, those governing


54347Federal Register / Vol. 66, No. 208 / Friday, October 26, 2001 / Rules and Regulations

FHC elections and activities (66 FR 400,Jan. 3, 2001), real estate brokerageactivities by FHCs (66 FR 307, Jan. 3,2001), merchant banking activities (66FR 8466, Jan. 31, 2001), the capitaltreatment of nonfinancial equityinvestments (66 FR 10212, Feb. 14,2001), transactions between banks andtheir affiliates (66 FR 24186, May 11,2001), and financial subsidiaries of statemember banks (66 FR 42929, Aug. 16,2001).

The Board has now reviewed its ’97Proposal in light of the significantlychanged landscape in relation toprovision of financial services post-GLB,as well as all comments filed on the ’97Proposal. The Board has concluded thata few of the changes proposed in 1997that would have allowed expansion ofactivities now authorized under GLB nolonger are appropriate, primarily thoserelating to equity dealing, portfolioinvestment, and insurance activities.However, consistent with the ’97Proposal, the Board has concluded thata number of provisions relating toforeign activities of U.S. bankingorganizations should be amended,including changes that would: (1)Expand permissible government bondtrading by foreign branches of memberbanks; (2) streamline procedures forestablishment of foreign branches byU.S. banking organizations; (3) expandpermissible equity underwritingactivities abroad for well-capitalizedand well-managed U.S. bankingorganizations; (4) expand generalconsent authority for well-capitalizedand well-managed U.S. bankingorganizations; (5) amend the debt/equityswaps authority to reflect changes incircumstances of eligible countries; and(6) implement the statutory provisionallowing member banks to invest, withthe Board’s approval, up to 20 percentof capital and surplus in the stock ofEdge and agreement corporations.Additional technical and clarifyingamendments were also made. Thesechanges to Regulation K, and thecomments received on the ’97 Proposal,are discussed below.

The Board also indicated in the ’97Proposal that it had not identified anychanges to the permissible U.S.activities of Edge corporations thatappeared necessary or appropriate tofulfill the purposes of the Edge Act, butsought comment on whether there wasa need for any such changes. Onecommenter urged the Board to permitEdge corporations to provide incidentalservices generating insignificantrevenues in the United States to U.S.persons affiliated with a foreign personor a foreign organization that isprincipally engaged in foreign business.

The Board does not believe this changeis necessary or appropriate or otherwiseconsistent with the purposes of the EdgeAct.

Expansion of Government Bond Tradingby Foreign Branches

Section 25 of the Federal Reserve Actpermits the Board to authorize foreignbranches of member banks to conductabroad activities that are not permitteddomestically. However, the statutestates that the Board shall not ‘‘exceptto such limited extent as the Board maydeem necessary with respect tosecurities issued by any ‘foreign state’* * * authorize a foreign branch toengage or participate, directly orindirectly, in the business ofunderwriting, selling, or distributingsecurities.’’

Given the statutory language, theBoard, to date, has only permittedforeign branches to underwrite and sellobligations of (i) the nationalgovernment of the country in which thebranch is located, (ii) an agency orinstrumentality of the nationalgovernment where supported by thetaxing authority, guarantee, or full faithand credit of the national government,and (iii) a political subdivision of thecountry. This was determined to beappropriate on the basis that it is oftennecessary in the ordinary course ofbanking business for a branch toparticipate in the selling of the bonds ofthe host country.

In recent years, U.S. bankingorganizations have become more activein trading and underwriting foreigngovernment securities. Increasingly,such business, where possible, is beingconducted in the foreign branches ofU.S. banks. Centralizing trading for allor for certain groups of countries in asingle branch can be desirable tofacilitate management and funding ofthis business. For example, a bankingorganization might wish to centralizegovernment securities trading for allcountries in the European Union in oneEuropean branch.

For these reasons, the Board proposedthat banks be permitted to underwriteand deal through their foreign branchesin obligations of governments other thanthe host government, provided that theobligations are of investment grade andthe business is otherwise subject tosound banking practices and prudentialregulations. The Board considered therequirement that the obligations must beinvestment grade would limit cross-border transfer risk to the bank becausetrading of government securities givingrise to such risk would be required tobe conducted either directly through alocal branch that is funded locally or

through a subsidiary, instead of throughthe bank. The Board also proposed toretain the existing authority of foreignbranches of member banks tounderwrite and deal in host governmentbonds regardless of whether they areinvestment grade. The Board soughtcomment on these proposals, as well ason what ratings should be considered tobe investment grade for these purposes.

Commenters expressed generalsupport for the Board’s proposal. Somecommenters suggested that the Boardtreat any government obligation,investment grade or otherwise, of anycountry or, alternatively, any country inwhich a bank has a foreign branch, aseligible to be underwritten and traded inbranches located outside of thatcountry. Other commenters argued thatsafety and soundness is enhanced byhaving centralized underwriting anddealing of all government securities,since the local branch which hasauthority to engage in non-investmentgrade underwriting and dealing may nothave the appropriate experience tomanage such operations.

The Board continues to believe theinvestment grade requirement forobligations of governments other thanthe host government is appropriate forthe reason set out in the proposal,namely, limitation of cross-bordertransfer risk to the bank. Non-investment grade government securitiesissued by foreign governments otherthan the host government are morelikely to give rise to such risks. For thisreason, the Board continues to be of theview that trading of non-investmentgrade securities should be conductedeither directly through a local branchthat is funded locally or through asubsidiary, instead of through the bank.Accordingly, in the final rule, the Boardhas retained the investment graderequirement for obligations ofgovernments other than the hostgovernment.

A few commenters recommended thatthe Board permit foreign branches ofU.S. banks to underwrite and deal ininvestment grade obligations of allpolitical subdivisions, and of agenciesand instrumentalities whether or notbacked by the national government.After further consideration, the Boardhas determined that it is appropriate toadopt this suggestion at least in part, solong as all such obligations areinvestment grade. As at present,obligations of agencies andinstrumentalities will be required to besupported by the taxing authority,guarantee, or full faith and credit of thenational government.

Commenters also requested thatforeign branches be permitted to



underwrite and deal in all securitiesguaranteed by a foreign government.The Board notes that the authoritygranted in section 25 of the FederalReserve Act in relation to this activityis with respect to securities ‘‘issued by‘foreign state’,’’ and declines to adoptthis change.

With respect to the Board’s request forcomment on which ratings should beconsidered to be investment grade forthese purposes, commenters urged theBoard to adopt the definition of‘‘investment grade’’ set out in the Officeof the Comptroller of the Currency’s(OCC) investment securities regulation.12 CFR 1.2(d). The OCC defines theterm to mean a security that is rated inone of the four highest rating categoriesby two or more ‘‘nationally recognizedstatistical rating organizations’’(NRSROs) as designated by theSecurities and Exchange Commission(SEC), or one such agency if the securityhas been rated by only one NRSRO. TheBoard considers this definition to beappropriate for purposes of this activityof foreign branches of U.S. banks;accordingly, that definition isincorporated into the final rule.

A few commenters also urged theBoard to adopt a procedure that wouldpermit the addition of agencies to thelist of permissible rating agenciesbeyond those that have been approvedby the SEC because of concern that arating by a NRSRO may not be availablefor some foreign government securities.The Board is not inclined to adopt sucha procedure at this time in view of thenumber of NRSROs that rate foreigngovernment securities. Board staffshould be consulted if any issues arisein relation to application of the‘‘investment grade’’ requirement. If itappears that additional guidance iswarranted, the Board will consider thematter further.

Comments also suggested thatsecurities that are not speculative innature and are deemed by the investorto be the credit equivalent of a securitythat is rated investment grade should beconsidered ‘‘investment grade’’ underthis provision of Regulation K. TheBoard believes that such an approachwould essentially mean that therewould be no requirement that theobligations be investment grade andrejects it for this reason. Finally,commenters sought clarification as towhether the limits applicable togovernment obligations, whether as apercentage of capital or of localdeposits, may be calculated on a netbasis rather than a gross basis. Thelimits applicable to governmentobligations under this section may becalculated on a net basis, provided that

the banking organization otherwise hasreceived no objection to its internalmodels being employed for purposes ofcompliance with these limits.

Foreign BranchingThe Board’s responsibilities as home

country supervisor under the MinimumStandards for the Supervision ofInternational Banking Groups and theirCross-border Establishments issued bythe Basle Committee on BankingSupervision (the Minimum Standards)call for its specific authorization of aU.S. banking organization’s outwardexpansion. Outward expansion for thesepurposes means the initialestablishment of a banking presence ina country by the bank or any affiliate.

Regulation K currently requires thespecific consent of the Board for theestablishment of branches by a memberbank, an Edge or agreement corporation,or a foreign bank subsidiary in its firsttwo foreign countries. The Boardproposed to amend Regulation K torequire only 30 days’ prior notice to theBoard before establishment of branchesin the first two countries, on the basisthat such a requirement also wouldfulfill the Board’s responsibilities underthe Minimum Standards. The Board alsoproposed that 30 days’ prior noticewould be required, consistent with theMinimum Standards, if the initialbanking presence abroad would be inthe form of a subsidiary bank; suchnotice would be required even if theamount to be invested were below thegeneral consent limits.

Under Regulation K at present, noprior Board approval is required for abanking entity to establish additionalbranches in any foreign country whereit already operates one or morebranches. However, a banking entitymust give the Board prior notice beforeestablishing a branch in a foreigncountry where it has no branches eventhough a banking affiliate operates abranch in that country.

The Board proposed to liberalizeRegulation K such that if any of themember banks, their Edge or agreementcorporation subsidiaries, or a foreignbank subsidiary (whether a subsidiary ofthe bank or of the bank holdingcompany) already has a branch in aparticular foreign country, a bankingaffiliate would be authorized to branchthere without prior notice to the board.After-the-fact notice, however, wouldstill be required.

The Board also proposed that the 45days’ prior notice currently required inorder to branch into additionalcountries where there is no affiliatedbanking presence (after the organizationhas branches engaged in banking in two

foreign countries) should be reduced to12 business days. In taking thisapproach, the foreign branchingestablishments of the entire bankingorganization would be taken intoaccount in determining whether thebanking entity would be subject to the30 day or 12 day prior notice procedure.Where a U.S. banking organization as awhole already operates foreign branchesof banking entities in two countries, anybanking affiliate would be able to opena branch in a country where suchorganization has no banking presence,pursuant to the 12 days’ prior noticeprocedure.

Finally, currently under Regulation K,nonbanking subsidiaries may branchinto any country in which any affiliatehas a branch without prior notice, buta 45-day prior notice must be submittedto establish a branch in a country whereno affiliate has a presence. The Boardproposed permitting nonbankingsubsidiaries held pursuant to RegulationK to establish foreign branches withoutprior review, subject only to an after-the-fact notice requirement.

The Board sought comment on theseproposed changes, including inparticular whether the proposedmodified notice periods wouldsufficiently accommodate foreignexpansion plans. Commenterssupported the Board’s proposedchanges. Accordingly, the Board isadopting the foreign branchingprovisions as proposed. The Boardwishes to clarify that filing Form FR2058 fulfills the after-the-fact noticerequirements of the foreign branchingprovisions. Additionally, the Boardnotes that the streamlined proceduresfor establishment of foreign branches arenot limited to well-capitalized, well-managed institutions. However, theBoard retains the authority to suspendgeneral consent authority in whole or inpart should circumstances warrant.

Permissible Activities of ForeignSubsidiaries of U.S. BankingOrganizations

One aspect of bank regulation towhich the Federal Reserve subscribes isthe fostering of a level competitiveplaying field for financialintermediaries. Thus, in the UnitedStates, the Board has advocated thatexpansion by banking organizations intononbanking activities should generallyoccur through the bank holdingcompany and not the bank. Banks in theUnited States benefit from the implicitsupport of the national government andits sovereign credit rating throughfederal deposit insurance, FederalReserve discount window access, andfinal riskless settlement of payment



2 The Edge Act prohibited member banks frominvesting more than 10 percent of their capital andsurplus in the capital stock of Edge and agreementcorporations. In September 1996, congress amendedthis limit to permit investments in excess of 10percent of capital and surplus with the specificapproval of the Board, provided the amountinvested shall not exceed 20 percent of capital andsurplus of the bank. See The Economic Growth andRegulatory Paperwork Reduction Act (EGRPRA),Pub. L. 104–208, sec. 2307 (12 U.S.C. 618).

system transactions. Extension of thissystem would make the existing playingfield in the United States unlevel fornonbank competitors and createunnecessary distortions in competition.

The same principle applies to U.S.banking organizations abroad. Othernations have chosen to allow theirbanks to engage in a broad array offinancial activities, especiallyinvestment banking activities, therebyextending to these activities the implicitsupport of their governments. In thosemarkets, U.S. banking organizationswould be at a disadvantage if unable tooffer their customers an equivalentrange of key services with theconvenience and efficiency of their localbank competitors. In many of thesemarkets, banks are the only significantproviders of capital markets services.Independent securities firms are notgenerally substantial competitors inthese markets, both for historicalreasons and because they may be unableto compete effectively with banks thathave the explicit and implicit support oftheir governments.

Congress has recognized the existenceof conflicting policy objectives andcompetitive pressures faced by U.S.banking organizations operating abroadand through legislation has struck abalance. In relation to the United States,Congress in enacting GLB demonstrateda strong preference that expandednonbanking financial activities beconducted in a structure that does notinvolve the federal bank subsidy.Expanded activities authorized by GLBare required to be conducted either innonbank subsidiaries of a financialholding company or in a financialsubsidiary of a bank, which would besubject to the restrictions on funding bya parent bank set out in sections 23Aand 23B of the Federal Reserve Act. Inrelation to competitive pressures arisingfrom abroad, Congress preserved theBoard’s authority under the Edge Act topermit Edge corporations, which may beowned by U.S. banks, to engage in awider range of activities outside theUnited States than permitted to U.S.banks domestically, where such powersare considered necessary to enable themto compete effectively with similarforeign-owned institutions in the UnitedStates and abroad and liberalizationotherwise is consistent with safety andsoundness considerations. Congress, inenacting the Edge Act, recognized thatU.S. banks in some circumstances mayneed vehicles that could exercisebroader financial powers abroad inorder to remain competitiveinternationally and to serve the needs ofU.S. firms. Congress granted the Boardsimilar broad discretion to allow bank

holding companies to engage inactivities outside the United States.

In exercising its statutory authorityunder the Edge Act, the Board hassought to balance the need for U.S.banking organizations to be competitiveabroad with the public interest inassuring the safety and soundness of thebanks, protecting the deposit insurancefund, and limiting the extension of thefederal safety net. In adopting finalrevisions to Regulation K, the Board hassought to grant expanded authority onlyin relation to those activities where: (i)The existing restrictions of Regulation Kappear to result in a competitive harmto the ability of an Edge corporation toprovide financial services necessary toattract and retain customers; and (ii)requiring the activities to be conductedoutside the bank chain of ownershipappears to compromise significantly thecompetitive position of U.S. bankingorganizations. The Board has concludedthat equity underwriting is one suchactivity, and the expansion of authorityproposed in 1997 with regard to thisactivity has been adopted, as discussedfurther below. The Board hasconcluded, however, that liberalizationset out in the ’97 Proposal in relation toother activities, such as equity dealing,venture capital investments andinsurance activities, should not beadopted at this time in light of thepassage of GLB. These latter activitiesappear to be able to be conductedcompetitively outside the bank chain ofownership under authority granted inGLB.

Two-Tier Capital Test for EdgeCorporations

As the Board noted in the ’97Proposal, tying applicable limits to thecapital of the parent bank is particularlyimportant for subsidiaries of Edgecorporations. Congress has limited amember bank’s investment in Edge andagreement corporations to 20 percent ofthe bank’s capital.2 However, for variousreasons, Edge corporations historicallyhave tended to retain their earningsrather than dividending them to theparent bank. In some cases due to suchretained earnings, the capital of a bank’sEdge and agreement corporations maybe in excess of 20 percent of the parentbank’s consolidated capital, even

though its investment in the Edgesubject to the above-referenced statutorylimit is below 20 percent.

In these circumstances, the Boardconsidered that the capital of an Edgecorporation that is in excess of 20percent of the parent bank’sconsolidated capital, when retainedearnings are counted, generally shouldbe excluded for purposes of determiningapplicable limits for activities of theEdge and its subsidiaries. Accordingly,the Board proposed that Edge andagreement corporations, as well asforeign bank subsidiaries of memberbanks (which are treated as Edgecorporations for purposes of theirlimits), would be subject to two limits,one tied to a percentage of the Edgecorporation’s tier 1 capital and the othertied to a percentage of the parent bank’stier 1 capital. Limits tied to the parentbank’s capital would be 20 percent ofthe limits otherwise applicable to Edgecorporations, and the lower limit wouldbe binding. For example, if a limitproposed for a given activity of an Edgecorporation is 10 percent of the Edgecorporation’s capital but the Edgecorporation’s capital is in excess of 20percent of the bank’s total capital, thebinding limit for the Edge corporationwould be two percent of the parentbank’s tier 1 capital. For those U.S.banks that do not have significant levelsof retained earnings at the Edge, thebinding limit more than likely would bethe separate limit tied to the Edgecorporation’s capital.

The Board considered that thisapproach would be consistent with theintent underlying the provisions of theEdge Act limiting the total amount ofcapital a bank may invest in Edgecorporations. This approach effectivelywould place a cap on the percentage oftotal bank capital that could be placedat risk through activities or investmentsnot otherwise permitted to the bankdirectly, regardless of the capital level ofthe Edge corporation. This approachalso would reduce any regulatoryincentive to retain earnings at the Edgebecause any regulatory benefit fromsuch retained earnings, in terms ofexpanded limits on activities abroad,would be denied.

The Board proposed that all limitsapplicable to Edge corporations underthe ’97 Proposal would proceed on thisbasis. Comment was requested on theseproposals and whether any otherapproach might achieve similarobjectives.

One commenter opposed the Board’sproposal to impose a two-tier capitaltest on Edge corporations, arguing thatthe proposal penalized organizationsthat achieve strong earnings in a



3 An investor for these purposes means an Edgecorporation, agreement corporation, bank holdingcompany, member bank and any foreign bankowned directly by a member bank.

4 Any foreign bank directly owned by a U.S. bankis treated as an Edge corporation for purposes of itslimits.

5 Investments in companies must be added to anyshares of such companies held in the dealingaccount for purposes of this limit.

subsidiary of a bank rather than asubsidiary of the holding company. Itfurther maintained that the limitationon the amount a bank can invest in anEdge corporation creates a practicallimit on the risk to the bank’s owncapital. Therefore, it argued the Boardshould look only at the capital of theEdge corporation in setting limits as apercentage of capital. The Boardcontinues to believe this two-tierapproach is consistent with the intentunderlying provisions of the Edge Actthat limit the total amount of capital abank may invest in Edge corporations.The Board notes that, due to theaccumulation of large amounts ofretained earnings in Edge corporations,the limitation on the amount a bank caninvest in an Edge corporation may notlimit the overall risk to the bank’sconsolidated capital.

Two other commenters argued theBoard should look only at the capital ofthe parent bank in setting limits underthe Edge corporation. The Boardbelieves, however, that activity limitsfor Edge corporations should be tied tothe capital of both the Edge corporationand the parent member bank, in orderto ensure that Edge corporations are nota source of potential weakness to theU.S. parent bank.

Securities Activities

Current Restrictions on SecuritiesActivities

Foreign subsidiaries of U.S. bankingorganizations have been permittedbroad authority to underwrite and dealin debt securities for over 25 years,subject to the provision that thesecurities must be included with loansfor purposes of compliance with theparent bank’s lending limit. No separatedollar limits have been placed onunderwriting and dealing in debtsecurities.

Since 1979, Regulation K also hasspecifically authorized foreignsubsidiaries of both U.S. banks and bankholding companies to underwrite anddeal in equity securities outside theUnited States, subject to certainlimitations and restrictions. Theseactivities were determined to bepermissible, within the applicablelimits, on two bases. First, it becameclear that it was necessary for U.S.banking organizations to be able toengage in these activities abroad, if theywere to compete successfully withforeign banks in the provision ofservices to foreign customers. Indeed,for some time, virtually all the majorforeign competitors of U.S. bankingorganizations have been foreign banksthat conduct equity securities activities

either directly in the bank or in asubsidiary of the bank. Thus, consistentwith the purposes underlying the EdgeAct and the BHC Act, there is clearstatutory authority for U.S. bankingorganizations to engage in theseactivities through subsidiaries abroad.Second, in any event, the provisions ofthe Glass-Steagall Act did not applyextra-territorially to the operations offoreign subsidiaries of U.S. bankingorganizations.

While equity underwriting anddealing have been permissible activitiesfor U.S. banking organizations’ foreignsubsidiaries for some time, as notedabove, the level of such activity issubject to limits under Regulation K.Restrictions currently applied to equitysecurities underwriting and dealingactivities under Regulation K includethe following.

Underwriting limits—Through aforeign subsidiary, an investor 3 mayunderwrite equity securities in amountsup to the lesser of $60 million or 25percent of its tier 1 capital. These limitsdo not include amounts covered bybinding commitments from sub-underwriters or other purchasers. If theunderwriting is done in a subsidiary ofthe member bank, the amount of theuncovered underwriting must beincluded in computing the bank’s singleborrower lending limit with respect tothe issuer.

Dealing limits—Through a foreignsubsidiary, an investor may hold adealing position in the equity securitiesof any one issuer in amounts up to thelesser of $30 million or 10 percent of itstier 1 capital. An investor must includeany shares of a company held in anaffiliate’s dealing account indetermining compliance with anypercentage limits placed on ownershipof that company.

Aggregate limit—There is an aggregatelimit on the total amount of equitysecurities that may be held ininvestment and dealing accounts,aggregating all shares held bysubsidiaries: for a bank holdingcompany, the limit is 25 percent of tier1 capital; for an Edge corporation,4 thelimit is 100 percent of the Edge’s tier 1capital.5

Prior review—Banking organizationsmust submit to a review of their foreign

securities operations prior to engagingin foreign equity securities activities tothe extent of these limits. They may alsoseek Board approval for higherunderwriting limits, subject to certainconditions.

Revisions of Equity Securities Authority

Equity Underwriting

’97 ProposalAlthough, as discussed above, the

existing limits on underwriting equitysecurities in Regulation K are expressedboth in terms of percentages of tier 1capital of the investor and absolutedollar limits, as a practical matter it hasbeen the dollar limits that haveconstrained the extent to which U.S.banking organizations may engage inthese activities through their foreignsubsidiaries. In the ’97 Proposal, theBoard noted the $60 million limit onunderwriting equity securitiessignificantly impedes the ability of U.S.banking organizations to compete forthis business in foreign markets, wheresecurities underwriting is a serviceroutinely offered by local banks. At thesame time, the risks associated with theactivity suggest that such a stringentlimit is not required for safety andsoundness purposes for well-capitalizedand well-managed bankingorganizations. While initialunderwriting commitments may involvelarge sums, in most cases by the timethe underwriting goes to market, largeportions of the exposure have beenpassed on to sub-underwriters orpresold. Thus, in most cases, the initialunderwriting commitment substantiallyoverstates the risk being assumed.

In order to reduce further theseconstraints, the Board proposed in 1997to replace the dollar limits forunderwriting activity with limits basedsolely on percentages of the investor’stier 1 capital for well-capitalized andwell-managed organizations. The Boardconsidered that, if a bankingorganization is well-capitalized andwell-managed, tying the underwritinglimits solely to capital levels wouldhave the benefit of more closely linkingthe limits to the ability of the companyto support the activity. It would alsoprovide U.S. banking organizations withgreater flexibility in responding tochanging market conditions, because theamount of capital devoted to an activityis, after meeting regulatory constraints,determined by the firm.

Accordingly, the Board proposed toamend Regulation K in relation to thosebanking organizations that are well-capitalized and well-managed byremoving the existing dollar limitsapplicable to equity underwriting



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

7 The Board proposed that what, if any, actionshould be taken in relation to bankingorganizations’ limits if they ceased to be well-capitalized and well-managed would be addressedon a case-by-case basis through supervisory action.

8 Commenters recommended that bankingorganizations also should be able to netunderwriting exposures for purposes of determiningcompliance with the limits. As a practical matter,Regulation K presently essentially authorizesnetting for these purposes given that, where theunderwriter is covered by binding commitmentsfrom subunderwriters or other purchasers, suchcommitments are excluded in determiningcompliance with the limits. Compliance with thelimits will continue to proceed on this basis. TheBoard does not believe a persuasive case has beenmade for any additional netting authority inrelation to equity underwriting at this time.

activities, and instead providing thatsuch activities would be limited topercentages of the investor’s tier 1capital. For well-capitalized and well-managed organizations, the Boardproposed applicable limits to bedetermined as follows.6 In relation tosecurities activities of subsidiaries ofbank holding companies, their limitswould be determined by reference topercentages of the tier 1 capital of theholding company. The Board proposedthat limits applicable to such activitiesundertaken by subsidiaries of Edge andagreement corporations, as well asforeign banks that may be directsubsidiaries of member banks, would bedetermined by reference to the tier 1capital of the parent bank as well as tothe tier 1 capital of the bank subsidiary.More specifically, limits forunderwriting exposure to a singlecompany would be established at 15percent of the bank holding company’stier 1 capital for its subsidiaries and, forsubsidiaries of Edge corporations, thelesser of three percent of tier 1 capitalof the bank or 15 percent of the tier 1capital of the Edge.

Under the ’97 Proposal, these limitson underwriting exposure to a singlecompany would be applied on anaggregate basis. A bank holdingcompany’s limit would include allunderwriting exposure to one issuer byall of the holding company’s direct andindirect subsidiaries, includingexposures held through its banksubsidiaries. The bank’s and Edge’slimits would include all exposures heldby their respective subsidiaries. TheBoard proposed, however, that thisexpanded underwriting authority wouldbe available to U.S. bankingorganizations only if each of the bankholding company, bank, and Edge oragreement corporation qualify as well-capitalized and well-managed.7

For organizations that fail to meet thewell-capitalized and well-managedcriteria, the Board proposed that theexisting dollar limits (i.e., $60 million)on commitments by an investor and itsaffiliates for the shares of anorganization would be retained.

The Board proposed that, in order toengage in such activities, all bankingorganizations would be required toimplement internal systems andcontrols adequate to ensure proper riskmanagement. Controls would have to be

in place to assure that underwritingpositions do not result in violations oflimits on securities held in the tradingaccount or exceed the parent bank’slending limits when the underwritingpositions are combined with othercredit exposures. Sanctions (such astemporary suspension of underwritingauthority) may be imposed forviolations of such limits.

Final Rule on Equity UnderwritingLimits.

The Board continues to believe thatthere is a strong competitive need forliberalization of the $60 millionRegulation K limit on equityunderwriting. Subsidiaries of Edgecorporations have been able to gainsome underwriting business throughobtaining commitments in advance fromsubunderwriters in order to reduce theirown exposure to $60 million, but thelimit clearly is a material constraint.Underwriting abroad continues to be abusiness that is conducted by localbanking firms and does not lend itselfreadily to cross-border activity, thusrequiring foreign subsidiaries of U.S.banks to compete with much larger localcompetitors.

Further, as noted above, the risksassociated with equity underwritingactivities suggest that stringent limitsare not required for safety andsoundness purposes for well-capitalizedand well-managed bankingorganizations. Although the percentagelimits proposed in the ’97 Proposalwould significantly increase the amountof underwriting authorized underRegulation K, underwriting is a shorterterm activity than, e.g., dealing.Moreover, under Regulation K, positionsundertaken in connection with anunderwriting and unplaced after 90days must be moved to the dealingaccount and counted against the dealinglimit. Consequently, the exposure of thebanking organization to the activity isminimized.

Commenters strongly supported theBoard’s proposed liberalization of theequity underwriting limits, and made afew additional suggestions. Onecommenter recommended that theproposed underwriting limits bedoubled. Another expressed concernthat the proposed limits might result insome Edge corporations having lessunderwriting authority than the existing$60 million limit. Some commentersalso objected to the disparity betweenthe limits proposed for BHC and banksubsidiaries.

The Board does not believe furtherexpansion of the underwriting limitsbeyond those proposed is warranted,particularly given that portions of an

underwriting that are covered bybinding commitments obtained fromsubunderwriters or other purchasers arenot counted in determining compliancewith the limits. U.S. bankingorganizations wishing to engage inunderwriting equity securities inamounts larger than those permittedunder Regulation K may do so byqualifying for GLB authority. The Boardalso continues to believe it isappropriate to tie the expanded limits tothe investor’s capital. If theunderwriting limit resulting from anEdge’s capital is considered to be toolow, it is of course open to theorganization to increase its capital andthereby increase its limit.8

Commenters also suggested that theexisting additional Regulation Kunderwriting authority, whereby anorganization may request the Board’sapproval to exceed the $60 millionunderwriting limit so long as the excessamount is deducted from capital and theorganization would remain stronglycapitalized after such deduction, alsoshould be extended to the expandedlimits. The Board does not believe it isappropriate to retain this authority inview of the significant increase in theunderwriting limits that would beotherwise authorized under theexpanded limits. Moreover, because thelimits are determined by reference tocapital, banking organizations seekinggreater underwriting authority mayexpand their limits by increasing theircapital.

For these reasons, the Board isadopting the expanded underwritinglimits for well-capitalized and well-managed banking organizations set outin the ’97 Proposal essentially withoutchange. As proposed, the limits wouldapply to all underwriting exposuresheld under authority of Regulation K bythe relevant entity and all of itssubsidiaries (e.g., a BHC’s limit wouldinclude all underwriting exposures toone issuer by all of the holdingcompany’s direct and indirectsubsidiaries, including exposures heldthrough its bank subsidiaries, and a



9 Additional comments relevant to the Board’sfinal action on equity underwriting authority alsowere submitted with regard to the Board’s proposedcriteria for determining whether bankingorganizations would be considered to be well-capitalized and well-managed for purposes of theexpanded authority, as well as with regard to thetwo-tiered capital test for Edge corporations forpurposes of determining eligibility. Each of theseissues is discussed separately.

10 As at present, shares held as an investmentpursuant to Subpart A also would be included indetermining compliance with the applicableaggregate limits.

11 The Board also proposed that a basket of stocks,specifically segregated by the banking organizationas an offset to a position in a stock index derivativeproduct, 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 incomputing net positions in stocks is subject to priorBoard review and the limitation that no net longposition in a security shall be deemed to have beenreduced through netting by more than 75 percent.

bank subsidiary’s limits would includeall exposures held by its subsidiaries).9

Equity Dealing

’97 ProposalThe Board also proposed for comment

liberalization of dealing activities forwell-capitalized and well-managedbanking organizations. As withunderwriting limits, the proposedexpansion of dealing limits would havebeen based on percentages of capital ofthe organization and, thus, on the abilityof the organization to accommodate risk.The Board also noted its belief thatdealing activities presented somewhatgreater risk of loss than underwriting,which resulted in somewhat morerestrictive limits being proposed fordealing activities relative tounderwriting activities.

For well-capitalized and well-managed organizations, the Boardproposed to remove the current dollarlimits and revise the existing percentageof capital limits as follows. First, inorder to provide diversification in thetrading account, the Board proposed alimit on holdings of any one stock in thetrading account of 10 percent of the tier1 capital of the bank holding companyfor its subsidiaries and, for subsidiariesof an Edge corporation, the lesser of twopercent of the bank’s tier 1 capital or 10percent of the Edge corporation’s tier 1capital.

Second, the Board proposed anaggregate limit applicable to all holdingsof equities in the trading accounts of alldirect and indirect subsidiariesauthorized pursuant to Subpart A.10

Without such an aggregate ceiling, theBoard was concerned that a bankingorganization could have excessiveexposure to movements in equitymarkets. The Board proposed aggregatelimits of 50 percent of the bank holdingcompany’s tier 1 capital for itssubsidiaries and, in the case of anEdge’s subsidiaries, the lesser of 10percent of the tier 1 capital of the bankor 50 percent of the Edge’s tier 1 capital.

The Board proposed that the limits onequity dealing would apply to netpositions across legal vehicles held,directly or indirectly, by the regulated

entity to which the limit applied (thatis, the bank holding company, the bankor the Edge corporation). Long equitypositions in a single stock could benetted against short positions in thesame stock and against derivativesreferenced to the same stock.11 Forpurposes of the aggregate limits, allphysical and derivative long positionscould be netted against physical andderivative short positions. It was furtherproposed that, for purposes ofmeasuring compliance with these limits,banks would be permitted to useinternal models to calculate the value ofderivative positions used to offsetexposures and net dealing positions inindividual stocks, as well as the valueof total net equity holdings in thetrading account.12 The Boardconsidered that the adequacy of suchmodels is subject to review during theexam process, and proposed that nospecial review would be required fortheir use in connection with theproposed limits on dealing activities.

For organizations that failed to satisfythe well-capitalized and well-managedcriteria, the Board proposed to retain theexisting dollar limit on individualshares held in the trading account (i.e.,$30 million), which would be calculatedin the same manner as at present. Asnoted, it is generally the dollar limitsthat currently constrain organizations intheir ability to conduct these activities.This is because, at present, only thelargest banking organizations areengaged in these activities. The Boardnoted, however, that in the future arelatively small organization may seekto enter these lines of business and, forit, exposures of $30 or $60 million maybe large relative to its capital. The Boardtherefore also sought comment onwhether, in addition to dollar limits,limits based on percentage of capitalalso should be adopted for organizationsthat are not well-capitalized and well-managed in order to address the relativeexposure of such organizations to theseactivities.

In addition, for organizations that arenot well-capitalized and well-managed,the Board also proposed an aggregatelimit on shares held in the tradingaccount, including all dealing positionsand investments held pursuant toRegulation K authority, of 25 percent of

the holding company’s capital for itssubsidiaries and, for subsidiaries ofEdges and any foreign bank helddirectly by a member bank, the lesser of5 percent of the bank’s tier 1 capital or25 percent of the Edge’s tier 1 capital.These limits were proposed on the basisthat they would be half of thoseapplicable to organizations that werewell-capitalized and well-managed.

The Board also sought comment onwhether, instead of imposing the limitsdiscussed above in relation to equityunderwriting and dealing activities bysubsidiaries of well-capitalized andwell-managed bank holding companies,it would be appropriate to lift all limitson these activities for such entitiesexcept for the limits on individualstocks held in the trading accountdiscussed above (i.e., 10 percent of theholding company’s tier 1 capital). TheBoard considered that, at a minimum,this limit should be imposed on holdingcompanies in order to assurediversification in individual stockholdings. Under this alternative,banking organizations also would berequired to implement internal systemsand controls adequate to ensure properrisk management and that underwritingpositions do not result in violations oflimits on investments in any onecompany.

Developments Since the ’97 ProposalSince the time the Board issued the

’97 Proposal for public comment, thestatutory and regulatory environmentgoverning the equity dealing activitiesof U.S. banking organizations, as well asthe market demand for such services,have changed significantly. Onesignificant change noted above was theenactment and implementation of GLB.Under GLB, FHCs may engage inunlimited equity dealing activities.While the GLB Act did not make anyrevisions to the Edge Act, the Boardbelieves that it demonstrates aCongressional intent that significantequity dealing activities should beconducted through FHC powers, absenta competitive need for U.S. bankingorganizations to engage in suchactivities through bank subsidiaries.

A second important change since the’97 Proposal has been the dramaticgrowth in the equity markets over thepast few years. The growth in demandin the U.S. market for equity securitiessince the early 1990s, growingacceptance of equity investments byEuropean investors since theestablishment of the Euro, and theglobal equity market volatility of thepast several years have combined withadvances in financial engineering tocreate significant customer demand for



13 Some commenters argued that bankingorganizations should be able to exceed individualand aggregate dealing limits, provided the amountin excess of the limits was deducted from capitaland, after deduction, the organization remainedwell-capitalized. Other commenters were concernedthat the proposed limits tied to capital mightactually result in a decrease in dealing authority,and recommended higher limits. Anothercommenter noted that the terms ‘‘shares’’ and‘‘equity’’ are both used in the ’97 Proposal andrecommended using ‘‘shares’’ to ensure thatconvertible debt and participating loans are notincluded in the limits. In view of its conclusionsregarding the absence of justification for anysignificant expansion of dealing authority underRegulation K, the Board rejects these suggestions.The Board does wish to clarify that convertible debtprior to conversion and participating loans are notencompassed within the dealing limit.

equity derivative instruments. Inparticular, the wide variety ofsophisticated investment strategiesemployed by institutional investors andhedge funds, as well as the increasingfocus of financial institutions onproviding high net worth privatebanking clients with sophisticatedportfolio diversification, hedging, andstock option monetization services, havetranslated into increasing volumes ofequity derivatives at global bankingorganizations. For example, fromDecember 31, 1996 to December 31,2000, the notional value of equityderivatives held by U.S. bankingorganizations has more than tripled toroughly $940 billion. In meeting thisdemand, institutions generally avoidtaking significant net open equitypositions and hedge their customerequity derivative transactions eitherwith other equity derivatives or withphysical securities.

Finally, although, as noted above,GLB did not expand the authority ofbanks to acquire equity securities, theOffice of the Comptroller of theCurrency (OCC) determined last yearthat several national banks could takepositions in equity securities solely tohedge bank permissible, customer-driven equity derivative transactions, asan activity incidental to the business ofbanking. The OCC imposed noquantitative limit on such equitypositions, but rendered the banks’authority to take such positions subjectto the following constraints:

(a) The banks committed that theywill use equities solely for hedging andnot for speculative purposes;

(b) The banks will not takeanticipatory or maintain residualpositions in equities except as necessaryto the orderly establishment orunwinding of a hedging position;

(c) The banks may not acquireequities for hedging purposes thatconstitute more than 5 percent of a classof stock of any issuer; and

(d) Banks must obtain OCCsupervisory approval prior to engagingin this activity in order to demonstratethat they have an appropriate riskmanagement process in place.

These developments, along with allcomments received on the ’97 Proposal,have been taken into account by theBoard in taking action on the final rule.

Final Rule on Equity Dealing Limits

Equity Securities Acquired To HedgeEquity Derivatives

Existing Regulation K and the ’97Proposal both proceed generally on thebasis that acquisition of shares of acompany by a subsidiary of a U.S. bank

must be authorized by and conform tolimits established for dealing in sharesof a single issuer and limits applicableto portfolio investments. In other words,both presume that all such acquisitionsof equity securities must conform toRegulation K limits because, absent theauthority of the Federal Reserve Act andRegulation K, such acquisitions ofshares of nonfinancial companies wouldbe impermissible for the bank and itssubsidiaries. The OCC’s recentdeterminations, however, render theRegulation K limits largely irrelevant fornational banks with respect to theirequity derivatives business.

Regulation K, however, also presentlyauthorizes for both subsidiaries of bankholding companies and subsidiaries ofmember banks abroad ‘‘commercial andother banking activities’’, whichencompass all activities in which banksare permitted to engage in the UnitedStates. 12 CFR 211.5(d)(1). Accordingly,the Board takes this opportunity toclarify that the effect of thedetermination that banks may takepositions in equity securities solely tohedge bank permissible, customer-driven equity derivative transactions asan activity incidental to the business ofbanking is to render this activity‘‘commercial or other banking activity’’for purposes of Regulation K. Theconsequence of this change is that, as anotherwise permissible banking activity,positions taken in equity securities forthis purpose may be excluded indetermining compliance with theseparate Regulation K dealing limits, solong as taking such positions continuesto be bank permissible and allconstraints placed upon the conduct ofthis activity in determining itspermissibility are observed, namely:

(a) The equities are used solely forhedging and not for speculativepurposes;

(b) no anticipatory or residualpositions in equities will be acquired ormaintained, except as necessary to theorderly establishment or unwinding of ahedging position;

(c) no equities may be acquired forhedging purposes that constitute morethan 5 percent of a class of stock of anyissuer; and

(d) the banking organization hasobtained approval from its primaryfederal regulator prior to engaging insuch hedging practices in order todemonstrate that they have appropriaterisk management processes in place.

The Board is concerned, however,that the first two constraints imposed bythe OCC on the conduct of this activity(specifically, requiring the equities to beused solely for hedging and not forspeculative purposes, and limiting

residual positions to those necessary tothe orderly establishment or unwindingof a hedging position) are ambiguousand potentially difficult to apply,particularly in light of the generallyintegrated nature of equity derivativesbusiness. Indeed, the Board notes that itis usually the case that, even where abank seeks to fully hedge equityderivatives with physical securities,residual positions will arise. It also isnot unusual for traders in this line ofbusiness to seek to maximize returns bytaking a view on price movements of theunderlying security at the same time asputting in place the hedges necessary tocover the unwanted portion ofderivative exposures. For this reason,the Board has concluded that, whereafter full netting and offset of equitysecurities against derivatives anyresidual positions in a single issuerremain, the value of all such residualpositions as calculated by theorganization’s internal models must beincluded in determining theorganization’s compliance with thedealing limit, as discussed furtherbelow.

The Board notes that the effect of thisclarification is to place the constraintsof the Regulation K dealing limits onthose activities involving the acquisitionof equity securities that are not bankpermissible. Any subsequent regulatoryor legislative determination thatacquiring equity securities to hedgebank permissible equity derivatives isnot a bank permissible activity wouldhave the effect of rendering all suchpositions subject again to the dealinglimits.

Equity Dealing LimitsComments on the ’97 Proposal

generally supported the Board’sproposed expansion of the equitydealing limits for well-capitalized, well-managed organizations.13 As notedabove, however, in light of theenactment of the GLB Act expandingauthority to engage in this activity, the



14 As discussed further below, however, theBoard has adopted the expanded netting authorityproposed in 1997 with a few minor changes.

Board no longer believes it isappropriate to increase the equitydealing limits under Regulation K.Instead, the Board considers that GLBauthority should be the vehicle for anysignificant increase in equity dealingauthority for subsidiaries of bankholding companies and of banks, unlessconcerns regarding the ability of U.S.banking organizations to compete in theprovision of financial services abroadotherwise support additionalliberalization under Regulation K. TheBoard is of the view that no suchconcerns appear to be raised in relationto dealing activities such as market-making and proprietary trading.

To the contrary, with respect tomarket-making, a limit of $30–40million per single issuer appearsgenerally consistent with being able tomake a market in a stock, which isnecessary to being competitive inforeign securities markets. With respectto proprietary or speculative positions,the Board considers that this is not anarea that should be the subject ofliberalization under Regulation K. Anybanking organization that wishes to takelarger speculative positions thanRegulation K allows can do so withoutlimit in an FHC subsidiary or a financialsubsidiary of the bank.

Accordingly, the Board does notconsider that there is sufficientjustification at this time for anysignificant increase in the single issuerdealing limit. However, the Boardbelieves it would be appropriate tomake a small incremental increase inthe equity dealing limit, raising it from$30 million to $40 million, inrecognition of the increased experienceof organizations engaged in this activityand the fact that the $30 million limitwas adopted 10 years ago. Thisapproach is consistent with the Board’saction in the past.

As noted above, all residual positionsin equity securities of a single issuerresulting from bank-permissible equityderivatives business must be includedin calculating compliance with the $40million limit. Additionally, whileunderwriting commitments and sharesheld for up to 90 days in connectionwith an underwriting would beexcluded from these limits, positionsunplaced after 90 days must be movedto the dealing account and countedagainst the dealing limit.

Otherwise, the Board has determinedthat the existing dealing authorityshould remain essentially unchanged.14

This would include the existing 25

percent constraint on the availability ofderivative hedges as a means ofreducing net long positions in physicalsecurities for purposes of compliancewith the single issuer limit. Morespecifically, under existing RegulationK, even if an organization has fullnetting authority and its net longpositions in physical securities of asingle company are fully hedged byderivative instruments referenced to thesame security, $.25 of each $1 in netlong physical securities neverthelesscontinues to count toward the $30million single issuer limit. As atpresent, this additional limit orconstraint will only apply to net longpositions in physical securities afterlongs and shorts are netted, andadditional derivative hedges may reducenet long positions in physical securitiesby up to 75 percent. The increase indealing limit to $40 million will resultin an overall cap on net long positionsin physical securities of $160 millioneven where the positions are fullyhedged. The Board has determined that,going forward, this additional constrainton dealing activity will only apply tonet long positions in physical securitiesheld under Regulation K dealingauthority, not to physical securitiesacquired in connection with bankpermissible hedging transactions.

Netting and Otherwise DeterminingCompliance With Dealing Limits

The Board has determined that itshould adopt one additional aspect ofthe ’97 Proposal as it would apply toequity securities activities, namely,allowing netting based on internalmodels for purposes of determiningcompliance with the single issuerdealing limit. Comments submittedwere overwhelmingly in support of theuse of internal models for this purpose.

Thus, consistent with the ’97Proposal, the equity dealing limit willapply to net positions across legalvehicles held, directly or indirectly, bythe regulated entity to which the limitis applicable (that is, the bank holdingcompany or the bank subsidiary). Longequity positions in a single stock may benetted against short positions in thesame stock and against derivativesreferenced to the same stock. Alsoconsistent with the ’97 Proposal, abasket of stocks, specifically segregatedby the banking organization as an offsetto a position in a stock index derivativeproduct, as computed by the bank’sinternal model, may be netted as awhole against the stock index. Forpurposes of the aggregate equity limits,all physical and derivative longpositions may be netted against physicaland derivative short positions.

Organizations may use their internalmodels to calculate the value ofderivative positions used to offsetexposures and net dealing positions inindividual stocks, as well as the valueof total net equity holdings in thetrading account.

For those banking organizations thatwish to rely on netting based on theirinternal models for purposes ofdetermining compliance with thedealing limits, the valuations generatedby those models based upon currentmarket values of the organization’sresidual positions in a single issuer willcount toward the single issuer dealinglimit. The Board considers it onlyappropriate that, if a bankingorganization uses its internal models forpurposes of netting and valuing residualexposures in its equity derivatives lineof business, it must use current marketvalues (and not historical cost) forcalculating compliance with the dealinglimits under Regulation K for all of itsequities lines of business. Theorganization may not ‘‘mix and match’’the use of historical cost and mark-to-market valuations where internalmodels are used for these purposes.

However, the Board notes that nettingbased on internal models is not themandatory method of compliance withthe dealing limit. In this regard,Regulation K dealing limits presentlyencompass only net long positions inphysical securities, after netting longand short positions in the same security.As is presently the case, organizationsnot wishing to determine compliancewith the dealing limits by netting andoffsetting positions in physicalsecurities against positions inderivatives referenced to the samesecurity may continue to determinecompliance with the $40 milliondealing limit solely by reference to thehistorical cost of its net long physicalpositions.

Commenters requested clarification ofone aspect of the ’97 Proposal regardingnetting, namely, whether positions in asingle stock would qualify for netting solong as the hedge for the position is helddirectly or indirectly by the entity towhich the limit applies (i.e., somewherewithin the investor chain, but notnecessarily in the same legal entityholding the related investment.) TheBoard confirms that netting of positionson this basis will be permissible. Thisapproach reflects the market oreconomic risk of positions held by theentity on a consolidated basis.

Finally, the ’97 Proposal would haveallowed netting based on a bankingorganization’s internal models withoutprior Board approval. The Boardcontinues to believe that prior approval



15 In response to comments, the Board notes thatorganizations would not be required to create a newmodel separate from existing internal models usedfor purposes of market risk assessment in order toengage in netting under Regulation K. Indeed, theBoard would expect that organizations would usefor this purpose the same internal models otherwisecurrently employed for purposes of riskmanagement.

should not be required to engage innetting through the use of internalmodels for this purpose. After furtherconsideration, however, the Boardbelieves prior notice of an organization’sintention to use its internal models forthis purpose is appropriate so that theBoard may object if it considers themodels inadequate for any reason.Banking organizations that havepreviously received approval underRegulation K to engage in nettingthrough the use of their internal modelsmay continue to do so withoutadditional notice to the Board.15

Authority To Engage in EquityUnderwriting and Dealing Activities

In the ’97 Proposal, the Board notedthat its approval currently is required toengage in underwriting and dealing inequity securities pursuant to RegulationK and sought comment on whetherbanking organizations that are well-capitalized and well-managed should beallowed to engage in equity securitiesactivities at the proposed expandedlevels without seeking prior Boardapproval. In response to this request,commenters urged allowing U.S.banking organizations meeting the well-capitalized, well-managed criteria toengage in the expanded activitieswithout Board approval, particularly ifthe organization already has experiencein such activities under Regulation Y orK.

As discussed above, the Board hasadopted the ’97 Proposal with regard toexpanded equity underwriting authorityfor organizations that are well-capitalized and well-managed, but hasonly increased the equity dealingauthority from $30 to $40 million. Thelatter increase in authority will beavailable to all organizations regardlessof whether they meet the well-capitalized, well-managed criteria. TheBoard has concluded that, in view of thesignificant liberalization inunderwriting authority underRegulation K, all organizations that wishto engage in the expanded underwritingactivities must first provide 30 days’prior notice to the Board. With regard tothe increased dealing authority, allorganizations that wish to engage indealing activities under the $40 millionlimit also must provide 30 days’ priornotice to the Board, unless the

organization already has received theBoard’s consent to engage in dealingactivities under the $30 million limit.Organizations presently engaging indealing activities under the $30 millionlimit may avail themselves of theadditional $10 million in dealingauthority without prior notice to theBoard.

Venture Capital Activities ThroughPortfolio Investments

Current Restrictions

Regulation K currently allows U.S.banking organizations to make portfolioinvestments, that is, limited,noncontrolling investments in foreigncommercial and industrial companies.This authority was adopted to enhancethe competitiveness of U.S. bankingorganizations by increasing the range offinancial services they may provideabroad. Many foreign financialinstitutions, including foreign banks,engage in venture capital activities, attimes in connection with the provisionof other financial services to thecompany.

’97 Proposal

The Board proposed in the ’97Proposal that existing dollar limits onportfolio investments made by well-capitalized, well-managed bank holdingcompanies under the Board’s generalconsent authority would be replaced bylimits tied solely to a percentage of theholding company’s tier 1 capital. Morespecifically, such bank holdingcompanies (and their nonbankingsubsidiaries) would be permitted toinvest up to 2 percent of the holdingcompany’s tier 1 capital in anyindividual investment and would besubject to an aggregate limit of 25percent of the holding company’s tier 1capital for all such investments. Indetermining compliance with theindividual limit, shares in suchcompanies held in the trading accountby the investor and its affiliates underRegulation K would be included.

For all other investors (i.e., Edgecorporations, foreign bank subsidiariesof member banks, and bank holdingcompanies that are adequatelycapitalized but fail to meet the well-capitalized and well-managedstandards), the Board proposedretaining limits of $25 million oninvestments in any one organizationunder general consent authority,although larger investments wouldcontinue to be eligible for prior noticeor specific approval treatment on a case-by-case basis. An aggregate limit onsuch investments would be imposed.For bank holding company investors,

that limit would be 25 percent of tier 1capital, and for Edge or foreign bankinvestors, it would be the lesser of 5percent of the parent bank’s tier 1capital or 25 percent of the Edge’s tier1 capital.

With respect to the limit on votingshares in the target company, the Boardproposed that investors would bepermitted to make noncontrollinginvestments in up to 24.9 percent of acompany’s voting shares. Theseinvestments would only be permissibleif, as at present, the investor does notcontrol the company in which theinvestment is made. Accordingly, theBoard noted an investor may not: (i)Control a majority of the board ofdirectors or have disproportionaterepresentation on the board; (ii) have amanagement contract with the companyor exercise veto power over its actions;or (iii) use any other means to controlthe operations of the company.

The Board requested comment on allof the foregoing revisions to theportfolio investment authority. Itspecifically requested comment on therelative risk of portfolio investmentsand whether there is a competitive needfor foreign subsidiaries of banks also tohave expanded authority in relation tosuch investments.

Final Rule on Portfolio InvestmentAuthority

Comments submitted on this aspect ofthe Board’s ’97 Proposal stronglysupported the liberalization proposed inrelation to limits applicable to portfolioinvestments made by bank holdingcompanies, as well as in relation to theproposed increase in permissibleindividual investments up to 24.9percent of voting shares. Certain of thecomments argued that the proposedliberalization for bank holdingcompanies also should be extended tobank subsidiaries, and variousclarifications were requested on theinteraction between the proposedchanges and the existing rule.Clarification of these matters isprovided below.

As discussed above, however, themajor development in this area since theBoard issued the ’97 Proposal wasenactment of the GLB Act, whichauthorizes FHCs to make merchantbanking investments without regard todollar limits or geographic restrictions.The Board notes that expandedmerchant banking authority under GLBis only available to holding companysubsidiaries; such authority may not beexercised in the bank chain.

The Board has therefore reconsideredthe ’97 Proposal in the light of passageof GLB and has determined not to adopt



the proposal to increase the generalconsent limit and the permissiblepercentage of shares for portfolioinvestments. The Board considers thatthe GLB Act established the frameworkfor engaging in merchant bankingactivities generally, and Regulation Kshould not establish an alternativeframework for expansion of this activityabsent a compelling competitive need.The Board does not believe that anysuch compelling competitive need hasbeen demonstrated. Bank holdingcompanies wishing to engage inmerchant banking activities other thanunder the existing constraints ofRegulation K should seek FHC status.

Investment LimitsA number of additional comments

were submitted that are also relevant tothe operation of existing provisions ofRegulation K in relation to portfolioinvestments. In particular, certaincommenters suggested that investorsshould be permitted to make portfolioinvestment under Regulation K inexcess of the $25 million generalconsent limit, so long as the amount inexcess were deducted from capital.Other commenters suggested thatorganizations should be permitted touse netting for purposes of calculatingcompliance with portfolio investmentlimits. The Board considers that neitherof these changes would be appropriatein view of the nature of portfolioinvestments and the availability of otherauthority for making such investments.

A few commenters also requestedclarification regarding whether thecalculation of limits on portfolioinvestments will continue to be on anhistorical cost basis. One expressed theconcern that an increase in the aggregateportfolio limit would be necessary ifthese investments would be valued atcurrent market value, not historical cost.The Board considers that limits onportfolio investments should becalculated consistent with theirtreatment for capital purposes. Morespecifically, the amount of theinvestment subject to the Regulation Klimit will equal the carrying value of theinvestment, or the value of theinvestment on the balance sheet,reduced by any unrealized gains on theinvestment that are reflected in thecarrying value but are excluded from theorganizations’ tier 1 capital.

Commenters also opposed combiningportfolio investments with dealingpositions, either for purposes of a singlecompany limit or aggregate limit, notingthat these activities have importantdifferences and are managed throughseparate lines of business. They arguedthat portfolio investments generally are

made with longer time horizons andtend to involve privately heldcompanies, whereas dealing positionsgenerally are taken for short periods oftime and involve public companies. TheBoard considers these points to be well-founded. In view of these comments andthe Board’s determination not to adoptany significant liberalization either inrelation to portfolio investments ordealing authority, the Board believes itis appropriate to amend the singlecompany limits for purposes of portfolioinvestments and for equity dealing suchthat the limits will apply to eachactivity separately. However, the Boardnotes that all equity shares held in asingle company, including those held inconnection with dealing activity (butexcluding underwriting commitmentsand shares held for up to 90 dayspursuant to an underwriting), must becombined for purposes of determiningcompliance with the control limitationsof: (i) section 4(c)(6) of the BHC Act(with respect to U.S. companies); and(ii) the voting and total equity limits forportfolio investments under RegulationK (with respect to foreign companies).

Additionally, the Board is retainingan overall aggregate equity limit thatwill apply to all shares held underRegulation K portfolio investment anddealing authority, for the reasonsdiscussed in the section below entitled‘‘Aggregate Equity Limits for Dealingand Portfolio Investments.’’

Finally, commenters recommendedthat the Board specifically grandfatherany investments that might be renderedimpermissible by revision to RegulationK, or include a phase-in period fordivestiture of such investments. TheBoard notes that, in view of the fact thatit is not diminishing in any way existingauthority in relation to theseinvestments, no issues relating to theneed for grandfathering arise.

Percentage of Permissible Voting SharesCommenters expressed support for

the ‘97 Proposal which would haveincreased the percentage of votingshares permissible for portfolioinvestments from 19.9 percent to 24.9percent. A few commentersrecommended higher levels ofpermissible voting shares, as well asincreasing the 40 percent nonvotingequity limit, arguing that such increaseswould better enable U.S. bankingorganizations to compete with foreignfinancial institutions.

As noted above, FHCs may now makeinvestments in nonfinancial companiesunder merchant banking authoritywithout limitation as to the percentageof voting or nonvoting shares held andwithout restriction geographically.

Consequently, the Board believes it isno longer appropriate to alter in anyway the existing Regulation K limits onvoting and nonvoting shares of portfolioinvestment companies. U.S. bankingorganizations wishing to invest innonfinancial companies outside theUnited States beyond the existing limitsof Regulation K should do so throughobtaining FHC status. In thesecircumstances, the existing Regulation Kvoting and nonvoting equity limits onqualifying portfolio investments do notappear to affect the ability of U.S.banking organizations to competeabroad.

As noted above, portfolio investmentsare only permissible within these limitsif the investor otherwise also does notcontrol the company in which theinvestment is made. In this regard,several commenters urged the Board toclarify that restrictive and negativecovenants, such as are commonly foundin senior debt, also are permissible inconnection with portfolio investmentson the basis that they would not give theinvestor control over the company. TheBoard believes that such covenants maybe permissible so long as their purposeis to protect the minority rights of theinvestor. However, such covenants maynot be used as a means to obtain controlover a portfolio investment bypreventing the company from makingnormal business decisions. For example,the Board considers that it would beinconsistent with the mandatorynoncontrolling nature of portfolioinvestments for investors to have theright to veto a company’s choices forsenior management positions. Shouldquestions of this nature arise inconnection with a proposed portfolioinvestment, banking organizationsshould seek the views of Board staff asto whether the proposed investmentwould qualify as a portfolio investment.

In this regard, commenters suggestedthat the Board should adopt forRegulation K a process similar to thatadopted in Regulation Y in relation toadvisory opinions regarding the scope offinancial activities. The Board hasadopted this suggestion and will seek torespond to requests for advisoryopinions under Regulation K within 45days of receipt of a complete writtenrequest, unless the request raisessignificant policy issues.

Finally, another commenter soughtclarification as to whether theproportionality test for directors shouldbe measured against the investor’svoting interest or economic interest,favoring the latter measure. The Boardbelieves that an investor in a portfolioinvestment should have representationon the board proportionate to its voting



16 In particular, the Federal Reserve Act prohibitsinvestments in companies engaging in ‘‘the generalbusiness of buying or selling goods, wares,merchandise or commodities in the United States.’’12 U.S.C. 615. Section 4(c)(13) investments underthe BHC Act are limited only by a requirement thatthe company do ‘‘no business in the United Statesexcept as incident to its international or foreignbusiness.’’

17 See 12 CFR 211.4(e).

interest, and not economic interest, inthe company. More specifically, in viewof the restriction on voting shares heldto 19.9 percent, the Board would expectthat an investor would have no morethan one director for every five seats onthe board. In addition, an investor maynot have a disproportionateparticipation on a board’s executivecommittee.

‘‘Incidental’’ Activities in the UnitedStates

’97 ProposalIn the ’97 Proposal, the Board

proposed one additional change relatedto portfolio investments, primarily toprovide some relief to U.S. bankingorganizations with regard to the U.S.activities of their foreign portfolioinvestments. As a result of limitations inthe Federal Reserve Act and the BHCAct, U.S. banking organizations areprohibited from investing in more than5 percent of the voting shares of foreigncompanies that engage in impermissibleactivities in the United States other thanthose activities that are an incident totheir international or foreign business.16

The Board previously has taken theview that such permissible incidentalactivities in the United States arelimited to those activities that the Boardhas determined are permissible for Edgecorporations to conduct in the UnitedStates.17

However, as discussed above,companies in which portfolioinvestments are made generally areengaged in industrial or commercialactivities, which are not permissibleactivities for Edge corporations.Consequently, under Regulation K atpresent, if a portfolio investmentcompany decides to engage in activitiesin the United States, the U.S. bankingorganization is forced to sell its interestin the portfolio investment, even ifmarket considerations are inconsistentwith selling the shares at that time. Thisdivestiture would be required despitethe fact that the U.S. bankingorganization, by reason of themandatory noncontrolling nature ofportfolio investments, is unlikely to bein a position to influence the decisionto enter the U.S. market. In the ’97Proposal, the Board expressed theconcern that, with the increasing

globalization of economies around theworld, this situation may become morecommon in the future.

In order to address these changes incircumstances and in view of theminority nature of portfolioinvestments, the Board proposed that,consistent with the Federal Reserve Actand the BHC Act, investors may retainportfolio investment companies thatderive no more than 10 percent of theirtotal revenue from activities in theUnited States that are not permissiblefor Edge corporations to conduct in theUnited States.

In proposing this change, the Boardnoted the nature of portfolioinvestments. In particular, mostportfolio investments are venture capitalinvestments that are not intended to bepermanent holdings of the bankingorganization and instead are intended tobe sold after a period of time. Inaddition, the preponderance of thevalue of portfolio investments is derivedfrom their foreign business.

The Board invited comment on thisproposed change. It also soughtcomment on what might be regarded asan appropriate period for divestiture ofnon-conforming investments, as well ason whether a time limit should beplaced on the period for holding thesetypes of investments in view of theirsupposedly medium-term nature.

Final ActionCommenters strongly endorsed the

Board’s proposed change ininterpretation of U.S. activitiesconsidered ‘‘incidental’’ to internationalor foreign activities for this purpose,although some comments recommendedthat Regulation K should allow portfoliocompanies to derive a larger percentageof their total revenues (e.g., 20 or 25percent) from activities in the UnitedStates. Some commenters recommendedthat the Board employ a percentage oftotal tangible assets test either in lieu ofor as an alternative to the revenues test,suggesting that tangible assets are amore stable indicator of the extent of acompany’s business in the United Statesand are easier to measure.

The Board adopts the change as setforth in the ’97 Proposal. Thus, forpurposes of determining whether aportfolio investment may continue to beheld or must be divested, portfolioinvestment companies that derive nomore than 10 percent of their totalrevenue in the United States may beconsidered to be engaged only inbusiness that is an incident to theirinternational or foreign business andtherefore may continue to be held underportfolio investment authority. TheBoard continues to believe that the 10

percent revenue limit is appropriate toaddress globalization concerns and isconsistent with the provisions of theFederal Reserve Act and the BHC Act.The Board further considers that therevenue test is a better indicator of thelevel of U.S. activity, rather than theamount of tangible assets in the UnitedStates which may be more susceptible tomanipulation.

A few commenters requestedclarification of the operation of thislimit. In response to these requests, theBoard notes that revenue derived fromactivities in the United States in its viewwould include all revenue derived fromactivities performed in U.S. offices, butnot business that may originate from theUnited States but is performed offshore.It is, of course, also the case that thisrevenue test would only be applied toU.S. activities of portfolio investmentsthat are not otherwise permissible forEdge corporations to conduct in theUnited States.

In response to the Board’s request forcomment on an appropriate divestitureperiod for investments that exceed the10 percent revenue limit, a number ofsuggestions were made, includingallowing U.S. revenues of up to 40percent for up to five years. Othercommenters variously suggested that theBoard should adopt existing debtspreviously contracted (‘‘DPC’’) timeperiods for divestiture; allow some otherspecified period to divest (e.g., a sixmonth period, with an opportunity forextensions of up to a total of two years);or establish divestiture deadlines on acase-by-case basis. The Board isretaining the current Regulation Krequirement of a ‘‘prompt’’ divestitureof all nonqualifying portfolioinvestments, which allows for a case-by-case determination as to the appropriateperiod of time within which animpermissible investment must bedivested.

Aggregate Equity Limits for Dealing andPortfolio Investments

In the ’97 Proposal, in view of thesignificant liberalization in authorityproposed for bank holding companies inrelation to portfolio investments, anaggregate limit on all portfolioinvestments was proposed. The Boardalso proposed an additional aggregateequity limit that would apply to allshares held as portfolio investments andin connection with dealing activities.The proposed aggregate limit for allsuch investments for bankingorganizations meeting the well-capitalized and well-managed tests was:

BHC Subsidiaries: 50 percent of tier 1capital.



18 The Board also proposed aggregate limits forinvestors that do not meet the well-capitalized andwell-managed standards of half that applicable towell-capitalized and well-managed organizations(i.e., 25 percent of tier 1 capital for bank holdingcompany subsidiaries, and, for bank subsidiaries,the lesser of 5 percent of the parent bank’s tier 1capital or 25 percent of the bank subsidiary’s tier1 capital.

19 An additional comment recommended that theaggregate equity limit should be expressed as apercentage of assets, rather than as a percentage oftier 1 capital. The Board believes that tying theequity limit to tier 1 capital is a more appropriaterestriction on the level of aggregate equity activitiesunder Regulation K and therefore is not adoptingthis recommendation.

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

Bank Subsidiaries: The lesser of 10percent of tier 1 capital of the bank, or50 percent of the bank subsidiary’s tier1 capital.

Underwriting commitments andshares acquired pursuant to anunderwriting commitment and held forless than 90 days were excluded fromthe proposed aggregate equity limit.18

Commenters opposed the aggregationof shares held as portfolio investmentswith those held in connection withdealing activity in determiningcompliance with this limit, againarguing that these are two separate linesof business that should not beaggregated. Commenters also opposedthe proposed reduction in the combinedaggregate limit for Edge corporationinvestors, from the current 100 percentof tier 1 capital to 50 percent of tier 1capital, notwithstanding the ability tonet dealing positions and the exclusionof underwriting commitments andshares held for up to 90 days pursuantto an underwriting.

In view of the fact that the Board hasdetermined that it will not adopt theliberalization proposed in relation toportfolio investments, it has alsodecided not to adopt the separate limiton total portfolio investments for anygiven banking organization. In theabsence of expanded authority in thisarea, no need arises for such a limit.

However, consistent with theprovisions of current Regulation K, theBoard continues to believe that anaggregate equity limit is necessary withrespect to all shares held underRegulation K (whether held underportfolio investment authority or inconnection with dealing activity) incompanies engaged in activities thatwould be impermissible for a subsidiaryor a joint venture under Regulation K.Accordingly, the Board generally isadopting the aggregate limits on equitysecurities held under Regulation Kpreviously proposed. Consistent withthe ’97 Proposal, underwritingcommitments and shares held pursuantto an underwriting commitment for upto 90 days would be excluded from theaggregate equity limit.

However, in light of commentsreceived, the Board is not adopting theproposed reduction in the aggregatelimit for investors that are subsidiariesof a member bank. Nevertheless, the

Board continues to believe it isimportant to tie the aggregate limit forbank subsidiaries to the capital levels ofboth the member bank and the banksubsidiary investor. Accordingly, theaggregate equity limit for subsidiaries ofbanks will be the lesser of 20 percent ofthe tier 1 capital of the member bank or100 percent of the tier 1 capital of thebank subsidiary.19

Commenters also requestedclarification on whether the aggregateequity limits include: (i) only equitysecurities held by the investor and itsdownstream subsidiaries or securitiesheld by all its affiliates; and (ii) onlyshares held under the authority ofRegulation K . The Board notes that,with respect to a particular investor,these limits will include all equitysecurities held by the investor and itsdownstream subsidiaries underRegulation K authority, whether arisingin connection with portfolioinvestments or dealing activity.20 Thus,the aggregate equity limit will notinclude investments in joint ventures orsubsidiaries under Regulation K, ormerchant banking or any otherinvestments made under authority otherthan Regulation K.

One commenter recommended thatthe Board permit aggregate dealingpositions to be calculated on a quarterlyaverage and suggested a ‘‘preclearance’’program for additional authority beyondthe regulatory limits. The Boardconsiders that determining compliancewith these limits on the basis of aquarterly average would beinappropriate and potentially be subjectto considerable manipulation. As notedabove, should an organization wish toengage in equity securities activitieswithout limit it should do so under FHCstatus subject to the FHC qualifyingcriteria. For these reasons, the Boarddeclines to adopt these proposals.

Insurance Activities

Reinsurance ProposalSection 211.5(d)(16) of Regulation K

presently authorizes bank holdingcompanies to own foreign companiesthat underwrite and reinsure life,annuity, pension-fund related, and other

types of insurance, where the associatedrisks have been previously determinedby the Board to be actuariallypredictable. Prompted by the Board’sconsideration in 1997 of a bank holdingcompany’s request, the Board requestedcomment on whether the reinsurance(via a retrocession agreement with anunaffiliated offshore reinsurer) by aforeign subsidiary of U.S. bank holdingcompany of all or a portion of the riskof policies or annuities sold in theUnited States by U.S. affiliates of thebank holding company or unrelatedparties could be considered to fallwithin this authority. It queried whetherthe fact that the risk to be reinsured isin the United States could cause theactivity to be considered located in theUnited States, particularly given thepotentially significant involvement ofthe bank holding company’s U.S.affiliates.

Several insurance trade associationsopposed any expansion of authority inthis area. They argued that thereinsurance activity necessarily wouldbe domestic because of its completedependence on U.S. insurance sales. Inaddition, they suggested the reinsuranceactivity would expose U.S. banks tounnecessary risk and conflicts ofinterests, be contrary to Boardprecedent, transfer regulatory scrutinyof domestically-originated risks from thestate regulators to less rigorous anduntested international regimes, and setthe stage for U.S. banking organizationsto underwrite and reinsure all types ofinsurance through foreign subsidiaries.Ultimately, they argued, anyliberalization in this area should comefrom Congress, not the Board.

Several U.S. banking tradeassociations and banking organizationsexpressed support for expandedauthority as described in the ’97Proposal. They emphasized that theproposal would only modestly extendan activity (i.e., underwriting andreinsuring life insurance abroad) longregarded as permissible by the Board. Inaddition, they maintained that thepermissible U.S. insurance sales wouldbe only an incidental, and not aprimary, feature of an activity—reinsurance—having an essentiallyforeign character. They noted that manyactivities in which U.S. bankingorganizations are permitted to engageabroad are related to their U.S. activities(e.g., securities activities) and assertedthat the relation in this instancebetween the reinsurance activity and theU.S. insurance sales similarly shouldnot result in rejection of the proposedactivity. These commenters also arguedthat the proposal would further the EdgeAct’s stated purpose of enhancing U.S.



banking organizations’ competitivenessabroad.

As noted above, the GLB Act wasenacted subsequent to the issuance ofthe Board’s reinsurance proposal. TheGLB Act allows FHCs to conductinsurance activities on a worldwidebasis and demonstrates a Congressionalpreference for conducting suchactivities through subsidiaries of FHCs.The Board does not believe, and thecomments on the Board’s proposal havenot shown, that competitive concernsrequire U.S. banking organizations toproceed under Regulation K in theconduct of this activity rather than GLBauthority. Accordingly, the Boarddeclines to adopt the reinsuranceproposal. As at present, however, abanking organization may seek theBoard’s specific consent to engage ininsurance activities more expansivethan those expressly authorized underthe regulation.

Other CommentsSupporters of the Board’s reinsurance

proposal urged the Board to liberalizeRegulation K’s insurance provisionsfurther in several respects. First, theyrecommended that the Board eliminatethe requirement that U.S. banks obtainBoard approval before engaging ininsurance activity through foreignsubsidiaries, asserting that bankingorganizations should be given maximumflexibility to determine how to structurethese activities. One commentersuggested that the Board replace theproposed prior approval requirementwith a 30-day prior notice requirement.On balance, the Board believes it isappropriate to continue to require priorBoard approval for such activities.Further, absent demonstration of acompelling need for competitivereasons, the Board expects insuranceunderwriting (other than credit lifeinsurance and credit accident andhealth insurance) to be conductedthrough subsidiaries of the holdingcompany, or otherwise under theexpanded authority provided in GLB.

The commenters also argued that U.S.banking organizations should not berequired to deconsolidate and deductinvestments in foreign insurancecompanies from the holding company’scapital for capital adequacy purposes,arguing that such a requirement isinappropriate and disproportionate tothe risks involved. The Board disagreesand declines to eliminate thisrequirement. The consolidation ofinsurance activities may result inoverstated capital ratios because therisk-based capital adequacy frameworkdoes not take into account traditionalinsurance risks. Although FHCs

currently may consolidate theirinsurance companies for purposes oftheir capital ratios, for supervisorypurposes their capital ratios also areanalyzed after deconsolidation anddeduction of such companies. Retainingthe deconsolidation and deductionrequirement in Regulation K also wouldbe consistent with proposed revisions tothe Basel Capital Accord.

In addition, the commenters urged theBoard to expand the types of insuranceforeign subsidiaries of bank holdingcompanies may underwrite andreinsure, to encompass all credit-relatedinsurance (including insuranceincidental to leasing activities ormortgage transactions, and motorvehicle comprehensive insurance inconnection with car loans). In theBoard’s view, in light of passage of GLB,there should be no general expansion ofpermissible types of insuranceunderwriting under Regulation K. As atpresent, however, application may bemade on a case-by-case basis for theBoard’s approval to engage in additionaltypes of insurance activities usual inconnection with the business of bankingabroad.

Debt/Equity SwapsRegulation K currently permits

banking organizations to swap certaindeveloping country debt for equityinterests in companies of any type.Established in 1987 to assist bankingorganizations in managing largeamounts of nonperforming, illiquidsovereign debt, these foreign investmentprovisions are more liberal thanRegulation K’s other investmentprovisions. Under certain conditions setout in Regulation K, investors mayinvest under general consent authorityup to one percent of their tier 1 capitalin up to 40 percent of the shares,including voting shares, of privatesector companies in eligible countries.Such an investment must be heldthrough the bank holding company,unless the Board specifically permits itto be held through the bank or a banksubsidiary. Eligible countries aredefined as those that have rescheduledtheir debt since 1980, or any country theBoard deems to be eligible.

Since the debt/equity swap provisionswere introduced, a well developedsecondary market in developing countrydebt has emerged. The vast bulk ofdeveloping country problem debt hasbeen repackaged in the form of long-term Brady bonds, mostly denominatedin U.S. dollars and fully collateralizedas to principal by U.S. governmentbonds. Many banking organizationsactively trade these instruments in thesecondary market.

Due to the development of thesecondary markets for emerging marketdebt, U.S. banks now have the sameoptions with regard to many of theseassets as they have with other bankassets—namely, they can hold the assetwith a view toward collecting atmaturity or sell the asset for cash toinvest in other bank eligible assets.Indeed, the sovereign debt of most of thehistorically ‘‘eligible countries’’ is nolonger illiquid, and those eligiblecountries that account for the vast shareof rescheduled debt have largelyregularized their relations withcommercial banks.

In light of these changedcircumstances and to redirect thisspecial authority to the asset qualityproblem it was originally intended tohelp resolve, in the ’97 Proposal theBoard proposed to redefine the term‘‘eligible country.’’ Under the proposeddefinition, only countries with currentlyimpaired sovereign debt (i.e., debt forwhich an allocated transfer risk reservewould be required under theInternational Lending Supervision Actand for which there is no liquid market)would be eligible for investmentsthrough debt/equity swaps underRegulation K. Existing holdings of suchinvestments would be grandfathered,subject to the existing divestitureperiods applicable to such investments(i.e., generally, 10 years from the date ofacquisition).

The Board solicited comment on theseproposed changes. It also soughtcomment on whether, alternatively, thedebt/equity swap authority should beeliminated as obsolete.

Several commenters supported theproposed changes. Only one commentopposed the change to the definition ofan ‘‘eligible country’’. Anothercommenter urged the Board to extendthe general consent authority for debt/equity swaps to such investments madeby banks and bank subsidiaries. TheBoard continues to believe theadditional authority granted under thedebt/equity swap provisions should belimited to countries with currentlyimpaired debt, in light of thedevelopments described above and,accordingly, adopts the proposedchange to the definition of an ‘‘eligiblecountry.’’ The Board also considers thatgeneral consent authority for engagingin debt/equity swaps under the bankcontinues to be inappropriate. As atpresent, a bank or bank subsidiary mayseek authority from the Board to holdsuch an investment on a case-by-casebasis.



21 The proposed definitions of well-managed andwell-capitalized for these purposes are discussedinfra under the heading ‘‘Well-capitalized/Well-managed Standards.’’

22 Under the proposal, if the Edge corporationwere making the investment, then the Edgecorporation, the member bank, and the bankholding company would be required to meet thewell-capitalized and well-managed tests. If themember bank were making the investment, then thebank and the bank holding company would berequired to meet the tests.

Streamlining Application Procedures

General Consent Limits

The Board noted in the ’97 Proposalthat, although existing Regulation Kprocedures have proved effective inmaintaining the safety and soundness ofU.S. banks’ international operations,they have become increasingly complexover the years. For example, under priornotice procedures, the Board hasreviewed all foreign investments madeby banking organizations above a deminimis level as a principal mechanismfor overseeing the safety and soundnessof the investing organization. In view ofthe shift in emphasis to supervisionbased upon risk managementcapabilities, the Board believes thatprior review of relatively smallinvestments is no longer useful as afundamental supervisory tool,especially where the investor is well-capitalized and well-managed.Accordingly, the Board proposed thatonly significant investments, asdetermined solely on the basis of theinvestor’s capital, would be subject toprior review by the Board, provided thatthe investors are well-capitalized andwell-managed.21 The proposed changesto the general consent proceduresattempt to balance safety and soundnessconsiderations with the objective ofenhancing the ability of U.S. bankingorganizations to compete with foreignbanks overseas.

Limits on Investments in One Company

Historically, all general consentinvestments under Regulation K weresubject to absolute dollar limits.Currently, the general consent limit formost investments is $25 million.However, as a result of amendments toRegulation K implemented in December1995, certain investments by stronglycapitalized and well-managed banks aresubject to Board review only to theextent they exceed a percentage of theinvestor’s capital.

In the ’97 Proposal, the Boardproposed expanding upon this approachby eliminating the absolute dollar limitson foreign investments permissibleunder general consent authority forwell-capitalized and well-managedinvestors (with the exception of thoseapplicable to portfolio investmentsmade under the bank). Under theproposal, general consent limits for allinvestors (bank holding companies,banks, and Edge corporations) would be

based solely on a percentage of their tier1 capital.22

The limits on individual investmentsmade under general consent authoritywould vary according to the investor(bank holding company, bank, or Edgecorporation) and the type of entity inwhich the investment is made. For well-capitalized and well-managed investors,the Board proposed the followingpercentage limits.

General consent limits on investment ina subsidiary

Bank holding company: 10 percent oftier 1 capital of the bank holdingcompany.

Bank: 2 percent of tier 1 capital of thebank.

Bank subsidiaries: the lesser of 2percent of tier 1 capital of the bank or10 percent of tier 1 capital of the banksubsidiary.

General consent limits on investment ina joint venture

Bank holding company: 5 percent oftier 1 capital of the bank holdingcompany.

Bank: 1 percent of tier 1 capital of thebank.

Bank subsidiaries: the lesser of 1percent of tier 1 capital of the bank or5 percent of tier 1 capital of the banksubsidiary.

These limits were proposed on thebasis that they reflected the riskinvolved in the type of investment. Ahigher percentage of capital would bepermitted in the case of an investmentin a subsidiary as opposed to aninvestment in a joint venture becausethe latter is considered to carry a greaterrisk of loss. Thus, with joint ventures,investors acquire less than full control,and the record on such investments hasshown that they experience a higher rateof loss. As a result, most U.S. banks donot now make sizeable joint ventureinvestments. In light of theseconsiderations, the Board believed thatlower general consent limits may beappropriate for joint ventureinvestments.

For investors that fail to meet thewell-capitalized or well-managedstandards, the Board proposed thefollowing limits. Individual investmentsunder general consent authority wouldbe limited to the lesser of $25 millionor 5 percent of tier 1 capital in the case

of an investor that is a bank holdingcompany, and the lesser of $25 millionor 1 percent of tier 1 capital if theinvestor is a member bank. Limits onindividual investments for an Edgecorporation would be $25 million or thelesser of 1 percent of the parent bank’stier 1 capital or 5 percent of the Edge’stier 1 capital. The Board also proposed,however, that authority would bedelegated to the Director of BankingSupervision and Regulation to approvehigher investment limits on a case-by-case basis or as part of an investmentprogram as described further below.

The Board sought comment on theseproposed limits, noting that these limitswould only cover investments madeunder general consent authority; largerinvestments may continue to be madewith 30 days’ prior notice. Noting thatan argument could be made that, incases involving investments by an Edgecorporation, the well-capitalized andwell-managed tests should be based ona review of the parent bank, not theEdge corporation, the Board also soughtcomment on the Board’s proposal toimpose limits tied to the condition ofthe Edge.

Commenters expressed generalsupport for the Board’s percentage-of-capital limits approach and proposal toreserve the greatest liberalization towell-capitalized and well-managedinvestors. Several, however, objected tothe proposed general consent limits forbank subsidiaries, arguing that they willhave the effect of reducing the generalconsent investment authority of someinvestors. Comments advanced anumber of rationales for either retainingthe existing limits, at least for well-capitalized and well-managed banksubsidiaries, or for increasing theproposed limits.

The Board believes the proposedgeneral consent limits for investmentsby bank subsidiaries are sufficient. TheBoard therefore is adopting the limits asproposed. Should investors desireincreased general consent authority,they may increase capital levels at thebank and/or bank subsidiary level, aswarranted. Additionally, as notedabove, an investment in excess of thegeneral consent limits may still be madefollowing prior notice procedures orwith the specific consent of the Board.In any event, the Board notes that, inmost instances, the binding constraint isthe member bank’s capital.

Two commenters, however, noted thatthe proposed general consent limitsmight be especially constraining fororganizations whose Edge corporationsare minimally capitalized. Theyrecommended that the Board allow awell-capitalized, well-managed parent



bank to make de minimis generalconsent investments through its Edgecorporation, even if that investmentwould be greater than otherwise wouldbe allowed under the limits applicableto the Edge. The Board disagrees andcontinues to be of the view that it isimportant to retain the well-capitalizedand well-managed tests for the Edgecorporation itself as one of the bases fordetermining limits applicable to generalconsent investments. This approach willhelp to ensure the safety and soundnessof Edge corporations in their own rightand is consistent with the statutory (andsupervisory) rationale underlying Edgecorporations. As discussed above,Congress limited the amount of capitalthat banks could invest in Edgecorporations, which in turn could investin activities otherwise prohibited tobanks that were perceived to be higherrisk. Congress also subjected Edgecorporations to regulation andexamination by the Federal Reserve. Forthese reasons, the Board considers thatEdge corporations should themselves beoperating satisfactorily and not be asource of potential weakness to itsparent bank. The Board therefore isadopting in final the proposed generalconsent limits that are tied to thecondition of the Edge.

In response to the Board’s request forcomment on the imposition of differentgeneral consent limits on investments insubsidiaries and joint ventures, twocommenters maintained that imposingdifferent limits on these investments isunjustified, arguing that the activitiespresent similar risks. The Boarddisagrees and continues to be of theview stated in the ’97 Proposal thatinvestments in joint ventures involvegreater risks than investments insubsidiaries. Consequently, the Boardadopts the limits on investments insubsidiaries and joint ventures asproposed.

Two commenters noted the lack of ageneral consent mechanism forincremental investments in a subsidiaryor joint venture once the individualcompany investment limit is reached.They recommended the inclusion ofsuch a provision to allow investors tomake additional small investmentsquickly, without encumbering both theinvestor and the Board with a case-by-case regulatory review. They furthersuggested that such investments beexcluded from the 12-month rollingaggregate general consent limits. TheBoard does not believe that thesechanges should be made to the proposal.As noted above, an investor mayincrease its investment limit byincreasing its capital. Moreover, aninvestor that has reached its individual

company investment limit may apply tothe Director of the Division of BankingSupervision and Regulation forappropriate relief or may submit a long-range investment plan for preclearance,as discussed further below.Accordingly, the Board is retaining therequirement that investments beyondthose permissible under general consentauthority must be made under the priornotice procedures unless relief isotherwise granted.

One commenter proposed allowinginvestors to carry forward andaccumulate for five years unusedinvestments of cash dividends, as ispresently authorized under RegulationK. The Board believes that thisprovision is no longer necessary in lightof the expansion of the general consentlimits and the ability of investors to seekwaivers or obtain preclearance of aninvestment program.

Another commenter noted that theBoard’s proposal would renderinvestments in general partnerships andunlimited liability companies inamounts of less than $25 millionineligible for the general consentprovisions and recommended that theBoard preserve the general consentstatus quo for such investments by well-capitalized, well-managed bankinginstitutions. The final rule adopts thisrecommendation.

Commenters also urged the Board toclarify that investments in single-purpose subsidiaries formed solely forthe purpose of facilitating a specificfinancing transaction (e.g., specialpurpose corporations formed by Edgecorporations engaged in specific leasingtransactions with a single customer)would not be subject to the individualor aggregate general consent limits. TheBoard will continue to exclude suchinvestments from the application orprior notice procedures provided theinvestment serves solely to finance aleasing transaction.

Aggregate LimitsThe limits on general consent

investments in any one company areintended to address the fact thatindividual foreign investments above acertain size may be a source of potentialconcern, and therefore prior review ofsuch investments should be required. Inaddition, the Board is also concernedwith any rapid increase in anorganization’s foreign investmentsoverall, made without prior review.Accordingly, in the ’97 Proposal, theBoard proposed that when thecumulative investments made undergeneral consent reach a certain amountover a given period, new or additionalinvestments would become subject to

prior review. Investments by allaffiliates of a bank holding companywould be taken into account indetermining compliance of the holdingcompany with the aggregate limits;investments of subsidiaries of a bank orof an Edge, respectively, would beaggregated in determining compliancewith their limits. Under the proposedliberalized general consent procedures,the new aggregate limit for allinvestments during any 12-monthperiod for investors meeting the well-capitalized and well-managed testswould be:

Bank holding companies: 20 percentof tier 1 capital.

Bank: 10 percent of tier 1 capital ofthe bank.

Bank subsidiaries: the lesser of 10percent of tier 1 capital of the bank or50 percent of the bank subsidiary’s tier1 capital.

The Board considered that, becausethe bank would have the exposure on aconsolidated basis for investments byeither the bank or the Edge, theseinvestments should have a combinedaggregate limit. However, the Boardproposed that this limit could bewaived, in whole or in part, by theDirector of the Division of BankingSupervision and Regulation underdelegated authority, based upon areview of the financial strength of theinvestor and its investment strategy andbusiness plans.

For bank holding companies, banks orEdge corporations that are adequatelycapitalized but do not meet the well-capitalized and well-managedstandards, the Board proposed that theaggregate limits on all investments madeunder authority of general consent inany 12-month period would be half thatapplicable to well-capitalized and well-managed organizations (i.e., 10 percentof tier 1 capital for bank holdingcompanies, 5 percent of tier 1 capital forbanks, and, for Edge corporations, thelesser of 5 percent of the parent bank’stier 1 capital or 10 percent of the Edge’stier 1 capital). In determiningcompliance with the aggregate limits,investments under Regulation K by allsubsidiaries of the investor would betaken into account.

A number of comments weresubmitted regarding these provisions.Some argued that there should beseparate rolling 12-month aggregatelimits for portfolio investments andinvestments in subsidiaries and jointventures. Other commenters objected tothe inclusion of dealing positions in therolling 12-month limits, and one arguedthat the percentage limits should beincreased if portfolio investments anddealing activities are both included in



determining compliance with the limits.A few commenters also requestedclarification of whether additionalinvestments in a company equal to cashdividends from the company,investments acquired from an affiliate,and investments made under the priornotice and specific consent provisionswould be included within the proposedrolling 12-month aggregate limits. Theyrecommended that the final regulationexplicitly exclude these investmentsfrom the aggregate limits.

As discussed above, the aggregatelimits are designed to address concernsthat a banking organization may useexpanded general consent investmentauthority, including that available inrelation to portfolio investments, toexpand excessively within a short timeperiod. The Board notes that theselimits are set at fairly high levels as apercentage of tier 1 capital. In order toprovide a meaningful constraint onexcessively rapid growth, in the Board’sview all amounts invested during therolling 12-month period should beincluded in the aggregate limit. TheBoard does not consider that any actionshould be taken to exclude portfolioinvestments from other investments insubsidiaries and joint ventures forpurposes of the aggregate generalconsent limit. After furtherconsideration, however, the Boardconsiders that shares acquired inconnection with Regulation K dealingactivity should be excluded from therolling 12-month aggregate limit, inview of the important differences in thenature of dealing activity. Aside fromthis change, in view of the ability of abanking organization to increase itsgeneral consent limits by increasingcapital, and the availability of otherprocedures for securing authority tomake investments should the limitsprove constraining (such as seeking awaiver of limits on a case-by-case basisor obtaining preclearance for aninvestment program), the Board adoptsthe proposed aggregate general consentlimits.

Preclearance of Investment ProgramIn connection with the foregoing, the

Board also in 1997 proposedestablishing a procedure that wouldallow U.S. banking organizations toobtain preclearance of an investmentprogram, even though one or more ofthe investments would be in excess ofthe individual or aggregate generalconsent investment limits and would bemade over a time period longer than oneyear. Preclearance authority would bedelegated to the Director of BankingSupervision and Regulation, with theconsent of the General Counsel. The

Board solicited comment on whethersuch a program would be useful to U.S.banking organizations and whether itshould be available to all bankingorganizations, including thoseorganizations that are not well-capitalized and well-managed.

In response to the Board’s request forcomment, several commentersrecommended that the Board adopt theproposed preclearance investmentprogram as enhancing U.S. bankingorganizations’ internationalcompetitiveness. Commenters believedthat the preclearance process shouldfocus on the merits of the applicant,rather than the specifics of theinvestment program. They argued that,for the preclearance option to beeffective, the regulatory review processmust be rapid and must not imposeexcessively narrow parameters on thetypes of investments permitted.

The Board is adopting the proposedpreclearance program that would allowinvestors to seek authority to exceed theindividual or rolling 12-month aggregategeneral consent investment limits.Because of the differing foreigninvestment needs of U.S. bankingorganizations, the Board is not at thistime placing specific limitations on thescope of the preclearance process, butrather will assess each proposal on acase-by-case basis. The Board believesthis approach provides maximumflexibility and will increase the utility ofthe process to all investors. Anypreclearance request should be inwriting and should indicate: (i) Theamount of preclearance authoritysought; (ii) the period of time for whichsuch authority is sought; (iii) thestrategic plan detailing the reasons forseeking preclearance authority; (iv)whether the applicant satisfies the well-capitalized and well-managed criteria;and (v) capital projections based uponanticipated investments made under thepreclearance authority.

Commenters also recommended thatinvestors be permitted to present theirinvestment programs as prior notices,rather than as applications for specificconsent. One commenter recommendedthat such authority be delegated toindividual Reserve Banks, rather than tothe Director of Banking Supervision andRegulation. In light of the fact that thepreclearance process under RegulationK is new, the Board believes that it isimportant, at least initially, for theserequests to be processed at the Boardunder specific consent. The proceduresfor obtaining preclearance authority willbe reviewed after the Board gainsexperience with the process.

Authorization To Invest More Than TenPercent of a Bank’s Capital in Its Edgeand Agreement CorporationSubsidiaries

Under a September 1996 amendmentto section 25A of the Federal ReserveAct, member banks may invest morethan 10 percent and up to 20 percent ofcapital and surplus in the stock of Edgeand agreement corporation subsidiarieswith the Board’s prior approval. TheBoard may not approve suchinvestments unless it determines thatthe investment of an additional amountby the bank would not be unsafe orunsound.

The Board proposed to implementthis provision by adding an applicationrequirement to Regulation K for banks toobtain the Board’s approval to invest inexcess of 10 percent of a bank’s capitalin the stock of Edge and agreementcorporations. The Board noted that itwould take the following criteria intoaccount in reaching a decision on suchan application: (i) The composition ofthe assets of the bank’s Edge andagreement corporations; (ii) the totalcapital invested by the bank in its Edgeand agreement corporations whencombined with retained earnings of theEdge and agreement corporations(including retained earnings of anyforeign bank subsidiaries) as apercentage of the bank’s capital; (iii)whether the bank, bank holdingcompany, and Edge and agreementcorporations are well-capitalized andwell-managed; and (iv) whether thebank is adequately capitalized afterdeconsolidating and deducting theaggregate investment in and assets of allEdge or agreement corporations and allforeign bank subsidiaries.

The Board invited comment onwhether the enumerated criteria areappropriate for determining whetherthese investments are unsafe orunsound. Additionally, the Boardsought comment on whether only thewell-capitalized and well-managedcriteria should apply in those instancesin which the total Edge and agreementcorporation capital (including retainedearnings) on a pro forma basis wouldnot exceed 20 percent of the bank’scapital. As discussed above, due to theaccumulation of retained earnings inEdge corporations, some member banksnow have over 20 percent of theirconsolidated capital in Edgecorporations.

Comments submitted generallysupported this proposal. Onecommenter urged the Board to state thatthe evaluative criteria are not all-inclusive, to permit the Board toconsider other issues as they may arise



23 Under the proposal, a bank holding companywould be considered well-capitalized if, on aconsolidated basis, it maintains total and tier 1 risk-based capital ratios of at least 10 percent and 6percent, respectively. In the case of an insureddepository institution, well-capitalized means thatthe institution maintains at least the capital levelsrequired to be well-capitalized under the capitaladequacy regulations or guidelines applicable to theinstitution that have been adopted under section 38of the Federal Deposit Insurance Act, 12 U.S.C.1831o. The Board proposed that an Edge oragreement corporation would be considered well-capitalized if it maintains total and tier 1 capitalratios of 10 and 6 percent, respectively.

24 Under the proposal, a bank holding companyor insured depository institution would beconsidered well-managed if, at its most recentinspection or examination or subsequent review,the holding company or institution received at leasta satisfactory composite rating. The Board notedthat, under standards adopted by the Board inconnection with the December 1995 expansion ofRegulation K’s general consent authority, an Edge

or agreement corporation would be considered to bewell-managed for these purposes if it received acomposite rating of 1 or 2 at its most recentexamination or review and it is not subject to anysupervisory enforcement action.

on a case-by-case basis. Anothercommenter recommended that theBoard include among the criteria anevaluation of the reasons for theproposed capital increase. The Boardbelieves these suggestions are implicitin the enumerated criteria. The Boardtherefore adopts the regulation asproposed, including applying only thewell-capitalized and well-managedcriteria in those instances in which thetotal Edge and agreement corporationcapital (including retained earnings) ona pro forma basis would not exceed 20percent of the bank’s capital. While theBoard expects the enumerated criteriawill be sufficient in most circumstances,the Board may take into accountadditional criteria if necessary to fullyevaluate a proposal and ensure safetyand soundness of member banks.

Finally, commenters recommendedthat a well-capitalized, well-managedbank should not be required to obtainprior approval for these investmentsbut, instead, should be subject only toa prior notice requirement in order tomake such an investment. The Boardconsiders, however, that the priorapproval requirement should bemaintained even for well-capitalized,well-managed banks in light of thesignificant amounts of retained earningsthat may be held through Edge oragreement corporations.

Well-Capitalized/Well-ManagedStandards

As discussed above, the Board’s ’97Proposal generally allowed well-capitalized and well-managed bankingorganizations to engage in expandedsecurities activities and to make largergeneral consent investments. The Boardproposed criteria for determiningwhether banking organizations wouldbe considered well-capitalized 23 andwell-managed.24 Whether an institution

is well-capitalized and well-managedalso was proposed as a factor in theBoard’s determination regardingwhether investments in Edgecorporations greater than 10 percent ofa member bank’s capital and surplusshould be permitted.

Commenters expressed widespreadsupport for additional flexibility forwell-capitalized, well-managedinvestors. However, they noted that thewell-managed test under Regulation Kdiffers from that for expedited actionunder Regulation Y by including arequirement that an institution not besubject to any supervisory enforcementaction. They expressed concern that thisprovision would not provide the Boardwith sufficient flexibility to determinewhen an institution is not well-managed, as some enforcement actionsmay involve matters that would not beconsidered material. Commenters alsonoted that the existence of supervisoryenforcement actions could be reflectedin either the management rating or thecomposite rating of an institution, andthat such ratings may be changed at anytime during an examination cycle. Inresponse to these concerns, the Board isamending the proposed definition ofwell-managed to delete the reference tosupervisory enforcement actions and,instead, to require that theorganization’s management rating mustbe at least satisfactory. Accordingly, aU.S. banking organization meets thewell-managed definition if its compositeand management ratings are at leastsatisfactory.

Some commenters suggested that theBoard should provide transitionalperiods and arrangements forinstitutions disqualified from well-capitalized and/or well-managed statusto conform to the lower limits. Since thecircumstances of disqualification mayvary, the Board believes transitionalperiods and arrangements should beaddressed on a case-by-case basis. Othercommenters suggested thatgrandfathering should be available forinstitutions that no longer qualify aswell-capitalized or well-managed,particularly where activities at issue arebeing conducted prudently andprofitably and are not a factor in thefailure to meet the eligibility tests. TheBoard does not believe grandfathering isappropriate in this context, as the well-capitalized, well-managed status of aninstitution is designed to mitigate theadditional risks created by the expandedauthority granted to such institutions.

Moreover, the ability to conductexpanded activities should also be anincentive for achieving and maintainingwell-capitalized, well-managed status.

Several commenters objected toapplication of the well-capitalized testto Edge corporations. They argued that,since the capital of an Edge corporationis consolidated with that of the parentbank, an independent well-capitalizedtest for Edge corporations would notadd to safety and soundness within thebank chain. They also maintained thatan independent capital test for Edgecorporations may encourageuneconomic booking decisions betweenthe bank and the Edge corporation. TheBoard, however, continues to believe itis important to retain these tests withreference to both the Edge corporationand the member bank in order to beeligible for the expanded authoritygranted to well-capitalized institutions.As noted above, this approach wouldhelp to ensure the safety and soundnessof the Edge corporation in its own rightand is consistent with the statutory (andsupervisory) rationale underlying Edgecorporations. The Board considers thatEdge corporations should themselves beoperating satisfactorily and not be asource of potential weakness to the U.S.parent bank.

Other Revisions to Subpart A

Harmonization of Regulation K WithOther Regulatory Changes

The ’97 Proposal noted that, as aresult of liberalizations of other Boardregulations, authority under RegulationK is now more restrictive than theauthority available to engage in certainactivities domestically. The Boardproposed changes to address thesedisparities and has determined to adoptall such harmonizing changes.

Leasing Activities

The Board proposed to interpretRegulation K’s leasing provisionconsistent with a revision to RegulationY’s authority for BHCs, eliminating therequirement that leasing activitiesconducted under authority ofRegulation K serve as the functionalequivalent of an extension of credit tothe lessee with respect to high residualvalue leasing. Commenters expressedsupport for this proposal andrecommended that the change be madeexplicit in the text of the final rule. TheBoard is adopting this proposal, and aconforming change has been made toRegulation K. As required underRegulation Y, however, the estimatedresidual value of real property must belimited to 25 percent of the value of theproperty at the time of the initial lease,



25 Regulation Y allows up to 30 percent of dataprocessing revenues to be derived from dataprocessing that is not financial, banking, oreconomic in nature.

26 In this regard, Regulation Y has been revisedto allow subsidiaries of BHCs to act as FCMs forfutures contracts traded on an exchange providedthe parent BHC does not provide a guarantee orotherwise become liable to the exchange or clearingassociation other than for proprietary trades.

to distinguish real property leasing fromreal estate development and investmentactivities.

Commodities Swaps ActivitiesIn light of changes to Regulation Y,

the Board proposed to eliminate therequirement that commodity-relatedswaps must provide an option for cashsettlement that must be exercised uponsettlement. Comments generallysupported this proposed revision, andthe Board has adopted the change infinal.

Other commenters recommended thatthe commodities swaps provision beexpanded to include activities relatingto the trading, sale, or investment incommodities and underlying physicalproperties (and, hence, to make it fullyconsistent with the correspondingprovision of Regulation Y). The Boardrejects these additional changes at thistime as inconsistent with section 25A ofthe Federal Reserve Act, 12 U.S.C. 617,which prohibits Edge corporations fromengaging in commerce or trade incommodities except as specificallyprovided therein.

Loans to Officers at Foreign BranchesIn the ’97 Proposal, the Board noted

that existing Regulation K imposeslimits on mortgage loans to executiveofficers of foreign branches of memberbanks that are more restrictive thanlimits imposed under analogousprovisions in Regulation O. The Boardproposed to eliminate the Regulation Kprovision to address this disparity.None of the public commentersaddressed this proposed change, and itis adopted as proposed. Accordingly,the limits in Regulation O apply withrespect to such loans.

Data Processing ActivitiesThe Board expressly declined to alter

or expand Regulation K’s dataprocessing provision. It noted, however,that this authority extends only to theprocessing of information and does notauthorize the general manufacture ofhardware for such services. Somecommenters presumed that the activityof data processing pursuant toRegulation K is unrestricted rather thanlimited to banking, financial, oreconomic data to the extent such dataprocessing is limited in Regulation Y.25

Moreover, some commenters read thelanguage in the preamble to theproposed revisions to Regulation K topreclude the offering of hardware inconnection with software that is

designed and marketed for theprocessing of financial, banking, oreconomic data where the generalpurpose hardware does not constitutemore than 30 percent of the cost of anypackaged offering. The Board notes thatan interpretation issued in 1999clarified that the scope of the dataprocessing authority of Regulation K iscoextensive with the data processingauthority of Regulation Y, absent Boardauthorization for additional activities.64 FR 58780, Nov. 1, 1999.

Additional Areas of Liberalization

Authorizing Foreign Branches ofOperating Subsidiaries of MemberBanks

The Board proposed to codify priorBoard determinations permittingmember banks to establish foreignbranches of domestic operatingsubsidiaries with the Board’s approval(under the prior notice or generalconsent procedures, as appropriate),provided that those branches wouldengage only in activities directlypermissible for the member bankparents. Commenters expressed supportfor this proposal, and the Board isadopting the revision as proposed.

FCM Activities

The Board proposed to eliminate therequirement that an investor seek Boardapproval before acting as a futurescommission merchant (FCM) forfinancial instruments, and onexchanges, not previously approved bythe Board. The Board also proposed toeliminate the requirement that investorsobtain prior Board approval for FCMactivities conducted on any exchange orclearing house that requires members toguarantee or otherwise to contract tocover losses suffered by other members(i.e., a mutual exchange).26 The Boardsought comment on whether the priornotice requirement should beeliminated where: (i) the activity isconducted through a separatelyincorporated subsidiary; and (ii) theparent bank does not provide aguarantee or otherwise become liable tothe exchange or clearing house for anamount in excess of the applicablegeneral consent limits. One commenteragreed that a prior notice requirementshould not be imposed in thesecircumstances. The Board is adoptingthe revisions to the FCM authorityunder Regulation K as proposed.

Changes With Respect to Edge andAgreement Corporations: VoluntaryLiquidation Procedures

The Board proposed changes relatingto the liquidation and receivership ofEdge and agreement corporations,including adding provisions: (i)Providing for 45 days’ prior notice to theBoard of an Edge or agreementcorporation’s intent to dissolve; (ii)specifying the grounds for determiningthat an Edge corporation is insolvent;and (iii) specifying the powers of areceiver of an Edge corporation. Onecommenter expressed general supportfor the voluntary liquidation proposal,and this provision is adopted asproposed. In light of the recentamendment of the Edge Act’sreceivership provision, 12 U.S.C. 624,the Board is not adopting the regulatoryproposal with respect to receivership.

Additional CommenterRecommendations Under Subpart A

Commenters urged the Board to reviseSubpart A of Regulation K in thefollowing respects not addressed by theBoard’s proposals.

Advisory Opinions Under Regulation KA commenter suggested that the

Board harmonize Regulations Y and Kfurther by establishing a procedure inRegulation K whereby questions arisingunder the regulation could be submittedby any person and the Board wouldissue an advisory opinion within 45days. The Board agrees that thisprocedure would enhance regulatorytransparency and facilitate regulatorycompliance. As noted above in thesection on portfolio investmentauthority, the Board is adopting therecommendation and including aprocedure in the final rule under whichadvisory opinions may be requested onthe scope of activities permissible underRegulation K. Board staff will endeavorto respond to any such requests within45 days of receipt of all relevantinformation, provided the request doesnot raise significant supervisory issues.

Divestiture Period for Debts PreviouslyContracted (‘‘DPC’’) Assets

Commenters recommended that theBoard adopt the OCC’s DPC divestiturerules, which provide for an initialholding period of up to five years, withan opportunity to extend for up to anadditional 5 years. Existing RegulationK, which the Board did not propose toamend, requires divestiture within twoyears after acquisition, unless the Boardauthorizes retention for a longer period.The Board believes the existing DPCdivestiture period is adequate given thatinvestors may request extensions of time



27 As discussed later, the law was amended in1996 to allow the Board to approve an applicationif the bank is not subject to CCS under certainconditions.

28 Wherever the record submitted by an applicantin a representative office case is sufficient to

support a CCS finding, the Board generally hasdone so. See, e.g., Caisse Nationale de CreditAgricole, 81 Fed. Res. Bull. 1055 (1995). The tworepresentative office standards have been applied inthose cases where the record is not sufficient tosupport a CCS finding.

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).

and therefore declines to adopt thisproposal.

Changes to Capitalization Requirementsfor Edge Corporations

Commenters recommended that theBoard revise the provisions regardingthe capitalization of Edge corporationsto facilitate their clearing activities byeither exempting sales of Fed funds toparent banks from the 10 percent capitaladequacy guideline applicable to Edgecorporations or eliminating the 10percent capital limitation applicable toEdges. The Board does not believe thisproposal is consistent with the safetyand soundness concerns the capitaladequacy guidelines for Edgecorporations are designed to address.Accordingly, it declines to adopt thisproposal.

Subpart B: Foreign BankingOrganizations

Subpart B of Regulation K governs theU.S. activities of foreign bankingorganizations. It implements the IBAand provisions of the BHC Act thataffect foreign banks.

This final rule for Subpart B seeks toeliminate unnecessary regulatoryburden, increase transparency, andstreamline the application/noticeprocess for foreign banks operating inthe United States based on the Board’srecent experience with foreign bankapplications. The final rule also wouldliberalize the standards under whichcertain foreign banking organizationsqualify for exemptions from thenonbanking prohibitions of section 4 ofthe BHC Act.

The rule also implements a number ofstatutory changes including certainapplication-related provisions of theEconomic Growth and RegulatoryPaperwork Reduction Act of 1996 (the1996 Act) and several provisions of theRiegle-Neal Interstate Banking andBranching Efficiency Act of 1994 (theInterstate Act) and the Gramm LeachBliley Act (the GLB Act) that affectforeign banks. The Board is alsorequesting comment on issues that arisein connection with the change in thedefinition of representative office madein the GLB Act. Finally, severaltechnical changes to various otherprovisions in Subpart B are beingadopted.

Streamlining the Regulatory ProcessThe Board is required to approve the

establishment by foreign banks ofbranches, agencies, commercial lendingcompanies, and representative offices inthe United States. This authority iscontained in the Foreign BankSupervision Enhancement Act of 1991

(FBSEA), which amended the IBA, andwas intended to close perceived gaps inthe supervision and regulation offoreign banks. Prior to FBSEA, there wasno federal approval required for theestablishment of most types of directU.S. offices of foreign banks, nor wereuniform standards applicable to theseoffices.

In the ten years since the enactmentof FBSEA, the Board has gainedsubstantial experience with the issuespresented by applications by foreignbanks to establish direct offices. Therevisions streamline the applicationsprocess based on experience gained overthis period. In addition, the final ruleimplements new discretionary authorityand time limits contained in the 1996Act.

Adoption of a Single Standard forRepresentative Offices

Under FBSEA, in order to approve anapplication by a foreign bank toestablish a branch, agency orcommercial lending company, the Boardgenerally is required to determine,among other things, that the applicantbank, and any parent bank, are subjectto comprehensive supervision on aconsolidated basis by its home countryauthorities (the CCS determination).27 Alesser standard, however, applies underFBSEA to representative officeapplications. While the Board isrequired to ‘‘take into account’’ homecountry supervision in evaluating anapplication by a foreign bank toestablish a representative office, a CCSdetermination is not required to approvesuch an application. The law simplyrequires the Board to consider the extentto which the applicant bank is subjectto CCS. A lesser standard appliesbecause representative offices do notconduct a banking business, such astaking deposits or making loans, andtherefore present less risk to U.S.customers and markets than dobranches or agencies.

Regulation K currently restates thestatutory ‘‘take into account’’ standardand does not define a minimumsupervision standard that a foreign bankmust meet in order to establish arepresentative office. Instead, the Boardhas developed standards in the contextof specific cases. To date, the Board hasused two different supervisionstandards in approving applications byforeign banks to establish representativeoffices.28

Under one, the Board has permitted aforeign bank to establish arepresentative office able to exercise allpowers available under applicable lawand regulation on the basis of a findingthat the home country supervisorsexercise a significant degree ofsupervision over the bank.29 Under thesecond, the Board has approved theestablishment of the office on the basisof a finding that the foreign bank issubject to a supervisory framework thatis consistent with approval of theapplication, taking into account anylimits placed on the activities of theproposed office and the operating recordof the bank.30

Based on experience in dealing withrepresentative office applications, theBoard believes that the existence of twostandards can be confusing and isunnecessary, particularly in light of thegenerally minimal risk presented to U.S.customers or markets by representativeoffices. Consequently, the Boardproposed Regulation K be amended toestablish only one flexible standard.Under the proposal, assuming all otherfactors were consistent with approval,the Board could approve an applicationto establish a representative office if itwere able to make a finding that theapplicant bank was subject to asupervisory framework that is consistentwith the activities of the proposedoffice, taking into account the nature ofsuch activities and the operating recordof the applicant.

The record necessary to support therequired finding would depend on thenature of the activities the applicantproposed to conduct in therepresentative office and the level ofhome country supervision. The Boardexpects that most applicants would beable to conduct all permissibleactivities. In those instances in whichthe Board had particular concernsregarding the consistency of theapplicant’s home country supervisionwith the proposed activities of theoffice, the applicant could commit torestrict the activities. A lesscomprehensive record on home countrysupervision would be required wherethe applicant committed to limit theactivities of the office to those posingminimal risk to the U.S. customers.



31 An editing error in the draft regulatorylanguage unintentionally limited the types of officeseligible for the prior notice procedure. Commentersrequested that the proposed 45-day prior noticeprovision be extended to the establishment oflimited branches outside the foreign bank’s homestate. This was the intent of the proposal.

32 As described further in the preamble, upgradesof limited branches and agencies outside the foreignbank’s home state would be eligible for prior noticeif other requirements were met. In response to acomment, the Board considered whether it might bepossible to process under the 45-day noticeprocedure proposals to establish full interstatebranches. Approval of full interstate branchesrequires consideration of factors in addition tothose required to be considered in a normal FBSEAapplication, as well as consultation with theDepartment of the Treasury. For this reason, anapplication requirement is being retained for theestablishment of full interstate branches undersection 5(a)(3) of the IBA.

Commenters generally supported thisproposal and the Board is adopting theproposal as set forth above.

Reduced Filing Requirements for theEstablishment of U.S. Offices

A major thrust of the proposedrevisions was reduction of burden in theapplication process by streamliningexisting application procedures for theestablishment of new U.S. offices offoreign banks. Under the currentSubpart B, the establishment by aforeign bank of a U.S. branch, agency,commercial lending companysubsidiary, or representative officegenerally requires the Board’s specificapproval. Once the Board has approvedthe establishment of a foreign bank’sfirst office under the standards set outin FBSEA, additional offices with thesame or lesser powers may be approvedby the Reserve Banks under delegatedauthority. Prior notice and generalconsent procedures are currentlyavailable for the establishment of certainkinds of representative offices. TheBoard’s proposed revisions would allowadditional types of applications to beprocessed under prior notice andgeneral consent procedures. The Boardhas determined to adopt the revisions asproposed. The specific instances inwhich additional prior notice andgeneral consent authority will beavailable are discussed below.

Prior Notice Available for AdditionalOffices After First CCS Determination

The Board proposed that any foreignbank which the Board has determined tobe subject to CCS in a prior applicationor determination under FBSEA or theBHC Act may establish additionalbranches (other than interstatebranches), agencies, commercial lendingcompany subsidiaries, andrepresentative offices pursuant to a 45day prior notice procedure.31 This timeframe would allow for review ofwhether any material changes hadoccurred with respect to home countrysupervision, a determination of whetherthe bank continues to meet capitalrequirements, and a review of any otherrelevant factors. The current delegationto the Reserve Banks for suchapplications would be deleted as nolonger necessary.

Four commenters expressed supportfor the Board’s proposal. In response tothe comments submitted, the Board is

adopting the proposal with languageclarifying that the prior noticeprocedure ordinarily would be availablefor foreign banks with a CCSdetermination that seek to establishadditional branches (other thaninterstate branches under section 5(a)(3)of the IBA (12 U.S.C. 3103(a)(3))),limited branches, agencies, commerciallending company subsidiaries, andrepresentative offices.32

Prior Notice Available for CertainRepresentative Offices

Many foreign banks have a U.S.banking presence and therefore aresubject to the provisions of the BHC Act,but have not received a CCSdetermination. If a foreign bank issubject to the provisions of the BHC Actthrough ownership of a bank orcommercial lending company oroperation of a branch or agency, it isalso subject to supervision and oversightthrough the Board’s Foreign BankingOrganization (FBO) program. Throughthe FBO program, the Board gainsknowledge of the bank, its policies andprocedures, and forms a general view onhome country supervision. In theseinstances, the Board believes that anexpedited procedure may be adopted forthe establishment of representativeoffices by these banks, even where theforeign bank had not previously beenreviewed under the standards of FBSEA.

The Board proposed that these foreignbanks be permitted to establishrepresentative offices using a 45-dayprior notice procedure. In addition, theBoard also proposed to permit theestablishment by prior notice ofadditional representative offices by anyforeign bank not subject to the BHC Actbut previously approved by the Board toestablish a representative office,regardless of the type of supervisionfinding made by the Board in the priorcase. Such applications are currentlydelegated to the Reserve Banks. TheBoard sees no reason to continue torequire full applications from suchbanks. The Board proposed that banksin these two categories be permitted touse the 45-day prior notice procedurefor opening a representative office,

rather than requiring them to use theapplication procedure.

Commenters generally supported thisproposal. One commenter additionallyrequested that foreign banks that havebeen approved to establish branches andagencies under the limited exception tothe CCS standard—which permits theBoard to approve applications toestablish branches and agencies if it isable to find, among other things, that thehome country supervisor of theapplicant bank is ‘‘actively working’’toward achieving CCS—be permitted touse a 45 day prior notice procedure foradditional offices with the same orlesser powers.

The Board is adopting the proposedrevisions. In addition, the Board isadopting the commenter’s proposal topermit establishment by prior notice ofrepresentative offices, but not additionalbranches, agencies or commerciallending companies, by foreign bankspreviously approved under the ‘‘activelyworking’’ standard. This would beconsistent with the Board’s proposal.

New General Consent AuthorityThe Board proposed to permit the

establishment by general consent of arepresentative office by a foreign bankthat is both subject to the BHC Act andhas been previously determined by theBoard to be subject to CCS.Establishment of a representative officeby such a foreign bank is currentlysubject to the prior notice procedure.The proposal was based on anassessment that a foreign bank that issubject to supervision under the FBOprogram and has been judged subject toCCS should generally qualify toestablish a representative office. TheBoard also proposed that a foreign bankthat is subject to the BHC Act couldestablish a regional administrative officeby general consent, whether or not theBoard had determined the bank to besubject to CCS. Regional administrativeoffices currently can be establishedusing the prior notice procedure.Commenters generally supported thisproposal and the Board is adopting therevisions as proposed.

One commenter requested that thegeneral consent procedure also beavailable for additional offices with thesame or lesser powers in a state inwhich the foreign bank already operatesan office where the foreign bank issubject to the BHC Act and has a CCSdetermination. The Board does notbelieve it would be appropriate to adoptthe commenter’s proposal because theproposal implicitly assumes that a CCSdetermination would never need to bereconsidered. In addition, in connectionwith each branch and agency case, the



33 See 12 CFR 225.2(s) (definition of ‘‘well-managed’’ foreign banking of such transactionsorganization).

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).

35 These activities include, in addition totraditional banking activities, underwriting varioustypes of insurance (credit life, life, annuity, pensionfund-related, and other types of insurance wherethe associated risks are actuarially predictable);underwriting, distributing, and dealing in debt andequity securities outside the United States;providing data processing, investment advisory,

Continued

Board also must confirm that the foreignbank’s capital meets the statutoryrequirements.

Suspension of Prior Notice and GeneralConsent Procedures

The proposed revisions also providedthat the Board, upon notice, may modifyor suspend the prior notice and generalconsent procedures described above forany foreign bank. For example,modification or suspension of theseprocedures might be appropriate if thecomposite rating of the foreign bank’scombined U.S. operations was less thansatisfactory,33 if the foreign bank weresubject to supervisory action, or ifquestions were raised about the foreignbank’s home country supervision oranti-money laundering policy andprocedures. The proposal would ensurethat any streamlining of the applicationsprocess would not compromise theBoard’s ability to make thedeterminations necessary in connectionwith the establishment of offices.

The proposed revision did not elicitspecific comment and it is adopted asproposed.

After-the-Fact Approvals

In implementing FBSEA in 1993, theBoard recognized that it would beimpractical to require prior approval forthe establishment of foreign bank officesacquired in certain types of overseastransactions, such as a merger of twoforeign banks, and provided for an after-the-fact approval in such cases. Theregulation currently requires the foreignbanks involved to commit to file anapplication to retain acquired U.S.offices as soon as possible after theoccurrence of such transactions.

Since the enactment of FBSEA, anumber of applicants using the after-the-fact procedure have chosen to winddown and close acquired offices orconsolidate them with existing offices,in each case within a reasonable timeframe. In most instances, no regulatorypurpose was served by requiring thefiling of an application. The regulationcurrently does not address thispossibility. The Board proposed toamend the rule to address both after-the-fact applications to retain, as well asdecisions to wind-down and close, U.S.offices acquired in a transaction eligiblefor the after-the-fact approval process.Where the foreign bank chooses to closethe acquired U.S. office, the Boardgenerally would not require the filing ofan application but could imposeappropriate conditions on the U.S.

operations until the winding-down iscompleted.

The proposed revision did not elicitspecific comment and it is adopted asproposed.

Implementation of the 1996 ActAs noted above, FBSEA generally

requires the Board to determine that aforeign bank applicant is subject to CCSin order to approve the establishment ofa branch, agency, or commercial lendingcompany. The 1996 Act gave the Boarddiscretion to approve the establishmentof such offices by a foreign bank wherethe application record is insufficient tosupport a finding that the bank issubject to CCS, provided the Board findsthat the home country supervisor isactively working to establisharrangements for the consolidatedsupervision of the bank, and all otherfactors are consistent with approval.This discretion gives the Boardflexibility to approve applications on anexceptional basis where the homecountry authorities are making progressin upgrading the bank supervisoryregime but the record may not yet besufficient to support a full CCS finding.The Board has stated that this authorityshould be viewed as a limited exceptionto the general requirement relating toCCS.34 The statutory standards are beingincluded in the final rule.

Two commenters expressed supportfor the Board’s proposed revision.

The Board has proposed toincorporate into Regulation K thestatutory time limits in the 1996 Act forBoard action on applications forbranches, agencies, and commerciallending companies. The 1996 Actprovided that the Board must act onsuch an application within 180 days ofits receipt. The time period may beextended once for an additional 180days, provided notice of the extensionand the reasons for it are provided to theapplicant and the licensing authority;the applicant may also waive the timeperiods. Although the regulation willreflect these statutory time periods, theBoard will maintain existing internaltime schedules that would require fasterprocessing where possible.

New StandardIn light of the increasing attention

being paid to the problem of moneylaundering, the Board currently requeststhat a foreign bank applying to establishU.S. offices provide information on themeasures taken to prevent the bank frombeing used to launder money, the legal

regime to prevent money laundering inthe home country, and the extent of thehome country’s participation inmultilateral efforts to combat moneylaundering. The Board considers thisinformation in reaching its decision onapplications. In light of this practice, theproposed revision included as astandard for the establishment of U.S.offices by foreign banks that the Boardmay consider the adequacy of measuresfor the prevention of money laundering.

One commenter expressed support forthis proposal and it is adopted asproposed.

Qualifications of Foreign Banks forNonbank Exemptions

Changes to the QFBO TestRegulation K implements statutory

exemptions from the BHC Act forcertain activities of foreign banks. Theseexemptions are available to qualifyingforeign banking organizations (QFBOs)and are found in sections 2(h) and4(c)(9) of the BHC Act. Section 2(h)allows a foreign company principallyengaged in banking business outside theUnited States to own foreign affiliatesthat engage in impermissiblenonfinancial activities in the UnitedStates, subject to certain requirements.These include that the foreign affiliatemust derive most of its business fromoutside the United States and it mayengage in the United States only in thesame lines of business it conductsoutside the United States. Section4(c)(9) allows the Board to grant foreigncompanies an exemption from thenonbank activity restrictions of the BHCAct where the exemption would not besubstantially at variance with the BHCAct and would be in the public interest.Under this authority, the Board hasexempted, among other things, allforeign activities of QFBOs from thenonbanking prohibitions of the BHCAct.

In order to qualify as a QFBO, aforeign banking organization mustdemonstrate that more than half of itsbusiness is banking and more than halfof its banking business is outside theUnited States. Banking business isdefined to include the activitiespermissible for a U.S. bankingorganization to conduct, directly orindirectly, outside of the UnitedStates.35 Under the current regulations



and management consulting services; andorganizing, sponsoring, and managing a mutualfund.

36 The exemption in § 211.23(f)(5)(iii) implementssection 3(h)(2) of the BHC Act. Any foreign bankingorganization that qualifies as a financial holdingcompany would be able to make merchant bankinginvestments, and investments in connection withits insurance business, in the United States to theextent permitted for a financial holding company.The lack of eligibility for the exemption providedin § 211.23(f)(5)(iii) would not negate or otherwiseaffect such authority.

such activities can be counted asbanking business for the purposes of theQFBO test only if they are conducted inthe foreign bank ownership chain; thatis, by the foreign bank or a subsidiaryof the foreign bank. Activitiesconducted by a parent holding companyor sister affiliate do not count towardqualification.

Modification of Proposal To Remove theBanking Chain Requirement from OneProng of the QFBO Test

The Board proposed liberalizing theQFBO test by removing the bankingchain requirement from the prong of theQFBO test that measures whether morethan half of a foreign bankingorganization’s business is banking. Byeliminating the banking chainrequirement from that prong of the test,a foreign banking organization that has,for example, substantial life insuranceactivities outside of the banking chainwould be able to count such activitiestoward meeting the QFBO test. Thecommenters supported thisliberalization.

When this proposal was made in1997, the Board was aware of relativelyfew foreign banking organizations,primarily those engaged in insurance,that would have benefitted from suchliberalization. Significantly, at that time,the BHC Act would have preventedsuch a foreign insurance company fromconducting insurance activities in theUnited States. Accordingly, theproposed change was expected to havelimited application and not to provideany significant competitive advantagefor foreign banking organizations.

The enactment of the Gramm-Leach-Bliley Act has changed the regulatorylandscape and the consequences of theproposed QFBO test. The BHC Act is nolonger a legal bar to companies thatwish to engage in insurance andmerchant banking activities in theUnited States, and a broader range offoreign companies may acquire foreignbanks with U.S. activities than waspossible in 1997. If the proposed testwere adopted, a foreign insurance groupthat qualified as a financial holdingcompany would be able to makecommercial and industrial investmentsin the United States beyond thosepermissible under insurance ormerchant banking authority eventhough a domestic insurance companywith financial holding company statuscould not. In light of these changes, theBoard has reconsidered its proposedchange to the QFBO test and determined

to adopt a modified form of the 1997proposal.

The existing QFBO test has beenretained and foreign bankingorganizations that are able to qualifyunder that test will continue to beeligible for all of the exemptions. A newprovision will permit those foreignbanking organizations that meet onlythe test proposed by the Board in 1997nevertheless to be eligible for all of theexemptions other than the exemptionfor limited commercial and industrialactivities provided under§ 211.23(f)(5)(iii).36 Such a foreignbanking organization will, however, beeligible for the limited exemptions onlyif the foreign banking organizationincludes a foreign bank that could itselfmeet the current QFBO test.

Although the foreign bankingorganization that is able to meet onlythe modified test generally would belimited in its ability to makeinvestments under the exemption insection 2(h)(2) of the BHC Act, theBoard considers that a foreign bankwithin the group should not be solimited. In this regard, the Board notesthat, in enacting section 2(h)(2),Congress recognized that banks in othercountries have traditionally beenpermitted to make commercial andindustrial investments. Accordingly,any foreign bank within such a groupthat itself is able to meet the currentQFBO test by reference to its and itssubsidiaries’ assets, revenues and netincome, will be eligible for all of theexemptions.

Limiting the eligibility for exemptionsin this way is consistent with thestatutory language in section 2(h)(2) ofthe BHC Act, which provides that itapplies to shares held by a foreigncompany that is ‘‘principally engaged inthe banking business outside the UnitedStates.’’ At the same time, modifying thetest in this manner would limit theextraterritorial effect of the BHC Act onforeign firms, and would not penalize aconsolidated group that engages mostlyin activities permissible for a U.S.banking organization.

Applications for Special Determinationof Eligibility for QFBO Treatment

The Board recognizes that there maybe types of ownership structures aboveforeign banks that would not meet even

the modified QFBO test. It also ispossible that foreign bankingorganizations that meet only themodified test might need limited relieffor commercial and industrial activitiesin the United States. In addition, theremay be foreign financial organizationsthat do not include a foreign bank andwish to acquire a U.S. bank. Suchfinancial organizations would fail theQFBO test, and it is not possible toknow the extent to which requiring suchan organization to conform itsworldwide operations to thosepermissible for a U.S. financial holdingcompany would interfere, in particular,with its foreign business. The Board isprepared to consider requests beyondthe current QFBO authority on a case-by-case basis. In considering such cases,the Board will take into account theprinciples of national treatment andequality of competitive opportunity andmay grant exemptions that are notsubstantially at variance with thepurposes of the BHC Act and are in thepublic interest.

Regulation K currently permits aforeign banking organization that ceasesto qualify as a QFBO to request a specialdetermination of eligibility. Thatprovision has been modified to give theBoard greater flexibility to grant specialdeterminations that will permit foreignbanking organizations and foreignorganizations that do not includeforeign banks to be eligible for some orall of the exemptions in appropriatecases.

The Board has also adopted theproposal made in 1997 that wouldpermit a former QFBO that has appliedfor a specific determination of eligibilityto continue to conduct its business as ifit were a QFBO, except with respect tomaking investments in U.S. companiesunder section 2(h)(2) of the BHC Act forwhich Board consent would berequired. The proposal reflects theapproach taken in a prior caseconsidered by the Board, and nocomments were received on theproposal.

Other Comments on the QFBO TestThe QFBO test in Regulation K

permits foreign banking organizations tocount in the measurement of ‘‘banking’’only those assets, revenues, or netincome related to activities that arepermissible for a U.S. bankingorganization to conduct outside of theUnited States. The Board requestedcomment with respect to a possibleexpansion of the list of activities thatwould be considered banking forpurposes of the QFBO test. Threecommenters suggested some expansionin the list. Two proposed that the QFBO



37 Foreign banking organizations already havegreater leeway than U.S. banking organizations withrespect to their noncontrolling investments inforeign companies engaged in U.S. activities thatare not ‘‘incidental’’. The U.S. assets of such foreigncompanies can account for up to 49.9 percent oftotal consolidated assets, and the foreign companiescan derive up to 49.9 percent of their consolidatedrevenues from the United States. Accordingly, thecommenters’ proposal would only affect the foreignbanking organization’s ability to make controllinginvestments in foreign companies with U.S.activities.

test be expanded to include all financialactivities which are usual in connectionwith the banking business in thosecountries in which the foreign bankingorganization is active. One proposedthat the Board consider other activitieson a case-by-case basis to reflectchanges in foreign financial markets.

To date, there have been very fewcases in which a foreign bankingorganization failed the QFBO testbecause certain types of financialactivities were not included on the list.In light of this, and in view of themodified QFBO test and the ability ofthe Board to make specialdeterminations of eligibility for some orall of the QFBO exemptions, the Boardhas determined not to make any changesat this time to the list of activities thatwould be considered banking forpurposes of the QFBO test.

Two commenters suggested that therequirement that a QFBO conduct morebanking than nonbanking activities isnot required by the statute. These samecommenters also proposed that even ifthat requirement is retained, the QFBOtest should be revised to allow U.S.banking business to be included whencalculating the extent of anorganization’s banking business. TheBoard has not adopted these proposalsbecause they would be inconsistentwith section 2(h)(2) of the BHC Act,which provides exemptions for foreigncompanies principally engaged inbanking business outside the UnitedStates. Moreover, a U.S. nonfinancialcompany is not permitted to own a U.S.bank, and altering the test to permit apredominantly nonfinancial foreigngroup to engage in banking in theUnited States would be inconsistentwith the principle of national treatment.

U.S. Activities of QFBOsSecurities Activities. Subpart B

currently provides that a foreignbanking organization may not own orcontrol shares of a foreign company thatdirectly underwrites, sells or distributes,or that owns or controls more than 5percent of the shares of a company thatunderwrites, sells or distributes,securities in the United States, except tothe extent permitted bank holdingcompanies. The Board proposed that the5 percent limit be raised to 10 percent.Two commenters suggested that thelimit be raised to 24.9 percent and oneproposed that no change be made. TheBoard has determined to adopt the 10percent limit as proposed. The Boardcontinues to hold the view expressed inthe 1997 proposal that a foreign bankshould not be able to exert a significantinfluence over such a securities firm.Investments above the 10 percent level

would be permitted if the foreign bankmet the requirements to be treated as afinancial holding company under theGLB Act.

Change in meaning of ‘‘incidental’’.Two commenters requested that theBoard apply an expanded definition of‘‘incidental’’ U.S. activities in SubpartB. Under the current rule in RegulationK, a QFBO is permitted to own up to100 percent of a foreign company thatconducts activities in the United Statesthat are ‘‘incidental’’ to the foreigncompany’s international or foreignbusiness. The Board’s longstandinginterpretation, for purposes of bothSubparts A and B of Regulation K, hasbeen that such incidental activities inthe United States are limited to thoseactivities that the Board has determinedare permissible for Edge corporations toconduct in the United States. The Boardproposed changes to Subpart Agoverning foreign portfolio investmentsby U.S. banking organizations to expandthe interpretation of ‘‘incidental’’ forsuch investments to permit U.S. bankingorganizations to hold foreign portfolioinvestments (maximum of 19.9 percentof voting and 40 percent of total equity)that derive no more than 10 percent oftheir total consolidated revenue in theUnited States. The commentersproposed that the Board apply the sameexpanded definition of ‘‘incidental’’U.S. activities to permit a QFBO to holdup to 100 percent of a foreign companywith U.S. activities so long as thoseactivities account for no more than 10percent of the total consolidatedrevenue of the company.37 The changeto Subpart A, which has been adopted,is intended to deal with investments incompanies over which the U.S. bankingorganization has no control. Thecommenters are proposing liberalizedtreatment for investments by foreignbanks where the foreign bank is in aposition to prevent the company fromentering the United States. There doesnot appear to be any public interestjustification for the request and theBoard has not adopted the commenters’proposal.

Determining Extent of Non-U.S.operations

Under Regulation K, a foreign bankmay own or control voting shares of aforeign company that is engaged inbusiness in the United States, subject toa number of restrictions. The first ofthese restrictions is that more than 50percent of the foreign company’sconsolidated assets must be located, andconsolidated revenues derived from,outside the United States. Onecommenter proposed that this assetsplus revenues test be replaced with arequirement that more than 50 percentof the organization’s business be outsidethe United States as measured by twoout of three indicia: location of assets,derivation of revenues, and derivationof net income. There have been very fewcases of an investment failing to complywith the assets/revenue test as currentlyapplied, and the commenter gave noindication that any foreign bank hasbeen harmed by it. The Board did notpropose such a revision and, in theabsence of an actual problem, hasdetermined not to adopt it.

Increasing Amount of Equity inNoncontrolling Investments

One commenter suggested increasingthe equity interest limit on non-controlling portfolio investments madeby QFBOs from 24.9 percent of votingstock and total equity to 24.9 percent ofvoting stock and 40 percent of totalequity to comport with limits applicableto U.S. banking organizations. Foreignbanking organizations already are ableto conduct a greater range of activitiesboth in and outside the United Statesthan are U.S. banking organizations. Theanalogy to portfolio investments of U.S.banking organizations is not valid; thenew authority for U.S. organizations inthis area is more limited than theexisting authority for QFBOs. The Boarddoes not consider that the additionalauthority proposed by this commenterfor investments by foreign bankingorganizations is warranted.

Exception for Line-of-BusinessRequirement

Section 2(h)(2) requires that the U.S.commercial and industrial holdings of aforeign banking organization be in thesame general line of business as theforeign investor company, or in abusiness related to the businessconducted outside the United States.Consistent with the intent of Congresswhen it adopted this provision,Regulation K uses the StandardIndustrial Classification (SIC) system fordetermining the comparability of U.S.and foreign nonbanking activities. One



38 The Board notes that material alterations innonbanking activities carried on by a particularsection 4(c)(8) company may require notice to theBoard. 12 CFR 225.25(c)(3).

commenter noted that the provisiondoes not permit any exceptions andsuggested that the Board establish aprocedure to permit a QFBO, when SICestablishment categories are notmatching, to demonstrate on a case-by-case basis that the U.S. activities of aforeign subsidiary are nonetheless thesame kind of activities, or related to theactivities, engaged in directly orindirectly by the foreign subsidiaryoutside the United States.

The Board is not aware of a significantnumber of cases where U.S. and foreigninvestments of QFBOs have not met therequirements of this provision and seesno reason to modify it at this time.However, in view of the fact that the SICclassification system is being replacedby the North American IndustryClassification System, the Board will bereviewing the provision and mayconsider if a procedure to exemptinvestments that do not comply with therelevant classification system would beappropriate.

This same commenter suggested thatthe Board review its reportingrequirements to seek ways to addressthe difficulty of monitoring compliancewith the requirements of section211.23(f) of Regulation K within acomplex, multi-tiered globalorganization. In the aftermath of theGramm-Leach-Bliley Act, the Board isundertaking a review of reportingrequirements for foreign bankingorganizations and is seeking to reduceburden where appropriate.

The Conduct of Unregulated ActivitiesAbroad through U.S. Companies

Pursuant to section 4(c)(9) of the BHCAct, Regulation K currently exemptsfrom the BHC Act any activityconducted by a QFBO outside theUnited States. In 1997, the Board notedthe growing trend by foreign banks touse this exemption to conductunregulated activities abroad throughforeign subsidiaries of U.S. companiesoperating under section 4(c)(8) of theBHC Act. U.S. bank holding companies,in contrast, are not able to conductunrestricted activities abroad throughforeign subsidiaries of their section4(c)(8) companies. Under the BHC Act,a U.S. bank holding company may ownforeign subsidiaries only under theauthority of Subpart A of Regulation Kwhich set limits on the activities thatcan be conducted in such subsidiaries.The Board requested comment onwhether it is consistent with the policyof national treatment to permit QFBOsto continue to use the exemption toconduct unrestricted activities abroad inforeign subsidiaries of companies

regulation by the Board under section4(c)(8).

The commenters generally favoredpermitting foreign banks to haveunrestricted 4(c)(9) foreign subsidiariesof 4(c)(8) companies. A number ofcommenters stated that a foreignbanking organization should bepermitted to organize its non-U.S.activities in the manner that best suitsits business, and that the home countrysupervisor and not the Federal Reserveis regarded by the market as thesupervisor of the activities of suchforeign companies. None of thecommenters expressed any views as towhether such practice may provideforeign banks with a competitiveadvantage over U.S. bankingorganizations in using and marketingthe name and operations of theregulated U.S. company, but they didstate that foreign banks could achievethe same benefits by establishing aforeign affiliate of the 4(c)(8) companywith a similar or identical name.

The Board has determined to take noaction at this time to prevent thepractice from continuing, but reservesthe right to review any of thesesituations as the facts warrant andrequire a change in the relationship ifthe structure in fact results incompetitive inequality.38

Implementation of New Interstate Rules

In addition to application proceduresand rules on nonbanking activities,Regulation K implements therestrictions on interstate operations offoreign banks provided in the IBA andthe BHC Act. The Interstate Actamended the IBA and the BHC Act toremove geographic restrictions oninterstate acquisitions of banks byforeign banks, permitted foreign banksto branch interstate by merger and denovo on the same basis as domesticbanks with the same home state as theforeign bank, and modified thedefinition of a foreign bank’s home statefor purposes of interstate branching. TheInterstate Act became fully effective inJune 1997.

In May 1996, the Board published afinal rule to implement certain of thechanges made by the Interstate Act. Therule required certain foreign banks toselect a home state for the first time, orhave a home state designated by theBoard, removed obsolete provisions ofRegulation K that restricted the abilityof a foreign bank to effect major bankmergers through U.S. subsidiary banks

located outside the foreign bank’s homestate, and deleted certain other obsoleterules governing home state selection.

The Board’s 1997 proposal sought toimplement and interpret certain otherchanges made by the Interstate Act. Theproposal would permit foreign banks tomake additional changes in home stateunder certain circumstances andclarified the extent to which a foreignbank changing its home state would berequired to conform its existing networkof bank subsidiaries and banking offices.

In addition, the proposal set forth theadditional standards for approval ofapplications by foreign banks toestablish interstate branches. It alsoclarified that the ‘‘upgrade’’ of agenciesand limited branches to full branchesrequired Board approval and that theBoard would approve such upgrades(absent a merger transaction) only if thehost state had enacted laws permittingde novo interstate branching. Finally,the proposal deleted the Board’s homestate attribution rule, which providesthat a foreign bank (or other company)and all other foreign banks which itcontrols must have the same home state.

The commenters were generallysupportive of the Board’s proposals inthe interstate area. With the exception ofthe ‘‘upgrades’’ proposal which, asdescribed below, has been mooted bysubsequent legislation, the Board hasadopted the changes as proposed.

Changes of Home StateIn 1980, the Board allowed foreign

banks a single change of home state asa compromise between the need forcomparable treatment with domesticbanks and Congress’ intent, in adoptingthe IBA, that foreign banks be allowedsome flexibility to change home state.The basic framework for interstatebanking, however, has changedsubstantially since 1980, when domesticbanks generally could not branchinterstate and rarely, if ever, couldchange home states. Domestic andforeign banks may now branch intoother states either de novo or by mergerin certain circumstances; interstatebranching by merger between banks isnow possible in all but one state (allstates will allow interstate branching bymerger as of year end 2001), and denovo interstate branching is permittedin 17 states. As a result, many domesticbanks with interstate branches nowhave significant opportunities to changehome state, although theseopportunities are not available to allbanks under all circumstances.

In light of these changes, the Boardproposed giving foreign banksadditional opportunities to changehome state in a way that affords



comparable treatment to foreign anddomestic banks. The proposal retainedthe ability of foreign banks undercurrent rules to change their home stateonce by filing a notice with the Board.Changes made by foreign banks prior tothe entry into effect of the final rulewould count toward this one-time limit.The proposal also established a newprocedure for foreign banks to changehome state an unlimited number oftimes, by applying for the prior approvalof the Board for each such change. Aforeign bank applying to change itshome state under the new procedurewould be required to show that adomestic bank with the same home statewould be able to make the same change.

The Board has adopted the change inhome state provision as proposed. Thecommenters supported the provisionbut questioned the need for prior Boardapproval; instead they recommended a45 day notice requirement. The Boardhas considered whether the issuespresented by a request for an additionalchange of home state could be dealtwith adequately during a 45 day priornotice period. The Board expects suchchanges to be comparatively rare. Inaddition, each such request presentsunique facts. For these reasons, theBoard has elected to retain the priorapproval requirement set forth in theproposal. As the Board gains experienceprocessing such requests, it mayconsider replacing the prior approvalwith a prior notice requirement.

One of the commenters soughtassurance that the Board would beflexible in interpreting the requirementthat a foreign bank seeking to make anadditional change of home statedemonstrate that a domestic bank withthe same home state would be able tomake the same change. The Boardbelieves the new procedure advancesthe policies of national treatment andequality of competitive opportunityunderlying the IBA by allowing foreignbanks to take advantage of changes inlaws concerning interstate branching inorder to change home state, when andto the extent those laws make it possiblefor similarly situated domestic banks tochange home state. Although theInterstate Act made it possible fordomestic banks to change home state insome cases, there are other cases wheresuch a change in home state may bedifficult or impossible. The newprocedure also seeks to prevent foreignbanks from gaining an unfaircompetitive advantage over domesticbanks. Accordingly, the new procedurewould allow foreign banks to changehome state only in cases where adomestic bank could effect acomparable change.

Changes in home state wouldgenerally have no impact on whichReserve Bank will supervise theoperations of a foreign bank nor onwhich Reserve Bank will receive aforeign bank’s reports and applications.

Conforming U.S. Operations UponChange in Home State

Regulation K currently requires aforeign bank that changes its home stateto conform its banking operationsoutside the new home state to whatwould have been permissible at the timeof the bank’s original home stateselection. The requirement, adopted in1980, implemented section 5 of the IBAwhich sought to prevent foreign banksfrom using a home state change toacquire and maintain subsidiary banksor branches in more than one state incircumstances where a domestic bank orbank holding company would be unableto do so.

The Interstate Act liberalized the ruleson interstate branches and eliminatedthe geographic restrictions on thepurchases of banks by domestic bankholding companies and foreign banksunder the BHC Act and the IBA.Consequently, the Board proposed thatthe provisions on conforming operationsupon a foreign bank’s change of homestate be revised to reflect changes madeby the Interstate Act. For example, withrespect to subsidiary banks, a foreignbank would no longer be required todivest a subsidiary bank outside its newhome state; the Interstate Act authorizesinterstate acquisitions of banksubsidiaries.

With respect to conforming branchesoutside the foreign bank’s new homestate, the proposal reflected theliberalized interstate branching rulesapplicable to foreign and domesticbanks as a result of the Interstate Act.A foreign bank changing its home statewould be permitted to retain allbranches which the foreign bank couldestablish (under current law) if italready had its new home state. Thisrelaxation is appropriate given thatdomestic, as well as foreign banks, nowhave significant opportunities toestablish and retain interstate branches.

The commenters supported thisproposal and the Board adopted it asproposed. One commenter wasconcerned, however, that a rigidinterpretation of the limitation onretention of existing branch operationsoutside the new home state to onlythose branches that the foreign bankcould establish under current law if italready had its new home state wouldseverely limit changes of home state bybanks with established,nongrandfathered operations in the old

home state. The Board intends to applythe rule consistent with the scope of thechanges to the interstate rules. TheBoard also notes that the GLB Actprovides opportunities for banks toupgrade existing operations outside thehome state. These opportunities shouldreduce the need for foreign banks tochange home states.

Additional Standards for InterstateOffices

The proposal also contained theadditional standards required by theInterstate Act for approval by the Boardof the establishment by a foreign bankof branches located outside of the bank’shome state. These standards weredesigned to insure that foreign banksseeking to establish interstate branchesmeet requirements comparable to thoseimposed on domestic banks seeking tooperate interstate. The Board receivedno comments on this aspect of theinterstate proposal and has adopted it asproposed.

Upgrading of Agencies and LimitedBranches to Full Branches

Section 5 of the IBA, as amended bythe Interstate Act, generally allows aforeign bank to establish full branchesoutside its home state only if a domesticbank with the same home state couldestablish branches in the same host stateunder the Interstate Act. The GLB Actcontained a new exception to thisgeneral limitation. The new provisionallows a foreign bank, with the Board’sapproval, to upgrade an existing agencyor limited branch outside the bank’shome state to a full service branchprovided the state would permit theupgrade and the office has been isexistence the minimum amount of timethat the state requires for the acquisitionof an interstate bank.

In response to inquiries and requestsfrom trade groups, the Board, in its 1997proposal, stated its view that upgradesof existing agencies and limitedbranches outside of a foreign bank’shome state constituted a ‘‘change instatus’’ of an office requiring Boardapproval under FBSEA. In addition, theBoard stated that such upgrades wouldbe approved only in situations wherethe state in which the upgraded officewas located permitted de novobranching.

The Board’s proposal elicitedresponses from three commenters, eachof which urged liberalization and/orflexibility to some degree. The proposaland the comments received have beensuperseded to a significant degree by theGLB Act provision permitting upgrades.The new statutory provision confirmedthat upgrades require Board approval



39 The grandfathering would be effective as of thedate of the proposal but only for those affiliatesengaged in activities clearly permissible to conductin combination with representative office functions.Thus, should the Board determine thatrepresentative functions may not be conducted ina money transmitter subsidiary, such activitieswould have to be discontinued.

but made such upgrades more widelyavailable than the Board had proposed.Upgrades may now be approvedprovided the state permits the upgradeand the office to be upgraded has beenin existence in that state for theminimum amount of time (no more than5 years) required for the acquisition ofan interstate bank. The Board isamending its interstate rules toimplement the GLB provision.Upgrades, like other branch proposalsunder FBSEA, generally require fullapplications. Prior notice may beavailable, as provided elsewhere in thisfinal rule, if the foreign bank haspreviously received a CCSdetermination from the Board.

Home State Attribution Rule Deleted

Regulation K currently provides that aforeign banking organization and all itsaffiliates are entitled to only one homestate. This would be true even if theforeign banking organization ownedseveral different foreign banks withoperations in the United States.

At the time the rule was adopted,domestic banks generally could notbranch into states other than the ones inwhich they were located, nor couldbank holding companies generallyacquire banks outside their home state.In that context, the Regulation Kprovision was structured to preventaffiliated groups of foreign banks fromgaining an unfair advantage overdomestic banks by having each of theaffiliated foreign banks select a differenthome state. Having done so, the foreignbanks would be able to open andoperate branches in more than one state.The rule sought to prevent this bystating that a foreign bankingorganization and any foreign bank thatit controls would be entitled to only onehome state.

The Interstate Act has substantiallychanged the rules on interstateexpansion since this provision wasoriginally adopted. Under current law, abank holding company may own manybanks in different states; each of thesebanks is entitled to its own home stateregardless of the home states of itsaffiliates. Consequently, in 1997 theBoard proposed that Regulation K beamended to eliminate the requirementthat a foreign bank and all its affiliatesare entitled to only one home state. Theproposal would preserve nationaltreatment for foreign banks and wouldnot put U.S. banking organizations atany competitive disadvantage. Thecommenters supported the proposal,and the Board has adopted it.

Representative Offices

Definition of Representative OfficeThe GLB Act amended the definition

of representative office such that asubsidiary of a foreign bank may now beconsidered a representative office. Thedefinition of representative office inRegulation K has been modified toconform with the change in law. Thestatutory amendment closed a potential‘‘loophole’’ that made it possible forforeign banks to set up subsidiaries toengage in representative activities, thusavoiding both the FBSEA applicationprocess and ongoing supervision of suchsubsidiary as a representative office.However, the fact that subsidiaries cannow be deemed to be representativeoffices raises new issues.

The Board is aware of only a fewcases in which banks sought to makeuse of this loophole and does notbelieve that there are significant currentissues with respect to representativefunctions being conducted out ofsubsidiaries. It is possible that a foreignbank could attempt to evade the IBA’srequirements by using a nonbanksubsidiary; it would be difficult,however, to anticipate and try toprohibit all potential schemes. TheBoard thus is not proposing to amendRegulation K to clarify all situations inwhich a nonbank subsidiary or affiliatewould be considered a representativeoffice. Rather the Board is providinggeneral guidance and seeks views onwhether more explicit guidance iswarranted.

As a general matter, any subsidiaryestablished for the purpose of acting asa representative office clearly would bea representative office. Similarly, asubsidiary would be considered to be arepresentative office when it holds itselfout to the public as a representative ofthe foreign bank, acting on behalf of theforeign bank, even if the subsidiaryengages in other nonbank business. Inaddition, an individual or a unit of asubsidiary that acts as a representativeof a foreign bank from the location ofthe nonbank subsidiary would betreated as a representative office. Animportant limitation on this generalapproach is that a subsidiary generallywould not be considered arepresentative office if it makescustomer referrals or cross-markets theforeign bank’s services in a manner thatwould be permissible for a nonbankaffiliate of a U.S. bank.

The Board is also interested inreceiving views on whether a moneytransmitter subsidiary of a foreign bankshould be prohibited from also engagingin representative functions oremploying individuals who act as bank

representatives. A money transmitter isa nonbank company that for a fee willsend funds to persons outside theUnited States. Often, the funds are firsttransmitted to the affiliated foreign bankfor the benefit of the ultimate recipient.A foreign bank is not entitled to use themoney transmitter to engage in deposit-taking. If a representative office werecombined with a money transmitter, itwould be extremely difficult if notimpossible to monitor or enforcecompliance with this restriction.Customers could also be confused aboutthe status of funds given to the moneytransmitter.

Registration of Existing IncorporatedRepresentative Offices

There may be some subsidiaries offoreign banks that will fall within thedefinition of ‘‘representative office’’ forthe first time, and these subsidiarieswill need to be identified. The Boardhas determined to impose a registrationrequirement similar to that imposedfollowing the enactment of FBSEA,which subjected representative officesof foreign banks to Board approvalrequirements and supervision for thefirst time. All subsidiaries that areacting as representative offices will berequired to complete a briefinformational report. The form will beissued separately. Subsidiaries andaffiliates of foreign banks that have beenconducting representative functions onbehalf of the foreign bank will be‘‘grandfathered’’ and not required toapply to ‘‘re-establish’’ a representativeoffice.39

Approval of Loans at a RepresentativeOffice

Regulation K currently includes aspermissible activities for arepresentative office those in which a‘‘loan production office’’ of a statemember bank may engage as set forth ina 1978 Board interpretation. The portionof the interpretation restricting loanapprovals at such offices has beensuperceded, and loan originationfacilities of state member banks mayapprove loans in certain circumstances.The Board considers that representativeoffices of foreign banks that are subjectto the BHC Act, and thus subject tosupervision in the United States, shouldbe permitted to engage in the sameactivities as such facilities. The Board is



40 As a general rule, the Board would require thatthere be no signs at any temporary locationidentifying it as an office of the bank, and that noclient meetings take place at a temporary location.

therefore amending Regulation K toremove the reference to theinterpretation and clarify thatrepresentative offices may make creditdecisions if (i) the foreign bank alsooperates one or more branches oragencies in the United States, (ii) theloans approved at the representativeoffice are made by a U.S. branch oragency of the bank, and (iii) the loanproceeds are not disbursed in therepresentative office.

Additional Matters

Temporary Additional Office LocationFrom time to time, the Board has

received requests from foreign banksthat desire to have an additionaltemporary location, usually as aninterim measure before moving into newoffice space that can accommodate theentire staff of the branch or agency. Theearliest inquiries were prompted byspace constraints at the existing officeand the need to relocate someemployees until renovations could becompleted at a new larger location. Toaccommodate such situations, the Boardproposed a new provision in RegulationK permitting the Board, in its discretion,to determine that a well-managedforeign bank would not be considered tohave established an office if certainconditions were met. Since the proposalwas made, staff has received additionalinquiries where the proposed relocationof employees would not fit within theprovision as proposed. These morerecent requests have involved mergersor consolidations of bank and nonbankentities within a banking group. TheBoard therefore, has adopted abroadened form of the provision tocover these additional types oftemporary relocation situations. Anyforeign bank taking advantage of thisauthority would be required to advisethe Board prior to the relocation, makecertain commitments,40 and provideperiodic information, as requested. TheBoard generally would not make suchdeterminations if the reason for therequest is the bank’s failure to file on atimely basis a notice or application forthe additional office, and the bank couldnot maintain the temporary location formore than twelve months.

Changes to Definition SectionThe revision makes certain technical

changes in the definition section ofSubpart B, including in the definitionsof ‘‘appropriate Federal Reserve Bank,’’‘‘change in status,’’ ‘‘foreign banking

organization,’’ ‘‘regional administrativeoffice,’’ and ‘‘representative office.’’

Conforming Changes To TerminationProvisions

The Board proposed to amend theprovisions of Subpart B dealing withtermination of a U.S. office of a foreignbank to add as a grounds for terminationa finding that the home countrysupervisor of a foreign bank is notmaking demonstrable progress inestablishing arrangements for thecomprehensive supervision orregulation of such foreign bank on aconsolidated basis. This change hasbeen adopted.

Reduction of Reporting RequirementsThe Board proposed reducing the

periodicity of reporting of allacquisitions of shares in companiesengaged in business in the United Statesfrom quarterly to annually. Since theissuance of the proposal, the Board hasreconsidered this issue in connectionwith the development and issuance of anew Form FR Y–10F. On this form,foreign banking organizations arerequired to report some of theinvestments covered by the oldquarterly report on an event-generatedbasis. Remaining U.S. investments willbe reportable only annually inconnection with the FR Y–7. The finalrule reflects the decisions on reportingmade in connection with the issuance ofthe FR Y–10F.

Subpart C: Export Trading CompaniesSubpart C of Regulation K sets out the

rules governing investments andparticipation in export tradingcompanies (ETCs) by bank holdingcompanies and other eligible investors.ETCs are companies in which bankholding companies and certain othereligible investors may invest for thepurpose of promoting U.S. exports.

Currently, an eligible investor mustgive the Board 60 days prior writtennotice of an investment of any amountin an ETC. The Board proposed addinga general consent provision underwhich an eligible investor that is well-capitalized and well-managed mayinvest in an ETC without prior notice.Such an investor would have to providecertain information to the Board in apost-investment notice. The terms well-capitalized and well-managed, as usedfor this purpose, would have the samemeanings as in the Board’s RegulationY.

The Board further proposed allowingan eligible investor, also under generalconsent authority, to reinvest an amountequal to dividends received from theETC in the prior year and to acquire an

ETC from an affiliate at net asset value.Other proposed revisions includedmoving all defined terms into a newdefinitions section; removing anobsolete provision relating to thecalculation of an ETC’s revenues; andmaking certain minor, technicalamendments.

One commenter expressed generalsupport for the Board’s proposal. TheBoard is adopting the revisions asproposed.

Delegations of AuthorityThe Board proposed additional and

modified delegations of authority withrespect to certain matters arising underRegulation K. Foremost, the Boardproposed to delegate additionalauthority to the Director of the Divisionof Banking Supervision and Regulationwith respect to foreign branching bymember banks, general consentinvestments under Subpart A, and thegeneral consent procedures of SubpartC. The Board also proposed to delegateto the Director and to the Reserve Banksadditional authority with respect toprior notice investments and theestablishment of prior notice U.S.offices by foreign banks. In addition, theBoard proposed to delete as no longernecessary the delegation to the ReserveBanks to approve an application by aforeign bank to establish an additionalU.S. office or a commercial lendingcompany under certain circumstances.These proposals did not elicit negativecomment, and they are adopted asproposed.

The Board also is authorizing severaladditional delegations of authority,relating generally to the processing andapproval of applications under allSubparts of Regulation K; investmentsin Edge and agreement corporationsubsidiaries; amendments to Edgecorporation charters; the establishmentof agreement corporations; ‘‘special-purpose foreign government-ownedbank’’ determinations under section211.24(d)(3); the approval of requestsarising under section 4(c)(9) of the BHCAct; and FHC elections by foreignbanks. The delegations of authority andmodifications to existing delegationsauthorized by this final rulemaking willbe variously codified in Regulation Kand the Board’s Rules RegardingDelegation of Authority (12 CFR part265).

Regulatory Flexibility ActThe Board has reviewed the final rule

in accordance with the RegulatoryFlexibility Act. This final rule makesamendments to subparts A, B and C ofRegulation K based upon a review of theregulation consistent with section 303 of



the Riegle Community Development andRegulatory Improvement Act of 1994(the Regulatory Improvement Act) andthe International Banking Act of 1978(the IBA). The rule streamlinesprocedures for U.S. and foreign bankingorganizations, implements portions ofthe Interstate Act, EGRPRA and GLB,and authorizes expanded activities forU.S. banking organizations abroad. Theoverall effect of the final rule will be toreduce regulatory burden. Pursuant tothe Regulatory Flexibility Act, the Boardhereby certifies that the final rule willnot have a significant economic impacton a substantial number of smallbusiness entities.

Paperwork Reduction ActIn accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3506;5 CFR 1320 Appendix A.1), the Boardreviewed the final rule under theauthority delegated to the Board by theOffice of Management and Budget. TheFederal Reserve may not conduct orsponsor, and an organization is notrequired to respond to, an informationcollection unless the Board displays acurrently valid OMB control number.The Board’s OMB control numbers forthe collections revised by this rule are7100–0107 (the InternationalApplications and Prior Notificationsunder Subparts A and C of RegulationK; FR K–1), 7100–0110 (the NotificationRequired Pursuant to Section 211.23(h)of Regulation K on Acquisitions byForeign Banking Organizations; FR4002), and 7100–0284 (the InternationalApplications and Prior Notificationsunder Subpart B of Regulation K; FR K–2).

The collections of information that arerevised by this rulemaking are found in12 CFR 211.3, 211.5, 211.7, 211.9through 211.11, 211.13, 211.22 through211.24, and 211.34. These informationcollections are required to evidencecompliance with the requirements ofRegulation K. The respondents are for-profit financial institutions, includingsmall businesses.

No comments specifically addressingthe burden estimate were received. Thecurrent estimated annual burden for the7100–0107 is 636 hours. The final rulewould result in an estimated 25 percentreduction in the number of applicationsfiled. The final rule would permitstrongly capitalized and well-managedU.S. banking organizations makinginvestments pursuant to general consentauthority to file an abbreviated post-investment notice with the Board. Thisnotice would take the place of certainrequirements for prior notices orapplications to the Board before anysuch investment could be made. The

current estimated annual burden for the7100–0284 is 600 hours. It is estimatedthat the final rule would reduce theburden by 10 percent due to a decreasein the average number of hours requiredto complete an application. The Boardexpects to publish a separate notice torevise these two applications to complywith the final rule’s reportingrequirements. In the interim,institutions may submit any newinformation requested in this rule in aletter format. The current estimatedannual burden for the 7100–0110 is 80hours. The final rule eliminates theneed for this separate informationcollection. Similar information iscollected on the Annual Report ofForeign Banking Organizations (FR Y–7;OMB No. 7100–0125) and the Report ofChanges in FBO OrganizationalStructure (FR Y–10F; OMB No. 7100–0297). The Board estimates there wouldbe no cost burden in addition to theannual hour burden.

For the 7100–0107 and the 7100–0284, the applying organization has theopportunity to request confidentialityfor information that it believes willqualify for an FOIA exemption.

The Federal Reserve has a continuinginterest in the public’s opinions of ourcollections of information. At any time,comments regarding the burdenestimate, or any other aspect of thiscollection of information, includingsuggestions for reducing the burden,may be sent to: Secretary, Board ofGovernors of the Federal ReserveSystem, 20th and C Streets, NW.,Washington, DC 20551; and to theOffice of Management and Budget,Paperwork Reduction Project (7100–0107 or 7100–0284), Washington, DC20503.

List of Subjects

12 CFR Part 211

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

12 CFR Part 265

Authority delegations (Governmentagencies), Banks, banking, FederalReserve System.

For the reasons set out in thepreamble, the Board of Governorsamends 12 CFR parts 211 and 265 as setforth below:

PART 211—INTERNATIONALBANKING OPERATIONS(REGULATION K)

1. The authority citation for part 211continues 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§§ 211.1 through 211.34) are revised toread as follows:

Subpart A—International Operations ofU.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 memberbanks.

211.5 Edge and agreement corporations.211.6 Permissible activities of Edge and

agreement corporations in the UnitedStates.

211.7 Voluntary liquidation of Edge andagreement 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 BankingOrganizations

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; standardsfor approval; representative officeactivities and standards for approval;preservation of existing authority.

211.25 Termination of offices of foreignbanks.

211.26 Examination of offices and affiliatesof foreign banks.

211.27 Disclosure of supervisoryinformation to foreign supervisors.

211.28 Provisions applicable to branchesand agencies: limitation on loans to oneborrower.

211.29 Applications by state branches andstate agencies to conduct activities notpermissible for federal branches.

211.30 Criteria for evaluating U.S.operations of foreign banks not subject toconsolidated 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.



1 Section 25 of the FRA (12 U.S.C. 601–604a),which refers to national banking associations, alsoapplies to state member banks of the FederalReserve System by virtue of section 9 of the FRA(12 U.S.C. 321)

Subpart A—International Operations ofU.S. Banking Organizations

§ 211.1 Authority, purpose, and scope.(a) Authority. This subpart is issued

by the Board of Governors of the FederalReserve System (Board) under theauthority of the Federal Reserve Act(FRA) (12 U.S.C. 221 et seq.); the BankHolding Company Act of 1956 (BHCAct) (12 U.S.C. 1841 et seq.); and theInternational Banking Act of 1978 (IBA)(12 U.S.C. 3101 et seq.).

(b) Purpose. This subpart sets outrules governing the international andforeign activities of U.S. bankingorganizations, including procedures forestablishing foreign branches and Edgeand agreement corporations to engage ininternational banking, and forinvestments in foreign organizations.

(c) Scope. This subpart applies to:(1) Member banks with respect to

their foreign branches and investmentsin foreign banks under section 25 of theFRA (12 U.S.C. 601–604a);1 and

(2) Corporations organized undersection 25A of the FRA (12 U.S.C. 611–631) (Edge corporations);

(3) Corporations having an agreementor undertaking with the Board undersection 25 of the FRA (12 U.S.C. 601–604a) (agreement corporations); and

(4) Bank holding companies withrespect to the exemption from thenonbanking prohibitions of the BHC Actafforded by section 4(c)(13) of that act(12 U.S.C. 1843(c)(13)).

§ 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 indirectsubsidiary; or

(2) Any direct or indirect subsidiaryof the organization or such entity.

(b) Capital Adequacy Guidelinesmeans the ‘‘Capital AdequacyGuidelines for State Member Banks:Risk-Based Measure’’ (12 CFR part 208,app. A) or the ‘‘Capital AdequacyGuidelines for Bank HoldingCompanies: Risk-Based Measure’’ (12CFR part 225, app. A).

(c) Capital and surplus means, unlessotherwise provided in this part:

(1) For organizations subject to theCapital Adequacy Guidelines:

(i) Tier 1 and tier 2 capital includedin an organization’s risk-based capital(under the Capital AdequacyGuidelines); and

(ii) The balance of allowance for loanand lease losses not included in anorganization’s tier 2 capital forcalculation of risk-based capital, basedon the organization’s most recentconsolidated Report of Condition andIncome.

(2) For all other organizations, paid-inand unimpaired capital and surplus,and includes undivided profits but doesnot include the proceeds of capital notesor debentures.

(d) Directly or indirectly, when usedin reference to activities or investmentsof an organization, means activities orinvestments of the organization or ofany subsidiary of the organization.

(e) Eligible country means anycountry:

(1) For which an allocated transferrisk reserve is required pursuant to§ 211.43 of this part and that hasrestructured its sovereign debt held byforeign creditors; and

(2) Any other country that the Boarddeems to be eligible.

(f) An Edge corporation is engaged inbanking if it is ordinarily engaged in thebusiness of accepting deposits in theUnited States from nonaffiliatedpersons.

(g) Engaged in business or engaged inactivities in the United States meansmaintaining and operating an office(other than a representative office) orsubsidiary in the United States.

(h) Equity means an ownershipinterest in an organization, whetherthrough:

(1) Voting or nonvoting shares;(2) General or limited partnership

interests;(3) Any other form of interest

conferring ownership rights, includingwarrants, debt, or any other intereststhat are convertible into shares or otherownership rights in the organization; or

(4) Loans that provide rights toparticipate in the profits of anorganization, unless the investorreceives a determination that such loansshould not be considered equity in thecircumstances of the particularinvestment.

(i) Foreign or foreign country refers toone or more foreign nations, andincludes the overseas territories,dependencies, and insular possessionsof those nations and of the UnitedStates, and the Commonwealth ofPuerto Rico.

(j) Foreign bank means anorganization that:

(1) Is organized under the laws of aforeign country;

(2) Engages in the business ofbanking;

(3) Is recognized as a bank by the banksupervisory or monetary authority of the

country of its organization or principalbanking operations;

(4) Receives deposits to a substantialextent in the regular course of itsbusiness; and

(5) Has the power to accept demanddeposits.

(k) Foreign branch means an office ofan organization (other than arepresentative office) that is locatedoutside the country in which theorganization is legally established and atwhich a banking or financing businessis conducted.

(l) Foreign person means an office orestablishment located outside theUnited States, or an individual residingoutside 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 investorand the investor’s affiliates hold morethan 5 percent of the equity of theorganization.

(n) Investment grade means a securitythat is rated in one of the four highestrating 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 memberbank.

(p) Joint venture means anorganization that has 20 percent or moreof its voting shares held directly orindirectly by the investor or by anaffiliate of the investor under anyauthority, but which is not a subsidiaryof the investor or of an affiliate of theinvestor.

(q) Loans and extensions of creditmeans all direct and indirect advancesof funds to a person made on the basisof any obligation of that person to repaythe funds.

(r) NRSRO means a nationallyrecognized statistical rating organizationas designated by the Securities andExchange Commission.

(s) Organization means a corporation,government, partnership, association, orany other entity.

(t) Person means an individual or anorganization.

(u) Portfolio investment means aninvestment in an organization otherthan a subsidiary or joint venture.

(v) Representative office means anoffice that:

(1) Engages solely in representationaland administrative functions (such as



soliciting new business or acting asliaison between the organization’s headoffice and customers in the UnitedStates); and

(2) Does not have authority to makeany business decision (other thandecisions relating to its premises orpersonnel) for the account of theorganization it represents, includingcontracting for any deposit or deposit-like liability on behalf of theorganization.

(w) Subsidiary means an organizationthat has more than 50 percent of itsvoting shares held directly or indirectly,or that otherwise is controlled orcapable of being controlled, by theinvestor or an affiliate of the investorunder any authority. Among othercircumstances, an investor is consideredto control an organization if:

(1) The investor or an affiliate is ageneral partner of the organization; or

(2) The investor and its affiliatesdirectly or indirectly own or controlmore than 50 percent of the equity ofthe organization.

(x) Tier 1 capital has the samemeaning as provided under the CapitalAdequacy Guidelines.

(y) Well capitalized means:(1) In relation to a parent member or

insured bank, that the standards set outin § 208.43(b)(1) of Regulation H (12CFR 208.43(b)(1)) are satisfied;

(2) In relation to a bank holdingcompany, that the standards set out in§ 225.2(r)(1) of Regulation Y (12 CFR225.2(r)(1)) are satisfied; and

(3) In relation to an Edge or agreementcorporation, that it has tier 1 and totalrisk-based capital ratios of 6.0 and 10.0percent, respectively, or greater.

(z) Well managed means that the Edgeor agreement corporation, any parentinsured bank, and the bank holdingcompany received a composite rating of1 or 2, and at least a satisfactory ratingfor management if such a rating is given,at their most recent examination orreview.

§ 211.3 Foreign branches of U.S. bankingorganizations.

(a) General—(1) Definition of bankingorganization. For purposes of thissection, a banking organization isdefined as a member bank and itsaffiliates.

(2) A banking organization isconsidered to be operating a branch ina foreign country if it has an affiliatethat is a member bank, Edge oragreement corporation, or foreign bankthat operates an office (other than arepresentative office) in that country.

(3) For purposes of this subpart, aforeign office of an operating subsidiaryof a member bank shall be treated as a

foreign branch of the member bank andmay engage only in activitiespermissible for a branch of a memberbank.

(4) At any time upon notice, the Boardmay modify or suspend branchingauthority conferred by this section withrespect to any banking organization.

(b) (1) Establishment of foreignbranches. (i) Foreign branches may beestablished by any member bank havingcapital and surplus of $1,000,000 ormore, an Edge corporation, anagreement corporation, any subsidiarythe shares of which are held directly bythe member bank, or any othersubsidiary held pursuant to this subpart.

(ii) The Board grants its generalconsent under section 25 of the FRA (12U.S.C. 601–604a) for a member bank toestablish a branch in theCommonwealth of Puerto Rico and theoverseas territories, dependencies, andinsular possessions of the United States.

(2) Prior notice. Unless otherwiseprovided in this section, theestablishment of a foreign branchrequires 30 days’ prior written notice tothe Board.

(3) Branching into additional foreigncountries. After giving the Board 12business days prior written notice, abanking organization that operatesbranches in two or more foreigncountries may establish a branch in anadditional foreign country.

(4) Additional branches within aforeign country. No prior notice isrequired to establish additionalbranches in any foreign country wherethe banking organization operates one ormore branches.

(5) Branching by nonbankingaffiliates. No prior notice is required fora nonbanking affiliate of a bankingorganization (i.e., an organization that isnot a member bank, an Edge oragreement corporation, or foreign bank)to establish branches within a foreigncountry or in additional foreigncountries.

(6) Expiration of branching authority.Authority to establish branches, whengranted following prior written notice tothe Board, shall expire one year fromthe earliest date on which the authoritycould have been exercised, unlessextended by the Board.

(c) Reporting. Any bankingorganization that opens, closes, orrelocates a branch shall report suchchange in a manner prescribed by theBoard.

(d) Reserves of foreign branches ofmember banks. Member banks shallmaintain reserves against foreign branchdeposits when required by Regulation D(12 CFR part 204).

(e) Conditional approval; access toinformation. The Board may imposesuch conditions on authority granted byit under this section as it deemsnecessary, and may require terminationof any activities conducted underauthority of this section if a memberbank is unable to provide informationon its activities or those of its affiliatesthat the Board deems necessary todetermine and enforce compliance withU.S. banking laws.

§ 211.4 Permissible activities andinvestments of foreign branches of memberbanks.

(a) Permissible activities andinvestments. In addition to its generalbanking powers, and to the extentconsistent with its charter, a foreignbranch of a member bank may engage inthe following activities and make thefollowing investments, so far as is usualin connection with the business ofbanking in the country where ittransacts business:

(1) Guarantees. Guarantee debts, orotherwise agree to make payments onthe occurrence of readily ascertainableevents (including, but not limited to,nonpayment of taxes, rentals, customsduties, or costs of transport, and loss ornonconformance of shippingdocuments) if the guarantee oragreement specifies a maximummonetary liability; however, except tothe extent that the member bank is fullysecured, it may not have liabilitiesoutstanding for any person on accountof such guarantees or agreements which,when aggregated with other unsecuredobligations of the same person, exceedthe limit contained in section 5200(a)(1)of the Revised Statutes (12 U.S.C. 84) forloans and extensions of credit;

(2) Government obligations. (i)Underwrite, distribute, buy, sell, andhold obligations of:

(A) The national government of thecountry where the branch is located andany political subdivision of thatcountry;

(B) An agency or instrumentality ofthe national government of the countrywhere the branch is located where suchobligations are supported by the taxingauthority, guarantee, or full faith andcredit of that government;

(C) The national government orpolitical subdivision of any country,where such obligations are ratedinvestment grade; and

(D) An agency or instrumentality ofany national government where suchobligations are rated investment gradeand are supported by the taxingauthority, guarantee or full faith andcredit of that government.



(ii) No member bank, under authorityof this paragraph (a)(2), may hold, or beunder commitment with respect to, suchobligations for its own account inrelation to any one country in anamount 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 onthe preceding year-end call report date(or the date of acquisition of the branch,in the case of a branch that has not beenso reported);

(3) Other investments. (i) Invest in:(A) The securities of the central bank,

clearinghouses, governmental entitiesother than those authorized underparagraph (a)(2) of this section, andgovernment-sponsored developmentbanks of the country where the foreignbranch is located;

(B) Other debt securities eligible tomeet local reserve or similarrequirements; and

(C) Shares of automated electronic-payments networks, professionalsocieties, schools, and the like necessaryto the business of the branch;

(ii) The total investments of a bank’sbranches in a country under thisparagraph (a)(3) (exclusive of securitiesheld as required by the law of thatcountry or as authorized under section5136 of the Revised Statutes (12 U.S.C.24, Seventh)) may not exceed 1 percentof the total deposits of the bank’sbranches in that country on thepreceding year-end call report date (oron the date of acquisition of the branch,in the case of a branch that has not beenso reported);

(4) Real estate loans. Take liens orother encumbrances on foreign realestate in connection with its extensionsof credit, whether or not of first priorityand whether or not the real estate hasbeen improved;

(5) Insurance. Act as insurance agentor broker;

(6) Employee benefits program. Pay toan employee of the branch, as part of anemployee benefits program, a greaterrate of interest than that paid to otherdepositors of the branch;

(7) Repurchase agreements. Engage inrepurchase agreements involvingsecurities and commodities that are thefunctional equivalents of extensions ofcredit;

(8) Investment in subsidiaries. Withthe Board’s prior approval, acquire all ofthe shares of a company (except wherelocal law requires other investors tohold directors’ qualifying shares orsimilar types of instruments) thatengages solely in activities:

(i) In which the member bank ispermitted to engage; or

(ii) That are incidental to the activitiesof the foreign branch.

(b) Other activities. With the Board’sprior approval, engage in other activitiesthat the Board determines are usual inconnection with the transaction of thebusiness of banking in the places wherethe member bank’s branches transactbusiness.

§ 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 itscapital and surplus in the aggregateamount of stock held in all Edge andagreement corporations.

(b) Organization of an Edgecorporation—(1) Permit. A proposedEdge corporation shall become a bodycorporate when the Board issues apermit approving its proposed name,articles of association, and organizationcertificate.

(2) Name. The name of the Edgecorporation shall include international,foreign, overseas, or a similar word, butmay not resemble the name of anotherorganization to an extent that mightmislead or deceive the public.

(3) Federal Register notice. The Boardshall publish in the Federal Registernotice of any proposal to organize anEdge corporation and shall giveinterested persons an opportunity toexpress their views on the proposal.

(4) Factors considered by Board. Thefactors considered by the Board inacting on a proposal to organize an Edgecorporation include:

(i) The financial condition and historyof the applicant;

(ii) The general character of itsmanagement;

(iii) The convenience and needs of thecommunity to be served with respect tointernational banking and financingservices; and

(iv) The effects of the proposal oncompetition.

(5) Authority to commence business.After the Board issues a permit, theEdge corporation may elect officers andotherwise complete its organization,invest in obligations of the U.S.government, and maintain deposits withdepository institutions, but it may notexercise any other powers until at least25 percent of the authorized capitalstock specified in the articles ofassociation has been paid in cash, andeach shareholder has paid in cash atleast 25 percent of that shareholder’sstock subscription.

(6) Expiration of unexercisedauthority. Unexercised authority tocommence business as an Edgecorporation shall expire one year afterissuance of the permit, unless the Boardextends the period.

(c) Other provisions regarding Edgecorporations—(1) Amendments toarticles of association. No amendmentto the articles of association shallbecome effective until approved by theBoard.

(2) Shareholders’ meeting. An Edgecorporation shall provide in its bylawsthat:

(i) A shareholders’ meeting shall beconvened at the request of the Boardwithin five business days after theBoard gives notice of the request to theEdge corporation;

(ii) Any shareholder or group ofshareholders that owns or controls 25percent or more of the shares of theEdge corporation shall attend such ameeting in person or by proxy; and

(iii) Failure by a shareholder orauthorized representative to attend suchmeeting in person or by proxy mayresult in removal or barring of theshareholder or representative fromfurther participation in the managementor affairs of the Edge corporation.

(3) Nature and ownership of shares—(i) Shares. Shares of stock in an Edgecorporation may not include no-par-value shares and shall be issued andtransferred only on its books and incompliance with section 25A of the FRA(12 U.S.C. 611 et seq.) and this subpart.

(ii) Contents of share certificates. Theshare certificates of an Edge corporationshall:

(A) Name and describe each class ofshares, indicating its character and anyunusual attributes, such as preferredstatus or lack of voting rights; and

(B) Conspicuously set forth thesubstance of:

(1) Any limitations on the rights ofownership and transfer of sharesimposed by section 25A of the FRA (12U.S.C. 611 et seq.); and

(2) Any rules that the Edgecorporation prescribes in its bylaws toensure compliance with this paragraph(c).

(4) Change in status of shareholder.Any change in status of a shareholderthat causes a violation of section 25A ofthe FRA (12 U.S.C. 611 et seq.) shall bereported to the Board as soon aspossible, and the Edge corporation shalltake such action as the Board maydirect.

(d) Ownership of Edge corporations byforeign institutions—(1) Prior Boardapproval. One or more foreign orforeign-controlled domestic institutionsreferred to in section 25A(11) of the



2 For purposes of this paragraph (d)(2), affiliatemeans any organization that would be an affiliateunder section 23A of the FRA (12 U.S.C. 371c) ifthe Edge corporation were a member bank.

FRA (12 U.S.C. 619) may apply for theBoard’s prior approval to acquire,directly or indirectly, a majority of theshares of the capital stock of an Edgecorporation.

(2) Conditions and requirements.Such an institution shall:

(i) Provide the Board with informationrelated to its financial condition andactivities and such other information asthe Board may require;

(ii) Ensure that any transaction by anEdge corporation with an affiliate2 is onsubstantially the same terms, includinginterest rates and collateral, as thoseprevailing at the same time forcomparable transactions by the Edgecorporation with nonaffiliated persons,and does not involve more than thenormal risk of repayment or presentother unfavorable features;

(iii) Ensure that the Edge corporationwill not provide funding on a continualor substantial basis to any affiliate oroffice of the foreign institution throughtransactions that would be inconsistentwith the international and foreignbusiness purposes for which Edgecorporations are organized; and

(iv) Comply with the limitation onaggregate investments in all Edge andagreement corporations set forth inparagraph (h) of this section.

(3) Foreign institutions not subject tothe BHC Act. In the case of a foreigninstitution not subject to section 4 of theBHC Act (12 U.S.C. 1843), thatinstitution shall:

(i) Comply with any conditions thatthe Board may impose that arenecessary to prevent undueconcentration of resources, decreased orunfair competition, conflicts of interest,or unsound banking practices in theUnited States; and

(ii) Give the Board 30 days’ priorwritten notice before engaging in anynonbanking activity in the UnitedStates, or making any initial oradditional investments in anotherorganization, that would require priorBoard approval or notice by anorganization subject to section 4 of theBHC Act (12 U.S.C. 1843); in connectionwith such notice, the Board may imposeconditions necessary to prevent adverseeffects that may result from suchactivity or investment.

(e) Change in control of an Edgecorporation—(1) Prior notice. (i) Anyperson shall give the Board 60 days’prior written notice before acquiring,directly or indirectly, 25 percent ormore of the voting shares, or otherwise

acquiring control, of an Edgecorporation.

(ii) The Board may extend the 60-dayperiod for an additional 30 days bynotifying the acquiring party.

(iii) A notice under this paragraph (e)need not be filed where a change incontrol is effected through a transactionrequiring the Board’s approval undersection 3 of the BHC Act (12 U.S.C.1842).

(2) Board review. In reviewing anotice filed under this paragraph (e), theBoard shall consider the factors set forthin paragraph (b)(4) of this section, andmay disapprove a notice or impose anyconditions that it finds necessary toassure the safe and sound operation ofthe Edge corporation, to assure theinternational character of its operation,and to prevent adverse effects, such asdecreased or unfair competition,conflicts of interest, or undueconcentration of resources.

(f) Domestic branching by Edgecorporations—(1) Prior notice. (i) AnEdge corporation may establishbranches in the United States 30 daysafter the Edge corporation has givenwritten notice of its intention to do soto its Reserve Bank, unless the Edgecorporation is notified to the contrarywithin that time.

(ii) The notice to the Reserve Bankshall include a copy of the notice of theproposal published in a newspaper ofgeneral circulation in the communitiesto be served by the branch.

(iii) The newspaper notice mayappear no earlier than 90 calendar daysprior to submission of notice of theproposal to the Reserve Bank. Thenewspaper notice shall provide anopportunity for the public to givewritten comment on the proposal to theappropriate Federal Reserve Bank for atleast 30 days after the date ofpublication.

(2) Factors considered. The factorsconsidered in acting upon a proposal toestablish a branch are enumerated inparagraph (b)(4) of this section.

(3) Expiration of authority. Authorityto establish a branch under prior noticeshall expire one year from the earliestdate on which that authority could havebeen exercised, unless the Boardextends the period.

(g) Agreement corporations—(1)General. With the prior approval of theBoard, a member bank or bank holdingcompany may invest in a federally orstate-chartered corporation that hasentered into an agreement orundertaking with the Board that it willnot exercise any power that isimpermissible for an Edge corporationunder this subpart.

(2) Factors considered by Board. Thefactors considered in acting upon aproposal to establish an agreementcorporation are enumerated inparagraph (b)(4) of this section.

(h) (1) Limitation on investment inEdge and agreement corporations. Amember bank may invest up to 10percent of its capital and surplus in thecapital stock of Edge and agreementcorporations or, with the prior approvalof the Board, up to 20 percent of itscapital and surplus in such stock.

(2) Factors considered by Board. Thefactors considered by the Board inacting on a proposal under paragraph(h)(1) of this section shall include:

(i) The composition of the assets ofthe bank’s Edge and agreementcorporations;

(ii) The total capital invested by thebank in its Edge and agreementcorporations when combined withretained earnings of the Edge andagreement corporations (includingretained earnings of any foreign banksubsidiaries) as a percentage of thebank’s capital;

(iii) Whether the bank, bank holdingcompany, and Edge and agreementcorporations are well-capitalized andwell-managed;

(iv) Whether the bank is adequatelycapitalized after deconsolidating anddeducting the aggregate investment inand assets of all Edge or agreementcorporations and all foreign banksubsidiaries; and

(v) Any other factor the Board deemsrelevant to the safety and soundness ofthe member bank.

(i) Reserve requirements and interestrate limitations. The deposits of an Edgeor agreement corporation are subject toRegulations D and Q (12 CFR parts 204and 217) in the same manner and to thesame extent as if the Edge or agreementcorporation were a member bank.

(j) Liquid funds. Funds of an Edge oragreement corporation that are notcurrently employed in its internationalor foreign business, if held or investedin the United States, shall be in the formof:

(1) Cash;(2) Deposits with depository

institutions, as described in RegulationD (12 CFR part 204), and other Edge andagreement corporations;

(3) Money-market instruments(including repurchase agreements withrespect to such instruments), such asbankers’ acceptances, federal fundssold, and commercial paper; and

(4) Short- or long-term obligations of,or fully guaranteed by, federal, state,and local governments and theirinstrumentalities.



1 For purposes of this section, management of aninvestment portfolio does not include operationalmanagement of real property, or industrial orcommercial assets.

(k) Reports by Edge and agreementcorporations of crimes and suspectedcrimes. An Edge or agreementcorporation, or any branch or subsidiarythereof, shall file a suspicious-activityreport in accordance with the provisionsof § 208.62 of Regulation H (12 CFR208.62).

§ 211.6 Permissible activities of Edge andagreement corporations in the UnitedStates.

(a) Activities incidental tointernational or foreign business. AnEdge or agreement corporation mayengage, directly or indirectly, inactivities in the United States that arepermitted by section 25A(6) of the FRA(12 U.S.C. 615) and are incidental tointernational or foreign business, and insuch other activities as the Boarddetermines are incidental tointernational or foreign business. Thefollowing activities will ordinarily beconsidered incidental to an Edge oragreement corporation’s international orforeign business:

(1) Deposit-taking activities—(i)Deposits from foreign governments andforeign persons. An Edge or agreementcorporation may receive in the UnitedStates transaction accounts, savings, andtime deposits (including issuingnegotiable certificates of deposits) fromforeign governments and their agenciesand instrumentalities, and from foreignpersons.

(ii) Deposits from other persons. AnEdge or agreement corporation mayreceive from any other person in theUnited States transaction accounts,savings, and time deposits (includingissuing negotiable certificates ofdeposit) if such deposits:

(A) Are to be transmitted abroad;(B) Consist of funds to be used for

payment of obligations to the Edge oragreement corporation or collateralsecuring such obligations;

(C) Consist of the proceeds ofcollections abroad that are to be used topay for exported or imported goods orfor other costs of exporting or importingor that are to be periodically transferredto the depositor’s account at anotherfinancial institution;

(D) Consist of the proceeds ofextensions of credit by the Edge oragreement corporation;

(E) Represent compensation to theEdge or agreement corporation forextensions of credit or services to thecustomer;

(F) Are received from Edge oragreement corporations, foreign banks,and other depository institutions (asdescribed in Regulation D (12 CFR part204)); or

(G) Are received from an organizationthat by its charter, license, or enablinglaw is limited to business that is of aninternational character, includingforeign sales corporations, as defined in26 U.S.C. 922; transportationorganizations engaged exclusively in theinternational transportation ofpassengers or in the movement of goods,wares, commodities, or merchandise ininternational or foreign commerce; andexport trading companies establishedunder subpart C of this part.

(2) Borrowings. An Edge or agreementcorporation may:

(i) Borrow from offices of other Edgeand agreement corporations, foreignbanks, and depository institutions (asdescribed in Regulation D (12 CFR part204));

(ii) Issue obligations to the UnitedStates or any of its agencies orinstrumentalities;

(iii) Incur indebtedness from atransfer of direct obligations of, orobligations that are fully guaranteed asto principal and interest by, the UnitedStates or any agency or instrumentalitythereof that the Edge or agreementcorporation is obligated to repurchase;and

(iv) Issue long-term subordinated debtthat does not qualify as a deposit underRegulation D (12 CFR part 204).

(3) Credit activities. An Edge oragreement corporation may:

(i) Finance the following:(A) Contracts, projects, or activities

performed substantially abroad;(B) The importation into or

exportation from the United States ofgoods, whether direct or throughbrokers or other intermediaries;

(C) The domestic shipment ortemporary storage of goods beingimported or exported (or accumulatedfor export); and

(D) The assembly or repackaging ofgoods imported or to be exported;

(ii) Finance the costs of production ofgoods and services for which exportorders have been received or which areidentifiable as being directly for export;

(iii) Assume or acquire participationsin extensions of credit, or acquireobligations arising from transactions theEdge or agreement corporation couldhave financed, including acquisition ofobligations of foreign governments;

(iv) Guarantee debts, or otherwiseagree to make payments on theoccurrence of readily ascertainableevents (including, but not limited to,nonpayment of taxes, rentals, customsduties, or cost of transport, and loss ornonconformance of shippingdocuments), so long as the guarantee oragreement specifies the maximummonetary liability thereunder and is

related to a type of transaction describedin paragraphs (a)(3)(i) and (ii) of thissection; and

(v) Provide credit and other bankingservices for domestic and foreignpurposes to foreign governments andtheir agencies and instrumentalities,foreign persons, and organizations of thetype described in paragraph (a)(1)(ii)(G)of this section.

(4) Payments and collections. An Edgeor agreement corporation may receivechecks, bills, drafts, acceptances, notes,bonds, coupons, and other instrumentsfor collection abroad, and collect suchinstruments in the United States for acustomer abroad; and may transmit andreceive wire transfers of funds andsecurities for depositors.

(5) Foreign exchange. An Edge oragreement corporation may engage inforeign exchange activities.

(6) Fiduciary and investment advisoryactivities. An Edge or agreementcorporation may:

(i) Hold securities in safekeeping for,or buy and sell securities upon the orderand for the account and risk of, aperson, provided such services for U.S.persons are with respect to foreignsecurities only;

(ii) Act as paying agent for securitiesissued by foreign governments or otherentities organized under foreign law;

(iii) Act as trustee, registrar,conversion agent, or paying agent withrespect to any class of securities issuedto finance foreign activities anddistributed solely outside the UnitedStates;

(iv) Make private placements ofparticipations in its investments andextensions of credit; however, except tothe extent permissible for member banksunder section 5136 of the RevisedStatutes (12 U.S.C. 24(Seventh)), noEdge or agreement corporationotherwise may engage in the business ofunderwriting, distributing, or buying orselling securities in the United States;

(v) Act as investment or financialadviser by providing portfolioinvestment advice and portfoliomanagement with respect to securities,other financial instruments, real-property interests, and other investmentassets,3 and by providing advice onmergers and acquisitions, provided suchservices for U.S. persons are withrespect to foreign assets only; and

(vi) Provide general economicinformation and advice, generaleconomic statistical forecasting services,and industry studies, provided such



4 For purposes of this section and §§ 211.9 and211.10 of this part, a direct subsidiary of a memberbank is deemed to be an investor.

services for U.S. persons shall be withrespect to foreign economies andindustries only.

(7) Banking services for employees.Provide banking services, includingdeposit services, to the officers andemployees of the Edge or agreementcorporation and its affiliates; however,extensions of credit to such personsshall be subject to the restrictions ofRegulation O (12 CFR part 215) as if theEdge or agreement corporation were amember bank.

(b) Other activities. With the Board’sprior approval, an Edge or agreementcorporation may engage, directly orindirectly, in other activities in theUnited States that the Board determinesare incidental to their international orforeign business.

§ 211.7 Voluntary liquidation of Edge andagreement corporations.

(a) Prior notice. An Edge or agreementcorporation desiring voluntarily todiscontinue normal business anddissolve, shall provide the Board with45 days’ prior written notice of its intentto do so.

(b) Waiver of notice period. The Boardmay waive the 45-day period if it findsthat immediate action is required by thecircumstances presented.

§ 211.8 Investments and activities abroad.(a) General policy. Activities abroad,

whether conducted directly orindirectly, shall be confined to activitiesof a banking or financial nature andthose that are necessary to carry on suchactivities. In doing so, investors 4 shallat all times act in accordance with highstandards of banking or financialprudence, having due regard fordiversification of risks, suitableliquidity, and adequacy of capital.Subject to these considerations and theother provisions of this section, it is theBoard’s policy to allow activities abroadto be organized and operated as bestmeets corporate policies.

(b) Direct investments by memberbanks. A member bank’s directinvestments under section 25 of theFRA (12 U.S.C. 601 et seq.) shall belimited to:

(1) Foreign banks;(2) Domestic or foreign organizations

formed for the sole purpose of holdingshares of a foreign bank;

(3) Foreign organizations formed forthe sole purpose of performing nominee,fiduciary, or other banking servicesincidental to the activities of a foreignbranch or foreign bank affiliate of themember bank; and

(4) Subsidiaries established pursuantto § 211.4(a)(8) of this part.

(c) Eligible investments. Subject to thelimitations set out in paragraphs (b) and(d) of this section, an investor may,directly or indirectly:

(1) Investment in subsidiary. Invest ina subsidiary that engages solely inactivities listed in § 211.10 of this part,or in such other activities as the Boardhas determined in the circumstances ofa particular case are permissible;provided that, in the case of anacquisition of a going concern, existingactivities that are not otherwisepermissible for a subsidiary mayaccount for not more than 5 percent ofeither the consolidated assets orconsolidated revenues of the acquiredorganization;

(2) Investment in joint venture. Investin a joint venture; provided that, unlessotherwise permitted by the Board, notmore than 10 percent of the jointventure’s consolidated assets orconsolidated revenues are attributable toactivities not listed in § 211.10 of thispart; and

(3) Portfolio investments. Makeportfolio investments in anorganization, provided that:

(i) Individual investment limits. Thetotal direct and indirect portfolioinvestments by the investor and itsaffiliates in an organization engaged inactivities that are not permissible forjoint ventures, when combined with allother shares in the organization heldunder any other authority, do notexceed:

(A) 40 percent of the total equity ofthe organization; or

(B) 19.9 percent of the organization’svoting shares.

(ii) Loans and extensions of credit.Any loans and extensions of creditmade by an investor or its affiliates tothe organization are on substantially thesame terms, including interest rates andcollateral, as those prevailing at thesame time for comparable transactionsbetween the investor or its affiliates andnonaffiliated persons; and

(iii) Protecting shareholder rights.Nothing in this paragraph (c)(3) shallprohibit an investor from otherwiseexercising rights it may have asshareholder to protect the value of itsinvestment, so long as the exercise ofsuch rights does not result in theinvestor’s direct or indirect control ofthe organization.

(d) Investment limit. In calculating theamount that may be invested in anyorganization under this section and§§ 211.9 and 211.10 of this part, thereshall be included any unpaid amountfor which the investor is liable and any

investments in the same organizationheld by affiliates under any authority.

(e) Divestiture. An investor shalldispose 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 underparagraph (c) of this section; or

(ii) Engages directly or indirectly inother business in the United States thatis not permitted to an Edge corporationin the United States; provided that aninvestor may:

(A) Retain portfolio investments incompanies that derive no more than 10percent of their total revenue fromactivities in the United States; and

(B) Hold up to 5 percent of the sharesof a foreign company that engagesdirectly or indirectly in business in theUnited States that is not permitted to anEdge corporation; or

(2) After notice and opportunity forhearing, the investor is advised by theBoard that such investment isinappropriate under the FRA, the BHCAct, or this subpart.

(f) Debts previously contracted. Sharesor other ownership interests acquired toprevent a loss upon a debt previouslycontracted in good faith are not subjectto the limitations or procedures of thissection; provided that such interestsshall be disposed of promptly but in noevent later than two years after theiracquisition, unless the Board authorizesretention for a longer period.

(g) Investments made through debt-for-equity conversions.

(1) Permissible investments. A bankholding company may makeinvestments through the conversion ofsovereign-or private-debt obligations ofan eligible country, either through directexchange of the debt obligations for theinvestment, or by a payment for the debtin local currency, the proceeds ofwhich, including an additional cashinvestment not exceeding in theaggregate more than 10 percent of thefair value of the debt obligations beingconverted as part of such investment,are used to purchase the followinginvestments:

(i) Public-sector companies. A bankholding company may acquire up to andincluding 100 percent of the shares of(or other ownership interests in) anyforeign company located in an eligiblecountry, if the shares are acquired fromthe government of the eligible countryor from its agencies or instrumentalities.

(ii) Private-sector companies. A bankholding company may acquire up to andincluding 40 percent of the shares,including voting shares, of (or otherownership interests in) any other



5 When necessary, the provisions of this sectionrelating to general consent and prior noticeconstitute the Board’s approval under section25A(8) of the FRA (12 U.S.C. 616) for investmentsin excess of the limitations therein based on capitaland surplus.

foreign company located in an eligiblecountry subject to the followingconditions:

(A) A bank holding company mayacquire more than 25 percent of thevoting shares of the foreign companyonly if another shareholder or group ofshareholders unaffiliated with the bankholding company holds a larger block ofvoting shares of the company;

(B) The bank holding company and itsaffiliates may not lend or otherwiseextend credit to the foreign company inamounts greater than 50 percent of thetotal loans and extensions of credit tothe foreign company; and

(C) The bank holding company’srepresentation on the board of directorsor on management committees of theforeign company may be no more thanproportional to its shareholding in theforeign company.

(2) Investments by bank subsidiary ofbank holding company. Uponapplication, the Board may permit anindirect investment to be made pursuantto this paragraph (g) through an insuredbank subsidiary of the bank holdingcompany, where the bank holdingcompany demonstrates that suchownership is consistent with thepurposes of the FRA. In granting itsconsent, the Board may impose suchconditions as it deems necessary orappropriate to prevent adverse effects,including prohibiting loans from thebank to the company in which theinvestment is made.

(3) Divestiture—(i) Time limits fordivestiture. A bank holding companyshall divest the shares of, or otherownership interests in, any companyacquired pursuant to this paragraph (g)within the longer of:

(A) Ten years from the date ofacquisition of the investment, exceptthat the Board may extend such periodif, in the Board’s judgment, such anextension would not be detrimental tothe public interest; or

(B) Two years from the date on whichthe bank holding company is permittedto repatriate in full the investment inthe foreign company.

(ii) Maximum retention period.Notwithstanding the provisions ofparagraph (g)(3)(i) of this section:

(A) Divestiture shall occur within 15years of the date of acquisition of theshares of, or other ownership interestsin, any company acquired pursuant tothis paragraph (g); and

(B) A bank holding company mayretain such shares or ownershipinterests if such retention is otherwisepermissible at the time required fordivestiture.

(iii) Report to Board. The bankholding company shall report to the

Board on its plans for divesting aninvestment made under this paragraph(g) two years prior to the final date fordivestiture, in a manner to be prescribedby the Board.

(iv) Other conditions requiringdivestiture. All investments madepursuant to this paragraph (g) aresubject to paragraph (e) of this sectionrequiring prompt divestiture (unless theBoard upon application authorizesretention), if the company invested inengages in impermissible business inthe United States that exceeds in theaggregate 10 percent of the company’sconsolidated assets or revenuescalculated on an annual basis; providedthat such company may not engage inactivities in the United States thatconsist of banking or financialoperations (as defined in§ 211.23(f)(5)(iii)(B)) of this part, ortypes of activities permitted byregulation or order under section 4(c)(8)of the BHC Act (12 U.S.C. 1843(c)(8)),except under regulations of the Board orwith the prior approval of the Board.

(4) Investment procedures—(i)General consent. Subject to the otherlimitations of this paragraph (g), theBoard grants its general consent forinvestments made under this paragraph(g) if the total amount invested does notexceed the greater of $25 million or 1percent of the tier 1 capital of theinvestor.

(ii) All other investments shall bemade in accordance with the proceduresof § 211.9(f) and (g) of this part,requiring prior notice or specificconsent.

(5) Conditions—(i) Name. Anycompany acquired pursuant to thisparagraph (g) shall not bear a namesimilar to the name of the acquiringbank holding company or any of itsaffiliates.

(ii) Confidentiality. Neither the bankholding company nor its affiliates shallprovide to any company acquiredpursuant to this paragraph (g) anyconfidential business information orother information concerning customersthat are engaged in the same or relatedlines of business as the company.

§ 211.9 Investment procedures.

(a) General provisions.5 Direct andindirect investments shall be made inaccordance with the general consent,limited general consent, prior notice, or

specific consent procedures containedin this section.

(1) Minimum capital adequacystandards. Except as the Board mayotherwise determine, in order for aninvestor to make investments pursuantto the procedures set out in this section,the investor, the bank holding company,and the member bank shall be incompliance with applicable minimumstandards for capital adequacy set out inthe Capital Adequacy Guidelines;provided that, if the investor is an Edgeor agreement corporation, the minimumcapital required is total and tier 1capital ratios of 8 percent and 4 percent,respectively.

(2) Composite rating. Except as theBoard may otherwise determine, inorder for an investor to makeinvestments under the general consentor limited general consent procedures ofparagraphs (b) and (c) of this section,the investor and any parent insuredbank must have received a compositerating of at least 2 at the most recentexamination.

(3) Board’s authority to modify orsuspend procedures. The Board, at anytime upon notice, may modify orsuspend the procedures contained inthis section with respect to any investoror with respect to the acquisition ofshares of organizations engaged inparticular kinds of activities.

(4) Long-range investment plan. Anyinvestor may submit to the Board for itsspecific consent a long-range investmentplan. Any plan so approved shall besubject to the other procedures of thissection only to the extent determinednecessary by the Board to assure safetyand soundness of the operations of theinvestor and its affiliates.

(5) Prior specific consent for initialinvestment. An investor shall apply forand receive the prior specific consent ofthe Board for its initial investmentunder this subpart in its first subsidiaryor joint venture, unless an affiliatepreviously has received approval tomake such an investment.

(6) Expiration of investment authority.Authority to make investments grantedunder prior notice or specific consentprocedures shall expire one year fromthe earliest date on which the authoritycould have been exercised, unless theBoard determines a longer period shallapply.

(7) Conditional approval; Access toinformation. The Board may imposesuch conditions on authority granted byit under this section as it deemsnecessary, and may require terminationof any activities conducted underauthority of this subpart if an investoris unable to provide information on itsactivities or those of its affiliates that the



Board deems necessary to determineand enforce compliance with U.S.banking laws.

(b) General consent. The Board grantsits general consent for a well capitalizedand well managed investor to makeinvestments, subject to the following:

(1) Well capitalized and well managedinvestor. In order to qualify for makinginvestments under authority of thisparagraph (b), both before andimmediately after the proposedinvestment, the investor, any parentinsured bank, and any parent bankholding company shall be wellcapitalized and well managed.

(2) Individual limit for investment insubsidiary. In the case of an investmentin a subsidiary, the total amountinvested directly or indirectly in suchsubsidiary (in one transaction or a seriesof transactions) does not exceed:

(i) 10 percent of the investor’s tier 1capital, where the investor is a bankholding company; or

(ii) 2 percent of the investor’s tier 1capital, where the investor is a memberbank; or

(iii) The lesser of 2 percent of the tier1 capital of any parent insured bank or10 percent of the investor’s tier 1capital, for any other investor.

(3) Individual limit for investment injoint venture. In the case of aninvestment in a joint venture, the totalamount invested directly or indirectlyin such joint venture (in one transactionor a series of transactions) does notexceed:

(i) 5 percent of the investor’s tier 1capital, where the investor is a bankholding company; or


(iii) The lesser of 1 percent of the tier1 capital of any parent insured bank or5 percent of the investor’s tier 1 capital,for any other investor.

(4) Individual limit for portfolioinvestment. In the case of a portfolioinvestment, the total amount investeddirectly or indirectly in such company(in one transaction or a series oftransactions) does not exceed the lesserof $25 million, or

(i) 5 percent of the investor’s tier 1capital in the case of a bank holdingcompany or its subsidiary, or Edgecorporation engaged in banking; or

(ii) 25 percent of the investor’s tier 1capital in the case of an Edgecorporation not engaged in banking.

(5) Investment in a generalpartnership or unlimited liabilitycompany. An investment in a generalpartnership or unlimited liabilitycompany may be made under authorityof paragraph (b) of this section, subject

to the limits set out in paragraph (c) ofthis section.

(6) Aggregate investment limits—(i)Investment limits. All investmentsmade, directly or indirectly, during theprevious 12-month period underauthority of this section, whenaggregated with the proposedinvestment, shall not exceed:

(A) 20 percent of the investor’s tier 1capital, where the investor is a bankholding company;

(B) 10 percent of the investor’s tier 1capital, where the investor is a memberbank; or

(C) The lesser of 10 percent of the tier1 capital of any parent insured bank or50 percent of the tier 1 capital of theinvestor, for any other investor.

(ii) Downstream investments. Indetermining compliance with theaggregate limits set out in this paragraph(b), an investment by an investor in asubsidiary shall be counted only once,notwithstanding that such subsidiarymay, within 12 months of the date ofmaking the investment, downstream allor any part of such investment toanother subsidiary.

(7) Application of limits. Indetermining compliance with the limitsset out in this paragraph (b), an investoris not required to combine the value ofall shares of an organization held intrading or dealing accounts under§ 211.10(a)(15) of this part withinvestments in the same organization.

(c) Limited general consent—(1)Individual limit. The Board grants itsgeneral consent for an investor that isnot well capitalized and well managedto make an investment in a subsidiaryor joint venture, or to make a portfolioinvestment, if the total amount investeddirectly or indirectly (in one transactionor in a series of transactions) does notexceed the lesser of $25 million or:

(i) 5 percent of the investor’s tier 1capital, where the investor is a bankholding company;


(iii) The lesser of 1 percent of anyparent insured bank’s tier 1 capital or 5percent of the investor’s tier 1 capital,for any other investor.

(2) Aggregate limit. The amount ofgeneral consent investments made byany investor directly or indirectly underauthority of this paragraph (c) duringthe previous 12-month period, whenaggregated with the proposedinvestment, shall not exceed:

(i) 10 percent of the investor’s tier 1capital, where the investor is a bankholding company;

(ii) 5 percent of the investor’s tier 1capital, where the investor is a memberbank; and

(iii) The lesser of 5 percent of anyparent insured bank’s tier 1 capital or 25percent of the investor’s tier 1 capital,for any other investor.

(3) Application of limits. Incalculating compliance with the limitsof this paragraph (c), the rules set forthin paragraphs (b)(6)(ii) and (b)(7) of thissection shall apply.

(d) Other eligible investments undergeneral consent. In addition to theauthority granted under paragraphs (b)and (c) of this section, the Board grantsits general consent for any investor tomake the following investments:

(1) Investment in organization equalto cash dividends. Any investment in anorganization in an amount equal to cashdividends received from thatorganization during the preceding 12calendar months; and

(2) Investment acquired from affiliate.Any investment that is acquired from anaffiliate at net asset value or through acontribution of shares.

(e) Investments ineligible for generalconsent. An investment in a foreignbank may not be made under authorityof paragraphs (b) or (c) of this section if:

(1) After the investment, the foreignbank would be an affiliate of a memberbank; and

(2) The foreign bank is located in acountry in which the member bank andits affiliates have no existing bankingpresence.

(f) Prior notice. An investment thatdoes not qualify for general consentunder paragraph (b), (c), or (d) of thissection may be made after the investorhas given the Board 30 days’ priorwritten notice, such notice period tocommence at the time the notice isreceived, provided that:

(1) The Board may waive the 30-dayperiod if it finds the full period is notrequired for consideration of theproposed investment, or that immediateaction is required by the circumstancespresented; and

(2) The Board may suspend the 30-day period or act on the investmentunder the Board’s specific consentprocedures.

(g) Specific consent. Any investmentthat does not qualify for either thegeneral consent or the prior noticeprocedure may not be consummatedwithout the specific consent of theBoard.

§ 211.10 Permissible activities abroad.(a) Activities usual in connection with

banking. The Board has determined thatthe following activities are usual inconnection with the transaction of



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

7 A basket of stocks, specifically segregated as anoffset to a position in a stock index derivativeproduct, as computed by the investor’s internalmodel, may be offset against the stock index.

banking or other financial operationsabroad:

(1) Commercial and other bankingactivities;

(2) Financing, including commercialfinancing, consumer financing,mortgage banking, and factoring;

(3) Leasing real or personal property,or acting as agent, broker, or advisor inleasing real or personal propertyconsistent with the provisions ofRegulation Y (12 CFR part 225);

(4) Acting as fiduciary;(5) Underwriting credit life insurance

and credit accident and healthinsurance;

(6) Performing services for otherdirect or indirect operations of a U.S.banking organization, includingrepresentative functions, sale of long-term debt, name-saving, holding assetsacquired to prevent loss on a debtpreviously contracted in good faith, andother activities that are permissibledomestically for a bank holdingcompany under sections 4(a)(2)(A) and4(c)(1)(C) of the BHC Act (12 U.S.C.1843(a)(2)(A), (c)(1)(C));

(7) Holding the premises of a branchof an Edge or agreement corporation ormember bank or the premises of a director indirect subsidiary, or holding orleasing the residence of an officer oremployee of a branch or subsidiary;

(8) Providing investment, financial, oreconomic advisory services;

(9) General insurance agency andbrokerage;

(10) Data processing;(11) Organizing, sponsoring, and

managing a mutual fund, if the fund’sshares are not sold or distributed in theUnited States or to U.S. residents andthe fund does not exercise managerialcontrol over the firms in which itinvests;

(12) Performing managementconsulting services, if such services,when rendered with respect to the U.S.market, shall be restricted to the initialentry;

(13) Underwriting, distributing, anddealing in debt securities outside theUnited States;

(14) Underwriting and distributingequity securities outside the UnitedStates as follows:

(i) Limits for well-capitalized andwell-managed investor—(A) General.After providing 30 days’ prior writtennotice to the Board, an investor that iswell capitalized and well managed mayunderwrite equity securities, providedthat commitments by an investor and itssubsidiaries for the shares of a singleorganization do not, in the aggregate,exceed:

(1) 15 percent of the bank holdingcompany’s tier 1 capital, where theinvestor is a bank holding company;

(2) 3 percent of the investor’s tier 1capital, where the investor is a memberbank; or

(3) The lesser of 3 percent of anyparent insured bank’s tier 1 capital or 15percent of the investor’s tier 1 capital,for any other investor;

(B) Qualifying criteria. An investorwill be considered well-capitalized andwell-managed for purposes of paragraph(a)(14)(i) of this section only if each ofthe bank holding company, memberbank, and Edge or agreementcorporation qualify as well-capitalizedand well-managed.

(ii) Limits for investor that is not wellcapitalized and well managed. Afterproviding 30 days’ prior written noticeto the Board, an investor that is not wellcapitalized and well managed mayunderwrite equity securities, providedthat commitments by the investor andits subsidiaries for the shares of anorganization do not, in the aggregate,exceed $60 million; and

(iii) Application of limits. Forpurposes of determining compliancewith the limitations of this paragraph(a)(14), the investor may subtractportions of an underwriting that arecovered by binding commitmentsobtained by the investor or its affiliatesfrom sub-underwriters or otherpurchasers;

(15) Dealing in equity securitiesoutside the United States as follows:

(i) Grandfathered authority. By aninvestor, or an affiliate, that hadcommenced such activities prior toMarch 27, 1991, and subject to thelimitations in effect at that time (See 12CFR part 211, revised January 1, 1991);or

(ii) Limit on shares of a single issuer.After providing 30 days’ prior writtennotice to the Board, an investor maydeal in the shares of an organizationwhere the shares held in the trading ordealing accounts of an investor and itsaffiliates under authority of thisparagraph (a)(15) do not in the aggregateexceed 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 bythe investor and its affiliates underauthority of this paragraph (a)(15) and§ 211.8(c)(3) of this part in organizationsengaged in activities that are notpermissible for joint ventures do notexceed:

(A) 25 percent of the bank holdingcompany’s tier 1 capital, where theinvestor is a bank holding company;

(B) 20 percent of the investor’s tier 1capital, where the investor is a memberbank; 6 and

(C) The lesser of 20 percent of anyparent insured bank’s tier 1 capital or100 percent of the investor’s tier 1capital, for any other investor;

(iv) Determining compliance withlimits—(A) General. For purposes ofdetermining compliance with all limitsset out in this paragraph (a)(15):

(1) Long and short positions in thesame security may be netted; and

(2) Except as provided in paragraph(a)(15)(iv)(B)(4) of this section, equitysecurities held in order to hedge bankpermissible equity derivatives contractsshall not be included.

(B) Use of internal hedging models.After providing 30 days’ prior writtennotice to the Board the investor may usean internal hedging model that:

(1) Nets long and short positions inthe same security and offsets positionsin a security by futures, forwards,options, and other similar instrumentsreferenced to the same security, forpurposes of determining compliancewith the single issuer limits ofparagraph (a)(15)(ii) of this section;7 and

(2) Offsets its long positions in equitysecurities by futures, forwards, options,and similar instruments, on a portfoliobasis, and for purposes of determiningcompliance with the aggregate equitylimits of paragraph (a)(15)(iii) of thissection.

(3) With respect to all equitysecurities held under authority ofparagraph (a)(15) of this section, no netlong position in a security shall bedeemed to have been reduced by morethan 75 percent through use of internalhedging models under this paragraph(a)(15)(iv)(B); and

(4) With respect to equity securitiesacquired to hedge bank permissibleequity derivatives contracts underauthority of paragraph (a)(1) of thissection, any residual position thatremains in the securities of a singleissuer after netting and offsetting ofpositions relating to the security underthe investor’s internal hedging modelsshall be included in calculatingcompliance with the limits of thisparagraph (a)(15)(ii) and (iii).

(C) Underwriting commitments. Anyshares acquired pursuant to anunderwriting commitment that are heldfor longer than 90 days after thepayment date for such underwritingshall be subject to the limits set out in



8 In the case of a foreign government, theseincludes loans and extensions of credit to theforeign government’s departments or agenciesderiving their current funds principally fromgeneral tax revenues. In the case of a partnershipor firm, these include loans and extensions of creditto its members and, in the case of a corporation,these include loans and extensions of credit to thecorporation’s affiliates, where the affiliate incursthe liability for the benefit of the corporation.

9 For purposes of this pargraph (b), subsidiariesincludes subsidiaries controlled by the Edgecorporation, but does not include companiesotherwise controlled by affiliates of the Edgecorporation.

paragraph (a)(15) of this section and theinvestment provisions of §§ 211.8 and211.9 of this part.

(v) Authority to deal in shares of U.S.organization. The authority to deal inshares under paragraph (a)(15) of thissection includes the authority to deal inthe shares of a U.S. organization:

(A) With respect to foreign personsonly; and

(B) Subject to the limitations onowning or controlling shares of acompany in section 4(c)(6) of the BHCAct (12 U.S.C. 1843(c)(6)) andRegulation Y (12 CFR part 225).

(vi) Report to senior management.Any shares held in trading or dealingaccounts for longer than 90 days shallbe reported to the senior management ofthe investor;

(16) Operating a travel agency, butonly in connection with financialservices offered abroad by the investoror others;

(17) Underwriting life, annuity,pension fund-related, and other types ofinsurance, where the associated riskshave been previously determined by theBoard to be actuarially predictable;provided that:

(i) Investments in, and loans andextensions of credit (other than loansand extensions of credit fully secured inaccordance with the requirements ofsection 23A of the FRA (12 U.S.C. 371c),or with such other standards as theBoard may require) to, the company bythe investor or its affiliates are deductedfrom the capital of the investor (with 50percent of such capital deduction to betaken from tier 1 capital); and

(ii) Activities conducted directly orindirectly by a subsidiary of a U.S.insured bank are excluded from theauthority of this paragraph (a)(17),unless authorized by the Board;

(18) Providing futures commissionmerchant services (including clearingwithout executing and executingwithout clearing) for nonaffiliatedpersons with respect to futures andoptions on futures contracts forfinancial and nonfinancial commodities;provided that prior notice under§ 211.9(f) of this part shall be providedto the Board before any subsidiaries ofa member bank operating pursuant tothis subpart may join a mutual exchangeor clearinghouse, unless the potentialliability of the investor to the exchange,clearinghouse, or other members of theexchange, as the case may be, is legallylimited by the rules of the exchange orclearinghouse to an amount that doesnot exceed applicable general consentlimits under § 211.9 of this part;

(19) Acting as principal or agent incommodity-swap transactions inrelation to:

(i) Swaps on a cash-settled basis forany commodity, provided that theinvestor’s portfolio of swaps contracts ishedged in a manner consistent with safeand sound banking practices; and

(ii) Contracts that require physicaldelivery of a commodity, provided that:

(A) Such contracts are entered intosolely for the purpose of hedging theinvestor’s positions in the underlyingcommodity or derivative contracts basedon the commodity;

(B) The contract allows forassignment, termination or offset priorto expiration; and

(C) Reasonable efforts are made toavoid delivery.

(b) Regulation Y activities. Aninvestor may engage in activities thatthe Board has determined in § 225.28(b)of Regulation Y (12 CFR 225.28(b)) areclosely related to banking under section4(c)(8) of the BHC Act (12 U.S.C.1843(c)(8)).

(c) Specific approval. With theBoard’s specific approval, an investormay engage in other activities that theBoard determines are usual inconnection with the transaction of thebusiness of banking or other financialoperations abroad and are consistentwith the FRA or the BHC Act.

§ 211.11 Advisory opinions underRegulation K.

(a) Request for advisory opinion. Anyperson may submit a request to theBoard for an advisory opinion regardingthe scope of activities permissible underany subpart of this part.

(b) Form and content of the request.Any request for an advisory opinionunder this section shall be:

(1) Submitted in writing to the Board;(2) Contain a clear description of the

proposed parameters of the activity, orthe service or product, at issue; and

(3) Contain a concise explanation ofthe grounds on which the submittercontends the activity is or should beconsidered by the Board to bepermissible under this part.

(c) Response to request. In response toa request received under this section,the Board shall:

(1) Direct the submitter to providesuch additional information as theBoard may deem necessary to completethe record for a full consideration of theissue presented; and

(2) Provide an advisory opinionwithin 45 days after the record on therequest has been determined to becomplete.

§ 211.12 Lending limits and capitalrequirements.

(a) Acceptances of Edge corporations.(1) Limitations. An Edge corporation

shall be and remain fully secured foracceptances of the types described insection 13(7) of the FRA (12 U.S.C. 372),as follows:

(i) All acceptances outstanding inexcess of 200 percent of its tier 1 capital;and

(ii) All acceptances outstanding forany one person in excess of 10 percentof its tier 1 capital.

(2) Exceptions. These limitations donot apply if the excess represents theinternational shipment of goods, and theEdge corporation is:

(i) Fully covered by primaryobligations to reimburse it that areguaranteed by banks or bankers; or

(ii) Covered by participationagreements from other banks, asdescribed in 12 CFR 250.165.

(b) Loans and extensions of credit toone person—(1) Loans and extensions ofcredit defined. Loans and extensions ofcredit has the meaning set forth in§ 211.2(q) of this part 8 and, for purposesof this paragraph (b), also include:

(i) Acceptances outstanding that arenot of the types described in section13(7) of the FRA (12 U.S.C. 372);

(ii) Any liability of the lender toadvance funds to or on behalf of aperson pursuant to a guarantee, standbyletter of credit, or similar agreements;

(iii) Investments in the securities ofanother organization other than asubsidiary; and

(iv) Any underwriting commitmentsto an issuer of securities, where nobinding commitments have beensecured from subunderwriters or otherpurchasers.

(2) Limitations. Except as the Boardmay otherwise specify:

(i) The total loans and extensions ofcredit outstanding to any person by anEdge corporation engaged in banking,and its direct or indirect subsidiaries,may not exceed 15 percent of the Edgecorporation’s tier 1 capital;9 and

(ii) The total loans and extensions ofcredit to any person by a foreign bankor Edge corporation subsidiary of amember bank, and by majority-ownedsubsidiaries of a foreign bank or Edgecorporation, when combined with the



total loans and extensions of credit tothe same person by the member bankand its majority-owned subsidiaries,may not exceed the member bank’slimitation on loans and extensions ofcredit to one person.

(3) Exceptions. The limitations ofparagraph (b)(2) of this section do notapply to:

(i) Deposits with banks and federalfunds sold;

(ii) Bills or drafts drawn in good faithagainst actual goods and on which twoor more unrelated parties are liable;

(iii) Any banker’s acceptance, of thekind described in section 13(7) of theFRA (12 U.S.C. 372), that is issued andoutstanding;

(iv) Obligations to the extent securedby cash collateral or by bonds, notes,certificates of indebtedness, or Treasurybills of the United States;

(v) Loans and extensions of credit thatare covered by bona fide participationagreements; and

(vi) Obligations to the extentsupported by the full faith and credit ofthe following:

(A) The United States or any of itsdepartments, agencies, establishments,or wholly owned corporations(including obligations, to the extentinsured against foreign political andcredit risks by the Export-Import Bankof the United States or the ForeignCredit Insurance Association), theInternational Bank for Reconstructionand Development, the InternationalFinance Corporation, the InternationalDevelopment Association, the Inter-American Development Bank, theAfrican Development Bank, the AsianDevelopment Bank, or the EuropeanBank for Reconstruction andDevelopment;

(B) Any organization, if at least 25percent of such an obligation or of thetotal credit is also supported by the fullfaith and credit of, or participated in by,any institution designated in paragraph(b)(3)(vi)(A) of this section in suchmanner that default to the lender wouldnecessarily include default to thatentity. The total loans and extensions ofcredit under this paragraph (b)(3)(vi)(B)to any person shall at no time exceed100 percent of the tier 1 capital of theEdge corporation.

(c) Capitalization. (1) An Edgecorporation shall at all times becapitalized in an amount that isadequate in relation to the scope andcharacter of its activities.

(2) In the case of an Edge corporationengaged in banking, the minimum ratioof qualifying total capital to risk-weighted assets, as determined underthe Capital Adequacy Guidelines, shallnot be less than 10 percent, of which at

least 50 percent shall consist of tier 1capital.

(3) For purposes of this paragraph (c),no limitation shall apply on theinclusion of subordinated debt thatqualifies as tier 2 capital under theCapital Adequacy Guidelines.

§ 211.13 Supervision and reporting.

(a) Supervision. (1) Foreign branchesand subsidiaries. U.S. bankingorganizations conducting internationaloperations under this subpart shallsupervise and administer their foreignbranches and subsidiaries in such amanner as to ensure that theiroperations conform to high standards ofbanking and financial prudence.

(i) Effective systems of records,controls, and reports shall bemaintained to keep managementinformed of their activities andcondition.

(ii) Such systems shall provide, inparticular, information on risk assets,exposure to market risk, liquiditymanagement, operations, internalcontrols, legal and operational risk, andconformance to management policies.

(iii) Reports on risk assets shall besufficient to permit an appraisal ofcredit quality and assessment ofexposure to loss, and, for this purpose,provide full information on thecondition of material borrowers.

(iv) Reports on operations andcontrols shall include internal andexternal audits of the branch orsubsidiary.

(2) Joint ventures. Investors shallmaintain sufficient information withrespect to joint ventures to keepinformed of their activities andcondition.

(i) Such information shall includeaudits and other reports on financialperformance, risk exposure,management policies, operations, andcontrols.

(ii) Complete information shall bemaintained on all transactions with thejoint venture by the investor and itsaffiliates.

(3) Availability of reports andinformation to examiners. The reportsspecified in paragraphs (a)(1) and (2) ofthis section and any other informationdeemed necessary to determinecompliance with U.S. banking law shallbe made available to examiners of theappropriate bank supervisory agencies.

(b) Examinations. Examinersappointed by the Board shall examineeach Edge corporation once a year. AnEdge or agreement corporation shallmake available to examinersinformation sufficient to assess itscondition and operations and the

condition and activities of anyorganization whose shares it holds.

(c) Reports—(1) Reports of condition.Each Edge or agreement corporationshall make reports of condition to theBoard at such times and in such form asthe Board may prescribe. The Boardmay require that statements of conditionor other reports be published or madeavailable for public inspection.

(2) Foreign operations. Edge andagreement corporations, member banks,and bank holding companies shall filesuch reports on their foreign operationsas the Board may require.

(3) Acquisition or disposition ofshares. Member banks, Edge andagreement corporations, and bankholding companies shall report, in amanner prescribed by the Board, anyacquisition or disposition of shares.

(d) Filing and processingprocedures—(1) Place of filing. Unlessotherwise directed by the Board,applications, notices, and reportsrequired by this part shall be filed withthe Federal Reserve Bank of the Districtin which the parent bank or bankholding company is located or, if none,the Reserve Bank of the District inwhich the applying or reportinginstitution is located. Instructions andforms for applications, notices, andreports are available from the ReserveBanks.

(2) Timing. The Board shall act on anapplication under this subpart within 60calendar days after the Reserve Bank hasreceived the application, unless theBoard notifies the investor that the 60-day period is being extended and statesthe reasons for the extension.

Subpart B—Foreign BankingOrganizations

§ 211.20 Authority, purpose, and scope.

(a) Authority. This subpart is issuedby the Board of Governors of the FederalReserve System (Board) under theauthority of the Bank Holding CompanyAct of 1956 (BHC Act) (12 U.S.C. 1841et seq.) and the International BankingAct of 1978 (IBA) (12 U.S.C. 3101 etseq.).

(b) Purpose and scope. This subpart isin furtherance of the purposes of theBHC Act and the IBA. It applies toforeign banks and foreign bankingorganizations with respect to:

(1) The limitations on interstatebanking under section 5 of the IBA (12U.S.C. 3103);

(2) The exemptions from thenonbanking prohibitions of the BHC Actand the IBA afforded by sections 2(h)and 4(c)(9) of the BHC Act (12 U.S.C.1841(h), 1843(c)(9));



(3) Board approval of theestablishment of an office of a foreignbank in the United States under sections7(d) and 10(a) of the IBA (12 U.S.C.3105(d), 3107(a));

(4) The termination by the Board of aforeign bank’s representative office,state branch, state agency, orcommercial lending companysubsidiary under sections 7(e) and 10(b)of the IBA (12 U.S.C. 3105(e), 3107(b)),and the transmission of arecommendation to the Comptroller toterminate a federal branch or federalagency under section 7(e)(5) of the IBA(12 U.S.C. 3105(e)(5));

(5) The examination of an office oraffiliate of a foreign bank in the UnitedStates as provided in sections 7(c) and10(c) of the IBA (12 U.S.C. 3105(c),3107(c));

(6) The disclosure of supervisoryinformation to a foreign supervisorunder section 15 of the IBA (12 U.S.C.3109);

(7) The limitations on loans to oneborrower by state branches and stateagencies of a foreign bank under section7(h)(2) of the IBA (12 U.S.C. 3105(h)(2));

(8) The limitation of a state branchand a state agency to conducting onlyactivities that are permissible for afederal branch under section (7)(h)(1) ofthe IBA (12 U.S.C. 3105(h)(1)); and

(9) The deposit insurance requirementfor retail deposit taking by a foreignbank under section 6 of the IBA (12U.S.C. 3104).

(10) The management of shellbranches (12 U.S.C. 3105(k)).

(c) Additional requirements.Compliance by a foreign bank with therequirements of this subpart and thelaws administered and enforced by theBoard does not relieve the foreign bankof responsibility to comply with thelaws and regulations administered bythe licensing authority.

§ 211.21 Definitions.The definitions contained in §§ 211.1

and 211.2 apply to this subpart, exceptas a term is otherwise defined in thissection:

(a) Affiliate of a foreign bank or of aparent of a foreign bank means anycompany that controls, is controlled by,or is under common control with, theforeign bank or the parent of the foreignbank.

(b) Agency means any place ofbusiness of a foreign bank, located inany state, at which credit balances aremaintained, checks are paid, money islent, or, to the extent not prohibited bystate or federal law, deposits areaccepted from a person or entity that isnot a citizen or resident of the UnitedStates. Obligations shall not be

considered credit balances unless theyare:

(1) Incidental to, or arise out of theexercise of, other lawful bankingpowers;

(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 assalaries, rent, or taxes;

(5) Withdrawn within a reasonableperiod of time after the specific purposefor which they were placed has beenaccomplished; and

(6) Drawn upon in a mannerreasonable in relation to the size andnature of the account.

(c)(1) Appropriate Federal ReserveBank means, unless the Boarddesignates a different Federal ReserveBank:

(i) For a foreign banking organization,the Reserve Bank assigned to the foreignbanking organization in § 225.3(b)(2) ofRegulation Y (12 CFR 225.3(b)(2));

(ii) For a foreign bank that is not aforeign banking organization andproposes to establish an office, an Edgecorporation, or an agreementcorporation, the Reserve Bank of theFederal Reserve District in which theforeign bank proposes to establish suchoffice or corporation; and

(iii) In all other cases, the ReserveBank designated by the Board.

(2) The appropriate Federal ReserveBank need not be the Reserve Bank ofthe Federal Reserve District in whichthe foreign bank’s home state is located.

(d) Banking subsidiary, with respectto a specified foreign bank, means abank that is a subsidiary as the termsbank and subsidiary are defined insection 2 of the BHC Act (12 U.S.C.1841).

(e) Branch means any place ofbusiness of a foreign bank, located inany state, at which deposits arereceived, and that is not an agency, asthat term is defined in paragraph (b) ofthis section.

(f) Change the status of an officemeans to convert a representative officeinto a branch or agency, or an agency orlimited branch into a branch, but doesnot include renewal of the license of anexisting office.

(g) Commercial lending companymeans any organization, other than abank or an organization operating undersection 25 of the Federal Reserve Act(FRA) (12 U.S.C. 601–604a), organizedunder the laws of any state, thatmaintains credit balances permissiblefor an agency, and engages in thebusiness of making commercial loans.Commercial lending company includesany company chartered under article XII

of the banking law of the State of NewYork.

(h) Comptroller means the Office ofthe Comptroller of the Currency.

(i) Control has the same meaning as insection 2(a) of the BHC Act (12 U.S.C.1841(a)), and the terms controlled andcontrolling shall be construedconsistently with the term control.

(j) Domestic branch means any placeof business of a foreign bank, located inany state, that may accept domesticdeposits and deposits that are incidentalto or for the purpose of carrying outtransactions in foreign countries.

(k) A foreign bank engages directly inthe business of banking outside theUnited States if the foreign bank engagesdirectly in banking activities usual inconnection with the business of bankingin the countries where it is organized oroperating.

(l) To establish means:(1) To open and conduct business

through an office;(2) To acquire directly, through

merger, consolidation, or similartransaction with another foreign bank,the operations of an office that is openand conducting business;

(3) To acquire an office through theacquisition of a foreign bank subsidiarythat will cease to operate in the samecorporate form following theacquisition;

(4) To change the status of an office;or

(5) To relocate an office from one stateto another.

(m) Federal agency, federal branch,state agency, and state branch have thesame meanings as in section 1 of theIBA (12 U.S.C. 3101).

(n) Foreign bank means anorganization that is organized under thelaws of a foreign country and thatengages directly in the business ofbanking outside the United States. Theterm foreign bank does not include acentral bank of a foreign country thatdoes not engage or seek to engage in acommercial banking business in theUnited States through an office.

(o) Foreign banking organizationmeans:

(1) A foreign bank, as defined insection 1(b)(7) of the IBA (12 U.S.C.3101(7)), that:

(i) Operates a branch, agency, orcommercial lending companysubsidiary in the United States;

(ii) Controls a bank in the UnitedStates; or

(iii) Controls an Edge corporationacquired after March 5, 1987; and

(2) Any company of which the foreignbank is a subsidiary.

(p) Home country, with respect to aforeign bank, means the country in



10 None of the assets, revenues, or net income,whether held or derived directly or indirectly, of asubsidiary bank, branch, agency, commerciallending company, or other company engaged in thebusiness of banking in the United States (includingany territory of the United States, Puerto Rico,Guam, American Samoa, or the Virgin Islands) shallbe considered held or derived from the business ofbanking ‘‘outside the United States’’.

which the foreign bank is chartered orincorporated.

(q) Home country supervisor, withrespect to a foreign bank, means thegovernmental entity or entities in theforeign bank’s home country withresponsibility for the supervision andregulation of the foreign bank.

(r) Licensing authority means:(1) The relevant state supervisor, with

respect to an application to establish astate branch, state agency, commerciallending company, or representativeoffice of a foreign bank; or

(2) The Comptroller, with respect toan application to establish a federalbranch or federal agency.

(s) Limited branch means a branch ofa foreign bank that receives only suchdeposits as would be permitted for acorporation organized under section25A of the Federal Reserve Act (12U.S.C. 611–631).

(t) Office or office of a foreign bankmeans any branch, agency,representative office, or commerciallending company subsidiary of a foreignbank in the United States.

(u) A parent of a foreign bank meansa company of which the foreign bank isa subsidiary. An immediate parent of aforeign bank is a company of which theforeign bank is a direct subsidiary. Anultimate parent of a foreign bank is aparent of the foreign bank that is not thesubsidiary of any other company.

(v) Regional administrative officemeans a representative office that:

(1) Is established by a foreign bankthat operates two or more branches,agencies, commercial lendingcompanies, or banks in the UnitedStates;

(2) Is located in the same city as oneor more of the foreign bank’s branches,agencies, commercial lendingcompanies, or banks in the UnitedStates;

(3) Manages, supervises, orcoordinates the operations of the foreignbank or its affiliates, if any, in aparticular geographic area that includesthe United States or a region thereof,including by exercising credit approvalauthority in that area pursuant towritten standards, credit policies, andprocedures established by the foreignbank; and

(4) Does not solicit business fromactual or potential customers of theforeign bank or its affiliates.

(w) Relevant state supervisor meansthe state entity that is authorized tosupervise and regulate a state branch,state agency, commercial lendingcompany, or representative office.

(x) Representative office means anyoffice of a foreign bank which is locatedin any state and is not a Federal branch,

Federal agency, State branch, Stateagency, or commercial lending companysubsidiary.

(y) State means any state of theUnited States or the District ofColumbia.

(z) Subsidiary means any organizationthat:

(1) Has 25 percent or more of itsvoting shares directly or indirectlyowned, controlled, or held with thepower to vote by a company, includinga foreign bank or foreign bankingorganization; or

(2) Is otherwise controlled, or capableof being controlled, by a foreign bank orforeign banking organization.

§ 211.22 Interstate banking operations offoreign banking organizations.

(a) Determination of home state. (1) Aforeign bank that, as of December 10,1997, had declared a home state or hada home state determined pursuant to thelaw and regulations in effect prior tothat date shall have that state as itshome state.

(2) A foreign bank that has anybranches, agencies, commercial lendingcompany subsidiaries, or subsidiarybanks in one state, and has no suchoffices or subsidiaries in any otherstates, shall have as its home state thestate in which such offices orsubsidiaries are located.

(b) Change of home state—(1) Priornotice. A foreign bank may change itshome state once, if it files 30 days’ priornotice of the proposed change with theBoard.

(2) Application to change home state.(i) A foreign bank, in addition tochanging its home state by filing priornotice under paragraph (b)(1) of thissection, may apply to the Board tochange its home state, upon showingthat a national bank or state-charteredbank with the same home state as theforeign bank would be permitted tochange its home state to the new homestate proposed by the foreign bank.

(ii) A foreign bank may apply to theBoard for such permission one or moretimes.

(iii) In determining whether to grantthe request of a foreign bank to changeits home state, the Board shall considerwhether the proposed change isconsistent with competitive equitybetween foreign and domestic banks.

(3) Effect of change in home state. Thehome state of a foreign bank and anychange in its home state by a foreignbank shall not affect which FederalReserve Bank or Reserve Bankssupervise the operations of the foreignbank, and shall not affect the obligationof the foreign bank to file required

reports and applications with theappropriate Federal Reserve Bank.

(4) Conforming branches to new homestate. Upon any change in home state bya foreign bank under paragraph (b)(1) or(b)(2) of this section, the domesticbranches of the foreign bank establishedin reliance on any previous home stateof the foreign bank shall be conformedto those which a foreign bank with thenew home state could permissiblyestablish or operate as of the date ofsuch change.

(c) Prohibition against interstatedeposit production offices. A coveredinterstate branch of a foreign bank maynot be used as a deposit productionoffice in accordance with the provisionsin § 208.7 of Regulation H (12 CFR208.7).

§ 211.23 Nonbanking activities of foreignbanking organizations.

(a) Qualifying foreign bankingorganizations. Unless specifically madeeligible for the exemptions by the Board,a foreign banking organization shallqualify for the exemptions afforded bythis section only if, disregarding itsUnited States banking, more than half ofits worldwide business is banking; andmore than half of its banking businessis outside the United States.10 In orderto qualify, a foreign bankingorganization shall:

(1) Meet at least two of the followingrequirements:

(i) Banking assets held outside theUnited States exceed total worldwidenonbanking assets;

(ii) Revenues derived from thebusiness of banking outside the UnitedStates exceed total revenues derivedfrom its worldwide nonbankingbusiness; or

(iii) Net income derived from thebusiness of banking outside the UnitedStates exceeds total net income derivedfrom its worldwide nonbankingbusiness; and

(2) Meet at least two of the followingrequirements:

(i) Banking assets held outside theUnited States exceed banking assetsheld in the United States;

(ii) Revenues derived from thebusiness of banking outside the UnitedStates exceed revenues derived from thebusiness of banking in the UnitedStates; or



(iii) Net income derived from thebusiness of banking outside the UnitedStates exceeds net income derived fromthe business of banking in the UnitedStates.

(b) Determining assets, revenues, andnet income. (1)(i) For purposes ofparagraph (a) of this section, the totalassets, revenues, and net income of anorganization may be determined on aconsolidated or combined basis.

(ii) The foreign banking organizationshall include assets, revenues, and netincome of companies in which it owns50 percent or more of the voting shareswhen determining total assets, revenues,and net income.

(iii) The foreign banking organizationmay include assets, revenues, and netincome of companies in which it owns25 percent or more of the voting shares,if all such companies within theorganization are included.

(2) Assets devoted to, or revenues ornet income derived from, activitieslisted in § 211.10(a) shall be consideredbanking assets, or revenues or netincome derived from the bankingbusiness, when conducted within theforeign banking organization by aforeign bank or its subsidiaries.

(c) Limited exemptions available toforeign banking organizations in certaincircumstances. The following shallapply where a foreign bank meets therequirements of paragraph (a) of thissection but its ultimate parent does not:

(1) Such foreign bank shall be entitledto the exemptions available to aqualifying foreign banking organizationif its ultimate parent meets therequirements set forth in paragraph(a)(2) of this section and could meet therequirements in paragraph (a)(1) of thissection but for the requirement inparagraph (b)(2) of this section thatactivities must be conducted by theforeign bank or its subsidiaries in orderto be considered derived from thebanking business;

(2) An ultimate parent as described inparagraph (c)(1) of this section shall beeligible for the exemptions available toa qualifying foreign bankingorganization except for those providedin § 211.23(f)(5)(iii).

(d) Loss of eligibility for exemptions—(1) Failure to meet qualifying test. Aforeign banking organization thatqualified under paragraph (a) or (c) ofthis section shall cease to be eligible forthe exemptions of this section if it failsto meet the requirements of paragraphs(a) or (c) of this section for twoconsecutive years, as reflected in itsannual reports (FR Y–7) filed with theBoard.

(2) Continuing activities andinvestments. (i) A foreign banking

organization that ceases to be eligible forthe exemptions of this section maycontinue to engage in activities or retaininvestments commenced or acquiredprior to the end of the first fiscal yearfor which its annual report reflectsnonconformance with paragraph (a) or(c) of this section.

(ii) Termination or divestiture.Activities commenced or investmentsmade after that date shall be terminatedor divested within three months of thefiling of the second annual report, or atsuch time as the Board may determineupon request by the foreign bankingorganization to extend the period,unless the Board grants consent tocontinue the activity or retain theinvestment under paragraph (e) of thissection.

(3) Request for specific determinationof eligibility. (i) A foreign bankingorganization that ceases to qualify underparagraph (a) or (c) of this section, or anaffiliate of such foreign bankingorganization, that requests a specificdetermination of eligibility underparagraph (e) of this section may, priorto the Board’s determination oneligibility, continue to engage inactivities and make investments underthe provisions of paragraphs (f)(1), (2),(3), and (4) of this section.

(ii) The Board may grant consent forthe foreign banking organization or itsaffiliate to make investments underparagraph (f)(5) of this section.

(e) Specific determination of eligibilityfor organizations that do not qualify forthe exemptions—(1) Application. (i) Aforeign organization that is not a foreignbanking organization or a foreignbanking organization that does notqualify under paragraph (a) or (c) of thissection for some or all of the exemptionsafforded by this section, or that has lostits eligibility for the exemptions underparagraph (d) of this section, may applyto the Board for a specific determinationof eligibility for some or all of theexemptions.

(ii) A foreign banking organizationmay apply for a specific determinationprior to the time it ceases to be eligiblefor the exemptions afforded by thissection.

(2) Factors considered by Board. Indetermining whether eligibility for theexemptions would be consistent withthe purposes of the BHC Act and in thepublic interest, the Board shall consider:

(i) The history and the financial andmanagerial resources of the foreignorganization or foreign bankingorganization;

(ii) The amount of its business in theUnited States;

(iii) The amount, type, and location ofits nonbanking activities, including

whether such activities may beconducted by U.S. banks or bankholding companies;

(iv) Whether eligibility of the foreignorganization or foreign bankingorganization would result in undueconcentration of resources, decreased orunfair competition, conflicts ofinterests, or unsound banking practices;and

(v) The extent to which the foreignbanking organization is subject tocomprehensive supervision orregulation on a consolidated basis or theforeign organization is subject tooversight by regulatory authorities in itshome country.

(3) Conditions and limitations. TheBoard may impose any conditions andlimitations on a determination ofeligibility, including requirements tocease activities or dispose ofinvestments.

(4) Eligibility not granted.Determinations of eligibility generallywould not be granted where a majorityof the business of the foreignorganization or foreign bankingorganization derives from commercial orindustrial activities.

(f) Permissible activities andinvestments. A foreign bankingorganization that qualifies underparagraph (a) of this section may:

(1) Engage in activities of any kindoutside the United States;

(2) Engage directly in activities in theUnited States that are incidental to itsactivities outside the United States;

(3) Own or control voting shares ofany company that is not engaged,directly or indirectly, in any activities inthe United States, other than those thatare incidental to the international orforeign business of such company;

(4) Own or control voting shares ofany company in a fiduciary capacityunder circumstances that would entitlesuch shareholding to an exemptionunder section 4(c)(4) of the BHC Act (12U.S.C. 1843(c)(4)) if the shares wereheld or acquired by a bank;

(5) Own or control voting shares of aforeign company that is engaged directlyor indirectly in business in the UnitedStates other than that which isincidental to its international or foreignbusiness, subject to the followinglimitations:

(i) More than 50 percent of the foreigncompany’s consolidated assets shall belocated, and consolidated revenuesderived from, outside the United States;provided that, if the foreign companyfails to meet the requirements of thisparagraph (f)(5)(i) for two consecutiveyears (as reflected in annual reports (FRY–7) filed with the Board by the foreignbanking organization), the foreign



company shall be divested or itsactivities terminated within one year ofthe filing of the second consecutiveannual report that reflectsnonconformance with the requirementsof this paragraph (f)(5)(i), unless theBoard grants consent to retain theinvestment under paragraph (g) of thissection;

(ii) The foreign company shall notdirectly underwrite, sell, or distribute,nor own or control more than 10 percentof the voting shares of a company thatunderwrites, sells, or distributessecurities in the United States, except tothe extent permitted bank holdingcompanies;

(iii) If the foreign company is asubsidiary of the foreign bankingorganization, the foreign company mustbe, or must control, an operatingcompany, and its direct or indirectactivities in the United States shall besubject to the following limitations:

(A) The foreign company’s activitiesin the United States shall be the samekind of activities, or related to theactivities, engaged in directly orindirectly by the foreign companyabroad, as measured by the‘‘establishment’’ categories of theStandard Industrial Classification (SIC).An activity in the United States shall beconsidered related to an activity outsidethe United States if it consists of supply,distribution, or sales in furtherance ofthe activity;

(B) The foreign company may engagein activities in the United States thatconsist of banking, securities, insurance,or other financial operations, or types ofactivities permitted by regulation ororder under section 4(c)(8) of the BHCAct (12 U.S.C. 1843(c)(8)), only underregulations of the Board or with theprior approval of the Board, subject tothe following;

(1) Activities within Division H(Finance, Insurance, and Real Estate) ofthe SIC shall be considered banking orfinancial operations for this purpose,with the exception of acting as operatorsof nonresidential buildings (SIC 6512),operators of apartment buildings (SIC6513), operators of dwellings other thanapartment buildings (SIC 6514), andoperators of residential mobile homesites (SIC 6515); and operating titleabstract offices (SIC 6541); and

(2) The following activities shall beconsidered financial activities and maybe engaged in only with the approval ofthe Board under paragraph (g) of thissection: credit reporting services (SIC7323); computer and data processingservices (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 rentaland leasing activities (SIC 4741, 7352,7353, 7359, 7513, 7514, 7515, and7519); accounting, auditing, andbookkeeping services (SIC 8721); courierservices (SIC 4215 and 4513); andarrangement of passenger transportation(SIC 4724, 4725, and 4729).

(g) Exemptions under section 4(c)(9)of the BHC Act. A foreign bankingorganization that is of the opinion thatother activities or investments may, inparticular circumstances, meet theconditions for an exemption undersection 4(c)(9) of the BHC Act (12 U.S.C.1843(c)(9)) may apply to the Board forsuch a determination by submitting tothe appropriate Federal Reserve Bank aletter setting forth the basis for thatopinion.

(h) Reports. The foreign bankingorganization shall report in a mannerprescribed by the Board any directactivities in the United States by aforeign subsidiary of the foreign bankingorganization and the acquisition of allshares of companies engaged, directly orindirectly, in activities in the UnitedStates that were acquired under theauthority of this section.

(i) Availability of information. If anyinformation required under this sectionis unknown and not reasonablyavailable to the foreign bankingorganization (either because obtaining itwould involve unreasonable effort orexpense, or because it rests exclusivelywithin the knowledge of a company thatis not controlled by the organization)the organization shall:

(1) Give such information on thesubject as it possesses or can reasonablyacquire, together with the sourcesthereof; and

(2) Include a statement showing thatunreasonable effort or expense would beinvolved, or indicating that thecompany whose shares were acquired isnot controlled by the organization, andstating the result of a request forinformation.

§ 211.24 Approval of offices of foreignbanks; procedures for applications;standards for approval; representativeoffice activities and standards for approval;preservation of existing authority.

(a) Board approval of offices of foreignbanks—(1) Prior Board approval ofbranches, agencies, commercial lendingcompanies, or representative offices offoreign banks. (i) Except as otherwiseprovided in paragraphs (a)(2) and (a)(3)of this section, a foreign bank shallobtain the approval of the Board beforeit:

(A) Establishes a branch, agency,commercial lending company

subsidiary, or representative office inthe United States; or

(B) Acquires ownership or control ofa commercial lending companysubsidiary.

(2) Prior notice for certain offices. (i)After providing 45 days’ prior writtennotice to the Board, a foreign bank mayestablish:

(A) An additional office (other than adomestic branch outside the home stateof the foreign bank established pursuantto section 5(a)(3) of the IBA (12 U.S.C.3103(a)(3))), provided that the Board haspreviously determined the foreign bankto be subject to comprehensivesupervision or regulation on aconsolidated basis by its home countrysupervisor (comprehensive consolidatedsupervision or CCS); or

(B) A representative office, if:(1) The Board has not yet determined

the foreign bank to be subject toconsolidated comprehensivesupervision, but the foreign bank issubject to the BHC Act, either directlyor through section 8(a) of the IBA (12U.S.C. 3106(a)); or

(2) The Board previously hasapproved an application by the foreignbank to establish a branch or agencypursuant to the standard set forth inparagraph (c)(1)(iii) of this section; or

(3) The Board previously hasapproved an application by the foreignbank to establish a representative office.

(ii) The Board may waive the 45-daynotice period if it finds that immediateaction is required by the circumstancespresented. The notice period shallcommence at the time the notice isreceived by the appropriate FederalReserve Bank. The Board may suspendthe period or require Board approvalprior to the establishment of such officeif the notification raises significantpolicy or supervisory concerns.

(3) General consent for certainrepresentative offices. (i) The Boardgrants its general consent for a foreignbank that is subject to the BHC Act,either directly or through section 8(a) ofthe IBA (12 U.S.C. 3106(a)), to establish:

(A) A representative office, but only ifthe Board has previously determinedthat the foreign bank proposing toestablish a representative office issubject to consolidated comprehensivesupervision;

(B) A regional administrative office; or(C) An office that solely engages in

limited administrative functions (suchas separately maintaining back-officesupport systems) that:

(1) Are clearly defined;(2) Are performed in connection with

the U.S. banking activities of the foreignbank; and



(3) Do not involve contact or liaisonwith customers or potential customers,beyond incidental contact with existingcustomers relating to administrativematters (such as verification orcorrection of account information).

(4) Suspension of general consent orprior notice procedures. The Board may,at any time, upon notice, modify orsuspend the prior notice and generalconsent procedures in paragraphs (a)(2)and (3) of this section for any foreignbank with respect to the establishmentby such foreign bank of any U.S. officeof such foreign bank.

(5) Temporary offices. The Board may,in its discretion, determine that aforeign bank has not established anoffice if the foreign bank temporarilyoperates at one or more additionallocations in the same city of an existingbranch or agency due to renovations, anexpansion of activities, a merger orconsolidation of the operations ofaffiliated foreign banks or companies, orother similar circumstances. The foreignbank must provide reasonable advancenotice of its intent temporarily to utilizeadditional locations, and the Board mayimpose such conditions in connectionwith its determination as it deemsnecessary.

(6) After-the-fact Board approval.Where a foreign bank proposes toestablish an office in the United Statesthrough the acquisition of, or merger orconsolidation with, another foreignbank with an office in the United States,the Board may, in its discretion, allowthe acquisition, merger, or consolidationto proceed before an application toestablish the office has been filed oracted upon under this section if:

(i) The foreign bank or banks resultingfrom the acquisition, merger, orconsolidation, will not directly orindirectly own or control more than 5percent of any class of the votingsecurities of, or control, a U.S. bank;

(ii) The Board is given reasonableadvance notice of the proposedacquisition, merger, or consolidation;and

(iii) Prior to consummation of theacquisition, merger, or consolidation,each foreign bank, as appropriate,commits in writing either:

(A) To comply with the proceduresfor an application under this sectionwithin a reasonable period of time; toengage in no new lines of business, orotherwise to expand its U.S. activitiesuntil the disposition of the application;and to abide by the Board’s decision onthe application, including, if necessary,a decision to terminate the activities ofany such U.S. office, as the Board or theComptroller may require; or

(B) Promptly to wind-down and closeany office, the establishment of whichwould have required an applicationunder this section; and to engage in nonew lines of business or otherwise toexpand its U.S. activities prior to theclosure of such office.

(7) Notice of change in ownership orcontrol or conversion of existing officeor establishment of representative officeunder general-consent authority. Aforeign bank with a U.S. office shallnotify the Board in writing within 10days of the occurrence of any of thefollowing events:

(i) A change in the foreign bank’sownership or control, where the foreignbank is acquired or controlled byanother foreign bank or company andthe acquired foreign bank with a U.S.office continues to operate in the samecorporate form as prior to the change inownership or control;

(ii) The conversion of a branch to anagency or representative office; anagency to a representative office; or abranch or agency from a federal to astate license, or a state to a federallicense; or

(iii) The establishment of arepresentative office under general-consent authority.

(8) Transactions subject to approvalunder Regulation Y. Subpart B ofRegulation Y (12 CFR 225.11–225.17)governs the acquisition by a foreignbanking organization of direct orindirect ownership or control of anyvoting securities of a bank or bankholding company in the United States ifthe acquisition results in the foreignbanking organization’s ownership orcontrol of more than 5 percent of anyclass of voting securities of a U.S. bankor bank holding company, includingthrough acquisition of a foreign bank orforeign banking organization that ownsor controls more than 5 percent of anyclass of the voting securities of a U.S.bank or bank holding company.

(b) Procedures for application—(1)Filing application. An application forthe Board’s approval pursuant to thissection shall be filed in the mannerprescribed by the Board.

(2) Publication requirement—(i)Newspaper notice. Except with respectto a proposed transaction where moreextensive notice is required by statute oras otherwise provided in paragraphs(b)(2)(ii) and (iii) of this section, anapplicant under this section shallpublish a notice in a newspaper ofgeneral circulation in the community inwhich the applicant proposes to engagein business.

(ii) Contents of notice. The newspapernotice shall:

(A) State that an application is beingfiled as of the date of the newspapernotice; and

(B) Provide the name of the applicant,the subject matter of the application, theplace where comments should be sent,and the date by which comments aredue, pursuant to paragraph (b)(3) of thissection.

(iii) Copy of notice with application.The applicant shall furnish with itsapplication to the Board a copy of thenewspaper notice, the date of itspublication, and the name and addressof the newspaper in which it waspublished.

(iv) Exception. The Board may modifythe publication requirement ofparagraphs (b)(2)(i) and (ii) of thissection in appropriate circumstances.

(v) Federal branch or federal agency.In the case of an application to establisha federal branch or federal agency,compliance with the publicationprocedures of the Comptroller shallsatisfy the publication requirement ofthis section. Comments regarding theapplication should be sent to the Boardand the Comptroller.

(3) Written comments. (i) Within 30days after publication, as required inparagraph (b)(2) of this section, anyperson may submit to the Board writtencomments and data on an application.

(ii) The Board may extend the 30-daycomment period if the Board determinesthat additional relevant information islikely to be provided by interestedpersons, or if other extenuatingcircumstances exist.

(4) Board action on application. (i)Time limits. (A) The Board shall act onan application from a foreign bank toestablish a branch, agency, orcommercial lending companysubsidiary within 180 calendar daysafter the receipt of the application.

(B) The Board may extend for anadditional 180 calendar days the periodwithin which to take final action, afterproviding notice of and reasons for theextension to the applicant and thelicensing authority.

(C) The time periods set forth in thisparagraph (b)(4)(i) may be waived by theapplicant.

(ii) Additional information. The Boardmay request any information in additionto that supplied in the application whenthe Board believes that the informationis necessary for its decision, and maydeny an application if it does notreceive the information requested fromthe applicant or its home countrysupervisor in sufficient time to permitadequate evaluation of the informationwithin the time periods set forth inparagraph (b)(4)(i) of this section.



(5) Coordination with other regulators.Upon receipt of an application by aforeign bank under this section, theBoard shall promptly notify, consultwith, and consider the views of thelicensing authority.

(c) Standards for approval of U.S.offices of foreign banks— (1) Mandatorystandards—(i) General. As specified insection 7(d) of the IBA (12 U.S.C.3105(d)), the Board may not approve anapplication to establish a branch or anagency, or to establish or acquireownership or control of a commerciallending company, unless it determinesthat:

(A) Each of the foreign bank and anyparent foreign bank engages directly inthe business of banking outside theUnited States and, except as provided inparagraph (c)(1)(iii) of this section, issubject to comprehensive supervision orregulation on a consolidated basis by itshome country supervisor; and

(B) The foreign bank has furnished tothe Board the information that the Boardrequires in order to assess theapplication adequately.

(ii) Basis for determiningcomprehensive consolidatedsupervision. In determining whether aforeign bank and any parent foreignbank is subject to comprehensiveconsolidated supervision, the Boardshall determine whether the foreignbank is supervised or regulated in sucha manner that its home countrysupervisor receives sufficientinformation on the worldwideoperations of the foreign bank(including the relationships of the bankto any affiliate) to assess the foreignbank’s overall financial condition andcompliance with law and regulation. Inmaking such a determination, the Boardshall assess, among other factors, theextent to which the home countrysupervisor:

(A) Ensures that the foreign bank hasadequate procedures for monitoring andcontrolling its activities worldwide;

(B) Obtains information on thecondition of the foreign bank and itssubsidiaries and offices outside thehome country through regular reports ofexamination, audit reports, orotherwise;

(C) Obtains information on thedealings and relationship between theforeign bank and its affiliates, bothforeign and domestic;

(D) Receives from the foreign bankfinancial reports that are consolidatedon a worldwide basis, or comparableinformation that permits analysis of theforeign bank’s financial condition on aworldwide, consolidated basis;

(E) Evaluates prudential standards,such as capital adequacy and risk assetexposure, on a worldwide basis.

(iii) Determination of comprehensiveconsolidated supervision not required incertain circumstances. (A) If the Boardis unable to find, under paragraph(c)(1)(i) of this section, that a foreignbank is subject to comprehensiveconsolidated supervision, the Boardmay, nevertheless, approve anapplication by the foreign bank if:

(1) The home country supervisor isactively working to establisharrangements for the consolidatedsupervision of such bank; and

(2) All other factors are consistentwith approval.

(B) In deciding whether to use itsdiscretion under this paragraph(c)(1)(iii), the Board also shall considerwhether the foreign bank has adoptedand implemented procedures to combatmoney laundering. The Board also maytake into account whether the homecountry supervisor is developing a legalregime to address money laundering oris participating in multilateral efforts tocombat money laundering. In approvingan application under this paragraph(c)(1)(iii), the Board, after requestingand taking into consideration the viewsof the licensing authority, may imposeany conditions or restrictions relating tothe activities or business operations ofthe proposed branch, agency, orcommercial lending companysubsidiary, including restrictions onsources of funding. The Board shallcoordinate with the licensing authorityin the implementation of suchconditions or restrictions.

(2) Additional standards. In acting onany application under this subpart, theBoard may take into account:

(i) Consent of home countrysupervisor. Whether the home countrysupervisor of the foreign bank hasconsented to the proposedestablishment of the branch, agency, orcommercial lending companysubsidiary;

(ii) Financial resources. The financialresources of the foreign bank (includingthe foreign bank’s capital position,projected capital position, profitability,level of indebtedness, and futureprospects) and the condition of any U.S.office of the foreign bank;

(iii) Managerial resources. Themanagerial resources of the foreignbank, including the competence,experience, and integrity of the officersand directors; the integrity of itsprincipal shareholders; management’sexperience and capacity to engage ininternational banking; and the record ofthe foreign bank and its management ofcomplying with laws and regulations,

and of fulfilling any commitments to,and any conditions imposed by, theBoard in connection with any priorapplication;

(iv) Sharing information withsupervisors. Whether the foreign bank’shome country supervisor and the homecountry supervisor of any parent of theforeign bank share material informationregarding the operations of the foreignbank with other supervisory authorities;

(v) Assurances to Board. (A) Whetherthe foreign bank has provided the Boardwith adequate assurances thatinformation will be made available tothe Board on the operations or activitiesof the foreign bank and any of itsaffiliates that the Board deems necessaryto determine and enforce compliancewith the IBA, the BHC Act, and otherapplicable federal banking statutes.

(B) These assurances shall include astatement from the foreign bankdescribing the laws that would restrictthe foreign bank or any of its parentsfrom providing information to theBoard;

(vi) Measures for prevention of moneylaundering. Whether the foreign bankhas adopted and implementedprocedures to combat moneylaundering, whether there is a legalregime in place in the home country toaddress money laundering, and whetherthe home country is participating inmultilateral efforts to combat moneylaundering;

(vii) Compliance with U.S. law.Whether the foreign bank and its U.S.affiliates are in compliance withapplicable U.S. law, and whether theapplicant has established adequatecontrols and procedures in each of itsoffices to ensure continuing compliancewith U.S. law, including controlsdirected to detection of moneylaundering and other unsafe or unsoundbanking practices; and (viii) The needsof the community and the history ofoperation of the foreign bank and itsrelative size in its home country,provided that the size of the foreignbank is not the sole factor indetermining whether an office of aforeign bank should be approved.

(3) Additional standards for certaininterstate applications. (i) As specifiedin section 5(a)(3) of the IBA (12 U.S.C.3103(a)(3)), the Board may not approvean application by a foreign bank toestablish a branch, other than a limitedbranch, outside the home state of theforeign 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’sfinancial resources, including thecapital level of the bank, are equivalentto those required for a domestic bank to



11 See 12 CFR 250.141(h) for activities thatconstitute preliminary and servicing steps.

be approved for branching under section5155 of the Revised Statutes (12 U.S.C.36) and section 44 of the FederalDeposit Insurance Act (FDIA) (12 U.S.C.1831u);

(B) Consults with the Department ofthe Treasury regarding capitalequivalency;

(C) Applies the standards specified insection 7(d) of the IBA (12 U.S.C.3105(d)) and this paragraph (c); and

(D) Applies the same requirementsand conditions to which an applicationby a domestic bank for an interstatemerger 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) ofthe IBA (12 U.S.C. 3103(a)(7)), the Boardmay not approve an application toestablish a branch through a change instatus of an agency or limited branchoutside the foreign bank’s home stateunless:

(A) The establishment and operationof such branch is permitted by suchstate; and

(B) Such agency or branch has been inoperation in such state for a period oftime that meets the state’s minimum agerequirement permitted under section44(a)(5) of the Federal Deposit InsuranceAct (12 U.S.C. 183u(a)(5)).

(4) Board conditions on approval. TheBoard may impose any conditions on itsapproval as it deems necessary,including a condition which may permitfuture termination by the Board of anyactivities or, in the case of a federalbranch or a federal agency, by theComptroller, based on the inability ofthe foreign bank to provide informationon its activities or those of its affiliatesthat the Board deems necessary todetermine and enforce compliance withU.S. banking laws.

(d) Representative offices—(1)Permissible activities. A representativeoffice may engage in:

(i) Representational andadministrative functions.Representational and administrativefunctions in connection with thebanking activities of the foreign bank,which may include soliciting newbusiness for the foreign bank;conducting research; acting as liaisonbetween the foreign bank’s head officeand customers in the United States;performing preliminary and servicingsteps in connection with lending; 11 orperforming back-office functions; butshall not include contracting for anydeposit or deposit-like liability, lending

money, or engaging in any otherbanking activity for the foreign bank;

(ii) Credit approvals under certaincircumstances. Making credit decisionsif the foreign bank also operates one ormore branches or agencies in the UnitedStates, the loans approved at therepresentative office are made by a U.S.office of the bank, and the loan proceedsare not disbursed in the representativeoffice; and

(iii) Other functions. Other functionsfor or on behalf of the foreign bank orits affiliates, such as operating as aregional administrative office of theforeign bank, but only to the extent thatthese other functions are not bankingactivities and are not prohibited byapplicable federal or state law, or byruling or order of the Board.

(2) Standards for approval ofrepresentative offices. As specified insection 10(a)(2) of the IBA (12 U.S.C.3107(a)(2)), in acting on the applicationof a foreign bank to establish arepresentative office, the Board shalltake into account, to the extent it deemsappropriate, the standards for approvalset out in paragraph (c) of this section.The standard regarding supervision bythe foreign bank’s home countrysupervisor (as set out in paragraph(c)(1)(i)(A) of this section) will be met,in the case of a representative officeapplication, if the Board makes afinding that the applicant bank issubject to a supervisory framework thatis consistent with the activities of theproposed representative office, takinginto account the nature of suchactivities and the operating record of theapplicant.

(3) Special-purpose foreigngovernment-owned banks. A foreigngovernment-owned organizationengaged in banking activities in itshome country that are not commercialin nature may apply to the Board for adetermination that the organization isnot a foreign bank for purposes of thissection. A written request setting forththe basis for such a determination maybe submitted to the Reserve Bank of theDistrict in which the foreignorganization’s representative office islocated in the United States, or to theBoard, in the case of a proposedestablishment of a representative office.The Board shall review and act uponeach request on a case-by-case basis.

(4) Additional requirements. TheBoard may impose any additionalrequirements that it determines to benecessary to carry out the purposes ofthe IBA.

(e) Preservation of existing authority.Nothing in this subpart shall beconstrued to relieve any foreign bank orforeign banking organization from any

otherwise applicable requirement offederal or state law, including anyapplicable licensing requirement.

(f) Reports of crimes and suspectedcrimes. Except for a federal branch or afederal agency or a state branch that isinsured by the Federal DepositInsurance Corporation (FDIC), a branch,agency, or representative office of aforeign bank operating in the UnitedStates shall file a suspicious activityreport in accordance with the provisionsof § 208.62 of Regulation H (12 CFR208.62).

(g) Management of shell branches. (1)A state-licensed branch or agency shallnot manage, through an office of theforeign bank which is located outsidethe United States and is managed orcontrolled by such state-licensed branchor agency, any type of activity that abank organized under the laws of theUnited States or any state is notpermitted to manage at any branch orsubsidiary of such bank which islocated outside the United States.

(2) For purposes of this paragraph (g),an office of a foreign bank locatedoutside the United States is ‘‘managedor controlled’’ by a state-licensed branchor agency if a majority of theresponsibility for business decisions,including but not limited to decisionswith regard to lending or assetmanagement or funding or liabilitymanagement, or the responsibility forrecordkeeping in respect of assets orliabilities for that non-U.S. office,resides at the state-licensed branch oragency.

(3) The types of activities that a state-licensed branch or agency may managethrough an office located outside theUnited States that it manage or controlsinclude the types of activitiesauthorized to a U.S. bank by state orfederal charters, regulations issued bychartering or regulatory authorities, andother U.S. banking laws, including theFederal Reserve Act, and theimplementing regulations, but U.S.procedural or quantitative requirementsthat may be applicable to the conduct ofsuch activities by U.S. banks shall notapply.

(h) Government securities salespractices. An uninsured state-licensedbranch or agency of a foreign bank thatis required to give notice to the Boardunder section 15C of the SecuritiesExchange Act of 1934 (15 U.S.C. 78o–5)and the Department of the Treasuryrules under section 15C (17 CFR400.1(d) and part 401) shall be subjectto the provisions of 12 CFR 208.37 tothe same extent as a state member bankthat is required to give such notice.

(i) Protection of customer information.An uninsured state-licensed branch or



agency of a foreign bank shall complywith the Interagency GuidelinesEstablishing Standards for SafeguardingCustomer Information prescribedpursuant to sections 501 and 505 of theGramm-Leach-Bliley Act (15 U.S.C.6801 and 6805), set forth in appendixD–2 to part 208 of this chapter.

§ 211.25 Termination of offices of foreignbanks.

(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 toterminate the activities of itsrepresentative office, state branch, stateagency, or commercial lending companysubsidiary if the Board finds that:

(i) The foreign bank is not subject tocomprehensive consolidatedsupervision in accordance with§ 211.24(c)(1), and the home countrysupervisor is not making demonstrableprogress in establishing arrangementsfor the consolidated supervision of theforeign bank; or

(ii) Both of the following criteria aremet:

(A) There is reasonable cause tobelieve that the foreign bank, or any ofits affiliates, has committed a violationof law or engaged in an unsafe orunsound banking practice in the UnitedStates; and

(B) As a result of such violation orpractice, the continued operation of theforeign bank’s representative office,state branch, state agency, orcommercial lending companysubsidiary would not be consistent withthe public interest, or with the purposesof the IBA, the BHC Act, or the FDIA.

(2) Additional ground. The Board alsomay enforce any condition imposed inconnection with an order issued under§ 211.24.

(b) Factor. In making its findingsunder this section, the Board may takeinto account the needs of thecommunity, the history of operation ofthe foreign bank, and its relative size inits home country, provided that the sizeof the foreign bank shall not be the soledetermining factor in a decision toterminate an office.

(c) Consultation with relevant statesupervisor. Except in the case oftermination pursuant to the expeditedprocedure in paragraph (d)(3) of thissection, the Board shall request andconsider the views of the relevant statesupervisor before issuing an orderterminating the activities of a statebranch, state agency, representativeoffice, or commercial lending companysubsidiary under this section.

(d) Termination procedures—(1)Notice and hearing. Except as otherwise

provided in paragraph (d)(3) of thissection, an order issued underparagraph (a)(1) of this section shall beissued only after notice to the relevantstate supervisor and the foreign bankand after an opportunity for a hearing.

(2) Procedures for hearing. Hearingsunder this section shall be conductedpursuant to the Board’s Rules of Practicefor Hearings (12 CFR part 263).

(3) Expedited procedure. The Boardmay act without providing anopportunity for a hearing, if itdetermines that expeditious action isnecessary in order to protect the publicinterest. When the Board finds that it isnecessary to act without providing anopportunity for a hearing, the Board,solely in its discretion, may:

(i) Provide the foreign bank that is thesubject of the termination order withnotice of the intended terminationorder;

(ii) Grant the foreign bank anopportunity to present a writtensubmission opposing issuance of theorder; or

(iii) Take any other action designed toprovide the foreign bank with noticeand an opportunity to present its viewsconcerning the order.

(e) Termination of federal branch orfederal agency. The Board may transmitto the Comptroller a recommendationthat the license of a federal branch orfederal agency be terminated if theBoard has reasonable cause to believethat the foreign bank or any affiliate ofthe foreign bank has engaged in conductfor which the activities of a state branchor state agency may be terminatedpursuant to this section.

(f) Voluntary termination. A foreignbank shall notify the Board at least 30days prior to terminating the activitiesof any office. Notice pursuant to thisparagraph (f) is in addition to, and doesnot satisfy, any other federal or staterequirements relating to the terminationof an office or the requirement for priornotice of the closing of a branch,pursuant to section 39 of the FDIA (12U.S.C. 1831p).

§ 211.26 Examination of offices andaffiliates of foreign banks.

(a) Conduct of examinations—(1)Examination of branches, agencies,commercial lending companies, andaffiliates. The Board may examine:

(i) Any branch or agency of a foreignbank;

(ii) Any commercial lending companyor bank controlled by one or moreforeign banks, or one or more foreigncompanies that control a foreign bank;and

(iii) Any other office or affiliate of aforeign bank conducting business in anystate.

(2) Examination of representativeoffices. The Board may examine anyrepresentative office in the manner andwith the frequency it deemsappropriate.

(b) Coordination of examinations. Tothe extent possible, the Board shallcoordinate its examinations of the U.S.offices and U.S. affiliates of a foreignbank with the licensing authority and,in the case of an insured branch, theFederal Deposit Insurance Corporation(FDIC), including through simultaneousexaminations of the U.S. offices andU.S. affiliates of a foreign bank.

(c) Frequency of on-siteexamination—(1) General. Each branchor agency of a foreign bank shall beexamined on-site at least once duringeach 12-month period (beginning on thedate the most recent examination of theoffice ended) by—

(i) The Board;(ii) The FDIC, if the branch of the

foreign bank accepts or maintainsinsured deposits;

(iii) The Comptroller, if the branch oragency of the foreign bank is licensed bythe Comptroller; or

(iv) The state supervisor, if the officeof the foreign bank is licensed orchartered by the state.

(2) 18-month cycle for certain smallinstitutions—(i) Mandatory standards.The Board may conduct a full-scope, on-site examination at least once duringeach 18-month period, rather than each12-month period as required inparagraph (c)(1) of this section, if thebranch or agency—

(A) Has total assets of $250 million orless;

(B) Has received a composite ROCAsupervisory rating (which rates riskmanagement, operational controls,compliance, and asset quality) of 1 or 2at its most recent examination;

(C) Satisfies the requirement of eitherthe following paragraph (c)(2)(i)(C)(1) or(2):

(1) The foreign bank’s most recentlyreported capital adequacy positionconsists of, or is equivalent to, tier 1 andtotal risk-based capital ratios of at least6 percent and 10 percent, respectively,on a consolidated basis; or

(2) The branch or agency hasmaintained on a daily basis, over thepast three quarters, eligible assets in anamount not less than 108 percent of thepreceding quarter’s average third-partyliabilities (determined consistent withapplicable federal and state law) andsufficient liquidity is currently availableto meet its obligations to third parties;



(D) Is not subject to a formalenforcement action or order by theBoard, FDIC, or OCC; and

(E) Has not experienced a change incontrol during the preceding 12-monthperiod in which a full-scope, on-siteexamination would have been requiredbut for this section.

(ii) Discretionary standards. Indetermining whether a branch or agencyof a foreign bank that meets thestandards of paragraph (c)(2)(i) of thissection should not be eligible for an 18-month examination cycle pursuant tothis paragraph (c)(2), the Board mayconsider additional factors, includingwhether—

(A) Any of the individual componentsof the ROCA supervisory rating of abranch or agency of a foreign bank israted ‘‘3’’ or worse;

(B) The results of any off-sitesurveillance indicate a deterioration inthe condition of the office;

(C) The size, relative importance, androle of a particular office when reviewedin the context of the foreign bank’sentire U.S. operations otherwisenecessitate an annual examination; and

(D) The condition of the foreign bankgives rise to such a need.

(3) Authority to conduct morefrequent examinations. Nothing inparagraphs (c)(1) and (2) of this sectionlimits the authority of the Board toexamine any U.S. branch or agency of aforeign bank as frequently as it deemsnecessary.

§ 211.27 Disclosure of supervisoryinformation to foreign supervisors.

(a) Disclosure by Board. The Boardmay disclose information obtained inthe course of exercising its supervisoryor examination authority to a foreignbank regulatory or supervisoryauthority, if the Board determines thatdisclosure is appropriate for banksupervisory or regulatory purposes andwill not prejudice the interests of theUnited States.

(b) Confidentiality. Before making anydisclosure of information pursuant toparagraph (a) of this section, the Boardshall obtain, to the extent necessary, theagreement of the foreign bank regulatoryor supervisory authority to maintain theconfidentiality of such information tothe extent possible under applicablelaw.

§ 211.28 Provisions applicable to branchesand agencies: limitation on loans to oneborrower.

(a) Limitation on loans to oneborrower. Except as provided inparagraph (b) of this section, the totalloans and extensions of credit by all thestate branches and state agencies of a

foreign bank outstanding to a singleborrower at one time shall be aggregatedwith the total loans and extensions ofcredit by all federal branches andfederal agencies of the same foreignbank outstanding to such borrower atthe time; and shall be subject to thelimitations and other provisions ofsection 5200 of the Revised Statutes (12U.S.C. 84), and the regulationspromulgated thereunder, in the samemanner that extensions of credit by afederal branch or federal agency aresubject to section 4(b) of the IBA (12U.S.C. 3102(b)) as if such state branchesand state agencies were federal branchesand federal agencies.

(b) Preexisting loans and extensionsof credit. Any loans or extensions ofcredit to a single borrower that wereoriginated prior to December 19, 1991,by a state branch or state agency of thesame foreign bank and that, whenaggregated with loans and extensions ofcredit by all other branches andagencies of the foreign bank, exceed thelimits set forth in paragraph (a) of thissection, may be brought into compliancewith such limitations through routinerepayment, provided that any new loansor extensions of credit (includingrenewals of existing unfunded creditlines, or extensions of the maturities ofexisting loans) to the same borrowershall comply with the limits set forth inparagraph (a) of this section.

§ 211.29 Applications by state branchesand state agencies to conduct activities notpermissible for federal branches.

(a) Scope. A state branch or stateagency shall file with the Board a priorwritten application for permission toengage in or continue to engage in anytype of activity that:

(1) Is not permissible for a federalbranch, pursuant to statute, regulation,official bulletin or circular, or order orinterpretation issued in writing by theComptroller; or

(2) Is rendered impermissible due toa subsequent change in statute,regulation, official bulletin or circular,written order or interpretation, ordecision of a court of competentjurisdiction.

(b) Exceptions. No application shallbe required by a state branch or stateagency to conduct any activity that isotherwise permissible under applicablestate and federal law or regulation andthat:

(1) Has been determined by the FDIC,pursuant to 12 CFR 362.4(c)(3)(i)through (c)(3)(ii)(A), not to present asignificant risk to the affected depositinsurance fund;

(2) Is permissible for a federal branch,but the Comptroller imposes a

quantitative limitation on the conduct ofsuch activity by the federal branch;

(3) Is conducted as agent rather thanas principal, provided that the activityis one that could be conducted by astate-chartered bank headquartered inthe same state in which the branch oragency is licensed; or

(4) Any other activity that the Boardhas determined may be conducted byany state branch or state agency of aforeign bank without further applicationto the Board.

(c) Contents of application. Anapplication submitted pursuant toparagraph (a) of this section shall be inletter form and shall contain thefollowing information:

(1) A brief description of the activity,including the manner in which it willbe conducted, and an estimate of theexpected dollar volume associated withthe activity;

(2) An analysis of the impact of theproposed activity on the condition ofthe U.S. operations of the foreign bankin general, and of the branch or agencyin particular, including a copy, ifavailable, of any feasibility study,management plan, financial projections,business plan, or similar documentconcerning the conduct of the activity;

(3) A resolution by the applicant’sboard of directors or, if a resolution isnot required pursuant to the applicant’sorganizational documents, evidence ofapproval by senior management,authorizing the conduct of such activityand the filing of this application;

(4) If the activity is to be conductedby a state branch insured by the FDIC,statements by the applicant:

(i) Of whether or not it is incompliance with 12 CFR 346.19 (Pledgeof Assets) and 12 CFR 346.20 (AssetMaintenance);

(ii) That it has complied with allrequirements of the FDIC concerning anapplication to conduct the activity andthe status of the application, includinga copy of the FDIC’s disposition of suchapplication, if available; and

(iii) Explaining why the activity willpose no significant risk to the depositinsurance fund; and

(5) Any other information that theReserve Bank deems appropriate.

(d) Factors considered indetermination. (1) The Board shallconsider the following factors indetermining whether a proposedactivity is consistent with soundbanking practice:

(i) The types of risks, if any, theactivity poses to the U.S. operations ofthe foreign banking organization ingeneral, and the branch or agency inparticular;



(ii) If the activity poses any such risks,the magnitude of each risk; and

(iii) If a risk is not de minimis, theactual or proposed procedures to controland minimize the risk.

(2) Each of the factors set forth inparagraph (d)(1) of this section shall beevaluated in light of the financialcondition of the foreign bank in generaland the branch or agency in particularand the volume of the activity.

(e) Application procedures.Applications pursuant to this sectionshall be filed with the appropriateFederal Reserve Bank. An applicationshall not be deemed complete until itcontains all the information requestedby the Reserve Bank and has beenaccepted. Approval of such anapplication may be conditioned on theapplicant’s agreement to conduct theactivity subject to specific conditions orlimitations.

(f) Divestiture or cessation. (1) If anapplication for permission to continueto conduct an activity is not approvedby the Board or, if applicable, the FDIC,the applicant shall submit a detailedwritten plan of divestiture or cessationof the activity to the appropriate FederalReserve Bank within 60 days of thedisapproval.

(i) The divestiture or cessation planshall describe in detail the manner inwhich the applicant will divest itself ofor cease the activity, and shall includea projected timetable describing howlong the divestiture or cessation isexpected to take.

(ii) Divestiture or cessation shall becomplete within one year from the dateof the disapproval, or within suchshorter period of time as the Board shalldirect.

(2) If a foreign bank operating a statebranch or state agency chooses not toapply to the Board for permission tocontinue to conduct an activity that isnot permissible for a federal branch, orwhich is rendered impermissible due toa subsequent change in statute,regulation, official bulletin or circular,written order or interpretation, ordecision of a court of competentjurisdiction, the foreign bank shallsubmit a written plan of divestiture orcessation, in conformance withparagraph (f)(1) of this section within 60days of the effective date of this part orof such change or decision.

§ 211.30 Criteria for evaluating U.S.operations of foreign banks not subject toconsolidated supervision.

(a) Development and publication ofcriteria. Pursuant to the Foreign BankSupervision Enhancement Act, Pub. L.102–242, 105 Stat. 2286 (1991), theBoard shall develop and publish criteria

to be used in evaluating the operationsof any foreign bank in the United Statesthat the Board has determined is notsubject to comprehensive consolidatedsupervision.

(b) Criteria considered by Board.Following a determination by the Boardthat, having taken into account thestandards set forth in § 211.24(c)(1), aforeign bank is not subject to CCS, theBoard shall consider the followingcriteria in determining whether theforeign bank’s U.S. operations should bepermitted to continue and, if so,whether any supervisory constraintsshould be placed upon the bank inconnection with those operations:

(1) The proportion of the foreignbank’s total assets and total liabilitiesthat are located or booked in its homecountry, as well as the distribution andlocation of its assets and liabilities thatare located or booked elsewhere;

(2) The extent to which the operationsand assets of the foreign bank and anyaffiliates are subject to supervision byits home country supervisor;

(3) Whether the home countrysupervisor of such foreign bank isactively working to establisharrangements for comprehensiveconsolidated supervision of the bank,and whether demonstrable progress isbeing made;

(4) Whether the foreign bank haseffective and reliable systems of internalcontrols and management informationand reporting, which enable itsmanagement properly to oversee itsworldwide operations;

(5) Whether the foreign bank’s homecountry supervisor has any objection tothe bank continuing to operate in theUnited States;

(6) Whether the foreign bank’s homecountry supervisor and the homecountry supervisor of any parent of theforeign bank share material informationregarding the operations of the foreignbank with other supervisory authorities;

(7) The relationship of the U.S.operations to the other operations of theforeign bank, including whether theforeign bank maintains funds in its U.S.offices that are in excess of amounts dueto its U.S. offices from the foreign bank’snon-U.S. offices;

(8) The soundness of the foreignbank’s overall financial condition;

(9) The managerial resources of theforeign bank, including the competence,experience, and integrity of the officersand directors, and the integrity of itsprincipal shareholders;

(10) The scope and frequency ofexternal audits of the foreign bank;

(11) The operating record of theforeign bank generally and its role in thebanking system in its home country;

(12) The foreign bank’s record ofcompliance with relevant laws, as wellas the adequacy of its anti-money-laundering controls and procedures, inrespect of its worldwide operations;

(13) The operating record of the U.S.offices of the foreign bank;

(14) The views and recommendationsof the Comptroller or the relevant statesupervisors in those states in which theforeign bank has operations, asappropriate;

(15) Whether the foreign bank, ifrequested, has provided the Board withadequate assurances that suchinformation will be made available onthe operations or activities of the foreignbank and any of its affiliates as theBoard deems necessary to determineand enforce compliance with the IBA,the BHC Act, and other U.S. bankingstatutes; and

(16) Any other information relevant tothe safety and soundness of the U.S.operations of the foreign bank.

(c) Restrictions on U.S. operations—(1) Terms of agreement. Any foreignbank that the Board determines is notsubject to CCS may be required to enterinto an agreement to conduct its U.S.operations subject to such restrictions asthe Board, having considered thecriteria set forth in paragraph (b) of thissection, determines to be appropriate inorder to ensure the safety andsoundness of its U.S. operations.

(2) Failure to enter into or complywith agreement. A foreign bank that isrequired by the Board to enter into anagreement pursuant to paragraph (c)(1)of this section and either fails to do so,or fails to comply with the terms of suchagreement, may be subject to:

(i) Enforcement action, in order toensure safe and sound bankingoperations, under 12 U.S.C. 1818; or

(ii) Termination or a recommendationfor termination of its U.S. operations,under § 211.25(a) and (e) and section(7)(e) of the IBA (12 U.S.C. 3105(e)).

Subpart C—Export Trading Companies

§ 211.31 Authority, purpose, and scope.(a) Authority. This subpart is issued

by the Board of Governors of the FederalReserve System (Board) under theauthority of the Bank Holding CompanyAct of 1956 (BHC Act) (12 U.S.C. 1841et seq.), the Bank Export Services Act(title II, Pub. L. 97–290, 96 Stat. 1235(1982)) (BESA), and the Export TradingCompany Act Amendments of 1988(title III, Pub. L. 100–418, 102 Stat. 1384(1988)) (ETC Act Amendments).

(b) Purpose and scope. This subpart isin furtherance of the purposes of theBHC Act, the BESA, and the ETC ActAmendments, the latter two statutes



being designed to increase U.S. exportsby encouraging investments andparticipation in export tradingcompanies by bank holding companiesand the specified investors. Theprovisions of this subpart apply toeligible investors as defined in thissubpart.

§ 211.32 Definitions.The definitions in §§ 211.1 and 211.2

of subpart A apply to this subpart,subject to the following:

(a) Appropriate Federal Reserve Bankhas the same meaning as in § 211.21(c).

(b) Bank has the same meaning as insection 2(c) of the BHC Act (12 U.S.C.1841(c)).

(c) Company has the same meaning asin 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 corporationsthat are subsidiaries of bank holdingcompanies but are not subsidiaries ofbanks;

(3) Banker’s banks, as described insection 4(c)(14)(F)(iii) of the BHC Act(12 U.S.C. 1843(c)(14)(F)(iii)); and

(4) Foreign banking organizations, asdefined in § 211.21(o).

(e) Export trading company means acompany that is exclusively engaged inactivities related to international tradeand, by engaging in one or more exporttrade services, derives:

(1) At least one-third of its revenuesin each consecutive four-year periodfrom the export of, or from facilitatingthe export of, goods and servicesproduced in the United States bypersons other than the export tradingcompany or its subsidiaries; and

(2) More revenues in each four-yearperiod from export activities asdescribed in paragraph (e)(1) of thissection than it derives from the import,or facilitating the import, into theUnited States of goods or servicesproduced outside the United States. Thefour-year period within which tocalculate revenues derived from itsactivities under this section shall bedeemed to have commenced with thefirst fiscal year after the respectiveexport trading company has been inoperation for two years.

(f) Revenues shall include net salesrevenues from exporting, importing, orthird-party trade in goods by the exporttrading company for its own accountand gross revenues derived from allother activities of the export tradingcompany.

(g) Subsidiary has the same meaningas in section 2(d) of the BHC Act (12U.S.C. 1841(d)).

(h) Well capitalized has the samemeaning as in § 225.2(r) of Regulation Y(12 CFR 225.2(r)).

(i) Well managed has the samemeaning as in § 225.2(s) of Regulation Y(12 CFR 225.2(s)).

§ 211.33 Investments and extensions ofcredit.

(a) Amount of investments. Inaccordance with the procedures of§ 211.34, an eligible investor may investno more than 5 percent of itsconsolidated capital and surplus in oneor more export trading companies,except that an Edge or agreementcorporation not engaged in banking mayinvest as much as 25 percent of itsconsolidated capital and surplus but nomore than 5 percent of the consolidatedcapital and surplus of its parent bankholding company.

(b) Extensions of credit—(1) Amount.An eligible investor in an export tradingcompany or companies may extendcredit directly or indirectly to the exporttrading company or companies in a totalamount that at no time exceeds 10percent of the investor’s consolidatedcapital and surplus.

(2) Terms. (i) An eligible investor inan export trading company may notextend credit directly or indirectly tothe export trading company or any of itscustomers or to any other investorholding 10 percent or more of the sharesof the export trading company on termsmore favorable than those affordedsimilar borrowers in similarcircumstances, and such extensions ofcredit shall not involve more than thenormal risk of repayment or presentother unfavorable features.

(ii) For the purposes of this section,an investor in an export tradingcompany includes any affiliate of theinvestor.

(3) Collateral requirements. Coveredtransactions between a bank and anaffiliated export trading company inwhich a bank holding company hasinvested pursuant to this subpart aresubject to the collateral requirements ofsection 23A of the Federal Reserve Act(12 U.S.C. 371c), except where a bankissues a letter of credit or advancesfunds to an affiliated export tradingcompany solely to finance the purchaseof goods for which:

(i) The export trading company has abona fide contract for the subsequentsale of the goods; and

(ii) The bank has a security interest inthe goods or in the proceeds from theirsale at least equal in value to the letterof credit or the advance.

§ 211.34 Procedures for filing andprocessing notices.

(a) General policy. Direct and indirectinvestments by eligible investors inexport trading companies shall be madein accordance with the general consentor prior notice procedures contained inthis section. The Board may at any time,upon notice, modify or suspend thegeneral-consent procedures with respectto any eligible investor.

(b) General consent—(1) Eligibility forgeneral consent. Subject to the otherlimitations of this subpart, the Boardgrants its general consent for anyinvestment an export trading company:

(i) If the eligible investor is wellcapitalized and well managed;

(ii) In an amount equal to cashdividends received from that exporttrading company during the preceding12 calendar months; or

(iii) That is acquired from an affiliateat net asset value or through acontribution of shares.

(2) Post-investment notice. By the endof the month following the month inwhich the investment is made, theinvestor shall provide the Board withthe following information:

(i) The amount of the investment andthe source of the funds with which theinvestment was made; and

(ii) In the case of an initialinvestment, a description of theactivities in which the export tradingcompany proposes to engage andprojections for the export tradingcompany for the first year following theinvestment.

(c) Filing notice—(1) Prior notice. Aneligible investor shall give the Board 60days’ prior written notice of anyinvestment in an export tradingcompany that does not qualify under thegeneral consent procedure.

(2) Notice of change of activities. (i)An eligible investor shall give the Board60 days’ prior written notice of changesin the activities of an export tradingcompany that is a subsidiary of theinvestor if the export trading companyexpands its activities beyond thosedescribed in the initial notice toinclude:

(A) Taking title to goods where theexport trading company does not havea 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 insection 4(c)(14)(F)(ii) of the BHC Act (12U.S.C. 1843(c)(14)(F)(ii)).

(ii) Such an expansion of activitiesshall be regarded as a proposedinvestment under this subpart.

(d) Time period for Board action. (1)A proposed investment that has not



been disapproved by the Board may bemade 60 days after the appropriateFederal Reserve Bank accepts the noticefor processing. A proposed investmentmay be made before the expiration ofthe 60-day period if the Board notifiesthe investor in writing of its intentionnot to disapprove the investment.

(2) The Board may extend the 60-dayperiod for an additional 30 days if theBoard determines that the investor hasnot furnished all necessary informationor that any material informationfurnished is substantially inaccurate.The Board may disapprove aninvestment if the necessary informationis provided within a time insufficient toallow the Board reasonably to considerthe information received.

(3) Within three days of a decision todisapprove an investment, the Boardshall notify the investor in writing andstate the reasons for the disapproval.

(e) Time period for investment. Aninvestment in an export tradingcompany that has not been disapprovedshall be made within one year from thedate of the notice not to disapprove,unless the time period is extended bythe Board or by the appropriate FederalReserve Bank.

PART 265—RULES REGARDINGDELEGATION OF AUTHORITY

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

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

2. Section 265.5 is amended byadding a new paragraph (d)(3) to read asfollows:

§ 265.5 Functions delegated to Secretaryof the Board.

* * * * *(d) * * *(3) Investments in Edge and

Agreement Corporations. To approve anapplication by a member bank to investmore than 10 percent of capital andsurplus in Edge and agreementcorporation subsidiaries.* * * * *

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

§ 265.6 Functions delegated to GeneralCounsel.

* * * * *(f) International banking—(1) After-

the-fact applications. With theconcurrence of the Board’s Director ofthe Division of Banking Supervision andRegulation, to grant a request by aforeign bank to establish a branch,agency, commercial lending company,or representative office through certainacquisitions, mergers, consolidations, or

similar transactions, in conjunctionwith which:

(i) The foreign bank would berequired to file an after-the-factapplication for the Board’s approvalunder § 211.24(a)(6) of Regulation K (12CFR 211.24(a)(6)); or

(ii) The General Counsel may waivethe requirement for an after-the-factapplication if:

(A) The surviving foreign bankcommits to wind down the U.S.operations of the acquired foreign bank;and

(B) The merger or consolidation raisesno significant policy or supervisoryissues.

(2) To modify the requirement that aforeign bank that has submitted anapplication or notice to establish abranch, agency, commercial lendingcompany, or representative officepursuant to § 211.24(a)(6) of RegulationK (12 CFR 211.24(a)(6)) shall publishnotice of the application or notice in anewspaper of general circulation in thecommunity in which the applicant ornotificant proposes to engage inbusiness, as provided in § 211.24(b)(2)of Regulation K (12 CFR 211.24(b)(2)).

(3) With the concurrence of theBoard’s Director of the Division ofBanking Supervision and Regulation, togrant a request for an exemption undersection 4(c)(9) of the Bank HoldingCompany Act (12 U.S.C. 1843(c)(9)),provided that the request raises nosignificant policy or supervisory issuesthat the Board has not alreadyconsidered.

(4) To return applications and noticesfiled under the International BankingAct for informational deficits.

(5) To determine that an entityqualifies as a ‘‘special-purpose foreigngovernment-owned bank’’ for purposesof § 211.24(d)(3) (12 CFR 211.24(d)(3)).* * * * *

4. Section 265.7 is amended by:a. Revising paragraph (d)(4); andb. Adding new paragraphs (d)(9),

(d)(10), (d)(11), (d)(12), (d)(13), and(d)(14).

The revision and additions read asfollows:

§ 265.7 Functions delegated to Director ofDivision of Banking Supervision andRegulation.* * * * *

(d) * * *(4) Authority under general-consent

and prior-notice procedures. (i) Withregard to a prior notice to establish abranch in a foreign country under§ 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 anapplication for the Board’s specificconsent.

(ii) With regard to a prior notice tomake an investment under § 211.9(f) ofRegulation 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 specificconsent.

(iii) With regard to a prior notice ofa foreign bank to establish certain U.S.offices under § 211.24(a)(2)(i) ofRegulation 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


(iv) To suspend the ability:(A) Of a foreign banking organization

to establish an office under the prior-notice procedures in § 211.24(a)(2)(i) ofRegulation K (12 CFR 211.24(a)(2)(i)) orthe general-consent procedures in§ 211.24(a)(3) of Regulation K (12 CFR211.24(a)(3));

(B) Of a U.S. banking organization toestablish a foreign branch under theprior-notice or general-consentprocedures in § 211.3(b) of Regulation K(12 CFR 211.3(b));

(C) Of an investor to makeinvestments under the general-consentor prior-notice procedures in § 211.9 ofRegulation K (12 CFR 211.9); and

(D) Of an eligible investor to make aninvestment in an export tradingcompany under the general-consentprocedures in § 211.34(b) of RegulationK (12 CFR 211.34(b)).* * * * *

(9) Allowing use of general-consentprocedures. To allow an investor that isnot well-capitalized and well-managedto make investments under the general-consent procedures in § 211.9 or211.34(b) of Regulation K (12 CFR 211.9or 211.34(b)), provided that:

(i) The investor has implementedmeasures to become well-capitalizedand well-managed;

(ii) Granting such authority raises nosignificant policy or supervisoryconcerns; and

(iii) Authority granted by the Directorunder this paragraph (d)(9) expires afterone year, but may be renewed.

(10) Exceeding general-consentinvestment limits. To allow an investorto exceed the general-consentinvestment limits under § 211.9 ofRegulation K (12 CFR 211.9), providedthat:

(i) The investor demonstratesadequate financial and managerialstrength;



(ii) The investor’s investment strategyis not unsafe or unsound;

(iii) Granting such authority raises nosignificant policy or supervisoryconcerns; and

(iv) Authority granted by the Directorunder this paragraph (d)(10) expiresafter one year, but may be renewed.

(11) Approval of temporary U.S.offices. To allow a foreign bank tooperate a temporary office in the UnitedStates, pursuant to § 211.24 ofRegulation K (12 CFR 211.24), providedthat:

(i) There is no direct public access tosuch office, with respect to any branchor agency function; and

(ii) The proposal raises no significantpolicy or supervisory issues.

(12) With the concurrence of theGeneral Counsel, to approveapplications, notices, exemptionrequests, waivers and suspensions, andother related matters under RegulationK (12 CFR part 211), where such mattersdo not raise any significant policy orsupervisory issues.

(13) With the concurrence of theGeneral Counsel, to approve:

(i) The establishment by a bankholding company or member bank of an

agreement corporation under section 25of the Federal Reserve Act; and

(ii) Any initial investment associatedwith the establishment of suchagreement corporation.

(14) With the concurrence of theGeneral Counsel, to determine that anelection by a foreign bank to become orto be treated as a financial holdingcompany is effective, provided that:

(i) The foreign bank meets the criteriafor becoming or being treated as afinancial holding company; and

(ii) The election raised no significantpolicy or supervisory issues.* * * * *

5. Section 265.11 is amended by:a. Revising paragraphs (d)(8) and

(d)(11); andb. Adding a new paragraph (d)(12).The revisions and addition read as

follows:

§ 265.11 Functions delegated to FederalReserve Banks.

* * * * *(d) * * *(8) Authority under prior-notice

procedures. (i) With regard to a priornotice to make an investment under

§ 211.9(f) of Regulation K (12 CFR211.9(f)):

(A) To suspend the notice period; or(B) To require the notificant to file an


(ii) With regard to a prior notice of aforeign bank to establish certain U.S.offices under § 211.24(a)(2)(i) ofRegulation 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’sspecific consent.* * * * *

(11) Investments in Edge andagreement Corporation subsidiaries. Toapprove an application by a memberbank to invest more than 10 percent ofcapital and surplus in Edge andagreement corporation subsidiaries.

(12) Amendments to Edge corporationcharters. To approve amendments toEdge corporation charters.

By order of the Board of Governors of theFederal 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


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