The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
F e d er a l R e s e r v e Ba n k DALLAS, TEXAS of Dallas 75222 Circular No. 80-151 August 5, 1980 INTERPRETATION OF REGULATION Y BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL Disposition of Property Acquired in Satisfaction of Debts Previously Contracted TO ALL MEMBER BANKS, BANK HOLDING COMPANIES, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has issued an interpretation concerning the disposition of assets acquired by bank holding companies and their banking and nonbanking subsidiaries, in satisfaction of debts previously contracted. The Board's Order, as submitted to the Federal Register, is printed on the following pages. Any questions concerning the interpretation should be directed to the Attorney's Section of our Holding Company Supervision Department, Ext. 6182. Additional copies of the document will be furnished upon request to the Bank and Public Information Department of this Bank, Ext. 6266. Sincerely yours, Robert H. Boykin First Vice President Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL RESERVE SYSTEM 12 CFR Part 225 [Reg Y. Docket No. R-0319] Part 225 BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL Disposition of property acquired in satisfaction of debts previously contracted AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final Interpretation. SUMMARY: This interpretation delineates the conditions governing the holding and disposition of assets acquired by bank holding companies and their banking or nonbanking subsidiaries in satisfaction of debts previously contracted. EFFECTIVE DATE: July 22, 1980. FOR FURTHER INFORMATION CONTACT: Bronwen M. Mason, Senior Attorney (202/452-3564), or Jennifer J. Johnson, Senior Attorney (202/452-3584), Legal Division, Board of Governors of the Federal Reserve System, Wash ington, D.C. 20551. Supplementary Information: Pursuant to the Board's authority under sections 4(c)(1)(D), 4(c)(2), 4(c)(8) and 5(b) of the Bank Holding Company Act (12 USC §§ 1843(c)(1)(D), (c)(2), (c)(8), and 1844(b)), and section 8 of the Financial Institutions Supervisory Act (12 USC § 1818) 12 CFR Part 225 is amended by adding a new section 225.140 to read as follows: 225. 140 Disposition of property acquired in satisfaction of debts previously contracted. The Board recently considered the permissibility, under section 4 of the Bank Holding Company Act, of a subsidiary of a bank holding company acquiring and holding assets acquired in satisfaction of a debt previously contracted in good faith (a "dpc" acquisition). In the situation presented, a lending subsidiary of a bank holding company made a "dpc" acquisition of assets and transferred them to a wholly-owned subsidiary of the bank holding company for the purpose of effecting an orderly divestiture. The question presented was whether such "dpc" assets could be held in definitely by a bank holding company subsidiary as incidental to its permissible lending activity. -2- While the Board believes that "dpc" acquisitions may be re garded as normal, necessary and incidental to the business of lending, the Board does not believe that the holding of assets acquired "dpc" without any time restrictions is appropriate from the standpoint of prudent banking and in light of the prohibitions in section 4 of the Act against engaging in nonbank activities. If a nonbanking subsidiary of a bank holding company were permitted, either directly or through a subsidiary, to hold "dpc" assets of substantial amount over an extended period of time, the holding of such property could result in an unsafe or unsound banking practice or in the holding company engaging in an impermissible activity in connection with the assets, rather than liqui dating them. The Board notes that section 4 ( c ) (2) of the Bank Holding Company Act provides an exemption from the prohibitions of section 4 of the Act for bank holding company subsidiaries to acquire shares "dpc". It also provides that such "dpc" shares may be held for a period of two years, subject to the Board's authority to grant three one-year extensions up to a maximum of five years.— Viewed in light of the Congressional policy evidenced by section 4(c)(2), the Board believes that a lending subsidiary of a bank holding company or the holding company itself, should be permitted, as am incident to permissible lending activities, to make acquisitions of "dpc" a s s et s . Consistent with the principles underlying the provisions of section 4 ( c ) (2) of the Act and as a matter of prudent banking practice, such assets may be held for no longer than five years from the date of acquisition. Within the divestiture period it is expected that the company will make good faith efforts to dispose of "dpc" shares or assets at the earliest practicable date. While no specific authorization is necessary to hold such assets for the five-year period, after two years from the date of acquisition of such assets, the holding company should report annually on its efforts to accomplish divestiture to its Reserve Bank. The Reserve Bank will monitor the efforts of the company to effect an orderly divestiture, and may order divestiture before the end of the five-year period if supervisory concerns warrant such action. The Board recognizes that there are instances where a company may encounter particular difficulty in attempting to effect an orderly divestiture of "dpc" real estate holdings within the divestiture period, notwithstanding its persistent good faith efforts to dispose of such 1/ The Board notes that where the dpc shares or other similar interests represent less than 5 per cent of the total of such interests outstanding, they may be retained on the basis of section 4 ( c ) (6), even if originally acquired dpc. -3- property. In the Depository Institutions Deregulation and Monetary Control Act of 1980, (P.L. 96-221) Congress, recognizing that real estate possesses unusual characteristics, amended the National Banking Act to permit national banks to hold real estate for five years and for an additional five-year period subject to certain conditions. Con sistent with the policy underlying the recent Congressional enactment, and as a matter of supervisory policy, a bank holding company may be permitted to hold real estate acquired "dpc" beyond the initial fiveyear period provided that the value of the real estate on the books of the company has been written down to fair market value, the carrying costs are not significant in relation to the overall financial position of the company, and the company has made good faith efforts to effect divestiture. Companies holding real estate for this extended period are expected to make active efforts to dispose of it, and should keep the Reserve Bank advised on a regular basis concerning their ongoing efforts. Fair market value should be derived from appraisals, comparable sales or some other reasonable method. In any case, "dpc" real estate would not be permitted to be held beyond 10 years from the date of its acquisition. With respect to the transfer by a subsidiary of other "dpc" shares or assets to another company in the holding company system, including a section 4(c)(1)(D) liquidating subsidiary, or to the holding company itself, such transfers would not alter the original divestiture period applicable to such shares or assets at the time of their acquisi tion. Moreover, to ensure that assets are not carried at inflated values for extended periods of time, the Board expects, in the case of all such intracompany transfers, that the shares or assets will be trans ferred at a value no greater than the fair market value at the time of transfer and that the transfer will be made in a normal arms-length transaction. With regard to "dpc" assets acquired by a banking subsidiary of a holding company, so long as the assets continue to be held by the bank itself, the Board will regard them as being solely within the regulatory authority of the primary supervisor of the bank. By order of the Board of Governors of the Federal Reserve System effective July 22, 1980. (Signed) Cathy L. Petryshyn Cathy L. Petryshyn Assistant Secretary of the Board [SEAL]