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F ed er a l Reser ve Ba n k o f D allas

DALLAS, TEXAS

75222
C i r c u l a r No. 76-30
M a rc h 2, 1976

A m e ric a n R e v o lu tio n B ic en ten n ia l

INTERPRETATION OF REGULATIONS K, M, AND Y
S ta t e m e n t of P o lic y on S to c k I n t e r e s t s in F o r e i g n J o i n t V e n t u r e s

TO ALL BANKS, BANK HOLDING COMPANIES,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
On F e b r u a r y 12, 1976, t h e B o a r d of G o v e r n o r s of t h e F e d e r a l
R e s e r v e S y s te m i s s u e d a n i n t e r p r e t a t i o n to its R e g u l a ti o n K, " C o r p o r a t i o n s
E n g a g e d in F o r e i g n B a n k i n g a n d F i n a n c i n g U n d e r th e F e d e r a l R e s e r v e A c t , "
R e g u l a ti o n M, " F o r e i g n A c t i v i t i e s of N ational B a n k s , " a n d R e g u l a ti o n Y,
" B a n k H old in g C o m p a n i e s , " s t a t i n g its p o li c y o n t h e a c q u i s i t i o n of s to c k
i n t e r e s t s in f o r e i g n jo i n t v e n t u r e s b y U . S . b a n k i n g o r g a n i z a t i o n s . T h e p o l ­
icy is d e s i g n e d to d e a l w ith p o s s i b l e f u t u r e r i s k s e n t a i l e d in b e c o m in g a
s h a r e h o l d e r in a f o r e i g n j o i n t v e n t u r e .
A s a m a t t e r o f p o l i c y , t h e B o a r d w ill t a k e t h e fo llo w in g f a c t o r s ,
am ong o t h e r s , into a c c o u n t in c o n s i d e r i n g w h e t h e r to a p p r o v e a n a p p l i c a t i o n
to i n v e s t in a f o r e i g n jo i n t v e n t u r e :
(1) T h e p o s s i b i l i t y t h a t t h e v e n t u r e m ig h t n e e d a d d i t i o n a l f i n a n ­
cial s u p p o r t , a n d
(2) T h e p o s s i b i l i t y t h a t t h e a d d i t i o n a l s u p p o r t m i g h t b e s i g n i f i ­
c a n t l y l a r g e r t h a n t h e o r i g i n a l e q u i t y i n v e s t m e n t in t h e jo i n t v e n t u r e .
T h e p o l i c y s t a t e m e n t is n o t i n t e n d e d to p r o h i b i t o r d i s c o u r a g e
jo in t v e n t u r e s a b r o a d . Its o b j e c t i v e is to c l a r i f y f o r all p a r t i e s th e p r o b a b l e
d i m e n s i o n s of t h e r i s k s in v o l v e d in s u c h v e n t u r e s .
E n c lo s e d is a c o p y o f t h e i n t e r p r e t a t i o n . I n q u i r i e s r e g a r d i n g t h e
m a t t e r s h o u l d b e d i r e c t e d to o u r R e g u l a t i o n s D e p a r t m e n t a t (214) 651-6325.
A d d itio n a l c o p i e s o f t h i s i n t e r p r e t a t i o n w ill b e f u r n i s h e d u p o n r e q u e s t to t h e
S e c r e t a r y ' s Office of t h i s B a n k .
S in ce rely y o u rs ,
T . W. P la n t
F i r s t V ice P r e s i d e n t
E n closure

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CORPORATIONS ENGAGED IN FOREIGN BANKING AND
FINANCING UNDER THE FEDERAL RESERVE ACT
FOREIGN ACTIVITIES OF NATIONAL BANKS
BANK HOLDING COMPANIES
INTERPRETATION OF REGULATIONS K, M, AND Y

SE C T IO N 2 1 1 .5 2 — S T A T E M E N T OF
P O L IC Y O N ST O C K IN T E R E S T S IN
F O R E IG N JO IN T V E N T U R E S *
In g e n e r a l , w h e n a m e m b e r b a n k o r a
corporation organized under § 2 5 ( a ) o f the F ed ­
eral R eserve A ct (a n “ E dge” corp oration ), or
operating pursuant to an agreem ent w ith the
Board under § 25 thereof (an “A greem ent” cor­
p oration ), or a bank holding com pany requests
the Board’s specific consent to acquire the stock
or other certificates o f ow nership o f a foreign
corporation that w ill be jointly-ow ned by the U .S.
banking organization and other foreign or d o­
m estic participants (hereinafter referred to as a
“foreign joint venture”1) , the Board considers,
am ong other factors, the degree o f legal and prac­
tical business responsibility the U .S . banking organ­
ization w ill bear for the financial condition and
operations o f the foreign joint venture in foreign
and international financial markets. In the Board’s
judgment, this factor, am ong others, is relevant
in assessing w hat effects the proposed investm ent
m ay have on the financial and m anagerial re­
sources o f the applying U .S. banking organization.
Based o n the recent experience o f certain for­
eign joint ventures in foreign and international
financial markets, the Board has fou n d that a
U.S. banking organization m ay, in certain circum ­

stances, feel im pelled fo r business reasons to pro­
vide financial support® to a foreign joint venture
in w hich it has an equity interest in the event
the venture has liquidity or other financial needs.
This support m ay be substantially in excess o f the
U .S. banking organization’s original equity invest­
m ent and m ay, in som e situations, be w ell in
excess o f its pro rata share. This has seem ed m ost
likely to occur in situations w here ( 1 ) the foreign
joint venture has included in its nam e a reference
to the U .S. banking organization, ( 2 ) the U .S .
banking organization or its affiliates have co n ­
sistently provided financial support to th e foreign
corporation in am ounts significantly beyond usual
com m ercial lim its or significantly disproportionate
to its pro rata stock interest, or (3 ) as the result
o f substantial managerial support furnished by
the U .S . banking organization under a contract
or other arrangement, the foreign corporation
has b een publicly identified as or considered to
be, som etim es with the active encouragem ent o f
the U .S . banking organization, an integral part o f
the U .S . banking organization’s international op­
erations.
A ccordingly, the Board, in considering applica­
tions by U .S. banking organizations to invest in
foreign joint ventures, w ill, as a m atter o f policy,
take in to account the possibility that the applicant
m ay feel im pelled for business reasons to provide

*This interpretation is also indexed as sections 213.52 and 225.51.
1 The term “foreign joint venture” is used to describe a situation in w hich a U .S. banking organization w ith a
m inority share interest participates, directly or indirectly, in the overall m anagem ent o f the corporation and
thus has an active operating interest. A purely passive m inority investm ent in a foreign corporation will n o t be
deem ed a “joint venture” investm ent for purposes o f this statement o f policy. This “joint venture” determination
will be made on the basis o f the facts and circumstances o f each case.
2 A s used herein, the term “support” includes, without lim itation, contributions to capital, purchase (or causing
the purchase) from the foreign corporation o f loans or securities, m aking (or causing the m aking) o f loans to
the foreign corporation, and the m aking (or causing the m aking) o f deposits in the foreign corporation.

financial support for such foreign joint venture
in the event the venture has liquidity or other
financial needs, and that such support could be
significantly greater than the amount of its pro­
posed equity investment. The Board will, there­
fore, consider such application in light of the
relative ability of the applicant to meet the de­
mands that such potential support could place on
its financial and managerial resources. In doing
so, the Board will take into consideration the risks
associated with the total assets and liabilities of
the foreign venture and its projected expansion,
and not merely the size of the proposed equity
investment by the applicant. In particular, the
Board will give great weight to these potential
risks and their implications for the applicant in
cases where the applicant proposes (1) to include
a reference to its name in that of the foreign joint
venture, (2) to provide general funding support
to the foreign joint venture in amounts dispro­
portionate to its pro rata stock interest, or (3) to
provide virtually all of the management for such
foreign joint venture.
If, however, in the case of any such proposed
joint venture investment, the U.S. banking organ­
ization can establish in the record of its applica­
tion that it has reached an agreement or arrange­
ment whereby its support of the proposed joint
venture in the event of liquidity or other financial
needs will be limited to its initial equity investment
or to some fixed amount, or will be shared pro
rata or otherwise with the other shareholders, or
will otherwise be limited, the Board will consider
the application and the risks associated therewith
on the basis of this additional information. In
this regard, the Board will also consider the
identity and financial strength of other partners
and investors in the venture and their respective
ability to provide support to the venture, if needed.
This statement of policy is not intended to
prohibit or discourage investments by U.S. bank­
ing organizations in foreign joint ventures, which
can be a useful form of corporate organization in

appropriate circumstances; rather, due to the dif­
ficulty of ascertaining the precise risks undertaken
in joint venture investments, its primary purpose
is to clarify for all parties concerned the probable
dimensions of risks assumed in any particular
investment. Thus, even if an applicant proposes
to assume a disproportionate share of the risks in
any joint venture, e.g., agrees to stand behind
more than its pro rata share of the joint venture’s
obligations, the Board might be willing to approve
the investment if the applicant’s financial and
managerial resources could bear this additional
risk and if other factors indicated that approval
would be consistent with the public interest.
The Board further notes that any action that
it might take on an application should not be
viewed or relied upon by the applying U.S. bank­
ing organization, other participants in the venture,
or any third party as constituting approval or dis­
approval, or ratification or rejection of any agree­
ment or arrangement that may have been entered
into by the shareholders of a foreign joint venture;
specifically, any Board action should not be viewed
as constituting any expression of judgment as to
the validity or enforceability of any such agree­
ment or arrangement. Any agreement or arrange­
ment will, rather, be merely one among many
factors considered by the Board in deciding on an
application.
This statement is intended to apply primarily
to proposed investments by U.S. banking organi­
zations in the stock of foreign corporations in
which they do not already have an equity invest­
ment. Applications involving an additional invest­
ment in an ongoing foreign joint venture will
continue to be considered by the Board on the
basis of outstanding facts and circumstances. In
the case of any ongoing foreign joint venture the
Board will, of course, continue to consider care­
fully the amount of support, if any, that is being
provided by the applicant to the venture and any
agreement or arrangement among the joint ven­
turers for the provision of any future support.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102