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F ederal Reserve Dallas bank of DALLAS, TEXAS 75222 Circular No. 69-309 December 22, 1969 To the Banks, Nonbank Financial Institutions and Other Firms Addressed in the Eleventh Federal Reserve District: There are enclosed copies of a press release and guidelines for the 1970 Voluntary Foreign Credit Restraint Program applicable to com mercial banks and nonbank financial institutions. If you have questions concerning this program or desire addi tional copies of the guidelines, please contact Vice President Cowan. Yours very truly, P. E. Coldwell President Enclosure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL press RESERVE release For im m e d ia te r e l e a s e . December 17, 1969. The Board of Governors of the Federal Reserve System announced today a revision in guidelines that U.S. banks and other financial institutions have been asked to follow in order to limit increases in loans and investments abroad. The revised guidelines continue restraints in effect since 1965. However, the program of voluntary in keeping with the Govern ment's efforts to help stimulate U.S. exports, the guidelines are changed to give greater and more explicit recognition to the estab lished priority for export financing. The Voluntary Foreign Credit Restraint Program is one of several elements in the Government's over all effort, which also includes the Interest Equalization Tax and the Foreign Direct Investment Control Program, to strengthen the U.S. balance-of-payments position. Under the revised program, each bank is to have a ceiling exclusively for loans of one year or longer that finance U.S. goods exported on or after December 1. This Export Term-Loan Ceiling is to be separate from a General Ceiling that will be available for loans of any type and of any maturity. Under the new program, the aggregate General Ceiling of banks currently reporting to the Federal Reserve Board will be $10.1billion, and the Export Term-Loan Ceiling for these banks will be about billion, for a total ceiling of $11.4 billion. Aggregate ceilings under the previous guidelines were $10.1 billion. As of the end of $1.3 -2 - October, the latest date for which data are available, the 165 reporting banks were approximately $1 billion below their ceilings. The guidelines for nonbank financial institutions, such as insurance companies and pension funds, continue to provide for a single ceiling. However, an institution may exceed its ceiling moderately if the excess reflects new export credits which could not be accommodated under its ceiling. In addition, an institution that has had either a low ceiling, or none at all, may now hold certain covered foreign assets up to a total of $500,000. The effective date for these changes in both the bank and nonbank provisions is December 1. Governor Andrew F. Brimmer, the Board member charged with administering the program, explained that the modifications have two objectives. The first aim, in accordance with the Government's effort to promote exports, is to direct greater attention to the existing priority for export financing, particularly for long-term export loans, within the limits of total lending restraints. The second aim is to enhance the opportunities among U.S. financial insti tutions to compete for foreign lending business. Under the revised program, a participating bank will have a General Ceiling equal to its old lending ceiling which can be used for any type and maturity of foreign loans. Each participating bank will also have an Export Term-Loan Ceiling equal to one half of 1 per cent of its end-of-1968 total assets which can be used for term loans to finance new U.S. exports. -3- The definition for these export term loans is the same as the definition banks have been using in reports to the Treasury Department on loans and commitments in connection with the Interest Equalization Tax. Essentially these are loans, for one year or longer and each of $250,000 or more, for U.S. exports of goods and for services performed abroad by U.S. firms. Any such loans granted for goods shipped, or services performed, after November 30, 1969, will be counted against a bank's Export Term-Loan Ceiling or, if the bank wishes, against its General Ceiling. By setting a separate category for long-term export loans and asking that, even among short-term loans, banks continue to give priority to export financing, the revised guidelines should ensure that a greater amount -- and proportion -- of U.S. bank loans to foreigners will be used to finance the purchase of U.S. goods and services. Similarly, by providing that General Ceilings be reduced, and Export TermrLoan Ceilings increased, by repayment of presently out standing export term-loans, the guidelines would preserve the lending leeway for export financing. Utilization of total assets of banks as a base for com puting the new export credit ceiling will make the foreign credit restraint program more equitable in its treatment of banks. Since 1965, the program has tended to freeze the pattern of foreign lending among banks. The guidelines for the larger banks have been based on the amount of foreign loans the banks held at the end of 1964. The ceilings for smaller banks, however, have been a percentage of their total assets. Now total assets, which are not directly related to the relative standings of banks in the foreign loan field, will be used for calculating the Export Term-Loan Ceilings of all banks. Under the new program, banks which had no ceilings under previous guidelines may qualify for lending ceilings through applica tion to the Federal Reserve Bank in their District. These ceilings are to be used predominantly for export financing. Funds of all types advanced to residents of Canada continue to be exempted from the program. Canada has been exempted since the end of February, 1968, when the Canadian Government took steps to ensure that Canadian financial institutions would not serve as a "pass through" for U.S. funds. Banks and other financial institutions are asked again to give priority to developing countries for loans and investments under the ceilings. As in the past, loans that are guaranteed or participated in by the Export-Import Bank, guaranteed by the Depart ment of Defense, or insured by the Foreign Credit Insurance Association are exempted from the ceilings. The exemption for long-term investments in Japan by nonbank financial institutions will not apply to investments made after this year but will continue for investments already held. Governor Brimmer reported that, during the first ten months of 1969, the banks have reduced their foreign assets covered by the pro gram by $138 million. In 1968, there was a net inflow of $612 million, compared with a suggested reduction of $400 million. In the third quarter of this year, a reduction in foreign assets more than offset a substantial outflow which occurred in the second quarter. -5At the end of October, 1969, the banks' covered assets, at $9.1 billion, were almost $400 million below the amount of such assets outstanding on the base date, December 31, 1964. A copy of the revised guidelines is attached. Copies will be made available to financial institutions through the Federal Reserve Banks. -0 - Attachment December 17, 1969. Revised Guidelines for Banks and Nonbank Financial Institutions I. General Purpose In order to help to strengthen the U.S. balance of payments, U.S. financial institutions are asked to continue to restrain their foreign loans and investments and, within the limits of the restraints, to give priority to financing U.S. exports of goods and services and to meeting the credit needs of developing countries. II. Banks A. Ceilings 1. Banks with ceilings under previous guidelines A bank that had a foreign lending ceiling under the Federal Reserve foreign credit restraint guidelines in existence on November 30, 1969 (hereafter "previous guidelines") will have, under the present revised guidelines, a General Ceiling and an Export Term-Loan Ceiling. The General Ceiling will be available for foreign claims of any type and maturity, in cluding Export Term Loans; subject to the definitions and other conditions set forth below, the Export Term-Loan Ceiling will be available solely for foreign export term loans. - 2 - a. General Ceiling i) The General Ceiling will be equal to the bank's adjusted ceiling as of November 30, 1969. ii) A bank should not at any time hold claims on foreigners in excess of its General Ceiling, except for the claims which it reports under its separate Export Term-Loan Ceiling described in section A-l-b, below, iii) Within its General Ceiling, a bank should give priority to credits financing exports of U.S. goods and services and to credits meeting the needs of developing countries b. Export Term-Loan Ceiling i) The Export Term-Loan Ceiling will be equal to 0.5 per cent of the bank's total assets as of December 31, 1968. ii) A bank should not at any time hold claims on foreigners that are export term loans, as defined in section G-3, below, to finance goods exported from the United States after November 30,1969, or to finance services performed in foreign countries by U.S. individuals or U.S. firms after November 30, 1969, in excess of the bank's Export Term-Loan Ceiling, except such export term loans as the bank counts against its General Ceiling, described in section A-l-a, above. - 3 - 2• Banks without ceilings under previous guidelines A bank that has not had a foreign lending ceiling under the previous guidelines may discuss with the Federal Reserve Bank in its District the possibility of adopting a General Ceiling and an Export Term-Loan Ceiling. In determining whether and, if so, in what amount, ceilings should be established, there should be clear reason for expecting that the bank will use such ceilings predominantly for short- and long-term export loans. Any General Ceiling, and any Export Term-Loan Ceiling should not, in the aggregate, exceed 1 per cent of the bank's total assets as of December 31, 1968. 3. Western Europe a. Ceiling adjustment for prior term loans. A bank each month should reduce its General Ceiling by the dollar amount of any repayments it receives on nonexport loans to residents of developed countries of continental Western Europe outstanding on December 31, 1967. b. Restraint on new nonexport term loans. A bank should not make new term loans to such residents, except loans that qualify as Export Term Loans. c. Short-term credits. A bank should hold the amount of short-term credits (having an original maturity of not over one year) to such residents to not more than 75 cent of the amounts of such credits outstanding on December 31, 1967. per - 4 4. Adjustment for P r io r Export Term Loans. A bank each month should reduce its General Ceiling, and should increase its Export Term-Loan Ceiling, by the dollar amount of any repayments it receives on Export Term-Loans outstanding on November 30, 1969, 5. Sales of Foreign Assets a. Sales without recourse. A bank that sells a foreign claim that is subject to the guideline ceilings, without recourse, (a) to a U.S. resident other than a financial institution participating in the Federal Reserve foreign credit restraint program or a direct investor subject to the controls admin istered by the Department of Commerce or (b) to the ExportImport Bank should reduce its General Ceiling or its Export Term-Loan Ceiling,whichever is relevant, by an equivalent amount. b. Sales with recourse. A bank that sells a foreign asset, with recourse, to a U.S. resident other than a financial institution participating in the Federal Reserve foreign credit restraint program or to a direct investor subject to the Foreign Direct Investment Program administered by the Department of Commerce should continue to report those assets under its General Ceiling or its Export Term-Loan Ceiling, as appropriate. 6. Total Assets For the purpose of calculating»the Export Term-Loan Ceiling, total assets are those shown in the Official Report of Condi tion submitted to the relevant supervisory agency as of December 31, 1968. - 5 - B. Exclusion 1. Canada a. No restraint. These guidelines are not to restrain the extension of credit to residents of Canada. b. Reporting. For the purpose of reporting claims under the General Ceiling, a bank should count against its General Ceiling claims on residents of Canada outstanding on February 29, 1968, deducting any net increase in such claims granted after that date and adding any net reduction in such claims granted after that date. 2. Certain Guaranteed and Insured Loans Loans to finance U.S. exports that are guaranteed, or partici pated in, by the Export-Import Bank, or guaranteed by the D e partment of Defense, or are insured by the Foreign Credit Insurance Association are exempted from the General Ceiling and the Export Term-Loan Ceiling. C. Temporary Overages A bank whose claims on foreigners are in excess of either or both of its ceilings and which does not show improvements will be invited periodically to discuss with the Federal Reserve Bank in its District the steps it has taken and that it proposes to take to bring the amount of its claims under the ceilings. - D. 6 - Applica bi lit y to Financial Institutions 1. Genera 1 The guidelines are applicable to all U.S. banks (exclusive of the trust departments of commercial banks, v/hich should follow the guidelines for nonbank financial institutions in Part III, below) and to "Edge Act" and "Agreement" Corpora tions. 2. E d g e Act and Agreement Corporations a. Policy of limiting aggregate ceilings. It is intended that the establishment of new Edge Act Corporations or new Agreement Corporations not result in the expansion of aggregate lending ceilings under these guidelines. b. One-bank owned Corporations. An Edge Act or Agreement Corporation that is owned by one bank and that, under previous guidelines, had a ceiling separate from that of its parent bank may continue to be guided by General and Export Term-Loan Ceilings separate from those of its parent or may combine its foreign loans and investments with the respective General and Export Term-Loan Ceilings of its parent. The General Ceiling and the Export Term- Loan Ceiling to which it would be entitled if it did not combine would be calculated as under section A-l, above, on the basis of the Corporation's total assets and its adjusted ceiling under previous guidelines. An Edge Act or Agreement Corporation that is owned by one bank and that was established after March 3, 1965 should share the General and Export Term-Loan Ceilings of its parent bank. - 7 - c. Multi-bank owned Corporations. i) Separate Ceilings. An Edge Act or Agreement Corpor ation that is owned by more than one bank or by a registered bank holding company will have a General Ceiling and an Export Term-Loan Ceiling separate from those of its parents. The Corporation's General Ceiling and Export Term-Loan Ceilings are each to be equal; respectively, to 100 per cent and 10 per cent of its adjusted ceiling as of November 30, 1969. ii) Transfer of Parent's Ceiling. crease ceilings, To acquire or to in such an Edge Act or Agreement Corpor ation may receive from one or more of its parent banks a share of the ceilings of the parent or parents. transferred to the Corporation, Once the ceilings should not be transferred back to the parent or parents, e x cept to meet unforeseen and overriding developments. If any such exceptional need for retransfer should arise, the Corporation and its parent or parents should consult in advance with the Federal Reserve in their respective Districts. 3. Bank Holding Companies a. Registered bank holding companies. A registered bank holding company is to be treated as a bank for the pur pose of these guidelines. Bank - 8 - b. One-bank holding companies. A one-bank holding company whose bank subsidiary has ceilings under these guidelines is to be treated as a bank for the purpose of these guidelines. Such a holding company, together with its bank subsidiary and any nonbank subsidiary, on a consolidated basis. However, the Export Term-Loan Ceiling, should report the General Ceiling and respectively, are to be calcu lated on the basis of the celling of the bank subsidiary under the previous guidelines and on the basis of the bank subsidiary's total assets. Furthermore, to minimize changes from earlier established procedures, any nonbank subsidiary that was reporting prior to December 1, 1969, to the D e partment of Commerce under the Foreign Direct Investment Program or to a Federal Reserve Bank under the nonbank financial institution guidelines should not report under these bank guidelines. c. Consolidation of subsidiaries' ceilings. (including a bank, Edge Act Corporation, A bank subsidiary or Agreement Cor poration) of a registered bank holding company may consoli date its General Ceiling and Export Term-Loan Ceiling with the respective ceilings of one or more of the holding company's other bank subsidiaries which had ceilings under previous guidelines. 4. Foreign Branches of U.S. Banks a. The guidelines are not designed to restrict the extension of foreign credits by foreign branches of U.S. banks if - 9 - the funds utilized are derived from foreign sources and do not add to the outflow of capital from the United States. b. Total claims of a bank's domestic offices on its foreign branches (including permanent capital invested in, as well as balances due from, such branches) represent bank credit to foreigners for the purposes of the program. E. Conformity with Objectives of Guidelines 1. Department of Commerce Program and Nonbank Financial Institu tion Guidelines Banks should avoid making loans that would directly or indirectly enable borrowers to use funds abroad in a manner inconsistent with the Department of Commerce program or with the guidelines for nonbank financial institutions. 2. Substitute Loans Banks should not extend to U . S .-resident subsidiaries, or branches,of foreign companies loans that otherwise might have been made by the banks to the foreign parent or other affiliate of the company or that normally yould have been obtained abroad. 3. Management of Liquid Assets A bank should not place its own funds abroad (other than in Canada) for short-term investment purposes, whether such investments are payable in foreign cur rencies or in U.S. dollars. Banks need not, however, reduce necessary working balances held with foreign correspondents. - 4. 10 - Transactions for Customers While recognizing that it must follow a customer's instruction, a bank should discourage customers from placing liquid funds outside the United States, except in Canada. A bank should not place with a customer foreign obligations that, in the absence of the guide lines, it would have acquired or held for its own account. 5. U.S. Branches and Agencies of Foreign Banks Branches and agencies of foreign banks located in the United States are requested to act in accordance with the spirit of these guidelines. F. Reporting Each bank that has ceilings under these guidelines and that on a reporting date had $500,000 or more in foreign claims should file a Monthly Report on Foreign Claims with the Federal Reserve Bank in the District in which the bank is located. (Forms are available at the Federal Reserve Banks.) G. Definitions 1. "Foreigners" include: individuals, partnerships, and corpora tions domiciled outside the United States, irrespective of citizenship, except their agencies or branches located within the United States; branches, subsidiaries, and affiliates of - 11 - U.S. banks and other U.S. corporations that are located in foreign countries; and any government of a foreign country or official agency thereof and any official international or regional institution created by treaty, irrespective of location. 2. "Claims on foreigners" are claims on foreigners held for a bank's own account. They include: foreign long-term securi ties; foreign customers’ liability for acceptances executed, whether or not the acceptances are held by the reporting banks; deferred payment letters of credit described in the Treasury Department's Supplementary Reporting Instructions No. 1, Treasury Foreign Exchange Reports, Banking Forms, dated Hay 10, 1968; participations purchased in loans to foreigners; loans to financial subsidiaries incorporated in the United States, 50 per cent or more of which is owned by foreigners; and foreign assets sold, with recourse, to U.S. residents other than financial institutions partici pating in the Federal Reserve credit restraint program or direct investors subject to the controls administered by the Commerce Department. "Claims on foreigners" exclude: contingent claims; unutilized credits; claims held for account of customers; acceptances executed by other U.S. banks; and, in the manner determined in section B-l-b above, claims on residents of Canada. - 12 - 3. An Export Term Loan is a loan of which a U.S. commercial bank would have to notify the Treasury Department under that Depart m e n t ^ Interest Equalization Tax reporting requirements being applied on December 1, 1969, concerning loans, or commitments, to foreign obligors. In summary, such loans include or ex clude the following. They include credits of an original maturity of one year or more and of an amount of $250,000 or more to a foreign obligor for U.S. goods exported or for U.S. services performed abroad. The loans may be made directly by a bank or may be made indirectly by a bank through its purchase of documented loan paper. present guidelines, For the purpose of the such loans that are to be counted against the Export Term-Loan Ceiling are confined to credits fi nancing U.S. exports shipped after November 30, 1969, or services performed abroad by U.S. individuals or U.S. firms after November 30, 1969. The loans exclude debt obligations acquired by a bank and having less than a year of remaining term until maturity (regardless of original length of maturity). The loans also exclude Export-Import Bank certificates of participation in a pool of loans. (Participations with the Export-Import Bank in particular loans and loan paper purchased from the Export-Import Bank of foreign obligors are exempted under section II-B-2, above.) It should be noted that, in accordance with IET - 13 - usage, Export Term-Loans have a maturity of one year or more, whereas, as used elsewhere in these guidelines, term loans of other types have a maturity of more than one year and, conversely, short-term credits have a maturity of one year or less. 4. Developing countries are all countries other than: Australia, Austria, Abu Dhabi, the Bahamas, Bahrain, Belgium, Bermuda, Canada, Denmark, France, Germany (Federal Republic), Hong Kong, Iran, Iraq, Ireland, Italy, Japan, Kuwait, Kuwait-Saudi Arabia Neutral Zone, Libya, Liechtenstein, Luxembourg, Monaco, Nether lands, New Zealand, Norway, Portugal, Qatar, Republic of South Africa, San Marino, Saudi Arabia, Spain, Sweden, Switzerland, and the United Kingdom; and other than: Albania, Bulgaria, the People's Republic of China, Cuba, Czechoslovakia, Estonia, Hungary, Communist-controlled Korea, Latvia, Lithuania, Outer Mongolia, Poland (including any area under its provisional administration), Rumania, Soviet Zone of Germany and the Soviet sector of Berlin, Tibet, Union of Soviet Socialist Republics and the Kurile Islands, Southern Sakhalin, and areas in East Prussia that are under the provisional admin istration of the Union of Soviet Socialist Republics, and Communist-controlled Vietnam. - 14 III. Nonbank Financial Institutions A. Types of Institutions Covered The group of institutions covered by the nonbank guidelines includes: trust companies; trust departments of commercial banks; mutual savings banks; insurance companies; investment companies; finance companies; employee retirement and pension funds; college endownment funds; charitable foundations; the U.S. branches of foreign insurance companies and of other foreign nonbank financial corporations; and holding companies (other than bank holding companies) whose domestic assets consist primarily of the stock of operating nonbank financial institutions. writing firms, Investment under securities brokers and dealers, and investment counseling firms also are covered with respect to foreign financial assets held for their own account and are requested to inform their customers of the program in those cases where it appears applicable. Businesses whose principal activity is the leasing of property and equipment, and which are not owned or controlled by a financial institution, are not defined as financial institutions. B. Ceiling and Priorities Each institution is requested to limit its aggregate holdings of foreign assets covered by the program to no more than 100 per cent of the adjusted amount of such assets held on December 31, 1967, except for special situations discussed in K below. Institutions generally are expected to hold no foreign deposits or money market instruments (other than Canadian). However, an institution may maintain such minimum working balances abroad as are needed for the efficient conduct of its foreign business activities. -• 15 - Among other foreign assets that are subject to the guideline celling, Institutions are asked to give first priority to credits that represent the bona fide financing of U. S. exports, and second priority to credits to developing countries. In addition, Institutions are requested not to increase the total of their Investments In the developed countries of continental Western Europe beyond the amount held on December 31, 1968, except for new credits that are judged to be essential to the financing of U. S. exports. This means that reductions through amortizations, maturities, or sales may be offset by new acquisitions In these countries. However, Institutions are expected to refrain from offsetting proceeds of sales to other Americans by new acquisitions from foreigners. Institutions may Invest In noncovered foreign assets generally as desired. However, they are requested to refrain from making any loans and Investments, noncovered as well as covered, which appear to be Inconsistent with other aspects of the President's balance of payments program. 1. Among these are the following: Noncovered credits under this program that substitute directly for loans that commercial banks would have made In the absence of that part of the program applicable to them. 2. Noncovered credits to developing country subsidiaries of U. S. corporations that would not have been permitted under the Department of Commerce program If made by the U. S. parent directly. 3. Credits to U. S. corporate borrowers that would enable them to make new foreign loans and Investments Inconsistent with the Department of Commerce program. - 4. 16 - Credits to U. S. subsidiaries and branches of foreign companies that otherwise would have been made to the foreign parent, or that would substitute for funds normally obtained from foreign sources. C. Covered Assets Covered foreign financial assets, subject to the guideline ceiling, include the following types of investments, except for "free delivery" items received after December 31, 1967: 1. Liquid funds in all foreign countries other than Canada. This category comprises foreign bank deposits, including deposits in foreign branches of U. S. banks, and liquid money market claims on foreign obligors, generally defined to include marketable negotiable instruments maturing In 1 year or less. 2. All other claims on non-Canadian foreign obligors written, at date of acquisition, to mature in 10 years or less. This category includes bonds, notes, mortgages, loans, and other credits. Excluded are bonds and notes of international institutions of which the United States is a member, regardless of maturity. Excluded also are loans guaranteed or participated in by the Export-Import Bank, guaranteed by the Department of Defense, or insured by the Foreign Credit Insurance Association. 3. Net financial investment in foreign branches, subsidiaries and affiliates, Canada.— ^ T7 See Note on p . 22. located in developed countries other than Such financial investment includes payments into - 17 equity and other capital accounts of, and net loans and advances to, any foreign businesses in which the U. S. institution has an ownership interest of 10 per cent or more. Excluded are earnings of a foreign affiliate if they are directly retained in the capital accounts of the foreign business. 4. Long-term credits of foreign obligors domiciled in developed countries other than Canada.— ^ are bonds, notes, mortgages, Included in this category loans, and other credits matur ing more than 10 years after date of acquisition. Excluded are bonds of international institutions of which the United States is a member. 5. Equity securities of foreign corporations domiciled in developed countries other than Canada,— ^ except those acquired after September 30, 1965, in U.S. markets from American in vestors. The test of whether an equity security is covered will depend on the institution's obligation to pay the Interest Equalization Tax on acquisition. Exclusion from covered assets under this program normally will be indicated when, in acquiring an equity security that otherwise would be covered, the purchas ing institution receives a certificate of prior American owner ship, or brokerage confirmation thereof. D. Base-Date Holdings Base-date holdings for any reporting date after September 30, 1969, are defined as: 1. Total holdings of covered foreign assets as of the base date, which is December 31, 1969 types described in C (3), for investments in Japan of the (4), and (5) above, and December 31, 1967 for all other covered assets; 1/ See Note on p. 22. - 18 - 2. - ' Minus, equity securities of companies domiciled in developed countries (except Canada), that are included in (1) but had been sold to American investors prior to the current quarter; 3. Plus, or minus, the difference between sales proceeds and "carrying1 value of covered equities sold prior to the current 1 quarter to other than American investors or in other than U« S. markets. On each reporting date, "carrying" value should be the value reflected in the institution's report (on Form FR 392R-68) for December 31, 1967, in the case of equities held on that date, and it should be cost in the case of equities purchased after that date. "Adjusted" base-date holdings, to which the 100 per cent ceiling applies, are equal to "base-date" holdings as defined above a d justed for sales during the current quarter of included covered equities in accordance with the procedures specified in (2) and (3) of the preceding paragraph. E. Noncovered Assets Foreign financial assets not covered by the guidelines are still reportable on the quarterly statistical reports to the Federal Reserve Banks. 1. Such noncovered foreign investments include the following: All financial assets in, or claims on residents of, the Dominion of Canada. 2. Bonds and notes of international institutions of which the United States is a member, regardless of maturity. - 3. 19 - Long-term investments in all developing countries, in cluding credit instruments with final maturities of more than 10 years at date of acquisition, direct investment in subsidiaries and affiliates, and all equity securities issued by firms domiciled in these countries. 4. Equity securities of firms in developed countries other than Canada that have been acquired in U.S. markets from American investors (see Point 5 above). Foreign assets of types covered by the program and acquired as "free delivery” items--that is, as new gifts or, in the case of trust companies or trust departments of commercial banks, in new accounts deposited with the institution--are not defined as covered assets if they were acquired after December 31, 1967. Such assets should be reported as a memorandum item, as should outstanding amounts of loans guaranteed or participated in by the Export-Import Bank, guaranteed by the Department of Defense, or insured by the Foreign Credit Insurance Association. F. Credits to Certain U. S. Corporations Any loan or investment acquired by a nonbank financial institution after June 30, 1968, that involves the advance of funds to a domestic corporation which is simply a financing conduit (commonly known as a "Delaware sub"), and which in turn will transmit the funds to a foreign business, should be reported as a foreign asset if one or more foreigners own a majority of the "Delaware" corporation. The amounts of such foreign loans or investments should be classified according to the country where the funds are actually to be used, not according - 20 - to the residence of the owners of the MDelaware"corporation. In the event that U. S. residents hold a majority ownership interest in the "Delaware1 corporation, no part of a loan or invest 1 ment in such a corporation is to be regarded as a foreign asset of the institution. G* Leasing of Physical Goods The foreign leasing activities of firms which engage primarily in the leasing of physical assets (e*g», computers, real property, ships, aircraft), and which are not owned or controlled by a U. S. financial institution, are not reportable under the nonbank program. However, such activities are reportable when they are undertaken by nonbank financial institutions. These institutions should report the book value of any physical assets leased to foreigners on the appropriate line of the quarterly form they file with their Federal Reserve Bank. H. Investment in Certain Foreign Insurance Ventures Net investment in foreign insurance ventures should be reported as such wherever possible. In the case of any such ventures in which there is no segregated net investment, the U. S. insurance company may exclude from its foreign assets investments within the foreign country involved, in amounts up to 110 per cent of reserves accumulated on insurance sold to residents of that country, or (if it is larger) the minimum deposit of cash or securities required as a condition of doing insurance business within that country. It Long-Term Credits to Developing-Countrv Businesses Institutions are requested to discuss with their Federal Reserve Bank in advance any future long-term loans or direct security - 21 - placements that would involve extensions of credit of $500,000 or more to private business borrowers located in the developing countries. J. Reporting Requirement Each nonbank financial institution holding, on any quarterly reporting date, covered assets of $500,000 or more, or total foreign financial assets of $5 million or more, is requested to file a statistical report covering its total holdings on that date with the Federal Reserve Bank of the Federal Reserve district in which its principal office is located. The reports are due within 20 days following the close of each calendar quarter, and forms may be obtained by contacting the Federal Reserve Bank. K. Covered Assets in Excess of Ceiling 1. In view of the balance of payments objectives of the program, it is noted that covered investments of nonbank financial institutions may be permitted to exceed the guideline ceiling to the extent that the funds for such investment are borrowed abroad for investment in the same country or in countries that are subject to the same or more liberal guideline limitations. Thus, funds borrowed in the developed countries of continental Western Europe may be used to finance investments in these countries and elsewhere, and funds borrowed in other developed countries (except Canada) may be used to finance investment in covered foreign assets anywhere but in the developed countries of continental Western Europe. Any institution desir ing to offset foreign borrowing against foreign investment, how ever, should discuss its plans with the Federal Reserve Bank before entering into such an arrangement. - 22 m 2. effort . i While institutions are expected to make every reasonable w to reduce outstanding nonexport credits in order to accommodate new export credits within their guideline ceiling, such a reduction may not be feasible for some institutions. An institution that can not avoid exceeding its guideline ceiling if it makes new loans to finance U.S. exports--excluding loans that are guaranteed or participated in by the Export-Import Bank, guaranteed by the Department of Defense, or insured by the Foreign Credit Insurance Association--should notify its Federal Reserve Bank of the prospective overage before making such loans. 3. An institution with a guideline ceiling of less than $500,000 may hold covered assets up to this amount if ite investments are consistent with other guideline provisions, e.g., those with respect to liquid funds and to nonexport credits to the developed countries of continental Western Europe. The institution is expected to file an initial statement of its holdings with its Federal Reserve Bank and thereafter to file a statement with the Bank within 20 days after the end of any calendar quarter when its total holdings of covered foreign assets have changed by as much as $100,000 since its previous report, even though its total holdings remain below the minimum reporting levels stipulated in the guidelines. Note.--Developed countries other than Canada: continental Western Europe-Austria, Belgium, Denmark, France, Germany (Federal Republic), Italy, Liechtenstein, Luxembourg, Monaco, Netherlands, Norway, Portugal, San Marino, Spain, Sweden, and Switzerland; other developed countries are: Abu Dhabi, Australia, the Bahamas, Bahrain, Bermuda, Hong Kong, Iran, Iraq, Ireland, Japan, Kuwait-Saudi Arabia Neutral Zone, Libya, New Zealand, Qatar, Republic of South Africa, Saudi Arabia, and the United Kingdom. Also to be considered "developed" are the following countries: Albania, Bulgaria, the People's Republic of China, Cuba, Czechoslovakia, Estonia, Hungary, Communist-controlled Korea, Latvia, Lithuania, Outer Mongolia, Poland (including any area under its provisional administration), Rumania, Soviet Zone of Germany and the Soviet sector of Berlin, Tibet, Union of Soviet Socialist Republics and the Kurile Islands, Southern Sakhalin, and areas in East Prussia which are under the provisional administration of the Union of Soviet Socialist Republics, and Communist-controlled Vietman.