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F ederal Reserve bank O F DALLAS Dallas, Texas, June 21, 1965 INTERPRETATIONS OF GUIDELINES NUMBERS 1, 3, AND 4 FOR FOREIGN LENDING ACTIVITIES OF COMMERCIAL BANKS To All Banks in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System released for publication in the morning newspapers of Monday, March 8, 1965, the guidelines for foreign lending activi ties of commercial banks under the President’s Balance of Paym ents Program. The guide lines were written to cover broad areas, and it was recognized that many questions would arise as to the proper interpretation. The Federal Reserve System does not expect, nor would it want, to pass on specific loan transactions — this is a m atter for the business judgm ent of banks acting under the guidelines. However, considerations of competitive equity make it important that all banks be informed as to the position of the System with respect to the application of the guidelines to certain types of transactions. Accordingly, there are transm itted herewith System interpretations as to the application of the guide lines to establishing a base for banks, as to banks in excess of the 5 per cent target, and as to which loans should receive priority. Other interpretations will be released from tim e to time. Additional copies of the interpretations will be furnished upon request addressed to any office of this Bank. Yours very truly, Watrous H. Irons President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) INTERPRETATIONS OF GUIDELINES NUMBERS 1, 3, AND 4 FOR FOREIGN LENDING ACTIVITIES OF COMMERCIAL BANKS QUESTIONS RELATING TO GUIDELINE NUMBER 1, E stablishing a target base fo r an individu al bank. 1. Should the issuance of a stand-by letter of credit, or an outright guarantee, by a U.S. bank to a foreign bank for the purpose of guaranteeing a loan made by the foreign bank to a foreign subsidi ary of a U.S. concern, be counted in the ceiling? No. Such transactions have the effect of substituting foreign for U.S. capital. However, if the line of credit were used or the terms of the guarantee invoked, the resulting loan would be a foreign loan subject to the ceiling. 2. Are loans made to foreigners to finance exports of products owned by the Commodity Credit Corporation to be regarded as foreign or domestic loans? Foreign loans. 3. Should loans to foreign concerns owned by U.S. citizens— for example, loans to corporations organized in flag-of-convenience countries — be regarded as foreign or domestic loans? Foreign loans. 4. Do loans made by foreign branches of a U.S. bank count in the bank’s base or against the 105 per cent ceiling? No. While the foreign branch is expected not to draw down its deposits with the head office for the purpose of m aking such loans, nor to solicit dollar deposits from U.S. residents or other U.S. sources, the branch’s loans are not a part of the base of the head office and do not count against the ceiling. 5. Should loans made to U.S. branches and agencies of foreign firms, and loans made to do m estic firms be regarded as foreign or domestic loans when the proceeds of the loans are to be used abroad? Such loans are to be regarded as domestic loans. However, Guideline Number 13, revised April 28, 1965, points out that banks should determine to the extent possible that the proceeds of such loans will not be used in a manner inconsistent with the purpose of the program. 6. Does a loan made to a less developed country and guaranteed by an agency of the U.S. Government come w ithin the ceiling? Such a loan is subject to the ceiling unless it is guaranteed by the Export-Import Bank or is insured by the Foreign Credit Insurance Association. However, under Guideline Number 4, and within the 105 per cent ceiling, such a credit would have absolute priority if it financed U.S. exports, and the highest priority in the nonexport category. 7. Are loans to U.S. m ilitary personnel and other employees of the U.S. Government stationed abroad foreign or domestic loans? Domestic loans. 8. Should loans to foreign governments or concerns, the proceeds of which are to be left on deposit in the U.S., be regarded as foreign or domestic loans? Foreign loans. Such transactions increase U.S. short-term liabilities to foreigners and short-term claims on foreigners, thus increasing the balance of paym ents deficit as it is cur rently measured. 9. Should a loan made to a foreign concern with recourse to a U.S. resident be regarded as a foreign or a domestic loan ? A foreign loan. See the explanation accompanying the previous question. 10. May firm commitments or term letters of credit on the books as of December 31, 1964, be included in a bank’s base ? Only that portion of a commitment or letter of credit which had been utilized on December 31, 1964, m ay be included in the base. Since the objective is to reduce the expansion in foreign loans to a given figure, the inclusion of commitments in the base would make it necessary to reduce the percentage by which loans could be increased over the chosen base. Inclusion of com mitments in the base would merely have the effect of redistributing the suggested expansion in favor of those banks whose firm commitments on December 31, 1964, were relatively large. 11. Are personal loans to individual representatives of foreign governments resident in the United States foreign loans or domestic loans? Domestic loans. QUESTIONS RELATING TO GUIDELINE NUMBER 3 , B anks in excess o f 5 p e r cent target. 1. If a bank is at or over the ceiling, should it fail to honor a firm commitment, or reduce or cancel lines of credit? Firm commitments are to be honored. Banks should endeavor to keep the use of other lines of credit within normal patterns. When a bank is over the ceiling for any reason, a program for getting below the ceiling should be discussed immediately with officers of the Federal Reserve Bank. 2. May a bank exceed the 105 per cent ceiling because of seasonal variations or as a result of individual transactions ? Seasonal variations or individual transactions may result in a bank’s being temporarily over the ceiling. In such cases the bank should discuss the m atter with officers of the Federal Reserve Bank and attem pt to work back within the ceiling as quickly as possible. QUESTIONS RELATING TO GUIDELINE NUMBER 4, Loan p rio rities. 1. What priority should be given to loans to support third-country financing? A low priority unless made to a less developed country. In that case the less developed country priority relating to nonexport credits would apply. 2. Would a loan to a concern in a developed country for use of a subsidiary in a less developed country be given a high priority because of the place in which the credit is to be used, or a low priority because of the location of the borrower? Assum ing that the loan is not financing a U.S. export, it would have a low priority. De veloped countries should arrange such financing in their own markets. 3. Which countries are to be considered as “less developed” for the purposes of this program? Developed countries are: Australia, Austria, the Bahamas, Belgium, Bermuda, Canada, Denmark, France, Germany (Federal Republic), Hong Kong, Ireland, Italy, Japan, Kuwait, Liechtenstein, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Portugal, Republic of South Africa, San Marino, Spain, Sweden, Switzerland, United Kingdom and countries defined as members of the Sino-Soviet bloc by Executive Order 11071, dated December 27, 1962. 4. W ithin the 105 per reference to export credits the suggestion that “banks Canada, Japan . . . and the cent ceiling, what is meant by the terms “absolute” and “highest” with and credits to the less developed countries? How do these terms relate to should avoid restrictive policies that would place an undue burden on . . . United K ingdom ”? All bona fide export credits have priority over all nonexport credits. Within nonexport credits, all credits to less developed countries have priority over all other nonexport credits. If it is necessary to make adjustments in credits to developed countries in order to conform to the suggested priorities, consideration should be given to the special circumstances of Canada, Japan, and the United Kingdom.