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Federal R eserve Bank OF DALLAS ROBERT D. M C T E E R , J R . DALLAS, TEXAS P R E S ID E N T A N D C H IE F E X E C U T I V E O F F I C E R January 31, 1996 75265-5906 Notice 96-08 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Rule Amending Regulation K (International Banking Operations) DETAILS The Board of Governors of the Federal Reserve System has issued a final rule amending Regulation K (International Banking Operations) to ease the burden on U.S. banking organizations seeking to make investments in foreign companies. The final rule, which is part of an overall review of the entire regulation, expands the authority of strongly-capitalized and well-managed banking organizations to make certain foreign investments. No prior notice or application to the Board will be required before an organization makes an investment that falls within this general consent authority. The final rule is effective immediately. ATTACHMENT A copy of the Board’s notice as it appears on pages 67050-54, Vol. 60, No. 249, of the Federal Register dated December 28, 1995, is attached. MORE INFORMATION For more information, please contact Ann Worthy at (214) 922-6156. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve 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. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 67050 Federal Register / Vol. 60, No. 249 / Thursday, December 28, 1995 / Rules and Regulations FEDERAL RESERVE SYSTEM 12CFR Part 211 [R eg ulatio n K; D ocket No. R-0896] International Operations of United States Banking Organizations Board of Governors of the Federal Reserve System. ACTION: Final rule. AGENCY: This final rule amends Subpart A of Regulation K (International Operations of U.S. Banking Organizations) to provide expanded general consent authority for investments in foreign companies by SUMMARY: Federal Register 7 Vol. 60, No. 249 / Thursday, December 28, 1995 / Rules and Regulations 67051 U.S. banking organizations that are strongly capitalized and well managed. This expanded authority is designed to permit U.S. banking organizations meeting these requirements to make larger investm ents w ithout the need for prior approval or review. Certain investm ents or activities, however, are not eligible for the expanded authority. The final rule requires an investor making use of the expanded authority to provide the Board w ith certain information after an investment has been made. In addition, for those investm ents requiring prior notice to the Board, the rule would streamline the processing of such notices. EFFECTIVE DATE: December 21,1995. On September 25,1995, the Board requested public comment on a proposed rule that would expand the general consent authority for strongly capitalized and well-managed banking organizations. 60 FR 49350. The expanded general consent authority (expanded authority) was intended to reduce the burden associated with obtaining approval for such investments for U.S. banking organizations meeting these requirements. The comment period ended on October 30,1995. The Board received nine public comments on the proposal. Comments were submitted by six banking organizations and three trade associations. The Board has considered the comments and, as a result of its further review, has made FOR FURTHER INFORMATION CONTACT: several changes to address these Kathleen M. O ’Day, Associate General comments in the final rule. Counsel (202/452-3786), Sandra L. The final rule removes the current $25 Richardson, Managing Senior Counsel m illion cap on general consent (202/452-6406), Jonathan D. Stoloff, investments, w hich is currently the Senior Attorney (202/452-3269), or binding constraint on such investment Andres L. Navarrete, Attorney (202/ in almost all cases, and instead ties the 452-2300), Legal Division; William A. expanded general consent limits to the Ryback, Associate Director (202/452capital of the investor. An aggregate 2722), Michael G. Martinson, Assistant Director (202/452-2798), or Betsy Cross, limit on investments made in any 12month period under the expanded Manager (202/452-2574), Division of authority is established. The final rule Banking Supervision and Regulation, also specifies the nature of investments Board of Governors of the Federal eligible for the expanded authority, as Reserve System. For the users of Telecommunication Device for the Deaf well as the types of activities that may be conducted by the organization in (TDD) only, please contact Dorothea w hich the investment is to be made. Thompson (202/452-3544), Board of Comments received regarding each of Governors of the Federal Reserve these areas are discussed below. System, 20th and C Streets, N.W., Washington, D.C. 20551. Investor Eligibility for Expanded General Consent SUPPLEMENTARY INFORMATION: Subpart A of the Board’s Regulation K sets out the The final rule limits the expanded rules governing the foreign activities of general consent authority to those U.S. banking organizations, including investors that are strongly capitalized procedures for making investments in and well managed. The expanded foreign banking and non-banking authority is available for investments by organizations. Under section 211.5(c), member banks, bank holding all such investments, w hether made companies, Edge corporations that are directly or indirectly, are required to be not engaged in banking, and agreement made in accordance with the general corporations. The expanded authority is consent, prior notice, or specific consent available only where the investor, its procedures contained in that paragraph. parent member bank, if any, and the 12 CFR 211.5(c). No prior notice or bank holding company are strongly application is required for any capitalized and well managed, as those investment that falls w ithin the general terms are defined by the Board. Strongly consent authority. Such authority at capitalized, in relation to member present is limited to investments where banks, is defined with reference to the the total amount invested in any one definition of “well capitalized” set out organization, in one transaction or a in the prompt corrective action series of transactions, does not exceed standards, which requires, at a the lesser of $25 million or 5 percent of minimum, a 6 percent tier 1 and 10 the investor’s Tier 1 capital where the percent total risk-based capital ratio and investor is a member bank, bank holding a leverage ratio of 5 percent.2 12 CFR company, or Edge corporation engaged 208.33(b)(1). Edge or agreement in banking.1 1 In the case of an Edge corporation not engaged in banking, the relevant general consent limit is the lesser of $25 m illion or 25 percent of its Tier 1 capital. corporations and bank holding companies are required to have a total risk-based capital ratio of 10 percent or more in order to be considered strongly capitalized for purposes of the expanded authority. One commenter asked for clarification with respect to the applicability of the capital tests, m aintaining that the capital requirement should apply only to the investor and entities that control the investor. Section 211.5(c)(2)(i)(F) of the proposed rule indicates that this is in fact the requirement. Another commenter pointed out that risk-based capital ratios have not been applicable previously to Edge corporations not engaged in banking. The Board notes this comment but considers that calculating such a ratio would not impose an undue burden on those investors seeking to utilize the expanded authority. The definition of well managed included in the proposed rule provided that, in order to be considered well managed, the Edge or agreement corporation, its parent member bank, if any, and the bank holding company must each have received a composite rating of at least 1 or 2, with no component below 3, at its most recent examination or review. Comments submitted advocated relying solely upon the composite rating for purposes of the “well managed” definition. The final rule incorporates this change. However, an additional element also has been incorporated in the definition to clarify that any investor that is under a formal supervisory action would be ineligible to take advantage of the expanded authority. The Board believes the existence of any such supervisory action would be indicative of managerial deficiencies such that the expanded authority should not be available. Individual Investment Limit Limits were proposed on the expanded authority that were tied to the level of capital of the investor. For Edge or agreement corporations, the relevant limits were proposed to be no more than the lesser of 20 percent of the Edge or agreement corporation’s tier 1 capital or 2 percent of the tier 1 capital of its parent member bank. For member banks and bank holding companies, the proposed limit was no more than 2 percent of tier 1 capital. One commenter proposed that the limit be raised to at least 2.5 percent of total capital. Several commenters noted 2 The member bank also may not be subject to any that the existing general consent written agreement, order, capital directive, or authority in Regulation K sets the limit prompt corrective action directive issued by the at 5 percent of tier 1 capital, and Board to meet and maintain a specific capital level advocated retention of the higher limit. for any capital measure. 12 CFR 208.33(b)(1). , 67052 Federal Register / Vol. 60, No. 249 / Thursday, December 28, 1995 / Rules and Regulations The Board notes, however, that the current limit is expressed as the lesser o f $25 million or 5 percent of tier 1 capital; the $25 million limit on general consent investments has proved to be the constraining factor, particularly for U.S. banking organizations that would meet the strongly capitalized standard. The Board believes that a general consent limit of 5 percent of tier 1 capital, in the absence of an absolute dollar cap, would be too high even for organizations that are strongly capitalized and well managed because an initial capital investment in, for example, a subsidiary, may be leveraged many times resulting in a potential total exposure far in excess of the initial 5% of capital. The Board has therefore decided to retain the proposed 2 percent limit in the final rule. In response to a comment seeking clarification that the existing authorization for general consent investments will continue to be available, the Board notes that the expanded authority is parallel authority for making investments by banking organizations that meet the strongly capitalized and well managed standards. As is clear from section 211,5(c)(2)(i)(B) and (C) of Regulation K, however, the limits on investment in any one organization apply on a cumulative basis over time and include investments made under the existing as well as the expanded authority. Several commenters argued that expanded authority should be available for additional investments in existing subsidiaries. The Board notes that, as indicated in section 211.5(c)(2)(iv)(D) of the final rule, using the expanded authority for making additional investments in existing subsidiaries and joint ventures is permissible under the terms of the final rule, subject to the investment limits and the other investment restrictions. Aggregate Investment Limit The proposed rule provided for an overall aggregate investment limit on all investments made during the previous 12-month period under the existing and the expanded authority. Under this limit, all such investments, when aggregated with the proposed investment, may not exceed the lesser of 50 percent of the Edge or agreement corporation’s total capital or 5 percent of the parent member bank’s total capital, in the case of an Edge or agreement corporation, or 5 percent of its total capital, in the case of a member bank or a bank holding company. A num ber of commenters supported the Board’s position that the aggregate limits apply only to general consent investments and not to investments made pursuant to prior notice or specific consent. However, one commenter argued that investments made under existing general consent authority should not count toward the aggregate limit because once the aggregate limit is reached, prior notice would be required for small investments representing little risk to the investor. The Board agrees that the additional regulatory burden associated with including investments made under the existing general consent authority in calculating the aggregate limits outweighs any supervisory benefits. Accordingly, the aggregate limit shall apply only to investments made under the expanded general consent authority. The proposal also provided that, in determining compliance with the aggregate limits and in order to avoid double counting of investments, an investment in a subsidiary shall be counted only once notwithstanding that such subsidiary may, w ithin the next 12 m onths, downstream all or part of such investment to another subsidiary. Several commenters argued for a longer time period in w hich to make downstream investments or that no time limit should be imposed. Tha Board believes the 12 m onth time limit should be retained as it strikes an appropriate balance between easing regulatory burden and maintaining adequate oversight, given that the condition of a banking organization may change over time. Supervisory views regarding downstreaming investments also may change over time in light of changed circumstances. One commenter argued that downstream investments should not be subject to the individual investment limits as well as the aggregate investment limits. However, the Board believes that supervisory concerns regarding the need to monitor diversification of investments in view of any changed circumstances relating to the investor means that the limits on investments in one organization should include downstream investments. Finally, a commenter argued that restructurings (through the contribution of an investment from one affiliate to another) should also be encompassed w ithin the same exclusion as that provided for downstream investments. The Board notes in response to this comment that Regulation K already provides general consent authority for transfers among affiliates a t net asset value. Eligible Investments The proposal limited the types of investments eligible for the expanded authority, as well as the types of activities that may be conducted by the organization in which the investment is to be made. Ineligible investments included an investor’s initial entry into a foreign country, the establishment or acquisition of an initial subsidiary bank in a foreign country, investments in general partnerships or unlim ited liability companies, and an acquisition of shares or assets of a corporation that is not an affiliate of the investor. Exclusion of the latter type of acquisition was intended to limit the expanded authority to investments in de novo subsidiaries (including subsequent investments in such subsidiaries) by excluding the acquisition of going concerns. Commenters requested clarification as to whether additional investments made in existing subsidiaries and joint ventures would be eligible investments under the expanded authority. The final rule authorizes investments in existing subsidiaries and joint ventures, provided they meet the remaining criteria for eligible investments and the criteria for eligible activities. Several commenters opposed the proposal’s exclusion of initial acquisitions of going concerns from the expanded investment authority. However, the Board continues to believe such exclusion is appropriate in light of the potential additional risk associated with such investments. These risks are greater than simply the am ount of capital invested, extending also, for example, to the value and quality of the acquired organization’s assets. The Board theitefore considers that prior notice of such an investment is appropriate. Several commenters argued that the acquisition or establishment of an initial bank subsidiary in a foreign country should be permissible w ithout prior notice to the Board where the investor already has a branch in that country. The Board believes that such a change may be inconsistent w ith its responsibility as home country supervisor under the Minimum Standards for Supervision of Internationally Active Banks established by the Basle Supervisors Committee, in those cases where the Board has not previously approved or reviewed the establishment of a significant subsidiary bank in that country. The Minimum Standards contemplate that the home country supervisor should specifically authorize any outward expansion by a bank, both to inform the home country Federal Register / Vol. 60, No. 249 / Thursday, December 28, 1995 / Rules and Regulations 67053 supervisor of the intention of the bank to operate in another country and to provide the host supervisor with the comfort that the home supervisor does not object to the expansion and takes responsibility for the supervision of the branch or subsidiary bank. Consequently, the Board believes it is appropriate to retain the prior notice requirement for establishment of an initial subsidiary bank in another country under the expanded authority. Post-investment Notice The proposal required an investor making use of the expanded authority to provide the Board with a post investment notice w ithin 10 business days of making the investment. However, the Board requested comment on w hether the requirements relating to the post-investment notice could be incorporated into existing reporting requirements. Several commenters argued the post investment notice would be unnecessary and inconsistent w ith the goal of reducing regulatory burden, particularly since investors are required to report acquisitions of shares in foreign organizations on an existing Federal Reserve form (F.R. 2064) by the end of the m onth following the month in which the investment was made. Commenters m aintained that the Board already has sufficient information to monitor investments in foreign subsidiaries through existing reporting and examination authority. Based upon the comments, the Board has decided to eliminate the 10 business day notice requirement. However, the Board has determined that certain limited additional information that is not at present provided in the FR 2064 is required to be submitted; such information may be submitted on the same schedule as the FR 2064, namely, by the end of the month following the m onth in w hich the investment was made. The Board agrees with those commenters who argued that additional information should be limited to cover specific areas of potential risks regarding investments made under the expanded general consent authority and accordingly has narrowed the information that would be required to be submitted following exercise of the expanded authority. More specifically, the information that would be required under the final rule is limited to: the respective responsibilities of the parties if the investment is a joint venture; one year projections for the organization in which the investment is made; and, where the investment is to redress a loss, a description of the reasons for the loss and the steps taken to address the problem. This would provide to the Board the minimum information necessary to monitor any additional risks posed by such investments. One commenter requested clarification as to whether or not the post-investment notice is intended to cover investments made pursuant to the existing general consent authority, which would make the proposal more restrictive than the present requirements for general consent investments. The Board notes that the post-investment notice would be required only in relation to investments made under the expanded authority. In response to another comment, the Board wishes to clarify that investments in newly established companies are not precluded by the restriction on the acquisition of shares or assets of an organization that is not an affiliate or joint venture of the investor. Processing Procedures The final rule incorporates the change in processing procedures indicating that the 45 day period commences upon receipt of the notice or application to invest in a foreign company. Commenters generally supported this change in processing procedures. Finally, one commenter noted generally that Regulation K is a technically difficult regulation and expressed concern that the proposed revisions, by incorporating additional technical language, would have the side effect of further diminishing the readability of the regulation. The Board notes that the five year review of Regulation K mandated by the International Banking Act of 1978 is now underway. Ways in which Regulation K may be simplified will be considered during the course of that review. Regulatory Flexibility Analysis Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. L. 9 6 354, 5 U.S.C. 601 et seq.), the Board certifies that this final rule will not have a significant economic impact on a substantial num ber of small entities that are subject to the regulation. Pursuant to 5 U.S.C..553(d), this amendment to Regulation K will become effective immediately. This final rule grants an exemption for certain U.S. banking organizations, and therefore the Board waives the 30 day general requirement for publication of a substantive rule. Paperwork Reduction Act Analysis In accordance with section 3506 of the Paperwork Reduction Act of 1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A .l), the Board reviewed the rule under the authority delegated to the Board by the Office of Management and Budget. The collection of information requirements in this regulation are found in 12 CFR 211.5(c). The submission of this information is mandatory under sections 25 and 25A of the Federal Reserve Act (12 U.S.C. 601604(a) and 611—631) and sections 4(c)(13), 4(jJ(14), and 5(c) of the Bank Holding Company Act (12 U.S.C. 1843(c)(13), 1843(c)(14) and 1844(c)) to evidence compliance with the requirements of Regulation K. The Federal Reserve uses the information to monitor the international operations of U.S. banking organizations, and to fulfill its supervisory responsibilities under Regulation K. The respondents are banks, bank holding companies, and Edge and agreement corporations. The Federal Reserve may not conduct or sponsor, and an organization is not required to respond to, this information collection unless it displays a currently valid OMB control number. The OMB control num ber is 7100-0107. No comments specifically addressing the estimate burden were received. The Federal Reserve estimates that, based on 1995 data, 10 responses per year will be filed by U.S. banking organizations under the expanded general consent authority. Currently, the investments that will be permitted under expanded general consent require prior notification on the form for International Applications and Prior Notifications under Subparts A and C of Regulation K (FR K—1; OMB No. 71000107). The estimated burden for each prior notification can range from 1 to 10 hours, depending on its complexity. Under the revised rule, an investor will no longer submit information prior to the investment; instead, it will submit limited information regarding specific areas of potential risks of the investment after the investment is made. The volume of this information will vary depending on the type of investment; the annual burden per respondent is estimated to be .5 hours, on average. Based on an hourly cost of $20, the annual cost to the public is estimated to be $100. There are no start up costs or capital costs. The information collected is not deemed confidential. The applying organization has the opportunity to request confidentiality for information that it believes will qualify for a Freedom of Information Act exemption: Send comments regarding the burden estimate, or any other aspect of this collection of information, including suggestions for reducing the burden, to: 67054 Federal Register / Vol. 60, No. 249 / Thursday, December 28, 1995 / Rules and Regulations this section, but subject to the other limitations of this section, the Board grants expanded general consent authority for investments in an organization by an investor that is strongly capitalized and well managed if: List of Subjects in 12 CFR Part 211 (A) The activities of the organization Exports, Federal Reserve System, are limited to activities in which a Foreign banking, Holding companies, national bank may engage directly or in Investments, Reporting and which a subsidiary may engage under recordkeeping requirements. paragraph (d) of this section; For the reasons set out in tffe (B) In the case of an investor that is preamble, the Board of Governors an Edge corporation that is not engaged amends 12 CFR Part 211 as set forth in banking or an Agreement corporation, below: the total amount invested in such organization (in one transaction or a PART 211— INTERNATIONAL series of transactions) does not exceed BANKING OPERATIONS the lesser of 20 percent of the investor’s (REGULATION K) Tier 1 capital or 2 percent of the Tier 1 capital of the parent member bank; 1. The authority citation for Part 211 (C) In the case of a bank holding is revised to read as follows: company or member bank investor, the Authority: 12 U.S.C. 221 etseq., 1818, total amount invested in such 1841 et seq., 3101 etseq., 3901 etseq. organization (in one transaction or a 2. Section 211.2 is amended by series of transactions) directly or redesignating paragraphs (u) and (v) as indirectly does not exceed 2 percent of paragraphs (v) and (w), respectively, the investor’s Tier 1 capital; and by adding new paragraphs (u) and (D) All investments made, directly or (x) to read as follows: indirectly, by an Edge corporation not engaged in banking or an Agreement §21 1.2 D efinitions. corporation during the previous 12* * * * * month period under paragraph (c)(2) of (u) Strongly capitalized means: this section, w hen aggregated with the (1) In relation to a parent member proposed investment, would not exceed bank, that the standards set out in 12 the lesser of 50 percent of the total CFR 208.33(b)(1) are satisfied; and capital of the Edge or Agreement (2) In relation to an Edge or corporation, or 5 percent of the total Agreement corporation or a bank holding company, that it has a total risk- capital of the parent member bank; (E) All investments made, directly or based capital ratio of 10.0 percent or indirectly, by a member bank or a bank greater. holding company during the previous * * * * * (x) Well managed means that the Edge 12-month period under paragraph (c)(2) of this section, w hen aggregated with or Agreement corporation, its parent the proposed investment, would not member bank, if any, and the bank exceed 5 percent of its total capital; and holding company have each received a (F) Both before and immediately after composite rating of 1 or 2 at its most the proposed investment the investor, recent examination or review and are its parent member bank, if any, and any not subject to any supervisory parent bank holding company are enforcement action. strongly capitalized and well managed. 3. Section 211.5 is amended by: (ii) Determining aggregate investment a. Redesignating paragraphs (c)(2) and limits. For purposes of determining (c)(3) as paragraphs (c)(3) and (c)(4) compliance w ith the aggregate respectively and by adding a new investment limits set out in paragraphs paragraph (c)(2); and (c)(2)(i)(D) and (E) of this section, an b. In newly designated paragraph (c)(3), by removing the word “accepted” investment by an investor in a subsidiary shall be counted only once in the third sentence and adding in its notwithstanding that such subsidiary place the word “received”. may, w ithin 12 months of the date of The addition reads as follows: making the investment, downstream all § 211.5 In v e stm e n ts a n d activ ities a b ro a d . or any part of such investment to * * * * * another subsidiary. (c) * * * (iii) Additional investments. An * * * * * investor that makes investments under (2)(i) Expanded general consent for de paragraph (c)(2)(i) of this section may also make additional investments in an novo investments. Notwithstanding the amount limitations of paragraph (c)(1) of organization under the standards set Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets, N.W., Washington, DC 20551; and to the Office of Management and Budget, Paperwork Reduction Project (7100-0107), Washington, DC 20503. forth in paragraphs (c)(l)(ii), (c)(l)(iii) and (c)(l)(iv) of this section. (iv) Ineligible investments. The following investments are not eligible for the general consent under paragraph (c)(2)(i) of this section: (A) An investment in a foreign country where the investor does not have an affiliate or a branch; (B) The establishment or acquisition of an initial subsidiary bank in a foreign country; (C) Investments in general partnerships or unlim ited liability companies; and (D) An acquisition of shares or assets of an organization that is not an affiliate or joint venture of the investor. (v) Post-investment notice. By the end of the m onth following the m onth in which the investment is made, the investor shall provide the Board with the following information relating to the investment: (A) If the investment is in a joint venture, the respective responsibilities of the parties to the joint venture; (B) Projections for the organization in which the investment is made for the first year following the investment; and (C) Where the investment is made in an organization that incurred a loss in the last year, a description of the reasons for the loss and the steps taken to address the problem. * * * * * By order of the Board of Governors of the Federal Reserve System, December 21,1995. Jennifer J. Johnson, Deputy Secretary o f the Board. [FR Doc. 95-31362 Filed 12-27-95; 8:45 am] BILUNG CODE 6210-01-P
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