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F ederal

reserve

Ba n k

DALLAS, T E X A S

of

Dallas

75222

C ircular No. 81-31
February 9, 1981
INTERPRETATION OF REGULATION K
(INTERNATIONAL BANKING OPERATIONS)
Investments by United States Banking Organizations
in Foreign Companies
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 adopted
an interpretation to its Regulation K concerning investments by United States
banking organizations in foreign companies (including foreign banks) th a t do
business in the United States. The interpretation applies to investm ents of Edge
Corporations, S ta te member banks, and bank holding companies.
Enclosed is the te x t of the Board's order as published in the Federal
R egister. Additional copies of the document may be obtained by contacting our
Bank and Public Information D epartm ent, Ext. 6266.
Any questions concerning the in terpretation may be directed to the
A ttorney's Section of our Holding Company Supervision D epartm ent, Ext. 6183.
Sincerely yours,
William H. Wallace
First Vice President

Enclosure

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 Register / Vol. 46, No. 17 / Tuesday, January 27, 1981 / Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Part 211
[D ocket No. R-0349; R egulation K]

International Banking Operations;
Investments by United States Banking
Organizations in Foreign Companies
a g e n c y : Board of Governors of the
Federal Reserve System.
ACTION: Interpretation.
SUMMARY: The Board of Governors of

the Federal Reserve System has issued
an interpretation describing the
circumstances in which a United States
banking organization will be permitted
to invest in foreign companies (including
foreign banks) that do domestic
business in the United States.
DATE: January 19,1981.
FOR FURTHER INFORMATION CONTACT:

Frederick R. Dahl, Associate Director.
Division of Banking Supervision and
Regulation (202/452-2726); or C. Keefe
Hurley, Jr., Senior Counsel, Legal
Division (202/452-3269) Board of
Governors of the Federal Reserve
System.
SUPPLEMENTARY INFORMATION: Edge
Corporations, member banks, and bank
holding companies are authorized to
invest in foreign companies with the
prior consent of the Board. Under the
relevant statutes, however, the United
States activities of the foreign company
must be incidental to its international or
foreign business as determined by the
Board. In the past the Board has
followed the policy that the United
States activities of any such foreign
company should, like those permitted
Edge Corporations, be exclusively
international in character. The Board
has reviewed this policy in the light of
developments in international banking
and finance and the directive to improve
the competitive capabilities of Edge
Corporations contained in the
International Banking Act of 1978.
This interpretation would permit
United States banking organizations,
with the prior consent of the Board, to
acquire and hold interests in foreign
companies (including foreign banks) that
operate United States subsidiaries or
direct offices that conduct domestic as
well as international business. The
Board would generally grant its consent
where the following conditions were
satisfied: (1) the foreign company is
engaged predominantly in business
outside the United States o r in
internationally related activities in the
United States; (2) the direct or indirect
activities of the foreign company in the
United States are either banking or

8437

closely related to banking; and (3) the
United States banking organization does
not own 25 per cent or more of the
voting stock of, or otherwise control, the
foreign company. In considering whether
to grant its consent for such
investments, the Board would also
review the proposals to ensure that they
are consistent with the purposes of the
Bank Holding Company Act and the
Federal Reserve Act.
Pursuant to its authority under
sections 25 and 25(a) of the Federal
Reserve Act (12 U.S.C. 601, 611) and
section 4(c)(13) of the Bank Holding
Company Act (12 U.S.C. 1843(c)(13)), the
Board has issued the following
interpretation with respect to the
investment powers of member banks,
Edge Corporations, and bank holding
companies (§ 211.5 of Regulation K, 12
CFR 211.5):
§ 211.602 Investm ents by United S tates
Banking O rganizations in Foreign
C om panies th a t T ran sact B usiness in the
United S tates.

Section 25(a) of the Federal Reserve
Act (12 U.S.C. 611, the “Edge Act")
provides for the establishment of
corporations to engage in international
or foreign banking or other international
or foreign financial operations (“Edge
Corporations”). Congress has declared
that Edge Corporations are to serve the
purpose of stimulating the provision of
international banking and financing
services throughout the United States
and are to have powers sufficiently
broad to enable them to compete
effectively with foreign-owned
institutions in the United States and
abroad. The Board w as directed by the
International Banking Act of 1978 (12
U.S.C. 3101) to revise its regulations
governing Edge Corporations in order to
accomplish these and other objectives
and w as further directed to modify or
eliminate any interpretations that
impede the attainment of these
purposes.
One of the powers of Edge
Corporations is that of investing in
foreign companies. Under the relevant
statutes, however, an Edge Corporation
is prohibited from investing in foreign
companies that engage in the general
business of buying or selling goods,
wares, merchandise or commodities in
the United States. In addition, an Edge
Corporation may not invest in foreign
companies that transact any business in
the United States that is not, in the
Board's judgment, “incidental” to its
international or foreign business. The
latter limitation also applies to
investments by bank holding companies
(12 U.S.C. 1843(c)(13)} and member
banks (12 U.S.C. 601).

8438

Federal Register / Vol. 46, No. 17 / Tuesday, January 27, 1981 / Rules and Regulations

The Board has been asked to
determine whether an Edge
Corporation’s minority investment
(involving less than 25 percent of the
voting shares) in a foreign company
would continue to be permissible after
the foreign company establishes or
acquires a United States subsidiary that
engages in domestic activities that are
closely related to banking. The Board
has also been asked to determine
whether an Edge Corporation’s minority
investment in a foreign bank would
continue to be permissible after the
foreign bank establishes a branch in the
United States that engages in domestic
banking activities. In the latter case, the
branch would be located outside the
State in which the Edge Corporation and
its parent bank are located.
In the past the Board, in exercising its
discretionary authority to determine
those activities that are permissible in
the United States, has followed the
policy that an Edge Corporation could
not hold even a minority interest in a
foreign company that engaged, directly
or indirectly, in any purely domestic
business in the United States. The
United States activities considered
permissible were those internationally
related activities that Edge Corporations
may engage in directly. If this policy
were applied to the subject requests, the
Edge Corporations would be required to
divest their interests in the foreign
companies notwithstanding the fact
that, in each case, the Edge Corporation,
as a minority investor, did not control
the decision to undertake activities in
the United States, and that even after
the United States activities are
undertaken the business of the foreign
company will remain predominantly
outside the United States.
International banking and finance
have undergone considerable growth
and change in recent years. It is
increasingly common, for example, for
United States institutions to have direct
or indirect offices in foreign countries
and to engage in activities at those
offices that are domestically as well as
internationally oriented. In this climate,
United States banking organizations
would be placed at a competitive
disadvantage if their minority
investments in foreign companies were
limited to those companies that do no
domestic business in the United States.
Moreover, continued adherence to the
existing policy would be contrary to the
declaration in the International Banking
Act of 1978 that Edge Corporations’
powers are to be sufficiently broad to
enable them to compete effectively in
the United States and abroad.
Furthermore, where the activities to be

conducted in the United States by the
foreign company are banking or closely
related to banking, it does not appear
that any regulatory or supervisory
purpose would be served by prohibiting
a minority investment in the foreign firm
by a United States banking organization.
In view of these considerations, the
Board has reviewed its policy relating to
the activities that may be engaged in in
the United States by foreign companies
(including foreign banks) in which Edge
Corporations, member banks, and bank
holding companies invest. As a result of
that review, the Board has determined
that it would be appropriate to interpret
sections 25 and 25(a)of the Federal
Reserve Act (12 U.S.C. 601, 611) and
section 4(c)(13) of the Bank Holding
Company Act (12 U.S.C. 1843(c)(13))
generally to allow United States banking
organizations, with the prior consent of
the Board, to acquire and hold
investments in foreign companies that
do business in the United States subject
to the following conditions: (1) the
foreign company is engaged
predominantly in business outside the
United States or in internationally
related activities in the United States;*
(2) the direct or indirect activities of the
foreign company in the United States
are either banking or closely related to
banking; and (3) the United States
banking organization does not own 25
percent or more of the voting stock of, or
otherwise control, the foreign company.
In considering w hether to grant its
consent for such investments, the Board
would also review the proposals to
ensure that they are consistent with the
purposes of the Bank Holding Company
Act and the Federal Reserve Act.
By order of the Board of Governors of the
Federal Reserve System, January 19,1981.
Theodore E. Allison,
Secretary of the Board.
[FR Doc. Bl-2945 Filed 1-26-81; 8:45 am]

BRUNO CODE 6210-01-M

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