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F ederal Reserve b a n k o f Dallas DALLAS. TEXAS 75222 C ir c u la r No. 75-61 May 6, 1975 INTERPRETATION OF REGULATION M (I n te r p re ta tio n of F o re ig n Bank for P u r p o s e s of Section 25 of the F e d e ra l R e s e r v e Act) TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: T h e B oard of G o v e r n o r s of th e Fed eral R e s e r v e System has is s u e d an in te r p r e ta tio n of its R egulation M, " F o re ig n A ctivities of National B a n k s , " r e g a r d i n g fo reig n in stitu tio n s th a t may b e c o n s id e r e d fo reign banks. T h e in te r p r e ta tio n is e n clo se d in s l i p - s h e e t form for in s e r tio n into the R egu latio n s b i n d e r . R eq u e s ts for add itio n al copies sh ould b e a d d r e s s e d to th e S e c r e t a r y 's Office of th is Bank. Sincerely y o u rs , T . W. P l a n t F i r s t V ic e P r e s i d e n t Enclosure 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 FOREIGN ACTIVITIES OF NATIONAL BANKS INTERPRETATION OF REGULATION M § 213.105 Interpretation of Foreign Bank for Purposes of Section 25 o f the Federal Reserve Act. U nder the third paragraph of section 25 of the Federal Reserve A ct, as am ended (12 U.S.C. 6 0 1 ), any national banking association1 possess ing a capital and surplus of $1,000,000 or more may file application with the Board fo r permission, upon such conditions and under such regulations as may be prescribed by the Board, “to acquire and hold, directly or indirectly, stock or other evidences of ownership in one or m ore banks organized under the law of a foreign country o r a dependency or insular possession of the U nited States and not engaged, directly or indirectly, in any activity in the U nited States except as, in the judgm ent of the Board shall be incidental to the international or foreign business of such foreign bank; and, notwithstanding the provisions of sec tion 23A of the Federal Reserve A ct (12 U.S.C. 3 7 1 c), to m ake loans or extensions of credit to or fo r the account of such bank in the m anner and w ithin the limits prescribed by the Board by general or specific regulation or ruling.” P ursuant to its authority under the third p ara graph of section 25 of the F ederal Reserve Act, the Board has prom ulgated section 213.4 of this part (R egulation M ) , w hich sets forth appropriate conditions and lim itations on a m em ber bank’s acquisition and holding, directly or indirectly, of the stock or other evidences of ow nership in one o r m ore foreign banks, and section 213.5 of this p art w hich allows a m em ber bank, which holds directly o r indirectly2 stock o r oth er evidences of ow nership in a foreign bank, to m ake loans or ex tensions of credit to or fo r the account of such foreign bank without regard to the provisions of section 23A of the F ederal Reserve A ct (12 U.S.C. 371 c). In several recent applications filed with the Board by m em ber banks under section 25 of the Act, the issue has arisen as to w hether particular foreign institutions can be considered as foreign banks for the purposes of section 25 of the A ct and sections 213.4 and 213.5 of this part. While the B oard has by regulation defined the term “foreign b an k ” to m ean a bank organized under the law of a foreign country and not engaged, directly or indirectly, in any activity in the U nited States except as, in the judgm ent of the Board, shall be incidental to the international or foreign business of such foreign bank,3 such defi nition imposes the statutory lim itation on ac tivities in the U nited States th a t can be conducted by a foreign bank, the shares of w hich are owned by a m em ber bank, and does not define as a threshold m atter w hich foreign institutions can be considered as foreign banks eligible for investment and Board exem ption from the provisions of sec tion 23A u nder section 25 of the Act. Congress in the third p aragraph of section 25 of the A ct has imposed incorporation and other requirem ents intended to ensure th a t a foreign bank acquired u nder th a t section is not engaged in a dom estic banking business. Congress did not, however, specify in section 25 the criteria a foreign institution m ust satisfy in order to be considered a foreign bank fo r the purposes of that section.4 T he th ird paragraph of section 25 was enacted in 1966 in order to give m em ber banks organizational flexibility in conducting their banking operations abroad. P rio r to its enactm ent, the B oard had interpreted the “stock purchase” prohibitions of Section 5136 of the Revised Stat utes as preventing m em ber banks fro m acquiring directly the shares o f foreign banks. Thus, until that tim e, m em ber banks w ere lim ited to conduct ing their banking operations abroad either through branches established und er section 25 o r through agencies, branches o r subsidiaries of their Edge or A greem ent C orporations established, respec tively, under section 2 5 (a ) or section 25 of the F ederal Reserve Act. Because the laws of some foreign countries prevented the establishm ent of branches and because the holding of shares of foreign banks through Edge o r A greem ent C or poration subsidiaries resulted in an unnecessary layering of organizational relationships, the en- 1 Paragraph 20 of section 9 of the Federal Reserve Act (12 U.S.C. 335) also makes the provisions of section 25 applicable to State member banks. 2Whether through a corporation operating under section 25 of the Act or organized under section 25(a) of the Act, or otherwise. “ Section 213.2 of this part. 4 While the term “bank” is defined in section 1 of the Federal Reserve Act (12 U.S.C. 221), that definition “. . . State bank, banking association, and trust company” is not applicable in the context of section 25. actm ent of the third paragraph of section 25 essentially was intended to allow m em ber banks to hold directly th e shares of foreign banks, instead of holding them indirectly through their E dge or A greem ent C orporation subsidiaries.5 T he provi sion in th a t paragraph w hich gives the Board the pow er to waive the restrictions of section 23A on loans or extensions of credit from a m em ber bank to its foreign bank affiliate was supported by the Board because section 23A in such circum stance tends to restrict norm al correspondent banking relationships between banks and their foreign bank affiliates. In the B oard’s judgm ent, a foreign bank for purposes of section 25 of th e A ct and sections 213.4 and 213.5 of this p art should be interpreted to mean, with certain lim ited exceptions hereinafter described, a foreign institution that is principally engaged in a com m ercial banking business. T he B oard believes th at such an interpretation is con sonant with th e lim ited purposes of section 25 and accords w ith Congress’ intent in enacting that section. This interpretation will apply both for purposes of determ ining permissible investments fo r m em ber banks under section 213.4 of this part and fo r purposes of the regulatory exemption from the provisions of section 23A un der section 213.5 of this part. In adopting this interpretation, however, the Board has determ ined that, in gen eral, certain m inim um criteria should be m et in every case. A ccordingly, in order for a foreign institution to be considered as principally engaged in a com m ercial banking business, the institution must, at least, receive deposits to a substantial extent in the regular course of its business, and also have the pow er to accept deposits th a t the depositor has a legal right to w ithdraw on dem and. In addition, the Board believes that fo r a foreign institution to be considered as a foreign bank u nder section 25, the institution should also be super vised, regulated, examined or otherwise recognized as a com m ercial bank by the appropriate bank supervisory or m onetary authority of either the country of its organization or the country of its principal banking operations. T he Board has also determ ined, however, that notw ithstanding the above test and m inim um cri teria, foreign institutions organized fo r the sole purpose of holding the shares of a foreign bank, or organized for the sole purpose of perform ing nominee, fiduciary, o r other banking services in cidental to the activities of a foreign branch or banking affiliate of a m em ber bank may be con sidered as foreign banks for purposes of section 25 and sections 213.4 and 213.5 of this part. The Board m ay recognize other exceptions to the criteria adopted in this general interpretation if it determines th a t any such exception would not be inappropriate under section 25 of the Federal Reserve A ct and this p a rt (R egulation M ) . BSee 112 Cong. Rec. 11866 (1966) (remarks of Senator Robertson).