View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

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).

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