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Federal Reserve Bank of DALLAS ROBERT D. McTEER, JR. DALLAS, TEXAS P R E S ID E N T 75265-5906 A N D C H IE F E X E C U T IV E O F F IC E R September 26, 1997 Notice 97-86 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Prohibition Against Use of Interstate Branches Primarily for Deposit Production DETAILS The Board of Governors of the Federal Reserve System, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, has issued a rule that adopts uniform regulations to implement section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). As required by section 109, the rule prohibits any bank from establishing or acquiring a branch or branches outside its home state under the Interstate Act primarily for deposit produc tion. In addition, the rule provides guidelines for determining whether such bank is reasonably helping to meet the credit needs of the communities served by the interstate branches. The rule becomes effective October 10, 1997. ATTACHMENT A copy of the Board’s notice as it appears on pages 47728-38, Vol. 62, No. 175 of the Federal Register dated September 10, 1997, is attached. MORE INFORMATION For more information, please contact Dean Pankonien at (214) 922-6154. For addi tional 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) 4 7728 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12CFR Part 25 [Docket No. 9 7 -1 6 ] RIN 1557-A B 50 FEDERAL RESERVE SYSTEM 12CFR Parts 208 and 211 [Regulations H and K; Docket No. R -0 96 2 ] FEDERAL DEPOSIT INSURANCE CORPORATION 12CFR Part 369 RIN 3 0 6 4-A B 9 7 Prohibition Against use of Interstate Branches Primarily for Deposit Production Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); and Federal Deposit Insurance Corporation (FDIC). ACTION: Joint final rule. AGENCIES: The OCC, Board, and FDIC (collectively, agencies) are adopting uniform regulations to im plem ent section 109 (section 109) of the RiegleNeal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). The final rule reflects comments received on the proposal and further internal consideration by the agencies. As required by section 109, the final rule prohibits any bank from establishing or acquiring a branch or branches outside of its home state under the Interstate Act prim arily for the purpose of deposit production, and provides guidelines for determining w hether such bank is reasonably helping to meet the credit needs of the com m unities served by these branches. EFFECTIVE DATE: October 10, 1997. SUMMARY: FOR FURTHER INFORMATION CONTACT: OCC: Neil M. Robinson, Senior Attorney, Comm unity & Consumer Law Division (202) 874-5750; Kevin L. Lee, Senior Attorney, Enforcement and Compliance Division (202) 874-4800; A ndrew T. Gutierrez, Attorney, Legislative and Regulatory Activities Division (202) 874-5090; or w ith respect to Federal branches of foreign banks, M aureen Cooney, Senior Attorney, International Activities Division (202) 874-0680. Board: Lawranne Stewart, Senior Attorney, Legal Division (202) 4 5 2 - 3513; Robert L. McKague, Attorney, Legal Division (202) 452-2810; Shawn McNulty, A ssistant Director, Division of Consumer and Community Affairs (202) 452-3946; or w ith respect to foreign banks, Kathleen M. O ’Day, Associate General Counsel, Legal Division (202) 452-3786. FDIC: Louise Kotoshirodo, Review Examiner, Division of Consumer Affairs (202) 942-3599; Doris L. Marsh, Examination Specialist, Division of Supervision (202) 898-8905; or Gladys Cruz Gallagher, Counsel, Legal Division (202) 898-3833. SUPPLEMENTARY INFORMATION: Background The Interstate A c t1 provides expanded authority for a domestic or foreign bank to establish or acquire a branch in a state other than the bank’s home state (host state). Section 109 requires the agencies to prescribe uniform rules that prohibit the use of the authority under the Interstate Act to engage in interstate branching primarily for the purpose of deposit production.2 The agencies m ust also provide guidelines to ensure that banks that operate such branches are reasonably helping to m eet the credit needs of the com m unities served by the branches. Congress enacted section 109 to ensure th at the new interstate branching authority provided by the Interstate Act w ould not result in the taking of deposits from a com m unity w ithout banks reasonably helping to m eet the credit needs of that community. See H.R. Conf. Rep. No. 103-651, at 62 (1994). Overview of Proposed Rule and Comments The agencies published a joint notice of proposed rulemaking on March 17, 1997 (62 FR 12730). The proposed rule applied to any bank that established or acquired, directly or indirectly, a branch u nd er the authority of the Interstate Act or am endm ents to any other provision of law m ade by the Interstate Act. These branches were referred to as “ covered interstate branches.” The proposed rule provided that, beginning no earlier than one year after a bank established or acquired a covered interstate branch, the appropriate agency w ould determine w hether the bank satisfied a “loan-todeposit ratio screen” based on reasonably available data. The loan-to-deposit ratio screen com pared the bank’s loan-to-deposit ratio w ithin the state w here the bank’s covered interstate branches were located 1 Pub. L. No. 103-328, 108 Stat. 2338. 212 U.S.C. 1835a. (the bank’s statewide loan-to-deposit ratio )3 w ith the loan-to-deposit ratio of banks w hose home state was that state (host state loan-to-deposit ratio). If the loan-to-deposit ratio screen indicated that the bank’s statewide loan-to-deposit ratio was at least 50 percent of the host state loan-to-deposit ratio, no further analysis w ould be required. If, however, the appropriate agency determ ined that the bank’s statewide loan-to-deposit ratio was less than 50 percent of the host state loan-to-deposit ratio, or determ ined that reasonably available data did not exist that perm itted the agency to determ ine the bank’s statewide loan-to-deposit ratio, the agency w ould perform a “credit needs determ ination.” U nder the credit needs determ ination, the appropriate agency w ould review the loan portfolio of the bank and determ ine w hether the bank was reasonably helping to m eet the credit needs of the com m unities served by the bank in the host state. Consistent w ith section 109, the agencies would consider the following in making a credit needs determination: (1) Whether the covered interstate branches were formerly part of a failed or failing depository institution; (2) w hether the covered interstate branches were acquired u nd er circumstances where there was a low loan-to-deposit ratio because of the nature of the acquired institution’s business; (3) w hether the covered interstate branches have a higher concentration of commercial or credit card lending, trust services, or other specialized activities; (4) the ratings received by the bank under the Community Reinvestment Act of 1977 (CRA);4 (5) economic conditions, including the level of loan demand, w ithin the com m unities served by the covered interstate branches; and (6) the safe and sound operation and condition of the bank. A bank that failed the loan-to-deposit ratio screen and that received a determ ination that it was not reasonably helping to meet the credit needs of the com m unities served by the b ank’s interstate branches could be subject to section 109’s sanctions after a hearing under section 8(h) of the Federal Deposit Insurance Act.5 3 The proposed rule designated this ratio as the “covered interstate branch loan-to-deposit ratio.” T he agencies changed the term because some com m enters m istakenly interpreted the proposed rule as requiring each covered interstate branch to be tested u n d er section 109’s loan-to-deposit ratio screen. Section 109 requires consideration of a bank’s statew ide lending and deposit taking as determ ined by the appropriate agency. 4 12 U.S.C. 2901 etseq. 512 U.S.C. 1818(h). Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations47729 The proposed rule also recognized that data necessary to perform the calculations required by the loan-todeposit ratio screen may not be reasonably available w ithout imposing additional regulatory burdens on banks. As discussed in the proposal, data that are currently reported have lim ited use in showing the geographic location of depositors and borrowers that is necessary for calculating the host state loan-to-deposit ratio. In addition, data storage practices vary w idely from bank to bank, thereby making it difficult to determ ine how many m ultistate banks w ould have reasonably available data relevant to calculating the bank’s statewide loan-to-deposit ratio in each state in w hich the bank has branches. The agencies requested com m ent on the data availability issues raised by section 109, including possible sources of relevant data that w ould be reasonably available to the agencies and appropriate m ethods of calculating the ratios. The agencies also requested comment on the proposed ru le’s approach of conducting a credit needs determ ination before applying the loanto-deposit ratio screen, if data sufficient to calculate the bank’s statewide loanto-deposit ratio were not reasonably available. Collectively, the agencies received 54 comments on the proposal. Comments were received from bank holding com panies (11), individual banks (17), banking industry representatives (8), state bank commissioners and an association of state bank commissioners (7), consumer and com m unity representatives (9), a nonbanking company (1), and an individual (1). Commenters supporting the proposal noted that the agencies were lim ited by section 109’s prohibition against imposing new burdens on banks. Commenters opposing the proposal generally disagreed w ith the statutory scheme rather than its proposed implementation. Other commenters suggested modifications to the proposal. In developing the final rule, the agencies have carefully considered all comments in light of the language and legislative intent of section 109. For the reasons discussed in detail below, the agencies have adopted the rule substantially as proposed. Analysis of Comments and Final Rule Interstate Branches Covered Several commenters raised a threshold issue based on a statement in the proposed rule concerning its coverage. The proposed rule stated that domestic banks may have branches located outside a bank’s home state that are not w ithin the scope of section 109 because they were not established or acquired pursuant to authority in the Interstate Act.6 Several commenters disputed this statement, especially as applied to any bank not grandfathered under the M cFadden Act of 1927.7 These commenters cited, in particular, pending litigation challenging the legality of branches established under the m ain office relocation provision in the National Bank Act.8 Commenters also stated that “thousands” of branches retained in transactions involving the relocation of a national bank’s main office across state lines before June 1, 1997 (retained branches), may be among the bank branches deem ed to be outside the coverage of section 109. The coverage of the final rule coincides w ith the coverage of the Interstate Act thereby ensuring that the agencies w ill apply section 109 consistent w ith the Interstate Act. Consistent w ith section 109, and as stated in the proposed rule, the final rule applies to any branch (1) established or acquired outside a bank’s home state pursuant to the Interstate Act or any am endm ent made by the Interstate Act to any other provision of law, or (2) that could not have been established or acquired outside a bank’s home state but for the previous establishm ent or acquisition of a branch established pursuant to the Interstate Act. The issue of the applicability of section 109 to branches in connection w ith a relocation under the National Bank Act is an issue w ithin the jurisdiction of the OCC. The OCC notes that a Federal court of appeals recently issued an opinion in one pending case involving relocations under the National Bank Act.9 The OCC believes that the commenters significantly overestimated the potential num ber of affected branches. The OCC estimates that by mid-1998, as banks establish or acquire branches pursuant to the Interstate Act, at most only a few h u ndred retained branches, ow ned by a small num ber of com m unity or mid-sized banks, w ould rem ain and expects that the num ber of these retained branches w ill continue to decrease as the banks engage in transactions pursuant to the Interstate Act. Data A vailability Commenters described in detail the shortcomings of reported data for calculating the host state loan-to-deposit ratio.10 Other commenters described the significant limitations on currently available data for providing the geographic location of a depositor or borrower that is necessary to calculate the bank’s statewide loan-to-deposit ratio. A num ber of commenters also noted that sampling loan files to calculate this ratio could significantly increase regulatory burden by extending the duration of an exam ination and by requiring a bank to devote additional resources to the examination process.11 Some commenters recom mended, however, that the agencies require banks to report publicly additional data on the geographic locations of their loans and deposits, and requested that the agencies obtain sufficient data to calculate the bank’s statewide loan-todeposit ratio in all cases regardless of the regulatory burdens imposed. The language of section 109 and its legislative history make clear that the agencies are to adm inister section 109 w ithout imposing additional regulatory burdens on banks. Section 109 directs the agencies to calculate the bank’s statewide loan-to-deposit ratio from reasonably available information, including an agency’s sampling of the bank’s loan files during an examination, or other available data. The agencies also are required to calculate the host state loan-to-deposit ratio as determinable from relevant sources. The House Conference Report states that “ [t]he Conferees do not intend that section 109 create any additional regulatory or paperwork burdens for any institution.” H.R. Conf. Rep. No. 103651, at 62 (1994). Therefore, consistent w ith the language and intent of section 109, the final rule does not impose additional data reporting requirem ents 10The agencies have also reviewed a report by the Comptroller General of the U nited States entitled “Bank Data: Material Loss of Oversight Information From Interstate Banking Is U nlikely” (GAO/GGD/ 97049) (March 26, 1997). 11 The com m enters also confirmed the agencies’ supervisory experience th at sam pling at a particular branch w ould not always produce reliable data because of w ide variations in data collection 6 As noted in the proposed rule, lim ited branches practices. For example, a bank m ay book loans or (i.e., offices that only accept internationally-related deposits at locations outside th e state where the deposits perm issible for an Edge A ct corporation to borrowers or depositors are located. Many domestic accept) and agencies operated by foreign banks and foreign institutions often consolidate outside their hom e state are not subject to section commercial loans and deposits at a bank’s m ain 109. office, w hile mortgage lending m ay be booked at a 7 12 U.S.C. 36. mortgage lending subsidiary. Although the loans 8 12 U.S.C. 30. m ay have been m ade through a ban k ’s covered 9 See Ghiglieri v. Sun World N a t’l A ss’n, Nos. 96 - interstate branch, they m ight not be booked at that branch. 50847 and 96-50948 (5th Cir. July 22, 1997). 47730 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations nor does it generally require a bank to produce, or assist in producing, relevant data. W hen data sufficient to calculate a bank’s statewide loan-to-deposit ratio are not reasonably available, the agencies w ill conduct a credit needs determ ination as discussed below. The agencies believe that this approach accomplishes the purpose of section 109 w ithout imposing additional burdens on the bank. Two-Step A nalysis Commenters generally supported the approach of the appropriate agency conducting a credit needs determ ination if reasonably available data are insufficient to calculate the bank’s statewide loan-to-deposit ratio. Some commenters, however, suggested that a bank should be allowed to request a credit needs determ ination before the application of the loan-to-deposit ratio screen in a section 109 review. Other commenters stated that the credit needs determ ination should be abandoned in favor of testing only w ith the loan-todeposit ratio screen. After carefully considering the comments received on this point, the agencies have concluded that the Interstate Act requires the agencies to conduct a loan-to-deposit ratio screen— or to determ ine that sufficient data are not reasonably available—before making a credit needs determination. Section 109 provides a two-step analysis to confirm a bank’s compliance w ith its prohibition against deposit production offices. The first step attem pts to measure compliance w ith the prescribed loan-to-deposit ratio screen, and the agencies w ill take into account all reasonably available data relevant to calculating the bank’s statewide loan-to-deposit ratio on a case-by-case basis in order to determine w hether that ratio can be calculated from such data. Relevant data are data that, for example, geocode loans or that can be used to sort borrowers by zip codes. The agencies also w ill consider data that are reasonably determinable from available information, w hich w ould include the agency’s sampling of the bank’s loan files during an examination, or data that w ould be otherwise available from the bank, such as data currently required to be reported by the bank. In determining w hether to sample a bank’s loan files for the purposes of section 109 during an examination, the agencies w ill consider the regulatory burden im posed w ithin the context of the examination. For example, an undue regulatory burden could result if a bank were required to expend resources that materially exceeded the resources required to produce data for sampling for other exam ination purposes. Similarly, sampling for the purpose of section 109 that w ould require a substantial extension of the scope or duration of the examination could also produce an un due regulatory burden on the bank. In such cases, the language and legislative intent of section 109 support proceeding to the second step in the two-step analysis. If the appropriate agency determines that data relevant to calculating the bank’s statewide loan-to-deposit ratio are not reasonably available w ithout imposing an u ndu e regulatory burden, or if the bank fails the loan-to-deposit ratio screen based on reasonably available data, in the second step the appropriate agency w ill look at the bank’s activities through a credit needs determ ination. A credit needs determ ination therefore w ill be m ade in all cases in w hich the appropriate agency is unable to readily verify compliance w ith the section 109 loanto-deposit ratio screen. Banks may provide the agencies w ith any relevant information, including loan data, if a credit needs determ ination is required. If the appropriate agency has not determ ined the bank’s statewide loanto-deposit ratio and the bank subsequently receives an adverse credit needs determ ination, the agency will then apply the loan-to-deposit ratio screen. Applying the loan-to-deposit screen at this stage in the process is consistent w ith the agencies’ statutory duty to determ ine a bank’s compliance w ith section 109 and to seek sanctions against a bank that fails to comply, as appropriate. Since a bank m ust fail both the loan-to-deposit screen and the credit needs determ ination in order to be out of compliance w ith section 109, the agencies have an obligation to apply the loan-to-deposit screen before seeking sanctions. Obtaining sufficient data to calculate the bank’s statewide loan-todeposit ratio may require the appropriate agency to expand the scope and duration of its examination and may require the bank to assist the appropriate agency in producing data that may not be reasonably available. The agencies conclude that their statutory responsibility to ensure compliance w ith the statute after an adverse credit needs determ ination m ust outweigh consideration of regulatory burden that may be im posed on a bank in order to carry out the legislative purpose of section 109. Section 109 Loan-to-Deposit Ratios A. H ost State Loan-to-Deposit Ratio Relevant Data The agencies w ill use the annual Summary of Deposits (prepared as of June 30) as the m ost reasonably available source of reported data on deposits. The agencies also w ill use quarterly Consolidated Reports of Condition and Income (Call Reports), w hich provide loan data for banks, as the m ost readily available source of reported data on loans. The agencies recognize that Summary of Deposits and Call Report data do not provide precise information on the geographic location of depositors and borrowers for all the reasons detailed in the proposed rule and the comments. However, these data are the most useful data that are reasonably available at this time. M ethod of Calculating Some commenters suggested alternative ways of calculating the host state loan-to-deposit ratio. One commenter suggested using the unw eighted average loan-to-deposit ra tio 12 for all of the home state banks in the host state. Another commenter recom m ended using the average daily balance for loans instead of the actual am ount of loans held at the end of the reporting period. One commenter suggested using third-quarter data for states w ith large rural and agricultural areas to capture the highest loan-todeposit ratio. The agencies have also considered using peer group ratios based on the Uniform Bank Performance Reports, and separating the peer groups into quintiles so that the banks in the quintiles w ith unusually high or low loan-to-deposit ratios could be eliminated. The agencies have determ ined to adopt the methodology discussed below w hich uses a weighted average loan-todeposit ratio and second-quarter loan data generally. An unw eighted average loan-to-deposit ratio for home state banks in the host state w ould fail to account for the greater lending and deposit-taking activities of the larger banks. In addition, third-quarter data for loans w ould not be appropriate because the Summary of Deposits data are only as of June 30, and loan and deposit data should be as of the same date. Moreover, available data are insufficient to 12 The unw eighted average loan-to-deposit ratio is calculated by adding the individual banks’ loan-todeposit ratios and dividing the result by the num ber of banks. A weighted average loan-to-deposit ratio is calculated by separately sum m ing loans and deposits for all of the banks and then dividing the sum of loans by the sum of deposits. Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations 47731 calculate the average daily balance for all loan categories reported in the Call Reports, and there is no indication that the purpose of the section 109 screen was to capture the highest loan-todeposit ratio of host state banks. Finally, methodologies based on peer groups require a sufficient num ber of institutions in each peer group, and it is likely that some states w ould not have sufficiently large peer groups, particularly for larger banks, to make a methodology using peer groups and quintiles feasible. Several commenters raised concerns that data for specialized banks, w hich do not engage in traditional deposit taking or lending, w ould distort the host state loan-to-deposit ratio. As noted in the proposed rule, lim ited purpose banks, such as credit card banks, and wholesale banks could have very large loan portfolios, but few, if any, deposits. The agencies w ill therefore exclude data from banks designated as lim ited purpose or wholesale banks under the CRA regulations of the appropriate agency in calculating the loan-to-deposit ratio for the host state.13 In addition, certain lending activities of banks w ith foreign branches could distort the ratio. The agencies w ill use a measure of domestic loans that excludes loans to non-U.S. addressees and loans in foreign offices to the extent that these adjustm ents can be m ade to data in the Call Reports. A measure of domestic deposits from the Summ ary of Deposits does not include foreign deposits so that, to the m axim um extent possible, domestic loans w ill be divided by domestic deposits. banks is more difficult. N either the Call Report nor any other source of loan data contain data on a branch-by-branch or state-by-state basis. Thus, unless a bank m aintains loan data on a state-by-state basis, there are no reasonably available data to calculate a m ultistate bank’s home state lending activities. In the proposal, the agencies suggested excluding m ultistate banks that have more than 50 percent of their branches outside their hom e state from the host state loan-to-deposit ratio. Recognizing the lim itations in this approach, the agencies requested com m ent on this approach and on any approach that w ould more accurately reflect a multistate bank’s home state activities. In response to the agencies’ request for comment, one comm enter supported the exclusion of large m ultistate banks from the host state loan-to-deposit ratio because larger banks can m aintain higher than average loan-to-deposit ratios by funding loans w ithout using deposits. Another commenter suggested using a bank’s deposits reported in its home state and a proportionate am ount of the bank’s loans based on the percentage of its total deposits that are reported in the bank’s home state. A third commenter suggested that deposit and loan proration be based on the num ber of hom e state branches as a percentage of the bank’s total num ber of branches. On further consideration of this issue, the agencies have concluded that the host state loan-to-deposit ratio could be distorted substantially if m ultistate banks w ith 50 percent or more of their branches outside their home state are Consideration of M ultistate Banks excluded, or if large m ultistate banks are As discussed in the proposal, banks excluded altogether. As interstate w ith branches outside their home state branching becomes more prevalent, (multistate banks), in light of the data some host states could eventually be left lim itations im posed by section 109, w ith few, if any, eligible host state pose particular problems for purposes of banks 14 to include in the ratio. calculating host state loan-to-deposit Moreover, including all loans and ratios. Loan and deposit data from those deposits of any multistate bank in banks could distort substantially the calculating the host state loan-to-deposit host state loan-to-deposit ratios, unless ratio for its home state w ould give too the data are adjusted to account for the m uch weight to that bank’s lending and banks’ out-of-state branches’ lending deposit-taking activities, and excluding and deposit-taking activities. Because all its loans and deposits w ould give no the Summary of Deposits contains data w eight at all. After carefully considering all on a branch-by-branch basis, the comments, and given the statutory agencies can account for the depositlim itation on additional data collection, taking activities of out-of-state branches the agencies believe the best available of m ultistate banks by using the approach requires assuming that a aggregate deposit-taking activities of a m ultistate b ank’s lending and depositmultistate banks’ home state branches taking activities in its hom e state only. Accounting for the lending activities correspond to its total lending and of out-of-state branches of multistate deposit-taking activities (i.e., the 13 See 12 CFR 25.25 (OCC); 12 CFR 228.25 (Board); and 12 CFR 345.25 (FDIC). 14 Host state banks are banks in a host state that have that state as their hom e state. percentage of its total loans that are in state is the same as the percentage of its total deposits that are in-state). In particular, the agencies w ill calculate the percentage of a multistate bank’s deposits that are attributable to in-state branches (as determ ined from the Summary of Deposits), and apply that percentage to the bank’s total domestic loans (as determ ined from the Call Report) in order to determ ine a proxy for the bank’s domestic loans attributable to that state. The agencies believe that this approach is preferable to including or excluding all loans and deposits of a m ultistate bank. The agencies recognize that this m ethod for calculating the host state loan-to-deposit ratio makes certain assum ptions that may not be universally true. For example, intrastate banks do not necessarily make loans only to in state borrowers. In addition, there is not necessarily a one-to-one correlation betw een in-state deposits and in-state loans for a multistate bank. Nevertheless, the data lim itations im posed by section 109 necessitate these assumptions. The agencies w ill adjust this m ethod as appropriate to account for changes in reporting requirem ents or additional sources of relevant data. The agencies also w ill continue to review ways to improve the calculation of the host state loan-todeposit ratio. The agencies w ill make each state’s host state loan-to-deposit ratio, and any changes in the way the ratio is calculated, publicly available. B. A B a n k’s Statew ide Loan-to-Deposit Ratio Relevant Data Several commenters suggested that a “loan” under the final rule should be defined more expansively than that term is defined in the Call Reports and should include, for example, loans originated and sold, securitized loans, investments in mortgage-backed securities and m unicipal bonds secured by loans, outstanding letters of credit, and loans booked through a bank’s affiliates. Since banks generally do not report these data, or do not report them in a format that w ould provide a differentiation between in-state quantities and out-of-state quantities, the data could not be used in calculating the host state loan-to-deposit ratios. Using such data for a particular bank’s statewide loan-to-deposit ratio, and not for the corresponding host state loan-todeposit ratio, w ould distort the loan-todeposit ratio screen. Consequently, the agencies w ill not consider these data in applying the loan-to-deposit ratio screen. However, the agencies may 4 7 7 3 2 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations consider such data as appropriate in making a credit needs determination. Credit Needs Determination Consideration of CRA Rating Some commenters m aintained that a satisfactory or better CRA rating in a host state should provide a “safe harbor” from evaluation u nder section 109 in that state. Other commenters, however, believed that little, if any, reliance should be placed on CRA ratings because these commenters viewed CRA ratings as inflated and often out-of-date. One commenter suggested that a less than satisfactory CRA rating should automatically w arrant an adverse credit needs determination. The agencies believe that it is consistent w ith the language and intent of section 109 to carefully weigh the CRA rating of the bank in making a credit needs determ ination under the factors enum erated in section 109. Section 109 specifies the bank’s CRA rating as a factor to be considered, and m ost of the other factors listed in section 109 are taken into account as part of the performance context evaluation pursuant to the agencies’ CRA regulations.15 Moreover, section 110 of the Interstate Act (section 110)16 requires the following separate w ritten evaluations and CRA ratings of the institution’s CRA performance (1) as a whole, (2) in each state in w hich it m aintains a branch, and (3) in any m ultistate m etropolitan area in w hich it m aintains a branch in two or more states. In addition, the statewide w ritten evaluation of a m ultistate bank m ust contain separate discussions of the institu tion ’s performance in any m etropolitan area in the state in w hich it m aintains a branch, as well as in the nonm etropolitan area of the state if a branch is m aintained there. Accordingly, inform ation from a CRA performance evaluation is particularly relevant in determining compliance w ith section 109 because it directly evaluates a bank’s performance in helping to m eet the credit needs of the com m unities it serves in a host state. As discussed below, the agencies expect to conduct the section 109 review in 15 The CRA regulations specify that the agencies w ill evaluate a bank’s perform ance in the context of a num ber of considerations, including the nature of the b an k’s product offerings and business strategy, the lending opportunities w ith in a bank’s assessm ent area, and any constraints on the bank such as the financial condition of the bank, the economic climate (national, regional and local), and safety and soundness limitations. See 12 CFR 25.21(b) (OCC); 12 CFR 228.21(b) (Board); and 12 CFR 345.21(b) (FDIC). 1612 U.S.C. 2906(b) and (d). connection w ith an evaluation of the bank’s CRA performance in the host state u nder section 110, as the appropriate agency deems necessary, thereby ensuring that the section 109 review w ill be based on current information. In this light, the agencies expect that a credit needs determ ination for a bank w ith CRA performance ratings of “satisfactory” or “outstanding” in the host state (including any m ultistate m etropolitan area) w ould be favorable. The agencies also expect that a credit needs determ ination for a bank w ith less th an satisfactory ratings for CRA performance in the host state (including any m ultistate m etropolitan area) w ould be adverse unless mitigated by the other factors enum erated in section 109. Commenters requested that a credit needs determ ination only consider the lending com ponent of a large bank’s CRA rating, or that the lending com ponent be given extra weight. The CRA rating for a large retail bank already weighs lending performance so that a bank may not receive an overall “ satisfactory” CRA performance rating unless its lending performance com ponent is rated at least “satisfactory.” Accordingly, the agencies are not adopting the suggested change. Other Factors Commenters also discussed other factors that section 109 requires the agencies to consider in making a credit needs determination. Some commenters suggested that, in considering economic conditions, the agencies should grant m ultistate banks greater leeway to anticipate economic trends in the host state and, if these trends are adverse, to reduce their efforts in helping to meet com m unity credit needs. Another com menter suggested eliminating all factors that could be used to mitigate a poor CRA performance record. There also were requests for more guidance in the regulation on how the statutory factors w ould be considered in a credit needs determination. The final rule incorporates the statutory factors as they are set forth in section 109. The agencies intend to apply these factors consistent w ith the plain m eaning of the language used in section 109, as discussed above. With respect to institutions designated as wholesale or lim ited purpose banks u nd er the CRA regulations, the agencies w ill consider the CRA performance for these banks under the special CRA performance test provided in the CRA regulations and the banks’ specialized operations. Banks Not Subject to CRA Some entities that could be subject to section 109, including certain special purpose banks and uninsured branches of foreign banks,17 are not evaluated for CRA performance by the agencies. Several commenters m aintained that, in making a credit needs determ ination for such institutions, the agencies should apply the same standards that are applied to CRA-rated institutions. As discussed in the proposed rule, neither the language nor the legislative history of section 109 supports applying the CRA to these institutions. The agencies intend to use the CRA regulations as guidelines in making a credit needs determ ination for these institutions. The CRA regulations w ould provide only guidance to assess w hether activities identified by the institution help to meet the com m unity’s credit needs, and w ould not obligate the institution to have a record of performance under the CRA or require that the institution pass any performance tests in the CRA regulations. The agencies also intend, as proposed, to give substantial weight to the factor relating to specialized activities in making a credit needs determ ination for institutions not evaluated u n der the CRA. For example, most branches of foreign banks derive substantially all their deposits from wholesale deposit markets, w hich are generally national or international in scope.18 This approach 17A special purpose bank that does not perform commercial or retail banking services by granting credit to the public in the ordinary course of business is not evaluated for CRA performance by the agencies. See 12 CFR 25.11(c)(3) (OCC); 12 CFR 228.11(c)(3) (Board); and 12 CFR 345.11(c)(3) (FDIC). In addition, the CRA does not apply to the branch of a foreign bank unless the branch is insured or results from an acquisition described in section 5(a)(8) of the International Banking Act (12 U.S.C. 3103(a)(8)) (IBA, 12 U.S.C. 3101 et seq.). See 12 CFR 25.11(c)(2) (OCC); 12 CFR 228.11(c)(2) (Board); and 12 CFR 345.11(c)(1) (FDIC). 18U.S. branches of foreign banks generally accept only u ninsured wholesale deposits, and are not established prim arily to gather deposits in their host state. In 1991, the Federal Deposit Insurance Corporation Im provem ent A ct am ended the IBA to prohibit U.S. branches of foreign banks from taking deposits in am ounts of less than $100,000, other than through the relatively few branches that were already insured by the FDIC in 1991, or to the extent the OCC or the FDIC determ ine that the branch is not engaged in dom estic retail deposit taking activities requiring deposit insurance protection. 12 U.S.C. 3104. Congress reaffirmed this prohibition in the Interstate Act, directing the OCC and the FDIC to revise their regulations to reduce further the opportunities for retail deposit-taking available to these branches. See section 107(b) of the Interstate Act (12 U.S.C. 3104, Historical and Statutory Notes). As a general matter, interstate branches of foreign banks established under the Interstate Act therefore cannot take retail deposits or draw a significant level of deposits from retail-oriented deposit markets w here the branches are located. Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations47733 is consistent w ith section 109’s overall purpose of preventing banks from using the Interstate Act to establish branches prim arily to gather deposits in their host state w ithout reasonably helping to meet the credit needs of the com munities served by the bank in the host state. Other Comments Several commenters requested that the public, including representatives of com m unity organizations and state bank commissioners, participate in a credit needs determination. Information provided to examiners through contacts w ith com m unity representatives during a CRA exam ination or through other activities, and the bank’s public comment file provide the agencies substantial inform ation to assess the views of com m unity organizations, government officials, and other interested persons. In addition, the agencies encourage w ritten comments from the public about a bank’s CRA performance at any tim e and publicly announce their CRA. examination schedules. The agencies w ill carefully review inform ation provided to examiners from com m unity contacts or through other activities, and the public com m ent file in making a credit needs determination. State bank commissioners also requested that the agencies consider com pliance w ith state CRA laws in making a credit needs determination. The agencies w ill take into account state CRA com pliance evaluations in a credit needs determination, as appropriate. Some commenters requested the agencies to consider affiliate lending activities in making a credit needs determ ination w hile other commenters cautioned against giving too m uch consideration to affiliate lending activities. The agencies’ CRA regulations perm it a bank’s affiliate lending to be considered as part of its CRA performance evaluation. Affiliate lending, therefore, w ould be relevant to a section 109 review to the extent that such lending is reflected in the bank’s overall CRA performance rating. Sanctions A pplication of Loan-to-Deposit Ratio Screen Before a bank could be sanctioned under section 109, the appropriate agency w ould be required to demonstrate that the bank failed to comply w ith the section 109 loan-todeposit ratio screen and failed to reasonably help in meeting the credit needs of the bank’s com m unities in the host state. Accordingly, the proposed rule required the agencies to determine a bank’s compliance w ith the loan-todeposit ratio screen. Some commenters suggested th at the agencies could im pose sanctions on a bank w ithout verifying noncom pliance w ith the loanto-deposit ratio screen and other commenters contended that requiring such a verification w ould impose significant regulatory burdens. As previously discussed, the agencies have concluded that the two-step com pliance analysis in section 109 requires the agencies to verify noncom pliance w ith both steps before imposing sanctions, and that the agencies’ responsibility to ensure compliance w ith section 109 after an adverse credit needs determ ination outweighs potential regulatory burdens associated w ith such a verification. Consultation and Public Comment If a bank fails both steps in the analysis, section 109’s sanctions (1) allow the appropriate agency to order the closing of a covered interstate branch in the host state unless the bank provides reasonable assurances to the satisfaction of the agency that it has an acceptable plan that w ill reasonably help to meet the credit needs of the com m unities served by the bank, and (2) prohibit the bank from opening a new branch in the host state unless the bank provides reasonable assurances to the satisfaction of the agency that the bank w ill reasonably m eet the credit needs of the com m unity to be served by the new branch.19 State banking commissioners requested consultation before the agencies ordered a branch closing. Informal consultations w ith state banking regulators may assist the agencies in assessing the im pact of branch closures, or a prohibition against new branches, on a state bank’s ability to comply w ith state CRA laws. Informal consultations may also assist in assessing the bank’s assurances to help m eet credit needs in light of its record w ith state banking regulators for addressing supervisory concerns. Accordingly, the agencies intend to consult w ith state banking authorities before imposing sanctions, as appropriate. Other commenters requested that the agencies solicit public comment on any plan proposed by the bank for meeting the credit needs of the com m unity to avoid a branch closing order. The agencies w ill review any proposal by 19 Section 109 requires the appropriate agency to issue a notice of intent to close a covered interstate b ranch to the bank and schedule a hearing in accordance w ith section 8(h) of the Federal Deposit Insurance Act (12 U.S.C. 1818(h)) before a branch can be closed. the bank in light of all comments from the public in the bank’s com m unity contacts portion of the CRA exam ination or through other activities, and the bank’s public comm ent file. In addition, the agencies intend to provide an opportunity for public comment on nonconfidential portions of the b ank’s proposal. Timing of Review Some commenters stated that section 109 reviews and CRA performance examinations should be conducted at the same time. One commenter requested clarification that section 109 reviews w ould be conducted more than once, another commenter requested that section 109 reviews be conducted annually, and a third commenter recom m ended a two-year grace period before conducting the reviews. As previously noted, the agencies intend to conduct section 109 reviews in connection w ith an evaluation of a m ultistate b ank’s CRA performance in a host state u n der section 110 of the Interstate Act. The appropriate agency w ill conduct a section 109 review of a m ultistate bank during the section 110 review, and a section 109 review of banks not subject to CRA, w hen the agency deems such a review to be necessary. The agencies w ill also coordinate w ith state banking authorities in applying section 109 to state-chartered branches of foreign banks that may be subject to section 109. Other Comments The agencies also received several recom m endations that are inconsistent w ith section 109. These suggestions include: (1) Increasing the loan-todeposit screen to more than 50 percent; (2) excluding a covered interstate branch if it does not solicit deposits from the public, or if it has a loan-todeposit ratio in the host state comparable to the bank’s overall loanto-deposit ratio; (3) applying section 109 to all the bank’s interstate branches in a host state rather than to “covered interstate branches” ; (4) applying the loan-to-deposit ratio to partial but geographically specific lending data (for example, home mortgages); and (5) exempting a bank that prim arily lends in a particular state from compliance w ith the loan-to-deposit ratio screen and from the calculation of the host state loan-to-deposit ratio. The agencies believe that it w ould be inappropriate to im plem ent these recom m endations because they are inconsistent w ith the agencies’ understanding of the language of section 109 and, accordingly, are not adopting them in the final rule. 4 7 7 3 4 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations Regulatory Flexibility Act Analysis Consistent w ith the requirem ent that the agencies use only available information to conduct a section 109 review, the final rule does not impose any additional regulatory burden on banks beyond w hat is required by statute. In particular, the final rule does not impose any additional paperw ork or reporting requirements. Thus, the final rule w ill not have a significant economic im pact on a substantial num ber of small entities consistent w ith the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). Moreover, the final rule affects only banks that have branches in more than one state, w hich are prim arily larger banks. However, the agencies note that some institutions w ith covered interstate branches may be subject to more extensive examinations or requests for inform ation necessary to obtain the relevant data if the agencies determine to impose sanctions. As noted above, the agencies believe that this information is required by the twostep analysis under section 109 before sanctions can be imposed, and that there are no feasible alternatives to mitigate this potential burden. Paperwork Reduction Act The agencies have determ ined that the final rule w ould not increase the regulatory paperw ork burden of banking organizations pursuant to the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 etseq.). Small Business Regulatory Enforcement Fairness Act The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) (Title II, Pub. L. 104-121) provides generally for agencies to report rules to Congress and the General Accounting Office (GAO) for review. The reporting requirem ent is triggered w hen a federal agency issues a final rule. The agencies w ill file the appropriate reports w ith Congress and the GAO as required by SBREFA. Because the Office of Management and Budget has determ ined that the uniform rule prom ulgated by the agencies does not constitute a “major ru le” as defined by SBREFA, the final rule w ill take effect 30 days from publication in the Federal Register. OCC Executive Order 12866 Determination The OCC has determ ined that this final rule is not a significant regulatory action. OCC Unfunded Mandates Reform Act of U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215, 215a, 481, 1814, 1816, 1828(c), 1995 Determination 1835a, 2901 through 2907, and 3101 The OCC has determ ined that the through 3111. final rule w ould not result in * * * * * expenditures by state, local, and tribal 4. Part 25 is am ended by adding a governments, or by the private sector, of new subpart E to read as follows: $100 m illion or more in any one year. Accordingly, a budgetary im pact Subpart E— Prohibition Against Use of statement is not required under section Interstate Branches Primarily for Deposit 202 of the U nfunded Mandates Reform Production Act of 1995. Sec. List of Subjects 12 CFR Part 25 Community development, Credit, Investments, National banks, Reporting and recordkeeping requirements. 12 CFR Part 208 Accounting, Agriculture, Banks, banking, Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements, Securities. 12 CFR Part 211 Exports, Federal Reserve System, Foreign banking, Holding companies, Investments, Reporting and recordkeeping requirements. 12 CFR Part 369 Banks, banking, Community development. Office of the Comptroller of the Currency 12 CFR Chapter I Authority and Issuance For the reasons set forth in the joint preamble, the Office of the Comptroller of the Currency amends part 25 of chapter I of title 12 of the Code of Federal Regulations as follows: PART 25— COMMUNITY REINVESTMENT ACT AND INTERSTATE DEPOSIT PRODUCTION REGULATIONS 1. The part heading for part 25 is revised to read as set forth above. 2. The authority citation for part 25 is revised to read as follows: Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215, 215a, 481, 1814, 1816, 1828(c), 1835a, 2901 through 2907, and 3101 through 3111. 3. Section 25.11 is am ended by revising paragraph (a)(1) to read as follows: §25.11 Authority, purpose, and scope. (a) A utho rity and OMB control num ber—(1) Authority. The authority for subparts A, B, C, D, and E is 12 25.61 25.62 25.63 25.64 25.65 Purpose and scope. Definitions. Loan-to-deposit ratio screen. Credit needs determination. Sanctions. Subpart E— Prohibition Against Use of Interstate Branches Primarily for Deposit Production § 25.61 Purpose and scope. (a) Purpose. The purpose of this subpart is to im plem ent section 109 (12 U.S.C. 1835a) of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). (b) Scope. (1) This subpart applies to any national bank that has operated a covered interstate branch for a period of at least one year, and any foreign bank that has operated a covered interstate branch that is a Federal branch for a period of at least one year. (2) This subpart describes the requirem ents im posed under 12 U.S.C. 1835a, w hich requires the appropriate Federal banking agencies (the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation) to prescribe uniform rules that prohibit a bank from using any authority to engage in interstate branching pursuant to the Interstate Act, or any am endm ent m ade by the Interstate Act to any other provision of law, prim arily for the purpose of deposit production. § 2 5 .6 2 Definitions. For purposes of this subpart, the following definitions apply: (a) B ank means, unless the context indicates otherwise: (1) A national bank; and (2) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and 12 CFR 28. l l ( j ) . (b) Covered interstate branch means any branch of a national bank, and any Federal branch of a foreign bank, that: (1) Is established or acquired outside the bank’s home state pursuant to the interstate branching authority granted by the Interstate Act or by any am endm ent m ade by the Interstate Act to any other provision of law; or (2) Could not have been established or acquired outside of the bank’s home Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations47735 state but for the establishm ent or acquisition of a branch described in paragraph (b)(1) of this section. (c) Federal branch means Federal branch as that term is defined in 12 U.S.C. 3101(6) and 12 CFR 28.11(i). (d) H om e state means: (1) W ith respect to a state bank, the state that chartered the bank; (2) W ith respect to a national bank, the state in w hich the m ain office of the bank is located; and (3) W ith respect to a foreign bank, the hom e state of the foreign bank as determ ined in accordance w ith 12 U.S.C. 3103(c) and 12 CFR 28.11(o). (e) H ost state m eans a state in w hich a bank establishes or acquires a covered interstate branch. (f) H ost state loan-to-deposit ratio generally means, w ith respect to a particular host state, the ratio of total loans in the host state relative to total deposits from the host state for all banks (including institutions covered under the definition of “bank” in 12 U.S.C. 1813(a)(1)) that have that state as their home state, as determ ined and updated periodically by the appropriate Federal banking agencies and m ade available to the public. (g) State m eans state as th at term is defined in 12 U.S.C. 1813(a)(3). (h) Statew ide loan-to-deposit ratio means, w ith respect to a bank, the ratio of the bank’s loans to its deposits in a state in w hich the bank has one or more covered interstate branches, as determ ined by the OCC. § 25.63 Loan-to-deposit ratio screen. (a) A pplication o f screen. Beginning no earlier than one year after a bank establishes or acquires a covered interstate branch, the OCC w ill consider w hether the bank’s statewide loan-todeposit ratio is less than 50 percent of the relevant host state loan-to-deposit ratio. (b) Results o f screen. (1) If the OCC determines that the bank’s statewide loan-to-deposit ratio is 50 percent or more of the host state loan-to-deposit ratio, no further consideration under this subpart is required. (2) If the OCC determines that the bank’s statewide loan-to-deposit ratio is less than 50 percent of the host state loan-to-deposit ratio, or if reasonably available data are insufficient to calculate the bank’s statewide loan-todeposit ratio, the OCC w ill make a credit needs determ ination for the bank as provided in § 25.64. § 2 5 .6 4 Credit needs determ ination. (a) In general. The OCC w ill review the loan portfolio of the bank and determ ine w hether the bank is reasonably helping to m eet the credit needs of the communities in the host state that are served by the bank. (b) Guidelines. The OCC w ill use the following considerations as guidelines w hen making the determ ination pursuant to paragraph (a) of this section: (1) W hether covered interstate branches were formerly part of a failed or failing depository institution; (2) W hether covered interstate branches were acquired under circumstances where there was a low loan-to-deposit ratio because of the nature of the acquired institution’s business or loan portfolio; (3) W hether covered interstate branches have a high concentration of commercial or credit card lending, trust services, or other specialized activities, including the extent to w hich the covered interstate branches accept deposits in the host state; (4) The CRA ratings received by the bank, if any; (5) Economic conditions, including the level of loan dem and, w ithin the com munities served by the covered interstate branches; (6) The safe and sound operation and condition of the bank; and (7) The OCC’s CRA regulations (subparts A through D of this part) and interpretations of those regulations. § 2 5 .6 5 Sanctions. (a) In general. If the OCC determines that a bank is not reasonably helping to m eet the credit needs of the com m unities served by the bank in the host state, and that the bank’s statewide loan-to-deposit ratio is less than 50 percent of the host state loan-to-deposit ratio, the OCC: (1) May order that a bank’s covered interstate branch or branches be closed unless the bank provides reasonable assurances to the satisfaction of the OCC, after an opportunity for public comment, that the bank has an acceptable plan under w hich the bank w ill reasonably help to meet the credit needs of the com m unities served by the bank in the host state; and (2) Will not perm it the bank to open a new branch in the host state that w ould be considered to be a covered interstate branch unless the bank provides reasonable assurances to the satisfaction of the OCC, after an opportunity for public comment, that the bank w ill reasonably help to meet the credit needs of the com m unity that the new branch w ill serve. (b) N otice prior to closure o f a covered interstate branch. Before exercising the OCC’s authority to order the bank to close a covered interstate branch, the OCC w ill issue to the bank a notice of ' the OCC’s intent to order the closure and w ill schedule a hearing w ith in 60 days of issuing the notice. (c) Hearing. The OCC w ill conduct a hearing scheduled u nder paragraph (b) of this section in accordance w ith the provisions of 12 U.S.C. 1818(h) and 12 CFR part 19. Dated: September 4, 1997. Eugene A. Ludwig, Comptroller o f the Currency. Federal Reserve System 12 CFR Chapter II Authority and Issuance For the reasons set forth in the joint preamble, the Board of Governors of the Federal Reserve System amends parts 208 and 211 of chapter II of title 12 of the Code of Federal Regulations as follows: PART 208— MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. The authority citation for part 208 is revised to read as follows: Authority: 12 U.S.C. 24, 248(a), 248(c), 321-338a, 371d, 461, 4 8 1 ^ 8 6 , 601, 611, 1814, 1820(d)(9), 1823(j), 1828(o), 1831o, 1831p— 1835a, 3105, 3310, 3331-3351, and 1, 3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 78l(i), 78o— 4(c)(5), 78q, 7 8 q -l, and 78w; 31 U.S.C. 5318. 2. A new § 208.28 is added to subpart A to read as follows: § 208.28 Prohibition against use of interstate branches primarily for deposit production. (a) Purpose and scope—(1) Purpose. The purpose of this section is to im plem ent section 109 (12 U.S.C. 1835a) of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). (2) Scope, (i) This section applies to any State member bank that has operated a covered interstate branch for a period of at least one year, and any foreign bank that has operated a covered interstate branch licensed by a State for a period of at least one year. (ii) This section describes the requirem ents im posed under 12 U.S.C. 1835a, w hich requires the appropriate Federal banking agencies (the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) to prescribe uniform rules that prohibit a bank from using any authority to engage in interstate branching pu rsuant to the Interstate Act, or any am endm ent made by the Interstate Act to any other 47736 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations provision of law, prim arily for the purpose of deposit production. (b) Definitions. For purposes of this section, the following definitions apply: (1) B ank means, unless the context indicates otherwise: (1) A State m em ber bank as that term is defined in 12 U.S.C. 1813(d)(2); and (ii) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and 12 CFR 2 1 1 .2 1 . (2) Covered interstate branch means any branch of a State mem ber bank, and any uninsured branch of a foreign bank licensed by a State, that: (i) Is established or acquired outside the bank’s home state pursuant to the interstate branching authority granted by the Interstate Act or by any am endm ent m ade by the Interstate Act to any other provision of law; or (ii) Could not have been established or acquired outside of the bank’s home state bu t for the establishm ent or acquisition of a branch described in paragraph (b)(2)(i) of this section. (3) H om e state means: (1) W ith respect to a state bank, the state that chartered the bank; (ii) W ith respect to a national bank, the state in w hich the m ain office of the bank is located; and (iii) W ith respect to a foreign bank, the home state of the foreign bank as determ ined in accordance w ith 12 U.S.C. 3103(c) and 12 CFR 211.22. (4) H ost state means a state in w hich a bank establishes or acquires a covered interstate branch. (5) H ost state loan-to-deposit ratio generally means, w ith respect to a particular host state, the ratio of total loans in the host state relative to total deposits from the host state for all banks (including institutions covered under the definition of “bank” in 12 U.S.C. 1813(a)(1)) that have that state as their home state, as determ ined and updated periodically by the appropriate Federal banking agencies and made available to the public. (6) State m eans state as that term is defined in 12 U.S.C. 1813(a)(3). (7) Statew ide loan-to-deposit ratio means, w ith respect to a bank, the ratio of the bank’s loans to its deposits in a state in w hich the bank has one or more covered interstate branches, as determ ined by the Board. (c) Loan-to-deposit ratio screen—(1) Application o f screen. Beginning no earlier than one year after a bank establishes or acquires a covered interstate branch, the Board w ill consider w hether the b ank’s statewide loan-to-deposit ratio is less than 50 percent of the relevant host state loanto-deposit ratio. (2) Results o f screen, (i) If the Board determines that the bank’s statewide acceptable plan under w hich the bank loan-to-deposit ratio is 50 percent or will reasonably help to meet the credit more of the host state loan-to-deposit needs of the com m unities served by the ratio, no further consideration under bank in the host state; and this section is required. (ii) If the Board determines that the (ii) Will not perm it the bank to open bank’s statewide loan-to-deposit ratio is a new branch in the host state that less than 50 percent of the host state w ould be considered to be a covered loan-to-deposit ratio, or if reasonably interstate branch unless the bank available data are insufficient to provides reasonable assurances to the calculate the bank’s statewide loan-tosatisfaction of the Board, after an deposit ratio, the Board will make a opportunity for public comment, that credit needs determ ination for the bank the bank w ill reasonably help to meet as provided in paragraph (d) of this the credit needs of the com m unity that section. the new branch w ill serve. (d) Credit needs determ ination—(1) In (2) Notice prior to closure o f a covered general. The Board w ill review the loan interstate branch. Before exercising the portfolio of the bank and determine Board’s authority to order the bank to w hether the bank is reasonably helping close a covered interstate branch, the to meet the credit needs of the Board w ill issue to the bank a notice of communities in the host state that are the Board’s intent to order the closure served by the bank. (2) Guidelines. The Board w ill use the and w ill schedule a hearing w ithin 60 days of issuing the notice. following considerations as guidelines w hen making the determ ination (3) Hearing. The Board w ill conduct a pursuant to paragraph (d)(1) of this hearing scheduled u nder paragraph section: (e)(2) of this section in accordance w ith (i) W hether covered interstate the provisions of 12 U.S.C. 1818(h) and branches were formerly part of a failed 12 CFR part 263. or failing depository institution; (ii) W hether covered interstate PART 211—INTERNATIONAL branches were acquired under BANKING OPERATIONS circumstances where there was a low (REGULATION K) loan-to-deposit ratio because of the 1. The authority citation for part 211 nature of the acquired institution’s business or loan portfolio; is revised to read as follows: (iii) W hether covered interstate Authority: 12 U.S.C. 221 et seq., 1818, branches have a high concentration of 1835a, 1841 et seq., 3101 et seq., and 3901 commercial or credit card lending, trust et seq. services, or other specialized activities, 2. In § 211.22, a new paragraph (d) is including the extent to w hich the added to read as follows: covered interstate branches accept deposits in the host state; § 211.22 Interstate banking operations of (iv) The Community Reinvestment foreign banking organizations Act ratings received by the bank, if any, * * * * * under 12 U.S.C. 2901 et seq.', (v) Economic conditions, including (d) Prohibition against interstate the level of loan demand, w ithin the deposit production offices. A covered com munities served by the covered interstate branch of a foreign bank may interstate branches; not be used as a deposit production (vi) The safe and sound operation and office in accordance w ith the provisions condition of the bank; and in § 208.28 of the Board’s Regulation H (vii) The Board’s Regulation BB— (12 CFR 208.28). Community Reinvestment (12 CFR Part By order of the Board of Governors of the 228) and interpretations of that Federal Reserve System, September 4, 1997. regulation. William W. Wiles, (e) Sanctions—(1) In general. If the Secretary o f the Board. Board determines that a bank is not reasonably helping to m eet the credit Federal Deposit Insurance Corporation needs of the com m unities served by the bank in the host state, and that the 12 CFR Chapter III bank’s statewide loan-to-deposit ratio is less than 50 percent of the host state Authority and Issuance loan-to-deposit ratio, the Board: For the reasons set forth in the joint (i) May order that a bank’s covered preamble, the Board of Directors of the interstate branch or branches be closed Federal Deposit Insurance Corporation unless the bank provides reasonable adds part 369 to chapter III of title 12 assurances to the satisfaction of the of the Code of Federal Regulations to Board, after an opportunity for public read as follows: comment, that the bank has an Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations47737 PART 369— PROHIBITION AGAINST USE OF INTERSTATE BRANCHES PRIMARILY FOR DEPOSIT PRODUCTION Sec. 369.1 Purpose and scope. 369.2 Definitions. 369.3 Loan-to-deposit ratio screen. 369.4 Credit needs determination. 369.5 Sanctions. Authority: 12 U.S.C. 1819 (Tenth) and 1835a. §369.1 Purpose and scope. (a) Purpose. The purpose of this part is to im plem ent section 109 (12 U.S.C. 1835a) of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). (b) Scope—(1) This part applies to any State nonm em ber bank that has operated a covered interstate branch for a period of at least one year. (2) This part describes the requirem ents im posed under 12 U.S.C. 1835a, w hich requires the appropriate Federal banking agencies (the FDIC, the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System) to prescribe uniform rules that prohibit a bank from using any authority to engage in interstate branching pu rsuant to the Interstate Act, or any am endm ent made by the Interstate Act to any other provision of law, prim arily for the purpose of deposit production. §3 6 9.2 Definitions. For purposes of this part, the following definitions apply: (a) B ank means, unless the context indicates otherwise: (1) A State nonm em ber bank; and (2) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and 12 CFR 346.1(a). (b) Covered interstate branch means any branch of a State nonm em ber bank, and any insured branch of a foreign bank licensed by a State, that: (1) Is established or acquired outside the bank’s home state pursuant to the interstate branching authority granted by the Interstate Act or by any am endm ent m ade by the Interstate Act to any other provision of law; or (2) Could not have been established or acquired outside of the bank’s home state but for the establishm ent or acquisition of a branch described in paragraph (b)(1) of this section. (c) H om e state means: (1) W ith respect to a state bank, the state that chartered the bank; (2) W ith respect to a national bank, the state in w hich the m ain office of the bank is located; and (3) W ith respect to a foreign bank, the hom e state of the foreign bank as determ ined in accordance w ith 12 U.S.C. 3103(c) and 12 CFR 346.1(j). (d) H ost state means a state in w hich a bank establishes or acquires a covered interstate branch. (e) H ost state loan-to-deposit ratio generally means, w ith respect to a particular host state, the ratio of total loans in the host state relative to total deposits from the host state for all banks (including institutions covered under the definition of “b ank” in 12 U.S.C. 1813(a)(1)) that have that state as their home state, as determ ined and updated periodically by the appropriate Federal banking agencies and m ade available to the public. (f) State m eans state as that term is defined in 12 U.S.C. 1813(a)(3). (g) Statew ide loan-to-deposit ratio means, w ith respect to a bank, the ratio of the bank’s loans to its deposits in a state in w hich the bank has one or more covered interstate branches, as determ ined by the FDIC. § 369.3 Loan-to-deposit ratio screen. (a) A pplication o f screen. Beginning no earlier than one year after a bank establishes or acquires a covered interstate branch, the FDIC w ill consider w hether the bank’s statewide loan-todeposit ratio is less than 50 percent of the relevant host state loan-to-deposit ratio. (b) R esults o f screen. (1) If the FDIC determines that the bank’s statewide loan-to-deposit ratio is 50 percent or more of the host state loan-to-deposit ratio, no further consideration under this part is required. (2) If the FDIC determines that the b ank’s statewide loan-to-deposit ratio is less than 50 percent of the host state loan-to-deposit ratio, or if reasonably available data are insufficient to calculate the bank’s statewide loan-todeposit ratio, the FDIC w ill make a credit needs determ ination for the bank as provided in § 369.4. § 3 6 9.4 Credit needs determ ination. (a) In general. The FDIC w ill review the loan portfolio of the bank and determine w hether the bank is reasonably helping to meet the credit needs of the com m unities in the host state that are served by the bank. (b) Guidelines. The FDIC w ill use the following considerations as guidelines w hen making the determ ination pursuant to paragraph (a) of this section: (1) W hether covered interstate branches w ere formerly part of a failed or failing depository institution; (2) W hether covered interstate branches were acquired under circumstances where there was a low loan-to-deposit ratio because of the nature of the acquired institution’s business or loan portfolio; (3) W hether covered interstate branches have a high concentration of commercial or credit card lending, trust services, or other specialized activities, including the extent to w hich the covered interstate branches accept deposits in the host state; (4) The Community Reinvestment Act (CRA) ratings received by the bank, if any, under 12 U.S.C. 2901 et seq.; (5) Economic conditions, including the level of loan dem and, w ithin the com munities served by the covered interstate branches; (6) The safe and sound operation and condition of the bank; and (7) The FDIC’s Community Reinvestment regulations (12 CFR Part 345) and interpretations of those regulations. § 3 6 9.5 Sanctions. (a) In general. If the FDIC determines that a bank is not reasonably helping to meet the credit needs of the com m unities served by the bank in the host state, and that the bank’s statewide loan-to-deposit ratio is less than 50 percent of the host state loan-to-deposit ratio, the FDIC: (1) May order that a b ank’s covered interstate branch or branches be closed unless the bank provides reasonable assurances to the satisfaction of the FDIC, after an opportunity for public comment, that the bank has an acceptable plan under w hich the bank w ill reasonably help to m eet the credit needs of the com m unities served by the bank in the host state; and (2) W ill not perm it the bank to open a new branch in the host state that w ould be considered to be a covered interstate branch unless the bank provides reasonable assurances to the satisfaction of the FDIC, after an opportunity for public comment, that the bank w ill reasonably help to meet the credit needs of the com m unity that the new branch w ill serve. (b) N otice prior to closure o f a covered interstate branch. Before exercising the FDIC’s authority to order the bank to close a covered interstate branch, the FDIC will issue to the bank a notice of the FDIC’s intent to order the closure and w ill schedule a hearing w ithin 60 days of issuing the notice. (c) Hearing. The FDIC will conduct a hearing scheduled u n der paragraph (b) of this section in accordance w ith the provisions of 12 U.S.C. 1818(h) and 12 CFR part 308. By order of the Board of Directors. Dated at W ashington, D.C., this 26th day of August, 1997. 47738Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Rules and Regulations Federal Deposit Insurance Corporation. Valerie J. Best, Assistant Executive Secretary. [FR Doc. 97-23950 Filed 9-9-9 7; 8:45 am] BILLING CODE 4810- 33- P , 6210- 01- P , 6714- 01- P
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