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federal reserve

Ba n k

DALLAS, TE X A S

of

Dallas

75222

Circular No. 83-155
December 30, 1983

REGULATION K
INTERNATIONAL BANKING OPERATIONS
(Proposed Amendments)
TO ALL STATE MEMBER BANKS,
EDGE AND AGREEMENT CORPORATIONS,
BANK HOLDING COMPANIES,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System is proposing to
amend its Regulation K in order to implement a section of the International
Lending Supervision Act of 1983 requiring banking organizations to maintain
special reserves against certain foreign loans or other foreign assets.
The
Board welcomes comments on this proposal; written comments should be directed
to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve
System,
Washington,
D.C., 20551.
Comments should refer to Docket No. R-0498
and must be received by January 11, 1984.
Attached is a copy of the Board's press release and the material
as
submitted to the Federal R e g i s t e r . Questions regarding the material contained
in this circular should be directed to Nancy P. Jacklin,
(202) 452-3428,
Kathleen O'Day,
(202) 452-3786, or Michael G. Martinson, (202) 452-3621, at
the Board of Governors, or to the Legal Department, Extension 6171.
Additional copies of this circular will be furnished upon request
the Public Affairs Department, Extension 6289.

to

Sincerely yours,

William H. Wallace
First Vice President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

FEDERA^RESERV^pres^j^lease
For immediate release

Decembe

The Federal Reserve Board today requested public comment on rules
proposed to implement a section of the International Lending Supervision
Act of 1983 requiring banking organizations to maintain special reserves
against certain foreign loans or other foreign assets.
The Board requested comment by January 11, 1984, and intends to
issue final regulations by January 31, 1984.
The reserves would be required for those assets the quality of
which has been impaired, in the judgment of the federal banking agencies, by
a protracted inability of public or private borrowers in a foreign country
to make payments on their external indebtedness or where no definite
prospects exist for orderly restoration of debt service.
The proposal is one facet of a joint program by the federal bank
regulators to strengthen, under the new law, the supervision and regulation
of foreign lending by U.S. banking organizations.
The Board's proposal is the same as proposals being made by the
other

federal

bank supervisors (the Office of the Comptroller of the Currency,

with respect to national banks and the Federal Deposit Insurance Corporation,
with respect to state-chartered banks that are not members of the Federal
Reserve System).

The Board's proposals would apply to state-chartered

member banks, Edge and Agreement C o r p o r a t i o n s , bank holding companies and
their

nonbank

subsidiaries.

The federal banking agencies are considering,as

directed by the Act, the extent and manner in which to apply provisions of
the Act to the United States banking offices o f f o r e i g n b a n k s , and the
agencies request comment on this issue.

-

4

-

Further rules as necessary to implement provisions of the Act other
than Section 905(a), dealt with in the present proposals, will be issued
separately.
As detailed in the attached notice, the draft regulations address
four aspects of implementation of Section 905(a) of the Act.
1.

The establishment of special reserves and the amounts
of such reserves.

2.

Procedures the federal bank regulators will follow in
determining:
the assets that will be subject to reserves,
initial amounts of the special reserves, and the
subsequent increases in or reductions of the reserves.

3.

The criteria the agencies will use in making these
determi nati ons.

4.

Accounting procedures applicable to the special reserves,
including a requirement that the reserves be established
as a charge against current income and not be counted as
capital and surplus. The proposals, which track the Act
closely, also give banking institutions the option of
writing off amounts of their assets equivalent to the
required reserves.

The agencies particularly requested comment on:
— The proposed percentage norms of special reserves.
--Factors to be used in determining the amount of the reserves.
— What international assets will be subject to the special
reserves, including the treatment of new loans to borrowers
in countries where comparable outstanding loans are subject
to the special reserves.
--Technical comment on the accounting provisions of the
proposed regulations.
-

Attachment

0

-

5

-

-

FEDERAL RESERVE SYSTEM
REGULATION K
[12 CFR PART 211]
[Docket No. R-0498]
INTERNATIONAL BANKING OPERATIONS
International Lending Supervision

AGENCY:

Board of

ACTION:

Notice of proposed rulemaking.

SUMMARY:

Governors of the Federal Reserve

This proposal

establish

special

would

reserves

require banking

against

certain international assets.
require banking
and

diminished

institutions
value

of

the

institutions

risks

In particular,
to recognize

international

System.

presented

to

in

it is intended to

uniformly

assets

the
have

which

been serviced over a protracted period of time.

risk
not

This proposal

would implement one aspect of the joint program of the Federal
banking

agencies

(Board

of

Governors

of

the

Federal

Reserve

System,

Office of

the Comptroller of the Currency

and Federal

Deposit

Insurance

corporation)

supervisory

and

regulatory

banks,

framework

incorporated

in

to strengthen

relating
section

to foreign

905(a)

of

the

lending

the

by U.S.

International

Lending Supervision Act of 1983.
It

is

important

that

this

provision

implemented expeditiously so that banking

of

law

institutions,

be
in the

-

6

-

process of preparing financial statements,
information
pursuant

on

the

reserves

to be

to section 905(a).

will have timely

required

Accordingly,

by

the

it is

agencies

the

intention

of the agencies that final regulations be adopted no later than
January 31, 1984.
Further
the

regulations

International

Lending

implementing

Supervision

other

Act

of

provisions
1983

will

of

be

issued separately.
DATE:

Written

comments

must

be

submitted

on

or

before

to

Docket

January 11, 1984.
ADDRESS:
R-0498,

All

20551,

p.m.

which

should

refer

should be mailed to William W. Wiles,

of Governors

N.W.,

comments,

of

the

Federal

Reserve

or delivered to Room B-2223,
Washington,

weekdays.

D.C.

System,

Secretary,
Washington,

may

be

Board
D.C.

20th and Constitution A v e .,

between the hours of 8:45 a.m.

Comments

No.

inspected

in

Room

and

5:15

B-1122

between 8:45 a.m. and 5:15 p.m. weekdays.
FOR FURTHER INFORMATION CONTACT:
General Counsel

(202/452-3428);

Legal

(202/452-3786);

Division

Projects Manager,

Nancy

P.

Kathleen O'Day,
or

Michael

International Activities,

Supervision and Regulation

Jacklin,

Assistant

Senior Counsel,

G.

Martinson,

Division of Banking

(202/452-3621).

SUPPLEMENTARY INFORMATION:
Purpose
The purpose
requirements

for

of this proposal

banking

institutions

is to establish
to provide

uniform

against

the

-

risks presented

7

-

in certain international assets by establishing

a special reserve for such assets out of current income.
Background
As

part

supervising

of

the

"transfer

review

risk"

of

in U.S.

their

procedures

banking

for

institutions

(the

possibility that an asset cannot be serviced in the currency of
payment

because

payment

in the

of

a

lack

of

of

the

country

foreign

exchange

obligor),

the

needed

Federal

for

banking

agencies have examined the methods used by banking institutions
to account

for credits

to governments

or

others

in countries

with severe and protracted external payments problems.
opinion of the agencies,

In the

present bank procedures do not always

reflect the reduced quality of these credits and do not account
for them uniformly.
Under current procedures,
their assets,

domestic

and

foreign,

should be written down or whether
be

made

to

traditional

the

allowance

commercial

banks are required to review

for

to determine

whether

additional provisions

possible

loan

losses.

credit process has not worked

should
This

well

assets that have been adversely affected due to transfer
For

example,

honoring
doing

debt

private
service

sector

borrowers

obligations,

so by governmental

uses of foreign exchange.

but

restrictions

may

be

they

capable

for
risk.

of

may be prevented
on the

availability

from
and

8

-

Transfer

risk

-

problems

can

seriously

liquidity and earning power of an asset.
interest

has

not

value

the

underlying

of

been

paid,

that,

asset.

by

The

Indeed,

itself

Federal

believe that when assets have not performed
terms

over

a protracted

period

of

impair

time

to the extent

diminishes
banking

to

a

the

agencies

according

due

the

to their

country's

inability to generate or unwillingness to provide the necessary
foreign exchange,
should

be

statement

the net carrying value of the affected assets

reduced
through

in

a

banking

charges

to

institution's

earnings

and

financial

balance

sheet

provi s i o n s .
Section
Supervision Act
provides

that

905(a)
of

the

1983

of

the

International

(Title IX,

appropriate

Pub.

Federal

Lending

L. 98-181) ("the Act")

banking

agency

—

the

Board of Governors of the Federal Reserve System in the case of
State

member

banks,

bank

holding

companies,

subsidiaries of a bank holding company,
Agreement Corporations —
establish

and

maintain

agency's judgment,

Edge Corporations,

shall require banking
a

special

nonbank

reserve

and

institutions to

whenever,

(1) the quality of the banking

in

the

institution's

assets has been impaired by a protracted inability of public or
private
their

borrowers

external

among others,
(i)

in

a

foreign

indebtedness,

as

country

to make

indicated

by

payments

such

on

factors,

as:
a failure by such public
to

make

full

inde btedness;

interest

or private borrowers

payments

on

external

-

(ii)

a

failure

to

9

-

comply

with

the

restructured indebtedness;
(iii)

of

any

or

a failure by the foreign country to comply with
any

International

Monetary

Fund

suitable adjustment program;
(2)

terms

or

other

or

no definite prospect exists for the orderly restoration of

debt service.
The Act requires that such reserves be charged against
current

income

surplus

or

banking

and not

allowances

agencies

be

considered

as part

of

for possible
required

are

loan

promulgate

to

capital

losses.

The

and

Federal

regulations

necessary to implement this section on or before March 29,

1984.

Proposal
The

agencies

to establish
assets

to require

"Allocated Transfer

that

problems

propose

are

found

described

to be

above.

Risk

Reserves"

impaired
In

the

banking

by

the

institutions
(ATRR)

transfer

alternative,

a

against
risk

banking

institution would have the option to write down all or part
the

assets

that

are

subject

consequently,

reduce

the

otherwise

be

required.

allowance

for possible

to

amount
If

loan

the

special

of AT RR

that

reserves

balances

option

is

that

selected,

of

and,
would
the

losses must be replenished out

of

current earnings by the amount written down.
International
include loans

assets

subject

or other extensions

to

the

of credit,

reserve

debt

may

securities,

10

-

deposit

arrangements/

listing

of

contained

the

orsimilar

types

in the

of

Exposure

banking

institutions

Report"

those

included

which may

be

"Instructions

(Form

and

A

joint

FFIEC No.

available

to any of the Federal banking
are

claims.

assets

agencies'

Country

-

reservable
for

009,

upon

Country

and

instrumentalities

of

foreign

assets

Exposure

Reports and may be liabilities of foreign governments
agencies

to

request

International

institutions'

is

Preparing

provided

to the public

agencies).

in banking

representative

or

corporations,

their
banks

or individuals.
A
exist

determination

would

be

based

that

on

severe

the

transfer

Federal

risk

banking

problems

agencies'

application of the general criteria contained in section 905(a)
of

the

International

criteria,
which

Lending

Supervision

the Federal banking

international

assets

agencies

will be

Act.

will

subject

Applying

jointly determine
to the reserve

the amount and timing of the reserve for specified
prescribed

by

determinations

section
with

905,

each

respect

to

agency
the

such

will

banking

assets.

implement

and
As

these

institutions

for

which it is the appropriate Federal banking agency.
Banking
percentage
The

amount

first year's

of the principal
higher.

institutions
of

reserve

required
amount

In view of the

will

be

required

notified
for

of

specified

reserve normally will be

of the asset
fact that

but

it may be

some countries

the
assets.

10 percent
lower

or

already have

-

exhibited debt
initial

11

-

service problems

reserves

established

over

a number

upon

of

years,

implementation

substantially higher than 10 percent.

Additional

may

the
be

reserves

be required in subsequent years,

generally in increments

percent

of

of

the

principal

amount

the

asset.

The

may

of

15

specific

amount and timing of the reserve would vary by country and may
also vary by

the

type

of

asset.

The percentage

reserve

for

specified assets would be uniform for all banking institutions.
Banking institutions must establish the reserve out of
current income.
and

surplus

The ATRR cannot be considered part

or

allowances

for possible

loan

of capital

losses.

If

the

agencies determine that the transfer risk problems affecting an
asset

nave

longer

decreased

necessary,

to

the

banking

extent

that

institutions

the

will

reserve
be

is

no

notified

that

the reserve may be reduced.
As

required

establishment

and

by

section

maintenance

institutions

would

supervisory,

and

apply

for

disclosure

905,

of

the

the

all

rules

ATRR

federal

purposes,

by

for

the

banking

regulatory,

including

disclosure

under the federal banking and securities laws.
Comments

are

specifically

percentage norms for the reserve;
determining
treatment
subject

the

amount

of

requested

(1)

the

(2) the factors to be used in

reserves;

and

of new loans where comparable

to reserves

on:

required by this

(3)

the

appropriate

outstanding

regulation.

loans

are

The Federal

-

12

-

banking agencies also are considering the extent

to and manner

in which to apply this and other provisions of the Act to U.S.
branches

and

subsidiaries,

agencies,

and

commercial

of foreign banks.

lending

Comments

are

company

invited

on these

questions.
Regulatory Flexibility Act
Pursuant
Flexibility Act

to
(Pub.

section
L.

605(b)

96-354,

of

the

proposed

significant

regulation,

economic

impact

if

Regulatory

601

5 U.S.C.

Board of Governors of the Federal Reserve
that

the

e t s e q . ) the
_

System has

adopted,

will

on a substantial

certified

not

have

number

entities since small banks generally do not hold

of

a

small

international

assets which would be affected by this regulation.
Executive Order 12291
The Board of Governors

of the Federal

Reserve

System

has determined that the proposed regulation does not constitute
a

"major

rule"

and

therefore

does

not

require

a regulatory

impact analysis.
List of Subjects in 12 CFR Part 211
Banks,

banking;

Investments;

Federal

Reserve

System;

Reporting requirements;

Foreign

Export

banking;

trading

companies;

Allocated transfer risk reserve.
Pursuant
25(a)

of

601-604a,

the
and

to

Federal
611

et

its

authority

Reserve

Act

under

sections

(12 U.S.C.

s e q . ) , section

5 of

the

221

9,

25

and

et_ s e q . ,

Bank

Holding

-

Company Act

(12 U.S.C.

13

-

section 1844),

and sections 905 and 910

of the International Lending Supervision Act of 1983
98-181,

Title IX),

(Pub.

the Board proposes to amend 12 CFR Part

L.
211

as follows:
1. By adding a new Subpart D as follows:
PART 211
INTERNATIONAL BANKING OPERATIONS

Subpart A * * *
Subpart B * * *
Subpart C * * *
Subpart D - International Lending Supervision
Sec.
211.41 - Authority,

purpose and scope

211.42 - Definitions
211.43 - Requirements
211.44 - Procedures
211.45 - Standards for Requiring an Allocated Transfer Risk
Reserve
211.46 - Accounting treatment of Allocated Transfer Risk Reserve
AUTHORITY:
Holding

Federal

Reserve Act

Company Act

of

1956,

(12 U.S.C.

as

amended

s e q . )? the International Banking Act
92 Stat. 607;
Act

(Title

12 U.S.C.

II,

Pub.

97 Stat.

(12 U.S.C.

of 1978

(Pub.

1841
L.

et

95-369;

3101 et s e q . ); the Bank Export Services

L.

97-290,

96

International Lending Supervision Act
L. 98-181,

221 et s e q . ); Bank

1153).
*

*

*

Stat.

1235);

of 1983

and

(Title

the
IX,

Pub.

-

subpart

14

-

D - INTERNATIONAL LENDING SUPERVISION
SECTION 211.41 - AUTHORITY,
(a)

Authority.

Governors of the Federal
the

International

98-181,

Title

This part is issued by the Board of
Reserve System under

Lending

IX

97

Supervision

Stat.

1153)

Supervision Act");

the Federal

s e q . ) ("FRA"),

the

amended

and

(12 U.S.C.
(b)

furtherance

the

Supervision Act,
banks

member banks");

of

1983

Company Act

L.

Lending

(12 U.S.C.
of

221

et

1956,

as

This part is issued in

of

the

International

and the BHC Act.

of

the Federal

corporations
611-631)

Reserve

organized

(12 U.S.C.

under

System

section

("Edge Corporations");

601-604a)

and bank holding companies

Lending

It applies to State

operating subject to an agreement with the Board
25 of the FRA

(Pub.

("International

Holding

purposes

the FRA,

(12 U.S.C.

the authority of

1841 £t s e q .) ("BHC Act").

that are members

the FRA

Bank

Act

Reserve Act

Purpose and s c o p e .
of

PURPOSE AND SCOPE

("State
25(a)

corporations

under

section

("Agreement Corporations");

(as defined in section 2 of the BHC

Act 12 U.S.C.

§ 1841(a))

subsidiaries,

but not including a bank holding company that

a

foreign

12 C.F.R.

banking

of

and their subsidiaries other than bank

organization

as

that

term

is

defined

is

in

211.2 3 ( a ) (2).
SECTION 211.42 - DEFINITIONS

For purposes
apply:

of

this

subpart

the

following

definitions

shall

-

(a)
bank

"Banking

holding

other

company;

than a bank

15

-

institution"
subsidiary

and

its

means

of

a

State

bank

subsidiaries;

member

holding

bank;

company

Edge Corporation;

and

Agreement Corporation.
(b)

"Federal

banking

agencies"

Governors of the Federal Reserve System,
Currency,

the

Board

of

the Comptroller of the

and the Federal Deposit Insurance Corporation.
(c)

included
Forms"

means

in

"International
banking

(FFIEC No.

assets"

institutions'

009)

as

means

those

"Country

such forms

may be

assets

Exposure
revised

Report
from time

to time.
(d)
more

of whose

"Subsidiary"
voting

means any organization 25 percent or

shares

is directly

or

indirectly

controlled or held with power to vote by a banking

owned,

institution,

or which is otherwise controlled or capable of being controlled
by a banking institution.
SECTION 211.43 - REQUIREMENTS
(a)

Establishment

of r e s e r v e .

shall establish an Allocated Transfer

A banking

Risk Reserve

institution
(ATRR)

for

specified international assets when required by the Board after
the Federal banking

agencies determine

that

such a reserve

is

necessary.
(b )

Amount of res e r v e s .
(1)

provision
amount

for

Initial p r o v i s i o n s .

the AT RR shall be ten percent

of the specified

international

assets,

of

the principal

or

such greater

The

initi

-

or lesser percentage,

16

-

required by the Board after determination

by the Federal banking agencies.
(2)

Subsequent

provision for the ATR R in subsequent years
of the principal amount of the
or

such greater

or

specified

lesser percentage,

shall be

provisions.

15 percent

international

required

by

Ad

assets,

the

Board

after determination by the Federal banking agencies.
SECTION 211.44 - PROCEDURES
(a)
shall

At

least annually,

jointly determine

which

the

international

subject to the ATRR and the amount
specified

assets

based

on

the

Applying the same standards,
an ATRR no longer is required

federal banking

should

and timing of the ATRR

standards

they shall
for

assets

agencies

in

section

be
for

211.45.

also determine whether

specified assets

and may be

reduced under section 211.46.
(b)

Banking

institutions

holding

assets

subject

to

the ATRR will be notified by the Board of the amount and timing
of the ATRR to be established

for each such asset

and whether

the AT R R for a specified asset may be reduced.
SECTION 211.45 - STANDARDS FOR REQUIRING AN
ALLOCATED TRANSFER RISK RESERVE
(a)
an ATRR

Assets requiring an A T R R .

is warranted

for particular

international

In determining whethe
assets

the

following criteria shall be applied:
(1)

whether

institution's

the

quality

assets

has

of

been

a

banking

impaired

by

a

-

protracted
obligors
on

(1)

-

inability

of

in a foreign

external

factors,

17

public

country

indebtedness

among others,
whether an
full

as

or

private

to make payments

indicated

by

such

as:

obligor has

interest

failed

payments

on

to make

external

indebte dness;
(ii)

whether an obligor has
with

the

terms

of

failed to comply

any

restructured

indebtedness 7 or
(iii)

whether a foreign country has
comply
Fund

with
or

program?
(2)

any

other

failed to

International
suitable

Monetary

adjustment

or

whether no definite prospects exist

for the

orderly restoration of debt service.
(b)

Amount

of

ATRR.

The

amount

of ATRR

shall

be

determined based upon the length of time the asset quality has
been

impaired,

capability,

recent

future

actions

prospects

taken
for

to

restore

restored

asset

debt

service

quality,

or

such other factors as the Federal banking agencies may consider
relevant to the quality of the asset.
SECTION 211.46 - ACCOUNTING TREATMENT OF ALLOCATED
TRANSFER RISK RESERVE
(a)
current income.

The

ATRR

shall

be

established

by

a charge

to

-

(b)

18

-

The AT RR is to be

the General Allowance

accounted

for separately from

for Possible Loan Losses,

and

is to be

deducted from "gross loans" to arrive at "net loans."
(c)

The ATRR shall

not

be

included

in

the

banking

institution's capital or surplus.
(d)

No ATRR provisions

are

institution writes down the assets
in that event,
must

be

out

of

if

the banking

in the requisite amount but,

the General Allowance

replenished

required

current

for Possible Loan Losses
earnings

by

the

amount

written down.
(e)

The ATRR may be reduced by a banking

institution

when notified by the Board.
2.

By

currently located

transferring

at the end

of Subpart

211.601
B,

and

211.602

to the end of new

Subpart D.

Board

of

Governors

of

the

Federal

which

Reserve

System,

December 22, 1983.

(signed) William W. Wiles

William W . Wiles
Secretary of the Board

are

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