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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