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Federal Reserve Bank
O F DALLAS
R O B E R T D. M c T E E R , J R .
D A LLA S , TE X A S
75265-590 6
PRESIDENT
AND CHIEF EX ECUTIVE O F F IC E R
June 20, 1994
Notice 94-60
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request fo r Public Comment on
Regulation H (Membership of State Banking
In s titu tio n s in the Federal Reserve System)
DETAILS
The Board of Governors of the Federal Reserve System is requesting
public comment on a proposed amendment to Regulation H (Membership of State
Banking Institutions in the Federal Reserve System). The proposed amendment
would permit state member banks to make certain types of public welfare
investments without specific Board approval and other public welfare invest
ments with specific Board approval. The proposed rule also addresses the
procedural aspects of these investments.
The Board must receive comments by July 22, 1994. Comments should
be addressed to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C.
20551. All comments should refer to Docket No. R-0838.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 27247-49,
Vol. 59, No. 101, of the Federal Register dated May 26, 1994, is attached.
MORE INFORMATION
For more information, please contact Michael Johnson at (214)
922-6081. For additional 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)
27247
Proposed Rules
Federal Register
Vol. 59, No. 101
Thursday, May 26, 1994
Regulation, Board of Governors of the
Federal Reserve System. For the hearing
impaired only, Telecommunications
Device for the Deaf (TDD), Dorothea
Thompson (202/452-3544), Board of
Governors of the Federal Reserve
System, Washington, DC 20551.
SUPPLEMENTARY INFORMATION: Section
FEDERAL RESERVE SYSTEM
6(b) of the Depository Institutions
Disaster Relief Act of 1992 added
12 CFR Part 208
paragraph 23 to section 9 of the Federal
Reserve Act, 12 U.S.C. 338a. Section
[Regulation H; Docket No. R-0838]
6(b) removes the restriction on the
ability of state member banks to
Membership of State Banking
purchase, sell, underwrite, and hold
Institutions in the Federal Reserve
investment securities provided that the
System
investment is designed primarily to
AGENCY: Board of Governors of the
promote the public welfare and that the
Federal Reserve System.
investment meets certain other criteria.
ACTION: Proposed rule.
Specifically, the investment must not
violate state law or expose the bank to
SUMMARY: The Board is proposing to
unlimited liability. The aggregate of the
amend Regulation H to implement
bank’s public welfare investments must
section 6(b) of the Depository
not exceed the sum of five percent of the
Institutions Disaster Relief Act of 1992,
which authorizes state member banks to bank’s capital stock actually paid in and
make investments designed primarily to unimpaired and five percent of its
promote the public welfare to the extent unimpaired surplus fund. The Board
permissible under state law and subject may waive this limit by order, on a caseby-case basis, however, and permit a
to regulation by the Board. The
bank to make investments in an amount
proposed amendment would permit
not exceeding the sum of ten percent of
state member banks to make certain
the capital stock actually paid in and
public welfare investments without
unimpaired and ten percent of the
specific Board approval and other
public welfare investments with specific unimpaired surplus fund of the bank.
Finally, the Board must limit a bank's
approval. The proposed rule also
investments in any one project.
addresses the procedural aspects of
In the past, requests by state member
these investments.
banks to make public welfare
DATES: Comments must be submitted on
investments have been dealt with on a
or before July 22,1994.
case-by-case basis. To reflect section
ADDRESSES: Comments, which should
6(b)’s amendment of the Federal Reserve
refer to Docket No. R-0838, may be
Act and to facilitate public welfare
mailed to the Board of Governors of the
investments under that section, the
Federal Reserve System, 20th and C
Board is publishing for comment an
Streets, NW., Washington, DC 20551,
amendment to Regulation H to be
Attention: Mr. William W. Wiles,
incorporated in a new section entitled
Secretary; or may be delivered to Room
Community Development and Public
B-2223 between 8:45 a.m. and 5:15 p.m. Welfare Investments. This amendment
All comments received at the above
would permit, in many cases, public
address will be made available to the
welfare investments without Board
public, and may be inspected at the
approval.
Freedom of Information Office, Room BCore Public Welfare Investments
1122 between 8:45 a.m. and 5:00 p.m.
FOR FURTHER INFORMATION CONTACT:
The proposed rule identifies classes of
Manley Williams, Attorney (202/736public welfare investments that do not
5565), Legal Division; Sandra
require Board approval, leaving less
Braunstein, Program Manager for
common investments and investments
Community Affairs, (202/452-3378),
of more than five percent of a bank’s
Division of Consumer and Community
capital subject to case-by-case review.
Affairs; Larry Cunningham, Senior
The proposed rule’s classification seeks
Financial Analyst (202/452-2701),
to distinguish public welfare
Division of Banking Supervision and
investments from entrepreneurial
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
investments-section 6(b) merely states
that public welfare investments include
investments designed primarily to
promote the welfare of low- and
moderate-income communities or
families. Under the proposed rule, a
state member bank may invest, without
Board approval, only in a corporation,
limited partnership, or other entity
established solely to engage in the
following activities: low- and moderateincome housing; nonresidential realestate development in a low- or
moderate-income area if that real-estate
is used primarily by low- and moderateincome persons; job training or
placement for low- and moderateincome persons; small business
development in a low- or moderateincome area; technical assistance and
credit counseling to benefit community
development; and job creation in a lowor moderate-income area for low- and
moderate-income persons. The Board is
particularly interested in comments on
whether the test for low- and moderateincome housing should be based on
whether a majority of the units are
occupied by low- and moderate-income
persons or on other Federal programs
such as the low income housing credit
in section 42 of the Internal Revenue
Code.
In defining low- and moderate-income
persons and low- or moderate-income
area, the proposed rule uses definitions
that will permit a state member bank to
look to readily obtainable data.
Specifically, the proposed rule uses the
Department of Housing and Urban
Development’s Chapter 69 Community
Development definition of low- and
moderate-income persons. Similarly,
low- or moderate-income area is defined
as an area in which the median family
income is less than eighty percent of the
median family income of the
Metropolitan Statistical Area, or, for
non-metropolitan areas, the state.
Finally, the proposed rule uses the
Small Business Administration’s
definition of small business.
Substantive Requirements
The proposed rule contains a number
of substantive requirements based on
section 6(b). Specifically, the
investment must not violate state law or
expose the bank to unlimited liability.
In addition, without Board approval, a
state member bank’s aggregate public
welfare investments must not exceed
27248
Federal Register / Vol. 59. No. 101 / Thursday, May 26, 1994 / Proposed Rules
the sum of 5 percent of the bank’s
capital stock actually paid in and
unimpaired and 5 percent of the bank's
unimpaired surplus fund. The Board
has previously determined that
undivided profits may be considered
part of the capital stock and surplus of
a state member bank (12 CFR 250.152).
Accordingly, the proposed rule limits
aggregate public welfare investments
without Board approval to up to five
percent of the capital stock and surplus
of the state member bank.
Section 6(b) also requires that the
Board limit investments by a state
member bank in any one public welfare
investment. Investment of up to two
percent of the bank’s capital and surplus
would not threaten the safety or
soundness of a well-run adequatelycapitalized bank. In addition, previous
community development investments
by state member banks have not
approached this ceiling. Accordingly,
the proposed rule limits a state member
bank to investing not more than two
percent of its capital and surplus in a
single in vestment without Board
approval.
The proposed rule also establishes
certain non-statutory substantive
requirements for state member banks
seeking to make public welfare
investments without Board approval.
Specifically, the bank must be at least
adequately capitalized and rated a
composite CAMEL "1” or “2", and the
bank must not be subject to any written
agreement, cease and desist order,
capital directive, or prompt corrective
action directive issued by the Board or
a Federal Reserve Bank acting under
delegated authority. These requirements
\ielp to ensure that the investment is
consistent with the safe and sound
operation of the bank.
Procedural Requirements
The proposed rule sets forth four
procedural requirements. First, to keep
Federal Reserve Banks apprised of
public welfare investments, within 30
days after making a public welfare
investment, a state member bank must
advise its Reserve Bank of the amount
of the investment and the identity of the
corporation, limited partnership, or
other entity in which the investment is
made. Second, a bank seeking to make
an investment that falls outside of the
investments specified in the proposed
rule must receive Board approval. In no
event may aggregate investments exceed
ten percent of the bank’s capital stock
and surplus. Third, if a public welfare
investment entered into under the
proposed rule ceases to meet the
statutory requirements or any
requirements established bv the Board
in granting approval, the bank must
divest itself of the investment to the
extent that the investment ceases to
meet those requirements.1 Finally, if a
preexisting public welfare investment
meets the requirements for investments
which do not need Board approval, or
if the Board approved the investment,
the bank need only notify its Reserve
Bank of the investment within sixty
days after the effective date of the final
rule. For other preexisting public
welfare investments, the bank should
apply to the Board for approval of the
investment within one year after the
final rule’s effective date.
Bank Holding Company Investments
In the event that the Board adopts a
final rule permitting state member banks
to make the proposed public welfare
investments discussed above, the Board
will consider revising its interpretation
of Regulation Y to permit the same class
of investments to be made by bank
holding companies. If revised
accordingly, a bank holding company
could apply to make those investments
under the existing expedited notice
procedures.
To deal with proposed public welfare
investments by state member banks
during the pendency of the proposed
rule, the Board has delegated to the
Director of the Division of Bank
Supervision and Regulation, in
consultation with the General Counsel
and the Director of the Division of
Consumer and Community Affairs, the
authority to approve investments that
meet the requirements of the proposed
rule.
in 12 CFR P art 208
Accounting. Agriculture, Banks,
banking, Confidential business
information. Currency, Federal Reserve
System, Reporting and recordkeeping
requirements, Securities.
For the reasons set forth in the
preamble, the Board is proposing to
amend 12 CFR part 208 as follows:
List o f Subjects
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:
A uthority: 12 U.S.C. 36, 248(a), 248(c).
321-338a, 371d. 461, 481-486, 601, 6 1 1 ,1 8 1 4 .
1823(j). 1828(o), 18310, 1 8 3 1 p -l, 3105, 3310.
3331-3351, a n d 3906-3909; 15 U.S.C. 1(b).
1(g). l(i), 78b, 78o-4(c){5), 78q, 7 8 q -l. and
78w; 31 U.S.C. 5318.
2. Section 208.21 is added to subpart
A to read as follows:
§ 208.21
Community development and
public welfare Investments.
(a) Definitions— (1) Low- or moderateincome area means:
(1) One or more census tracts in a
Metropolitan Statistical Area where the
median family income adjusted for
family size in each census tract is less
than eighty percent of the median
family income adjusted for family size
of the Metropolitan Statistical Area; or
(ii) If not ima Metropolitan Statistical
Area, one or more census tracts or
block-numbered areas where the median
family income adjusted for family size
in each census tract or block-numbered
area is less than eighty percent of the
median family income adjusted for
family size of the State.
Regulatory Flexibility Act Analysis
(2) Low- and moderate-income
persons has the same meaning as lowPursuant to section 605(b) of the
and moderate-income persons as
Regulatory Flexibility Act (Pub. L. 96defined in 42 U.S.C. 5302a(20)(A).
354. 5 U.S.C. 601 et seq.), the Board
(3) Small business means a business
certifies that the proposed amendment
that meets the size eligibility standards
will not have a significant economic
impact on a substantial number of small of 13 CFR 121.802(a)(2).
(b) Investments that do not require
entities, and that any impact on those
prior Board approval. Notwithstanding
entities should be positive. The
the provisions Of R.S. 5136,12 U.S.C. 24
proposed amendments will reduce the
(Seventh) made applicable to State
regulatory burden for many state
member banks by paragraph 20 of
member banks by permitting them to
section 9 of the Federal Reserve Act (12
make certain investments that had
previously required Board approval, and U.S.C. 335), a State member bank may
make an investment, without prior
will have no effect in other cases.
Board approval, if the following
conditions are met:
1 This divestiture is governed by the same
(1) The investment is in a corporation,
requirements as divestitures of interests acquired by
limited partnership, or other entity:
u lending subsidiary of a bank holding company or
a bank holding company itself in satisfaction of a
(i) Where the Board has determined
debt previously contracted.
that an investment in that entity is a
Divestiture is not required if the investment
public welfare investment under
ceases to meet the non-statutory requirements
paragraph 23 of section 9 of the Federal
concerning capital, CAMKL ratings, and
enforcement actions.
Reserve Act (12 U.S.C. 338a). or a
Federal Register / Vol. 59, No. 101 / Thursday, May 26, 1994 / Proposed Rules
community development investment
(b) of this section, the bank shall advise
under Regulation Y (12 CFR
its Federal Reserve Bank of the
225.25(b)(6)); or
investment, including the amount of the
(ii) Where that entity engages solely in investment and the identity of the entity
one or more of the following community in which the investment is made.
development activities:
(d) Investments requiring Board
(A) Investing in, developing,
approval. With prior Board approval, a
rehabilitating, managing, selling, or
State member bank may make public
renting residential property if'a majority welfare investments under paragraph 23
of the units will be occupied by lowof section 9 of the Federal Reserve Act
and moderate-income persons;
(12 U.S.C. 338a), other than those
(B) Investing in, developing,
specified in paragraph (b) of this
rehabilitating, managing, selling, or
section.
renting nonresidential real property or
(e) Divestiture o f investments. A bank
other assets located in a low- or
shall divest itself of an investment made
moderate-income area and to be used
under paragraph (b), (d) or (f) of this
primarily by low- and moderate-income section to the extent that the investment
persons;
exceeds the scope of, or ceases to meet,
(C) Investing in one or more small
the requirements of paragraphs (b)(1)
businesses located in a low- or
through (5), or paragraph (d) of this
moderate-income area to stimulate
section. The divestiture shall be made in
economic development;
the manner specified in Regulation Y
(D) Investing in, developing, or
(12 CFR 225.140) for interests acquired
otherwise assisting job training or
by a lending subsidiary of a bank
placement facilities or programs that
bolding company or the bank holding
will be used primarily by low- and
company itself in satisfaction of a debt
moderate-income persons;
previously contracted.
(E) Investing in an entity located in a
(f) Preexisting investments. (1) For
low- or moderate-income area if that
ongoing investments made prior to [the
entity creates long-term employment
final rule’s effective date) that are
opportunities, a majority of which
covered by paragraph (b) of this section,
(based on full time equivalent positions) a State member bank shall notify its
will be held by low- and moderateFederal Reserve Bank of the investment
income persons; and
not more than sixty days after [the final
(F) Providing technical assistance,
rule’s effective date).
credit counseling, research, and
(2) For other ongoing investments
program development assistance to low- made prior to [the final rule’s effective
and moderate-income persons, small
date), a State member bank shall request
businesses, or nonprofit corporations to Board approval not more than one year
help achieve community development;
after [the final rule’s effective date).
(2) The investment is permitted by
By ord er of the B oard o f G overnors o f the
State law;
F ederal Reserve System , M ay 19,1994.
(3) The investment will not expose
the bank to liability beyond the amount William W. Wiles,
Secretary of the Board.
of the investment;
(4) The investment does not exceed
[FR Doc. 94-12718 F iled 5-25-94; 8;45 am)
the sum of two percent of the bank’s
6ILU N G CODE 6210-01-F
capital stock and surplus as defined
under 12 CFR 250.162;
(5) The aggregate of all such
investments of the bank does not exceed
the sum of five percent of its capital
stock and surplus as defined under 12
CFR 250.162;
(6) The bank is well capitalized or
adequately capitalized under §
208.33(b)(1) and (2);
(7) The bank received a composite
CAMEL rating of “1” or “2” under the
Uniform Financial Institutions Rating
System as of its most recent
examination; and
(8) The bank is not ^subject to any
written agreement, cease and desist
order, capital directive, or prompt
corrective action directive issued by the
Board or a Federal Reserve Bank.
(c) Notice. Not more than 30 days after
making an investment under paragraph
27249
@FedFRASER