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Federal R eserve Bank
OF DALLAS
WILLIAM H. WALLACE
FIRST VICE PRESIDENT
DALLAS, TEXAS 75222
,
January 15, 1987
Circular 87-4
TO:
The Chief Executive Officer of all
member banks, bank holding companies
and others concerned in the
Eleventh Federal Reserve D i s t r i c t
SUBJECT
Request f o r public comnent on Regulation Y — Bank Holding Companies
and Change in Bank Control
DETAILS
The Board of Governors of the Federal Reserve System has requested
public comment on proposed rulemaking to i t s Regulation Y to permit bank
holding companies to engage in real e s t a t e investment a c t i v i t i e s within
c ertain l i m i t s . The Board also is requesting public comment regarding whether
a subsidiary of a holding company bank should be permitted or prohibited from
conducting real e s t a t e a c t i v i t i e s , and on whether bank holding companies
should be permitted to conduct real e s ta te investment a c t i v i t i e s on a
nationwide basis.
Comments should be addressed to Mr. William W. Wiles, Secretary,
Board of Governors of the Federal Reserve System, Washington, D.C. 20551. All
correspondence should r e f e r to Docket No. R-0537 and must be received by
February 23, 1987.
ATTACHMENTS
The Board's press release and the material as published in the
Federal Register are attached.
MORE INFORMATION
For f u rth er information, please contact Basil Asaro a t (214)
698-4345, Gayle Teague a t (214) 651-6481, or David W. Dixon of the Legal
Department a t (214) 651-6228.
Sincerely yours,
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE press release
For immediate r e l e a s e
December 31, 1986
The Federal Reserve Board today requested comment on proposed
rulemaking t o permit bank holding companies to engage in real e s t a t e
investment a c t i v i t e s within c e r ta in l i m i t s .
The proposed l i m i t s are
designed to ensure th a t conduct of the a c t i v i t y does not r e s u lt
or unsound p r a c t i c e s , unfair com petition, c o n f l i c t s
of
in unsafe
i n t e r e s t or
other
adverse e f f e c t s .
Comments should be received by the Board on t h i s matter by
February 23, 1987.
The s p e c i f i c con d ition s on which the Board requests comment include:
t
a requirement that the a c t i v i t y be conducted through a d ir e c t
nonbank real e s t a t e subsidiary o f the bank holding company;
•
a requirement that bank holding companies th at engage in th ese
a c t i v i t i e s meet c e r ta in c a p ital standards, and th a t the amount of
real e s t a t e investment a c t i v i t i e s conducted d i r e c t l y or i n d i r e c t l y
by th e bank holding company be considered
1n
determining th e adequacy
of a bank holding company's c a p i t a l ;
•
a requirement th at a bank holding company's t o t a l real e s t a t e
Investment a c t i v i t i e s , Including r e la te d e xtensions of c r e d i t ,
not exceed th e larger of 25 percent of th e bank holding company's
c o n s o lid a te d primary c a p ita l or $250,000;
•
a requirement that the bank holding company's t o t a l investment 1n
real e s t a t e s u b s id ia r ie s be lim ite d t o 5 percent o f the bank
holding company's consolidated primary c a p i t a l ;
(over)
-2 -
•
a lim itatio n on the t o ta l leverage in a real e s t a t e subsidiary
equal to 5 times the capital of the real e s t a t e subsidiary;
t
a lim ita tio n of the t o ta l investment in a single real e s t a t e project
or se r ie s of related real e s t a t e projects to 10 percent of the bank
holding company's consolidated primary c a p i t a l ;
•
a requirment t h a t the real e s t a t e subsidiary conduct a ll real e s t a t e
investment a c t i v i t i e s through passive, noncontrolling investments in
j o i n t ventures or partnerships, with the to ta l investment by the
real e s t a t e subsidiary representing no more than 49 percent of the
equity of the j o i n t venture or partnership;
•
and,
a requirement t h a t during each of the f i r s t three years, a bank
holding company may invest no more than one-third of i t s aggregate
real e s t a t e investment lim it in these a c t i v i t i e s .
The Board also requests public comment regarding whether a subsidiary
of a holding company bank should be permitted or prohibited from conducting
real e s t a t e investment a c t i v i t i e s , and on whether bank holding companies should
be permitted to conduct real e s t a t e investment a c t i v i t i e s on a nationwide basis.
The Board's notice is attached.
-0 -
Attachment
543
Proposed Rules
Federal Register
VoL 52, No. 4
Wednesday. )anuary 7, 1987
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Oock«t No. R-0537]
Bank Holding Companies and Change
in Bank Control; Permissibility of Real
Estate Investment Activities for Bank
Holding Companies and Their Direct
and Indirect Nonbank Subsidiaries
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Proposed Rule.
SUMMARY: The
Federal Reserve Board is
soliciting comment as part of a
rulemaking proceeding under the Bank
Holding Company Act to permit bank
companies to engage in real estate
investment activities under specific
conditions that have been designed to
ensure that the conduct of the activity
does not result in unsafe or unsound
banking practices, unfair competition,
conflicts of interest or other adverse
effects. The Board is seeking comment
on whether real estate investment
activities are closely related to banking
for purposes of section 4(c)(8) of the
Bank Holding Company Act when
conducted within the framework set
forth in this proposal. The Board also
seeks comment on a number of specific
conditions, including requirements that:
(a) the activity be conducted only
through a nonbank subsidiary of the
bank holding company (the “real estate
subsidiary"); (b) the real estate
subsidiary be maintained independent
in name and operation from any bank
affiliate and maintain adequate capital;
(c) a bank holding company desiring to
engage in real estate investment
activities comply with certain capital
requirements; and (d) the real estate
subsidiary’s investment be limited to a
passive, nonvoting equity investment. In
addition, the Board seeks comment on
possible limitations on the level of the
holding company's exposure to this
activity, including limitations regarding:
(a) The amount of the holding
company’s investment in the real estate
subsidiary and on the real estate
subsidiary’s leverage; and, (b) the bank
holding company’s total investment in
real estate investment activities,
including equity investments and
lending by the holding company and its
affiliates to any project in which the real
estate subsidiary has an interest, a co
venturer or other co-participant with the
real estate subsidiary in a real estate
project, or purchasers of property in
which the real estate subsidiary has an
interest.
The Board is also seeking comment on
whether, in authorizing the activity for
bank holding companies subject to these
proposed prudential limitations, the
Board should prohibit or limit the
conduct of real estate investment
activities through nonbank subsidiaries
of banks that are owned by bank
holding companies, and should establish
special capital requirements for bank
holding companies that control banks
directly engaged in real estate
investment activities to reflect the
increased risk to the bank holding
company system from such activities.
Moreover, the Board seeks comment on
the appropriate geographic scope for the
conduct of these activities.
DATE: Comments must be received by
February 23,1987.
a d d r e s s : All comments, which should
refer to Docket No. R-0537, should be
mailed to William W. Wiles, Secretary,
Board of Governors of the Federal
Reserve System, Washington, DC 20551,
or delivered to Room B-2223, 20th &
Constitution Avenue NW., Washington,
DC, between 8:45 a.m. and 5:15 p.m.
weekdays. Comments may be inspected
in Room B-1122 between 8:45 a.m. and
5:15 p.m. weekdays.
FOR FURTHER INFORMATION CONTACT:
Virgil Mattingly, Deputy General
Counsel (202/452-3430), Scott G.
Alvarez, Senior Counsel (202/452-3583 J,
Legal Division; Roger Cole, Manager
(202/452-2618). Margaret Spillenkothen,
Supervisory financial Analyst (202/4522720), Division of Banking Supervision
544
Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
and Regulation; or Myron Kwast, Chief,
Financial Studies Section, Division of
Research and Statistics (202/452-2909),
Board of Governors of the Federal
Reserve System, Washington, DC 20551.
For the hearing impaired only,
Telecommunications Service for the
Deaf, Eamestine Hill or Dorothea
Thompson, (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Introduction
During the past several years, a
number of states have enacted
legislation permitting banks chartered
and operating in those states to conduct
a wide range of real estate investment
and development activities. The Board
has held since 1972 that real estate
investment and development activities
are not closely related to banking and,
therefore, are not permissible
nonbanking activities for bank holding
companies under the Bank Holding
Company Act (‘‘BHC Act”).
In response to the recent initiatives by
states, the Board, in January 1985,
requested public comment on whether
the Board should initiate rulemaking
under section 4(c)(8) of the BHC Act to
permit bank holding companies to
conduct real estate investment activities
or whether the Board should exercise its
authority to prohibit bank holding
companies from directly or indirectly
conducting real estate investment
activities. 50 FR 4519 (January 31,1985).
The FDIC is also reviewing a proposal in
this area, and the Federal Home Loan
Bank Board is considering whether to
readopt its existing regulations, due to
expire in March 1987, permitting federal
thrift institutions limited authority to
engage in real estate investment
activities.
In its initial request for comment, the
Board expressed a number of
supervisory concerns regarding the
risks, conflicts of interest, and other
potential adverse effects associated
with the real estate investment
activities, and requested comment
regarding whether these concerns could
be addressed by establishing certain
prudential limits within which bank
holding companies could conduct real
estate investment activities.
The general prudential limits put
forward by the Board in its initial
request for comment included:
(1) A requirement that all real estate
investment activities be conducted
through a separate nonbank real estate
subsidiary of the bank holding company;
(2) A minimum parent bank holding
company capital level;
(3) Limitations on the maximum
investment a bank holding company
may make in its real estate subsidiary;
(4) Limitations on the amount of
leverage in the real estate subsidiary;
(5) A requirement that the investment
in real estate projects be passive, and
limited in size and scope;
(6) Limitations on all lending by the
bank holding company and its
subsidiaries to the real estate
subsidiary, any project in which it has
an interest, all co-venturers or partners,
and any purchasers of real estate in
which the real estate subsidiary has an
interest; and
(7) Limitations on transactions as
fiduciary. The Board also requested
comment on whether bank holding
companies should be authorized to
conduct real estate investment activities
on a nationwide basis, or only in states
that permit state banks to conduct these
activities, and on whether limitations on
real estate investment activities
imposed by individual states on state
banks should apply to bank holding
companies conducting real estate
investiment activities within the state.
A total of 145 comments were
submitted, with respondents including
banks and bank holding companies, a
number of bank holding company and
real estate trade associations, and
several state bank supervisors. The vast
majority of comments—107 in total—
advocated that the Board authorize
bank holding companies to conduct real
estate investment activities within
prudential limits in order to permit bank
holding companies to compete more
equally with other financial institutions
in the real estate lending business and
to share in the rewards of real estate
appreciation and development.
Twenty-nine comments urged the
Board to prohibit real estate investment
activities largely because of the
significant risks these commenters
perceived in real estate investment
activities and the possibility of conflicts
of interest and anticompetitive tying
arrangements.
II. Possible Adverse Effects of Real
Estate Investment Activities
The Board continues to believe that
real estate investment activities involve
a significant degree of risk beyond other
activities conducted by banks and bank
holding companies. Investments in real
estate are often characterized by
considerable variations in economic
value, returns and cash flow. In
addition, real estate investments are
generally illiquid, particularly during
periods that involve economic stress on
the banking system. To the extent that
the profitability of a particular real
estate investment rests upon hopes for
capital appreciation rather than on
established operating profits, the risks of
the investment become even greater.
Moreover, while the rewards of an
equity investment in a real estate
project may be potentially greater than
the income from an extension of credit
to the same project the risks associated
with an equity investment are typically
greater than those associated with a
loan. An equity investor is an unsecured
and subordinated investor whose entire
investment is at risk until the real estate
project is completed or sold. A mortgage
lender typically receives payments
throughout the life of the real estate
project and stands to lose only the
difference between the outstanding loan
balance plus any unpaid interest and the
liquidation value of the property.
In addition to those risks, permitting
banks and bank holding companies to
engage in real estate investment
activities raises the potential for
conflicts of interest It has been argued
that the ability of banks to make
prudent credit judgments and to serve as
impartial providers of credit could be
subject to potential conflicts of interest
if the bank or its affiliate were also a
real estate investor or developer. In
particular, a bank's credit judgment
could be inappropriately influenced by
the incentive of an equity participation
in a real estate project or by the fact
that an affiliate of the bank or a person
related to the bank, including an officer,
director or principal shareholder, has
made an equity investment in the real
estate project. Further, a bank could be
inappropriately influenced not to lend to
an independent developer of a project
that would be in direct competition with
one in which the bank or one of its
affiliates has an equity interest.
III. Proposed Prudential lim its on Real
Estate Investment Activities
In light of the risks associated with
real estate investment activities and the
potential for conflicts of interest that
may accompany these activities, the
Board proposes to establish certain
prudential limits for the conduct by
bank holding companies of real estate
investment activities. The Board
requests public comment regarding
whether these limitations, individually
and taken together, are adequate and
appropriate for addressing any issues of
safety and soundness, conflicts of
interest and other adverse effects that
may be associated with bank holding
companies conducting real estate
investment activities.
Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
1. D efinition o f R eal Estate Investm ent
A ctivities
The attached proposal would define
real estate investment activities as the
direct or indirect ownership of any
interest in real estate, whether in the
form of an equity interest, partnership,
joint venture or otherwise. The proposal
would permit bank holding companies to
invest—through a separate nonbank real
estate subsidiary and subject to the
other prudential limits discussed
below—in real estate of any kind and at
any stage of development, including by
taking an equity position in improved or
unimproved real estate as part of a
financing transaction, or purchasing raw
land for development.1
The attached proposal would define
real estate investment activities also to
include acquisition, development and
construction arrangements that have
been deemed by the Notice to
Practitioners from the American
Institute of Certified Public Accountants
to be real estate investments or real
estate joint ventures.8 The Board has
also reserved the right to determine on
an individual basis that the facts and
circumstances surrounding a particular
interest may require treatment of that
interest as a real estate investment for
purposes of this proposed regulation.
The Board requests comment regarding
whether other types of loans or
investments should be included within
the definition of real estate investment
activities.
The Board also requests public
comment regarding whether real estate
1 The proposed regulation would not affect or
limit the current regulatory provisions permitting
bank holding companies and their subsidiary banks
to invest in real estate for bank and bank holding
company premises, to hold real estate acquired in
satisfaction of a debt previously contracted, or to
make community welfare investments, provided
that these investments are made pursuant to. and
conform with, the Board's, or other appropriate
bank supervisor’s regulations regarding these types
of investments.
* These loans generally (1) provide all or
substantially all of the funds necessary for a real
estate venture with the borrower providing littie or
no equity to the venture. (2) include loan
commitment and/or origination fees in the amount
of the loan. (3) include accrued interest and/or fees
during the term of the loan in the amount of the
loan, (4) permit the lending bank to participate to a
significant extent in expected residual profits of the
project during the life of the project or upon sale of
the property. (5) are secured by the real estate
without recourse to the resources of the borrower,
(6) are structured so that foreclosure as a result of
delinquency is unlikely during the project's
development because the borrower is not required
to make any payments until the project is
completed, and (7) effectively permit the lender to
recover its funds only if the property is sold to an
independent third party, the borrower obtains
refinancing from another source, or the property is
placed in service and generates sufficient net cash
flow to service the debt. AICPA Notice to
Practitioners. The CPA Letter, February 10.1988.
investment activities should also include
activities that are incidental to the
ownership of real property, such as
property management, maintenance and
brokerage activities conducted in
connection with real estate in which the
bank holding company has an interest.
The Board does not now propose to
authorize bank holding companies to
engage generally in real estate
brokerage, management or maintenance
activities.
The attached proposal does not
contemplate that bank holding
companies would be permitted directly
or indirectly to conduct, or own shares
of companies that conduct, real estate
syndication, construction engineering,
architectural design or other similar
commercial activities, or provide title
insurance, whether or not these
activities are conducted in connection
with real estate in which the bank
holding company has an interest. Bank
holding companies would be permitted,
however, to enter into contracts with
independent third parties that provide
these services in connection with real
estate in which the bank holding
company has an interest
2. Separate Subsidiary
Under the proposal, a bank holding
company could conduct real estate
investment activities only through a
separately incorporated nonbank
subsidiary of the bank holding company.
The proposal would permit a bank
holding company to invest an aggregate
of up to 5 percent of its consolidated
primary capital in equity of real estate
subsidiaries. Each real estate subsidiary
would be required to maintain a level of
capital that is fully adequate to meet its
obligations and could not leverage its
capital more than 5 times.
The proposal would prohibit a bank
holding company from conducting real
estate investment activities through a
nonbank subsidiary of a holding
company bank. This requirement is
intended to separate the bank
subsidiaries of holding companies as
much as possible from real estate
investment activities and any adverse
effect they could have on bank
subsidiaries including the direct legal
obligation for losses that might result
from these activities.3
The Board proposes, as an alternative,
that nonbank subsidiaries of holding
company banks be permitted to engage
in real estate investment activities—
where the parent bank has been
* Under this alternative, a bank-would not be
authorized to establish a subsidiary under the Bank
Service Corporation Act to engage in real estate
investment activities. 12 U.S.C. 1861 et seq.
545
authorized under state law to conduct
these activities—within the limits and
subject to the restrictions that would
apply to the conduct of real estate
investment activities by a direct
nonbank subsidiary of a bank holding
company.
As discussed below, these proposals
would require the Board to amend its
existing regulation permitting nonbank
subsidiaries of holding company banks
to conduct any activity that the parent
bank is permitted under state law to
conduct directly. The Board does not
propose to amend this regulation
otherwise. In this connection and as
discussed below, the Board will
consider public comment regarding the
scope of the Board’s authority under
section 4 of the BHC Act to regulate the
real estate investment activities of these
nonbank subsidiaries of holding
company banks.
The proposal would also require that
the real estate subsidiary maintain
adequate and separate books and
records, and operate in a manner that
makes clear to customers, co-investors,
and others dealing with the real estate
subsidiary that the obligations of the
subsidiary are not insured by any
agency of the federal government and
are not obligations of any affiliated
banks.
In order to maintain the separation
between the banks in a holding
company and real estate subsidiaries of
the bank holding company, the Board
also requests comment regarding
whether the real estate subsidiary
should be required (1) not to share a
common name or identifying symbol
with its bank affiliates, (2) not to
maintain any officers, directors or
employees in common with its bank
affiliates, and (3) to operate at locations
separate from its bank affiliates. The
Board requests comment whether these
restrictions are likely to lessen the
potential for conflicts of interest that
may result from combining real estate
investment and bank lending activities
and to enhance the ability of the bank
affiliate to isolate itself from legal
obligation for any losses that may be
associated with the real estate
investment activities of its affiliates. In
this regard, the Board notes that the
FDIC has proposed adopting similar
restrictions to address these concerns.
The Board also requests comment
regarding whether bank holding
companies engaged in real estate
investment activities should be required
to submit, on a quarterly basis,
information necessary to monitor the
performance of real estate investment
activities and their compliance with the
546
Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
prudential limits set forth in this
proposal.
3. Lim itations on S ize o f R eal Estate
Investm ent A ctivities
The attached proposal would
authorize bank holding companies to
engage in real estate investment
activities up to an aggregate limit of the
higher of 25 percent of the consolidated
primary capital of the bank holding
company, or $250,000.4 This aggregate
investment limit would apply to the total
of: (1) All direct or indirect investments,
in any form, in real estate by the real
estate subsidiary, and (2) all loans,
advances, commitments and guarantees
by the bank holding company or any of
its bank or nonbank subsidiaries (i) to or
for the benefit of a real estate project in
which the real estate subsidiary has any
equity interest (ii) to partners, coventurers, or contractors involved in
such a real estate project or (iii) to
anyone that purchases real estate in
which the real estate subsidiary has an
interest except for individual purchases
of owner-occupied single family housing
units.5 This aggregate limit is intended
to govern all investments, in any form,
in real estate and all forms of credit or
commitments to extend credit by the
bank holding company or any of its
bank or nonbank subsidiaries, to any
party connected with real estate or a
real estate project in which the real
estate subsidiary has an interest The
Board requests comment regarding the
appropriate level and definition of this
overall lim it
As noted, in the previous section, the
Board also proposes to place a limit of 5
percent of the bank holding company’s
primary capital on the aggregate equity
investments by bank holding companies
in real estate subsidiaries. Thus, a bank
holding company would, under this
proposal, be permitted to invest an
amount equal to up to 5 percent of its
primary capital in equity of any number
of real estate subsidiaries. The total real
estate investment activities that these
real estate subsidiaries may conduct
including all related extensions of credit
by the real estate subsidiary, the bank
4 As noted above, investments in bank premises,
real estate acquired entirely as the result of a debt
previously contracted, and similar real estate
acquisitions currently permitted under the BHC Act
would not be subject to the proposed investment
limits provided the investments are made pursuant
to, and conform with, the Board’s, or other
appropriate bank supervisor’s, regulations regarding
these types of investments.
* In addition, the limitations of section 23A of the
Federal Reserve Act would also apply to
transactions, including loans and the purchase of
assets, between a bank and its affiliate, including
an affiliate engaged in real estate investment
activities. 12 U.S.C. 371c; 12 U.S.C. 1828(j).
holding company, and any of its bank or
nonbank subsidiaries, would then be
limited to an aggregate total of 25
percent of the bank holding company’s
primary capital.
In determining whether a bank
holding company has reached its 25
percent investment limit, real estate
investments and related loans made
directly by banks owned by the holding
company would be deducted from the 25
percent level, even if the real estate
affiliate has no interest in the real
estate. This would prevent a holding
company, for example, that had utilized
its fiill 25 percent limit through a
nonbank real estate subsidiary from
making additional investments directly
in a bank owned by the holding
company. It would also preclude a
holding company that conducts a
significant amount of real estate
investment activities directly in its
banks under provisions of state law,
which may, for example, permit the
bank to devote up to 100 percent of its
equity capital to direct real estate
investment activities, from conducting
additional real estate investment
activities through a nonbank real estate
subsidiary of the holding company.
It should be noted, however, that
while the attached proposal would
count the direct real estate investment
activities of &bank owned by a holding
company towards that holding
company’s aggregate real estate
investment activity limit, the proposal
would not limit in any way real estate
investment activities that are conducted
directly and entirely within a state bank
owned by a bank holding company.
Thus, the proposal would not limit a
bank’s direct and sole ownership of title
to a plot of real estate acquired for any
purpose permitted under state law,
including for the purpose of
independently contracting for the
development of the property. A holding
company bank’s investment in real
estate would be covered under the
attached proposal, on the other hand, if
the bank acquires voting shares of a
company, including a partnership or
joint venture, for the purpose of
investing in real estate—as opposed to
the bank acquiring title to the real estate
directly.®
Within this general limit, the Board
also seeks comment on whether to
establish sublimits that would apply to
particular types of real estate
investment activities, such as
investments in raw land, property under
development, or property producing
• See Security P acific Corporation. 72 Federal
Reserve Bulletin 800 (1988).
insufficient income to cover operating
expenses. These sublimits may be
appropriate as a means of recognizing
and limiting the different degrees of risk
associated with different types of real
estate investment activities.
The alternative ceiling of $250,000 is
proposed in order to permit small bank
holding companies to participate in a
meaningful way in real estate
investment activities.
4. C apital A dequacy o f Bank Holding
Company.
The proposal would require that bank
holding companies seeking to engage in
real estate investment activities be in
satisfactory financial condition and be
particularly strongly capitalized. In the
event th a t after the bank holding
company has commenced real estate
investment activities, the bank holding
company’s falls below the minimum
level set in the Board’s Capital
Adequacy Guidelines or such higher
level set by the Board in approving the
bank holding company's entry into this
activity, it is proposed that the bank
holding company be permitted to
complete its ongoing real estate projects,
but be prohibited from initiating new
real estate investment activities until its
capital position is adequate.
Because of the significant risks
discussed above that are associated
with real estate investment activities,
the Board also proposes to amend its
Capital Adequacy Guidelines to provide
that funds devoted to real estate
investment activities be excluded on a
weighted basis (for example, at a level
of 50 to 100 percent) from the calculation
of the parent holding company’s capital
for capital adequacy purposes. The
Board would take this action pursuant to
authority granted under the BHC Act
and the International Lending
Supervision A ct 12 U.S.C. 3701 et seq. In
this regard, the Board seeks comment on
the appropriate weight at which real
estate investment activities should be
excluded.
The Board notes that the appropriate
discount to be given to real estate
investment activities in calculating
capital adequacy should be influenced
by the level of real estate investment
activities that bank holding companies
are authorized to conduct. The proposal
suggests that a 50 percent discount
would be appropriate in the event bank
holding companies are authorized to
devote approximately 25 percent of their
capital to real estate investment
activities. The Board requests comment
regarding whether the safety and
soundness concerns raised by
increasing the aggregate investment
Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
limit above 25 percent might be
adequately addressed by setting a
higher discount to be given these
activities in calculating the adequacy of
a bank holding company’s capital.
5. Adjustm ent to Capital fo r Bank
Holding Companies Thai Control Banks
Engaged in R eal Estate Investm ent
A ctivities
In order to address the risks to the
bank holding company organization as a
whole from real estate investment
activities conducted directly in a holding
company bank, the Board proposes,
pursuant to authority granted under the
BHC Act and the International Lending
Supervision Act, to amend its Capital
Adequacy Guidelines to provide a
weighted adjustment to the primary
capital of bank holding companies that
control banks engaged directly in real
estate investment activities, Tliis
proposal is similar to the exclusion
proposed and discussed above for real
estate investment activities conducted
through a nonbank real estate
subsidiary of the bank holding company
and would provide that, in calculating
the consolidated primary capital of the
bank holding company, a given
percentage of the amount of real estate
investment activities conducted directly
in the bank (up to 100 percent) would be
excluded.
The Board requests comment on the
appropriate discount that should be
given to these activities in determining
the bank holding company’s capital
level. Inparticular, the Board requests
comment on whether the weighted
adjustment for real estate investment
activities conducted directly by a bank
should be set at a level that is different
from the adjustment made to the capital
of the bank holding company for real
estate investment activities conducted
through direct nonbank subsidiaries of
the holding company. This difference in
weighting may be appropriate in order
to reflect the greater risk posed to the
bank holding company organization
from conducting real estate investment
activities directly in a holding company
bank.
6. Lim it to E ssentially Passive
Investm ent
The attached proposal includes a
provision that would limit a real estate
subsidiary’s investment in real estate to
an essentially passive, noncontrolling
investment in a joint venture or
partnership with third parties that are
independent of, unrelated to, and do not
share common officers, directors,
principal shareholders, or employees
with the bank holding company or any
of its subsidiaries or affiliates. The
provision would also limit the real
estate subsidiary’s investment to no
more than 49 percent of the equity of the
partnership or joint venture, thereby
requiring that other independent
investors maintain a substantial
economic interest in the project.
This condition has been proposed as a
method of permitting bank holding
companies to participate in the financial
rewards of real estate, investment
activities, such as real estate
appreciation, while limiting the bank
holding company's exposure to the risks
of real estate projects. Limiting a bank
holding company to a passive role may
also encourage bank holding companies
to seek prudent and knowledgeable co
venturers or partners who would
provide the real estate project with
necessary expertise and would be
motivated by a substantial economic
stake in the project. The Board requests
public comment regarding whether this
condition is appropriate. As discussed
below, the Board also requests comment
regarding whether this limitation may be
necessary to assure that real estate
investment activities of bank holding
companies are closely related to
banking.
As an alternative to limiting bank
holding companies to passive
investments, the Board requests
comment on whether bank holding
companies should be permitted through
their real estate subsidiaries to acquire a
majority interest in real estate projects
and to participate actively in the
management decisions of the real estate
project including decisions regarding
selecting and replacing partners and
contractors associated with the real
estate project. The Board does not
propose under either alternative to
permit bank holding companies to
engage in, or own shares of a company
engaged in, real estate syndication,
construction, engineering, architectural
design or similar commercial activities.
The Board proposes under both
alternatives that bank holding
companies be required to conduct real
estate investment activities only with
third parties that are independent of,
and unaffiliated with, the bank holding
company or any of its subsidiaries.
Under both alternatives, the bank
holding company would be prohibited
from conducting real estate investment
activities with any project in which
officers, directors, employees, or
principal shareholders (including
members of their immediate family) of
the bank holding company or any of its
bank or nonbank subsidiaries have also
invested. It is proposed that this
restriction would also extend to entities
547
that provide services, including
consulting, management, design,
development, construction, brokerage,
or any other services, in connection with
real estate in which the real estate
subsidiary has an interest.
7. Single Project Lim itation and PhaseIn Period
The proposal would also limit the
total investment, including related
extensions of credit as defined above,
that a bank holding company may make
in a single real estate project, or series
of related projects, to 10 percent of the
bank holding company’s consolidated
primary capital. The proposal would
also provide that a bank holding
company may not, during the first three
years in which it conducts these
activities, invest more than one-third of
its aggregate real estate investment
activity limit in real estate investment
activities in any one twelve-month
period, thereby establishing a three year
phase-in period for real estate
investment activities.
8. Geographic Lim its and State
Restrictions
The Board proposes to permit bank
holding companies to conduct real
estate investment activities on a
nationwide basis, except in those states
that prohibit banks and bank holding
companies operating in that state from
conducting these activities. This
proposal is consistent with the Board's
approval of other types of nonbanking
activities, and permits bank holding
companies to gain the benefits of
geographic diversification of their real
estate investment activities. This
proposal also reserves the right to the
states to prohibit real estate investment
activities by banks and bank holding
companies, provided that the state
prohibition applies equally to both in
state and out-of-state banks and bank
holding companies.
9. Restrictions on Lending and on
A ctions as Fiduciary
The Board also proposes to require
that extensions of credit to any third
party for the purpose of acquiring an
interest in real estate in which the real
estate subsidiary has an interest, or to a
real estate project, partner, co-venturer,
or contractor to a project in which the
real estate subsidiary has an interest
must be on substantially the same terms
and conditions as comparable loans
where the real estate subsidiary does
not have an interest. As noted above,
the Board proposes that the amount of
these loans Would be included in the
548________ Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
overall investment limit described
above.
The Board also proposes to require
that a bank holding company not
purchase or lease, in its capacity as a
fiduciary, co-fiduciary or managing
agent, any property in which a real
estate subsidiary of the holding
company has an interest or which it
sells or markets, unless the purchase or
lease is: (1) Expressly authorized by the
account instrument or court order, (2)
specifically authorized by all interested
parties after full disclosure of all
relevant facts surrounding the fiduciary
institution’s relationship with the real
estate subsidiary; or (3) otherwise
permissible under applicable law or
regulations.
IV. Legal Framework
The Board may authorize bank
holding companies to engage in real
estate investment activities under
section 4(c)(8) of the BHC Act only if the
Board determines, by order or regulation
and after notice and opportunity for
hearing, that real estate investment
activities are so closely related to
banking or managing or controlling
banks as to be a proper incident thereto.
12 U.S.C. 1843(c)(8).
In N ational Courier Association v.
Board o f Governors,1 the court
suggested three standards that would
aid the Board in determining whether a
specific activity is closely related to
banking:
(1) Banks have generally provided the
proposed service in the past;
(2) The proposed services are operationally
or functionally so similar to existing services
or activities provided by banks and bank
holding companies as to make banks and
bank holding companies particularly well
equipped to provide the proposed services; or
(3) Existing services that banks and bank
holding companies provide are so integrally
related to the proposed activity as to require
its provision in a specialized form.
In determining whether a particular
activity is a proper incident to banking,
the Board is required to consider
whether performance of the activity by a
bank holding company or its affiliate
can reasonably be expected to produce
benefits to the public that outweigh
possible adverse effects.
The Board seeks public comment
regarding whether the real estate
investment activities described in this
proposal may be authorized by the Bank
Holding Company Act to permit
activities that are closely related to
banking and are a proper incident
thereto. 12U.S.C. 1843(c)(8).
7 518 F ^d 1229 (D C O r. 1975).
In this regard, several of the
comments received by the Board in
response to its preliminary request for
comment argued that real estate
investment activities are closely related
to banking under the first two criteria
suggested in N ational Courier.
Commenters argued that banks and
bank holding companies have
traditionally engaged in a variety of real
estate investment activities in
connection with the ownership, leasing
and management of bank premises.
Bank holding companies also conduct a
full range of real estate management
and development activities as the
interim owner of real estate acquired
through default on a debt previously
contracted ("dpc”). Similarly, bank
holding companies are permitted to
make equity investments in corporations
or projects designed primarily to
promote community welfare, including
through the ownership and development
of housing, and may conduct other
activities that are related to real estate
investment activities, such as real estate
leasing activities, real estate appraisal
activities, and acting as intermediary for
commercial real estate equity financing.
12 CFR 225.25(b) (6), (5), (13), and (14).
Commenters also argue that real
estate investment activities, particularly
when conducted as a means of financing
commercial real estate projects, are the
functional and operational equivalents
of traditional long-term debt financing
activities of banks. These commenters
contend that the process of determining
whether to invest in a real estate project
requires the same type of review of the
business and economic risks of the
projects as must currently be done by
banks in determining whether to extend
credit to the real estate project This
credit review process includes
reviewing the credit worthiness and
financial resources of the participants;
reviewing the geographic location and
design of the project analyzing the
m arket sales and rental prospects, and
payout/payback projections for the
project; reviewing alternate sources of
financing; and reviewing prospects for
end-use financing.
The Board requests public comment
regarding whether these and other
activities currently conducted by banks
and bank holding companies would
support a determination that real estate
investment activities, when conducted
within the limits proposed here, are
closely related to banking for purposes
of the BHC Act. In addition, the Board
requests comments regarding what, if
any, restrictions should be imposed on
real estate investment activities in order
to limit bank holding companies to
conducting real estate investment
activities that are closely related to
banking.
In this regard, the Board specifically
requests comment regarding whether, in
order to meet the closely related to
banking te s t real estate investment
activities o f bank holding companies
must be limited to passive,
noncontrolling, minority investments in
joint ventures o r limited partnerships.
These types of passive investments may
be structured as the functional
equivalent of a loan and would limit the
bank holding company’s involvement in
a real estate project essentially to its
traditional role of an extender of credit.
The Board also seeks comments
regarding whether bank holding
companies may be permitted under the
closely related test to take a more
active, entrepeneurial role in the
management decisions regarding real
estate projects in which the bank
holding company has invested.
V. Limitations on Real Estate Investment
Activities of Nonbank Subsidiaries of
Holding Company Banks
As explained above, the Board
requests public comment regarding
whether, in light of the financial risks,
potential conflicts of interest and other
adverse effects potentially arising from
real estate investment activities, the
Board should prohibit nonbank
subsidiaries of holding company banks
from engaging in real estate investment
activities or should permit nonbank
subsidiaries of holding company banks
to engage in these activities only within
the limits set forth in this proposal for
other nonbank subsidiaries of the
holding company. Both of these
proposals would involve Board action to
amend § 225.22(d)(2) of Regulation Y as
that regulation applies to the ownership
by a holding company bank of a
nonbank company engaged in real
estate investment activities.
Section 225.22(d)(2) of Regulation Y
(formerly § 225.4(e)) allows holding
company state-chartered banks to
acquire or retain all of the voting shares
of a nonbank company so long as the
nonbank company engages solely in
activities in which the parent bank may
engage directly, at locations at which
the bank may engage in these activities.
12 CFR 225.22(d)(2). The regulation thus
permits a holding company state bank to
establish a wholly-owned subsidiary to
engage in nonbanking activities that the
state bank may conduct directly even
though the activities are not otherwise
permitted for bank holding companies.
The Board adopted this regulation in
1971 in order to permit holding company
banks to establish nonbank subsidiaries
Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
and to compete on an equal footing with
banks that are not in a holding
company. At that time, the Board stated
that it would not apply the nonbanking
prohibitions of the BHC Act to nonbank
subsidiaries of holding company banks
unless changed circumstances indicated
a need to apply the provisions in order
to carry out the Act’s purposes or to
prevent evasions of the Act.
Accordingly, the Board stated that it
would review the merits of that decision
from time to time:
The Board should not at this time apply the
[nonbanking] restrictions [of the BHC Act] to
subsidiaries of banks. This decision is
believed warranted by considerations of
equity between banks that are and are not
members of bank holding companies and by
the absence of evidence that acquisitions by
holding company banks are resulting in
evasions of the purposes of the Act. The
merits of this decision will be reviewed by
the Board from time to time in light of its
experience in administering the Act. (36 FR
9292 (May 22,1988))
The developments discussed above
regarding broad state authorizations for
real estate investment activities suggest
that reconsideration of the Board’s 1971
regulation may be appropriate, insofar
as it permits holding company state
banks to establish subsidiaries engaged
in real estate investment activities
beyond the prudential limits proposed
by the Board for the parent bank holding
company.
In this regard, some of the comments
responding to the Board’s initial request
for comment regarding real estate
investment activities argued that the
Board has no authority under the BHC
Act to regulate the activities of holding
company banks and their wholly-owned
subsidiaries. These commenters contend
that the nonbanking provisions of
section 4 of the Act, by their express
terms, do not apply to a bank owned by
a holding company. On this basis, these
commenters argue that a subsidiary o fa
holding company bank is also exempt
from the nonbanking provisions of the
Act.
Other commenters argue that the
express terms of section 4 of the Act
apply to voting shares acquired or
retained by a bank holding company
indirectly through a holding company
bank as well as to shares acquired
directly by the holding company. In
addition, these commenters state that,
under the express terms of the Act, a
bank holding company may not control
any subsidiary other than a bank or a
nonbank subsidiary engaged in
activities that have been determined by
the Board to be closely related to
banking or that are subject to some
other exemption under the Act. These
commenters note that, under section
2(g)(1) of the Act, shares owned by any
subsidiary of a bank holding company
are deemed to be indirectly owned by
the parent bank holding company and
that any company controlled by a
subsidiary bank of a bank holding
company is an indirect subsidiary of the
holding company.* In support of these
arguments, it has been noted that
nonbank subsidiaries of a holding
company bank are not “banks” as that
term is defined in the Act. that the Act
contains certain exemptions for shares
held by holding company banks, which
would be unnecessary if the nonbanking
prohibitions of the Act did not apply to
shares held by a holding company
bank,9 and that long-standing Board
interpretations of the Act state that
voting stock held by a holding company
bank is indirectly owned by the parent
bank holding company.10 It has also
been argued that the legislative history
of the Act supports this view.11
The Board will consider any further
comments regarding this issue.
VI. Regulatory Flexibility Act Analysis
This proposal to expand the
permissible nonbanking activities of
bank holding companies is not expected
to have a significant economic impact
on a substantial number of small
business entities within the meaning of
the Regulatory Flexibility Act (5 U.S.C.
601 e t seq.). The Board is required by
section 4(c)(8) of the BHC Act, 12 U.S.C.
1843(c)(8), to determine whether
nonbanking activities are closely related
to banking and thus are permissible for
bank holding companies. This proposal,
if adopted, would permit bank holding
companies to engage in limited real
estate investment activities that bank
holding companies are not now
permitted to conduct. The proposal does
not impose more burdensome
requirements on bank holding
companies than are currently
•12 U.S.C. 1841(g)(1).
• See Bank Holding Company Act of 1958. Pub. L
No. 511. 4(c) (2) and (4), 70 Stat. 133,138 (1958)
(providing an exemption for voting shares held by
"any banking subsidiary . . . in satisfaction of a
debt previously contracted in good faith,” and by
"any banking subsidiary . . . in good faith in a
fiduciary capacity”) (Current version at 12 U.S.C.
1843(c) (2) & (4) (I960)).
*u 12 CFR 225.101 A 102 (1958-57); see also Board
statement made in connection with promulgation of
5 225.22(d)(2) (formerly 225.4(e)) of Regulation Y, 36
FR 9292 (May 22,1971).
1' See. e.g.. One Bank Holding Company
Legislation o f 1970. Hearings Before the Senate
Committee on Banking and Currency, 91st Cong., 2d
Sess. 198 (1970), (Statement of William B. Camp.
U.S. Comptroller of the Currency) ("There is no
legal doubt that any acquisition by the national
bank subsidiary would be an indirect acquisition by
the one-bank holding company.”).
549
applicable, and includes provisions
designed to permit small bank holding
companies to participate meaningfully in
the proposed activities.
The Board believes that there are not
a significant number of small bank
holding companies engaged in real
estate investment activities at this time.
As noted, bank holding companies have
not previously been permittted to
engage in real estate banks to engage in
these activities has been considered in a
number of states, these initiatives have
been taken only recently. Moreover, the
proposal, if adopted, would expand the
powers of bank holding companies by
authorizing bank holding companies to
conduct real estate investment activities
within prudential limits, either by
establishing a direct nonbank subsidiary
of the holding company, or, under one
alternative, by conducting these
activities through nonbank subsidiaries
of holding company banks. The proposal
does not impose any limitations on the
direct real estate investment activities of
holding company banks or on any other
activity of a holding company or its
bank or nonbank subsidiaries.
The proposal requests comment
regarding whether additional reporting
requirements applicable to all bank
holding companies that engage in the
proposed activities would be
appropriate.
List of Subjects in 12 CFR Part 225
Banks, banking, Federal Reserve
System, Holding companies, Reporting
and recordkeeping requirements.
For the reasons set out in this notice,
and pursuant to the Board's authority
under section 5(b) of the Bank Holding
Company Act of 1958, as amended (12
U.S.C. 1044(b)), the Board proposes to
amend 12 CFR Part 225 as follows:
1. The authority citation for Part 225
continues to read as foilows:
Authority; 12 U.S.C. 1817(j)(13). 1818.
1843(c)(8). 1844(b), 3106, 3108, 3907 and 3909.
§225.25
[A m ended]
2. The Board proposes to amend
§ 225.25 by adding a new paragraph
(b)(25) to read as follows:
♦
*
*
*
*
(b) * * *
(25) R eal Estate Investm ent A ctivities.
Conducting real estate investment
activities, subject to the conditions and
limitations set forth below. For purposes
of this paragraph, real estate investment
activities are defined as the direct or
indirect ownership of any interest in
550
Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
real estate,12 whether in the form of an
equity in terest partnership, joint
venture or otherwise, including loans
and profit participations deemed for
accounting purposes to be an investment
in real estate,13 as well as incidental
activities such as property management,
maintenance, and brokerage of such real
property.14 Real estate investment
activities may be conducted by a bank
holding company provided that:
(i) The activity is conducted through a
separately incorporated nonbank
subsidiary of the bank holding company
(the “real estate subsidiary’’);
(id) The bank holding company and its
bank subsidiaries are in satisfactory
financial condition and the bank holding
company is particularly strongly
capitalized on a consolidated basis. In
determining a bank holding company’s
consolidated capital,___ (between 50
and 100) percent of the amount of real
estate investment activities, including
all related extensions of credit as
defined in paragraph (b)(25)(vi) of this
section, conducted by all nonbank
subsidiaries of the bank holding
company, a n d ___ (up to 100) percent of
the amount of real estate investment
activities, including all related
extensions of credit as defined in
paragraph (b)(25)(vi) of this section
conducted directly by a bank owned by
the holding company, shall be excluded.
In the event the bank holding company’s
consolidated primary capital M is below
the minimum level 3et forth in the
Board's Capital Adequacy Guidelines
(Appendix A of this Subpart), or such
higher level required by the Board in
approving an application under this
paragraph or under its authority under
the International Lending Supervision
Act, the bank holding company shall not
make any further investment in the real
12 Real estate includes real property and any
improvements to real property. Real estate
investment activities do not include the ownership
of real property acquired in satisfaction of a debt
previously contracted, held for bank or bank
holding company premises, or made as a community
welfare investment, provided that these investments
are made pursuant to, and conform with, the
Board's or other appropriate bank supervisor's
regulations regarding these types of investments.
13 In this regard, real estate investments would
include acquisition, development and construction
arrangements by financial institutions that have
been deemed to be real estate investment or real
eatate joint ventures under the Notice to
Practitioners by the American Institute of Certified
Public Accountants (January 28,1988). The Board
may also determine in individual cases that the
facts and circumstances of a particular interest
warrant treatment of the interest as an investment
in real estate for purposes of this subparagraph.
14 Real eslate investment activities do not include
directly or indirectly engaging in. or owning or
controlling a company engaged in. real estate
syndication, construction, engineering, architectural
design, or otber similar commercial activities.
estate subsidiary and the real estate
subsidiary shall not commence any
additional real estate investment
activities without the Board's prior
approval;
(iii) The bank holding company’s
aggregated equity investments in all real
estate subsidiaries shall not exceed 5
percent of the primary capital of the
bank holding company;
(iv) The real estate subsidiary shall
maintain capitalization fully adequate to
meet its obligations and support its
activities, and shall not incur debt in
excess of 5 times the capital of the real
estate subsidiary;
(v) The real estate subsidiary shall
maintain adequate and separate books
and records and shall operate in a
manner so as to make clear to
customers, co-investors, and others
dealing with the real estate subsidiary
that the obligations of the subsidiary are
not insured by any agency of the federal
government and are not obligations of
any bank affiliated with the subsidiary;
(vi) The aggregate investment by a
bank holding company in real estate
investment activities, including all
related extensions of credit, shall be
limited to the higher of 25 percent of the
bank holding company’s consolidated
primary capital or $250,000, minus the
aggregate investment in real estate
investment activities, including all
related extensions or credit, made
directly by any bank owned by the
holding company. The aggregate
investment in real estate investment
activities, including all related
extensions of credit, is defined as the
total of (A) all direct and indirect
investments in any form in real estate,
(B) all loans, advances, commitments,
and guarantees by the bank holding
company or any of its bank or nonbank
subsidiaries to any project, partner, coventurer, contractor or other party with
which the real estate subsidiary is
associated in any manner regarding real
estate in which the real estate
subsidiary has a direct or indirect
interest, and (C) ail loans, advances,
commitments and guarantees by the
bank holding company or any of its
bank or nonbank subsidiaries to any
third party for the purpose of acquiring
any interest in real estate in which the
real estate subsidiary ha3 a direct or
indirect interest except for mortgages
made to individual purchasers of owneroccupied single family housing units;15
15 This limit does not apply to investments in
bank premises, real estate acquired and held in
good faith in satisfaction of debts previously
contracted, and real estate acquired as part of a
community welfare project of the type permitted
under $ 225.22(b) (0) of this subpart, provided these
(vii) During the first three years after
obtaining Board approval under this
subpart to conduct real estate
investment activities, no more than onethird of a bank holding company's
aggregate investment limits described in
(b)(25)(vi) of this section shall be made
during any one twelve-month period;
(viii) The aggregate investment,
including any related extensions of
credit, as defined in (b)(25)(vi) of this
section, by a bank holding company in
any single real estate project or series of
related projects shall not exceed 10
percent of die bank holding company’s
consolidated primary capital;
(ix) The real estate subsidiary shall
conduct all real estate investment
activities through passive,
noncontrolling investments in joint
ventures or partnerships (A) with third
parties that are independent of, and
unrelated to, the bank holding company
or its subsidiaries and affiliates, and
that do not share common officers,
directors, employees or principal
shareholders (including members of
their immediate families) with the bank
holding company or any of its
subsidiaries or affiliates, and (B) in
which the total investment by the real
estate subsidiary represents no more
than 49 percent of the equity of the joint
venture or partnership;
(x) The real estate investment
activities may be conducted on a
nationwide basis, except in a state that
prohibits banks and bank holding
companies operating in that state from
conducting these activities;
(xi) A bank holding company that
operates a real estate subsidiary
authorized pursuant to this paragraph,
and any subsidiary of such bank holding
company, shall not extend credit to any
third party for the purpose of acquiring
any interest in any real estate in which
such real estate subsidiary has a direct
or indirect interest unless the extension
of credit is consistent with safe and
sound banking practices, is made on
substantially the same terms, including
those governing interest rate and
collateral, as those prevailing at the time
for comparable transactions with other
persons, and does not involve more than
the normal risk of repayment or present
other unfavorable features;
(xii) A bank holding company that
controls a real estate subsidiary
authorized pursuant to this paragraph,
and any subsidiary of such bank holding
company, shall not extend credit to any
partner, co-venturer or other entity with
investments are made pursuant to and conform with
the Board's or other appropriate bank supervisor's
regulations regarding these investments.
Federal Register / Vol. 52, No. 4 / Wednesday, January 7, 1987 / Proposed Rules
which the real estate subsidiary is
associated by joint venture, contract or
otherwise in connection with real estate
in which such real estate subsidiary has
a direct or indirect interest, unless the
extension of credit is consistent with
safe and sound banking practices, is
made on substantially the same terms,
including those governing interest rate
and collateral, as those prevailing at the
time for comparable transactions with
other persons, and does not involve
more than the normal risk of repayment
or present other unfavorable features:
and
(xiii) A bank holding company and
any of its subsidiaries shall not
purchase or lease, as fiduciary, co
fiduciary, or managing agent on behalf
of an account for which the holding
company or subsidiary has investment
discretion, any property or interest in
property in which a real estate
subsidiary of the holding company has
an interest or which it sells or markets,
unless the purchase or lease is: (AJ
Expressly authorized by the account
instrument or court order; (B)
specifically authorized by all interested
parties after full disclosure of all
relevant facts surrounding the fiduciary
institution’s relationship with the
property or interest in property; or (C)
otherwise permissible under applicable
law or regulations.
3. The Board proposes to amend
§ 225.22(d)(2) by adding the following at
the end of that section:
§225.22 [Amended]
*
*
«
*
*
(d) * * *
( 2) * • *
Notwithstanding the above, a state
bank owned by a bank holding company
may not directly or indirectly acquire or
retain securities of a company engaged
in real estate investment activities as
defined in § 225.25(b)(25).
♦
*
*
*
*
Appendix A—[Amended]
4. The Board proposes to amend
Appendix A to 12 CFR Part 225 by
adding the following at the end of the
Appendix:
Treatment of Investments in Real Estate
Investment Activities for the Purpose of
Determining the Capital Adequacy of Bank
Holding Companies
In its proposal to authorize bank holding
companies to engage in real estate
investment activities, the Board expressed its
concern that these activities involved a
significant degree of risk beyond other
activities conducted by banks and bank
holding companies in part because of the
illiquid nature of real estate; the considerable
variation in economic value, returns and cash
flow that often characterize investments in
real estate; and the greater risks associated
with an equity investment as compared to a
traditional bank loan. Based on these
supervisory concerns, the Board has imposed
prudential limits on the size and conduct of
real estate investment activities of bank
holding companies.
In addition, the Board believes that the
amount of real estate investment activities
conducted by a bank holding company and
any of its direct or indirect bank and
nonbank subsidiaries must be considered in
evaluating the capital adequacy of the bank
holding company. In this regard, in
determining the capital adequacy of a bank
holding company,_____(between 50 and 100)
percent of the amount of the real estate
investment activities conducted by nonbank
subsidiaries of the bank holding company,
including related extensions of credit by the
parent bank holding company or any bank or
nonbank subsidiaries, shall be excluded from
the calculation of the parent bank holding
company's consolidated primary capital.
Similarly,___ (up to 100) percent of the
amount of the real estate investment
activities conducted directly by a bank
owned by a bank holding company, including
related extensions of credit by the bank
holding company or any bank or nonbank
subsidiary, shall be excluded from the
calculation of the parent bank holding
company’s consolidated primary capital. For
purposes of these calculations, real estate
investment activities, including related
extensions of credit, shall be defined as in
9 225.25(b)(25) of this part.7 Real estate
investment activities and related extensions
of credit shall be deemed to be made by a
bank owned by a bank holding company for
purposes of applying these weighted capital
adjustments if the holding company bank
holds any interest, in any form, in the real
estate.
Board of Governors of the Federal Reserve
System, December 31,1988.
James McAfee,
Associate Secretary of the Board.
[FR Doc. 87-183 Filed 1-6-87; 8:45 am]
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