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FE D E R A L R ESER VE B A N K O F D ALLA S DALLAS, TEXAS 75222 Circular No. 73-198 August 7 , 1973 REVISED PROPOSED AMENDMENT TO REGULATION Y (Real and Personal Property Leasing) To All Banks and Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System on July 31? 1973 announced for comment a revised proposal to amend Regulation Y "Bank Holding Companies” to permit in certain cases the leasing of both real and personal property. A hearing has also been scheduled for September 12, 1973 on the revised proposal. If adopted, the proposal would supersede the existing regulatory provision authorizing bank holding companies to engage in personal property leasing, and would place both under a common set of rules. The Board initially issued a proposal which, as detailed in our Circular No. 72-^0 , darted February 25, 1972, was concerned with real property leasing only. A revised proposal somewhat similar to the current proposal was transmitted with our Circular No. 72-28U on December 15, 1972. The Board has considered the comments received on the last pro posal and has made certain modifications. The principal changes in the leasing rules, as now proposed, are: 1. The term "residual value" would be substituted for "salvage value", and in computing full payout recovery maximum allowable residual value would be limited to 10 percent of acquisition cost of the property. 2. In computing full payout recovery reasonably anticipated renewal leases can be relied upon with respect to governmental entities, but not private lessees. 3. The proposal would permit a bank holding company to own property to be leased for up to 50 years, but would require full payout recovery within ^0 years. b. The prior proposal would have required bank holding companies to dispose of the property within two years after expiration of the initial full payout lease term. The revised proposal would permit the alternative of re-leasing the property. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Other provisions of the previous proposal, including require ments that the lease constitute the functional equivalent of an extension of credit, that the property to be leased be acquired specifically for the leasing transaction, and that the lease be on a non-operating basis, are unchanged. Written comments on the revised proposal should be addressed to the Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. 20551? to be received not later than October 3, 1973. A hearing -will also be held before available members of the Board on September 12, 1973? at 10:00 a.m. in Room 1202 at the Board's building at 20th Street and Constitution Avenue, N. W. Persons interested in participating in the hearing by presenting material orally should in form the Secretary of the Board in -writing no later than August 2U, 1973. Each person admitted as a party to the hearing proceedings -will be given 30 minutes to present his views. A copy of the Board's press release, revised proposal and hearing order is attached. Very truly yours, P. E. Coldwell President Attachments GOV'y ^ FEDERAL ^ press RESERVE release F o r im m e d ia te r e l e a s e J u l y 3 1 , 1973 The B o ard o f G o v e rn o rs o f th e F e d e r a l R e s e rv e S y stem to d a y p u b lis h e d f o r comm ent an d s c h e d u le d a h e a r i n g f o r S e p te m b e r 12 on a r e v i s e d p r o p o s a l to p e r m it b a n k h o l d in g c o m p a n ie s t o e n g a g e i n b o th r e a l a n d p e r s o n a l p r o p e r t y le a s in g u n d e r a c o n s o lid a te d s e t o f r u l e s . T o d a y 's r e v i s i o n f o llo w e d B o a rd c o n s i d e r a t i o n o f com m ents r e c e i v e d on an e a r l i e r p r o p o s a l t h a t w as a n n o u n c e d l a s t D ecem ber 6 . The B o a rd s c h e d u le d t h e h e a r i n g i n v ie w o f t h e c o m p l e x it i e s o f th e i s s u e s in v o lv e d an d t h e B o a r d 's d e s i r e t o g a t h e r f u r t h e r i n f o r m a t io n p r i o r to f i n a l a c t i o n . The h e a r i n g i s t o b e h e ld a t th e B o a r d 's o f f i c e s b e f o r e a v a i l a b l e B o a rd m em bers. The p r o p o s a l w o u ld s u p e r s e d e t h e e x i s t i n g r e g u l a t o r y p r o v i s i o n a u t h o r i z i n g b a n k h o l d in g c o m p a n ie s t o e n g a g e i n p e r s o n a l p r o p e r t y l e a s i n g , and w o u ld p r o v id e a common s e t o f r u l e s f o r b a n k h o ld in g c o m p a n ie s e n g a g in g i n p e rs o n a l o r r e a l p ro p e rty le a s in g o r b o th . The p r o p o s a l r e t a i n s t h e c e n t r a l c o n d i t i o n t h e B o a rd h a s im p o sed u po n l e a s i n g b y b a n k h o l d in g c o m p a n ie s - - t h a t t h e l e a s i n g t r a n s a c t i o n s e r v e a s th e f u n c t i o n a l e q u i v a l e n t o f a n e x t e n s i o n o f c r e d i t w h e re b y t h e l e s s o r re c o v e rs i t s f u l l in v e s tm e n t i n t h e le a s e d p r o p e r t y d u r in g t h e i n i t i a l te rm o f th e l e a s e . P r i n c i p a l c h a n g e s i n t h e l e a s i n g r u l e s , a s now p r o p o s e d , a r e : 1. The te rm " r e s i d u a l v a l u e 11 w o u ld b e s u b s t i t u t e d f o r " s a lv a g e v a lu e " a n d , i n c o m p u tin g f u l l p a y o u t r e c o v e r y , maximum a ll o w a b l e r e s i d u a l v a lu e w o u ld b e l i m i t e d t o 10 p e r c e n t o f t h e a c q u i s i t i o n c o s t o f t h e p r o p e r t y . - 2 - 2. I n c o m p u tin g f u l l p a y o u t r e c o v e r y r e a s o n a b ly a n t i c i p a t e d r e n e w a l l e a s e s c a n b e r e l i e d upon w ith r e s p e c t t o g o v e rn m e n ta l e n t i t i e s o n ly a n d n o t p r iv a te le s s e e s . 3. The p r o p o s a l w o u ld p e r m it a b a n k h o l d in g com pany t o own p r o p e r t y to b e l e a s e d f o r u p t o 50 y e a r s , b u t w ould r e q u i r e f u l l p a y o u t r e c o v e r y w i t h i n 40 y e a rs . 4. The p r i o r p r o p o s a l w o u ld h a v e r e q u i r e d b a n k h o l d in g c o m p a n ie s t o s e l l t h e p r o p e r t y w i t h i n tw o y e a r s a f t e r e x p i r a t i o n o f th e i n i t i a l f u l l p a y o u t l e a s e te r m . The r e v i s e d p r o p o s a l w o u ld p e r m it b a tik h o l d in g c o m p a n ie s th e a l t e r n a t i v e o f r e - l e a s i n g t h e p r o p e r ty * O th e r p r o v i s i o n s o f t h e p r e v io u s p r o p o s a l , i n c l u d i n g r e q u ir e m e n ts t h a t t h e p r o p e r t y t o b e l e a s e d w as a c q u ir e d s p e c i f i c a l l y f o r t h e l e a s i n g t r a n s a c t i o n a n d t h a t t h e l e a s e i s on a n o n - o p e r a ti n g b a s i s , a r e u n c h a n g e d . W r i t te n com m ent o n t h e r e v i s e d p r o p o s a l w i l l b e r e c e i v e d b y th e S e c r e t a r y o f t h e B o a rd th ro u g h O c to b e r 3 , 1 9 7 3 . p a rtic ip a tin g P e rso n s i n t e r e s t e d in i n th e h e a r i n g s h o u ld in fo r m th e S e c r e t a r y o f t h e B o a rd i n w r i t i n g n o t l a t e r th a n A u g u s t 2 4 , 1 9 7 3 . E ach p e r s o n a d m itte d a s a p a r t y t o t h e p r o c e e d in g w i l l b e g iv e n u p t o 30 m in u te s t o p r e s e n t h i s v ie w s . A c o p y o f th e B o a r d 's r e v i s e d p r o p o s a l a n d h e a r i n g o r d e r i s a t t a c h e d . -0 - FEDERAL RESERVE SYSTEM [12 CFR Part 225] BANK HOLDING COMPANIES N o n b a n k in g A c t i v i t i e s The B o ard o f G o v e rn o rs h a s c o n s id e r e d t h e com m ents r e c e i v e d on its p r o p o s a l (3 7 F .R . 2 6 5 3 4 ) t o p e r m it b an k h o l d in g c o m p a n ie s , u n d e r t h e a u th o r ity o f s e c tio n 4 (c )(8 ) o f t h e B ank H o ld in g Company A c t, t o e n g a g e i n r e a l and p e r s o n a l p r o p e r t y l e a s i n g u n d e r s u b s t a n t i a l l y th e same c o n d i t i o n s a n d h a s m ade c e r t a i n m o d i f i c a t i o n s o f s u c h p r o p o s a l , w h ic h a r e s e t fo rth h e re in a fte r. Due t o t h e num ber a n d c o m p le x ity o f t h e i s s u e s in v o lv e d i n t h e p r o p o s a l , t h e B o ard b e l i e v e s i t in th e p u b lic i n t e r e s t t o g a t h e r m ore i n f o r m a t io n a b o u t t h e p r o p o s a l a t a h e a r i n g . A c c o r d in g ly , t h e B o ard h a s d i r e c t e d t h a t a h e a r i n g b e h e ld b e f o r e a v a i l a b l e m em bers o f t h e B o a rd i n Room 1202 o f i t s b u i l d i n g a t 2 0 th S t r e e t an d C o n s t i t u t i o n A v en u e, N .W ., W a s h in g to n , D. C . , on S e p te m b e r 1 2 , 1 9 7 3 , a t 1 0 :0 0 a .m . T he p ro p o s e d am endm ent, a s m o d if ie d , r e a d s a s f o ll o w s : § 2 2 5 .4 N o n b a n k in g A c t i v i t i e s ( а) A c t i v i t i e s c l o s e l y r e l a t e d t o b a n k in g o r m an a g in g o r c o n t r o l l i n g b a n k s . * * * The f o llo w in g a c t i v i t i e s h a v e b e e n d e te r m in e d b y t h e B o ard t o b e so c l o s e l y r e l a t e d t o b a n k in g o r m a n a g in g o r c o n t r o l lin g b anks a s to be a p ro p e r in c id e n t th e r e to : ( б) L e a s in g r e a l an d p e r s o n a l p r o p e r t y o r a c t i n g a s a g e n t , b r o k e r o r a d v i s e r i n l e a s i n g s u c h p r o p e r t y p r o v id e d : -2 - ( i) th e le a s e e x te n s io n o f c r e d i t (ii) is to s e rv e a s th e f u n c tio n a l e q u iv a le n t o f an to th e th e p r o p e rty l e s s e e o f th e p r o p e r t y ; t o b e l e a s e d i s a c q u ir e d s p e c i f i c a l l y f o r th e l e a s i n g t r a n s a c t i o n u n d e r c o n s i d e r a t i o n o r w as a c q u ir e d s p e c i f i c a l l y fo r an e a r l i e r le a s in g tr a n s a c tio n ; (iii) th e le a s e (iv ) a n o n o p e r a tin g b a s i s ; a t t h e i n c e p t i o n o f t h e i n i t i a l l e a s e t h e e f f e c t o f th e tra n s a c tio n ( a n d , w i t h r e s p e c t t o g o v e rn m e n ta l e n t i t i e s o n l y , r e a s o n a b ly a n t i c i p a t e d re n ta ls , i s on f u t u r e t r a n s a c t i o n s * ) w i l l y i e l d a r e t u r n fro m (1 ) ( 2 ) e s ti m a t e d t a x b e n e f i t s ( in v e s tm e n t t a x c r e d i t , n e t ec o n o m ic g a in fro m t a x d e f e r r a l fro m a c c e l e r a t e d d e p r e c i a t i o n , and o t h e r t a x b e n e f i t s w ith a s u b s t a n t i a l l y s i m i l a r e f f e c t ) , a n d (3 ) th e e s ti m a t e d r e s i d u a l v a lu e o f t h e p r o p e r t y a t t h e e x p i r a t i o n o f t h e i n i t i a l te r m o f t h e l e a s e , w h ic h i n no c a s e s h a l l e x c e e d 10 p e r c e n t o f t h e a c q u i s i t i o n c o s t o f t h e p r o p e r t y t o t h e l e s s o r , t h a t w i l l com p e n s a t e t h e l e s s o r f o r n o t l e s s th a n t h e l e s s o r * s f u l l in v e s tm e n t i n t h e p r o p e r t y p l u s th e e s t i m a t e d t o t a l c o s t o f f i n a n c i n g t h e p r o p e r t y o v e r t h e te rm o f t h e l e a s e ; * * * The B o ard u n d e r s t a n d s t h a t some F e d e r a l , S t a t e an d l o c a l g o v e rn m e n ta l e n t i t i e s may n o t e n t e r i n t o a l e a s e f o r a p e r i o d i n e x c e s s o f one y e a r . S u ch a n im p e d im e n t d o e s n o t p r o h i b i t a com pany a u t h o r i z e d u n d e r § 2 2 5 #4 ( a ) from e n t e r i n g i n t o a l e a s e w i t h s u c h g o v e rn m e n ta l e n t i t i e s i f th e com pany r e a s o n a b ly a n t i c i p a t e s t h a t s u c h g o v e rn m e n ta l e n t i t i e s w i l l re n e w th e l e a s e a n n u a ll y u n t i l s u c h tim e a s t h e com pany i s f u l l y c o m p e n s a te d f o r i t s in v e s tm e n t i n th e l e a s e d p r o p e r t y p l u s i t s c o s t s o f f i n a n c i n g t h e p r o p e r t y . F u r t h e r , a com pany a u t h o r i z e d u n d e r § 2 2 5 .4 ( a ) may a l s o e n g a g e i n a s o - c a l l e d " b r i d g e ” l e a s e f i n a n c i n g o f p e r s o n a l p r o p e r t y , b u t n o t r e a l p r o p e r t y , w h e re t h e l e a s e i s s h o r t te r m p e n d in g c o m p le tio n o f lo n g te r m f i n a n c i n g , by t h e same o r a n o th e r l e n d e r , ** The e s t i m a t e by t h e l e s s o r o f t h e t o t a l c o s t o f f i n a n c i n g t h e p r o p e r t y o v e r t h e te r m o f t h e l e a s e s h o u ld r e f l e c t , among o t h e r f a c t o r s , t h e te rm o f t h e l e a s e , t h e m odes o f f i n a n c i n g a v a i l a b l e t o t h e l e s s o r , t h e c r e d i t r a t i n g o f t h e l e s s o r a n d /o r t h e l e s s e e , i f a f a c t o r i n th e f i n a n c i n g , an d p r e v a i l in g r a t e s i n t h e m oney a n d c a p i t a l m a r k e ts . -3- (v ) t h e maximum l e a s e te rm d u r in g w h ic h t h e l e s s o r m u st r e c o v e r t h e l e s s o r 's f u l l in v e s tm e n t i n t h e p r o p e r t y p l u s t h e e s t i m a t e d c o s t o f f i n a n c i n g t h e p r o p e r t y s h a l l be 40 y e a r s ; (v i) a t t h e e x p i r a t i o n o f t h e l e a s e ( i n c l u d i n g an y r e n e w a ls o r e x t e n s i o n s w i t h t h e same l e s s e e ) , a l l i n t e r e s t i n t h e p r o p e r t y s h a l l b e e i t h e r l i q u i d a t e d o r r e - l e a s e d on a n o n o p e r a tin g b a s i s a s so o n a s p r a c t i c a b l e b u t i n no e v e n t l a t e r th a n tw o y e a r s fro m t h e e x p i r a t i o n o f t h e l e a s e ,* * * h o w e v e r, i n no c a s e s h a l l t h e l e s s o r r e t a i n an y i n t e r e s t i n t h e p r o p e r t y b e y o n d 50 y e a r s a f t e r i t s a c q u is itio n o f th e p r o p e r ty . I n c o n n e c tio n w ith t h e h e a r i n g , t h e B o ard n o t e s t h a t B ankA m erica C o r p o r a t i o n , S an F r a n c i s c o , C a l i f o r n i a , h a s r e q u e s t e d a n o p p o r t u n i t y f o r a h e a r i n g w i t h r e g a r d t o t h e e f f e c t t h e p r o p o s a l w o u ld h a v e u p o n t h e B o a r d 's e x i s t i n g p e r s o n a l p r o p e r t y l e a s i n g r e g u l a t i o n ( 2 2 5 .4 ( a ) ( 6 ) o f R e g u l a ti o n Y ) . O th e r i n t e r e s t e d p e r s o n s a r e i n v i t e d t o p a r t i c i p a t e by p r e s e n t i n g t h e i r v ie w s on i s s u e s r a i s e d by t h e p e n d in g p r o p o s a l . not p a rtic ip a te In te r e s te d p e rso n s need i n t h e h e a r i n g th r o u g h o r a l p r e s e n t a t i o n i n o r d e r t o h a v e t h e i r v ie w s c o n s i d e r e d . A l l v ie w s p r e v i o u s l y e x p r e s s e d i n w r i t i n g on th e p e n d in g p r o p o s a l a r e u n d e r c o n s i d e r a t i o n b y t h e B o ard a n d a r e a v a i l a b l e f o r i n s p e c t i o n and c o p y in g i n Room 1020 o f t h e B o a r d 's b u i l d i n g . *** I n th e e v e n t o f a d e f a u l t on a l e a s e a g re e m e n t p r i o r t o t h e e x p i r a t i o n o f t h e l e a s e te r m , th e l e s s o r s h a l l e i t h e r r e - l e a s e s u c h p r o p e r t y , s u b j e c t to a l l th e c o n d itio n s o f t h i s s u b s e c tio n 6 , o r liq u i d a te su ch p r o p e r ty as so o n a s p r a c t i c a b l e b u t i n no e v e n t l a t e r t h a n tw o y e a r s fro m th e d a t e o f d e f a u l t on a l e a s e a g r e e m e n t. -4- P e rso n s i n te r e s te d i n p a r t i c i p a t i n g i n t h e h e a r i n g by p r e s e n t i n g m a t e r i a l o r a l l y s h o u ld in fo r m t h e S e c r e t a r y o f t h e B o ard i n w r i t i n g n o t l a t e r t h a n A u g u st 2 4 , 1 9 7 3 . E ach p e r s o n a d m itte d a s a p a r t y t o t h e p r o c e e d in g w i l l b e g iv e n up t o 30 m in u te s t o p r e s e n t h i s v ie w s . A nyone w is h in g t o s u b m it w r i t t e n com m ents on i s s u e s r a i s e d a t t h e h e a r i n g may d o s o a t a n y tim e b e f o r e t h e c l o s e o f b u s in e s s O c to b e r 3 , 1 9 7 3 . By o r d e r o f t h e B o a rd o f G o v e r n o rs , J u l y 2 7 , 1 9 7 3 . ( S ig n e d ) C h e s te r B. F e ld b e r g Chester B. Feldberg Secretary of the Board [SEAL]
@FedFRASER