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FEDERAL RESERVE BANK
OF NEW YORK
No.
[ Circular
June 13, 1990
10352 "I
LEASING OF PERSONAL PROPERTY BY BANK HOLDING COMPANIES
Proposed Amendment to Regulation Y
Comments Invited by July 16, 1990
To All State Member Banks and Bank Holding Companies
in the Second Federal Reserve District, and Others Concerned:
The Board of Governors of the Federal Reserve System has issued the following statement:
The Federal Reserve Board has issued for public comment a proposal to add non-full payout leasing
to the list of permissible activities in Regulation Y.
Comment is requested by July 16, 1990.
The proposed amendment would raise the maximum estimated residual value of leased personal
property on which bank holding companies may rely for their compensation in leasing transactions to
up to 100 percent of the acquisition cost of the leased property. The Office of the Comptroller of the
Currency has also issued a proposed regulation which would allow national banks to rely on residual
values up to 100 percent of the acquisition cost of the leased property. The Competitive Equality Banking
Act of 1987 had amended the National Bank Act to expand the leasing authority of national banks.
These higher residual value leasing transactions would be subject to certain volume limitations,
and would also remain subject to the prudential limitations currently set forth in Regulation Y.
Printed on the following pages is the text of the Board’s proposed amendment to Regulation Y,
which has been reprinted from the Federal Register of June 1. Comments thereon should be sub
mitted by July 16, and may be sent to the Board of Governors, as set forth in the notice, or to our
Domestic Banking Applications Division.
E. Gerald C orrigan,
President.
FEDERAL RESERVE SYSTEM
1 2 C F R Part 225
[Regulation Y; Docket No. R-0694] Leasing
Personal Property
AGENCY: Board of Governors of the
Federal Reserve System.
a c t i o n : Notice of proposed rulemaking.
SUMMARY: The Board is seeking public
comment on a proposal to amend the
provision in Regulation Y governing
leasing transactions by bank holding
companies to relax the limitation on
reliance on the residual value of leased
property. Pursuant to section 4(c)(8) of
the Bank Holding Company Act ("BHC
Act”) (12 U.S.C. 1843(c)(8)), the Board
has previously determined that the
leasing of personal property subject to
certain criteria is so closely related to
banking as to be a proper incident
thereto. These criteria include a
limitation in which the bank holding
company may rely on an estimated
residual value of the leased property at
the end of the lease of no more than 20
percent of the acquisition cost of the
leased property in recovering the
holding company’s full costs of the
leasing transaction.
Section 108 of the Competitive
Equality Banking Act ("CEBA"), Public
Law 100-86,101 Stat. 579 (August 10,
1987), amended the National Bank Act
(12 U.S.C. 24) to expand the authority of
national banks to permit investment of
up to 10 percent of the assets of the
national bank in tangible personal
property for lease financing transactions
on a net lease basis. This section was
enacted in order to permit relaxation of
the residual value limitations currently
applicable to leasing transactions by
national banks. A number of national
banks have relied on this authority to
engage in personal property leasing
transactions with reliance on estimated
residual values of up to 100 percent of
the acquisition cost of the leased
property. A number of states also allow
state banks to engage in similar
transactions. In view of this, as well as
other factors, including the extensive
experience gained by bank holding
companies in estimating the residual
value of property in currently
permissible leasing transactions, the
Board is proposing to raise the
maximum estimated residual value of
leased personal property on which bank
holding companies may rely for their
compensation in leasing transactions to
up to 100 percent of the acquisition cost
of the leased property. These higher
residual value leasing transactions
would be subject to certain volume
limitations, and would also remain
subject to the prudential limitations
currently set forth in Regulation Y.
DATES: Comments must be received by
July 16,1990.
ADDRESSES: Comments, which should
refer to Docket No. R-0694, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and
Constitution Avenue, NW, Washington,
DC 20551, to the attention of Mr.
William W. Wiles, Secretary; or
delivered to room B-2223, Eccles
Building, between 8:45 a.m. and 5:15 p.m.
Comments may be inspected in room B 1122 between 9 a.m. and 5 p.m., except
as provided in 1 261.8 of the Board’s
Rules Regarding Availability of
Information, 12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT:
Scott G. Alvarez, Assistant General
Counsel (202/452-3583), Thomas M.
Corsi, Attorney (202/452-3275), or
Donna R. Nordenberg, Attorney (202/
452-3281), Legal Division: or Sidney M.
Sussan, Assistant Director (202/452—
2638), Division of Banking Supervision
and Regulation, Board of Governors. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), Earnestine Hill or Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
Background
Since 1971, bank holding companies
have been permitted to engage in full
payout leasing of personal property.
Section 225.25(b)(5) of the Board’9
Regulation Y currently provides that
these leasing transactions must be on a
nonoperating basis and only upon the
order of customers. At the inception of
the lease, a bank holding company must
expect to realize a return of its full
leasing costs mainly from rentals and
estimated tax benefits. Under current
regulations, a bank holding company
may also rely for compensation on the
estimated residual value of the leased
property in an amount up to 20 percent
of the acquisition cost of the leased
property. In the case of a personal
property lease of no more than seven
years in duration, a bank holding
company may rely for compensation on
certain guarantees in an amount up to 60
percent of the acquisition cost of the
leased property.
In 1987, section 108 of CEBA amended
the National Bank Act to permit national
banks to lease tangible personal
property so long as the leases are on a
PRINTED IN NEW YORK, FROM
FEDERAL REGISTER, VOL.
2
net lease basis 1 and represent, in the
aggregate, no more than 10 percent of
the bank's assets. The legislative history
indicates that this amendment was
intended to permit the Comptroller to
relax or eliminate the residual value
limitation in the Comptroller’s existing
regulations authorizing personal
property leasing activities by national
banks in a manner consistent with
sound banking practices. S. Rep. No. 19,
100th Cong., 1st Sess. 43 (1987). The
legislative history of section 108 also
indicates that the section is not intended
to allow national banks to engage in the
daily or short-term equipment or
automobile rental business. H.R. Conf.
Rep. No. 261,100th Cong., 1st Sess. 143
(1987).
In reliance on this statutory
authorization, a number of national
banks currently engage in leasing
personal property with reliance on
residual values as high as 100 percent of
the cost of the leased property. The
Comptroller has recently proposed to
amend its regulations to permit personal
property leasing activities by national
banks without restriction on the residual
value that may be relied on by the
bank.12 The Comptroller also proposes to
limit the volume of leasing transactions
entered into by national banks pursuant
to section 108 to 10 percent of the
national bank’s total consolidated
assets. A number of states have also
permitted state-chartered banks to
conduct leasing activities without limit
on the amount of residual value that
may be relied on by the lessor bank.3
The Board recently approved the
application of Security Pacific
Corporation to engage in personal
property leasing transactions that rely
on estimated residual values of the
leased property for compensation to a
greater extent than Regulation Y
currently allows (hereinafter “higher
residual value leases”).4 In its Security
Pacific Order, the Board permitted
reliance on residual values of up to 100
percent of the property’s acquisition
cost. Security Pacific proposed to
conduct these higher residual value
leasing activities within the volume
1 A “net lease basis." as defined by the leasing
provisions of the Office of the Comptroller of the
Currency ("Comptroller"), is essentially identical to
a "nonoperating basis" under Regulation Y.
1 54 FR 53,071 (1989) (proposed December 27,
1989).
3 A number of states including California. Florida,
Maryland, Michigan, Illinois and Indiana allow
banks to lease personal property without a limit as
to the amount of residual value on which the bank
may rely.
4 Security Pacific Corporation. 78 Federal
Reserve Bulletin______(Order dated April 30,1990).
55, NO. 106, pp. 22348-22351
restrictions imposed on national banks
by section 108 of CEBA. Security Pacific
also committed that higher residual
value leases would have a minimum
lease term of one year and that these
leasing activities would otherwise
conform to the existing provisions of
§ 225.25(b)(5) governing leasing
activities of bank holding companies.
Proposal
In light of these developments in the
leasing powers and activities of banks,
the Board proposes in this amendment
to raise the maximum estimated residual
value of leased personal property on
which bank holding companies may rely
for their compensation in leasing
transactions to up to 100 percent of the
acquisition cost of the leased property.
The Board is further proposing to limit
the volume of lease transactions
conducted by bank holding companies
in which the companies rely on higher
residual values in a manner similar to
the statutory limitations imposed on
national banks by section 108. Under
this proposal, higher residual value
leases must have a minimum lease term
of at least 90 days, and the leasing
activity must otherwise conform to the
current leasing provisions of Regulation
Y. Finally, the Board proposes that bank
holding companies maintain separate
records for leasing transactions
conducted with reliance on higher
residual values.
Section 4(c)(8) Analysis
Section 4(c)(8) of the BHC Act allows
bank holding companies to engage in
nonbanking activities that the Board
determines are so closely related to
banking as to be a proper incident
thereto.
A. C losely re la te d to banking.
As
noted above, the Board has previously
determined that leasing tangible
personal property is an activity that is
closely related to banking where the
leases meet certain criteria including
requirements that the leases do not rely
on an estimated residual value in excess
of 20 percent of the acquisition cost of
the property, serve as the functional
equivalent of an extension of credit, and
are on a nonoperating basis. 12 CFR
225.25(b)(5). The question raised by this
proposal is whether leasing activities
conducted within these parameters,
except with reliance on a residual value
that exceeds 20 percent of the cost of the
property, are closely related to banking.
In National Courier Ass’n v. Board of
Governors, 516 F.2d 1229 (D.C. Cir. 1975),
the court suggested three alternative
guidelines for determining whether an
activity is closely related to banking:
1. Banks generally have in fact
provided the proposed services; or,
2. Banks generally provide services
that are operationally or functionally so
similar to the proposed services as to
equip them particularly well to provide
the proposed services; or,
3. Banks generally provide services
that are so integrally related to the
proposed services as to require their
provision in a specialized form.
The court provided these guidelines as
alternative justifications for determining
whether a particular activity met the
closely related to banking test, and
expressly held that the Board may also
consider other approaches.5
The Board requests public comment
on whether the activity being proposed
should be considered so closely related
to banking as to be a proper incident
thereto by the Board, and consequently
be made a permissible nonbanking
activity for bank holding companies. In
light of the fact that national banks and
many state banks are permitted to, and
do, conduct directly leasing activities of
the type being proposed here, the Board
believes that a reasonable basis exists
for determining that the proposed
leasing activities are closely related to
banking within the meaning of section
4(c)i8).
B. P roper in cident to banking. Section
4(c)(8) of the BHC Act states that, in
determining whether a proposed activity
is s proper incident to banking, the
Boa-d is required to consider whether
the performance of the activity by a
bank holding company affiliate "can
reasonably be expected tc produce
benefits to the public, such as greater
convenience, increased competition, or
gains in efficiency that outweigh
possible a d v erse e ffects, such as undue
concentration of resources, decreased or
unfair competit’on, conflicts of interest,
or unsound banking practices."
1. Public Benefits
The Senate Report accompanying
CEBA stated that relaxation of the
residual value limitation applicable to
leasing transactions was necessary to
allow national banks to compete more
effectively with thrifts6 and other
nonbank lessors, and respond to
customer demand for a broader range of
lease financing transactions. S. Rep. No.
19,100th Cong., 1st Sess. 43 (1987). The
5 See A la b a m a A s s 'n o f In su ra n c e A g e n ts v.
B o a r d o f G o v e rn o rs. 533 F.2d 224 (5th Cir. 1978)
6 Since 1982. savings associations have been
permilied to engage in leasing transactions with
reliance on a residual value of up to 70 percent. 12
CFR 545.78(b).
3
Board notes that the current residual
value limitation appears to constrain
bank holding companies from initiating
some types of equipment leases that are
arranged by their bank and nonbank
competitors. The Board requests public
comment on whether relaxing the
residual value requirement applied to
bank holding companies to the same
extent that this requirement has been
relaxed for national banks would allow
bank holding companies to compete
more equa)!v in these leasing
transactions. The Board also requests
comment on whether other public
benefits may be expected to result from
this proposal.
2. Adverse effects
At the time that the Board adopted its
regulations authorizing bank holding
companies to engage in leasing activities
in 1971, and again in 1976 when the
Board modified its regulations to permit
certain types of automobile leasing
activities, the Board focused on the
potential adverse effects that might be
associated with reliance by bank
holding companies on high residual
values in leasing transactions. In order
to address the concern that authorizing
leasing activities would encourage
speculation by bank holding companies
in personal property, the Board limited
the reliance bank holding companies
could place on residual value to a
maximum of 20 percent of the cost of the
leased property. The Board also
established a number of other
requirements designed to discourage
speculation in the residual value of
leased property, including limitations
that prevent bank holding companies
from maintaining an inventory of
property.
In ord er to a d d ress p oten tial a d v erse
effects that may result from reliance on
residual values in excess of 20 percent,
the Board proposes that bank holding
companies continue to abide by these
limitations in conducting leasing
transactions with higher residual value
reliance, including that: (1) Bank holding
companies will acquire property to be
leased only in connection with a specific
leasing transaction under consideration,
(2) bank holding companies will either
sell or re-lease the leased property
within two years of the expiration of the
initial lease, and (3) the leases are on a
non-operating basis. The Board also
proposes that leases arranged by bank
holding companies that rely cn higher
residual values have a minimum term of
at least 90 days. The Board requests
public comment on whether it is
appropriate in the context of higher
residua! value leasing to require a
minimum lease term longer than 90
days, such as, for example, one year.
In addition, the Board proposes to
adopt the volume limitation currently
imposed by statute on the higher
residual value leasing activities of
national banks. This would limit the
total volume of bank holding company
investments in leases with estimated
residual values in excess of 20 percent
of the acquisition cost of the leased
property to no more than 10 percent of
the bank holding company's total
consolidated assets. This quantitative
limitation is an aggregate limitation that
would apply to bank holding companies
on a consolidated basis. This limitation
would not in any way limit leasing
activities conducted directly by bank
subsidiaries of the bank holding
company. Without limiting the leasing
activities of banks, higher residual value
leasing activities conducted within a
bank subsidiary of the holding company
would be counted towards the volume
limitation in determining the amount of
higher residual value leasing activities
that may be conducted by the bank
holding company and its nonbank
affiliates. The proposed quantitative
limitation would not apply to leasing
transactions that are conducted under
the current provisions of Regulation Y in
which reliance on residual value is
limited to 20 percent of the acquisition
cost of the leased property. In addition,
these quantitative limitations would not
apply to companies advised by bank
holding company leasing subsidiaries.
The Board also proposes that bank
holding companies capitalize their
leasing subsidiaries to an extent
necessary to support fully this activity
and commensurate with industry
standards. Further, where applicable,
segregation of leasing records would be
required to distinguish a bank holding
company s leasing activities that rely on
existing provisions from those leasing
activities that rely on the expanded
residual value provisions of this
proposal. This would not represent a
new recordkeeping requirement, but
would be satisfied where a bank holding
company segregates the leasing records
normally maintained by the holding
company for ease of monitoring.
The Board requests public comment
regarding whether these criteria are
appropriate for addressing any potential
adverse effects that may be associated
with reliance by bank holding
companies on higher residual values in
leasing transactions. The Board also will
consider public comment on any other
aspect of this proposal.
Section-by-section Analysis
Section 225.25(b)(5)(i): The proposal
retains in full the existing leasing
provision of § 225.25(b)(5) redesignating
it as § 225.25(b)(5)(i). Thus, bank holding
companies may continue to enter into
leasing transactions that comply with
existing criteria without restriction as to
total volume. Section 225.25(b)(5)(h): The
proposed amendment adds
§ 225.25(b)|5)(ii) which authorizes bank
holding companies to lease tangible
personal property subject to the
limitations set forth in paragraph
(b)(5)(i) above except that the
companies may rely for their
compensation on residual values in
excess of 20 percent of the acquisition
cost of the property. This section would
also limit the total volume of these
leases, set a minimum lease term of 90
days, and require that records of a
holding company’s leasing activities
under this proposal be segregated from
records of the holding company’s leasing
activities under existing provisions.
Regulatory Flexibility Act Analysis
Pursuant to section 805(b) of the
Regulatory Flexibility Act (Pub. L. 96354, 5 U.S.C. 801 et seq.), the Board of
Governors of the Federal Reserve
System certifies that this notice of
proposed rulemaking, if adopted as a
final rule, will not have a significant
economic impact on a substantial
number of small entities that would be
subject to the regulation.
List of Subjects in 12 CFR Part 225
Administrative practice and
procedure, Appraisals, Banks, Banking,
Capital adequacy, Federal Reserve
System, Holding companies. Reporting
and recordkeeping requirements,
Securities, State member banks.
For the reasons set forth in this notice,
and pursuant to the Board’s authority
under section 5(b) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1844),
the Board proposes to amend 12 CFR
part 225 as follows:
PART 225— BANK HO LDING
COM PANIES AND CHANG E IN BANK
CO NTRO L
1. The authority citation for part 225
continues to read as follows:
4
Authority: 12 U S.C. 1817(j)(13), 1818,1831i,
1843(c)(8), 1844(b), 3106, 3108, 3907, and 3909.
2. In § 225.25, paragraph (b)(5) is
redesignated as paragraph (b)(5)(i);
paragraphs (b)(5) (i) through (vi) are
redesignated as paragraphs (b)(5)(i) (A)
through (F); and paragraphs (b)(5)(iv)
(A) through (D) are redesignated as
paragraphs (b)(5)(i)(D) (f) through (4 ).
3. In § 225.25, paragraph (b)(5) is
further amended by adding new
paragraph (b)(5)(ii) to read as follows:
§ 225.25 List of permissible nonbanking
activities.
(b) * * *
(5) * * *
(ii) L ea sin g tangible p e rs o n a l
property. Leasing tangible personal
property or acting as agent, broker, or
adviser in leasing such property where,
in calculating the return described in
paragraph (b)(5)(i)(D), the lessor relies
on rental payments, estimated tax
benefits (as described in paragraph
(b)(5)(i)(D)(2)), and an estimated
residual value of the property at the
expiration of the initial term of the lease
that exceeds 20 percent, but in no event
exceeds 1 percent, of the acquisition
cost of the property to the lessor, if—
(A) The activity otherwise meets the
requirements of paragraph (b)(5)(i);
(B) The aggregate amount of leases in
which the bank holding company, or any
of its bank or nonbank subsidiaries,
relies on an estimated residual value in
excess of 20 percent of the acquisition
cost of the property is limited to no more
than 10 percent of the bank holding
company’s total consolidated assets:
(C) The minimum initial lease term is
90 days;
(D) The bank holding company's
leasing affiliate maintains capitalization
fully adequate to meet its obligations
and support its activities, and
commensurate with industry standards
for comparable leasing activities; and
(E) The bank holding company
maintains separately identifiable
records of the leasing activities
conducted under paragraphs (b)(5)(i)
and (b)(5)(h) where it conducts leasing
activities under the authority of both
paragraphs.
Board of Governors of the Federal Reserve
System, May 25,1990.
William W. Wiles,
Secretary of the Board.
[FR Doc. 90-12658 Filed 5-31-90: 8:45 am]
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