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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10543
June 9, 1992
"I
REGULATIONS O AND Y AM ENDM ENTS
— Lending Lim its and Reporting Requirements
on Loans to Insiders
— Expansion of Permissible Leasing Activities
of Bank Holding Companies
To All State-Chartered Banks, and Bank Holding Companies,
in the Second Federal Reserve District, and Others Concerned:
The Board of Governors of the Federal Reserve System has adopted amendments to its Reg
ulations O and Y to implement the requirements of the Federal Deposit Insurance Corporation
Improvement Act of 1991 with regard to loans to bank and bank holding company insiders. Note,
as explained below, that the effective date of these amendments, as published in the F e d e r a l R e g is te r
of May 19, was incorrect; the effective date for those amendments is M a y 1 8 , 1 9 9 2 . In addition
the Board has amended Regulation Y, effective May 14, 1992, to expand the leasing activities per
missible to bank holding companies to include non-full-payout leasing.
The following statements were issued by the Board in announcing the amendments and the
F e d e r a l R e g is te r correction:
Loans to Insiders
The Federal Reserve Board has announced approval of amendments to Regulation O (Loans to Ex
ecutive Officers, Directors, and Principal Shareholders of Member Banks) to implement the require
ments of section 306 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
The most significant changes are:
• a new aggregate lending limit applicable to all of a bank’s insiders; and
• the extension of an existing Regulation O lending limit on loans to directors and their related in
terests.
In connection with the implementation of the general aggregate insider lending limit, the Board
has determined to exercise its discretion under FDICIA to permit banks with deposits of less than $100
million to establish a higher limit up to a maximum of two times the bank’s unimpaired capital and un
impaired surplus.
The higher aggregate limit will be effective for a one-year period during which the Board, in con
sultation with the other Federal banking agencies, will collect specific data on bank lending to insiders,
including directors, in order to analyze the effect of a limitation on the ability of banks to attract directors
and to serve the credit needs of local communities.
The Board also announced approval of an amendment to Regulation Y (Bank Holding Companies
and Change in Bank Control) to implement a credit reporting requirement created by FDICIA that applies
to executive officers and directors of certain bank holding companies.
(OVER)
Correction of Effective Date
The amendments to Regulation O and Y that the Board adopted to implement the requirements of
section 306 of the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) are effective
as of May 18, 1992.
The Board took this action in light of the fact that the requirements of section 306 of the FDICIA
became effective on that date. The Board has issued a notice to correct the effective date of the final
rule published in the Tuesday, May 19, 1992, issue of the F ederal R egister.
The original F ederal R e g ister notice contained an effective date of June 18, 1992, which was in
error.
Leasing Activities
The Federal Reserve Board has announced approval of amendments to Regulation Y (Bank Holding
Companies and Change in Bank Control) to expand the leasing activities that are generally permissible
for bank holding companies to include non-full-payout leasing.
The amendments 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, subject to certain conditions, including volume limitations.
These transactions remain subject to the prudential limitations previously set forth in Regulation Y.
Enclosed is a copy of the text of (1) the corrected amendments to Regulations O and Y,
effective May 18, 1992, revising the lending limits on insider loans, and (2) the amendments to
Regulation Y, effective May 14, 1992, expanding leasing activities generally permissible to bank
holding companies.
Questions regarding the insider lending amendments may be directed to our Domestic Banking
Department (Tel. No. 212-720-6611); questions regarding the leasing activity amendments may be
directed to our Domestic Banking Applications Division (Tel. No. 212-720-5861).
E. G erald C o rr ig a n ,
P r e s id e n t.
Board of Governors of the Federal Reserve System
AM ENDM ENTS TO REGULATION Y
Leasing Activities Permissible to Bank Holding Companies
E ffe c tiv e M a y 1 4 , 1 9 9 2
benefits, and the estimated residual
value of the property at the expiration of
the initial term of the lease. In
calculating this yield, the existing
regulation limits reliance on estimated
residual values to a maximum of 20
percent of the acquisition cost of the
property. In the case of a personal
property lease of no more than seven
years in duration, bank holding
FOR FURTHER INFORMATION CONTACT:
companies may rely on an additional
Scott G. Alvarez, Associate General
amount, up to 60 percent of the
Counsel (202/452-3583), Thomas M.
property’s acquisition cost, if the
Corsi, Senior Attorney (202/452-3275)
residual value is guaranteed by the
Donna R. Nordenberg, Attorney (202/
lessee or a third party.
452-3281), Legal Division: Molly S.
In 1987, section 108 of CEBA amended
Wassom, Manager, Applications Issues the National Bank Act to authorize
(202/452-2305), or Theresa A. Claffey.
national banks specifically to lease
Supervisory Financial Analyst (202/4522964), Division of Banking Supervision tangible personal property so long as the
and Regulation, Board of Governors of leases are on a "net lease basis" and
represent, in the aggregate, no more than
the Federal Reserve System. For the
10 percent of the bank’s assets.12 The
hearing impaired only,
Telecommunication Device for the Deaf legislative history indicates that this
(TDD). Dorothea Thompson (202/452- amendment w78as intended to permit the
Office of the Comptroller of the
3544).
Currency (OCC) to relax or eliminate, in
a manner consistent with sound banking
SUPPLEMENTARY INFORMATION:
practices, the residual value limitation
Background
in the OCC’s existing regulations
Since 1971, bank holding companies authorizing personal property leasing
have been permitted to engage in leasing activities by national banks *.3 The
legislative history of section 108 also
personal or real property where the
lease is the functional equivalent of an indicates that the section is not intended
to allow national banks to engage in the
extension of credit (so-called "fullpayout leasing”). Under Regulation Y.
full-payout leases must be on a
1 12 CFR 225.25(b)(5). The nonoperating condition
nonoperating basis and only upon the
the re sponsibilities for the leased property's
order of customers.1 In addition, at the places
care an d m ain ten an ce upon the custom er. In such
inception of the initial lease, the effect lease arrangem ents, the lessor m ay not provide or
pay for o p e ra tio n a l services such as repair and
of the transaction must yield a return
that will compensate the bank holding insurance.
* See 12 U.S.C. 24 (Tenth). T he OCC has
company for its full leasing costs
Interpreted the term “net lease b a sis" to m ean that
(including the total cost of financing the the lease m ust be on a nonoperating basis.
property) through rentals, estimated tax 8 S. Rep. No. 19. 100th Cong.. 1st Sess. 43 (1987).
engage in full-payout leasing
transactions by permitting bank holding
companies to engage in these
[Regulation Y; Docket No. R-0694J
transactions and rely for compensation
RIN 7100-AB12
of their full leasing costs, at the
Bank H olding C o m p an ie s a n d C h an g e inception of the initial lease, on
estimated residual values for the leased
in Bank C ontrol L easing P erso n al
property of up to 25 percent of the
P ro p e rty
acquisition cost of the property.
AGENCY: Board of Governors of the
EFFECTIVE DATE: May 14. 1992.
Federal Reserve System.
FEDERAL RESERVE SYSTEM
12 CFR P art 225
ACTION:
Final rule.
The Board is amending
Regulation Y to expand the leasing
activities that are generally permissible
for bank holding companies. The rule
allows bank holding companies to enter
into leasing transactions in which the
companies may rely for compensation of
their full leasing costs, at the inception
of the initial lease, on estimated residual
values for the leased property of up to
100 percent of the acquisition cost of the
property, subject to certain conditions
(so-called “higher residual value
leasing"). The Board has by order
previously permitted bank holding
companies to engage in higher residual
value leasing. The final rule requires
that higher residual value leasing
transactions conform to the current
leasing provision in Regulation Y except
with respect to the residual value
reliance limitation. The final rule
contains additional requirements
applicable only to the expanded leasing
activity. These requirements include a
limit on the volume of such leasing
transactions similar to the limitation
placed on the leasing activities of
national banks under section 108 of the
Competitive Equality Banking Act
(CEBA), amending the National Bank
Act.
The final rule also alters the existing
authority for a bank holding company to
SUMMARY:
PRINTED IN NEW YORK, FROM FED ERAL REGISTER, VOL. 57, NO. 96, pp. 20958-62
[Enc. Cir. No. 10543]
Cu\. A I
streamlined procedures contained in
Regulation Y for obtaining review of
these proposals. Following review of the
comments received, the Board has
determined to adopt its amendment
substantially as proposed.
Several modifications, discussed
below, have been made to the proposal
to address matters raised by the
comments. The final rule adopted by the
Board adds the activity of conducting
higher residual value leasing of tangible
personal property to the regulatory list
of permissible nonbanking activities for
bank holding companies. This activity
will be permitted within certain
prudential limitations. In particular, the
rule provides that higher residual value
lease transactions will remain subject to
the current provisions of Regulation Y
applicable to full-payout leasing
activities (other than the residual value
limitations applicable to full-payout
leasing), including that: (1) Bank holding
companies may acquire property to be
leased only in connection with a specific
leasing transaction under consideration,
( 2 ) bank holding companies must either
sell or release the leased property
within two years of the expiration of the
initial lease, and (3) the leases must be
on a non-operating basis.
The Board also has determined to
Rule Adopted by the Board
adopt certain restrictions that would
The Board has sought public comment apply only to the expanded leasing
activities. First, the higher residual value
on a proposal to add higher residual
value leasing activities to its regulatory leases arranged by bank holding
companies must have a minimum lease
list of activities permissible for bank
holding companies. 55 FR 22348, June 1, term of at ldast 90 days. Second,
consistent with the limit imposed by
1990; 55 FR 23446, June 8,1990. This
amendment would permit bank holding CEBA on national banks, the total
volume of bank holding company
companies seeking to conduct this
investments in higher residual value
activity to take advantage of the
leases must be limited to no more than
10 percent of the bank holding
* H.R. Conf. Rep. No. 2 6 1 .100th Cong., 1st Sess.
company’s total consolidated assets.
143 (1987).
Third, bank holding companies must
5 Prom pted by the e x p an d ed authority of section
108. the OCC recently am en d ed its regulation on
capitalize their leasing subsidiaries
le a se financing tra n sac tio n s of n atio n al b an k s. 56
commensurate with industry standards
FR 28314. June 20,1991 (to be codified a t 12 CFR
and to an extent necessary to support
p art 23).
fully the expanded leasing activity.
6 T hese sta te s include C alifornia, Florida,
M aryland, M ichigan, Illinois, a n d Indiana.
Fourth, bank holding companies must
7 Security Pacific C orporation. 76 Federal R eserve maintain records regarding their higher
Bulletin 462 (1990) ("Security Pacific").
residual value leasing activities that are
8 Security Pacific com m itted to limit the total
separate from their records for fullam ount of its in v estm en t in leases w ith e stim ated
payout leasing transactions. These
resid u al values in e x ce ss of 25 p ercen t o f the
acquisition cost of the le a se d property to no m ore
limitations are consistent with the
than 10 p ercen t of the holding com pany’s total
limitations adopted by the OCC for
co n so lid ated a sse ts. In addition, Security Pacific
higher residual value leasing activities
com m itted to limit the total am ount of its
investm ent in leases w ith estim ated resid u al values of national banks.
daily or short-term equipment or
automobile rental business.456
Based 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.3 A number of states also have
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.9
The Board previously has determined
by order that the activity of higher
residual value leasing of tangible
personal property is closely related to
banking and a proper incident to
banking for purposes of section 4(c)(8) of
the Bank Holding Company Act.7 In that
case, Security Pacific committed that it
would limit the volume of its higher
residual value leasing transactions, and
that the higher residual value leases
would have a minimum term of one
year.8 Security Pacific also committed to
conform its higher residual value leasing
activities to the existing restrictions
imposed by the Board on full-payout
leasing. Since the Security Pacific
decision, several other bank holding
companies have received approval from
the Board to engage in the same leasing
activity subject to identical conditions.9
in ex cess of 70 p ercen t of the acquisition cost of the
leased property to the lesser of: 0.5 p ercen t of the
holding com pany's to tal co n so lid ated a sse ts o r 10
p ercen t of th e holding co m pany's to tal co n so lid ated
sh areh o ld e rs' equity.
9 T he Fuji Bank. Limited, 77 Federal R eserve
Bulletin 490 (1991); The S an w a Bank, Limited. 77
Federal R eserve B ulletin 187 (1991), Dai-Ichi K angvo
Bank. Limited. 76 F ederal R eserve Bulletin 960
(1990).
P u b lic C o m m en ts
The Board received 22 public
comments regarding this proposal. All
except one of the commenters supported
the Board’s proposal allowing bank
holding companies to engage in higher
residual value leasing of tangible
2
d.
personal property. Several commenters
recommended certain modifications to
the restrictions proposed by the Board.
A u th o rity fo r A c tiv ity
Commenters in favor of the proposal
supported the Board’s determination in
Security Pacific that the activity of
higher residual value leasing is closely
related to banking for purposes of
section 4(c)(8) of the Bank Holding
Company Act. Commenters stated that
the activity is permissible for national
banks under the National Bank Act and
is permissible for state banks under
various state laws. Commenters also
argued that higher residual value leasing
activities are functionally similar to
other leasing activities conducted by
banking organizations.10*
Most of the commenters also argued
that these activities are a proper
incident to banking for purposes of
section 4(c)(8) of the Bank Holding
Company Act. In particular, commenters
maintained that the expanded leasing
authority is necessary in order for bank
holding companies to compete
effectively with other lessors and to
better serve the needs of their
customers.
R isk o f A c tiv ity
The commenter opposing the proposal
contended that financial institutions
have shown a willingness to rely on
unrealistic and excessive residual value
forecasts and that it would be prudent to
retain existing limitations on residual
value reliance. This commenter argued
that a relaxation of residual value
limitations will increase the riskiness of
financial institutions’ leasing activities.
This comment suggested that leasing
activities that rely on limited residual
values are less risky than leasing
activities with a greater reliance on
residual values because of uncertainties
in predicting residual values. A study by
Board staff, however, suggests that
limitations on the ability of bank holding
companies to rely on residual value may
not reduce the riskiness of the leasing
activities of bank holding companies.11
The leasing activities of bank holding
company leasing subsidiaries appear to
be less profitable and have higher
charge-off and past due rates than
leases made by companies and banks
that have greater flexibility to rely on
residual values. This might result from
the fact that, while bank holding
10 See Notional Courier A ss'n v. Board o f
Governors. 516 F.2d 1229 (D.C. Cir. 1975).
11 See Residual Value Regulation and the
Performance of Bank Holding Company Leasing
Subsidiaries, Jim Burke and Nellie Liang.
ic S
company leases currently are not
subject to significant risk from
miscalculation of residual values, leases
by bank holding companies are subject
to a greater degree of credit risk.
Permitting greater reliance on residual
values increases the possibility that
bank holding companies may
miscalculate residual values. However,
companies not associated with bank
holding companies appear to be able to
estimate residual values reasonably
successfully and there is no indication
that bank holding companies do not
have, or could not develop, the same
expertise. In addition, generally
accepted accounting principles require
that assumed residual values be
reviewed and adjusted annually. These
values and compliance with GAAP
would be subject to annual review by
the external auditors for the holding
company, and in bank holding company
examinations. A lease could be subject
to criticism or classification to the
extent that the holding company relies
on over-estimated residual values to
achieve full compensation for the costs
of the lease. Finally, the Board’s
proposal includes an aggregate limit on
the amount of higher residual value
leasing transactions that a bank holding
company may conduct.
comments, the Board has also amended
its final rule to permit bank holding
companies to hold originally conforming
leases acquired from other lessors
where the term remaining on the lease is
less than 90 days.14
V olum e L im ita tio n
The Board’s original proposal limited
the aggregate volume of a bank holding
company’s higher residual value leasing
activity to a maximum of 10 percent of
the bank holding company’s
consolidated assets. This limitation is
analogous to the 10 percent of assets
limitation contained in CEBA and
adopted by the OCC for national banks.
Several commenters suggested that the
Board not impose any limit on the level
of this activity. Other commenters,
however, suggested that, in light of the
risks associated with this activity, the
Board consider imposing a lower
aggregate limit based on the capital
level of the bank holding company.
The Board believes that adopting an
asset-based limit analogous to the
statutory limit in CEBA and the limit
adopted by the OCC is an appropriate
way to limit the potential risks
associated with higher residual value
leasing until such time as holding
companies and the Board have gained
additional experience with the activity.
M inim um L ea se Term R eq u irem e n t
On the other hand, the Board has
Five public commenters argued that
determined not to adopt a lower limit at
the Board should not impose a
this time because establishing a lower
requirement that the initial lease term be limit for bank holding companies, either
for a minimum of 90 days. The Board’s
in relation to assets or capital, could
current rule for full-payout leasing
encourage banks to conduct this activity
transactions does not contain a
directly in order to avoid a lower limit
minimum duration requirement.
on the holding company’s activity.*13*
However, the combination of the
existing limitations on residual value
*• S everal com m enters re q u e ste d th a t the B oard
and the requirement that the bank
not apply the 90-day m inim um lease term
holding company project full
req u irem ent to le a se s th a t a re e n te re d into a t the
compensation for the transaction based conclusion of the initial le a se term a n d prior to the
on the initial lease effectively eliminate d isp o sition of the le a se d p roperty b y the ban k
the possibility of very short-term leases. holding com pany or to le a se s th a t have been
term in a te d p rio r to m aturity by the lessee. T he
Short-term and daily leases became a
B o ard 's current ru les regarding leasing tra n sac tio n s
possibility once the limitation on
req u ire th a t a b a n k holding com pany eith e r dispose
of le a se d property or re-lease the property in an
residual value is relaxed.
a u th o rized leasing tra n sac tio n w ithin tw o y e ars of
The legislative history of CEBA
term in atio n of the initial le a se (subject to
indicates that Congress intended not to pthoessib
le ex te n sio n s of this tim e by the Board). 12
permit national banks to engage in
CFR 225.25(b)(5) n.8. It has been the B oard's policy
short-term leasing transactions. For that to perm it ban k holding com panies to m axim ize the
reason, the OCC has restricted national valu e of this off-lease pro p erty during this
iv estitu re period, including by perm itting sh o rt
banks from engaging in higher residual dterm
leases o f the property, provided th a t th e bank
value leasing transactions with a
holding com pany conform s w ith the requirem ent
duration of less than 90 days.
th a t the property e ither be liquidated o r re-leased in
a conform ing le a se w ithin the tw o -y e a r period. T he
Commenters have not suggested an
B oard's final rule h a s been am ended to s ta te this
alternative method for implementing a
expressly.
duration requirement other than to leave policy
13 T he OCC applies the lending lim its applicable
a determination regarding duration to
to n atio n al bank lending to leases arran g ed by
the discretion of each bank holding
n a tio n a l b a n k s b e ca u se these leases a re view ed as
company. Accordingly, in this final rule the functional equ iv alen t of an ex ten sio n of credit.
holding com panies a re not su b ject to sim ilar
the Board is adopting a minimum lease Bank
lim its on th eir lending activ ities and the B oard h a s
term requirement similar to that adopted not im posed a sim ilar limit on the full-payout
by the OCC. In response to several
leasing activities o,f b a n k holding com panies.
3
'O
Three commenters requested that the
Board clarify the proposed volume
limitation for higher residual value
leases as it applies to domestic banks
with foreign assets and to foreign banks.
In particular, these commenters
requested clarification that the volume
limitation is tied to a banking
organization’s total worldwide assets.
The final rule clarifies that the aggregate
limit is based on total domestic and
foreign assets of the organization. This
clarification is consistent with the
Board’s orders approving higher residual
value leasing activities for foreign
banking organizations, and with the
instructions on the periodic Reports of
Condition.
In calculating whether an organization
has reached its aggregate limit, the
proposal also clarifies that all higher
residual value leasing transactions
conducted within domestic bank
subsidiaries of the bank holding
company as well as within certain
nonbank subsidiaries must be included
within the aggregate amount of higher
residual value leasing activities
conducted by the bank holding
company. This method of calculation
takes into account the possibility that
banks owned by a holding company
may engage in higher residual value
leasing transactions up to a percentage
of the bank’s assets, and avoids the
possibility of double counting the bank’s
assets in the holding company limit
without taking account of its leasing
transactions. This method of calculation
does not impose any limit on the amount
of higher residual value leasing
conducted directly by banks owned by a
bank holding company. It does,
however, have the effect of limiting-the
amount of higher residual value leasing
transactions that a bank holding
company or its nonbank subsidiary may
conduct if these activities are
simultaneously conducted within a bank
affiliate. The final rule also clarifies that
traditional full-payout leasing
transactions, and leasing transactions
conducted by domestic and foreign bank
holding companies under other leasing
authority, including leasing activities
outside the United States, are not
subject to the aggregate limit14
Accordingly, this proposal does not establish such
limits on individual leases made by bank holding
companies.
14 The volume limitation would not apply to
companies advised by leasing subsidiaries of bank
holding companies, nor would it apply to lease
brokerage transactions entered into by these leasing
subsidiaries.
(m
C a p ita l L e v e l o f L easin g A ffilia te
Two commenters objected to the
proposed requirement that a company
that conducts higher residual value
leasing activities be capitalized in
accordance with industry levels. These
commenters maintained that the only
relevant capital requirements in
connection with this activity should be
the capital standards for the subsidiary
banks or the bank holding company on a
consolidated basis.
The Board’s capital adequacy
guidelines provide that all nonbanking
subsidiaries of a bank holding company
“should maintain levels of capital
consistent with levels that have been
established by industry norms or
standards” unless the Boafd establishes
a different standard.18 The industry
norms for equipment leasing appear to
be generally higher than the capital
levels for bank holding companies.*16
The Board believes that it is appropriate
to expect holding company affiliates
engaged in higher residual value leasing
to maintain capital levels that reflect the
higher risk of this activity as reflected in
the market.
Finally, two commenters contended
that the Board should not require bank
holding companies that already have
authority to engage in full-payout
leasing to seek additional Board
approval to engage in higher residual
value leasing. On the other hand, one
commenter suggested that the Board
should require formal and separate
applications to conduct this activity
because of the added risk of this
activity.
Because higher residual value leasing
transactions involve more risk than
other leasing transactions, the Board
believes it is appropriate to require bank
holding companies to seek approval to
engage in these transactions in order to
assess properly each company’s ability
to assume this additional risk. Because
this activity is being added to the
Board’s regulatory list of permissible
activities, bank holding companies
seeking to conduct this activity would
be able to take advantage of the
streamlined notice procedures in the
regulation.
C om m ents R egardin g B oard's Current
Full-Payout L easin g P ro visio n s
Five commenters recommended that
the Board conform its provisions
governing more traditional full-payout
leasing activities to the OCC’s residual
^alue limitation for full-paycut leases.
,s 12 CFR p art 225 ap p en d ix B (1991).
16 See A m erican A sso ciatio n of Equipm ent
.esso rs. The A nnual Survey of Industry A ctivity
1991).
The OCC permits reliance on up to 25
percent of the property's acquisition cost
for traditional leasing transactions
rather than the 20 percent residual value
limit established under the Board’s
current provision.17 The commenters
argued that modifying this provision to
match the OCC’s rules will increase the
competitiveness of bank holding
company lessors and will avoid the
burden that results from imposing
different requirements on national
banks and their nonbank affiliates.
In light of the benefits of reduced
burden, the increased competitiveness
from adopting a uniform rule for leasing
transactions, and the fact that the OCC
has not identified any significant
increased risk from permitting reliance
on this somewhat higher level of
residual values, the Board has adopted
this suggestion. This amendment applies
to full-payout leasing activities involving
personal property as well as full-payout
leasing of real estate, as otherwise
permitted under the Board’s Regulation
Y. Bank holding companies that are
currently authorized to conduct fullpayout leasing activities pursuant to
section 4(c)(8) of the Bank Holding
Company Act are not required to seek
additional Board approval to conduct
full-payout leasing transactions that rely
on residual values up to 25 percent of
the acquisition cost of the property,
provided that these activities are
conducted within the other limitations in
the Board’s Regulation Y and any other
conditions imposed on the individual
bank holding company by order.
.
/O S -/3
on bank holding companies than are
currently applicable.
Effective Date
The provisions of 5 U.S.C. 553(d)
generally prescribing 30 days’ prior
notice of the effective date of a rule
have not been followed in connection
with the adoption of this amendment
because adoption of the rule reduces a
regulatory burden. Section 553(d) grants
a specific exemption from its deferred
effective date requirements in these
instances.
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 the
preamble, and pursuant to the Board’s
authority under section 5(b) of the Bank
Holding Company Act of 1956, as
amended (12 U.S.C. 1844(b)), the Piard
amends 12 CFR part 225 as follows;
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
1. The authority citation for part 225
continues to read as follows:
A u t h o r i t y : 12 U.S.C. 1817(j)(13), 1 8 1 8 ,1831i,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3907.
3909,3310, and 3331-3351.
2. In § 225.25, footnotes 7 through 14
are redesignated as 8 through 15,
respectively. Paragraphs (b)(5) heading
Final Regulatory Flexibility Act
and introductory text, (b)(5)(i) through
Analysis
(iii), (b)(5)(iv) introductory text, (b)(5)(iv)
Pursuant to section 605(b) of the
(A) through (D), and (b)(5)(v) and (vi)
Regulatory Flexibility Act (Pub. L. 9&are redesignated as (b)(5)(i) heading and
354; 5 U.S.C. 601 e t seq.), the Board of
introductory text, (b)(5)(i)(A) through
Governors of the Federal Reserve
(C). (b)(5)(i)(D), (b)(5)(i)(D)(J) through
System certifies that the amendment
(4), and (b)(5) (E) and (F), respectively.
will not have a significant economic
The heading for paragraph (b)(5) is
impact on a substantial number of small added. Newly designated paragraphs
entities that would be subject to the
(b)(5)(i) introductory text, (b)(5)(i)(D)
regulation.
introductory text, (b)(5)(i)(D)(5), and
This amendment will add to the list of (b)(5)(i)(F) are revised, and paragraph
permissible bank holding company
(b)(5)(ii) is added to read as follows:
activities in the Board’s Regulation Y, an
§ 225.25 List o f permissible nonbanking
activity that has been previously
activities.
approved for bank holding companies
*
*
*
*
*
by Board order-. This addition will have
(b) * * *
the effect of reducing the burden on
(5)
Leasing—(i) Leasing personal or
bank holding companies, including small
real property. Leasing personal or real
bank holding companies, that wish to
property or acting as agent, broker, or
conduct these activities by simplifying
adviser in leasing such property if—
and streamlining the regulatory review
(A) * * *
procesg. The amendment does not
impose more burdensome requirements
(B) * * *
(C) * * *
17 C om pare 12 CFR 225.25(b)(5) w ith 12 CFR p art
(D) At the inception of the initial lease
23 (1991).
the effect of the transaction (and, with
4
Cu>. / 05^3
respect to governmental entities only,
reasonably anticipated future
transactions4) will yield a return that
will compensate the lessor for not less
than the lessor’s full investment in the
property plus the estimated total cost
of financing the property over the term
of the lease,5 from —
* * * * *
(3) the estimated residual value of
the property at the expiration
of the initial term of the lease,
which in no case shall exceed
25 percent of the acquisition
cost of the property to the
lessor; and
* * * * *
(F)
At the expiration of the lease
(including any renewals or extensions
with the same lessee), all interest in the
property shall be either liquidated or
released on a nonoperating basis as
soon as practicable but in no event later
than two years from the expiration of
the lease;6 however, in no case shall the
4 The Board understands that some federal,
state, and local governmental entities may not enter
into a lease for a period in excess of one year. Such
an im pedim ent does not prohibit a com pany
authorized to conduct leasing activities under this
paragraph from entering into a lease w ith such
governmental entities if the com pany reasonably
anticipates that the governmental entities w ill
renew the lease annually until such time as the
com pany is fully compensated for its investment
in the leased property plus its costs of financing
the property. Further, a com pany authorized to
conduct personal property leasing activities under
this paragraph may also engage in so-called
“bridge” lease financing of personal property, but
not real property, if the lease is short-term pending
completion of long-term financing, by the same or
another lender.
5 The estimate by the lessor of the total cost of
financing the property over the term of the lease
should reflect, among other factors, the term of the
lease, the modes of financing available to the
lessor, the credit rating of the lessor and/or the
lessee, if a factor in the financing, and prevailing
rates in the money and capital markets.
6 In the event of a default on, or early
term ination of, a lease agreement prior to the
lessor retain any interest in the
property beyond 50 years after its
acquisition of the property.
subclause (1) of this section, the bank
holding company shall include all
tangible personal property held for
lease in transactions in which the bank
(ii)
Certain Higher Residual Value holding company or any of its nonbank
Leasing. Leasing tangible personal
subsidiaries acting under authority of
property or acting as agent, broker, or this paragraph, or any domestic
adviser in leasing such property, in
subsidiary bank of such holding
which the lessor relies on an estimated company, relies on an estimated
residual value of the property in excess residual value in excess of 25 percent
of the 25 percent limitation described of the acquisition cost of the property;
in paragraph (b) (5) (i) (D) (3) of this
section, if —
(D) The initial term of the lease is at
least 90 days7;
(A) The activity otherwise meets the
requirements of paragraph (b) (5) (i); of
(E) Each company that conducts
this section;
leasing transactions under paragraph
(b) (5) (ii) of this section maintains
(B) The lessor in no case relies on an capitalization fully adequate to meet its
estimated residual value of the property obligations and support its activities,
in excess of 100 percent of the
and commensurate with industry
acquisition cost of the property to the standards for companies engaged in
lessor;
comparable leasing activities; and
(C) (1) The aggregate book value of
all personal property described in
paragraph (b) (5) (ii) (C) (2) of this
section does not exceed 10 percent of
the bank holding company’s
consolidated domestic and foreign
assets;
(F) The bank holding company
maintains separately identifiable
records of the leasing activities
conducted under paragraphs (b) (5) (i)
and (ii) of this section, where it
conducts leasing activities under the
authority of both paragraphs (b) (5) (i)
and (ii) of this section.
(2) For purposes of calculating the
Board of Governors of the Federal
limit provided in paragraph (b) (ii) (C) Reserve System, May 8, 1992.
expiration of the lease term, the lessor shall either
re-lease the property, subject to all the conditions
of this paragraph, or liquidate the property as soon
as practicable but in no event later than two years
from the date of default on the lease agreement (in
the event of a default) or term ination of the lease
(in the event of termination), or such additional
time as the Board may perm it under § 225.22(c)(1)
of this part, as if the property were DPC property.
During the period following default on, or
expiration or term ination of a lease, the lessor may
lease the property on a short-term basis in a lease
that does not conform to the requirements of this
paragraph provided that the property is liquidated
or re-leased in a conforming lease prior to the
expiration of this period.
Jennifer J. Johnson
Associate Secretary of the Board
[FR Doc. 92-13560 Filed 5-15-82: 8:35 em)
BilUHO, COOf 6ro -# 1 ^U
7
This m inim um lease term requirement is not
intended to prohibit a bank holding company from
acquiring personal property subject to an existing
lease w ith a remaining m aturity of less than 90
days, provided that, at the inception of the lease,
such lease conformed w ith all of the requirements
of this paragraph.
Thursday
May 28, 1992
Vol. 57, No. 103
Pp. 22417-26
Amendments to Regulations O and Y
Docket No. R-0747
To implement the requirements of Section
306 of the Federal Deposit Insurance
Corporation Improvement Act
Effective M ay 18, 1992
[ E n c . C ir . N o . 1 0 5 4 3 ]
(M .
FEDERAL RESERVE SYSTEM
T2 CFR P a rt* 3 1 5 a n d 225
[Regulations 0 and Y; Docket No. R-0747]
L o a n s t o E x ec u tiv e O fficers, D irecto rs,
a n d Principal S h a re h o ld e rs o f M em ber
B anks; B ank H olding C o m p an ie s a n d
C h a n g e in B ank C on tro l; C h a n g e of
E ffective D ate a n d R e p u b ttc atio n o f
Rule
AGENCY: Board of Governors of the
Federal Reserve System.
a c t i o n : Change of effective date and
republication of rule.
SUMMARY? This document contains a
change to the effective date and
repubUcatioa of a final rule that was
published in the issue of Tuesday. May
19.1992 {57 FR 21199). The final rule
implements revisions to the Board’s
Regulations O and Y requited by section
306 of the Federal Deposit Insurance
Corporation Improvement Act of 1991
(FDICIA). The effective date as
published in the Federal Register was
June IS. 1992. in order to permit small
banks to take immediate advantage of
authority contained in Regulation O to
establish an aggregate insider lending
limit at a higher level than that provided
in section 306 of FDICIA. the Board has
determined that the final rule is effective
as of May 18.1992.
e f f e c t iv e d a t e : The final rule is
effective as of May IS, 1992.
FOR FURTHER INFORMATION CONTACT:
Andrew Karp. Attorney (202/452-3554).
Legal Division. Board of Governors of
the Federal Reserve System. For the
hearing impaired only,
Telecommunications Device for the Deaf
(HMD). Dorothea Thompson (202/4523554k Board of Governors of the Federal
Reserve System. 20th and C Streets.
NW., Washington. DC 20551.
SUPPLEMENT ARY INFORMATION:
Change o f E ffective Date and
R epublication o f Final Rule
On April 22.1992, the Board adopted
amendments to Regulations O and Y to
implement the requirements of section
306 of the Federal Deposit Insurance
Corporation Improvement Act (FDICIA).
The statutory requirements were
effective May 18,1992. Pursuant to
section 306(n) of FDICIA, however, the
section 306 requirements do not affect
the validity of any extension of credit
lawfully entered into on or before the
effective date of the statutory
amendments- Therefore, the
requirements apply to all extensions of
credit entered into May 19.1992. or
thereafter and all such extensions of
credit must comply with the
requirements of the statute, including
the aggregate insider lending limit and
the tending limit applicable to loans to
directors and their related interests.
In connection with the implementation
of the general aggregate insider lending
limit the Board exercised its discretion
under FDICIA to revise Regulation O to
permit banks with deposits of less than
$100 million to establish a higher limit
up to a maximum of two times the
bank's unimpaired capital and
unimpaired surplus. By press release
dated May 7,1992, and by notice
published in the Tuesday May 19,1992,
issue of the Federal Register, the Board
stated that the revisions to Regulations
O and Y were to be effective mid-June
1992. In order to permit banks with
deposits of less than $100 million to take
immediate advantage of the regulatory
authorization of a higher limit, the
amendments to Regulations O and Y
implementing section 306 of FDICIA are
effective on May 18,1992, not mid-June
1992, as previously published.
Accordingly, this document changes the
effective date of the final rule published
May 19,1992 in the Federal Register.
Under the Administrative Procedure
Act (APA), a final agency rule generally
becomes effective no sooner than 30
days following publication of the final
rule in the Federal Register. 5 U.S.C.
553(d). The APA provides that an
agency may dispense with the 30 day
waiting period if the final rule grants or
recognizes an exemption or relieves a
restriction, or if the agency finds for
good cause that it may dispense with the
30 day waiting period and publishes that
finding in the final rule. Id. Courts have
interpreted the good cause language to
require that the agency find that a delay
in the final rule’s effective date would
be contrary to an important public
interest. See, e.g., B ritish A m erica n
C o m m o d ity O p tio n s Corp. v. B agley, 552
F.2d 482 (2d. Cir. 1980).
The Board believes that dispensing
with the 30 day waiting period is
appropriate in this instance. First, the
rule relieves a restriction imposed by
section 306 of FDICIA. Under section
306, a member bank may not lend to an
insider if the extension of credit, when
aggregated writh all of the banks’s
outstanding extensions of credit to its
insiders, would exceed 100 percent of
the bank’s unimpaired capital and
unimpaired surplus. FDICIA provides
the Board discretion to permit banks
with deposits of less than $100 million to
establish a higher aggregate insider
lending limit not to exceed two limes a
2
h tb .
bank’s unimpaired capital and
unimpaired surplus. The final rule
relieves a statutory restriction by
permitting banks with deposits of less
than $100 million to establish such
higher limits under certain conditions.
Second, the Board believes there is
good cause to make the final rule
effective as of May 18,1992, As noted,
the statutory provisions that the final
rule implements became effective May
18,1992. The Board believes that an
effective date of May 18,1992, for the
final rule is important to permit banks
with deposits of less than $100 million to
take immediate advantage of the higher
aggregate insider lending limit provided
in the final rule. In addition, an effective
date of May 18,1992, for the final rule
will prevent confusion regarding
interpretation of the statute that could
arise if the final rule were to become
effective significantly later than the
statutory provisions.
The Board believes that persons
affected by this rule have had adequate
notice and opportunity to comment on
both the substance of the final rule and
the issues involved in consideration of
the rule. The Board notes that notice of
the proposal appeared in the Federal
Register February 20,1992 (57 FR 6077).
In this respect, the Board believes that
affected persons have also had
adequate opportunity to take the steps
necessary to comply with the substance
of the final rule by the May 18,1992
effective date. In addition, the Board
notes that the statutory provision
implemented by the final rule became
effective May 18,1992. Therefore, the
transactions that are subject to, and the
persons affected by, the final rule are
subject to the requirements of section
306 as of May 18,1992. Because the final
rule is not more restrictive than the
statute in any respect, a May 18,1992
effective date for the final rule will not
prejudice persons affected by the rule.
Moreover, because the rule relaxes the
aggregate lending limit as applied to
small banks, an early effective date will
benefit certain affected persons without
prejudicing others.
This document does not modify any
portion of the final rule as published
previously, except that it changes the
final rule’s effective date from June 18,
1992, to May 18,1992; adds an Effective
Date paragraph immediately following
the Regulatory Flexibility Act Analysis
paragraphs in SUPPLEMENTARY
INFORMATION; and, in the third sentence
of the second paragraph under
discussion heading of Grandfathering
provision, adds the phrase "on or” after
extension of credit, and in the fourth
sentence modifies the second date
C t/t-
referenced to May 19,1992, or thereafter.
The SUPPLEMENTARY INFORMATION
portion and regulatory text of the final
rule published at 57 FR 21199, May 19,
1992, with the modifications stated
above, are republished for the
convenience of the reader as follows:
Background
Section 22(h) of the Federal Reserve
Act (12 U.S.C. 375b) restricts the amount
and terms of extensions of credit from a
bank to its executive officers, directors
and principal shareholders (collectively,
"insiders”) and to any company or
political campaign control by an insider
(“related interests"). The Board
promulgated Regulation O in 1978 to
implement this statute. In general,
section 22(h):
1 . R e q u i r e s a b a n k ’s b o a r d o f d i r e c t o r s t o
a p p r o v e a n y e x t e n s io n o f c r e d it to a n in s id e r
o r a r e la t e d i n t e r e s t in e x c e s s o f a t h r e s h o ld
a m o u n t ( g e n e r a l l y t h e h ig h e r o f $ 2 5 ,0 0 0 o r
f i v e p e r c e n t o f t h e b a n k s ’s c a p i t a l a n d
u n i m p a i r e d s u r p lu s , u p to $ 5 0 0 ,0 0 0 );
2 . P r o h ib its a n y e x t e n s io n o f c r e d it o n
p r e fe r e n tia l te r m s:
3 . L im its t h e a m o u n t a b a n k m a y le n d to
e a c h o f its e x e c u t iv e o ff ic e r s a n d p r in c ip a l
s h a r e h o ld e r s a n d th e ir r e la te d in t e r e s ts : 1
and
4. P r o h ib its th e p a y m e n ts b y a m e m b e r
b a n k o f a n o v e r d r a ft o f a n e x e c u t iv e o ff ic e r
o r d ir e c to r o n a n a c c o u n t a t th e b a n k .2
On December 19,1991, the President
signed into law the Federal Deposit
Insurance Corporation Improvement Act
of 1991 ("FDICIA").3 Section 306 of the
FDICIA amends section 22(h) of the
Federal Reserve Act. On February 20,
1992, the Board published for comment
proposed revisions to Regulation O to
implement the amendments of section
22(h) of the Federal Reserve Act made
by FDICIA. The comment period expired
on March 23,1992. The FDICIA
amendments take effect May 18,1992.
Section 306 of FDICIA replaces the
language of section 22(h) with the
provisions of the Board’s Regulation O.
Section 306 also makes a number of
substantive modifications to section
22(h). The most significant changes
required by the provisions of FDICIA
are as follows:
1.
N e w A g g r e g a t e L e n d in g L im it. S e c t io n
3 0 6 e s ta b lis h e s a lim it o n th e to ta l a m o u n t a
b a n k m a y le n d in th e a g g r e g a te to its in s id e r s
a n d th e ir r e la te d in t e r e s ts a s a c la s s . In
g e n e r a l , t h i s l i m i t i s e q u a l t o t h e b a n k ’s
u n im p a ir e d
c a p ita l a n d u n im p a ir e d
s u r p lu s .
2.
L e n d in g L im it
Related
for Directors and
I n te r e s ts . S e c t io n
3 0 6 e x te n d s to
lo a n s to d ir e c to r s (a n d th e ir r e la te d
in t e r e s ts ) th e s a m e le n d in g lim it c u r r e n tly
a p p lic a b le to e x e c u t iv e o f f ic e r s a n d
p r in c ip a l s h a r e h o ld e r s (a n d th e ir r e la te d
in te r e s ts ) u n d e r s e c tio n
s e c tio n
2 2 (h ).4 P r e v io u s ly ,
2 2 (h ) d id n o t lim it th e a m o u n t
d ir e c to r s a n d th e ir r e la te d in t e r e s ts c o u ld
b orrow
3.
fr o m
C r e d it
th e ir b a n k s.
Standards.
r e q u ir e m e n t th a t, w h e n
S e c t io n
306 adds a
le n d in g to a n
in s id e r , a b a n k m u s t f o llo w
c r e d it
u n d e r w r itin g p r o c e d u r e s th a t a re “n o t le s s
s tr in g e n t th a n t h o s e a p p lic a b le to
c o m p a r a b le tr a n s a c tio n s b y th e b a n k w it h
[p e r s o n s o u t s id e th e b a n k .]”
4.
Definition of Principal Shareholder.
S e c t io n
3 0 6 tig h te n s th e d e fin it io n o f
p r in c ip a l s h a r e h o ld e r fo r b a n k s lo c a te d in
s m a l l c o m m u n i t i e s . F o r m e r ly , s e c t i o n 2 2 ( h )
d e fin e d a p r in c ip a l s h a r e h o ld e r a s a p e r s o n
w h o ow n ed
o r c o n tr o lle d
m o r e th a n
10
e r c e n t o f a c la s s o f th e v o tin g sh a r e s o f a
a n k , e x c e p t fo r b a n k s lo c a te d
in
c o m m u n itie s w ith p o p u la tio n s o f le s s th a n
3 0 ,0 0 0 , in w h ic h
c a s e th e a m o u n t w a s 1 8
p e r c e n t. T h e 1 0 p e r c e n t d e fin it io n
now
a p p lie s to a ll b a n k s , r e g a r d le s s o f th e s iz e o f
th e c o m m u n it y w h e r e th e b a n k is lo c a te d .
5.
Definition of M
em ber
3 0 6 r e d e fin e s th e te r m
Bank.
S e c t io n
“ m e m b e r b a n k ” fo r
th e p u r p o s e s o f s e c tio n 2 2 (h ) to in c lu d e a n y
s u b s id ia r y o f th e m e m b e r b a n k , c la r if y in g
th a t a n e x t e n s io n o f c r e d it fr o m a s u b s id ia r y
o f a m e m b e r b a n k is s u b je c t to th e s a m e
in s id e r r e s tr ic tio n s a s a n e x t e n s io n
fr o m
6.
c r e d it
th e m e m b e r b a n k its e lf.
C overage
Banks.
of All Companies That Own
S e c t io n 3 0 6 a m e n d s s e c t io n 2 2 (h ) to
c o v e r a ll c o m p a n ie s th a t o w n b a n k s ,
1 Th is amount is 15 percent of the bank's
unimpaired capita! and unimpaired surplus in the
case of loans that are not fully secured and an
additional 10 percent of the bank’s unimpaired
capital and unimpaired surplus in the case of loans
that are fully secured. In calculating this limit, all of
the bank's loans to the insider and the insiders's
related interests are aggregated. Th is lending limit is
subject to the exceptions set forth in section 5200 of
the Revised Statutes (12 U.S.C. 84). These
exceptions generally provide higher or no lending
limits for loans secured by various kinds of
obligations. Thus, for example, loans secured by
obligations fully guaranteed by the United States
are not subject to a lending limit.
2 Th e overdraft prohibition does not apply to
principal shareholders, unless the principal
shareholder is also an executive officer or director
Th e prohibition also does not apply to the related
interests of an executive officer or director. In
addition, the prohibition does not apply to
inadvertent overdrafts, as defined in Regulation O.
s Public Law No. 102-242,105 Stat. 2236 (1991).
r e g a r d le s s o f w h e t h e r th e c o m p a n y is
t e c h n ic a lly a b a n k h o ld in g c o m p a n y .
7 . P r o h i b i t i o n o n Knowing Receipt of
Unauthorized E x t e n s i o n s of Credit. S e c t i o n
3 0 6 a m e n d s s e c tio n
in s id e r s fr o m
2 2 (h ) to p r o h ib it
k n o w in g ly r e c e iv in g
(o r
k n o w in g ly p e r m it tin g th e ir r e la te d in t e r e s ts
to r e c e iv e ) a n y e x t e n s io n
a u th o r iz e d b y s e c tio n
8 . Reporting
Credit. S e c t i o n
o f c r e d it n o t
2 2 (h ).
R e q u ir e m e n t
for Certain
3 0 6 r e q u ir e s e x e c u t iv e
o ff ic e r ,” “ e x t e n s io n o f c r e d it ,” “ r e la te d
i n t e r e s t ,” a n d “ s u b s id ia r y .” E a c h d e f in it io n
is c o n s is te n t w ith
th e c o r r e sp o n d in g
d e f in it io n s in c u r r e n t R e g u la tio n O .
The final rule adopted by the Board
implements these statutory requirements
and contains several technical revisions,
discussed below, to conform Regulation
O with section 306 and to correct
existing ambiguities.
The proposal the Board published for
comment sought only to implement the
FDICIA amendments. The proposal did
not modify the regulation where the
statutory amendments track the present
regulatory language.*5 The Board did not
request comment on existing features of
Regulation O. except as necessary to
implement the FDICIA amendments.6*
The Board received 268 written
comments in response to notice of the
proposal. Community or independent
banks submitted the majority of
comments. Other comments included
several large banks and bank holding
companies, individual bank directors,
numerous state and national banking
trade associations, several state banking
superintendents, and four Federal
Reserve Banks.
Discussion of Issues
/. L en din g L im it A p p lic a b le to
In d ivid u a l D ire c to rs
The preponderance of the
commenters. including community
banks, state and national independent
bankers' trade associations, and certain
state banking supervisors, objected to
the FDICIA requirement that the
Regulation O individual lending limit be
applied to loans to directors. These
commenters observed that directors of
community banks frequently control
substantial local business enterprises,
especially in small o t rural communities.
In this regard, the commenters stated,
such directors provide to bank
management Important expertise and
valuable credit and deposit
relationships. The commenters asserted
nearly unanimously that application of
the Regulation G lending limit to
directors would curtail the ability of
banks to serve the credit needs of their
directors (and the directors' related
o ff ic e r s a n d d ir e c to r s o f m e m b e r b a n k s a n d
b a n k h o ld in g c o m p a n ie s w it h o u t p u b lic ly
tr a d e d s to c k to r e p o r t to th e ir in s t it u t io n s
a n n u a lly th e o u ts ta n d in g a m o u n t o f a n y
c r e d it th a t is s e c u r e d b y sh a r e s o f th e
i n s i d e r ’s i n s t i t u t i o n .
9.
Definitions.
S e c t io n
3 0 6 d e fin e s th e
te r m s “ c o m p a n y ,” “ c o n t r o l,” “ e x e c u t iv e
* See note 1, supra.
3
5 Thus, for example, the existing regulatory
definitions of “control,” “executive officer,”
“extention of credit,” “overdraft” and “related
interest” rem ain unchanged, as the new statutory
definitions are fully consistent w ith the present
regulatory definitions.
6 The final rule am ends the Board’s Regulation
Y to implement a loan reporting requirem ent
created by the FDICIA that applies to executive
officers and directors of certain bank holding
companies.
Cm - 105*13
interests)- The commenters concluded
that the limit will force -directors or
prospective directors to choose between
retaining or accepting a directorship and
maintaining a customer relationship
with the bank, thereby in turn depriving
banks of either informed leadership or
valuable customer relationships.
The final rule implements the director
lending limit as proposed. FDICIA
requires that the Board apply this limit
to extensions of credit to directors and
their related interests and gives the
Board no discretion in applying this
aspect of the statute. It should be noted,
however, that directors and their related
interests generally have long been
subject to similar borrowing constraints
by reason of the concentration of credit
rules under the National Bank Act and
state laws. See, e.g- 12 U.S.C. 84; 12 CFR
part 32. The section 22(h) lending limit
incorporates the limits and exceptions of
the concentration of credit rules under
the National Bank Act. Thus, the section
22(h) lending limit generally permits
each individual director and his or her
related interests to borrow in aggregate
amounts the equivalent of up to 15
percent of the bank's unimpaired capital
and unimpaired surplus on an unsecured
basis and an additional 10 percent on a
secured basis. The exceptions provide
higher limits for. or exclude from
limitation altogether, various credit
transactions, such as extensions of
credit secured by obligations of the
United States or guaranteed by a
Federal agency, extensions of credit
secured by bills of lading or warehouse
receipts covering readily marketable
staples, and extensions of credit secured
by livestock or dairy cattle.
2. Limit on Aggregate Lending to
Insiders
As amended by FDICIA. section 22(h)
establishes a limit on the total amount a
member bank may lend to its insiders
and their related interests as a class.
The statute generally restricts that
amount to an amount that is no greater
than the bank’s unimpaired capital and
unimpaired surplus. The Board is
authorized, however, to set a more
stringent general limit. The statute
permits the Board to make an exception
to this limit only for banks with deposits
of less than $100 million and only if the
Board determines that the exception
would be “important to avoid
constricting the availability of credit in
small communities or to attract directors
to such banks." 1 The statute provides
7
Fed eral D eposit In su ran ce C o rp o ratio n
Im provem ent A ct o f 1991. P ublic L aw *io. 102-242.
sec. 306(d), 1 0 5 S tat. 2238. 2356(1991).
that the higher limit for banks with
deposits of less than $100 million may
not exceed 200 percent of the bank’s
unimpaired capital and unimpaired
surplus.
The legislative history' of FDICIA
indicates that the aggregate limit was
adopted in response to the significant
insider lending at Madison National
Bank and other failed institutions.*8 In
this respect, the aggregate limit was
designed as a prophylactic measure to
limit the risks to the deposit insurance
system of large concentrations of credit
to institution insiders.
The final rule’s general limit—100
percent of the member bank’s
unimpaired capital and unimpaired
surplus—is the same as provided in the
statute.9 The Board requested specific
comment regarding whether to provide
an exception to the general limit for
banks with deposits of under $100
million. The Board also requested
comment on whether a 100 percent limit
as applied to small banks would unduly
restrict credit or limit the availability of
directors. In connection with these
requests, the Board requested that
commenters supply specific data as to
the effect of the aggregate limit.
The great preponderance of
commenters, including community
banks and bank trade associations,
opposed the aggregate limit in principle.
Every commenter that referred to the
Board’s discretion to make exceptions to
the general limit for small banks urged
the Board to raise that limit to 200
percent of unimpaired capital and
unimpaired surplus for small banks.
These commenters included community
banks, larger banks, the American
Bankers Association, and the
Independent Bankers Association of
America.
The commenters argued the same
points discussed above with respect to
the director lending limit. Commenters
argued nearly unanimously that the
aggregate limit, like the application of
the director lending limit, would inhibit
unduly the ability of community banks
to serve the credit needs of their
directors and the related interests of the
directors. As a result, commenters
contended, directors will be forced to
choose between retaining a directorship
or maintaining a customer relationship
with the bank, thereby depriving the
bank of either informed leadership or
valuable customer relationships. Apart
from anecdotal evidence, commenters
did not provide specific information
regarding the amount of lending by
banks to their directors and related
interests, or other specific information
that would allow the Board to determine
the effect of the aggregate limit on the
availability of credit and directors.1010
In light of the great concern evidenced
by the comments of small banks, the
Board has determined that an exception
to the general aggregate lending limit for
small banks is important to avoid
constricting the availability of credit or
directors in small communities.
Accordingly, the Board has determined
to exercise its discretion under FDICIA
to permit small banks [i.e., banks with
total deposits under $100 million) to
establish a higher aggregate lending
limit for loans to executive officers,
directors, and principal shareholders,
and their related interests, where the
board of directors of the bank has
determined, based on its experience
with loans to such persons and related
interests, that a higher aggregate lending
limit is consistent with prudent, safe,
and sound banking practices. This
higher limit must be considered and
established by the bank’s board of
directors by resolution, and may not
exceed a maximum amount of 200
percent of the bank’s unimpaired capital
and unimpaired surplus.
The Board has determined to permit
small banks to establish this higher
aggregate limit for a one-year period
that will expire May 18,1993. This oneyear period will enable the Board, in
consultation with the other federal
banking agencies, to collect specific
data on the lending practices of banks to
insiders, including directors, in order to
analyze the effect of a limitation on this
lending on the ability of banks to attract
qualified directors and to serve the
credit needs of local communities. The
Board will then revisit the issue of an
appropriate limit for small banks.
• See S. R ep. N o. 167. 192nd Cong.. 1st S ess. 55
(1991],
9 Under R egulation O, unim paired capital a nd
u n im paired surplus is the sum of (1) total equity
cap ital a s reported on the b a n k 's m ost recent report
of condition; (2) any su b ordinated notes and
d eb entures approved a s an addition to the b a n k 's
c ap ital structure by the app ro p riate federal banking
agency: and (3) a ny valuation reserv es c re ated by
charges to the b a n k 's income. T otal equity capital
includes retain ed eam ing9. See 12 CFR 215.2(h),
4
10 Tw o com m unity ban k com m enters subm itted
d a ta regarding the p ercentage of capital a n d surplus
re p re sen te d by loans to directors or to other
insiders. O ne dem o n strated that loans to insiders,
including directors, e x ceed ed 100 p ercent of
unim paired capital a nd surplus. The second
q uestioned the necessity of any limit, on the b a sis
th a t its loans to insiders, including directors, fell far
short of 100 percent.
6
3. Bank Holding Company Indebtedness authority. Thus, the statute requires that
bank extensions of credit to parent
Under the Aggregate Limit
holding companies and nonbank
A. Section 23A
affiliates count toward to aggregate
lending limit.
There larger holding companies
The Board, intends to propose
commented that the application of the
legislation to cure the inconsistent
aggregate lending limit to transactions
with holding company affiliates that are treatment of certain transactions under
section 22(h) (as amended by section
also covered by section 23A of the
306) and section 23A. In this respect, the
Federal Reserve A c t11 may produce
inconsistent results. Under section 23A, Board believes that the best approach
a member bank’s transactions with any would be to exclude extensions of credit
one affiliate are limited to 10 percent of to parent holding companies and their
non-bank affiliates from section 22(h)
the bank’s capital and surplus; an
altogether on the basis that such
aggregate 20 percent limit applies to
transactions are controlled adequately
transactions with all affiliates.1112
by
section 23A, which regulates
However, several types of transactions
that present little or no risk to the bank comprehensively inter-affiliate
are excluded from the quantitative limits transactions.
of section 23A. These transactions
B. National Bank Act
include loans that are fully secured by
One commenter requested that the
(i) the obligations of the United States or Board exclude from the aggregate
certain Federal agencies or (ii)
lending limit any extension of credit
segregated, earmarked deposit accounts. subject to the exceptions provided under
The FDICIA aggregate lending limit
the concentration of credit rules of the
does not provide for any exemptions.
National Bank Act.14 For the same
Three commenters observed that
reasons discussed with respect to
inclusion under the aggregate lending
section 23A, the Board declined to
limit of holding company indebtedness, implement such an exemption. To
including indebtedness exempt from the address the problem of inconsistent
quantitative limits of section 23A, could treatment, the Board intends to propose
render unavailable a significant portion legislation to grant to the Board specific
of the aggregate lending limit.
authority to define exclusions from the
section 22(h) definition of extension of
The commenters suggested that the
credit. On the basis of such authority,
Board address this problem by
the Board could revise Regulations O to
excluding from the FDICIA aggregate
exclude from the aggregate lending limit
lending limit extensions of credit to
certain transactions that present little or
parent holding companies and their
no risk to the bank, including
nonbank subsidiaries.13 These
transactions that are exempt under the
transactions would continue to be
National Bank Act or section 23A.
subject to the requirements of section
23A.
4. Definition of the Term “Member
The Board declined to adopt this
Bank" To Include A ny Subsidiary of the
suggestion. The FDICIA aggregate
Member Bank
lending limit by its terms applies to all
As amended by section 306, section
extensions of credit by a bank to
22(h) defines the term “member bank"
principal shareholders and their related specifically to include any subsidiary of
interests, thereby covering extensions of the member bank. The definition is
credit to parent holding companies and designed to codify Board policy that an
the companies they control. The FDICIA extension of credit made by a subsidiary
aggregate limit provides no exclusion for of a bank is considered to have been
loans to a parent holding company or its made by the bank itself. The purpose of
non-bank affiliates. In addition, unlike
the policy is to ensure that an extension
section 23A, section 22(h) does not
of credit from a subsidiary of a member
provide the Board general exemptive
bank is subject to the same insider
restrictions as an extension of credit
11 12U .S.C. 371c
from the member bank itself.15*
12 Section 23A also applies q u alitativ e
Two commenters asserted that the
restrictio n s to such tran sactio n s. For exam ple, the
definition would have the additional
tra n sac tio n s m ust be on term s a n d conditions th at
effect of constituting executive officers
are con sisten t w ith safe a n d sound banking
and directors of subsidiaries of banks as
practices, a n d the m em ber bank m ay not pu rch ase
executive officers and directors of the
low -quality a sse ts from its affiliates.
13 Under existing law a n d regulations, member
bank ex ten sio n s of cred it to affiliated b an k s are
exem pt in m any resp ects from the coverage of boih
R egulation O a n d section 23A
14 12 U.S.C. 84; 12 CFR p art 32.
15 See 138 Cong. Rec. S2059, S2077 (daily ed.
February 21,1992) (S tatem ent of Sen. Riegle).
5
a
/ 4 5 V J3
parent bank. As a result, the
commenters contended, extensions of
credit to insiders of the subsidiaries of
banks would become subject to
requirements of Regulation O, including
the aggregate lending limits.18
The commenters argued that the
statutory amendment of the term
member bank to include subsidiaries of
the bank nullifies the regulatory
distinction between insiders of
subsidiaries of the bank and insiders of
a bank or its parent and non-bank
affiliates. The commenters urged the
Board to clarify that Regulation O does
not cover insiders of subsidiaries of
banks (unless they are also insiders of
the bank or its parent or non-bank
affiliates).
The final rule retains the proposed
definition of member bank, which
specifically includes any subsidiary of
the member bank. Prior to the enactment
of FDICIA, Regulation O did not reach
the insiders of such subsidiaries, unless
an insider actually participated in the
major policy-making functions of the
bank.17 Accordingly, the Board believes
that the inclusion of subsidiary in the
term member bank is not intended to
modify the existing policy that
Regulation O does not reach the insiders
of subsidiaries of banks (unless an
insider is a bank director or actually
participates in major policy-making
functions at the bank).
5. Elimination of Higher Control
Threshold for Principal Shareholders of
Banks Located in Small Communities
Prior to the enactment of FDICIA,
section 22(h) defined a principal
shareholder as a person who owns or
controls more than 10 percent of a class
of the voting shares of a bank, except for
banks located in communities with
populations of less than 30,000, in which
case the amount was 18 percent. FDICIA
eliminated the exception for banks
located in small communities. As a
result, the 10 percent definition now
applies to all banks, regardless of the
size of the community where the bank is
located.
Several commenters objected to this
statutory modification and urged the
‘ • T h e com m enters o bserved th a t such a result
a p p ea rs to conflict w ith an existing provision of
R egulation O, w hich excludes subsid iaries of b anks
from the definition of subsidiary. See 12 CFR
215.2(n). A n effect of this exclusion h a s been to
rem ove the insiders of su b sid iaries of b anks from
the requirem ents of Regulation O.
17 This is so b e ca u se u n d e r section 215.2(n) of
R egulation O su b sid iaries of b a n k s a re not
c o n sid ered to be p a re n t holding com pany
subsidiaries.
Cm . IOs 'HZ
Board to preserve the exception.
Because the Board has no discretion in
the application of this statutory
provision, the final rule eliminates the 18
percent exception.
technically a bank holding company. As
noted above, the Board has no
discretion to exclude such insiders from
the coverage of section 22(h).
Accordingly, the Board believes that
implementation of the suggested
6. Coverage o f A ll Companies That Own exclusion would not be consistent wTith
Banks
the terms of section 306.
Prior to the enactment of FDICIA,
7. Prohibition on Knowing Receipt of
section 22(h) deemed insiders of bank
A ny Extension of Credit Not Authorized
holding companies to be insiders of the
by Section 22(h)
bank holding companies’ subsidiary
Section 306 amended section 22(h) to
banks. This provision reflected the
prohibit an insider from knowingly
statutory presumption that insiders of
receiving an extension of credit not
the parent holding company are
authorized by section 22(h). Several
involved necessarily in the major
commenters requested that the Board
decisions of bank subsidiaries. Section
refine the prohibition by including the
306 amended section 22(h) in several
Regulation O a provision permitting
places by replacing the term bank
insiders to rely in good faith on a bank’s
holding company with the term
statement that an extension of credit is
company. This change was intended to
authorized by section 22(h).
ensure that insiders of holding
This prohibition applies only to
companies that are not technical bank
knowing receipt of unauthorized
holding companies are treated in the
extensions of credit. The Board believes
same manner as insiders of bank
that the reference to knowing receipt
holding companies.18
adequately protects insiders in the
One commenter, a law firm
circumstances cited by the proponents
representing diversified financial
of the good faith reliance safe-harbor.
holding companies, argued that this
8. Grandfathering Provision
revision would work an especial
hardship on such companies. The
FDICIA provides that amendments
commenter asserted that, in contrast to
made by section 306 do not affect the
the insiders of bank holding companies, validity of any extension of credit or
many insiders of diversified financial
other transaction lawfully entered into
holding companies have no
on or before the effective date of the
responsibility for, or influence over, the FDICIA amendments. The effective date
operations of subsidiary banks. Instead, of the amendments relating to section
22(h) is the earlier of (i) the date on
responsibility for subsidiary banks
which the required revisions to
typically devolves to a small, readily
Regulation O become effective or (ii) 150
identifiable group, with most insiders
days after the date of enactment of the
responsible for the company’s primary
FDICIA. Accordingly, May 18.1992 is
business lines, such as manufacturing,
retail sales, or insurance. Therefore, the the effective date of the Statutory
commenter contended, the regulation as provisions.
Several commenters sought guidance
proposed would serve no purpose to the
as to the effect of this statutory
extent it would constitute as insiders
persons who have no ability to influence provision. The provision applies to the
the operations of subsidiary banks. The newly limited loans to directors and the
aggregated loans to insiders. As applied
commenter suggested that Board revise
to both categories, the provision
Regulation O to implement a method to
requires that banks and insiders comply
exclude from coverage insiders of
prospectively after the effective date of
diversified parent holding companies
who do not supervise subsidiary banks. the statute (May 18,1992). Extensions of
credit made on or before the effective
The final rule does not include such
date are not required to comply with the
an exclusion. As amended by section
306, section 22(h) presumes that insiders single borrower limit made applicable to
directors and their related interests or
of parent holding companies exercise
with
the aggregate limit on loans to
sufficient influence over subsidiary
insiders and their related interests
banks to be deemed bank insiders. In
addition, FDICIA amended section 22(h) contained in Regulation O. All
extensions of credit made after the
specifically to treat in the same fashion
effective date (i.e., made May 19,1992 or
insiders of all companies that own
thereafter) must comply with all of the
banks—whether or not the company is
provisions of the statute and Regulation
O. Banks would not be authorized to
18 See 138 Cong. Rec. S2059, S2077 (daily ed.
extend further credit in amounts that,
F eb ru ary 21.1992) (S tatem en t o f Sen. Riegle)
6
when aggregated with outstanding loans
to insiders, would exceed either limit.
9. General Review o f Regulation O
The Independent Bankers Association
of America requested that, within a year
of the promulgation of this final rule, the
Board review Regulation O in its
entirety, including aspects of the
regulation on which the Board did not
seek comment in connection with the
amendments discussed above. FDICIA
mandates that the federal banking
agencies conduct general reviews of the
regulations implemented under the
statutes they administer.19 Accordingly,
the Board will review Regulation O in its
entirety and the effect of the regulation
on bank operations and consider any
modifications that are shown by
experience to be necessary or
appropriate to carry out the intent of
Congress in this area or to prevent
evasions of sections 22(g) and 22(h).
10. Technical Revisions
The final rule also contains several
technical revisions to conform the
Regulation O with section 306 and to
correct existing ambiguities. In this
respect, for example, the final rule:
1. Modifies the requirement that member
bank loans to executive officers be “made
subject to the condition that the extension of
credit will, at the option of the member bank,
become due and payable” to clarify that the
condition must be in writing.
2. Replaces the term “bank” with the term
"insured depository institution” where
appropriate to reflect statutory usage.
3. Provides a dedicated definition of the
term "foreign bank" that is the same as the
existing definition that is provided in the
definition of “member bank.”
4. Replaces the term “capital stock” with
the term “unimpaired capital” where
appropriate to reflect statutory usage.
5. Adds a date specification to the
calculation of valuation reserves for purposes
of determining a member bank's unimpaired
capital and unimpaired surplus under
Regulation O.
6. Clarifies the definition of extension of
credit on which a party may be liable.
Section-By-Section Analysis
The following describes the final
rule’s amendments of Regulation O.
Section 215.1(a)
The final rule adds a references to
FDICIA.
Section 215.2(a)
The final rule replaces the term
18 Federal D eposit Insurance C orporation
Im provem ent A ct of 1991, sec. 221,105 S lat. 2236,
2305 (1991).
Cu). toS V3
"bank” with the term "depository
institution" to reflect statutory usage.
Sections 215.2 (c) and (d) and 215.4(c);
and Redesignated Section 215.2(b)
The final rule replaces the term “bank
holding company” with the term
"company” and removes the reference
to the statutory definition of bank
holding company.
Section 215.3(a)(8)
The final rule adds the term "similar”
to reflect statutory usage.
amount limit under this paragraph
applies only to an executive officer's
primary residence. The final rule does
not add the term “primary.”
Section 215.3 (b)(2) and (b)(5)
The final rule modifies the regulatory
references to conform with the
reorganized regulation.
Section 215.5(d)
The final rule adds the phrase “in
writing" after the term “condition” to
clarify that the condition required by
this paragraph must be in writing. The
proposed rule also proposed to add the
term “corresponding” before the phrase
“category of credit." The final rule does
not add the term “corresponding."
Section 215.4(a)(1)
The final rule adds to the existing
qualitative requirements the new
requirement that, in extending credit to
an insider, a member bank follow credit
underwriting procedures no less
stringent than those prevailing for
Section 215.2(e)
comparable transactions with non
insiders. In addition, the proposal
The final rule creates a new
paragraph (e) that relocates the existing proposed to replace the term
“repayment” with the term “default."
Regulation O definition of the term
The final rule retains the term
"foreign bank.” The definition, which
“repayment.”
remains unchanged, was previously a
parenthetical part of the Regulation O
Section 215.4(b) (2) and (3)
definition of "member bank.”
The final rule reorganizes § 215.4 by
Section 215.2(f)
redesignating existing paragraphs (b)(2)
and (b)(3) of § 215.4 as paragraphs (b)(3)
The final rule creates a new
and (b)(4) to accommodate new
paragraph (f) that defines the term
paragraph (b)(2).
“insider.”
Section 215.4(b)(2)
Redesignated Section 2152(h)
The final rule reorganizes section
The final rule replaces the regulatory 215.4 by creating a new paragraph (b)(2)
term "capital stock” with the statutory
to contain the existing $500,000
term “unimpaired capital” and adds a
limitation. The limitation provision is
date specification to the definition of
not modified substantively.
valuation reserves for the purposes of
Section 215.4(c)
calculating a member bank’s capital.
The final rule adds the term
Redesignated Section 215.2(i)
“directors" to the list of persons subject
The final rule defines the term
to the lending limit. This reflects the
"member bank” to include any
FDICIA amendment of section 22(h) that
subsidiary of the member bank.
extends to loans to directors the section
22(h) lending limit.
Redesignated Section 215.2(1)
Sections 2152 (e) Through (1)
The final rule redesignates these
paragraphs as paragraphs (g) through (n)
to accommodate new paragraphs (e) and
(f) of § 215.2.
Sections 215.6 Through 215.10
The final rule redesignates these
sections as § § 215.7 through 215.11 to
accommodate new § 215.6.
Section 215.6.
The final rule creates a new § 215.6
that implements FDICIA revisions to
section 22(h) that prohibit an insider
from knowingly receiving (or knowingly
permitting the insider’s related interest
from receiving) an extension of credit
that is not authorized under Regulation
O.
Section 215.11
The final rule redesignates § 215.11 as
§ 215.13 and adds a new § 215.12 to
implement the FDICIA requirement that
executive officers and directors of
certain member banks report certain
credits to the board of directors of the
executive officer’s or director’s member
bank.
Redesignated Section 215.9.
The proposal proposed to add the
term “corresponding” before the phrase
“category of credit” in redesignated
§ 215.9. The final rule does not add term
“corresponding.”
The final rule replaces the phrase “an Section 215.4(d)
individual or company” with the term
Redesignated Section 215.13.
The final rule redesignates existing
“person” to reflect statutory usage. The paragraph (d) as paragraph (e) to
The final rule amends this section to
final rule also strikes the sentence that accommodate new paragraph (d). New refer to the appropriate civil penalty
implemented the control standard for
paragraph (d) implements the aggregate provisions of the Federal Reserve Act
determining “principal shareholder” of limit on extensions of credit to all
The following describes the final
member banks located in communities
insiders as a class mandated by FDICIA. rule’s amendment of Regulation Y.
with populations of less than 30,000
Section 215.5(a), Footnote 4
S e c tio n 225.4(f)
persons.
The
final
rule
strikes
the
first
sentence
The final rule adds a new paragraph
Redesignated Section 215.2(m)
to reflect the FDICIA revisions that
(f) to implement the FDICIA requirement
The final rule adds the phrase “of a
amend section 22(g) of the Federal
that executive officers and directors of
person” to the definition of “related
Reserve Act to cover non-member
certain bank holding companies report
interest” to reflect statutory usage.
insured banks. The final rule also
certain credits to the board of directors
modifies regulatory references to
of the executive officer’s or director’s
Section 215.3(a)(4)
conform them with the reorganized
bank holding company.
The final rule replaces the term
regulation.
R egulatory F lexibility A ct A n a ly sis
“person” with the term “insider” to
clarify that the definition applies when Section 215.5(c)(2)
The final rule implements additional
the party liable is a bank insider.
restrictions on member banks’ lending to
The proposal proposed to add the
phrase “the primary” to clarify that the their executive officers, directions, and
7
CcA 10SH3
principal shareholders that are required
by section 306 of the FDICIA. The final
rule also adds reporting requirements
mandated by FDICIA that relate to
certain credit to executive officers and
directors of certain banks and bank
holding companies.
The Board expects that these
statutorily mandated requirements, such
as the aggregate lending limit, will
impose costs on banking organizations,
including small banking organizations.
As authorized by FDICIA, however, the
Board has determined to permit banks
total deposits of less than $100 million to
establish a higher aggregate lending
limit (not to exceed two times the bank’s
unimpaired capital and unimpaired
surplus) under certain circumstances.
The Board has determined to permit the
higher limit for a one-year period in
order to enable the Board to collect data
for the purpose of assessing the effect of
the aggregate lending limit on the ability
of small banks to attract directors and to
lend.
The final rule does not establish any
new substantive, procedural, or
reporting requirements that are not
required by FDICIA, with the exception
of a submission required of small banks
that establish higher aggregate lending
limits authorized by the regulation. The
final rule requires that such small banks
submit to the appropriate federal
banking agency and to the Board of
Governors the resolution that records
the board of directors'consideration and
adoption of any higher limit. This
resolution must set forth the facts and
reasoning that support the board of
directors’ decision, including a
statement of the bank’s lending to its
insiders as a percentage of the bank’s
unimpaired capital and unimpaired
surplus.
Effective Date
The provisions of 5 U.S.C. 553(d)
generally prescribing 30 days prior
notice of the effective date of a rule
have not been followed in connection
with the adoption of this amendment
because adoption of the rule reduces a
regulatory burden and because the
Board has found good cause to dispense
with 30 days prior notice. Section 553(d)
grants a specific exemption from the
deferred effective date requirements in
these instances.
List of Subjects
12 CFR Part 215
Credit, Federal Reserve System,
Reporting and recordkeeping
requirements, Security measures.
D ep o sit Insurance C orporation
Im provem ent A ct o f 1991 (Pub. L. No.
1 0 2 -242,105 S ta t 2236 (1991)).
*
*
*
*
*
12 CFR Part 225
4 .1 2
CFR 215.2 is am ended b y revising
paragraphs (a), (c), and (d),
redesignating paragraphs (e) through (1)
a s paragraphs (g) through (n), adding
n e w paragraphs (e) and (f), and revising
n ew ly d esign ated paragraphs (h), (i), (1),
and (m) to read a s follow s:
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 rule,
§ 215.2 Definitions.
and pursuant to the Board’s authority
* * * * *
under sections 22(g) and 22(h) of the
(a)
C o m p a n y m ean s any corporation,
Federal Reserve Act (12 U.S.C. 375a and partnership, trust (b u sin ess or
375b), section 5(b) of the Bank Holding
otherw ise), association , joint venture,
Company Act (12 U.S.C. 1844(b)), and
p ool syn d icate, so le proprietorship,
section 306 of the Federal Deposit
unincorporated organization, or any
Insurance Corporation Improvement Act other form o f b u sin ess entity not
of 1991 (Pub. L No. 102-242,105 Stat.
sp ec ifica lly listed herein. H ow ever, the
2236 (1991)), the Board is amending 12
term d o es not include:
CFR part 215, subpart A, and 12 CFR
(1) A n insured depository institution
part 225, subpart A, as follows:
(as d efined in 12 U.S.C. 1813); or
(2) A corporation the m ajority o f the
sh ares o f w hich are ow n ed by the
U nited S ta tes or by an y S tate
*
*
*
*
*
PART 215—LOANS TO EXECUTIVE
OFFICERS, DIRECTORS, AND
PRINCIPAL SHAREHOLDERS OF
MEMBER BANKS
(c) Director of a member bank
includes:
1. The authority citation for part 215 is
(1) A ny director o f a m em ber bank,
revised to read as follows:
w h eth er or not receiving com pensation;
(2) A ny director o f a com pany o f
Authority: Secs. ll(i), 22(g) and 22(h),
w hich the m em ber bank is a subsidiary;
Federal Reserve Act (12 U.S.C. 248(i), 375a,
and
375(b)(7)), 12 U.S.C. 1817(k)(3) and
(3) A ny director o f any other
1972(2)(F^(vi), and sec. 306 of the Federal
subsidiary o f that com pany. A n advisory
Deposit Insurance Corporation Improvement director is not con sid ered a director if
Act of 1991 (Pub. L. No. 102-242,105 Stat.
the ad visory director—
2236 (1991)).
(i) Is not elected b y the shareholders
o f the com pany or bank;
S ubpart A—Loans by Member Banks
(ii) Is not authorized to vote on
to Their Executive Officers, Directors,
m atters b efore the board o f directors;
and Principal S hareholders
and
2. In part 215, the footnotes are
(iii) P rovides so le ly general p olicy
removed or redesignated as shown in
a d v ice to the board o f directors.
the following table:
(d)
(1) Executive officer o f a com pany
or bank m ean s a p erson w ho
participates or h as authority to
Current
N e w N o.
S ection a n d paragraph
No.
p articipate (other than in the cap acity o f
a director) in m ajor policym aking
3 rem oved functions o f the com p an y or bank,
2 1 5 .4 (c )..........................................
3 w heth er or not: the officer h as an official
4
2 1 5 .4 (d ) „ .......................................
5
4
2 1 5 .5 (a )........................................
title; the title d esig n a tes the officer an
6
2 1 5 .8 ...............................................
5
7
6 assistan t; or the officer is serving
2 1 5 .9 ...............................................
7
8
w ithout salary or other co m p en sation .1
2 1 5 .1 0 (a )...... ............................. ..
2 1 5 .1 0 (b )........... ..... .....................
9
8
1 T he term is not in ten d ed to include p erso n s w ho
m ay h a v e official titles a n d m ay e x ercise a certa in
m easure of d iscretion in the perform ance of th eir
3.12
CFR 215.1 is amended by revising
duties, including d iscretion in the m aking of loans,
paragraph (a) to read as follows:
b u t w ho do no t p a rtic ip a te in the determ in atio n of
m ajor policies of the b a n k or com pany an d w hose
§ 251.1 Authority, purpose, and scope.
decisions a re lim ited by policy sta n d a rd s fixed by
(a)
Authority. This subpart is issued the senior m anagem ent of the b a n k o r com pany. For
exam ple, the term d oes not include a m an ag er or
pursuant to sections ll(i), 22(g), and
a ss is ta n t m an ag er of a b ra n c h of a b a n k unless th a t
22(h) of the Federal Reserve Act (12
individual p a rtic ip a te s, or is a u tho rized to
U.S.C. 248(i), 375a, and 375b), 12 U.S.C.
p articip ate, in m ajor policym aking functions of the
1817(k)(3), and section 306 of the Federal ban k or com pany.
8
6m . W S ^-3
The chairman of the board, the
president, every vice president, the
cashier, the secretary, and the treasurer
of a company or bank are considered
executive officers, unless: The officer is
excluded, by resolution of the board of
directors or by the bylaws of the bank or
company, from participation (other than
in the capacity of a director) in major
policymaking functions of the bank or
company: and the officer does not
actually participate therein.
(2)
For the purpose of § § 215.4 and
215.8 of this part, an executive officer of
a member bank includes an executive
officer of a company of which the
member bank is a subsidiary; and any
other subsidiary of that company, unless
the executive officer of the subsidiary is
excluded (by name or by title) from
participation in major policymaking
functions of the member bank by
resolutions of the boards of directors of
both the subsidiary and the member
bank, and does not actually participate
in such major policymaking functions.
(e) Foreign b a n k has the meaning
given in 12 U.S.C. 3101 (7).
(f) In sid e r means an executive officer,
director, or principal shareholder, and
includes any related interest of such a
person.
* * * * *
(h) The len d in g lim it for a member
bank is an amount equal to the limit of
loans to a single borrower established
by section 5200 of the Revised Statutes,*
U.S.C. 84. This amount is 15 percent of
the bank’s unimpaired capital and
unimpaired surplus in the case of loans
that are not fully secured, and an
additional 10 percent of the bank’s
unimpaired capital and unimpaired
surplus in the case of loans that are fully
secured by readily marketable collateral
having a market value, as determined by
reliable and continuously available
price quotations, at least equal to the
amount of the loan. The lending limit
also includes any higher amounts that
are permitted by section 5200 of the
Revised Statutes for the types of
obligations listed therein as exceptions
to the limit. A member bank’s
unimpaired capital and unimpaired
surplus equals the sum of:
(1) The "total equity capital" of the
member bank reported on its most
recent consolidated report of condition
filed under 12 U.S.C. 1817(a)(3);
(2) Any subordinated notes and
debentures approved as an addition to
* W h ere S tate la w e sta b lish e d a lending limit for
a S tate m em b er ban k th a t is lo w e r th an the am ount
perm itted in sectio n 5200 of the R evised S tatu tes,
the lending limit e sta b lish e d by ap p licab le S late
law s shall b e th e lending limit for the S tate m em ber
bank.
the member bank’s capital structure by
(b)* * *
the appropriate federal banking agency;
(2)
A receipt by a bank of a check
hnd
deposited in or delivered to the bank in
(3) Any valuation reserves created by the usual course of business unless it
charges to the member bank's income
results in the carrying of a cash item for
reported on its most recent consolidated or the granting of an overdraft [other
report of condition filed under 12 U.S.C. than an inadvertent overdraft in a
1817(a)(3).
limited amount that is promptly repaid,
(i)
M e m b e r b a n k means any bankingas described in § 215(4)(e) of this part):
* * * * *
institution that is a member of the
Federal Reserve System, including any
(5)
Indebtedness of $5,000 or less
subsidiary of a member bank. The term arising by reason of any general
does not include any foreign bank that
arrangement by which a bank:
maintains a branch in the United States,
(i) Acquires charge or time credit
whether or not the branch is insured
accounts; or
(within the meaning of 12 U.S.C. 1813(s))
(ii) Makes payments to or on behalf of
and regardless of the operation of 12
participants in a bank credit card plan,
U.S.C. 1813(h) and 12 U.S.C. 1828(j)(2).
check credit plan, interest bearing
* * * * *
overdraft credit plan of the type
(1)
P rin cip a l sh a re h o ld e r means a
specified in § 215.4(e) of this part, or
person (other than an insured bank) that similar open end credit plan; Provided:
directly or indirectly, or acting through
(A) H ie indebtedness does not involve
or in concert with one or more persons, prior individual clearance or approval
owns, controls, or has the power to vote by the bank other than for the purposes
more than 10 percent of any class of
of determining authority to participate in
voting securities of a member bank or
the arrangement and compliance with
company. Shares owned or controlled
any dollar limit under the arrangement:
by a member of an individual’s
and
immediate family are considered to be
(B) The indebtedness is incurred
held by the individual. A principal
under terms that are not more favorable
shareholder of a member bank includes: than those offered to the general public.
* * * * *
(1) A principal shareholder of a
company of which the member bank is a
6.12
CFH 215.4 is amended by revising
subsidiary; and
paragraphs (a)(1), (b)(1) and (c),
(2) A principal shareholder of any
redesignating paragraphs (b)(2) and
other subsidiary of that company.
(b)(3) as paragraphs (b)(3) and (b)(4).
(m)
R e la te d in te r e st of a person
respectively, adding a new paragraph
means:
(b)(2). redesignating paragraph (d) as
(1) A company that is controlled by
paragraph (e), and adding a new
that person; or
paragraph (d) to read as follows:
(2) A political or campaign committee § 215.4 General prohibitions.
that is controlled by that person or the
(a) * * *
funds or sendees of which will benefit
that person.
(1)
Is made on substantially the same
* * * * *
terms {including interest rates and
collateral) as, and following credit
5.12
CFR 215.3 is amended by revising
paragraphs (a)(4), (a)(8), (b)(2) and (b)(5) underwriting procedures that are not
less stringent than, those prevailing at
to read as follows:
the time for comparable transactions by
fi 215.3 Extension o f cre d it
the bank with other persons that are not
covered by this part and who are not
W '*
employed by the bank: and
(4) An acquisition by discount
purchase, exchange, or otherwise of any * * * * *
note, draft, bill of exchange, or other
(b) P rio r a p p ro va l. (1) No member
evidence of indebtedness upon which an bank may extend credit (which term
insider may be liable as maker, drawer, includes granting a line of credit) to any
endorser, guarantor, or surety;
of its executive officers, directors, or
* * * * *
principal shareholders or to any related
[b]
Any other similar transaction as ainterest of that person in an amount
that, when aggregated with the amount
result of which a person becomes
of all other extensions of credit to that
obligated to pay money (or its
person and to all related interests of that
equivalent) to a bank, whether the
person, exceeds the higher of $25,000 or
obligation arises directly or indirectly,
5 percent of the member bank’s
or because of an endorsement on an
unimpaired capital and unimpaired
obligation or otherwise, or by any
surplus, unless:
means whatsoever.
9
Ua .
directors bases the finding, including the
(1) The extension of credit has been
amount of the bank’s lending to its
approved in advance by a majority of
insiders as a percentage of die bank's
the entire board of directors of that
unimpaired capital and unimpaired
bank; and
(ii)
the interested party has abstained surplus as of the date of the resolution;
(iii) The bank has submitted the
from participating directly or indirectly
resolution to die appropriate Federal
in the voting.
banking agency (as defined in 12 U.S.C.
(2) In no event may a member bank
extend credit to any one of its executive 1813(q)) with a copy to the Board of
Governors; and
officere, directors, or principal
(iv) The bank meets or exceeds, on a
shareholders, or to any related interest
fully-phased in basis, all applicable
of that person, in an amount that, when
capital requirements established by the
aggregated with all other extensions of
appropriate Federal banking agency.
credit to that person, and all related
•
«
*
*
+
interests of that person, exceeds
7.12
CFR
215.5
is
amended
by revising
$500,000. except by complying with the
newly designated footnote 4 in
requirements of this paragraph.
*
•
•
*
*
paragraph (a) and by revising paragraph
(d) to read as follows:
(c) Lending lim it No member bank
may extend credit to any of its executive § 215.5 Additional restrictions on loans to
officers, directors, or principal
executive officers of member banks.
shareholders or to any related interest
(a) **** * * •
of that person in an amount that, when
♦
•
a
*
•
aggregated with the amount of all other
(d)
Any
extension
of credit by a
extensions of credit by the member
member
bank
to
any
of
its
executive
bank to that person and to all related
officers shall be:
interests of that person, exceeds the
(1) Promptly reported to the member
lending limit of the member bank
bank’s
board of directors;
specified in § 215.2(h) of this part. This
(2) In compliance with the
prohibition does not apply to an
extension of credit by a member bank to requirements of f 215.4(a) of this part;
(3) Preceded by the submission of a
a company of which the member bank is
detailed
current financial statement of
a subsidiary or to any other subsidiary
the executive officer; and
of that company.
(4) Made subject to the condition in
(d) Aggregate lending limit—(1)
writing that the extension of credit will
General limit. A member bank may not at the option of the member bank,
extend credit to any insider unless the
become due and payable at any time
extension of credit is in an amount that, that the officer is indebted to any other
when aggregated with the amount of all bank or banks in an aggregate amount
outstanding extensions of credit by that greater than the amount specified for a
bank to all of its insiders, does not
category of credit in paragraph (c) of
exceed the bank’s unimpaired capita!
this section.
and unimpaired surplus (as defined in
8.12 CFR 215.11 is redesignated as
| 215.2(h) of this part).
§ 215.13, § § 215.6 through 215.10 are
(2)
Members banks with deposits o f redesignated as §§ 215.7 through 215.11,
respectively, and a new § 215.6 is added
less than $100,000,000. A member bank
to read as follows:
with deposits of less than $100,000,000
may by resolution of its board of
§ 215.6 Prohibition on knowingly receiving
directors increase the general limit
unauthorized extension of credit
specified in paragraph (d)(i) of this
No executive officer, director, or
section for the one-year period ending
principal
shareholder of a member bank
May 18,1993, to a level not to exceed
two times the bank's unimpaired capital shall knowingly receive (or knowingly
permit any of that person’s related
and unimpaired surplus, if;
interests to receive) from a member
(i) The board of directors determines
that such higher limit is consistent with bank, directly or indirectly, any
extension of credit not authorized under
prudent safe, and sound banking
this part.
practices in light of the bank's
experience in lending to its insiders and
4 Sections 215.5. 215.9. a n d 215.10 c f this p art
is necessary to attract or retain directors im plem ent se ctio n 22(g) o f th e F e d e ra l R eserve Act.
F or th e purposes o f those se ctio n s, an e xe cu tive
or to prevent restricting the availability
officer o f a m em ber b a n k does n o t in c lu d e an
of credit in small communities;
ex ecu tive o ffic e r o f a b a n k holding com pany of
(ii) The resolution sets forth the facts
w hich th e m em ber b a n k is a su b sid iary or any other
and reasoning on which the board of
su b sid iary of th at ban k holding com pany
10
io s
^3
9. A new 12 CFR 215.12 is added to
read as follows:
§ 215.12 Reporting requirement for credit
secured by certain bank stock.
Each executive officer or director of a
member bank the shares of which are
not publicly traded shall report annually
to the board of directors of the member
bank the outstanding amount of any
credit that was extended to the
executive officer or director and that is
secured by shares of the member bank.
10. Newly designated 12 CFR 215.13 is
revised to read as follows:
§ 215.13
Civil penalties.
Any member bank, or any officer,
director, employee, agent, or other
person participating in the conduct of
the affairs of the bank, that violates any
provision of this subpart (other than
§ 215.11) is subject to civil penalties as
specified in section 29 of the Federal
Reserve Act (12 U.S.C. 504).
PART 225— BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
1.
The authority for part 225 is revised
to read as follows:
A u t h o r it y : 1 2 U .S .C . 1 8 1 7 { j)(1 3 ), 1 8 1 8 ,
1 8 3 1 (i), 1 8 4 3 (c )(8 ), 1 8 4 4 (b ), 3 1 0 6 , 3 1 0 8 , 390 7
3 9 0 9 , 3 3 1 0 , a n d 3 3 3 1 - 3 3 5 1 , a n d s e c . 3 0 6 o f ti.v .
F e d e r a l D e p o s it I n s u r a n c e C o r p o r a tio n
I m p r o v e m e n t A c t o f 1 9 9 1 (P u b . L. N o . 1 0 2 -2 4 2
1 0 5 S ta t. 2 2 3 6 (1 9 9 1 )).
2.12
CFR 225.4 is amended by adding
paragraph (f) to read as follows:
§ 225.4
*
Corporate practices.
*
*
*
*
(f) Reporting requirement for credit
secured by certain bank holding
company stock. Each executive officer
or director of a bank holding company
the shares of which are not publicly
traded shall report annually to the boarc
of directors of the bank holding
company the outstanding amount of any
credit that was extended to the
executive officer or director and that is
secured by shares of the bank holding
company. For purposes of this
paragraph, the terms “executive officer"
and "director" shall have the meaning
given in § 215.2 of Regulation 0 , 12 CFR
215.2.
B o a rd o f G o v e r n o r s o f th e F e d e r a l R e se r v e
S y s t e m , M a y 2 1 ,1 9 9 2 .
Jennifer J. Johnson,
Associate Secretary o f the Board.
[F R D o c . 9 2 - 1 2 3 5 4 F ile d 5 - 2 2 - 9 2 ; 9 :5 8 a m ]
BILLING CODE 6210-01-M
@FedFRASER