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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10743 "I November 28, 1994 J INTERNATIONAL BANKING OPERATIONS Amendment to Regulation K To All Depository Institutions in the Second Federal Reserve District, and Others Concerned: The Board of Governors of the Federal Reserve System has amended its Regulation K, “International Banking Operations,” effective January 1, 1995, in order to set forth the application procedures that State-licensed branches and agencies of foreign banks will be required to follow to request the Board’s approval to engage in or continue to engage in activities not generally permissible for a federal branch o f a foreign bank. The amendment also provides that no application will be required in connection with the conversion by a foreign bank of its federally licensed branch or agency into a State-licensed branch or agency. Enclosed — for member banks, branches and agencies of foreign banks, foreign bank holding companies, and others maintaining sets of the Board’s regulations — is the text o f the amendment to Regulation K, which has been reprinted from the Federal Register of November 3. Questions regarding this matter may be directed to Carmine Gioioso, Examining Officer, European Examinations Department (Tel. No. 212-720-6965). W il l ia m J. M c D o n o u g h , President. Board of Governors of the Federal Reserve System INTERNATIONAL BANKING OPERATIONS AMENDMENT TO REGULATION K (Effective January 1, 1995) FEDERAL RESERVE SYSTEM FOR FURTHER INFORMATION CONTACT: desires to engage in or continue to engage in an activity that is not Kathleen M. O ’Day, Associate General 12CFR Part 211 permissible for a federal branch, Counsel (202/452-3786), Ann E. pursuant to statute, regulation or order Misback, Managing Senior Counsel [Regulation K; Docket No. R-0793] or interpretation issued by the Office of (202/452-3788), John W. Rogers, the Comptroller of the Currency (OCC), Attorney (202/452-2798); Michael G. International Banking Operations Martinson, Assistant Director (202/452- to file an application in letter form to AGENCY: Board of Governors of the 3640), Division of Banking Supervision the Board for permission to conduct or Federal Reserve System. to continue to conduct such activity. and Regulation, Board of Governors of The‘proposed regulation set forth the ACTION: Final rule. the Federal Reserve System. For the required contents of the application and hearing impaired only, SUMMARY: The Board of Governors of the Telecommunication Device for the Deaf a procedure for divestiture or cessation Federal Reserve System (Board or of impermissible activities not approved [TDD], Dorothea Thompson (202/452Federal Reserve) amends its Regulation 3544), Board of Governors of the Federal by_the Board. K concerning the permissible activities The Board specifically requested Reserve System, 20th and C Streets, of state-licensed branches and agencies comment on several items, including N.W ., Washington, D.C. 20551. of foreign banks. Section 202(a) of the the contents of the application, whether SUPPLEMENTARY INFORMATION: Section Federal Deposit Insurance Corporation 202 of the Act amended section 7 of the prior notice rather than an application Improvement Act of 1991 (FDICIA or might be appropriate for certain classes International Banking Act (IBA) by Act) provides that after December 19, of activities, and whether the conduct of adding several new subsections 1992, a state-licensed branch or agency activities permitted by the OCC concerning the establishment and of a foreign bank may not engage in any pursuant to informal rather than formal termination of foreign bank branches in activity that is not permissible for a interpretation, opinion or advice should the United States. N ew subsection 7(h) federal branch of a foreign bank unless require the filing of an application. of the IBA provides that: the Board has determined that the In addition, the Board requested (1) IN GENERAL.— A fter the en d o f the 1- comment on another provision of activity is consistent with sound year p eriod b eg in ,n in g, on„the date o f banking practice, and in the case of an Regulation K which requires that a , . . , . . . , en actm en t o f the [ Ac t a St at e b r a n c h or St at e , insured branch, the Federal Deposit r foreign bank wishing to convert from a ' . ___ . ^ ng a g e i n a n y t y p e ot act i vi t y r , ° ° .. agen cy m ay n ot engage Insurance Corporation (FDIC) has federal branch or agency license-to a that is n ot p erm issib le for a F ederal branch determined that the activity would pose u n le ss— state branch or agency license file for no significant risk to the affected approval to do so with the Board. (A) the [Federal Reserve] Board has The Board received four public deposit insurance fund. This d eterm in ed that su ch activity is co n sisten t comments on the regulation. Comments amendment to Regulation K sets forth w ith so u n d b an k in g practice; and (B) in th e ca se o f an in su red branch, the were submitted by a state banking the application procedures which stateF ederal D ep o sit Insurance C orporation has supervisor, an association of state licensed branches and agencies of d eterm in ed that the a ctiv ity w o u ld p o se no banking supervisors, a trade association foreign banks w ill be required to follow significant risk to the deposit insurance fund ^ a ]aw The commented in order to request the Board’s 12 U.S.C. 3105(h)(1). generally Were supportive of the permission to engage in or continue to In order to implement this provision, approach taken in the proposed rule, engage in an activity which is not the Board issued a proposed rule on The comments focused on whether an permissible for a federal branch of a January 6,1993, with a request for activity-based approach rather than a foreign bank and the requirements of divestiture and cessation plans. Insured public comment. (58 FR 513). In taking bank-based approach would be this action, the Board stated that it preferable, whether the conduct of branches are also required to seek the would consider revisions to the activities permitted by the OCC approval of the FDIC to engage in or to proposed rule as appropriate and on the pursuant to informal rather than formal continue to engage in such an activity. interpretation, opinion or advice should The final rule also amends Regulation K basis of the comments received. The comment period endpct on March 5, require an application and whether an to clarify that no application w ill be 1993. The Board indicated that it would application would be required to required in connection with the accept and process applications under conduct an activity that the OCC conversion by a foreign bank of its federally-licensed branch or agency into the statute during the pendency of the permitted but only subject to rulemaking. No applications have been quantitative restrictions. The a state-licensed branch or agency. received. commenters uniformly stated that no EFFECTIVE DATE: This regulation is The proposed rule required a foreign application should be required to effective on January 1,1995, except for bank operating a state-licensed branch convert from a federal branch or agency § 211.21(e) which is effective December or agency in the United States, which license to a state branch or agency 5,1994. PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 59. NO. 212, pp. 55026-29 |Enc. Cir. No. 107431 license. On March 2,1993, the FDIC issued its own proposed regulation implementing section 7(h) of the IBA. See 58 FR 11992. The Board has consulted with the FDIC concerning the response to its proposed rule. Both the Board and the FDIC have attempted to make their final rules as consistent with one another as possible and thereby to reduce the burden that might be imposed on applicants. A description of the final rule and an analysis of the relevant comments follows. Determining if an Activity is Permissible for a Federal Branch The commenters generally stated that no application should be required from a state-licensed branch or agency for the conduct of an activity that is permitted for a federal branch pursuant to interpretation, opinion or advice issued in writing by the OCC or its staff, as well as by statute, regulation official bulletin, circular or order. The commenters argued that a stricter requirement would result in a competitive disadvantage to state licensed offices and thereby would be inconsistent with the intent of the statute. The Board agrees with that argument. Accordingly, the conduct of activities permitted for a federal branch pursuant to interpretation, opinion or advice issued in writing by the OCC or its staff w ould not require an application, so long as such interpretation, opinion or advice is still considered valid, i . e . , it has not been overruled by the OCC or found invalid by a court of competent jurisdiction. In addition, because national banks and federal branches may rely on a written opinion of counsel that an activity is permissible under the National Bank Act or other applicable statutes, in the Board’s view, it would be appropriate to permit state-licensed branches and agencies also to rely on such opinions, provided the opinion of counsel is based on a reasoned analysis of applicable statutes, regulations, official bulletins, circular, orders, or interpretations, opinions or advice of the OCC or its staff. The Board plans to consult with the OCC when questions arise as to the permissibility of any particular activity. Insured branches of foreign banks also should consult with the FDIC as to the permissibility of particular activities. Bank Approach Versus Activity Approach The Board’s proposed rule took a bank-based approach to im plem enting the statute; that is, an application was required from each bank wishing to conduct or continue to conduct an activity not permissible for a national bank. The comments suggested that the Board instead take an activity based approach, at least with respect to activities which the commenters believed presented minimal risk. One commenter suggested that the Board entertain applications from industry trade groups with respect to the conduct of such activities. The Board has determined that a combination of the two approaches is the appropriate way to proceed and has modified the proposed rule accordingly. As described in further detail below, the final rule provides that certain categories of activities are consistent with sound banking practice and that no application should be required to conduct such activities. The fact that the Board’s prior consent is not required does not preclude the Board from taking any appropriate action within its authority with respect to such activities if the facts and circumstances warrant such action. found to be improperly conducted, the Board retains enforcement authority to require conformance to safety and soundness requirements. Finally, like the proposed rule, the final rule provides that an application under this section normally shall not be required where an activity is permissible to a federal branch but the OCC imposes a quantitative restriction on the conduct of such activity by the federal branch. The commenters were supportive of this exemption. The Board believes appropriate quantitative restrictions can be addressed on a caseby-case basis as part of the ongoing supervisory process. Contents of Application Section 211.29(b) of the proposed regulation provided that the application shall be in letter form and shall contain certain information, including among other things, a description of the activity in which the branch or agency desires to engage or in which it is already engaged, the foreign bank’s financial condition, the assets and liabilities of the branch or agency, the projected effect of the proposed activity on the Application Not Required in Certain financial condition of the foreign bank Instances and the branch or agency, and in the case of an application by a stateThe first category of activities licensed insured branch, a statement of exempted from the application why the proposed activity w ill pose no requirement are certain activities significant risk to the deposit insurance already determined by the FDIC not to fund. pose a significant risk to the Bank The commenters suggested that Insurance Fund pursuant to § 362.4(c)(3) applicants not be required to provide of the FDIC’s regulations (12 CFR part information already available to the 362). The Board has determined not to Federal Reserve through its general require an application under this part for the conduct of any such activity that examination and supervisory process. the FDIC would permit an insured state Accordingly, the Board has deleted from the final rule the requirement to provide bank to conduct directly, provided the activity is permissible for the branch or certain financial information. The Board may request such information in agency under applicable state law and individual cases if the information in its any other applicable federal law or possession is either out of date or regulation. The Board believes the conduct of these activities, with proper otherwise deemed insufficient. The Board and the FDIC have controls, is consistent with safe and consulted concerning the type of sound banking. A s set forth in 12 CFR information which each agency w ill 362.4(c)(3)(i)—(ii)(A), the exempted need in order to make an informed activities include guarantee activities judgment and have agreed on a common and activities found by the Board by regulation or order to be closely related list of information in order that applicants w ill need to prepare only one to banking. In addition, the Board has application which, in the case of determined to exempt from the insured branches, may be submitted to application requirement any activity both agencies. It is contemplated that conducted as agent rather than as the Board and the FDIC w ill review principal, provided that the activity is one that could be conducted by a state- such applications simultaneously. chartered bank headquartered in the Standards To Be Examined same state as the branch or agency is licensed. O f course, all activities of the Section 211.29(d) of the final rule sets branches and agencies remain subject to forth the standards that the Board w ill examination. If any particular activity is examine in order to determine whether 2 a particular activity is consistent with sound banking practice. These factors are: connection with the conversion of: (1) a Office of the Comptroller of the federally-licensed branch to a state Currency; or (2) Is rendered impermissible due to licensed-branch; or (2) a federally • What types of risks, if any, the a subsequent change in statute, licensed-agency to a state-licensed activity poses to the U.S. operations of agency. Applications are not considered regulation, official bulletin or circular, the foreign banking organization; written order or interpretation, or necessary in light of the fact that state• If the activity poses any such risks, licensed branches and agencies must decision of a court of competent the magnitude of each risk; and jurisdiction. restrict their activities to those • If a risk is not de m in im is, the (b) E xception s. No application shall permissible for a federal branch or actual or proposed procedures to control receive the Board’s approval to engage be required by a state-licensed branch or and minimize such risk. in the activity. Section 24 of Regulation agency to conduct any activity that is Each of these factors shall be evaluated K w ill be amended accordingly. otherwise permissible under applicable in light of the ability of the foreign bank state and federal law or regulation and Regulatory Flexibility Act to provide financial and managerial that: support to the branch or agency, the (1) Has been determined by the FDIC Pursuant to section 605(b) of the performance record of the foreign bank Regulatory Flexibility Act (5 U.S.C. 601 pursuant to 12 CFR 362.4(c)(3)(i)in general and the branch or agency in et seq.), it is certified that this final rule (c)(3)(ii)(A ) not to present a significant particular, and the volume of the risk to the affected deposit insurance w ill not have a significant impact on a fund; proposed activity. The Board may also substantial number of small entities. (2) Is permissible for a federallydetermine that a particular activity, after List of Subjects in 12 CFR Part 211 licensed branch but the OCC imposes a consideration of the above factors and quantitative limitation on the conduct of subject to any conditions or limits Exports, Federal Reserve System, such activity by the federal branch; imposed by die Board, may be Foreign banking, Holding companies, (3) Is conducted as agent rather than conducted by any other state-licensed Investments, Reporting and record as principal, provided that the activity branch or agency without further keeping requirements. is one that could be conducted by a application to the Board. For the reasons set forth in the state-chartered bank headquartered in This section remains unchanged from preamble, the Board amends 12 CFR the same state in which the branch or the proposed rale. part 211 as set forth below: Cessation or Divestiture In the event that a state branch or agency is required to cease conducting an activity pursuant to the final regulation, § 211.29(f) sets forth the guidelines that must be followed to divest or cease the impermissible activity. Generally, this section provides that the state branch or agency shall submit a written plan of divestiture or cessation within 60 days of (1) being notified by the Board or the FDIC that an application to continue to conduct the activity has been denied, (2) the effective date of the regulation in the event that the foreign bank elects not to apply for permission to continue to conduct the activity, and (3) any change in statute, regulation, order or OCC interpretation that renders the activity impermissible. Divestiture or cessation shall be completed within one year, or sooner if the Board so directs. The Board requested comment on whether or not this period of time should be longer or shorter. No comments were received on this portion of the proposed rule. Accordingly, no substantive changes were made. Conversion From Federal to State License As suggested by the commenters, the Board has determined not to require an application under the Foreign Bank Supervision Enhancement Act in PART 211— INTERNATIONAL BANKING OPERATIONS (REGULATION K) 1. The authority citation for Part 211 is revised to read as follows: A u thority: 12 U.S.C. 221 e t s e q . , 1818, 1841 e t s e q . , 1843 e t s e q . , 3101 e t s e q . , 3901 e t seq. 2. In § 211.21, paragraph (e) is revised to read as follows: agency is licensed; or (4) Any other activity that the Board has determined may be conducted by any state-licensed branch or agency of a foreign bank without further application to the Board. (c) Contents o f a p p lica tion . An application submitted pursuant to paragraph (a) of this section shall be in letter form and shall contain the following information: (1) A brief description of the activity, including the manner in which it will be conducted and an estimate of the §211.21 D efinitions. expected dollar volume associated with * * * * * the activity; (e) Change the status of an office (2) A n analysis of the impact of the means convert a representative office proposed activity on the condition of into a branch or agency, or an agency the U.S. operations of the foreign bank into a branch, but does not include in general and of the branch or agency renewal of the license of an existing in particular, including a copy, if office. available, of any feasibility study, * * * * * management plan, financial projections, 3. In § 211.29, the text is added to business plan, or similar document read as follows: concerning the conduct of the activity; (3) A resolution by the applicant’s § 211.29 Applications by state-licensed board of directors or, if a resolution is branches and agencies to conduct activities not required pursuant to the applicant’s not permissible for federal branches. organizational documents, evidence of (a) Scope. A state-licensed branch or approval by senior management, agency shall file with the Board a prior authorizing the conduct of such activity written application for permission to and the filing of this application; engage in or continue to engage in any (4) If the activity is to be conducted type of activity that: by a state-licensed insured branch, a (1) Is not permissible for a federal statement by the applicant of whether or branch, pursuant to statute, regulation, not it is in compliance with 12 CFR official bulletin or circular, or order or 346.19 and 346.20, Pledge of Assets and interpretation issued in writing by the Asset Maintenance, respectively; 3 paragraph (d)(1) of this section, shall be (5) If the activity is to be conducted evaluated in light of the financial by a state-licensed insured branch, condition of the foreign bank in general statements by the applicant: (i) That it has complied with all and the branch or agency in particular and the volume of the activity. requirements of the Federal Deposit (e) A p p lic a tio n p roced ures. Insurance Corporation concerning an Applications pursuant to this section application to conduct the activity and shall be filed with the responsible the status of the application, including a copy of the FDIC’s disposition of such Reserve Bank for the foreign bank. A n application shall not be deemed application, if available; and complete until it contains all the (ii) Explaining why the activity w ill information requested by the Reserve pose no significant risk to the deposit Bank and has been accepted. Approval insurance fund; and (6) Any other information that the of such an application may be Reserve Bank deems appropriate. conditioned on the applicant’s (d) Factors co n sid e re d in agreement to conduct the activity determ ination. (1) The Board shall subject to specific conditions or consider the following factors in limitations. determining whether a proposed (f) D ivestiture o r cessation. (1) In the activity is consistent with sound event that an applicant's application for banking practice: permission to continue to conduct an activity is not approved by the Board or, (1) T h e ty p e s o f risks, if any, the activity if applicable, the FDIC, the applicant p o se s to the U .S . o p era tio n s o f the foreign b an k in g org a n iza tio n in general and the shall submit a detailed written plan of branch or a g en cy in particular; divestiture or cessation of the activity to (ii) If the a ctiv ity p o se s any su ch risks, the the responsible Reserve Bank within 60 m a g n itu d e o f e a ch risk; and days of the disapproval. The divestiture (iii) If a risk is n ot d e m in im is, the actual or cessation plan shall describe in detail or p ro p o sed p ro ced u res to control and the manner in which the applicant w ill m in im ize the risk. divest itself of or cease the activity and (2) Each of the factors set forth in 4 shall include a projected timetable describing how long the divestiture or cessation is expected to take. Divestitures or cessation shall be complete within one year from the date of the disapproval, or within such shorter period of time as the Board shall direct. (2) In the eyent that a foreign bank operating a state branch or agency chooses not to apply to the Board for permission to continue to conduct an activity that is not permissible for a federal branch or which is rendered impermissible due to a subsequent change in statute, regulation, official bulletin or circular, written order or interpretation, or decision of a court of competent jurisdiction, the foreign bank shall submit a written plan of divestiture or cessation, in conformance with paragraph (f)(1), of this section within 60 days of January 1,1995 or of such change or decision. By order o f the Board o f G overnors o f the F ederal R eserve S y stem , O ctober 2 7 ,1 9 9 4 . William W. Wiles, Secretary of the Board. (FR Doc. 9 4 -2 7 1 2 1 F ile d 1 1 - 2 -9 4 ; 8:45 am] BILLING CODE 6210-01-P
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