Full text of Federal Reserve Bank of New York Circulars : 7036. Amendments to Voluntary Foreign Credit Restraint Guidelines

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FEDERAL RESERVE BANK
OF NEW YORK
r C ircular No. 7 0 3 6 * 1
L N ovem ber 13, 1972 J

Amendments to Voluntary Foreign Credit Restraint Guidelines
Effective N ovem ber 7, 1972
T o A ll B anks and O ther Financial Institutions
in the Second Federal Reserve D istrict:

T he follow ing statem en t w as issued N ovem ber 7 by the B oard of G overnors of the F ederal
Reserve S ystem :
The Board of Governors of the Federal Reserve System announced today the adoption of several clar­
ifying amendments to the Voluntary Foreign Credit Restraint (V F C R ) Guidelines. The revisions do not
affect the foreign lending and investment ceilings of banks and other financial institutions. The amend­
ments are essentially administrative and are designed to be neutral with respect to capital outflows under the
Guidelines.
One change extends to nonbank domestic subsidiaries of bank holding companies an opportunity already
afforded to domestic subsidiaries of Edge Act Corporations. That opportunity would now permit those
holding company subsidiaries to reduce the amount of foreign assets charged against bank lending ceilings
by the amount of outstanding borrowings they have made from foreigners for minimum maturities of three
years in order to invest abroad.
In amending the provision, the Board recognized that some banks now utilize domestic subsidiaries of
their holding companies to make foreign investments in the same manner as banks have been using domestic
subsidiaries of Edge Act Corporations.
The Board also amended the Guidelines to incorporate several interpretations made since the present
Guidelines were revised and reissued on November 11, 1971. Those amendments will:
1) specify how banks that have come into being since the end of 1970 are to calculate their lending
ceilings;
2) distinguish between the characteristics of real estate investment trusts that are to be treated as non­
bank financial institutions for purposes of the Guidelines and those that are not;
3) state that banks without ceilings may hold foreign assets up to $500,000 or in some cases a
lower amount;
4) explain that only those trust funds over which trustees have some investment discretion and that are
not separately reported by the customer are to be treated as subject to the restraints applicable to those
institutions;
5) state that equity securities issued by a nonbank financial institution and sold to, and held by, for­
eigners in developed countries may be counted as offsets to foreign assets under ceiling in the same way
that borrowings from such foreigners have been treated as offsets;
6) make clear that special adjustments for investments in foreign insurance ventures is limited only to
investments made before 1965; and
7) indicate that foreign tariffs are not to be considered as part of the cost of U. S. exports for the
purpose of determining an export credit.
The amendments become effective immediately.

T h e te x t of the changes in the guidelines, effective N ovem ber 7, 1972, is printed on the follow ­
ing pages. A dditional copies of this circu lar will be fu rn ish ed upon request.




A lfred

H ay es,

President.

CHANGES IN GUIDELINES
II.
A.

BANKS

Ceilings for N onexport Financing
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2.

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III.

Calculation of ceilings

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c. 2 per cent of its total assets, as of December 31,
1970, except for a bank established on a subsequent
date, 2 per cent of its total assets, month by month,
until it has been in operation one full calendar year
and thereafter 2 per cent of its total assets at the end
of that first full calendar year of operation.
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Foreign borrowings
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a.

Banks, bank holding companies, Edge A ct Cor­
porations, and Agreement Corporations. A bank, a

bank holding company, an “ Edge Act” Corporation, or
an “ Agreement” Corporation may not count its bor­
rowings from, or its other liabilities to, foreigners as
offsets to its claims on foreigners and other foreign
assets.
b. Domestic subsidiaries. A domestically chartered
nonbank subsidiary (for example, a so-called Delaware
subsidiary) of a bank holding company, of an Edge Act
Corporation, or of an Agreement Corporation may count
the outstanding amount of its borrowings from foreign­
ers as offsets to its claims on foreigners and to its
other foreign assets, provided those borrowings are of
an original maturity of 3 years or more. Such borrow­
ings would include debentures, promissory notes, or
other debt obligations of the domestic subsidiary to a
foreigner. The amount of the offset at any time would
be equal to the amount of the outstandings after deduct­
ing (i) any repayments of principal and (ii) in the case
of convertible debt issues, any conversions. This off­
setting principle may be used to reduce the value of
foreign assets of the subsidiary in computing the value
o f foreign assets to be consolidated for reporting pur­
poses with those of the parent institution; any excess
of outstanding borrowings of the subsidiary over for­
eign assets of the subsidiary may not be used to reduce
the reportable value of foreign assets o f the parent
institution.
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E.

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C onform ity w ith objectives of Guidelines
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6.

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A bank will have a ceiling which will be the greatest
of the following:

7.

for example, with the request against holding funds
abroad in liquid form except for necessary working
balances.

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Banks without ceilings

A bank that has not adopted a ceiling will be acting
in conformity with the objectives of the Guidelines (a)
if its foreign assets of types subject to restraint do
not exceed the lesser of (i) $500,000 or (ii) 2 per cent
of its end-of-1970 total assets and (b ) if those foreign
assets are otherwise in conformity with the Guidelines,




A.

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NONBANK FINANCIAL INSTITUTIONS

A pplicability to financial institutions
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Businesses whose principal activity is the leasing of
property and equipment, and which are not owned or
controlled by a financial institution, are not defined as
financial institutions. Real estate investment trusts
whose assets consist primarily of real property as con­
trasted with financial assets (such as mortgages) also
are not covered by these Guidelines.
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D.

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Covered assets—subject to ceiling
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7.
Investments made by trust departments of com­
mercial banks or by trust companies with trust funds
over which the trustee (or co-trustee) has at least some
influence over investment policy and not separately
reported by another financial situation.
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H.

*

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Investm ent in certain foreign insurance ventures

Net investment in foreign insurance ventures should
be reported. In the case only of a foreign insurance
venture in which a U. S. nonbank financial institution
had an investment before 1965, if it is not feasible to
segregate the net investment of the U. S. nonbank finan­
cial institution, the latter may exclude from its foreign
assets subject to ceiling the aggregate of the larger of
the following in each foreign country in which a foreign
affiliate sells insurance: (a) 110 per cent of assets held
in the foreign country as reserves against insurance
sold to residents of that country by the foreign affiliate
or (b ) the minimum deposit of cash or securities re­
quired by foreign authorities as a condition of doing
insurance business in that country.
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J.

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Covered assets in excess of ceiling

1.
In view of the balance of payments objectives of
the program, covered investments of nonbank financial
institutions may be permitted to exceed the Guideline
ceiling to the extent that the funds for such investment
are (a) borrowed abroad for investment in the same
country or in countries that are subject to the same or
more liberal Guideline restraint or (b ) derive from
equity securities issued by the nonbank financial institu­
tion and sold to residents of foreign developed countries
( other than Canada), provided that the nonbank financial
institution promptly treats as a charge against its ceil­
ing the amount of any such equity securities at any
moment it is unable to assure itself fully that any such
securities continue in the possession of such foreigners.

(For reporting purposes, amount of such securities
held by foreigners should be included with borrowings
in foreign countries.) Thus, funds borrowed in the
developed countries of continental Western Europe
may be used to finance investments in these countries
and elsewhere, and funds borrowed in other developed
countries (except Canada) may be used to finance in­
vestment in covered foreign assets anywhere but in the
developed countries of continental Western Europe.
Any institution desiring to offset foreign borrowing
against foreign investment, however, should discuss its
plans with the Federal Reserve Bank before entering
into such an arrangement.
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IV. DEFINITIONS
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3.

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“ Export Credit” ***
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The cost of freight in connection with exportation,
the cost of transport insurance in connection with ex­
portation, and the cost of export credit guarantees and
export credit insurance borne by the foreign buyer or
the foreign financial institution may be included in the
cost of export for the purpose of determining the amount
of credit that is to be considered export credit. Any
element of foreign duty is to be excluded for this
purpose.