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FED ER A L R ESERVE BANK O F N E W YORK r L C ircu lar N o . 7 2 0 A u g u s t 3, 1973 3 1 J REGULATION Y — BANK HOLDING COMPANIES Revised Proposal and Hearing on Real and Personal Property Leasing Activities To All Bank Holding Companies, and Others Concerned, in the Second Federal Reserve District: Following is the text of a statement issued July 31 by the Board of Governors of the Federal Reserve System: The Board of Governors of the Federal Reserve System today published for comment and scheduled a hearing for September 12 on a revised proposal to permit bank holding companies to engage in both real and personal property leasing under a consolidated set of rules. Today’s revision followed Board consideration of comments received on an earlier proposal that was announced last December 6. The Board scheduled the hearing in view of the complexities of the issues involved and the Board’s desire to gather further information prior to final action. The hearing is to be held at the Board’s offices before available Board members. The proposal would supersede the existing regulatory provision authorizing bank holding companies to engage in personal property leasing, and would provide a common set of rules for bank holding companies engaging in personal or real property leasing or both. The proposal retains the central condition the Board has imposed upon leasing by bank holding com panies — that the leasing transaction serve as the functional equivalent of an extension of credit whereby the lessor recovers its full investment in the leased property during the initial term of the lease. Principal changes in the leasing rules, as now proposed, a r e : 1. The term “ residual value” would be substituted for “ salvage value” and, in computing full pay out recovery, maximum allowable residual value would be limited to 10 per cent of the acquisition cost of the property. 2. In computing full payout recovery reasonably anticipated renewal leases can be relied upon with respect to governmental entities only and not private lessees. 3. The proposal would permit a bank holding company to own property to be leased for up to 50 years, but would require full payout recovery within 40 years. 4. The prior proposal would have required bank holding companies to sell the property within two years after expiration of the initial full payout lease term. The revised proposal would permit bank hold ing companies the alternative of re-leasing the property. Other provisions of the previous proposal, including requirements that the property to be leased was acquired specifically for the leasing transaction and that the lease is on a non-operating basis, are unchanged. Written comment on the revised proposal will be received by the Secretary of the Board through Oc tober 3, 1973. Persons interested in participating in the hearing should inform the Secretary of the Board in writing not later than August 24, 1973. Each person admitted as a party to the proceeding will be given up to 30 minutes to present his views. Printed on the reverse side is the text of the revised proposal and hearing order. Written comments on the proposal should be submitted by October 3 and may be sent to our Bank Applica tions Department. A lfred H ayes , President. ( over) BANK HOLDING COMPANIES Nonbanking Activities The Board of Governors has considered the com ments received on its proposal (37 F.R. 26534) to permit bank holding companies, under the authority of section 4 ( c ) ( 8 ) of the Bank Holding Company Act, to engage in real and personal property leasing under substantially the same conditions and has made certain modifications of such proposal, which are set forth here inafter. Due to the number and complexity of the issues involved in the proposal, the Board believes it in the public interest to gather more information about the proposal at a hearing. Accordingly, the Board has di rected that a hearing be held before available members of the Board in Room 1202 of its building at 20th Street and Constitution Avenue, N.W., Washington, D. C., on September 12, 1973, at 10:00 a.m. The proposed amendment, as modified, reads as fol lows : SECTION 225.4— N O N B A N K IN G A C T IV IT IE S (а) Activities closely related to banking or man aging or controlling banks. * * * The following ac tivities have been determined by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto: ♦ * * (б ) Leasing real and personal property or acting as agent, broker or adviser in leasing such property pro vided : (i) the lease is to serve as the functional equivalent of an extension of credit to the lessee of the property; (ii) the property to be leased is acquired speci fically for the leasing transaction under consideration or was acquired specifically for an earlier leasing transaction; (iii) the lease is on a nonoperating basis; (iv) at the inception of the initial lease the effect of the transaction (and, with respect to governmental entities only, reasonably anticipated future transac tions)* will yield a return from (1 ) rentals, (2) estimated tax benefits (investment tax credit, net economic gain from tax deferral from accelerated de preciation, and other tax benefits with a substantially similar effect), and (3 ) the estimated residual value * The Board understands that some Federal, State and local govern mental entities may not enter into a lease for a period in excess of one year. Such an impediment does not prohibit a company authorized under 5225.4(a) from entering into a lease with such governmental entities if the company reasonably anticipates that such governmental entities will renew the lease annually until such time as the company is fully com pensated for its investment in the leased property plus its costs o f financ ing the property. Further, a company authorized under §225.4 (a ) may also engage in a so-called “ bridge” lease financing of personal property, but not real property, where the lease is short term pending completion of long term financing, by the same or another lender. of the property at the expiration of the initial term of the lease, which in no case shall exceed 10 per cent of the acquisition cost of the property to the lessor, 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 ;** (v ) the maximum lease term during which the lessor must recover the lessor’s full investment in the property plus the estimated cost of financing the property shall be 40 years; and (v i) 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 re-leased on a nonoperating basis as soon as practic able but in no event later than two years from the expiration of the lease,*** however, in no case shall the lessor retain any interest in the property beyond 50 years after its acquisition of the property. In connection with the hearing, the Board notes that BankAmerica Corporation, San Francisco, Cali fornia, has requested an opportunity for a hearing with regard to the effect the proposal would have upon the Board’s existing personal property leasing regulation (2 2 5 .4 (a )(6 ) of Regulation Y ). Other interested per sons are invited to participate by presenting their views on issues raised by the pending proposal. Interested persons need not participate in the hearing through oral presentation in order to have their views consid ered. All views previously expressed in writing on the pending proposal are under consideration by the Board and are available for inspection and copying in Room 1020 of the Board’s building. Persons interested in participating in the hearing by presenting material orally should inform the Secretary of the Board in writing not later than August 24, 1973. Each person admitted as a party to the proceeding will be given up to 30 minutes to present his views. Anyone wishing to submit written comments on issues raised at the hearing may do so at any time before the close of business October 3, 1973. By order of the Board of Governors, July 27, 1973. * * The estimate by the lessor of the total cost of financing the property over the term o f the lease should reflect, among other factors, the term of the lease, the modes o f financing available to the lessor, the credit rating of the lessor a n d /or the lessee, if a factor in the financing, and prevailing rates in the money and capital markets. * * * In the event of a default on a lease agreement prior to the expira tion of the lease term, the lessor shall either re-lease such property, subject to all the conditions of this subsection 6, or liquidate such property as soon as practicable but in no event later than two years from the date of default on a lease agreement.