The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FED ER AL RESERVE BANK O F N EW YORK [ Circular No. 8 5 6 7 T May 3, 1979 J REGULATION Y Comment Invited on Proposal To Include Only Foreign Organizations Principally Engaged in Banking Outside the United States in the Definition of “Foreign Bank H olding Company” To A ll Member Banks and Bank Holding Companies, and Others Concerned, in the Second Federal Reserve District: The Board of Governors of the Federal Reserve System has issued a proposal to amend its Regulation Y, “Bank Holding Companies and Change in Bank Control,” to narrow the definition of “foreign bank holding company” to foreign organizations principally engaged in banking outside the United States. Printed below is the text of the Board’s proposal and an analysis by the Board of Governors of the proposed change, which have been reprinted from the F e d e r a l R e g i s t e r of April 27, 1979. Comments on the proposal should be submitted by June 20, and may be sent to our Domestic Banking Applications Department. P aul A . V olcker, President. FEDERAL RESERVE SYSTEM [12 CFR Part 225] BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL The Board of Governors of the Federal Reserve System proposes to revise its regulation governing foreign bank holding companies. Under current regulations, foreign bank holding companies are afforded certain exemptions from the nonbanking prohibitions applicable to bank holding companies. The proposed rule would amend the definition of "foreign bank holding company" to include only those foreign organizations principally engaged in banking outside the United States. d a t e : Comments must be received by June 20.1979. ADDRESS: Send comments to the Secretary, Board of Governors of the Federal Reserve System. Washington, D.C. 20551. All comments should refer to Docket No. R-0219. summary: FOR FURTHER INFORMATION CONTACT: Michael G. Martinson, Senior Financial Analyst, Division of Banking Supervision and Regulation (202-45?3621); or C. Keefe Hurley. Jr., Senior Attorney, Legal Division (202-452-3269), Board of Governors of the Federal Reserve System. [Reg. Y ; Docket No. R-0219] in f o r m a t io n : Section half of whose consolidated assets are 4(c)(9) of the Bank Holding Company located, or consolidated revenues Act (“Act”) (12 U.S.C. 1843(c)(9)) permits derived, outside the United States. the Board, by regulation or order, to Although not required by the grant an exemption from the nonbanking . regulation, most foreign bank holding prohibitions of the Act with respect to companies are also foreign banks with a the nonbanking activities of foreign high degree of banking expertise. The bank holding companies that do the banking experience of such foreign greater part of their business outside the banks has generally contributed to the United States if the exemption would managerial strength of their subsidiary not be substantially at variance with the banks. In the Board's judgment, it would purposes of the Act and would be in the be inconsistent with the purposes of the public interest. The Board has exercised Act and would not be in the public its regulatory authority pursuant to interest for the exemptions afforded by section 4(c)(9) and granted foreign bank section 4(c)(9) of the Act and § 225.4(g) holding companies limited exemptions of Regulation Y to be extended to a from the nonbanking prohibitions of the foreign organization that is not Act (see § 225.4(g) of Regulation Y, 12 principally engaged in banking. CFR 225.4(g)). The Board's regulatory Accordingly, the Board proposes to exemptions relate primarily to amend the regulatory definition of nonbanking activities that are "foreign bank holding company" so as to conducted outside the United Stales. In include only those foreign organizations order to qualify for these exemptions, that are principally engaged in the the foreign organization must be a banking business outside the United "foreign bank holding company" which, States. In order to meet this test, more according to the regulation, means a than one-half of an organization's bank holding company organized under consolidated deposits must be located the laws of a foreign country, more than outside the United States. For the SUPPLEMENTARY purpose of this test, the foreign deposits of a United S tates bank will not be considered to be located outside the United States. The Board specifically invites comment on the desirability of using a proportion of deposits as a criteria for determining foreign bank holding company status. Also, the Board invites comment on the question of whether the criteria for determining foreign bank holding company status should be applied solely at the time of application or on a continuing basis. Those few foreign organizations that qualify as foreign bank holding companies under the current regulation but which would not qualify under the proposed definition, would be permitted to retain investments and engage in activities that were undertaken in reliance on the current exemption. This action is taken in connection with a regulatory analysis of the need and purposes of the regulation, and pursuant to the Board's authority under sections 4(c)(9) and 5(b) of the Act (12 U.S.C. 1843(c)(9) and 1844(b)). Regulatory Analysis of Proposed Amendment to § 225.4(g) of Regulation Y Section 4(c)(9) of the Bank Molding Company Act allows the Board to exempt foreign bonk holding companies from certain prohibitions on ownership of nonbanking companies. The proposed change in Regulation Y narrows the definition of foreign companies that can qualify for these exemptions to those that are primarily engaged in banking abroad. N e e d f o r th e Purpose o f th e A m e n d m e n t The Board recently completed a review of its policies toward foreign bank holding companies. That review took account of the growth of foreign ownership of U.S. banking institutions, the experience gained with foreign bank holding companies since the 1970 amendments to the Bank Holding Company Act, and the provisions of the recently enacted International Banking Act of 1978. The Board's policy statement of February 23,1979, which was issued as a consequence of that review, emphasized the Board’s position It is proposed that 12 CFR C hapter II that foreign bank holding companies, be am ended as follows: like domestic bank holding companies, PART 225— BANK HOLDING should be sources of strength to their COMPANIES U.S. subsidiary banks. In U.S. banking law, Congress has 1. By deleting existing § 225.4(g)(l)(iii) mandated a separation of banking and and adding a new subsection; and by commerce as a way of discouraging adding a new § 225.4(g)(4) so that conflicts of interest and potentially § 225.4(g) reads as follows: unfair competition in the United States. $ 225.4 Nonbanking activities. However, an exception to these rules * * * * * and standards was provided for bona Fide foreign organizations in their (g) Foreign bank holding companies. operations outside the United States. (1) As used in this paragraph: * * * (iii) "foreign bank holding company” Thus, in Section 4(c)(9) of the Bank Holding Company Act, the Board was means a bank holding company, empowered to grant exemptions from organized under the laws of a foreign the nonbanking prohibitions of that Act country, that is principally engaged in to foreign companies conducting the the banking business outside the United greater part of their business outside the States. A company will not be United States. The legislative history of considered to be principally engaged in the banking business outside the United that section makes it clear that it was intended to apply to companies States unless at least 50 per cent of its principally engaged in the banking consolidated deposits are located business. That view was reinforced by outside the United States. the 1978 amendments to section 2(h) of * * * * * that Act which enlarged the statutory (4) A company that (i) was a bank exemptions given to foreign companies holding company on April 21, 1979; (ii) is principally engaged in the banking organized under the laws of a foreign business outside the United States. country; and (iii) has more than half of Present provisions of Regulation Y its consolidated assets located, or implementing Section 4(c)(9) permit any consolidated revenues derived, outside foreign company, whether principally the United States may continue to engaged in banking or not. to qualify for engage in activities or retain these exemptions so long as the majority investments that were permissible at the of its assets or revenues are outside the time they were commenced or acquired. United States. Most of the companies * * * * * qualifying for these exemptions have in fact been principally engaged in banking, and indeed have been the large 2 international banks. However, experience has indicated that nonbanking companies can qualify as foreign bank holding companies. Moreover, because of the revenue generating capabilities of certain nonbanking businesses, even relatively small companies can meet the criteria and acquire a U.S. bank that by most other standards is larger than itself. These possibilities contradict the policy objective that a foreign bank holding company should be a source of Financial and managerial strength to the U.S. subsidiary bank. The purpose of the amendment is to correct this potential deficiency by limiting exemptions under section 4(c)(9) to companies principally engaged in the business of banking outside the United States. P ossible A lte rn a tiv e s to th e Pro p osed R e g u la to ry Change One alternative would be to substantially increase the supervision of foreign bank holding companies that are not primarily banking institutions. This avoids changing the Regulation, but would increase supervisory costs and would require bank examiners to assess operations in which they lack expertise. It also continues to permit foreign firqis that are essentially commercial in nature to own U.S. banks, while similar domestic firms are prohibited from doing so. A second alternative would be to increase the required percentage of foreign assets or revenues. This approach would ensure that the foreign organization is larger relative to the U.S. bank than is permitted now, but would not prevent a foreign nonbanking organization from acquiring a U.S. bank and qualifying for Section 4(c)9 exemptions. Additionally, it might conflict with the intent of (amended) Section 2(h) of the Bank Holding Company Act, which states that the Act's restrictions on nonbank activities do not apply to foreign organizations "principally engaged in business outside the U.S. if such shares are held or acquired by a bank holding company organized under the laws of a foreign country that is p r in c ip a lly engaged in the banking business outside the U.S." (emphasis added). A third approach would be to drop the revenue test. This would disqualify relatively small revenue intensive companies, but also fails to address the issued of nonbanking business. Foreign commercial companies could continue to apply for foreign bank holding company status based on the assets of their foreign activities. E conom ic Im plications a n d C om petitive E ffects Few foreign bank holding com panies w ould be affected by the proposed change. W ith few exceptions, existing foreign bank holding com panies are relatively large foreign banks that meet the proposed test. A ctivities of any existing foreign bank holding com pany not meeting the test w ould be g randfathered by the proposed regulation. Consequently, no existing foreign bank holding com pany w ould be required to divest its U.S. bank subsidiary or its foreign nonbanking activities due to the proposed change. Preventing nonbanking organizations from becom ing foreign bank holding com panies in the future should not have an adverse com petitive effect in U.S. financial m arkets. Foreign bank holding com panies generally increase com petition by establishing new U.S. banks or by providing financial support an d grow th to existing banks. The com panies m ost likely to do this are foreign banks, w hich are unaffected by this proposal. Foreign nonbank organizations can still acquire U.S. banks, but they w ould be treated as dom estic bank holding com panies, and required to divest of any nonbanking activities not perm itted under Section 4(c)® or 4(c)13 of the Bank Holding Com pany Act. T here w ould also be no additional com pliance, reporting, or recordkeeping requirem ents asso ciated w ith this regulatory change. Bank holding com panies m ust continue to dem onstrate that they m eet the sta n d ard s required to qualify as a foreign bank holding com pany, but the procedures w ould be sim ilar to those under existing requirem ents. The proposed change is designed to discourage m isuse of the U.S. b an k 's resources and to reduce its possible risk exposure. To th at extent the prim ary beneficiaries are the U.S. banking industry, U.S. b ank depositors, creditors, and shareholders, the FDIC as insurer of bank deposits, and the other sta te and federal bank supervisory agencies. A d v a n ta g e s o f th e R e c o m m e n d e d C han g e The proposed change has several ad vantages over the existing requirem ents and over the specified alternatives. Requiring that the foreign com pany be principally engaged in banking provides g reater assu ran ce that its m anagem ent is fam iliar w ith the banking business an d gives priority to m anaging its banking activities and m aintaining its reputation in financial m arkets. W hen banking is a m inor p art of the paren t com pany's business, the paren t may be less inclined to monitor the b an k 's activities an d to provide ad eq u ate support. M oreover, w hen the foreign p aren t is prim arily a banking organization, there is less likelihood that the U.S. b an k 's resources w ould be diverted to its nonbanking affiliates. D om estic b an k holding com panies m ust restrict their nonbanking activities to those perm issible u n d er Sections 4(c)8 or 4(c)13 of the Bank Holding C om pany Act. Section 2(h) of th a t A ct perm its other nonbanking activities, but only for foreign bank holding com panies that are prim arily banks. O nly the recom m ended change restricts the Section 4(c)9 exem ptions to sim ilar institutions and avoids an unnecessarily w ide exem ption. The change to m easurem ent of holding com pany size b ased on deposits, rath e r than asse ts or revenues, recognizes th a t banking includes different activities outside the U.S. but that deposit-taking activities are cen tral to any banking function involving risks sim ilar to those taken by U.S. banks. In m ost countries banking is more highly regulated an d supervised than other industries. W here U.S. authorities are lim ited in supervising the paren t com panies, this foreign supervision an d the restriction of risks to those of a banking n atu re provide an additional layer of protection for U.S. banking subsidiaries, financial m arkets, an d the U.S. public. (Regulation Y: Docket No. R-OZ19J (FR Doc. 79-13043 Filed 4-29-79; 8:45 am| R E PR IN T E D FROM FEDERAL REGISTER , VOL. 4 4 , NO. 8 3 — FRID A Y , A PR IL 2 7 , 1 9 7 9 3
@FedFRASER