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FEDERAL RESERVE BANK
OF N EW YORK
Circular No. 8 6 7 3 1
November 2 , 1979 J
REGULATION K — INTERNATIONAL BANKING OPERATIONS
Comment Invited on Proposed Regulatory Changes
Limiting the Interstate Banking Activities of Foreign Banks
T o A l l M e m b e r B a n k s , E d g e a n d A g r e e m e n t C o r p o r a ti o n s ,
B r a n ch es a n d A g e n c ie s o f F o r e ig n B an ks, a n d O th e r s C o n c e r n e d ,
in t h e S e c o n d F e d e r a l R e s e r v e D is t r ic t :
The Board of Governors of the Federal Reserve System has invited public comment on a proposal
to amend its Regulation K, “International Banking Operations,” to limit the interstate banking activ
ities of foreign banks in the United States. In addition, the Board of Governors is also requesting
comment on an interpretation of the regulation dealing with that proposal.
Following is the text of the Board’s statement on this matter:
The proposed rules, on which the Board asked for comment by January 4, 1980, would implement the
provisions of the International Banking Act of 1978 restricting the establishment in the United States by
foreign banks of branches and subsidiary banks in more than one State. The proposed rules would be
incorporated into the Federal Reserve’s Regulation K.
Prior to passage of the IBA, foreign banks could establish branches or agencies in one or more States,
under State license. The IBA placed foreign banking in the United States under Federal regulation and
established certain restrictions on the interstate operation of branches, agencies, commercial lending com
panies ( New York investment companies) and subsidiary banks of foreign banks.
In general, the Board’s proposals would prescribe procedures by which a foreign bank could choose a
“home State” for its office or offices in the United States; establish rules limiting interstate expansion of
domestic deposit taking by foreign banks, and provide Federal standards for distinguishing deposits from
“credit balances” as a regulatory guide in limiting deposit taking by foreign banks in more than one State.
In making its proposals the Board noted that:
The legislative history of the IBA indicates that the competitive advantage of foreign banks over
domestic banks prior to passage of the IBA was most evident in the ability of foreign banks to receive
domestic deposits at interstate offices.
In general, one of the purposes of the IBA is to limit the interstate domestic deposit taking capabili
ties of foreign banks. The Congress was less concerned with interstate lending by foreign banks, and,
thus, the IBA and the Board’s proposed rules do not limit such activity.
The IBA provides that the U.S. offices that foreign banks established or applied to establish as of July
27, 1978 are “grandfathered”. Such foreign banks may thus continue to operate these offices. The Act pro
vides that a foreign bank may operate domestic deposit taking offices established after the grandfather date
only in its “home State”.
The IBA provides further:
— A foreign bank with offices in more than one State may choose as its home State any State in which
it had, as of the grandfather date, a branch, agency, commercial lending company or a subsidiary
bank. If a foreign bank does not choose a home State, the Board may do so for it.
— Within this home State the foreign bank may expand its deposit taking activities. In other States
where it has grandfathered offices it may retain those offices but not add new ones.
— After it chooses a home State, the foreign bank may establish, elsewhere, branches or agencies that do
not accept domestic deposits.
— In the event a new out-of-home-State branch is to be established, the foreign bank must enter into an
agreement with the Board that the new branch will accept only deposits such as E dge Corporations
may accept: those that are incidental to or for the purpose of carrying out international transactions.
— A foreign bank that has chosen a home State may not acquire a bank in another State.
Following are the Board’s proposals with respect to these provisions of the IB A, and some of the prin
cipal considerations bearing upon the proposals.
Home State selection
1. Where a foreign bank has no deposit taking offices (branches or subsidiary banks) in the United
States, the Board would not require the foreign bank to select a home State.
2. In most circumstances, the Board would accept a foreign bank’s selection of a home State from
among the States in which it has grandfathered offices.
3. Where a foreign bank has one branch or one subsidiary bank and no other banking offices in the
United States, the State with that branch or subsidiary would be the foreign bank’s home State.
4. Where a foreign bank has one or more deposit taking offices in the United States it would be
required to select a home State within 90 days after the Board’s regulations in this respect become final.
If such a bank does not choose a home State, the Board would do so for it.
Changing a Home State
A foreign bank would be allowed to change its home State one time, provided:
—It either closes branches it had been allowed to open due to its first home State designation, or con
verts such branches to agencies or to branches limited to the deposit taking authority of E dge
Corporations.
— It divests any interests it had been allowed to acquire due to its first home State designation.
Branches and Agencies
The IBA restricts the establishment of branches, but not agencies, outside a foreign bank s home State.
The IBA defines a “branch” as “any office or any place of business of a foreign bank located in any State of
the United States at which deposits are received.” The IBA defines an “agency” as an office or place of
business of a foreign bank in a State “at which credit balances are maintained . . . but at which deposits
may not be accepted from citizens or residents of the United States.”
Thus, the ability of an agency to receive only credit balances distinguishes an agency from a branch.
Currently, the various States determine what constitutes a credit balance. To avoid a multiplicity of criteria
for distinguishing credit balances from deposits, the Board proposed the following minimum criteria as a
Federal standard:
1. Sources — For an account to be considered a credit balance, the funds in the account must be:
derived from the exercise of other lawful banking powers; maintained at all times to serve a specific purpose;
and not solicited from the general public.
2. Uses — For an account to be considered a credit balance, funds in the account:
pay operating expenses in the United States, such as rent, salaries or taxes; must be
reasonable period of time after the specific purpose for which they were placed in
plished; and must be drawn upon in a manner reasonable in relation to the size and
must not be used to
withdrawn within a
the account is accom
nature of theaccount.
Control of foreign bank and its affiliates
The interstate banking provisions of the IBA state that a foreign bank may not directly or indirectly
establish and operate a Federal or State chartered branch outside its home State. This raises the question:
What constitutes indirect control for these purposes?
The Board proposed that two or more foreign banks operating in the United States, each of which is
majority owned by a common parent bank, be regarded as one banking organization, entitled to only one
home State. A foreign bank and its majority owned foreign bank subsidiaries would also be regarded as one
banking organization.
In making this proposal the Board recognized that it differs from the definition of a banking “family”
set forth in the rules proposed by the Board under the IBA in July for the purpose of reserve requirements.
The Board noted that the earlier proposal stated explicitly that the same definition of “family” may not be
used for other purposes.
Acquisition by merger
The provisions of the IBA raise the question whether a foreign bank, although prohibited from acquir
ing directly a bank outside its home State, should also be prohibited from doing so by merger.
2
The Board noted that, under the Bank Holding Company Act, without application to the Board for
approval a bank holding company may effectively acquire an additional bank indirectly by having its sub
sidiary bank acquire the assets of another bank. The Board said that this would be at odds with the general
purposes of the IBA, as it would allow a foreign bank to expand its domestic deposit taking capabilities in
more than one State.
To carry out the purposes of the IBA to limit the interstate domestic deposit taking ability of foreign
banks in the United States, the Board proposed:
1. To require a foreign bank holding company that has a subsidiary bank outside its home State to
give 60 days notification to the Board before the subsidiary acquires all or substantially all of the assets of a
bank. The Board would then examine the proposed acquisition, and determine whether it appeared to be
consistent with the interstate restraints of the IBA.
If the Board decided that the resulting acquisition by merger would be contrary to the purposes of the
IBA, the Board would require the foreign bank holding company to show cause why its home State designa
tion should not be changed to that of its subsidiary bank. The foreign bank holding company would, except
in the case of grandfathered offices, be required to terminate domestic deposit taking in its original home
State.
2. In addition, the Board said it would support legislation that would amend the Bank Holding Com
pany Act to forbid such acquisitions by merger.
California offices
The Board has issued a separate proposed interpretation stating that, for purposes of the interstate
restrictions of the IBA, it will regard offices of foreign banks that accept foreign source deposits, but not
domestic deposits, (as agencies may do under California law) as agencies rather than branches.
Enclosed—for member banks, Edge and Agreement Corporations, bank holding companies, branches
and agencies of foreign banks, and others directly concerned in this District — is a copy of the complete
text of the proposals described in the Board’s statement. It is also available to others upon request
directed to the Circulars Division of this Bank, and will be published shortly in the Federal Register.
Comments on the proposals must be submitted by January 4, 1980, and may be sent to our Domestic
Banking Applications Department.
T
ho m as
M.
T
im l e n
,
First Vice President
3
TITLE 12— BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Reg. K; Docket No. R-0258]
PART 211— INTERNATIONAL BANKING OPERATIONS
Interstate Banking Restrictions For Foreign Banks
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Proposed Rule.
SUMMARY: The International Banking Act of 1978 limits the expansion
of the interstate domestic deposit-taking capabilities of foreign banks
by restricting the establishment of branches and subsidiary banks by
a foreign bank outside of its "home State." The proposed amendments
to Regulation K (International Banking Operations) implement these provisions
of the International Banking Act.
DATE:
Comments must be received by January 4, 1980.
ADDRESS: Comments, which should refer to Docket No. R-0258, may be
mailed to Theodore E. Allison, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, Northwest,
Washington, D.C. 20551, or delivered to Room B-2223 between 8:45 a.m.
and 5:15 p.m. Comments received may be inspected at Room B-1122 between
8:45 a.m. and 5:15 p.m., except as provided in section 261.6(a) of the
Board's Rules Regarding Availability of Information (12 CFR § 261.6(a)).
FOR FURTHER INFORMATION CONTACT: C. Keefe Hurley, Jr., Senior Counsel
(202/452-3269), or James S. Keller, Attorney (202/452-3582), Legal Division,
Board of Governors of the Federal Reserve System.
SUPPLEMENTARY INFORMATION: Section 5(a) of the International Banking
Act of 1978 (12 U.S.C. 3101 et seg.) ("IBA") provides that, with the
exception of grandfathered offices, no foreign bank may directly or
indirectly establish and operate either a Federal or a State branch
outside its "home State" unless the foreign bank enters into an agreement
or undertaking with the Board to accept only such deposits at the outof-home State branch as would be permissible for an Edge Corporation
(such agreement to be filed on a form provided by the Board). Under
the Edge Act (12 U.S.C. 611 et seg.), Edge Corporations may only receive
deposits in the U.S. as may be "incidental to or for the purpose of
carrying out transactions in foreign countries or dependencies or insular
possessions of the United States." In addition to the requirement of
an agreement to restrict deposit-taking, a Federal branch or agency
may be established or operated outside a foreign bank's home State only
if the operation of such an office is expressly permitted by the receiving
[Encl„ Cir, No. 8673]
-2 -
State, while a State branch, agency or commercial lending company may
be established outside a foreign bank's home State only if it is approved
by the bank regulatory authority of the receiving State. Subsection (a)
also prohibits a foreign bank from acquiring directly or indirectly
an interest in a bank located outside of the foreign bank's home State
if the acquisition would be prohibited under section 3(d) of the Bank
Holding Company Act ("BHCA") if the foreign bank were a bank holding
company whose State of principal banking operations was the foreign
bank's home State.
Subsection 5(b) grandfathers for purposes of the interstate
banking restrictions any branch, agency, bank or commercial lending
company subsidiary that commenced operation or for which an application
to commence business had been filed on or before July 27, 1978. Subsection
5(c) provides that the home State of a foreign bank that has any combination
of branches, agencies, subsidiary lending companies, or subsidiary banks,
in more than one State, is whichever State is chosen by the foreign
bank (or by the Board in the event the foreign bank does not make a
choice).
Several issues arise in connection with the interstate restrictions
of the IBA that are not addressed in the statute. The Board has attempted
to resolve these issues in a manner consistent with the purposes of
section 5 and its legislative history. There follows a discussion of
the issues unresolved by section 5 and the Board's proposed responses.
Selection of Home State. Section 5(c) is silent as to the
appropriate home State of a foreign bank that either has one deposit
taking office in the United States or is making its initial deposit
taking entry into the United States. The statute also makes no distinction
between foreign banks with deposit-taking offices (i.e. branches or
subsidiary banks) and foreign banks that have have only non-deposit
taking offices(i.e. agencies or commercial lending company subsidiaries).
The legislative history of section 5 indicates Congress' intent
that the home State of a foreign bank having no deposit-taking operations
in the United States be the State in which that foreign bank opens its
initial deposit-taking office. Consistent with this expressed intent,
the Board proposes that:(1) a foreign bank with no deposit-taking offices
in the U.S., even though it may have offices in more than one State
that do not take deposits, is not required to select a home State; and
(2) the home State of a foreign bank with one branch or subsidiary bank,
and no other offices, in the United States is the State in which that
branch or subsidiary bank is located.
The Board proposes that a foreign bank with more than one
office as of the grandfather date, one of which accepts domestic deposits,
be required to select a home State within 90 days after the Board's
regulations on this matter become final. In the event a foreign bank
—
-
-
-3fails to select a home State, the Board proposes to exercise its authority
to determine a foreign bank's home State. The Board proposes to use
a test analogous to that used in section 3(d) of the BHCA for determining
the home State of a bank holding company (that State in which the total
deposits of all its banking subsidiaries is largest) to determine a
foreign bank's home State. In applying this test to foreign banks,
the deposits as of the latest report of condition would be determinative
in the Board's designating a home State for a foreign bank that fails
to do so.
Change of Home State. No provision in the IBA explicitly
allows a foreign bank to change its home State. Nevertheless, it is
clear from the legislative history of this section that Congress intended
that the Board provide by regulation "a suitable procedure for registering
with the Federal Reserve the home State and for changing it." In this
regard, the most relevant consideration with respect to the change of
home State for any foreign bank would be whether, and to what extent,
the foreign bank has made use of its current home State to establish
additional deposit-taking offices. The Board recognizes that the ability
of a foreign bank to change its home State could, if unrestricted, afford
a foreign bank a significant advantage over a domestic bank. A domestic
bank is, for the most part, restricted to operating in the State where
it is organized and, depending upon State law, may be restricted to
a particular city or county. In order to afford a foreign bank some
flexibility in its operations without causing competitive imbalance,
the Board proposes that a foreign bank be permitted to change its home
State only once, and that such a change in home State be conditioned
upon the foreign bank:
(1) either closing branches opened in reliance
on its original home State designation, converting the branches to agencies
or entering into an agreement with the Board regarding deposit-taking
at such branches as prescribed in section 5(a) of the IBA, and (2) divesting
any interests acquired in banks in reliance upon its original home State
designation. This procedure would be self-implementing in that it would
require notification to the Board but no Board action (unless divestiture
should require a control determination under section 2(g)(3) of the
BHCA).
Out-of-home State mergers. Under section 5(a) of the IBA
and section 3(d) of the BHCA, a foreign bank with a subsidiary bank
in one State (State X) and a branch in another State (State Y ) , that
declares State Y as its home State is prohibited from:
(1) acquiring
more than 5 per cent of the shares of an additional bank in State Y
(by the provisions of section 3(d) of the BHCA); or (2) acquiring more
than 5 per cent of the shares of an additional bank in State X (by the
provisions of section 5(a)(5) of the IBA). The Board is concerned that
a foreign bank might be able to acquire an additional bank by merger
in State X and at the same time continue to expand its deposit-taking
capabilities in State Y by further branching.
-4 -
The ability of a foreign bank to expand its deposit-taking
capabilities significantly in more than one State appears to contravene
the intent of section 5. Accordingly, the Board proposes that a foreign
bank with a subsidiary bank (or banks) and branches located in different
States that chooses as its home State a State other than where its subsidiary
bank is located be required to give the Board 60 days' notice prior
to acquiring all or substantially all of the assets of a bank outside
its home State. The Board would then make a determination as to whether
the foreign bank should be required to show cause as to why its home
State should not be changed to the State where its subsidiary bank is
located. Absent an adequate showing by the foreign bank, the heme
State of the foreign bank would be redesignated upon consummation of
the transaction. Redesignation would require that the foreign bank
terminate any domestic deposit-taking operations undertaken as a result
of its original home State selection. In addition, the foreign bank
would be precluded from future expansion of its domestic deposit-taking
capability in its original home State. Such a procedure would enable
the Board to ensure that home State selection is not used in a manner
to circumvent the domestic deposit limitations of the IBA.
The factors to be considered by the Board in making its preliminary
and final determinations would include:
the size of the proposed acquisition
relative to the foreign bank's other operations in the United States;
the ability of the foreign bank to change its home State; and the existence
of other potential acquirers.
Credit balances. As discussed, the interstate restrictions
of the IBA were designed to limit the future deposit-taking capabilities
of foreign banks. Therefore, agencies and commercial lending companies,
which by law may not receive deposits, are not affected by the restrictions.
Agencies do, however, receive funds in the form of credit balances,
which have many of the characteristics of deposits. While the distinction
between credit balances and deposits is a narrow one, it is this distinction
that separates a branch from an agency. Currently each State determines
the types of funds that may be maintained in the form of credit balances.
Since these determinations have been made, for the most part, through
the regulations or administrative practices of the State banking authorities
rather than by statute, there is variation from State to State as to
what constitutes a permissible credit balance. The Board is proposing,
therefore, minimum criteria by which an account, if it satisfies the
criteria, would be presumed to be a credit balance. The Board believes
that, absent a workable Federal standard for determining whether an
account at an office of a foreign bank is a credit balance or a deposit,
the interstate banking restrictions of the IBA would be difficult to
enforce.
-5 The criteria proposed by the Board may be divided according
to the sources of funds placed as credit balances and the uses of such
accounts:
Sources
1. funds must be derived from the exercise of other lawful
banking powers;
2. funds must be placed in an account to serve a specific
purpose; and
3.
funds may not be solicited from the general public.
Uses
1. accounts may not be used to pay operating expenses in
the United States such as salaries, rent or taxes;
2. funds must be withdrawn within a reasonable period of
time after the specific purpose for which they were placed
in the account has been accomplished; and
3. draft usage must be reasonable in relation to the size
and nature of the accounts.
These proposed minimum criteria are generally consistent with
standards that have been applied by the Board as well as by States through
their statutes, regulations and practices governing credit balances.
Attribution of home State. Section 5 of the IBA states that "no foreign
bank may directly or indirectly establish and operate a Federal [or
State] branch outside of its home State." Under section 2(A)(2)(a)
of the BHCA, a company is considered to control a bank or another company
if the company directly or indirectly has the power to vote 25 per cent
or more of any class of voting shares of the bank or company. The Board
believes that, in consideration of the differences between banking in
foreign countries and banking in the United States, this statutory test
for determining control of banks and companies should not be imposed
upon foreign organizations. Rather, the Board proposes that the test
for what constitutes acting indirectly be ownership or control of a
majority of the voting shares of a bank. While majority ownership would
be a conclusive presumption of ownership or control, the Board would
reserve the right to determine administratively whether the ownership
of less than a majority of the voting shares constituted acting indirectly.
Under this proposal, the Board would treat as one organization entitled
to one home State a foreign bank or company and its majority owned subsidiaries.
Also treated as a part of the same organization would be those subsidiaries
that the Board determines after notice and opportunity for a hearing
are actually controlled by the foreign organization.
J
-6 Pursuant to its authority under the International Banking
Act of 1978 (12 U.S.C. § 3101 et seg.), the Board proposes to amend
Regulation K (12 C.F.R. Part 211) as follows:
1.
Section 211.1 would be revised to read as follows:
SECTION 211.1— AUTHORITY, PURPOSE, AND SCOPE
*
*
*
*
*
(b)
Purpose and scope. This Part is in furtherance of the
purposes of the FRA, the BHCA, and the IBA. It applies to corporations
organized under section 25(a) of the FRA (12 U.S.C. 611—631), Edge
Corporations"; to corporations having an agreement or undertaking with
the Board under section 25 of the FRA (12 U.S.C. 601-604(a)), "Agree
ment Corporations"; to member banks with respect to their foreign branches
and investments in foreign banks under section 25 of the FRA (12 U.S.C.
601-604(a));— to bank holding companies with respect to the exemption
from the nonbanking prohibitions of the BHCA afforded by section 4(c)(13)
of the BHCA (12 U.S.C. 1843(c)(13)); and to foreign banks with respect
to the limitations on interstate banking under section 5 of the IBA
(12 U.S.C. 3103).
1/
Section 25 of the FRA, which refers to national banking associations,
also applies to State member banks of the Federal Reserve System by
virtue of section 9 of the FRA (12 U.S.C. 321) .
2. Section 211.2 would be revised to read as follows, redesignating
subsections where appropriate:
SECTION 211.2— DEFINITIONS
For the purposes of this Part:
*
*
*
*
*
(b)
"Agency" means any office or any place of business of
a foreign bank located in any State of the United States at which credit
balances are maintained, checks are paid, or money is lent but at which
deposits may not be accepted from a citizen or resident of the United
States. An account will not be considered a credit balance unless funds
placed in the account:
(i) are derived from the exercise of other lawful
banking powers; (ii) are to serve a specific purpose; (iii) are not
solicited from the general public; (iv) are not used to pay operating
expenses in the United States such as salaries, rent or taxes; (v) are
withdrawn within a reasonable period of time after the specific purpose
for which they were placed there has been accomplished; and (vi) are
drawn upon in a manner reasonable in relation to the size and nature
of the account.
-7 (c)
"Banking subsidiary," with respect to a specified foreign
bank, means a Untied States bank that is a subsidiary as those terms
are defined in section 2 of the BHCA (12 U.S.C. 1841).
*
*
*
*
*
(e)
"Commercial lending company" means any institution, other
than a bank or an organization operating under section 25 of the FRA,
organized under the laws of any State of the United States or the District
of Columbia, which maintains credit balances and engages in the business
of making commercial loans. An account will not be considered a credit
balance unless funds placed in the account conform to the criteria set
forth in the definition of "agency" in subsection (b) of this section.
*
*
*
*
*
(g)
"Domestic branch" means any office or any place of business
of a foreign bank located in any State of the United States that may
accept domestic deposits and deposits that are incidental to or for
the purpose of carrying out transactions in foreign countries or dependencies
or insular possessions of the United States.
*
*
*
*
*
(k) "Foreign Bank" * * *. For purposes of § 211.8 of this
Part, an institution organized under the laws of a foreign country that
engages in the business of banking is a "foreign bank" even though all
of the criteria of the preceding sentence are not satisfied.
*
*
*
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*
3. Regulation K would be amended by adding a new section, §211.8, as
follows:
SECTION 211.8— INTERSTATE BANKING OPERATIONS OF FOREIGN BANKS AND FOREIGN
BANK HOLDING COMPANIES
(a) Determination of home State. A foreign bank shall have its home
State determined according to this section. A foreign bank that is
authorized to select its home State shall do so by filing a declaration
of home State within 90 days of the effective date of this section.
In the absence of such selection, the Board will determine a foreign
bank's home State. Within one year after the home State of a foreign
bank has been determined:
(i) the foreign bank shall close its domestic
branches that are not permissible under section 5(b) of the IBA or convert
such domestic branches to agencies or enter into an agreement with the
Board regarding deposits at such branches as prescribed in section 5(a)
of the IBA and (ii) the foreign bank shall divest voting shares of,
interests in or assets of banks that are not permissible under section 5(b)
of the IBA.
-8 1. A foreign bank that does not operate a domestic branch
or banking subsidiary shall not be required to select a home State and
shall not have its home State designated by the Board.
2. A foreign bank (except a foreign bank to which subsection 4
of this section applies) that has any combination of domestic branches,
banking subsidiaries, agencies, or commercial lending company subsidiaries
that, before July 27, 1978, were established or applied for in more
than one State may select its home State only from those States in which
the foreign bank has continuously operated such offices.
3. A foreign bank that before July 27, 1978, had established
or applied for one domestic branch or one banking subsidiary, and was
not otherwise engaged in banking in the United States on that date,
shall have its home State determined to be the State in which such domestic
branch or banking subsidiary is located.
4. A foreign bank that before July 27, 1978, had no domestic
branches or banking subsidiaries or had only agencies or commercial
lending companies, and, after that date, has established or establishes
either a domestic branch or a banking subsidiary shall have as its home
State that State in which its initial domestic branch or banking subsidiary
is located.
(b) Change of home State.
once if:
(c)
A foreign bank may change its home State
(1)
prior notification of the proposed change is filed with the
Board; and
(2)
domestic branches established and investments in banks acquired
in reliance on its original home State designation are conformed
to that which would have been permissible had the new home
State been designated as its home State originally.
Bank mergers
(1) A foreign bank with one or more banking subsidiaries that
selects as its home State a State other than that in which
a banking subsidiary is located shall, if it proposes to acquire
all or substantially all of the assets of a bank located outside
its home State:
(i) give 60 days' prior notification to the Board concerning
the proposed acquisition, and
(ii) if the Board makes a preliminary determination that
the proposed acquisition would be inconsistent with the foreign
bank's home State selection, show cause why its home State
should not be redesignated as a result of the proposed transaction;
and
(iii) if after reviewing the foreign bank's submissions the
Board makes a final determination that the proposed
acquisition would be inconsistent with the foreign bank's
home State selection, change its home State to the State where
such acquisition is to be made in accordance with subsection (b)(2)
of this section.
(2) Factors to be considered by the Board in making its preliminary
and final determinations will include: the size of the proposed
acquisition relative to the foreign bank's other operations
in the United States; the ability of the foreign bank to change
its home State; and the existence of other potential acquirers.
(d)
Attribution of home State
(1)
A foreign bank or organization and the other foreign banks
or organizations over which it exercises actual control shall
be regarded as one foreign bank and shall be entitled to one
home State.
(2)
Actual control shall be conclusively presumed to exist in
the case of a bank or organization that owns or controls a
majority of the voting shares of another bank or organization.
(3)
Where it appears to the Board that a foreign bank
or organization exercises actual control over
the management or policies of another foreign
bank or organization, the Board may inform the
parties that a preliminary determination of control
has been made on the basis of the facts summarized
in the communication.
In the event of a preliminary
determination by the Board, the parties shall
within 30 days (or such longer period as may be
permitted by the Board):
(i) indicate to the
Board a willingness to terminate the control relationship; or
(ii) set forth such facts and circumstances as
may support the contention that actual control
does not exist (and may a request a hearing to
contest the Board's preliminary determination);
or (iii) accede to the Board's determination in
which event the parties will be regarded as one
foreign bank and will be entitled to one home
State.
-1 0 (4)
Until otherwise advised by the Board, a foreign
bank or organization and any foreign bank or organization
of which it owns 10 per cent or more of the voting
shares shall be regarded as one foreign bank entitled
to one home State.
Board of Governors of the Federal Reserve System, October 29,
1979.
Theodore E. Allison
Secretary of the Board
-1 1 TITLE 12— BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Reg. K; Docket No. R-0259]
PART 211— INTERNATIONAL BANKING OPERATIONS
Interstate Banking Restrictions For Foreign Banks
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Proposed Interpretation.
SUMMARY: The Board of Governors of the Federal Reserve System has issued
an interpretation of section 211.2(b) of its proposed amendments to
the Board's Regulation K (12 CFR § 211), which defines "agency" for
the purposes of Regulation K.
DATE:
Comments must be received by January 4, 1980.
ADDRESS: Comments, which should refer to Docket No. R-0259, may be
mailed to Theodore E. Allison, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, Northwest,
Washington, D.C. 20551, or delivered to Room B-2223 between 8:45 a.m.
and 5:15 p.m. Comments received may be inspected at Room B-1122 between
8:45 a.m. and 5:15 p.m., except as provided in section 261.6(a) of the
Board's Rules Regarding Availability of Information (12 CFR § 261.6(a)).
FOR FURTHER INFORMATION CONTACT: C. Keefe Hurley, Jr., Senior Counsel
(202/452-3269), or James S. Keller, Attorney (202/452-3582), Legal Division,
Board of Governors of the Federal Reserve System.
SUPPLEMENTARY INFORMATION: Section 5(a) of the International Banking
Act of 1978 (12 U.S.C. 3101 et seq.) ("IBA") provides that, with the
exception of grandfathered offices, no foreign bank may directly or
indirectly establish and operate either a Federal or a State branch
outside its "home State" unless the foreign bank enters into an agreement
or undertaking with the Board to accept only such deposits at the outof-home State branch as would be permissible for an Edge Corporation.
Under the Edge Act (12 U.S.C. 611 et seg.), Edge Corporations may only
receive deposits in the U.S. as may be "incidental to or for the purpose
of carrying out transactions in foreign countries or dependencies or
insular possessions of the United States." In addition to the requirement
of an agreement to restrict deposit-taking, a Federal branch or agency
may be established or operated outside a foreign bank's home State only
if the operation of such an office is expressly permitted by the receiving
State, while a State branch, agency or commercial lending company may
be established outside a foreign bank's home State only if it is approved
-12by the bank regulatory authority of the receiving State. Subsection (a)
also prohibits a foreign bank from acquiring directly or indirectly
an interest in a bank located outside of the foreign bank's home State
if the acquisition would be prohibited under section 3(d) of the Bank
Holding Company Act ("BHCA") if the foreign bank were a bank holding
company whose State of principal banking operations was the foreign
bank's home State.
Subsection 5(b) grandfathers for purposes of the interstate
banking restrictions, any branch, agency, bank or commercial lending
company subsidiary that commenced operation or for which an application
to commence business had been filed on or before July 27, 1978. Subsection
5(c) provides that the home State of a foreign bank that has any combination
of branches, agencies, subsidiary lending companies, or subsidiary banks,
in more than one State, is whichever State is chosen by the foreign
bank (or by the Board in the event the foreign bank does not make a
choice).
California offices. Section 1(b) of the IBA defines "agency"
as an office that maintains credit balances but at which "deposits may
not be accepted from citizens or residents of the United States," while
it defines "branch" as any office "at which deposits are received."
While offices of foreign banks in California have generally been prohibited
from accepting deposits by a requirement of State law that such offices
obtain Federal deposit insurance (an office of a foreign bank could
not obtain such insurance before the passage of the IBA), California
law does permit offices of foreign banks, with approval of the Banking
Department, to accept deposits from any person that resides, is domiciled
and maintains its principal place of business in a foreign country.
Therefore, according to a literal reading of the IBA, a California office
of a foreign bank that accepts deposits from certain foreign sources
(e.g., a U.S. citizen residing abroad) is a branch rather than an agency.
If the Board were to determine such an office, established or applied
for prior to July 27, 1978, to be a branch rather than an agency, then
it would be grandfathered as a branch. Accordingly, a foreign bank
in this situation could elect a State other than California as its home
State, obtain deposit insurance, and convert its California office to
a full domestic deposit-taking facility. If, however, the Board were
to determine such an office to be an "agency," then it would be grandfathered
as such and could not expand its deposit-taking capabilities (unless
the foreign bank selected California as its home State). The proposed
interpretation indicates that, for purposes of section 5 of the IBA,
the Board will regard offices of foreign banks that accept foreign source
deposits, but not domestic deposits, as agencies rather than branches.
Both the legislative history of section 5 of the IBA and the purposes
of that section support such an interpretation. Furthermore, funds
that may be received by these California offices are the type that Edge
Corporations and, therefore, branches established and operated outside
of a foreign bank's home State may receive. Treating these offices
as agencies appears to be consistent with their method of operation
and with the purpose of section 5 of the IBA.
-1 3 Pur suant to its authority under the International Banking
Act of 1978 (12 U.S.C. § 3101 et seq.), the Board has issued the following
interpretation of its proposed amendments to section 211.2(b) of its
Regulation K:
§ 211.113 Grandfather status of certain agencies for purposes of the
International Banking Act restrictions on interstate banking operations
The Board has considered the question of whether a foreign bank's California
office that may accept deposits from certain foreign sources (e.g.,
a United States citizen residing abroad) is a branch or an agency for
the purposes of the grandfather provisions of the International Banking
Act of 1978 (12 U.S.C. § 3103(b)). The question has arisen as a result
of the definitions in the International Banking Act of "branch" and
"agency," and the limited deposit-taking capabilities of certain California
offices of foreign banks.
The International Banking Act defines "agency" as "any office . . . at
which deposits may not be accepted from citizens or residents of the
United States," and defines "branch" as "any office . . . of a foreign
bank . . . at which deposits are received" (12 U.S.C. § 3101(1) and
(3)). Offices of foreign banks in California prior to the International
Banking Act were generally prohibited from accepting deposits by the
requirement of State law that such offices obtain Federal deposit insurance
(Cal. Fin. Code § 1756); until the passage of the International Banking
Act an office of a foreign bank could not obtain such insurance. California
law, however, permits offices of foreign banks, with the approval of
the Banking Department, to accept deposits from any person that resides,
is domiciled, and maintains its principal place of business in a foreign
country (Cal. Fin. Code § 1756.2). Thus, under a literal reading of
the definitions of "branch" and "agency" contained in the International
Banking Act, a foreign bank's California office that accepts deposits
from certain foreign sources (e.g., a U.S. citizen residing abroad),
is a branch rather than an agency.
Section 5 of the IBA establishes certain limitations on the
expansion of the domestic deposit-taking capabilities of a foreign bank
outside its home State. It also grandfathers offices established or
applied for prior to July 27, 1978,and permits a foreign bank to select
its home State from among the States in which it operated branches and
agencies on the grandfather date. If a foreign bank's office that was
established or applied for prior to June 27, 1978, is a "branch" as
defined in the International Banking Act, then it is grandfathered as
a branch. Accordingly, a foreign bank could designate a State other
than California as its home State and subsequently convert its California
office to a full domestic deposit-taking facility by obtaining Federal
deposit insurance. If, however, the office is determined to be an "agency,"
then it is grandfathered as such and the foreign bank may not expand
its deposit-taking capabilities in California without declaring California
its home State.
-1 4 In the Board's view, it would be inconsistent with the purposes
and the legislative history of the International Banking Act to enable
a foreign bank to expand its domestic interstate deposit-taking capabilities
by grandfathering these California offices as branches because of their
ability to receive certain foreign source deposits. The Board also
notes that such deposits are of the same type that may be received by
an Edge Corporation and, hence, in accordance with section 5(a) of the
International Banking Act, by branches established and operated outside
a foreign bank's home State.
It would be inconsistent with the structure
of the interstate banking provisions of the International Banking Act
to grandfather as full deposit-taking offices those facilities whose activities
have been determined by Congress to be appropriate for a foreign bank's
out-of-home State branches.
Accordingly, the Board, in administering the interstate banking
provisions of the IBA, regards as agencies those offices of foreign
banks that do not accept domestic deposits but that may accept deposits
from any person, that resides, is domiciled, and maintains its principal
place of business in a foreign country.
Board of Governors of the Federal Reserve System, October 29,
1979.
Theodore E. Allison
Secretary of the Board
@FedFRASER