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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 8 8 8 9 "1
July 31, 1980
J
R E G U L A T IO N Y
I n te r p r e ta tio n R e la tin g to D is p o s itio n o f C erta in A ssets
To All Bank Holding Companies, and Others Concerned,
in the Second Federal Reserve District:
The Board of Governors of the Federal Reserve System has issued
an interpretation of its Regulation Y, “Bank Holding Companies and
Change in Bank Control/’ regarding the holding and disposition of
assets acquired in satisfaction of debts previously contracted.
Enclosed is an excerpt from the Federal Register of July 28, 1980,
containing the text of the interpretation. Questions thereon may be
directed to our Domestic Banking Applications Department (Tel. No.
212-791-5861).
A
nthony
M.
So l o m o n ,
President.
B o a r d o f G o v e r n o r s o f th e F e d e r a l R e se r v e S y stem
B A N K H O L D IN G C O M P A N IE S A N D C H A N G E IN B A N K C O N T R O L
IN TER PRETA TIO N OF REGULATION Y
orderly divestiture. The question
presented was whether such “dpc”
12 CFR Part 225
assets could be held indefinitely by a
bank holding company subsidiary as
[Reg. Y, Docket No. R-0319]
incidental to its permissible lending
activity.
Bank Holding Companies and Change
(b) While the Board believes that
in Bank Control; Disposition of
“dpc" acquisitions may be regarded as
Property Acquired in Satisfaction of
normal, necessary and incidental to the
Debts Previously Contracted
business of lending, the Board does not
AGENCY: Board of Governors of the
believe that the holding of assets
Federal Reserve System.
acquired “dpc” without any time
ACTION: Final interpretation.
restrictions is appropriate from the
standpoint of prudent banking and in
SUMMARY: This interpretation delineates
light of the prohibitions in section 4 of
the conditions governing the holding and
the Act against engaging in nonbank
disposition of assets acquired by bank
activities. If a nonbanking subsidiary of
holding companies and their banking or
a bank holding company were
nonbanking subsidiaries in satisfaction
permitted, either directly or through a
of debts previously contracted.
subsidiary, to hold “dpc” assets of
EFFECTIVE DATE: July 22.1980.
substantial amount over an extended
FOR FURTHER INFORMATION CONTACT.
period of time, the holding of such
Bronwen M. Mason, Senior Attorney
property could result in an unsafe or
(202/452-3564), or Jennifer J. Johnson,
unsound banking practice or in the
Senior Attorney (202/452-3584), Legal
holding company engaging in an
Division, Board of Governors of the
impermissible activity in connection
Federal Reserve System, Washington,
with the assets, rather than liquidating
D.C. 20551.
them.
SUPPLEMENTARY in f o r m a t io n : Pursuant
(c) The Board notes that section
to the Board’s authority under sections
4(c)(2) of the Bank Holding Company
4(c)(1)(D), 4(c)(2), 4(c)(8) and 5(b) of the
Act provides an exemption from the
Bank Holding Company Act (12 U.S.C.
prohibitions of section 4 of the Act for
1843 (c)(1)(D), (c)(2), (c)(8), and 1844(b)),
bank holding company subsidiaries to
and section 8 of the Financial
acquire sh a re s “dpc". It also provides
Institutions Supervisory Act (12 U.S.C.
that such “dpc” shares may be held for a
1818) 12 CFR Part 225 is amended by
period of two years, subject to the
adding a new { 225.140 to read as
Board’s authority to grant three one-year
follows:
extensions up to a maximum of five
years.1Viewed in light of the
$ 225.140 D isposition of property
Congressional policy evidenced by
acquired in satisfaction of debts previously
section 4(c)(2), the Board believes that a
contracted.
lending subsidiary of a bank holding
(a)
The Board recently considered the company or the holding company itself,
permissibility, under section 4 of the
should be permitted, as an incident to
Bank Holding Company Act, of a
permissible
lending activities, to make
subsidiary of a bank holding company
acquisitions of "dpc" a ss e ts. Consistent
acquiring and holding assets acquired in
with the principles underlying the
satisfaction of a debt previously
provisions of section 4(c)(2) of the Act
contracted in good faith (a "dpc”
and as a matter of prudent banking
acquisition). In the situation presented, a practice, such assets may be held for no
lending subsidiary of a bank holding
longer than five years from the date of
company made a “dpc” acquisition of
acquisition. Within the divestiture
assets and transferred them to a whollyperiod it is expected that.the company
owned subsidiary of the bank holding
will make good faith efforts to dispose
company for the purpose of effecting an
of “dpc” shares or assets at the earliest
FEDERAL RESERVE SYSTEM
(Enc. Cir. Np. 8889)
P R IN T E D IN N E W YORK
practicable date. While no specific
authorization is necessary to hold such
assets for the five-year period, after two
years from the date of acquisition of
such assets, the holding company should
report annually on its efforts to
accomplish divestiture to its Reserve
Bank. The Reserve Bank will monitor
the efforts of the company to effect an
orderly divestiture, and may order
divestiture before the end of the fiveyear period if supervisory concerns
warrant such action.
(d)
The Board recognizes that there
are instances where a company may
encounter particular difficulty in
attempting to effect an orderly
divestiture of “dpc” real estate holdings
within the divestiture period,
notwithstanding its persistent good faith
efforts to dispose of such property. In
the Depository Institutions Deregulation
and Monetary Control Act of 1980, (Pub.
L. 96-221) Congress, recognizing that
real estate possesses unusual
characteristics, amended the National
Banking Act to permit national banks to
hold real estate for five years and for an
additional five-year period subject to
certain conditions. Consistent with the
policy underlying the recent
Congressional enactment, and as a
matter of supervisory policy, a bank
holding company may be permitted to
hold real estate acquired “dpc" beyond
the initial five-year period provided that
the value of the real estate on the books
of the company has been written down
to fair market value, the carrying costs
are not significant in relation to the
overall financial position of the
company, and the company has made
good faith efforts to effect divestiture.
Companies holding real estate for this
extended period are expected to make
active efforts to dispose of it, and should
keep the Reserve Bank advised on a
regular basis concerning their ongoing
efforts. Fair market value should be
1The Board notes that where the dpc shares or
other similar interests represent less than 5 percent
of the total of such interests outstanding, they may
be retained on the basis of section 4(c)(6), even if
originally acquired dpc.
(over)
derived from appraisals, comparable
sales or some other reasonable method.
In any case, "dpc” real estate would not
be permitted to be held beyond 10 years
from the date of its acquisition.
(e)
With respect to the transfer by a
subsidiary of other "dpc” shares or
assets to another company in the
holding company system, including a
section 4(c)(1)(D) liquidating subsidiary,
or to the holding company itself, such
transfers would not alter the original
divestiture period applicable to such
shares or assets at the time of their
acquisition. Moreover, to ensure that
assets are not carried at inflated values
for extended periods of time, the Board
expects, in the case of all such
intracompany transfers, that the shares
or assets will be transferred at a value
no greater than the fair market value at
the time of transfer and that the transfer
will be made in a normal arms-length
transaction.
(f)
With regard to “dpc” assets
acquired by a banking subsidiary of a
holding company, so long as the assets
continue to be held by the bank itself,
the Board will regard them as being
solely within the regulatory authority of
the primary supervisor of the bank.
By order of the Board of Governors of the
Federal Reserve System effective July 22,
1980.
Cathy L. Petryshyn,
Assistant Secretary o f the Board.
[FR Doc. 80-22556 Filed 7-25-80; 8:45 amj
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