Full text of Federal Reserve Bank of New York Circulars : 9929. Activities of Edge Corporations

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FEDERAL RESERVE BAMHC
OF MEW YOREC
r Circular No. 9929 1
I
October 8, 1985
j:

A C TIV ITIES O F ED G E C O RPO RA TIO N S
Revlsloe off R egulation K
To All Member Banks, Edge and Agreement Corporations, and Bank Holding Companies
in the Second Federal Reserve District, and Others Concerned:

■Following is the text of a statement issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has published revisions to its Regulation K — International Banking Operations — that
will permit Edge corporations to enlarge the scope of their activities.
The revisions become effective October 24, 1985 with one exception. The provisions that pertain to investment pro­
cedures are effective immediately.
The International Banking Act requires the Board to review and to revise Regulation K every five years to ensure that
the purposes of the Edge Act are being served in light of prevailing economic conditions and banking practices. Edge
corporations are corporations chartered to engage in international or foreign banking or other international or foreign oper­
ations.
The major revisions to the regulation pertain to: activities of Edge corporations in the United States; changes in con­
trol of Edge corporations; and investment procedures. Certain other technical and clarifying revisions have been made to
Regulation K as well. The Board has deferred making any changes in the capital requirements for banking Edge corpora­
tions.
The revised regulation will allow Edge corporations to provide full banking services to a limited class of companies,
such as foreign airlines and shipping companies, that are restricted by their charters or licenses to international business.
The Board may consider whether procedures can be developed to identify other companies engaged in international busi­
ness that could qualify for full banking services from Edge corporations.
The Board adopted changes to the regulation that would require any party purchasing 25 percent or more of the voting
shares of an Edge corporation to give the Board 60 days notice prior to acquisition.
The Board revised the investment procedures applicable to Edge corporations. The regulation has permitted Edge
corporations to invest the lesser of $2 million or five percent of their capital and surplus without prior notice or approval by
the Federal Reserve. The Board increased the dollar investment amount to $15 million.
The Board also granted a certain amount of leeway in the permissible activities of subsidiaries. In order to provide
some flexibility to U.S. banking organizations in acquiring controlling interests in existing companies engaged in imper­
missible activities, the Board has liberalized its standards to allow such companies to derive up to five percent of assets
and revenues from impermissible activities.
In addition, the Board took action on some technical provisions of the regulation regarding U.S . nonbanking activi­
ties of foreign banks.
Enclosed is a copy of the text of the amendments to Regulation K, “International Banking Operations,” and sup­
plementary information, reprinted from the Federal Register of October 1,1985. Questions regarding the regulation
may be directed to our Foreign Banking Applications Department (Tel. No. 212-791-5878).




E. G erald Corrigan,
President.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
IN T E R N A T IO N A L B A N K IN G O PE R A T IO N S

AMENDMENTS TO REGULATION K
(effective October 24, 1985)

through which they may compete with
In June
similar foreign-owned institutions in the
1984, the Board published forcomment
12 CFR Part 211
proposed revisions toRegulation K. The United States and abroad. An Edge
proposals were made pursuant to the
corporation is limited by statute to
[Docket Mo. P3-0520]
directive in the International Banking
engaging only in activities in the United
Act of1978 ("IBA”)that the Board
States that are “incidental’’ to
Regulation Ki International Banking
review and revise itsregulations
international or foreign business. The
governing Edge corporations every five Board, however, has broad discretionary
A<§lEtfgvs Board of Governors of the
years in order to ensure that the
authority to determine what U.S.
Federal Reserve System.
purposes of the Edge Act are being
activities are incidental to international
a c t io n : Final rale.
served inlightofprevailing economic
or foreign business of an Edge
c
o
n
d
i
t
i
o
n
s
.
corporation.
The Board has interpreted
SUMMARY: The Board has reviewed and
The Board proposed major revisions
this provision to require that all deposits
revised its regulations governing the
infour areas: (1)Activities ofEdge
accepted by Edge corporations from
operations of Edge corporations. The
corporations
i
n
t
h
e
United
S
t
a
t
e
s
;
(
2
)
domestic
residents must be related to or
revisions concern certain U.S. activities
of Edge corporations, lending limits and capitalization requirements and lending for the purpose of carrying out
internatioal transactions, and that all
limits ofEdge corporations; (3)
investment and change in control
procedures topermit Board review ofa credit and other transactions with
procedures applicable to Edge
domestic residents must be related to
proposed change in control ofEdge
corporations. Some proposals dealing
cor
p
o
r
a
t
i
o
n
s
,
and
(
4
)
l
i
m
i
t
s
on
identifiable international transactions.
with foreign banking organizations
This approach, designed to assure the
operating in the United States have also investments in other organizations. In
international character of Edge
addition, various changes were
been adopted.
corporations and prevent their use to
proposed to otherparts ofthe
EFFECTIVE © a t e : October 24,1985,
circumvent limitations on interstate
regulation.
except in the use ofthe provisions in
banking, imposes fairly stringent
The Board received 56 public
section 211.5(c), which are effective
constraints on the operations of Edge
comments on the proposal. The final
immediately.
corporations in the United States.
revisions to the regulation and the
F@!3 FURTHER INFORMATION CONTACT:
In its1984 proposal for comment, the
reasons forthe Board’s action are
Frederick R. Dahl, Associate Director
Board suggested several possible
outlined below. Some ofthe proposed
(202/452-2726); James S.Keller,
modifications to this transaction-by­
revisions did not receive substantial
Manager, International Banking
transaction approach. The Board
comment and were adopted as
Applications (202/452-2523), Division of proposed. In addition to the revisions
requested comment on the feasibilityof
Banking Supervision and Regulation;
described below, a number oftechnical these proposals and whether they would
Ricki Rhodarmer Tigert, Assistant
and clarifying changes were also made. maintain the necessary linkage with
General Counsel (202/452-3428);
international or foreign business
Activities of Edge Corporations in the
Kathleen M. O ’Day, Senior Counsel
required by statute. The proposals were
United
States
(202/452-3786), Legal Division; or Joy W.
as follows:
O ’Connell, Telecommunication Device
1. Allow Edge corporations to provide
Edge corporations are international
for the Deaf (TDD), (202/452-3244),
full banking services (deposits, loans
banking and financial vehicles through
Board ofGovernors ofthe Federal
and other services) to a limited class of
which U.S. banking organizations can
Reserve System.
offer international banking services and companies that are restricted charters or
FEDERAL RESERVE SYSTEM

SUPPLEMENTARY INFORMATION:

PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 50, NO. 190

For this regulation to be complete, retain:
1) Pamphlet effective July 8, 1983.
2) Amendments December 20, 1983, February 13, 1984, March 29, 1984, and June 30,
1984 (included in slip sheet dated April 1984).
3) This slip sheet.
[Ene. Cir. No. 9929]




licenses to an exclusively international
business.
2.Allow Edge corporations to engage
in domestic lending activities to the
extent they were funded with overseas
deposits from nonbank sources (the
“limitedbranch" concept).
3.Allow Edge corporations to lend for
domestic purposes toU.S. resident
customers so long as atleast 75 percent
ofthe credits extended to that customer
were forinternational purposes and met
the traditional transactions test(a
“transactional leeway” approach).
4.Allow Edge corporations tolend for
domestic purposes to certain qualifying
customers (U.S. residents engaged
principally in international business) so
long as 75 percent ofa corporation’s
business meets the transactions test(a
modified transactional leeway
approach).
The comments on the proposals were
mixed. Twenty commenters opposed
any expansion at allofthe powers of
Edge corporations. These commenters,
primarily smaller and regional banking
organizations and associations
representing such organizations, stated
that any intrusion ofEdge corporations
into domestic business iscontrary to the
intent ofthe Edge Act, would constitute
impermissible interstatebanking, and
would benefit only large institutions to
the detriment ofsmaller organizations.
On the otherhand, four commenters
supported allthe proposals to expand
Edge powers. The remainder ofthe
comments supported some expansion of
powers ofEdge corporations but there
was considerable diversityin the
recommended approaches.
Restricted Charter
Under thisproposal, an Edge
corporation could provide fullbanking
services (deposit-taking, lending and
other services) to any entitythat
engages only ininternational business
by virtue ofitscharter or license or by
government regulation. These
establishments would include such
entities as international airlines or
shipping lines and export trading
companies that engage exclusively in
international activities.This proposal is
viewed as easier to administer than the
qualifiedbusiness entity (“QBE”)
concept that was proposed but not
adopted in1979, which required that the
QBE meet a quantitative testbased on
export-import transactions.
The Board has determined to adopt
this testas proposed. There isa clear
international connection in the
operations ofthese entities and any
transaction by an Edge corporation with
one ofthese entitieswould be incidental
to international or foreignbusiness.




Some commenters suggested expanding
the listofeligible organizations to
include embassies, consulates, agencies
offoreigngovernments, international
commodities brokerage firms,
international organizations such as the
World Bank, and Foreign Sales
Corporations (“FSCs”).The Board has
included FSCs on the listin the
regulation because they meet the testof
being exclusively engaged in
international transactions. The other
entities suggested by the comments all
transact substantial domestic business
and therefore would not qualifyunder
the test.Itshould be noted, however,
thatEdge corporations are currently
permitted tomaintain officialembassy
and consular accounts, although they
may not offeraccounts to embassy
personnel. The Board iscontinuing to
consider standards and procedures for
determining whether other entities or
businesses may be considered truly
international and therefore eligiblefor
fullbanking services from Edge
corporations.

“limited Branch” Concept
Under this approach, the international
link that isrequired between an Edge
corporation’s domestic and international
business would have been supplied by
the funding sources ofthe Edge. The
proposal would have permitted an Edge
corporation to lend for any purpose in
the United States up to the amount of
the deposits itderived from foreign
nonbank sources. This proposal drew
the most support ofany ofthe proposals
from money center banks, some regional
companies active ininternational
lending, and trade associations ofthe
largerinstitutions.These commenters
stated thatthisproposal could be the
singlemost important regulatory
measure thatwould enable Edges to
compete more effectivelywith U.S.
branches and agencies offoreign banks.
They also stated that the Board has
broad discretionary power under the
Edge Act to determine what is
“incidental” and that the tiebetween
nonqualifying loans and foreign deposit­
taking may provide a sufficient
international nexus. They went on to
state that the effectiveness ofthe
approach would be seriously
compromised by not including all
foreign source deposits, including those
from foreign banks.
The opponents ofthisapproach stated
that a funding linkisinsufficientto
make domestic loans "incidental” to
international business. They asserted
that the Board would be assisting in the
creation of a loophole thatwould permit
evasion ofthe restrictions on interstate
banking, including by nonbank banks.
2

Opponents also contended thatEdges
remain an attractive vehicle despite
limitations on powers, as evidenced by
theirproliferation since 1979 (from about
70 offices to about 320 offices).
After consideration ofthe comments
received, the Board was not convinced
that adoption ofthisproposal would be
consistent with the requirements ofthe
Edge Act that an Edge corporation’s
business in the United States must be
incidental to foreign business. Itwas
also not clear that the proposal would
further the purpose ofthe Act to finance
international trade since the thrust of
the proposal would be toward
transactions ofa purely domestic
nature. For these reasons the Board
determined not to adopt the proposal in
the finalrevision.
Transactional Leeway Proposals
The two other proposals put forthfor
comment attracted littlesupport. In the
transactional leeway proposal, an Edge
corporation would be permitted to lend
to a customer for any purpose up to 25
percent ofthe Edge’s totallending to
that customer. Thus, 75 percent ofthe
business ofan Edge corporation with
that customer would have to meet the
transaction-by-transaction testbut the
Edge would also be able to service the
needs ofthe customer betterby lending
a limited amount forpurposes that could
not meet this stricttransaction test.
There would be no expansion of
deposit-taking activities.
Some commenters were opposed to
thisapproach as an unwarranted
expansion ofEdge powers in the
domestic area. Others did not support it
because the proposal would be too
difficultto implement. These
commenters stated that the
recordkeeping would be burdensome
and that compliance could fluctuate
according towhen a customer repaid
loans.
In a similarvein, itwas also proposed
that an Edge corporation be permitted to
lend to "qualified customers” for
domestic purposes up to 25 percent of
the Edge’s totallending. No expansion
ofdeposit-taking would be permitted.
The Board requested specific comment
on the feasibilityofthe approach and on
the measures that should be employed
in determining qualified customers. The
Board requested actual data that could
be used in establishing the test.
As with the previous approach, few
commenters supported thisproposal.
Most objectionsfocused on the
difficultiesin establishing a rational test
formeasuring international business
and on the recordkeeping burden that
would be required. Others objected on

thegrounds that the benefits received
would be faroutweighed by the
burdensome requirements ofthe
proposal. Many other commenters,
mainly smaller and regional banking
organizations, objected because, in their
view, itwould exceed the scope ofthe
Edge Act and would permit Edge
participationin domestic banking.
In proposing these forcomment, the
Board had intended toreduce the
burden ofmaintaining records on a
tramsaction-by-transactiom basis.Many
ofthe comments indicate that these
proposals would be more burdensome
than the current requirements.
Moreover, littleuseful data thatWould
help establish a qualified customer test
in the modified transactional leeway
proposal was supplied by the comments.
Inlightofthisand the admittedly
difficultadministrative problems
associated with the proposals, the Board
has determined not to adopt these
proposals.
One commenter did submit data on
the number ofcompanies that engage in
export sales and recommended adoption
ofa testthat establishes a very low
threshold ofinternational sales—-10
percent-in order to qualify. In support
ofthisvery low test,the comment states
that Itisthose companies with low
exports sales that could best use the
services ofEdge corporations. The
Board isofthe view that this does not
meet the intent ofthe proposal, which
was to establish a testofwhether a
customer isprimarily engaged in
international business such that allofan
Edge’s dealings with that customer
could reasonably be deemed tobe
internationallyrelated. This particular
proposal would permit Edges to actas
fullservice lenders to companies that
have negligible connections to
international business transactions and,
forthisreason, the Board did not adopt
it.
In sum, the Board has revised
Regulation K topermit Edge
corporations to engage in a fullerrange
oftransaction with identifiable
international businesses. The Board has
not adopted provisions thatwould allow
a substantial expansion ofan Edge
corporation’s domestic powers because
ofthe difficultyin devising standards
thatwould meet the incidental test,
would be easily administered, and
would not involve potential evasion of
statutoryrestrictions against interstate
banking.
Although the Board has adopted only
one ofthe proposals liberalizingEdge
lending powers, the Board also believes
thatthe purposes ofthe revision of
Regulation K, which are tomake Edge
corporations more competitive and to




provide U.S. businesses with a source of
international credit and other services,
are met through otherrevisions ofthe
regulation adopted by the Board. These
include a significantincrease inthe
lending limitofEdge corporations and
the liberalization ofinvestment limits.
With respect to activitiesin the United
States, the revised regulation clarifies
that an Edge corporation may offer
merger and acquisition advice to foreign
persons and t©U.S. persons with respect
to foreign assets. This would Include
providing advice to a U.S. company on ®
proposed merger with or acquisition by
a foreign company. This activityhas
been previously determined to be
permissible forEdge corporations
subject to the conditions that a foreign
company to which itprovides advice is
a company more than halfofthe assets
and revenues ofwhich, on a
consolidatedbasis at the ultimate
parent level, are located and derived
outside the United States. Advice on
transactions in the United States is
available only to foreign persons and a
U.S. subsidiary ofa foreign company
would not be considered “foreign” for
thispurpose.
Similarily, the provision dealing with
an Edge corporation acting as a agent
forthe purchase ofsecurities atthe
order and forthe account ofa customer
has been adopted as proposed. The
provision was clarifiedto require that,
with respect toU.S. securities, the
customer forwhom the Edge corporation
isactingmust be a foreign person. In
thisregard, an Edge corporation would
be permitted to purchase and sell,for
the account of any customer, securities
that are registered in the United States
forthe sole purpose ofserving as a
substitute forforeign securities issued
abroad. These kinds ofsecurities, socalled American depository receipts
(“ADRs”),have substance only with
respect to the underlying foreign
securities and therefore would be
considered foreign securities for
purposes ofRegulation K.
The revised regulation also would
permit Edge corporations to engage in a
wider range offoreign exchange activity
than iscurrently permitted. As new
contracts inforeign exchange are
developed, an Edge corporation would
be permitted to enter these contracts
without receiving priorBoard approval.
Several commenters stated that futures,
options and options oh futures contracts
on foreign exchange are useful hedging
tools that enhance the abilityofan Edge
corporation to minimize risk associated
with transactions related to foreign
currencies. An Edge corporation is
expected to conduct these operations in
a prudent manner and in accordance

3

with the policies governing the foreign
exchange activities ofitsparent U.S.
banking organization. For an Edge
corporation that isnot owned by a U.S.
banking organization, the Edge
corporation should conduct itsforeign
exchange activities in accordance with
Board policies.This authority would not
permit an Edge corporation tobecome a
member ofan exchange or to act
generally as a broker orfutures
commission merchant with respect to
contracts on foreign exchange. Such
activitywould require an application to
the Board forprior approval
Prudential imitations on Edge

corporations
The Board proposed a number of
changes to § 211.6 ofRegulation K,
dealing with limits on acceptances,
lending limits, and capital requirements.
The technical changes on bankers’
acceptances— one clarifyingthat a
separate lending limitapplies to
acceptances ofthe kind described in
section 13 ofthe Federal Reserve Act
and the other clarifying the treatment of
participation agreements with respect to
acceptances— drew littlecomment and
are adopted as proposed.
The Board has also proposed raising
the customer lending limitforEdge
corporation from 10 percent to 15
percent ofthe Edge Corporation’s
capital and surplus. Some commenters
stated that an Edge corporation does not
need a separate lending limitand that
an Edge’slending should merely be
aggregated into the parent bank’s
customer lending limit.The Board,
however, continues to believe that Edge
corporations, as separate corporate
banking vehicles, should be operated in
accordance with prudent standards,
which would include diversification.
Therefore, the separate lending limitfor
Edge corporation ismaintained. The
Board adopted the proposed increase in
the per-customer lending limitof15
percent ofthe Edge corporation’s capital
and surplus.
With respect to lending limits
generally, Regulation K also requires
aggregation ofthe loans made to a
customer by an Edge corporation with
the loans to the same customer by the
parent bank. The total amount may not
exceed the parent bank’slending limit.
The provision has been the source of
some confusion because Regulation K
includes within the lending limitcertain
kinds ofobligations that may not be
included in the parent bank lending
limit.For example, Regulation K
includes within the lending limit
investments inunaffiliated
organizations. The National Bank Act,

however, permits a national bank to
investup to10 percent ofitscapital and
surplus indebt securitiesofother
organizations. These investment
securities are not included in the
National Bank Act’slending limit.
The purpose ofthe aggregation
requirement istoprevent,theparent
bank from using the Edge corporation to
evade the parent bank’slending limits.
For purposes ofdetermining compliance
with the aggregation provision of
Regulation K’slending limit,a parent
bank may exclude from the Edge
corporation’sloans and extensions of
credit any obligations, such as
investment securities, that are not
included inthe parent bank’s lending
limit.Where such obligations, however,
are subject to separate limitations in the
law or regulations governing the parent
bank, the Edge corporation’sholdings of
such obligations may not be used to
evade these separate limitations on the
parent bank.
With respect to capitalization
requirements, under the current
regulation the capitalrequirement for
banking Edge corporations isset at 7
percent of“risk” assets with riskassets
being defined as total assets less cash,
amounts due from domestic banking
organizations, U.S. government
securities, and federal funds sold. Itwas
proposed to change thisstandard to
accord with the standards applied to
commercial banks under the Board’s
capital adequacy guidelines. The Board
did not adopt thisproposal.
The principal objection to the
proposal in comments submitted to the
Board was similarto thatvoiced with
respect tolending limits,namely, thatno
separate capital requirement should be
applied toEdge corporations because
they are generally parts oflarger
banking organizations towhich a capital
requirement isapplied on a consolidated
basis. However, as already noted, an
Edge corporation isa separately
chartered company engaged in the
conduct ofa banking business and
should therefore maintain an individual
capital position to support itsown
operations. Moreover, not allbanking
Edge corporations are part oflarger
banking organizations towhich U.S.
capital requirements apply. In addition
to Edge corporations owned by foregin
banks, several Edge corporations have
recently been acquired by nonbanking
organizations.
A number ofcomments objected to
abandoning the “risk asset” capital
requirement, asserting that itwould
have a negative impact on some Edge
corporations because ofclearing
activities and the large amounts offunds
in the category of “due from banks.” At




the time the change was proposed,
available data indicated that,while a
few banking Edge corporations would
have to strengthen theircapital
positions, changes in clearing
procedures had greatly reduced the
amount offloat,and thus the amount of
interbank claims booked inEdge
corporations. Thus, the original
justificationforthe risk asset standard
forcapital requirements appeared
inapplicable. More recent data stillseem
toconfirm that conclusion. The data
show that12 out of94 banking Edge
corporations would have to obtain
additional capital or reduce assets ifthe
capital standard were changed. Of those
12 Edge corporations, many are either
placing large amounts ofsurplus funds
with theirparent banks or are very
active in interbank money market
transactions. For example, in several of
these cases, claims on otherbanks
amount to a majority oftotal assets.
Most ofthe affected corporationshave
capital ratios that range from three to
fivepercent oftotal assets and are still
capitalized well above the 7 percent of
risk assets standards. The remaining 82
banking Edge corporations, in addition
tomeeting the risk-assetratio
requirement, also have capital ratios
well in excess ofthe minimum
standards under the capitalguidelines.
In lightofthe generally satisfactory
capital positions on Edge corporations,
the Board has decided to defer action on
thisproposal pending father experience
with the capital guidelines forbanks
and bank holding companies. Those
guidelines are being reevaluated in the
lightofrecent developments inbanking
markets and for their adequacy in
relation to current banking practices.
The Board believed that a change in the
method ofcalculating the capital
requirements ofEdge Corporations
should await that reevaluation. As
already noted, the great bulk ofexisting
banking Edge corporations now meet
the commercial bank capital standards.
Because the Board ha3 deferred action
on the proposal to adopt the capital
adequacy standards applicable tobanks
forEdge corporations, Regulation K has
not been revised to conform the
definition ofcapital and surplus tothe
components ofprimary capital in the
Board’s capital adequacy guidelines.
Capital and surplus therefore will
continue to be defined in § 211.2(b) to
include paid-in and unimpaired capital
and surplus, which would include
reserves for loan losses, and undivided
profits, but not capital notes or
debentures.

4

Change in control ofEdge corporations
The Board in 1984 proposed for
comment a procedure thatwould require
a person togive the Board priornotice
ofacquisition ofcontrol ofan Edge
corporation. In itsproposal, the Board
noted the substantial growth inthe
number and the asset size ofEdge
corporations since 1979, and their
increased participationin the economy
and the interbank market. The prior
review procedure was intended toallow
the Board to assess the financial
strength ofthe acquiror and whether
adverse effects might resultfrom the
acquisition.
Under the proposed procedure any
person would be required togive 00
days’notice before acquiring 25 percent
or more ofthe voting shares ofan Edge
corporation. The Board could
disapprove an investment or impose
conditions necessary toprevent adverse
effects such as conflicts ofinterest,
undue concentration ofresources or
unsound banking practices. The
proposal was generally supported in the
comments received. However, three
commenters objected on the grounds
that the Board lacked specific statutory
authority forthe requirement.
The Board has exclusive jurisdiction
over chartering, supervising and
examining Edge corporations. The
governing statute and the Board’s
regulations establish a comprehensive
scheme requiring the prior approval of
the Board forthe formation and
establishment ofEdge corporations,
extensions oftheir corporate existence,
change to theirarticles ofassociation,
theirinvestments in other organizations
and any new activitiesinwhich they
may seek to engage. Moreover,
paragraph 4 ofthe Edge Act provides
that an Edge corporation may prescribe
“by-laws not inconsistent with law or
with the regulations ofthe Board . . .
regulating the manner inwhich itsstock
shallbe transferred . . . .” This
framework commits responsibility to the
Board to maintain the sound operation
ofEdge corporations and clearly
authorizes the Board to adopt a
procedure forreview ofthe transfer of
ownership ofan Edge corporation.
Therefore, the Board adopted the
proposal The language ofthe proposal
was revised to reflect some technical
clarifications and to make clear that the
priornotice requirements applies to
foreign banks acquiring between 25 and
50 percent ofthe shares ofan Edge
corporation.

Investment procedures
Under Regulation K, U.S. banking
organizations may invest in
international subsidiaries that confine
theiractivities to those specified by the
Board as permissible, and may acquire
20 to 50 percent interests in foreignjoint
ventures that are predominantly
engaged inpremissible activities. They
may also make international portfolio
investment by acquiring up to 20 percent
ofthe shares ofcompanies regardless of
the nature oftheiractivities.These
investments must be made in
accordance with procedures set forth in
the regulation.
Three changes were proposed inthose
procedures.
1.Under the General Consent, toraise
the amount forinitialinvestments that
may be made without priornotice or
approval from $2 million to$15 million.
2.Under the General Consent, toalter
from historical cost tobook value the
basis on which additional investments
in a single organization may be made
without priornotice or approval.
3.In the acquistion ofgoing concerns,
to permit some leeway in the
requirement that subsidiaries confine
theiractivities exclusively to those
listedinthe regulation.
The General Consent now permits
initialinvestments oflesser of$2 milion
or fivepercent ofthe investor’s capital
and surplus tobe made without prior
notice or consent, provided, ofcourse,
that the investment raises no question
regarding the permissiblity ofthe
activities.The comment supported a
liberalizationofthe General Consent,
with some commenters proposing a
higher dollar amount than that
proposed, and others suggested
elimination ofthe dollar amount with
reliance exclusively on the five percent
ofcapitallimitation. After consideration
ofallcomments, the Board adopted the
proposal toraise the initialinvestment
amount covered by general consent to
$15 million. In reaching this
determination, the Board noted that
elimination ofa dollar amount limit
would allow the largestbanks to make
substantial individual investments
without any priorreview, in some cases
ofup to$300 million. Because this
amount can be leveraged many times in
the case ofsubsidiaries, thus increasing
exposure beyond the investment
amount, the Board decided tomaintain a
dollar limit set at a level that would
allow routine initialinvestments tobe
made without regulatory scrutiny while
at the same time permitting regulatory
review ofthose investments that are
likely tobe more significant.




As to the second proposed change in
investment procedures, additional
investments beyond the initial
investment (orseries ofinvestments up
to $15 million) inan organization may
now be made under the General
Consent in any one year ofup to 10
percent oftheh istorical cost ofthe
investment and these rights may be
carried forward and accumulated forup
to fiveyears [i.e„ up to 50 percent). It
was proposed that the basis for this
calculation be changed from historical
cost tobook value. Itwas believed that
the book value would be easier to
account forover time and therefore that
the change would represent a
simplication. However, a number of
strong objections were received to the
proposed change, and these objections
were registered mainly by organizations
active inmaking additional investments.
The main arguments were that
maintaining records ofhistorical cost is
not burdensome, that book values
fluctuate, and that more often than not
additional investments are likely to be
needed where the book value has fallen
below historical cost. Some commenters
suggested thatifa change were tobe
made itshould permit the greater of
historical cost or book value to be used
as the basis. However, this could lead to
difficultproblems ofregulatory
administration and compliance. In light
ofallthe comments, the Board decided
toretain the historical cost criterionfor
calculating additional investments under
the General Consent.
The thirdproposed change in
investment procedures was to allow a
certain amount ofleeway in the
permissible activities ofsubsidiaries
when they are acquired as going
concerns. Under the present regulatory
requirements, a subsidiary must
conform itsactivities exclusively to
those listed inthe regulation or
otherwise permitted by the Board. By
contrast, up to 10 percent ofthe assets
or revenues ofa jointventure may be
attributable to impermissible activities.
When subsidiaries have been
acquired as going concerns, there have
often been parts of the organization
engaged inimpermissible activities.
These sectors, either departments ofthe
company or separate subsidiaries, have
often been small in relation to the
overall organization and sometimes
have been historically associated with
the firm acquired. In the circumstances,
ithas frequently been awkward to effect
theirdiscontinuance eitherprior to
acquisition or even post-acquisition. The
proposed change sought to avoid this
kind ofdifficultyby setting a de m inim is
standard thatwould allow up to 2
percent ofassets and revenues in such

5

companies tobe derived from
impermissible activities.,
While supporting the idea inprinciple,
many commenters suggested a higher
limit[e.g., 5 percent) or applying the
limitselected to allsubsidiaries (going
concerns and de novo). Because the
proposal was intended to provide
flexibilityto banking organizations, the
Board adopted a limit of5 percent of
assets and revenues thatmay be
derived from impermissible activities in
a subsidiary acquired as a going
concern. The provision isintended
primarily to permit acquisitions under
the General Consent and should provide
the intended flexibiityin that area.
Where, however, an investor proposes
to acquire a very large organization,
which does not qualify for the General
Consent, such that 5 percent ofassets
and revenues would be large in absolute
dollar terms, the Board will take into
account the size ofthe investment, the
magnitude ofimpermissible activities,
and the structure ofthe acquired
organization in detemining whether the
proposed investment should be
approved or whether the impermissible
activities could be retained. The Board
also determined that de novo
subsidiaries should continue to conform
strictlyto the activities standards setby
the Board because the parent has
control over the subsidiary’s activities
from the outset.
In addition to these revisions, the
Board adopted as proposed the revision
to § 211.5(d)(5) that would permit foreign
subsidiaries to underwrite allforms of
credit life,and credit accident and
health insurance, eliminating the
requirement that such insurance be
underwritten only for credit extended by
the investor and itsaffiliates.Section
211.5(d)(1) was revised to clarifythat a
U.S. banking organization may invest in
foreign thriftinstitutions, such as
savings banks and building and loan
associations.
The Board also adopted as proposed
the revision that eliminates from the list
ofactivities in § 211.5(d) those activities
that the Board has found to be closely
related to banking b y order under
section 4(c)(8) ofthe Bank Holding
Company Act. Investments made or
activities commenced in reliance on this
provision may continue to be held or
conducted.

Securities Activities Abroad
The Board proposed no change to the
provision permitting foreign subsidiaries
to engage in certain securities activities.
Comments were received on two
aspects of securities activities abroad:
limits on the underwriting of equities

and limits affecting dealing or trading in
equities. Because ofsignificant
developments currentlyunder way in
this area, no changes were adopted in
the rules governing the conduct of
securities activities abroad pending
furtherstudy and analysis.
U.S. nonbanking a ctivities o f foreign
banks. One proposed change in the

foreign shell holding companies that are
set up for legitimate corporate tax
purposes. The Board did not intend that
the proposal interfere with or inhibit the
legitimate structuring of foreign holdings
by foreign banking organizations. The
Board adopted the proposal with the
clarification that the U.S. company may
be held through a shell holding company
so long as the foreign banking
organization controls a foreign company
actually engaged in the same kind of
commercial business as the U.S.
company.
The Board had also proposed a
change to §211.23(b) ofRegulation K
concerning qualification offoreign
banking organizations to take advantage
ofthe exemptions forforeign banks in
the Bank Holding Company Act. The
proposal required that a foreign bank
include initscalculation ofthe amount
ofitsassets, revenues and net income
attributable toU.S. banking, any assets,
revenues or income derived from
banking operations inU.S. territories
and possessions and Puerto Rico. The
Institute ofForeign Bankers objected to
thisproposal because such locations
have generally been treated as foreign.
However, the Board continues to be of
theview that a foreign bank, should not
be permitted tobootstrap itselfinto
qualificationfor exemptions from
nonbanking prohibitions by including
banking assets.thatare subject toU.S.
jurisdiction.Therefore, the Board
adopted thisrevision as proposed.
Other Issues
The Board also adopted two
liberalizing provisions that were not
contained in the proposal for comment

regulation dealt with exempt U.S.
nonbanking activitiesofforeignbanks.
Section 2(h) ofthe BHG Act permits
foreignbanks to own foreign companies
that engage innonbanking activitiesin
the United States ifthe U.S. activities
are in the same general lineofbusiness
as the company’sforeign activities.The
exemption isintended toprevent
disruptions in the foreign activities and
business offoreignbanks that would
occur ifitsnonbank affiliateswere
completely barred from U.S. markets.
However, the exemption was intended
tobe available to commercial and
industrial companies with which foreign
banks were affiliatedand not to
companies that engage infinancial or
financially-related activities,or are
primarily investment vehicles.
To clarifythispoint, an amendment to
§ 211.23(f)(5)was proposed which would
require these foreign companies
affiliatedwith foreign banks to conduct
an actual operating business overseas in
order to take advantage ofthe
exemption. This would preclude a
foreign company that engages only in
acquiringnoncontrolling interests in
other companies from using the section
2(h) exemption toengage in the United
States in activities ofthe kind conducted
by such companies. An example would
be a foreignbank that directly or
A dditional investm ent authority fo r
indirectly acquires oiland gas properties
abroad as investments and seeks to rely foreign branches. Section 25 ofthe
Federal Reserve Act provides that a
on the section 2(h) exemption to engage
in the oiland gas business in the United member bank may hold the shares of a
foreignbank as a limited exception to
States or to engage generally in
the restrictions on member bank
investing in such properties in the
ownership ofstock generally. The Board
United States.
Two commenters opposed adoption of has not permitted member banks tohold
this change. They argued that the Board directly the shares ofany foreign
organization other than a foreignbank.
should not seek to prevent foreign
banking organizations from investing for The Board has received requests to
permit member banks tohold directly
their own account in real estate and oil,
the shares ofcompanies that engage
gas and other mineral properties in the
only in activitiespermitted to the foreign
United States because these are
branch orforeignbank subsidiary ofthe
commercial properties entitled to the
exemption. The Board is of the view that member bank where the conduct ofthe
activityin a separate company is
the exemption was intended to apply
only to directly related U.S. activities of required ornecessary under locallaw or
foreign affiliates engaged in commercial regulation.
The Board has the authority under
activities and was not intended to allow
section 25 togrant additionalpowers to
unrelated investments in commercial
foreign branches ofmember banks
and industrial businesses in the U.S.
where such powers are usual in
simply because investments are held in
connection with the banking business in
the same kinds of businesses abroad.
the country inwhich the bank islocated.
Both commenters requested that the
The Board has used this authority where
provision not be construed to exclude




6

an additional power appeared necessary
inorder to allow foreign branches of
member banks to compete with local
banking organizations.
The Board has amended the
regulations to permit a member bank,
with the prior approval ofthe Board, to
hold shares ofsubsidiaries that engage
solely in activitiespermitted to a foreign
branch where this structure isrequired
by local law or regulation. Because the
subsidiary would engage only in
activitiespermitted to the branch, the
shareholding would be permissible and
consistent with the Board’s longstanding
position that a member bank may not
directly hold the shares ofa foreign
company except as the Board may
permit in accordance with section 25 of
the Federal Reserve Act.
D e m inim is investm ents in shares.

Regulation K requires divestiture ofany
investment ifthe organization invested
in engages directly or indirectlyin
business in the United States that isnot
permitted to an Edge Corporation. This
requirement applies no matter how
small the ownership interestmay be,
and can have an adverse impact upon
U.S. banking organizations thatmake
small investments inforeign companies
that thereafterengage directlyor
indirectlyin activities in the United
States.
Several commenters requested limited
relieffrom this divestiture requirement.
The Board believes that thisrequirement
isunnecessarily stringentand has
amend the regulation to permit U.S.
banking organizations to invest inup to
five percent ofthe shares ofa foreign
company thatengages inbusiness in the
United States without being required to
divest those shares. This five percent
exemption would correspond tothe
exemption forbank holding companies
under the Bank Holding Company Act
forinvestments inup to fivepercent of
the shares ofany company without
regard to the activitiesofthe company
and may fairlybe regarded as incidental
to the foreignbusiness ofthe investor
because itisa de m inim is holding.
In lightofthe Board’s adoption of this
liberalization, other clarifyingand
conforming changes were made to
§ 211.5(b).
Pursuant to section 605(b) ofthe
Regulatory flexibilityAct (Pub. L 90354, 5 U.S.C. 601 e t seq.)t the Board
certifies that the regulation will not have
a significant economic impact on a
substantial number-of small entities.
ListofSubjects m 12 CFR Part ill

Banks, banking; Federal Reserve
System; Foreign banking, Investments,
Reporting and recordkeeping

requirements, Export trading companies,
Allocated transferriskreserve, reporting
and disclosure ofinternational assets,
accounting forfees on international
loans.
12 CFR Part 211 isamended as
follows:
1. The authority citation forPart 211
continues toread as follows:
Authority: Federal R eserve Act (12 U.S.C.
211 e t seg.y, Bank Holding C om pany Act of
1956, as am ended (12 U.S.C 1841 e t s e q .); the
International Banking Act of 1978 (Pub. L. 95369; 92 Stat. 607; 12 U.S.C. 3101 e t s e q .)\ the
Bank Export Services Act (Title II, Pub. L. 97290, 96 Stat. 1235); and the International
Lending Supervision Act (Title IX, Pub. L. 98181, 97 Stat. 1153).

25(a) ofthe FRA (12 U.S.C. 611-631),
“Edge corporations”;to corporations
having an agreement or undertaking
with the Board under section 25 ofthe
FRA (12U.S.C. 601-604a), “Agreement
corporations"; tomember banks with
respect to theirforeign branches and
investments inforeign banks under
section 25 ofthe FRA (12U.S.C. 601604a);1and to bank holding companies
with respect to the exemption from the
nonbanking prohibitions ofthe BHC Act
afforded by section 4(c)(13) ofthe BHC
Act (12 U.S.C. 1843(c)(13)).
§2112

Definitions.

Unless otherwise specified, for the
purposes of this subpart:
Subpart A of12 CFR Part 211 is
(a)An “affiliate” ofan organization
revised toread as follows:
means (1)any entity ofwhich the
organization isa direct or indirect
P m i 211— INTERNATIONAL
subsidiary; or (2) any direct or indirect
BANKING OPERATIONS
subsidiary ofthe organization or such
entity.
Subpart A-=-8nternatsonaS Operations of
(b) “Capital and surplus” means paidUnited States Banking Organizations
in and unimpaired capital and surplus,
Sec.
and includes undivided profits but does
211.1 Authority, purposes, and scope.
not include the proceeds ofcapital notes
211.2 Definitions.
or debentures.
211.3 Foreign branches of U.S. banking
(c) “Directly or indirectly” when used
organizations.
in reference to activities or investments
211.4 Edge and A greem ent corporations.
of an organization means activities or
211.5 Investm ents and activities abroad.
211.6 Lending limits and capital
investments of the organization or of
requirem ents.
any subsidiary of the organization.
211.7 Supervision and reporting.
(d) An Edge corporation is “engaged
*
*
*
*
*
in banking” if it is ordinarily engaged in
the business of accepting deposits in the
SUBPART A—INTERNATIONAL
United States from nonaffiliated
OPERATIONS OF UNITED STATES
persons.
BANKING ORGANIZATIONS
(e) “Engaged in business” or “engaged
in activities” in the United States means
§ 211.1 Authority, purpose, and seop®.
maintaining and operating an office
(a)Authority. This subpart isissued
(other than a representative office) or
by the Board ofGovernors ofthe
subsidiary in the United States.
Federal Reserve System (“Board”)under
(f)“Foreign” or “foreign country”
the authority ofthe Federal Reserve Act refers to one or more foreignnations,
(“FRA”)(12 U.S.C. 221 etseq.)] the Bank and includes the overseas territories,
Holding Company Act of1956 (“BHG
dependencies, and insularpossessions
Act”)(12U.S.C. 1841 e t seq.)\ and the
ofthose nations and ofthe United
International Banking Act of1978
States, and the Commonwealth of
(“IBA”)(92 Stat. 607; 12 U.S.C. 3101 et
Puerto Rico.
seq.). Requirements forthe collection of
(g) “Foreign bank” means an
information contained in thisregulation organization that: is organized under the
have been approved by the Office of
laws of a foreign country; engages in the
Management and Budget under the
business of banking; is recognized as a
provision of44 U.S.C. 3501, etseq. and
bank by the bank supervisory or
have been assigned OMB Nos. 7100monetary authority of the country of its
0107; 7100-0109; 7100-0110; 7100-0069;
organization or principal banking
7100-0086, and 7100-0073.
operations; receives deposits to a
(b)Purpose. This subpart sets out
substantial extent in the regular course
rulesgoverning the international and
of its business; and has the power to
foreign activities ofU.S. banking
accept demand deposits.
organizations, including procedures for
(h) “Foreign branch” means an office
establishing foreign branches and Edge
of an organization (other than a
corporations to engage international
banking and forinvestments inforeign
1 Section 25 of the FRA, which refers to national
organizations.
banking associations, also applies to state member
(c)Scope. This subpart applies to
banks o f the Federal Reserve System by virtue of
corporations organized under section
section 9 o f the FRA (12 U.S.C. 321).




7

representative office) that islocated
outside the country under the laws of
which the organization isestablished, at
which a banking or financing business is
conducted.
(i)“Investment” means the ownership
or control ofshares (including
partnership interests and other interests
evidencing ownership), binding
commitments to acquire shares,
contributions to the capital and surplus
ofan organization, and the holding ofan
organization’s subordinated debt when
shares ofthe organization are also held
by the investor or the investor’saffiliate.
(j)“Investor” means an Edge
corporation, Agreement corporation,
bank holding company, or member bank.
(k) “Jointventure”means an
organization thathas 20 percent or more
ofitsvoting shares held directly or
indirectlyby the investor or by an
affiliateofthe investor, but which isnot
a subsidiary ofthe investor.
(l) “Organization” means a
corporation, government, partnership,
association, or any other entity.
(m) “Person” means an individual or
an organization.
(n) “Portfolio investment” means an
investment in an organization other than
a subsidiary orjointventure.
(o) “Representative office” means an
office that engages solely in
representational and administrative
functions such as solicitationofnew
business for or liaison between the
organization’shead office and
customers inthe United States, and does
not have authority tomake business
decisions for the account ofthe
organization represented.
(p) “Subsidiary” means an
organization more than 50 percent ofthe
voting shares ofwhich isheld directly or
indirectly by the investor, or which is
otherwise controlled or capable ofbeing
controlled by the investor or an affiliate
ofthe investor.
§ 211.3 Foreign Ibranehes off U.S. banking
organisations.

(a) E stablishm ent o f foreign
branches. — (1)Right to establish
branches. Foreign branches may be
established by any member bank having
capital and surplus of$1,000,000 or
more, an Edge corporation, an
Agreement corporation, or a subsidiary
held pursuant to this Subpart. Unless
otherwise provided in this section, the
establishment ofa foreign.branch
requires the specificprior approval of
the Board.
(2) Branching within a foreign
country. Unless the organization has
been notified otherwise, no prior Board
approval is required for an organization

to establish additional branches in any
foreign country where itoperates one or
more branches,2
(3)Branching into additional foreign
countries. After giving the Board 45
days’prior written notice, an
organization that operates branches in
two or more foreign counties may
establish a branch in an additional
foreign country, unless notified
otherwise by the Board.2
(4)Expiration of branching authority.

securities held as required by the law of
that country or as authorized under
section 5136 ofthe Revised Statutes (12
U.S.C. 24, Seventh)) may not exceed one
percent ofthe totaldeposits ofthe
bank’sbranches in that country on the
preceding year-end callreport date (or
on the date ofacquisition ofthe branch
in the case of a branch thathas not so
reported);
(3)Government obligations.
Underwrite, distribute, buy, and sell
Authority to establish branches through obligations of:(i)The national
prior approval or prior notice shall
government ofthe country inwhich the
expire one year from the earliest date on branch islocated; (ii)an agency or
which the authority could have been
instrumentality of the national
exercised, unless the Board extends the
government; and (iii)a municipality or
period.
other local or regional governmental
(5)Reporting. Any organization that
entity ofthe country; however, no
opens, closes, or relocates a branch
member bank may hold, or be under
shall report such change in a manner
commitment with respect to,such
prescribed by the Board.
obligations for itsown account in an
(b) Further powers of foreign
aggregate amount exceeding 10 percent
branches of member banks. In addition
ofitscapital and surplus;
to its general banking powers, and to the
(4)Credit extensions to bank’s
extent consistent with its charter, a
officers. Extend credit to an officerof
foreign branch of a member bank may
the bank residing in the country in
engage in the following activities so far
which the foreign branch islocated to
as usual in connection with the business finance the acquisition or construction
of banking in the country where it
oflivingquarters to be used as the
transacts business:
officer’sresidence abroad, provided the
(1)Guarantees. Guarantee debts, or
credit extension isreported promptly to
otherwise agree tomake payments on
the branch’shome office and any
the occurrence ofreadily ascertainable
extension ofcredit exceeding $100,000
events,3ifthe guarantee or agreement
(orthe equivalent in local currency) is
specifies a maximum monetary liability; reported also to the bank’sboard of
but except to the extent that the member directors;
bank isfully secured, itmay not have
(5)Real estate loans. Take liens or
liabilitiesoutstanding for any person on other encumbrances on foreign real
account ofsuch guarantees or
estate in connection with itsextensions
agreements which when aggregated with ofcredit,whether or not offirstpriority
other unsecured obligations ofthe same
and whether or not the real estate has
person exceed the limitcontained in
been improved.
paragraph (a)(1) ofsection 5200 ofthe
(6)Insurance. Act as insurance agent
Revised Statutes (12U.S.C. 84) forloans or broker;
and extensions ofcredit;
(7)Employee benefits program. Pay to
(2)Investments. Invest in: (i)The
an employee ofthe branch, as part ofan
securities ofthe central bank, clearing
employee benefits program, a greater
houses, governmental entities, and
rate ofinterest than thatpaid to other
government-sponsored development
depositors ofthe branch;
banks ofthe country inwhich the
(8)Repurchase agreements. Engage in
foreign branch islocated; (ii)other debt repurchase agreements involving
securities eligible tomeet local reserve
securities and commodities that are the
or similarrequirements; and (iii)shares
functional equivalents ofextensions of
ofprofessional societies, schools, and
credit;
the likenecessary to the business ofthe
(9)Investment in subsidiaries. With
branch; however, the totalinvestments
the Board’sprior approval, establish or
ofthe bank’sbranches inthat country
invest in a wholly-owned subsidiary to
under this paragraph (exclusive of
engage solely in activities inwhich the
member bank ispermitted to engage in
2For the purpose o f this paragraph, a subsidiary
or activities that are incidental to the
other than a bank or an Edge or Agreement
activities ofthe foreign branch, where
corporation is considered to be operating a branch
required by local law or regulation; and
in a foreign country if it has an affiliate that
operates an office (other than a representative
(10) Other activities. With the Board’s
office) in that country.
prior approval, engage in other activities
3 “Readily ascertainable events" include, but are
that the Board determines are usual in
not limited to, events such as nonpayment of taxes,
connection with the transaction ofthe
rentals, customs duties, or costs of transport and
business ofbanking in the places where
loss or nonconformance of shipping documents.




8

the member bank’sbranches transact
business.
(c) Reserves of foreign branches of
member banks. Reserves shall be
maintained against foreign branch
deposits when required by Part 204 of
this chapter (Regulation D).
§ 211.4

Edg© and A 0r©@m©nt

A

e@rp@rat8@ns.
(a) Organization.—(1)Permit. A
proposed Edge corporation shall become
a body corporate when the Board issues
a permit approving itsproposed name,
x
articles of association, and organization
certificate.
(2)Name. The name shall include
“international,” “foreign,” “overseas,”
or some similarword, but may not
resemble the name ofanother
organization to an extent that might
mislead or deceive the public.
(3)Federal Registernotice. The Board
will publish in the Federal Register
notice of any proposal to organize an
Edge corporation and will give
interested persons an opportunity to
express theirviews on the proposal.
(4)Factors considered by the Board.
The factors considered by the Board in
acting on a proposal to organize an Edge
Corporation include:
(i)The financial condition and history
of the applicant:
(ii)The general character ofits
management;
(iii)The convenience and needs ofthe
community to be served with respect to
international banking and financing
services; and
(iv) The effects of the proposal on
competition.
(5)Authority to commence business.
After the Board issues a permit, the
Edge corporation may electofficers and
otherwise complete itsorganization,
invest in obligations ofthe United States
Government, and maintain deposits
with depository institutions, but itmay
not exercise any other powers until at
least 25 percent ofthe authorized capital
stock specified in the articles of
association has been paid in cash, and
i
each shareholder has paid in cash at
least 25 percent ofthat shareholder’s
stock subscription. Unexercised
authority to commence business as an
Edge corporation shall expire one year
afterissuance ofthe permit, unless the
Board extends the period.
(6) Amendments to articles of
association. No amendment to the
articles of association shall become
effective until approved by the Board.
(b)Nature and ownership of shares.—
(1) Shares. Shares ofstock in an Edge
corporation may not include no-par
f
v.
value shares and shallbe issued and
>

(d)Reserve requirements and interest
unsound banking practices in the United
rate limitations. The deposits ofan Edge
States; and (ii)give the Board 45 days’
or Agreement corporation are subject to
prior written notice, in a form tobe
Parts 204 and 217 ofthis chapter
prescribed by the Board, before
engaging in any nonbanking activity in
(Regulations D and Q) in the same
manner and to the same extent as ifthe
the United States, or making any initial
or additional investments inanother
Edge or Agreement corporation were a
organization, that would require prior
member bank.
Board approval or notice by an
(e)Permissible activities in the
organization subject to section 4 ofthe
United States. An Edge corporation may
BHC Act; inconnection with such
engage directly or indirectly in activities
notice, the Board may impose conditions in the United States that are permitted
necessary toprevent adverse effects
by the sixth paragraph of section 25(a)
that may resultfrom such activity or
of the FRA and are incidental to
investment; and
international or foreign business, and in
(E) invest inEdge corporation no moresuch other activities as the Board
than 10 percent of the institution’s
determines are incidental to
capital and surplus.
international or foreign business. The
(3) Change in control.—[i)Prior
following activities will ordinarily be
notice. Any person shallgive the Board
considered incidental to an Edge
60 days’prior written notice, in a form to corporation’s international or foreign
be prescribed by the Board, before
business:
acquiring, directly or indirectly, 25
(1) Deposit activities.— (i)Deposits
percent or more ofthe voting shares, or from foreign governments and foreign
(2) Ownership of Edge corporations
otherwise acquiring control, ofan Edge
by foreign institutions.— (i)Prior Board
persons. An Edge corporation may
corporation; the Board may extend the
approval. One or more foreign or
receive in the United States transaction
60-day period for an additional 30 days
foreign-controlled domestic institutions
accounts, savings, and time deposits
by notifying the acquiring party.
referred to inparagraph 13 ofsection
(including issuing negotiable certificates
(ii) Board review. Interviewing a
25(a) ofthe FRA (12U.S.C. 619) may
ofdeposits) from foreigngovernments
notice filedunder thisparagraph, the
apply forthe Board’sprior approval to
and their agencies and instrumentalities;
Board shall consider the factors set forth offices orestablishments located, and
acquire directly or indirectly a majority
in paragraph (a)(4) ofthis section and
ofthe shares ofthe capital stock ofan
individuals residing, outside the United
may disapprove a notice or impose any
Edge corporation.
States.
(ii) Conditions and requirements. Suchconditions that itfinds necessary to
(ii) Deposits from other persons. An
assure
th
e
sa
f
e
and
sound
operation
o
f
an institution shall:
Edge corporation may receive from any
the Edge corporation, to assure the
(A) Provide the Board information
other person in the United States
international character ofitsoperation,
related toitsfinancial condition and
transaction accounts, savings, and time
and
t
o
prevent
adverse
e
f
f
e
c
t
s
such
as
activitiesand such other information as
deposits (including issuing negotiable
decreased or unfair competition,
may be required by the Board;
certificates ofdeposit) ifsuch deposits:
conflicts ofinterest, or undue
(B) Ensure that any transaction by an
(A) Are to be transmitted abroad;
Edge corporation with an affiliate4ison concentration ofresources.
(B) Consist offunds to be used for
(c) Domestic branches. An Edge
substantially the same terms, including
payment ofobligations to the Edge
corporation
may
e
s
t
a
b
l
i
s
h
branches
i
n
interestrates and collateral, as those
the United States 45 days afterthe Edge corporation or collateral securing such
prevailing at the same time for
obligations;
corporation has given notice to its
comparable transactions by the Edge
(C) Consist ofthe proceeds of
Reserve
Bank,
unless
t
h
e
Edge
corporation with nonaffiliatedpersons,
c
o
l
lections abroad that are tobe used to
corporation isnotified to the contrary
and does not involve more than the
pay for exported or imported goods or
within
t
h
a
t
t
i
m
e
.
The
n
otice
t
o
t
h
e
normal riskofrepayment or present
Reserve Bank shall include a copy ofthe for other costs ofexporting or importing
other unfavorable features;
or that are tobe periodically transferred
notice ofthe proposal published in a
(C) Ensure that the Edge corporation
to the depositor’s account at another
newspaper ofgeneral circulation in the
will not provide funding on a continual
communities to be served by the branch financial institution;
or substantial basis to any affiliateor
(D) Consist ofthe proceeds of
and may appear no earlierthan 90
office ofthe foreign institution through
extensions
ofcredit by the Edge
calendar
days
p
r
i
o
r
t
o
submission
o
f
transactions thatwould be inconsistent
c
o
r
p
o
r
a
t
i
o
n
;
no
t
i
c
e
o
f
the
proposal
t
o
th
e
Reserve
with the international and foreign
(E)Represent compensation to the
Bank. The newspaper notice must
business purposes forwhich Edge
Edge
corporation forextensions ofcredit
provide
an
opportunity
f
o
r
t
h
e
public
t
o
corporations are organized;
(D) In the case of a foreign institution give written comment on the proposal to or services to the customer;
(F)Are received from Edge or
the appropriate Federal Reserve Bank
not subject to section 4 ofthe BHC Act:
Agreement corporations, foreign banks
(i) Comply with any conditions that the forat least30 days afterthe date of
and other depository institutions (as
Board may impose that are necessary to publication. The factors considered in
described inPart 204 ofthis chapter
a
c
t
i
n
g
upon
a
proposal
t
o
e
s
t
a
b
l
i
s
h
a
prevent undue concentration of
(Regulation B));
branch are enumerated inparagraph
resources, decreased or unfair
(G) Are received from an organization
(
a
)
(
4
)
o
f
t
h
i
s
s
e
c
t
i
o
n
.
Authority
t
o
open
a
competition, conflicts ofinterest, or
that by itscharter, license or enabling
branch under priornotice shall expire
one year from the earliest date on which law islimited to business that isofan
4For purposes of this paragraph, “affiliate” means
international character, including
that authority could have been
any organization that would be an "affiliate" under
exercised, unless the Board extends the Foreign Sales Corporations (26U.S.C.
section 23A o f the FRA (12 U.S.C. 371c) if the Edge
921); transportation organizations
corporation were a member bank.
period.

transferred only on itsbooks and in
compliance with section 25(a) ofthe
FRA and this subpart. The share
certificates ofan Edge corporation shall:
(1)Name and describe each class of
shares indicating itscharacter and any
unusual attributes such as preferred
status or lack ofvoting rights; and
(ii) Conspicuously set forth the
substance of:
(A) Limitations upon the rights of
ownership and transfer of shares
imposed by section 25(60 ofthe FRA;
and
(B) Rules that the Edge corporation
prescribes in itsby-laws to ensure
compliance with thisparagraph. Any
change in status ofa shareholder that
causes a violation of section 25(a) ofthe
FRA shallbe reported to the Board as
soon as possible, and the Edge
corporation shall take such action as the
Board may direct.




9

engaged exclusively in the international
transportation ofpassengers or in the
movement ofgoods, wares, commodities
or merchandise ininternational or
foreign commerce; and export trading
companies that are exclusively engaged
in activitiesrelated to international
trade.
(2)Liquid funds. Funds ofan Edge or
Agreement corporation not currently
employed in itsinternational or foreign
business, ifheld or invested inthe
United States, shall be in the form of
cash, deposits with depository
institutions, as described inPart 204 of
this chapter (Regulation D), and other
Edge and Agreement corporations, and
money market instruments (including
repurchase agreements with respect to
such instruments) such as bankers’
acceptances, obligations ofor fully
guaranteed by federal, state, and local
governments and theirinstrumentalities,
federal funds sold, and commercial
paper.
(3)Borrowings. An Edge corporation
may:
(i)Borrow from offices ofother Edge
and Agreement corporations, foreign
banks, and depository institutions (as
described inPart 204 ofthis chapter,
Regulation D) orissue obligations to the
United States or any ofitsagencies or
instrumentalities;
(ii)Incur indebtedness from a transfer
ofdirect obligations of,or obligations
that are fullyguaranteed as toprincipal
and interestby, the United States or any
agency or instrumentality thereofthat
the Edge corporation isobligated to
repurchase;
(iii)Issue long-term subordinated debt
that does not qualify as a “deposit”
under Part 204 ofthis chapter
(Regulation D).
(4)Credit activities. An Edge
corporation may:
(i)Finance the following: (A)
contracts, projects, or activities
performed substantially abroad; (B) the
importation into or exportation from the
United States ofgoods, whether direct
or through brokers or other
intermediaries; (C) the domestic
shipment or temporary storage ofgoods
being imported or exported (or
accumulated forexport); and (D) the
assembly or repackaging ofgoods
imported or tobe exported;
(ii)Finance the costs ofproduction of
goods and services forwhich export
orders have been received orwhich are
identifiable as being directlyfor export;
(iii)Assume or acquire participations
in extensions of credit, or acquire
obligations arisingfrom transactions the
Edge corporation could have financed;
(iv)Guarantee debts, or otherwise
agree tomake payments on the




occurrence ofreadily ascertainable
events,5ifthe guarantee or agreement
specifies the maximum monetary
liabilitythereunder and isrelated to a
type oftransaction described in
paragraphs (e)(4)(i) and (ii)of this
section; and
(v) Provide credit and other banking
services fordomestic and foreign
purposes to organizations ofthe type
described in § 211.4(e)(1)(ii)(G) ofthis
part.
(5)Paym ents and collections. An Edge
corporation may receive checks, bills,
drafts, acceptances, notes, bonds,
coupons, and other instruments for
collection abroad, and collect such
instruments inthe United States for a
customer abroad; and may transmit and
receive wire transfers offunds and
securities fordepositors.
(6)Foreign exchange. An Edge
corporation may engage inforeign
exchange activities.
(7)Fiduciary and investm ent advisory
activities. An Edge corporation may:
(i)Hold securities in safekeeping for,
or buy and sellsecurities upon the order
and forthe account and risk of,a
person, provided such services forU.S.
persons shallbe with respect to foreign
securities only;
(ii)Act as paying agent for securities
issued by foreign governments or other
entities organized under foreign law;
(iii)Act as trustee, registrar,
conversion agent, or paying agent with
respect to any class of securities issued
to finance foreign activities and
distributed solely outside the United
States;
(iv)Make private placements of
participations initsinvestments and
extensions ofcredit;however, except to
the extent permissible formember
banks under section 5136 ofthe Revised
Statutes (12U.S.G. 24, Seventh), no Edge
corporation may otherwise engage in the
business ofunderwriting, distributing, or
buying or selling securities in the United
States;
(v)Act as investment or financial
adviser by providing portfolio
investment advice and portfolio
management with respect to securities,
other financial instruments, real
property interests and other investment
assets,6and by providing advice on
6 "Readily ascertainable even ts” include, but are
not limited to, events such as nonpayment of taxes,
rentals, customs duties, or cost of transport and loss
or nonconformance of shipping documents.
6For purposes of this section, management of an
investment portfolio does not include operational
management of real property, or industrial or
commercial assets.

10

mergers and acquisitions, provided such
services forU.S. persons shall be with
respect to foreign assets only; and
(vi) Provide general economic
information and advice, general
economic statisticalforecasting services
and industry studies, provided such
services forU.S. persons shall be with
respect to foreign economies and
industries only.
(8)Banking services for em ployees.
Provide banking services, including
deposit services, to the officers and
employees ofthe Edge corporation and
itsaffiliates;however, extensions of
credit to such persons shallbe subject to
the restrictions ofPart 215 ofthis
chapter (Regulation O) as ifthe Edge
corporation were a member bank.
(9)Other activities. With the Board’s
prior approval, engage in other activities
in the United States that the Board
determines are incidental to the
international or foreignbusiness ofEdge
corporations.
(f) Agreem ent corporations. With the
prior approval ofthe Board, a member
bank orbank holding company may
invest in a federally- or state-chartered
corporation that has entered into an
agreement orundertaking with the
Board that itwill not exercise any
power that isimpermissible for an Edge
corporation under this subpart.
§

21 1.5

[Investm ents arad astivitses ab ro a d .

(a) G eneral policy. Activities abroad,
whether conducted directly or indirectly,
shallbe confined to those ofa banking
or financial nature and those that are
necessary to carry on such activities. In
doing so, investors shall at alltimes act
in accordance with high standards of
banking or financial prudence, having
due regard for diversification ofrisks,
suitable liquidity, and adequacy of
capital. Subject to these considerations
and the other provisions of this section,
itisthe Board’s policy to allow activities
abroad to be organized and operated as
best meets corporate policies.
(b)Investm ent requirements.— (1)
Eligible investm ents, (i)An investor
may directly or indirectly:
(A) Invest in a subsidiary that engages
solely in activities listedinparagraph
(d) ofthis section or in such other
activities as the Board has determined
inthe circumstances ofa particular case
are permissible except thai, in the case
ofan acquisition ofa going concern,
existing activities that are not otherwise
permissible fora subsidiary may
account fornot more than five percent
ofeither the consolidated assets or
revenues ofthe acquired organization;
(B) Invest in a jointventure provided
that,unless otherwise permitted by the

Board, not more than 10 percent ofthe
accordance with the general consent,
jointventure’s consolidated assets or
priornotice, or specific consent
revenues shall be attributable to
procedures contained in thisparagraph.
activitiesnot listedinparagraph (d) of
The Board may at any time, upon notice,
this section; and
suspend the general consent and prior
notice procedures with respect to any
(C) Make portfolio investments
investor or with respect to the
(including securities held intrading or
acquisition ofshares oforganizations
dealing accounts) in an organization if
engaged inparticular kinds ofactivities.
the totaldirectand indirect portfolio
investments in organizations engaged in An investor shall apply forand receive
the priorspecific consent ofthe Board
activitiesthat are not permissible for
foritsinitialinvestment in itsfirst
jointventures does not at any time
subsidiary orjointventure unless an
exceed 100 percent ofthe investor’s
affiliatehas made such an investment.
capital and surplus.78
Authority to make investments under
(ii) A member bank’s direct
investments under section25 ofthe FRA prior notice or specific consent shall
expire one year from the earliest date on
shall be limited toforeign banks and to
foreign organizations formed forthe sole which the authority could have been
exercised, unless the Board extends the
purpose ofeitherholding shares ofa
period.
foreign bank or performing nominee,
(1) G eneral consent. Subject to the
fiduciary, or other banking services
other limitations ofthis section, the
incidental to the activitiesofa foreign
Board grants itsgeneral consent forthe
branch or foreign bank affiliateofthe
following:
member bank.
(i)Any investment in a jointventure
(2)Investm ent limit. In computing the
or subsidiary, and any portfolio
amount that may be invested in any
investment, ifthe totalamount invested
organization under this section, there
shallbe included any unpaid amount for (inone transaction or ina series of
transactions) does not exceed the lesser
which the investorisliable and any
of;
investments by affiliates.
(A) $15 million; or
(3)Divestiture. An investor shall
dispose ofan investment promptly
(B) 5 percent ofthe investor’s capital
(unless the Board authorizes retention)
and surplus in the case ofa member
if:
bank, bank holding company, orEdge
corporation engaged inbanking, or 25
(i)The organization invested in—
(A) Engages in the general business of percent ofthe investor’s capital and
surplus in the case ofan Edge
buying or sellinggoods, wares,
corporation not engaged inbanking;
merchandise, or commodities in the
(ii)Any additional investment in an
United States;
organization in any calendar year so
(B) Engages directly orindirectly in
long as
other business in the United States that
(A) The total amount invested in that
isnot permitted to an Edge corporation
calendar year does not exceed 10
in the United States except that an
percent ofthe investor’s capital and
investor may hold up tofivepercent of
surplus; and
the shares ofa foreign company that
engages directly or indirectly in
(B) The total amount invested under
business in the United States that isnot
§ 211.5 (including investments made
permitted to an Edge corporation; or
pursuant to specific consent orprior
notice) in that calendar year does not
(C) Engages inimpermissible
exceed cash dividends reinvested under
activities to an extent not permitted
under paragraph (b)(1) ofthissection; or paragraph (c)(l)(iii)ofthis section plus
10 percent ofthe investor’sdisect and
(ii)After notice and opportunity for
indirect historical cost9in the
hearing, the investor isadvised by the
Board that itsinvestment is
9
The “historical cost” of an investment consists
inappropriate under the FRA, the BHC
o f the actual amounts paid for shares or otherwise
Act, or thissubpart.
contributed to the capital accounts, as measured in
(c) Investm ent procedures.6 D ived anddollars at the exchange rate in effect at the time
each investment w as made. It does not include
indirect investments shall be made in
7For this purpose, a direct subsidiary of a
member bank is deemed to be an investor.
8When necessary, the general consent and prior
notice provisions of this section constitute the
Board’s approval under the eighth paragraph of
section 25(a) of the FRA for investments in excess
of the limitations therein based on capital and
surplus.




subordinated debt or unpaid commitments to invest
even though these may be considered investm ents
for other purposes of this part. For investments
acquired indirectly as a result of acquiring a
subsidiary, the historical cost to the investor is
measured as o f the date of acquisition of the
subsidiary at the net asset value o f the equity
interest in the case of subsidiaries and joint
ventures, and in the case of portfolio investments, at
the book carrying value.

11

organization, which investment
authority, to the extent unexercised,
may be carried forward and
accumulated forup to fiveconsecutive
years;
(iii)Any additional investment in an
organization inan amount equal tocash
dividends received from that
organization during the preceding 12
calendar months; or
(iv)Any investment thatisacquired
from an affiliateat net asset value.
(2)Prior notice. An investment that
does not qualify under the general
consent procedure may be made after
the investor has given 45 days’prior
written notice to the Board ifthe total
amount to be invested does not exceed
10 percent ofthe investor’scapital and
surplus.The Board may waive the 45day period ifitfinds immediate action is
required by the circumstances
presented. The notice period shall
commence at the time the notice is
accepted. The Board may suspend the
period or act on the investment under
the Board’s specific consent procedures.
(3)Specific consent. A ny investment
that does not qualify foreither the
general consent or the priornotice
procedure shallnot be consummated
without the specificconsent ofthe
Board.
(d) Perm issible activities. The Board
has determined that the following
activities are usual in connection with
the transaction ofbanking or other
financial operations abroad;
(1)Commercial and other banking
activities;
(2)Financing, including commercial
financing, consumer financing, mortgage
banking, and factoring;
(3)Leasing real or personal property,
or acting as agent, broker, or advisor in
leasing real or personal property, ifthe
lease serves as the functional equivalent
ofan extension ofcredit to the lessee of
the property;
(4)Acting as fiduciary;
(5)Underwriting creditlifeinsurance
and credit accident and health
insurance;
(6)Performing services forother direct
or indirect operations ofa United States
banking organization, including
representative functions, sale oflong­
term debt, name saving, holding assets
acquired to prevent loss on a debt
previously contracted ingood faith,and
other activities that are permissible
domestically for a bank holding
company under sections 4(a)(2)(A) and
4(c)(1)(C) ofthe BHC Act;
(7)Holding the premises ofa branch
of an Edge corporation ormember bank
or the premises ofa director indirect
subsidiary, or holding or leasing the

residence of an officer or employee of a
branch or subsidiary;
(8) Providing investment, financial, -or
economic advisory services;
(9) General insurance agency and
brokerage;
(10) Data processing;
(11) Managing a mutual fund if the
fund’s shares are not sold or distributed
in the United States or to United States
residents and the fund does not exercise
managerial control over the firms in
which it invests;
(12) Performing management
consulting services provided that such
services when rendered with respect to
the United Sates market shall be
restricted to the initial entry;
(13) Underwriting, distributing, and
dealing in debt and equity securities
outside the United States, provided that
no underwriting commitment by a
subsidiary of an investor for shares of
an issuer may exceed $2 million or
represent 20 percent of the capital and
surplus or voting shares of an issuer
unless the underwriter is covered by
binding commitments from
subunderwriters or other purchasers;
(14) Operating a travel agency
provided that the travel agency is
operated in connection with financial
services-offered abroad by the investor
or others;
(15) Engaging in activities that the
Board has determined by regulation in
12 CFR 225.25(b) are closely related to
banking under section 4(c)(8) of the BHC
Act; and
(16) With the Board’s specific
approval, engaging in other activities
that the Board determines are usual in
connection with the transaction of the
business of banking or other financial
operations abroad and are consistent
with the FRA or the BHC Act.
(e)
Debts previously contracted.
Shares or other ownership interests
acquired to prevent a loss upon a debt
previously contracted in good faith shall
not be subject to the limitations or
procedures of this section; however,
they shall be disposed of promptly but
in no event later, than two years after
their acquisition, unless the Board
authorizes retention for a longer period.

described in paragraph 7 of section 13 of
the FRA (12 U.S.G. 372).
(2)
Exceptions. These limitations do
not apply if the excess represents the
international shipment of goods and the
Edge corporations (i) is fully covered by
primary obligations to reimburse it that
are guaranteed by banks or bankers, or
(ii) is covered by participation
agreements from other banks, as such
agreements are described in § 250.165 of
this chapter.
(b)
Loans and extensions of credit to
one person.—(1) Limitations. Except as
the Board may otherwise specify:
(1) The total loans and extensions of
credit outstanding to any person by an
Edge corporation engaged in banking
and its direct or indirect subsidiaries
may not exceed 15 percent of the Edge
corporation’s capital and surplus;!0 and
(ii)
The total loans and extensions of
credit to any person by a foreign bank or
Edge corporation subsidiary of a
member bank, and by majority-owned
subsidiaries of a foreign bank or Edge
corporation, when combined with the
total loans and extensions of credit to
the same person by the member bank
and its majority-owned subsidiaries,
may not exceed the member bank’s
limitation on loans and extensions of
credit to one person.
(2) “Loans and extensions of credit"
means all direct or indirect advances of
funds to a person 11made on the basis of
any obligation of that person to repay
the funds. These shall include
acceptances outstanding not of the types
described in paragraph 7 of section 13 of
the FRA (12 U.S.G. 372); any liability of
the lender to advance funds to or on
behalf of a person pursuant to a
guaranteed, standby letter of credit, or
similar agreements; investments in the
securities of another organization except
where the organization is a subsidiary,
and any underwriting commitments to
an issuer of securities where no binding
commitments have been secured from
subunderwriters or other purchasers.
(3) Exceptions. The limitations of
paragraph (b)(1) of this section do not
apply to:
(i)
Deposits with banks and federal
funds sold;10*

§ 2111.® Lending limits and eapotaS
r©qiLair(sm®in!tg„

10 For purposes of this subsection, "subsidiary”
includes subsidiaries controlled by the Edge
corporation but does not include companies
otherwise controlled by affiliates of the Edge
corporation.
"In the case of a foreign government, these
include loans and extensions of credit to the foreign
government’s departments or agencies deriving their
current funds principally from general tax revenues.
In the case of a partnership or firm, these include
loans and extensions of credit to its members and,
in the case of a corporation, these include loans and
extensions of credit to the corporation’s affiliates
where the affiliate incurs the liability for the benefit
of the corporation.

(a)
Acceptances of Edge
corporations.—(1) Limitations. An Edge
corporation shall be and remain fully
secured for (i) all acceptance
outstanding in excess of 200 percent of
its capital and surplus; and (ii) all
acceptances outstanding for any one
person in excess of 10 percent of its
capital and surplus. These limitations
apply only to acceptances of the types




12

(ii) Bills or drafts drawn in good faith
against actual goods and on whic’h two
or more unrelated parties are liable;
(iii) Any bankers’ acceptance of the
kind described in paragraph 7 of section
13 of the FRA that is issued and
outstanding;
(iv) Obligations to the extent secured
by cash collateral or by bonds, notes,
certificates of indebtedness, or Treasury
bills of the United States;
(v) Loans and extensions of credit that
are covered by bona Fide participation
agreements; or
(vi) Obligations to the extent
supported by the full faith and credit of
the following:
(A) The United States or any of its
departments, agencies, establishments,
or wholly-owned corporations (including
obligations to the extent insured against
foreign political and credit risks by the
Export-Import Bank of the United States
or the Foreign Credit Insurance
Association), the International Bank, for
Reconstruction and Development, the
International Finance Corporation, the ■
International Development Association,
the Inter-American Development Bank,
the African Development Bank, or the
Asian Development Bank;
(B) Any organization if at least 25
percent of such an obligation or of the
total credit is also supported by the full
faith and credit of, or participated in by,
any institution designated in paragraph
(b)(3)(v)(A) of this section in such
manner that default to the lender will
necessarily include default to that
entity. The total loans and extensions of
credit under this subparagraph to any
person shall at not time exceed 100
percent of the capital and surplus of the
Edge corporation.
(c)
Capitalization. An Edge
corporation shall at all times be
capitalized in an amount that is
adequate in relation to the scope and
character of its activities. In the case of
an Edge corporation engaged in banking,
its capital and surplus shall be not less
than 7 percent of risk assets. For this
purpose, subordinated capital notes'or
debentures, in an amount not to exceed
56 percent of non-debt capital, may be
included for determining capital
adequacy in the same manner as for a
member bank; risk assets shall be
deemed to be all assets on a
consolidated basis other than cash,
amounts due from banking institutions
in the United States, United States
Government securities, and Federal
funds sold.
§211?

Supervision and reporting.

Supervision.—[1] Foreign branches
and subsidiaries. Organizations
(a)

conducting international banking
operations under this Subpart shall
supervise and administer their foreign
branches and subsidiaries in such a
manner as to ensure that their
operations conform tohigh standards of
banking and financial prudence.
Effective systems ofrecords, controls,
and reports shall be maintained tokeep
management informed oftheiractivities
and condition. Such systems should
provide, inparticular, information on
risk assets, liquiditymanagement, and
operations of controls and conformance
to management policies. Reports on risk
assets should be sufficient topermit an
appraisal ofcredit quality and
assessment ofexposure to loss, and for
thispurpose provide fullinformation on
the condition ofmaterial borrowers.
Reports on the operations ofcontrols
should include internal and external
audits ofthe branch or subsidiary.
(2)Joint ventures. Investors shall
maintain sufficientinformation with
respect to jointventures to keep
informed oftheiractivities and
condition. Such information shall
include audits and other reports on
financialperformance, risk exposure,
management policies, and operations of
controls. Complete information shallbe
maintained on alltransactions with the
jointventure by the investor and its
affiliates.
(3)A v a ila b ility o f reports to
examiners. The reports and information
specified inparagraph (a) (1)and (2)of
this section shallbe made available to
examiners ofthe appropriate bank
supervisory agencies.
(b)Examinations. Examiners
appointed by the Board shall examine
each Edge corporation once a year. An
Edge corporation shall make available
to examiners sufficientinformation to
assess itscondition and operations and
the condition and activities ofany
organization whose shares itholds.
(c)Reports .— (1)R eports o f condition.
Each Edge corporation shall make
reports ofcondition to the Board atsuch
times and in such form as the Board may
prescribe. The Board may require that
statements ofcondition or other reports
be published ormade available for
public inspection.
(2)Foreign operations. Edge and
Agreement corporations, member banks,
and bank holding companies shall file
such reports on theirforeign operations
as the Board may require.
(3)Acquisition or disposition of
shares. A member bank, Edge or
Agreement corporation or a bank
holding company shallreport ina
manner prescribed by the Board any
acquisition or disposition of shares.




(d) Filing and processing procedures.
(1) Unless otherwise directed by the
Board, applications, notifications, and
reports required by thispart shallbe
filedwith the Federal Reserve Bank of
the districtinwhich the parent bank or
bank holding company islocated or,if
none, the Federal Reserve Bank of the
districtinwhich the applying or
reporting institutionislocated.
Instructions and forms for such
applications, notifications and reports
are available from the Federal Reserve
Banks.
(2) The Board shall act on an
application or notification under this
Subpart within 60 calendar days after
the Reserve Bank has accepted the
application or notification unless the
Board notifies the investor that the 60day period isbeing extended and states
the reasons forthe.extension.
3. Subpart B of12 CFR Part 211 is
amended by revising § 211.23 (b) and (f)
introductory text and (f)(5)to read as
follows:

(2) Meet at least two ofthe following
requirements:
(i)Banking assets held outside the
United States exceed banking assets
held in the United States;
(ii)Revenues derived from the
business ofbanking outside the United
States exceed revenues derived from the
business ofbanking in the United States;
or
(iii)Net income derived from the
business ofbanking outside the United
States exceeds net income derived from
the business ofbanking in the United
States.

*

*

*

*

*

(f)

Perm issible a ctivities and
investm ents. A foreign banking

organization that qualifies under
paragraph (b) ofthis section may:

*

*

*

*

*

(5) Own or control voting shares ofa
foreign company that isengaged directly
or indirectly inbusiness in the United
States other than that which is
incidental to itsinternational or foreign
Subpaft ©=F@r@ig)STi Bankim®
business, subject to the following
©rgarsfeatsoo®
limitations:
* * * * *
(i)More than 50 percent of the foreign
company’s consolidated assets shall be
§ 211.23 Nonbanking Activities ©f Foreign
located, and consolidated revenues
Banking Organizations.
derived from, outside the United States;
* * * * *
(ii)The foreign company shall not
(b) Qualifying foreign banking
directly underwrite, sell,or distribute,
organizations. Unless specificallymade
nor own or control more than 5 percent
eligibleforthe exemptions by the Board, ofthe voting shares of a company that
a foreignbanking organiz§tion shall
underwrites, sells, or distributes
qualify forthe exemptions afforded by
securities in the United States except to
this section only if,disregarding its
the extent permitted bank holding
United States banking, more than halfof companies;
itsworldwide business isbanking: and
(iii)Ifthe foreign company isa
more than halfofitsbanking business is subsidiary of the foreign banking
outside the United States.1In order to
organization, the foreign company must
qualify, a foreign banking organization
be, or control, an operating company
shall:
and itsdirect or indirect activities in the
(1) Meet at least two of the following United States shallbe subject to the
requirements:
following limitations:
(i) Banking assets held outside the
* * * * *

United States exceed total worldwide
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 s e r v e
nonbanking assets:
(ii)Revenues derived from business of S y ste m , S e p te m b e r 2 5 ,1 9 8 5 .
William W. Wiles,
banking outside the United States
Secretary of the Board.
exceed totalrevenues derived from its
[FR D o c . 8 5 -2 3 3 3 9 F ile d 9 -3 0 -8 5 ; 8:45 am ]
worldwide nonbanking business; or
(iii)Net income derived from the
business ofbanking outside the United
States exceeds totalnet income derived
from itsworldwide nonbanking
businesses; and
1None of the assets, revenues, or net income,
whether held or derived directly or indirectly, of a
subsidiary bank, branch, agency, commercial
lending company, or other company engaged in the
business of banking in the United States (including
any territory of the United States, Puerto Rico,
Guam, American Samoa, or the Virgin Islands) shall
be considered held or derived from the business of
banking “outside the United States."

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