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FEDERAL RE SERVE BANK OF N E W YO R K INTERNATIONAL BANKING ACT OF 1978 — Text of Proposed New Regulation K — Transfer of Reserve Requirement Provisions /ft C yX a February 28, 1979 T o A ll M e m b e r B a n k s, a n d O th e r s C o n c e r n e d , in t h e S e c o n d F e d e r a l R e s e r v e D i s t r i c t : In our Circular No. 8521, dated February 16, 1979, we sent you the text of a state ment, by the Board of Governors of the Federal Reserve System, announcing a proposed new regulation to implement section 3 of the International Banking Act of 1978. Printed on the following pages is the text of the proposed regulation as it appeared in the F e d e r a l R e g is te r of February 21, 1979. Comments thereon should be submitted by April 15 and may be sent to our Foreign Banking Applications Department. In a related action, the Board of Governors transferred its rules regarding reserve requirements for foreign branches of member banks from Regulation M to Regulation D. Enclosed is a copy of an amendment to those regulations, reflecting that action. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ■■ Paul A. V olcker, P resid en t. _________ £ [6210-01-M] FEDERAL RESERVE SYSTEM [Regulation K; Docket No. R-02041 [12 CFR Part 211] INTERNATIONAL BANKING OPERATIONS AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed rule. SUMMARY: Board of Governors of the Federal Reserve System proposes to revise its regulations governing the international operations of member banks, Edge and Agreement Corpora tions and bank holding companies. The proposal would update existing regulations and combine them in one comprehensive regulation. With re spect to Edge Corporations in particu lar, the International Banking Act of 1978 (“IBA”) directs the Board to revise its current regulation so as to further certain purposes including the stimulation of competition in provid ing international banking and financ ing services throughout the United States. The Board is required to issue final regulations by June 14, 1979. The proposed regulation implements that and other Congressional purposes con tained in the IBA in addition to revis ing and reorganizing the Board’s inter national banking regulations. DATE: Comments must be received by April 15, 1979. ADDRESS: Address comments to the Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. Comments should refer ence Docket No. R-0204. FOR FURTHER INFORMATION CONTACT: Frederick R. Dahl, Associate Direc tor, Division of Banking Supervision and Regulation (202-452-2726); or C. Keefe Hurley, Jr., Senior Attorney, Legal Division (202-452-3269) Board of Governors of the Federal Reserve System. SUPPLEMENTARY INFORMATION: The International Banking Act of 1978 (Pub. L. No. 95-369) (“IBA”) requires the Board to revise its regulations gov erning corporations engaged in inter national banking and financial oper ations under section 25(a) of the Fed eral Reserve Act (12 U.S.C. 611) (“Edge Corporations”). The Board has taken this opportunity to review not only its regulations governing Edge Corporations (Regulation K, 12 CFR 211) but also its regulations governing the foreign operations of member banks (Regulation M, 12 CFR 213) and foreign investment by bank holding companies § 225.4(f) of Regulation Y, 12 CFR 225.4(f)). These regulations would be revised and combined in one comprehensive regulation entitled “In ternational Banking Operations” to be designated as Regulation K. Integrat ing these related matters into one reg ulation should result in better under standing of the regulation require ments. Section 3 of the IBA contains the first significant amendment to section 25(a) of the Federal Reserve Act (“Edge Act”) since the enactment of the Edge Act in 1919. In amending the Edge Act, Congress declared that Edge Corporations are to have powers suffi ciently broad to enable them to com pete with foreign banks in the United States as well as abroad and to provide all segments of the United States economy a means of financing interna tional trade and, in particular, ex ports. In addition, Edge Corporations are to serve as a means of fostering the participation of regional and smaller banks in international banking and financing and, in general, to stim ulate competition in making those services available throughout the United States. The Board is directed to revise its regulations and policies in furtherance of these objectives. The Board is spe cifically directed to eliminate or modify any unnecessary retrictions that disadvantage Edge Corporations in competing foreign banks in the United States or abroad or that have the opposite effect of discriminating against foreign-owned banking institu tions. Final revised regulations must be issued within 120 days of their pub lication for comment, or by June 14, 1979. The Board has reviewed its regula tions with several objectives in mind: first, to comply with the Congression al mandate, particularly as it relates to the United States activities of Edge Corporations; second, to eliminate ob solete restrictions and clarify remain ing requirements; third, to incorporate in the regulations the policies of the Board that have previously been con tained in individual interpretations and decisions; fourth, to simplify the regulatory approval process; and final ly, to promote regulatory efficiency. It is intended that the revised rules will supersede the conditions now con tained in individual Board consents. As a result of this review, several areas of the regulations have been identified as being in need of signifi cant revision. These relate to banking operations in the United States of Edge Corporations, United States of fices of Edge Corporations, and regula tory approvals for foreign operations. B a n k i n g o p e r a tio n s in th e S ta te s. The proposed revision U n ited departs from past practice by creating a class of customer whose deposit and loan business would be presumed to be for international purposes. Those custom 2 ers which, on a nonconsolidated basis, have more than two-thirds of their purchases or sales in international commerce, would be able to obtain full deposit and other banking services from Edge Corporations. This proposal represents a signifi cant departure from existing rules and the Board invites comment on this matter. In particular, comments are invited regarding the desirability of the qualifying customer approach, the criteria for designating an internation al customer, the number and size of firms that would qualify, the effects of using a different percentage, and the desirability of using a test other than purchases or sales in international commerce such as the proportion of the customer’s business devoted to ex ports. Under current rules and policies of the Board each deposit and credit transaction by a United States resi dent must be directly related to an in ternational transaction. The Board’s strict interpretation of the statutory requirement has resulted in Edge Cor porations being unable to fully service, and compete effectively for the busi ness of, firms specializing in interna tional trade. Moreover, these rules have placed an administrative and su pervisory burden on both Edge Corpo rations and the Federal Reserve System. The proposed approach would reduce these burdens and enlarge the ability of Edge Corporations to pro vide international financial services and, in this way, would be consistent with the new expression of legislative intent contained in the IBA. Those United States residents that do not qualify as international customers would continue to be able to obtain limited banking services directly con nected to international transactions. U.S. O ffic e s o f Edge C o rp o r a tio n s . Under current regulations, Edge Cor porations may establish and operate branches abroad but not in the United States. In order to provide internation al banking services at different loca tions in the United States, banks have been required to incorporate separate Edge Corporations. This requirement, by necessitating separate capitaliza tion and separate administrations, has involved certain inefficienies and, for some banks, has been a barrier to en tering new markets. The proposals wrould allow Edge Cor porations to establish domestic branches with the specific prior ap proval of the Board. This offers the possibility of reducing costs and incon venience associated with separate in corporation and would contribute to the efficiency and competitiveness of Edge Corporations. Allowing domestic branches of Edge Corporations would also be consistent with another direc tive of the IBA to make international banking and financial services availa ble throughout the United States. For those banks now operating Edge Cor porations at several locations in the United States, the proposal would offer the possibility of a change of or ganizational form. Comments are re quested on the proposal to allow Edge Corporations to establish branches in the United States. R e g u la to r y a p p ro v a ls. Under exist ing rules, prior Board consent is re quired for virtually all investments in foreign companies unless the invest ment is for less than $500,000 an in volves an ownership interest of less than 25 per cent for which a General Consent is given. In addition, prior Board approval is required for the is suance of debt obligations of more than one year maturity. The proposed revisions contemplate the use of an expanded General Con sent and prior notification, as well as specific consent procedures. The ex panded General Consent would allow investments of up to $2 million in sub sidiaries and joint ventures so long as they are engaged in certain specified activities, and would allow portfolio in vestments in other companies up to the same dollar amount. Beyond that amount, investments could be made in subsidiaries and joint ventures en gaged in specified activities up to 10 per cent of an Edge Corporation’s cap ital with 60 days prior notice to the Board. Simplifed General Consent and notification procedures would also apply to additional investments. All other investments, either involving larger amounts or activities not speci fied in the regulation, would require specific prior Board approval. The acitivities specified are those which the Board generally has allowed foreign subsidiaries to engage in because of the financial character of the activi ties or their relationship to interna tional banking and financial oper ation. The requirement for prior ap proval of long-term borrowings is eliminated. Another proposal pursuant to the IBA is that the limitation on the ag gregation liabilities of Edge Corpora tions (currently ten times capital and surplus) be revised. All Edge Corpora tions will be expected to maintain ade quate capital in relation to the scope and character of their operations. However, the proposal would require Edge Corporations engaged in banking to have capital and surplus of not less than six per cent of total assets. Com ments are invited on the proposed cap ital standards. Provisions relating to reseves against foreign branch deposits (§ 213.7 of Regulation M, 12 CFR 213.7) are being transferred to Regulation D (12 CFR 204). Rules regarding reserve requirments as they may apply to interna tional operaions conducted by member 3,957). The proposals were inititated banks and Edge and Agreement Cor before the policy statement was adopt porations through foreign branches ed and expeditious action is necessary and subsidiaries will be considered in to meet the statutory deadline for is connection with the Board’s current suing these proposals, i.e. February 14, review of the applicability or reserve 1979. requirements under the IBA, as well as For this reason, the regulatory anal the general review of Regulation D ysis at this stage is neither as exhaus that is in process. tive nor as formal as that contemplat As has been indicated, the IBA in ed by the statement. The regulatory amending the Edge Act emphasizes analysis should include at a minimum that Edge Corporations should provide a discussion of the need for and pur to all segments of the United States pose of the regulation; a description of economy a means of financing interna the various options available; and an tional trade and, in particular, ex analysis, if appropriate, of their possi ports. The proposals would further ble economic consequences; an esti this objective by permitting Edge Cor mate of the reporting burdens or rec porations to finance the production of ordkeeping requirements, and recom goods in the United States where the mendations for the best course of goods are to be exported. Under the action based on an evaluation of the current regulation, Edge Corporations alternatives. may finance the shipment and storage The Board would appreciate any of goods for export but not their pro data and information from the public duction. In addition, by making Edge that would be of use in improving the Corporations more efficient and more regulatory analysis before final action competitive, the proposals would pro is taken. Specifically, figures based on mote United States’ trade. The Board studies or surveys regarding the costs welcomes comments on these propos and benefits of the proposals or alter als and any suggestions that, in the natives would be especially helpful. terms of the IBA, would assist in Conclusions should be reached as to achieving “a sound United States’ in whether the proposals or any alterna ternational trade position.” tives favored by the respondents The proposed revisions are intended would have a major impact on: to be comprehensive. Since the exist (1) The nation’s economy as a whole ing regulations have not been substan e.g., an effect of $100 million or more tially amended or revised for many in gross annual costs or revenues; years, comments are invited not only (2) Costs or prices for consumers, in on the major revisions described above dividual industries, levels of govern but on all other parts, including those ment or geographic regions; where no changes are proposed. (3) The volume and cost of credit. The proposals do not address the REGULATION K question of the appropriateness of for eign subsidiaries lending to United (12 C.F.R. 211) States residents for domestic purposes. As amended effective In the pa^t, the Board has generally considered this to be an impermissible PART 211—INTERNATIONAL BANKING activity for foreign subsidiaries on the OPERATIONS grounds that it was not related to in ternational business. There have been Sec. indications that the Board’s interpre 211.1 Authority, Purpose, and Scope. tation is unnecessarily restrictive in 211.2 Definitions. that it interferes with the ability of 211.3 Foreign Branches of Member Banks. 211.4 Edge and Agreement Corporations. foreign subsidiaries of Edge Corpora 211.5 Investments by Member Banks, Edge tions and member banks to compete and Agreement Corporations, and Bank with foreign banks. Views on this issue Holding Companies. are requested. 211.6 Prudential Limitations, Supervision, Finally, under section 3(g) of the and Reporting. IBA, the Board is required to report to § 211.1 A u th o rity , purpose, and scope. Congress recommendations on the question of whether Edge Corpora (a) A u th o r ity . This part is issued by tions should be permitted to become the Board of Governors of the Federal members of the Federal Reserve Reserve System under the authority System. Currently, the Edge Act pro of the Federal Reserve Act (12 U.S.C. hibits them from becoming members 226) (“Act”); the Bank Holding Com even though they are required to pany Act of 1956 (12 U.S.C. 1841) maintain reserves on their domestic (“BHCA” ); and the International deposits. Public comment is invited in Banking Act of 1978 (92 Stat. 607) order to assist the Board in its consid (“IBA” ). eration of this issue. (b) P u r p o s e a n d sc o p e. This Part is In developing these proposals, the in furtherance of the purposes of the Board has not followed all of the pro Act, the BHCA, and the IBA. It ap cedures set forth in its policy state plies to corporations organized under ment of January 15, 1979 (44 FR section 25(a) of the Act (12 U.S.C. 611- 3 631), ‘‘Edge Corporations”; to corpora tions having an agreement or under taking with the Board under section 25 of the Act (12 U.S.C. 601-604(a)), “Agreement Corporations”; to member banks with respect to their foreign branches and investments in foreign banks under section 25 of the Act (12 U.S.C. 60l-604(a)); 1 and to domestic bank holding companies with respect to the exemption from the nonbank ing prohibitions of the BHCA afforded by section 4(c)(13) of the BHCA (12 U.S.C. 1843(0(13)). fication to the Board; (2) without spe cific prior approval a member bank may establish and operate additional branches in any foreign country in which it operates one or more branches. Without 30 days a member bank, shall inform the Board of the opening, closing or relocation and the address of a new or relocated branch. (b) F u r th e r P ow ers of F o r eig n B r a n c h e s. In addition to its general banking powers, and to the extent con sistent with its charter in the case of a State bank, a foreign branch of a member bank so far as usual in con § 2 1 1 .2 D e fin ition s. nection with the business of banking (a) “Abroad,” “foreign,” or “foreign in the.country where it transacts busi country” refers to one or more foreign ness may: (1) Guarantee customers’ nations, and includes the overseas ter debts or otherwise agree for their ritories, dependencies, and insular pos benefit to make payments on the oc sessions of the United States, and the currence of readily ascertainable events,2 if the guarantee or agreement Commonwealth of Puerto Rico. (b) An Edge Corporation is “engaged specifies its maximum monetary liabil in banking” if it ordinarily has in the ity thereunder; but, except to the United States total deposit, accept extent that the member bank is fully ance, and Federal funds liabilities ex secured, it may not have liabilities out standing for any person on account of ceeding its capital and surplus. (c) “Invest,” “investment,” and such guarantees or agreements which “ have invested,” means the purchase when aggregated with other obliga of shares (including rights to acquire tions of the same person exceeds the shares) and other contributions to the limit contained in section 5200 of the capital or surplus of an organization, Revised Statutes (12 U.S.C. 84); (2) Accept drafts or bills of exchange including the holding of an organiza drawn upon it provided that such ac tion’s subordinated debt. (d) “Foreign bank” means an institu ceptances shall be subject to the tion organized under the laws of a for amount limitations of sectibn 13 of the eign country and any subsidiary or af Act (12 U.S.C. 372); (3) Invest in the securities of the filiate of the institution organized under such laws that engages in the central bank, clearing houses, govern business of banking, including mer mental entities, and governmentchant banking and other activities owned development banks of the coun usual in connection with the business try in which the foreign branch is lo of banking, in the country where the cated, but the total of such invest ments by the branch (exclusive of se institution is organized. (e) “Foreign branch” means any curities held as required by the law of branch located outside the country in that country or as authorized under which the parent organization is incor section 5136 of the Revised Statutes (12 U.S.C. 24)) shall not exceed one porated. (f) “Organization” means a corpora percent of its total deposits on the pretion, gpvernment, partnership, associ ceeding year-end call report date (or ation, or any other legal or commer on the date of acquisition in the case of a newly established branch which cial entity. (g) “Person” means an individual or has not so reported); (4) Underwrite, distribute, buy, and an organization. sell obligations of the national govern § 2 1 1 .3 F oreign branch es of m em ber ment of the country in which it is lo banks. cated (including obligations issued by (a) E sta b lish in g F o r e ig n B r a n c h e s. any agency or instrumentality, and Prior Board approval is required for supported by the full faith and credit the establishment and operation of a of the government). However, no member bank’s initial branches in two member bank may hold, or be under foreign countries. Unless otherwise ad commitment with respect to, obliga vised by the Board: ( l ) a member bank tions of a government as a result of that has branches in two or more for underwriting, dealing, or purchasing eign countries may establish and oper for its own account an aggregate ate initial branches in additional for amount exceeding 10 percent of the eign countries after 60 days’ prior noti- member bank’s capital and surplus; (5) Take liens or other encum brances on foreign real estate in con 1 Although section 25 of the Act refers to national banking associations, for purposes of Federal law, the provisions of this Part apply to State member banks of the Federal Reserve System, see section 9 of the Act (12 U.S.C. 321). nection with its extensions of credit, whether or not of first priority and whether or not such real estate is im proved or has been appraised, and without regard to maturity or amount limitations or amortization require ments of section 24 of the Act (12 U.S.C. 371); (6) Extend credit to an executive of ficer of the foreign branch in an amount up to $100,000 or its equiva lent in order to finance the acquisition or construction of living quarters to be used as the officer’s residence abroad, provided each credit extension is promptly reported to the branch’s home office. When necessary to meet local housing costs, such amount may be exceeded with the specific prior ap proval of the member bank’s board of directors; (7) Act as insurance agent or broker. A member bank that is of the opin ion that other activities are usual in connection with the transaction of the business of banking in the places where its branches transact business, may apply to the Broad for permission to engage in such activities. (c) S u s p e n d in g O p e r a tio n s D u r in g D is tu r b e d C o n d itio n s . The officer in charge of a foreign branch may sus pend its operations during disturbed conditions which make conduct of op erations impracticable; but every effort shall be made before and during the suspension to serve the branch’s depositors and customers. Full infor mation concerning any suspension shall be reported promptly to the branch’s home office, which shall im mediately send a copy to the Board through the Federal Reserve Bank of its district. (d) R e se r v es . Reserves shall be main tained against foreign branch deposits when and as required by Part 204 (Regulation D). § 2 1 1 .4 Edge tions. and agreem ent co rp ora (a) O r g a n iz a tio n . A proposed Edge Corporation shall become a body cor porate upon issuance by the Board of a preliminary permit approving its proposed name, articles of association, and organization certificate. The name shall include “international,” “for eign,” “overseas,” or some similar word, but may not resemble the name of another organization to an extent that might mislead or deceive the public. After issuance by the Board of a preliminary permit, an Edge Corpo ration may (1) elect officers and other wise complete its organization and (2) invest in obligations of the United States Government, but none of its 2 Including, but not limited to events such other powers may be exercised until the Board has issued a final permit to as nonpayment of taxes, rentals, customs duties, or costs of transport and loss of non commence business. No amendment to conformance of shipping documents. the articles of association shall 4 become effective until approved by the Board. (b) O w n e r s h ip o f S h ares. Shares of stock in an Edge Corporation may not include no par value shares and shall be issuable and transferable only on its books and in compliance with sec tion 25(a) of the Act. Any change in status of a shareholder that causes a violation of section 25(a) of the Act shall be reported to the Board as soon as possible and the Edge Corporation shall take action with respect thereto as the Board may direct. The share certificates of an Edge Corporation shall (1) name and describe each class of shares indicating its character and any unusual attributes such as pre ferred status of lack of voting rights; and (2) conspicuously set forth the substance of (i) limitations upon the rights of ownership and transfer of shares imposed by section 25(a) of the Act, and (ii) rules which the Edge Cor poration shall prescribe in its by-laws to ensure compliance with this para graph. (c) F o r eig n O w n e rsh ip . One or more foreign banks may apply for the Board’s prior approval to acquire 50 per cent or more of the shares of the capital stock of an Edge Corporation. The Board will require a foreign bank that, in connection with such applica tion proposed to acquire 25 per cent or more of the voting shares of an Edge Corporation, to enter into an agree ment or undertaking with the Board that it will comply with the provisions of the BHCA in the same manner and to the same extent as a foreign bank that has a branch or agency in United States. (d) B ra n c h es. With prior Board ap proval, an Edge Corporation may es tablish branches in the United States. An Edge Corporation may establish branches abroad in accordance with the procedures set forth in § 211.3(a). Operations of a branch abroad may be suspended during disturbed conditions in accordance with section 211.3(c). (e) R e s e r v e R e q u ir e m e n ts a n d I n te r e st R a te L im it a t io n s . The liabilities of an Edge Corporation for desposits in the United States and abroad shall be subject to Parts 204 (Regulation D) and 217 (Regulation Q) in the same manner and to the same extent as if the Edge Corporation were a member bank of the Federal Reserve System. (f) P e r m issib le A c t iv i t ie s in the U n ited S ta te s .— (1) G e n er a l p o lic y . In addition to the activities described in the sixth paragraph of section 25(a) of the Act, an Edge Corporation may engage in such activities in the United States as the Board determines are in cidental to its international or foreign business. The following activities will ordinarily be considered incidental to an Edge Corporation’s international or foreign business: (2) D e p o s its f r o m q u a lify in g p er so n s. An Edge Corporation may receive in the United States demand, time, and savings deposits from, and issue nonnegotiable certificates of deposit to: (i) Foreign governments, persons conducting business principally at their offices or establishments abroad, and individuals resident abroad; (ii) Persons principally engaged in international or foreign commerce. Unless the circumstances indicate oth erwise, a person shall be presumed to be principally engaged in international or foreign commerce if, on an unconsolidated basis and according to documents maintained by the Edge Corporation, two thirds of the per son’s purchases or sales of goods and services are directly attributable to in ternational 6r foreign commerce. (3) D e p o s its f r o m o th e r th a n q u a lify in g e n titie s . An Edge Corporation may receive in the United States demand, time, and savings deposits and may issue nonnegotiable certificates of de posit that are not to be used to pay ex penses in the United States of an office or representative if the deposits: (i) Are to be transmitted abroad; (ii) Consist of collateral or funds to be used for payment of extensions of credit; (iii) Consist of the proceeds of collec tions abroad which funds are to be used to pay for goods exported or im ported or for other costs of export or import or are to be periodically trans ferred to the depositor’s account at an other financial institution; (iv) Consist of the proceeds of exten sions of credit by the Edge Corpora tion; or (v) Represent compensation to the Edge Corporation for extensions of credit or services to the customer. (4) U se o f sh o rt te rm fu n d s in the U n ited S ta tes. Funds of an Edge cor poration not currently employed in its international or foreign business, if held or invested in the United States, shall be in the form of cash, deposits with banks, and money market instru ments including bankers’ acceptances, obligations of Federal, State, and local governments, Federal funds sold, and commercial paper. (5) O th e r p e r m is s ib le a c tiv itie s . Subject to the limitations of section 25(a) of the Act and §211.6 of this Part, an Edge Corporation may to the extent consistent with sound banking practices: (i) Issue obligations to domestic banking offices of other banks, or to the United States or agencies thereof; (ii) Incur indebtedness from a trans fer of direct obligations that are fully guaranteed as to principal and interest by the United States or any agency thereof that the Edge Corporation is obligated to repurchase; 5 (iii) Issue long term subordinated debt that does not qualify as a “depos it” under Part 204 (Regulation D); (iv) Extend credit for any purpose to a person that would be permitted to maintain deposits with the Edge Cor poration under § 211.4(f)(2) where such funds are to be used in the per son’s business; (v) Finance the following: (A) con tracts, projects, or activities performed abroad, (B) the importation into or ex portation from the United States of goods, (C) the domestic shipment or temporary storage of goods being ex ported or imported; (vi) Finance the direct production and preparation of goods readily iden tifiable as being for export; (vii) Take over or acquire subsequent participations in extensions of credit, or acquire obligations, growing out of transactions the Edge Corporation could have financed at inception; (viii) Guarantee a customer’s debts or otherwise agree for ihe customer’s benefit to make payments on the oc currence of readily ascertainable events such as nonpayment of taxes, rentals, customs duties, or costs of transport and loss or nonconformance of shipping documents. The guarantee or agreement must specify the maxi mum monetary liability thereunder and be related to a type of transaction described in (iv)-(vi) above; (ix) Receive checks, bills, drafts, ac ceptances, notes, bonds, coupons, and other securities for collection abroad, and collect such instruments in the United States for a customer abroad; (x) Hold securities in safekeeping for, or buy and sell securities upon the order and for the account and risk of an existing customer; (xi) Act as paying agent for securi ties issued by foreign governments or other entities organized under foreign law and not qualified under the laws of the United States or any State or the District of Columbia to do busi ness in the United States; (xii) Act as trustee, registrar, conver sion agent, and paying agent with re spect to any class of securities issued to finance foreign activities and dis tributed solely outside the United States; (xiii) Make private placements of participations in its investments and extensions of credit; however, no Edge Corporation may otherwise engage in the business of selling or distributing securities in the United States. (xiv) Buy and sell spot and forward foreign exchange. (6) An Edge Corporation that is of the opinion that other activities in the United States would be incidental to its international or foreign business may apply to the Board for such a determination. (g) C o r p o r a t io n s w ith A g r e e m e n ts u n d e r s e c t i o n 25 o f th e A c t. With the prior approval of the Board, a member bank may invest in a Corporation that has entered into an agreement or un dertaking with the Board that it will not exercise any power except as would be permissible for an Edge Cor poration under this Part. § 2 1 1 .5 In vestm en ts tions. in oth er o rg a n iz a (a) G e n e r a l P o lic y . Edge Corpora tions, bank holding companies, and member banks (referred to in this Sec tion as “investors” ), shall confine their activities abroad to those of a banking or financial nature. In doing so, they shall at all times act in accordance with high standards of banking or fi nancial prudence, having due regard for diversification of risks, suitable li quidity, and adequacy of capital. Sub ject to these considerations and the other provisions of this section, it is the Board’s policy to allow activities abroad to be organized and operated as best meets corporate policies. For purposes of this section: (i) “sub sidiary” is an organization 50 per cent or more of the capital and surplus or voting stock of which is held directly or indirectly by an investor or which is otherwise controlled by an investor; (ii) “joint venture” is an organization 20 per cent or more but less than 50 per cent of the capital and surplus or voting stock of which is held directly or indirectly by an investor and which is not controlled by the investor; (iii) “portfolio investment” refers to an in vestment in any company other than a subsidiary or joint venture; (iv) “listed activities” means the activities con tained in section 211.5(d)(l)— <13) that the Board has determined are usual in connection with the transaction of the business of banking or ge other finan cial operations abroad. (b) I n v e s t m e n t lim it a t io n s . (1) In ac cordance with the investment proce dures described in paragraph (c) of this section, an investor may: (1) invest in a subsidiary that en gages solely in listed activities or in such other activities as the Board has determined in the circumstances of a particular case are permissible; (ii) invest in a joint venture provided that, unless otherwise permitted by the Board, not more than 5 per cent of the joint venture’s consolidated assets or revenues shall be attributable to ac tivities that would not be permissible for a subsidiary; (iii) make portfolio investments in any organization provided that the total direct and indirect porfolio in vestments shall not exceed 50 per cent of the investor’s capital and surplus. (2) A member bank’s direct invest ments shall be limited to foreign banks that: (i) are principally engaged in a commercial banking business; (ii) tained in this section. The Board may are recognized as commercial banks by at any time, upon notice, suspend the the bank supervisory or monetary au General Consent and notification pro thority of the country of their organi cedures with respect to any investor or zation or principal banking operations; with respect to the acquisition of (iii) receive deposits to a substantial shares of companies engaged in partic extent in the regular course of their ular kinds of activities. Each investor business; and (iv) have the power to must receive prior specific consent of accept demand deposits. A member the Board for its first investment in a bank may also own or control foreign subsidiary, its first investment in a organizations that are organized for the sole purpose of either holding joint venture, and its first portfolio in shares of a foreign bank or performing vestment. (1) G e n e r a l C o n se n t. The board nominee, fiduciary or other banking services incidential to the activities of grants its General Consent for the fol a foreign branch or foreign bank affili lowing: (A) Any investment in a joint ven ate of the member bank. Investments by a foreign bank subsidiary of a ture or subsidiary, and any portfolio member bank shall be subject to the investment, provided: (i) the organiza same limitations and restrictions as an tion is not engaged in business in the Edge Corporation. United States; (ii) the amount invested (3) Investments by subsidiaries shall does not exceed $2 milliop or 5 per be subject to the limitations, restric cent of the investor’s capital and sur tions and procedures of this section. plus in the case of a member bank, Subsidiaries may establish branches in bank holding company or Edge Corpo accordance with the procedures set ration engaged in banking; or (iii) $2 forth in 211.3(a). million or 25 per cent of the investor’s (4) In computing the amount which capital and surplus in the case of an may be invested in any organization Edge Corporation not engaged in under this section there shall be in banking; cluded any unpaid amount for which (B) Additional investment in an or the investor is liable and any invest ganization in which the investor has ments by affiliated companies. The ac an existing investment, provided: (i) quisition of rights to acquire shares shall be regarded as an investment; the additional investment does not however, prior Board consent is not re cause the investor to hold either 20 quired for the acquisition of rights to per cent or more or 50 per cent or acquire shares of an organization if more of the capital and surplus or such rights are acquired as an incident voting stock of an organization being to an extension of credit, are exercis held by the investor; (ii) the additional able only with specific Board consent, amount invested does not in any calen and do not cause the investor to have der year exceed 10 per cent of the in invested more than $2 million in the vestor’s original cost plus dividends for rights and shares of the organization. that year. The ability to make an in (5) An investment in an organization vestment pursuant to this provision of shall be disposed of as promptly as the General Consent may, if not exer cised, be carried forward and accumu practicable if: (l) the organization engages in the lated for up to 5 consecutive years. business of underwriting, selling or (2) P r io r N o t ific a t io n . An invest distributing securities in the United ment (including an additional invest States or buying or selling goods, ment) in a subsidiary or joint venture wares, merchandise, or commodities in that does no business in the United the United States; States and that does not qualify under (ii) except to such limited extent as the General Consent may be made is permissible for joint ventures, a after the investor has given 60 days’ joint venture or subsidiary engages in prior written notice to the Board pro any activity other than that which the vided the amount to be invested does Board has determined to be permissi not exceed 10 per cent of the inves ble; or tor’s capital and surplus. The Board (iii) the investor is advised by the may, during that period, either issue a Board that its investment is inappro written notice disapproving the invest priate under the Act, the BHCA or ment, extend the period or request a this Part. full application. (c) I n v e s t m e n t p r o c e d u r e s .3 Subject (3) S p e c ific C o n s e n t Any investment to the limitations of (b) above, invest ments may be made in accordance that does not qualify for either the with the general consent, notification, General Consent or the prior notifica and specific consent procedures con tion procedure shall not be consum mated without the specific prior ap proval of the Board. 3 When necessary, the General Consent (d) A c t iv it ie s . and prior notification provisions of this sec (1) Commercial banking; tion constitute the Board’s approval under (2) Financing, including commercial the eighth paragraph of the Act for invest financing, consumer financing, mort ments in excess of the limitations therein gage banking and factoring; on capital and surplus. 6 goods and the Edge Corporation is tor, (iii) obligations to the extent se fully covered by primary obligations to cured by cash collateral or (iv) obliga reimburse it which are also guaran tions to the extent supported by the teed by banks or bankers or where the full faith and credit of the following: (1) The United States or any of its Edge Corporation is covered by par ticipation agreements from other departments, agencies, establishments or wholly owned corporations (includ banks. (2) L ia bilities o f on e person. Except ing obligations to the extent insured against foreign political and credit as the Board may otherwise specify; (i) The total liabilities of any person risks by the Export-Import Bank of to an Edge Corporation and its direct the United States or the Foreign or indirect subsidiaries shall at no Credit Insurance Association), the In* time exceed 50 per cent of the Edge temational Bank for Reconstruction Corporation’s capital and surplus, or and Development, the International 10 per cent of its capital and surplus if Finance Corporation, the Internation the Edge Corporation is engaged in al Development Association, the InterAmerican Development Bank, or the banking; (ii) The total liabilities of any person Asian Development Bank; (2) Any organization if at least 25 to an Edge Corporation that is a sub sidiary of a member bank or to direct per cent of such an obligation or of or indirect subsidiaries of the Edge the total credit is also supported by Corporation when combined with li the full faith and credit of, or partici abilities to the member bank and its pated in by any institution designated other subsidiaries shall not exceed the in (i) above in such manner that de amount limitation on the member fault to the lender will necessarily in clude default to such institution. The bank’s loans to one borrower; (iii) The total liabilities of any total liabilities of such person shall at person to a foreign bank that is a sub no time exceed 100 per cent of the cap sidiary of a member bank shall not ital and surplus of the lender or the exceed 50 per cent of the foreign parent Edge Corporation. (3) C apitalization. An Edge Corpo bank’s capital and surplus and when combined with liabilities to the ration shall at all times be capitalized member bank and its other subsidiar in an amount that is adequate in rela ies shall not exceed the amount limita tion to the scope and character of its tion on the member bank’s loans to activities, but in the case of an Edge Corporation engaged in banking, its one borrower; and (iv) The total liabilities of any capital and surplus shall not be less person to a foreign subsidiary of a than six per cent of total consolidated bank holding company (other than assets. (4) U nderw riting and dealing in se those held through member banks and curities abroad. Where a foreign sub Edge Corporations) shall not exceed sidiary of GUi Edge Corporation, 50 per cent of the subsidiary’s capital member bank, or bank holding compa and surplus. ny engages in underwriting or dealing In this section, “capital and surplus” in securities,4 abroad pursuant to sec means paid in and unimpaired capital tion 211.5(d), g u i underwriting commit and surplus and undivided profits but ment with regard to a security shall be does not include the proceeds of capi deemed a liability of the issuer to the tal notes or debentures. “Subsidiary” investor and the amount of the under has the same meaning as in §211.5. writing commitment plus other liabil “Liabilities” includes: ineligible accep ities of the issuer shall not exced the tances; obligations for money bor investor’s lending limit. rowed; investments in another organi (b) Su pervision . Member banks, zation (valued at original cost) except Edge Corporations and bank holding where that organization is a direct or companies shall supervise and admin indirect subsidiary; unsecured obliga ister their foreign branches, subsidiar tions resulting from the issuance of ies and joint ventures in such a guarantees, or similar agreements; in mGuiner gis to ensure that their oper the case of a partnership or firm, obli ations conform to high standards of gations of its members; in the case of a bGuiking and financial prudence. Effec corporation, obligations incurred for tive systems of records, controls, and § 2 1 1 .6 Prudential lim itatio n s supervision its benefit by other corporations that reports shall be maintained to keep and reporting. it controls; and in the case of a foreign management informed of the activities (a) Prudential lim ita tion s and re government, the liabilities of its de and condition of foreign branches, striction s.— (1) A cceptan ces o f Edge partments or agencies deriving their subsidiaries and joint ventures. Such C orporations. An Edge Corporation current funds principally from general systems should provide, in particular, shall be and remain fully secured for tax revenues. “Liabilities” does not in information on risk assets, liquidity (i) all acceptances outstanding in clude Federal funds sold. The limita management, and operations of con excess of twice its capital and surplus, tions of this paragraph shall not apply and (ii) all acceptances for any one to (i) negotiable bills or drafts drawn 4 Equity securities held in a trading or person in excess of 10 per cent of its in good faith against actual goods and dealing portfolio are to be included when capital and surplus. These limitations on which two or more parties are determining the aggregate amount of "port shall not apply where the excess rep liable (ii) any acceptance that has not folio investments” permitted under section resents the intemationl shipment of matured and is not held by the accep 211.5. (3) Leasing real or personal property as is permissible for bank holding com panies pursuant to section 225.4(a)(6) of Regulation Y; (4) Acting as fiduciary; (5) Underwriting credit life insur ance and credit accident and health in surance related to extensions of credit by the investor or its affiliates; (6) Performing services for other direct or indirect operations of a United States banking organization in cluding representative functions, the sale of long term debt, name saving, holding assets that are acquired to prevent loss on a debt previously con tracted in good faith; (7) Holding the premises of a branch of an affiliated Edge Corporation or member bank but the amount so in vested shall not exceed that which a State member bank may invest pursu ant to section 24A of the Act (12 U.S.C. 371(d)); (8) Acting as investment or financial advisor to non residents of the United States; (9) General insurance brokerage; (10) Data processing; (11) Managing a mutual fund, pro vided the fund’s shares are not sold or distributed in the United States or to United States residents and the fund does not exercise any managerial con trol over the firms in which it invests; (12) Performing management con sulting services, provided that such services when rendered with respect to the United States market shall be re stricted to the initial entry; and (13) Underwriting, distributing and dealing in debt and equity securities outside the United States in accord ance with section 211.6(a)(4) provided that, except as covered by binding commitments from subunderwriters or other purchasers, no underwriting commitment for an equity security may exceed $2 million or represent more than 20 per cent of the capital and surplus or voting stock of any or ganization. An investor that is of the opinion that other activities are usual in con nection with the transaction of the business of banking or other financial operations abroad and are not incon sistent with the Act may apply to the Board for such a determination. 7 <£■ (e) F ilin g p ro c ed u res. Unless other trols and conformance to management ations and the condition and activities policies. Reports on risk assets should of any organization whose shares it wise directed by the Board, applica tions, notifications, and reports re be sufficient to permit an appraisal of holds. credit quality and assessment of expo (d) R e p o r ts. (1) Each Edge Corporaquired by this Part shall be filed with sure to loss of the subsidiary, joint tion shall make at least two reports of the Federal Reserve Bank of the dis ventures, or branch, and for this pur condition annually to the Board at trict in which the parent bank or bank pose provide full information on the such times and in such form as the holding company is located, or if none, condition of material borrowers. Re Board may prescribe. The Board may the Federal Reserve Bank of the dis ports on the operations of controls require that statements of condition trict in which the applying or report should include the internal and exter or other reports be published or made ing institution is located. Instructions and forms for such applications, noti nal audits of the branch, subsidiary or available for public inspection. fications and reports are available joint venture. These reports and this (2) Edge Corporations, member from the Federal Reserve Bank. information shall be made available to examiners of the appropriate bank su banks, and bank holding companies shall file such reports on their foreign By order of the Board of Governors, pervisory agencies. February 14, 1979. (c) E x a m in a tio n s . Examiners ap operations as the Board may require. (3) A member bank, Edge Corpora pointed by the Board shall examine T heodore E. A llison , each Edge Corporation once a year. tion or a bank holding company shall S e c r e ta r y o f the B o a rd . An Edge Corporation shall make avail report within 30 days an acquisition or able to examiners sufficient informa disposition of shares in a manner pre [FR Doc. 79-5324 Filed 2-20-79; 8:45 am] tion to assess its condition and oper scribed by the Board. 8 Board of Governors of the Federal Reserve System AM ENDM ENTS TO REGULATIONS & M (e ffe c tiv e F e b r u a r y 1 4 ,1 9 7 9 ) [6210-01-MJ Title 12—Banks and Banking CHAPTER II—FEDERAL RESERVE SYSTEM SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM [Reg. M and D; Docket No. R-0205] PART 204—RESERVES OF MEMBER BANKS PART 213—FOREIGN ACTIVITIES OF NATIONAL BANKS AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final rule. SUMMARY: This rule transfers provi sions of the Board’s regulations re garding reserve requirements for for eign branches of member banks from Regulation M (Part 213) to Regulation D (Part 204). The transfer is being done as part of the Board’s revision of its international banking regulations. EFFECTIVE DATE: February 14, 1979. FOR FURTHER CONTACT: INFORMATION Robert F. Gemmill, Associate Direc tor, Division of International Fi nance (202-452-3733); or C. Keefe Hurley, Jr., Senior Attorney, Legal Division, Board of Governors of the Federal Reserve System (202-4523269). Section 213.7 of the Board’s Regula tion M (12 CFR 213.7) is deleted. Sec tion 204.5 of the Board’s Regulation D (12 CFR 204.5) is amended by adding the following subsections: § 204.5 * R eserve requirem ents. * • • (d) Foreign branch transactions with parent bank. During each week of the four-week period beginning May 22, 1975, and during each week of each successive four-week (“maintenance” ) period, a member bank having one or more foreign branches shall maintain with the Reserve Bank of its district, as a reserve against its foreign branch deposits, a daily average balance equal to zero percent of the daily average total of— (1) Net balances due from its domes tic offices such branches, and (2) Assets (including participations) held by such branches which were ac quired from its domestic offices (other than assets representing credit ex tended to persons not residents of the United States), during the four-week computation period ending on the Wednesday fifteen days before the be ginning of the maintenance period. (e) Foreign branch credit extended to United States residents. During P R IN T E D IN N E W Y O R K [Enc. AT 8526] * each week of the four-week period be ginning May 22, 1975, and during each week of each successive four-week maintenance period, a member bank having one or more foreign branches shall maintain with the Reserve Bank of its district, as a reserve against its foreign branch deposits, a daily aver age balance, equal to zero percent of the daily average credit outstanding from such branches to United States residents 13(other than assets acquired and net balances due from its domestic offices) during the four-week compu tation period ending on the Wednes day fifteen days before the beginning of the maintenance period: P ro v id ed , That this paragraph does not apply to credit extended (1) in the aggregate amount of $100,000 or less to any United States resident, (2) by a foreign branch which at no time during the computation period had credit out standing to United States residents ex ceeding $1 million, (3) to enable the borrower to comply with the require ments of the Office of Foreign Direct Investments, Department of Com merce,14 (4) under binding commit ments entered into before May 17, 1973, or (5) to an institution that will be maintaining reserves on such credit under subsection (c) of this section or § 211.3(g) of Regulation K. By order of the Borad of Governors, February 14, 1979. T heodore E. A llison , S e c r e ta r y o f the B o a rd . CFR Doc. 79-5374 Filed 2-20-79; 8:45 am)
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