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Home > News & Events > Inactive Financial Institution Letters




Inactive Financial Institution Letters


[Federal Register: September 10, 1997 (Volume 62, Number 175)]
[Rules and Regulations]
[Page 47727-47738]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10se97-11]

[[Page 47727]]

_______________________________________________________________________

Part III

Department of the Treasury
Office of the Comptroller of the Currency

12 CFR Part 25

Federal Reserve System

12 CFR Parts 208 and 211

Federal Deposit Insurance Corporation

12 CFR Part 369

_______________________________________________________________________

Prohibition Against Use of Interstate Branches Primarily for Deposit
Production; Joint Final Rule

[[Page 47728]]

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 25

[Docket No. 97-16]
RIN 1557-AB50

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 211

[Regulations H and K; Docket No. R-0962]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 369

RIN 3064-AB97


Prohibition Against use of Interstate Branches Primarily for
Deposit Production

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).

ACTION: Joint final rule.

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SUMMARY: The OCC, Board, and FDIC (collectively, agencies) are adopting
uniform regulations to implement section 109 (section 109) of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Interstate Act). The final rule reflects comments received on the
proposal and further internal consideration by the agencies.
    As required by section 109, the final rule prohibits any bank from
establishing or acquiring a branch or branches outside of its home
state under the Interstate Act primarily for the purpose of deposit
production, and provides guidelines for determining whether such bank
is reasonably helping to meet the credit needs of the communities
served by these branches.

EFFECTIVE DATE: October 10, 1997.

FOR FURTHER INFORMATION CONTACT:

    OCC: Neil M. Robinson, Senior Attorney, Community & Consumer Law
Division (202) 874-5750; Kevin L. Lee, Senior Attorney, Enforcement and
Compliance Division (202) 874-4800; Andrew T. Gutierrez, Attorney,
Legislative and Regulatory Activities Division (202) 874-5090; or with
respect to Federal branches of foreign banks, Maureen Cooney, Senior
Attorney, International Activities Division (202) 874-0680.
    Board: Lawranne Stewart, Senior Attorney, Legal Division (202) 452-
3513; Robert L. McKague, Attorney, Legal Division (202) 452-2810; Shawn
McNulty, Assistant Director, Division of Consumer and Community Affairs
(202) 452-3946; or with respect to foreign banks, Kathleen M. O'Day,
Associate General Counsel, Legal Division (202) 452-3786.
    FDIC: Louise Kotoshirodo, Review Examiner, Division of Consumer
Affairs (202) 942-3599; Doris L. Marsh, Examination Specialist,
Division of Supervision (202) 898-8905; or Gladys Cruz Gallagher,
Counsel, Legal Division (202) 898-3833.

SUPPLEMENTARY INFORMATION:

Background

    The Interstate Act 1 provides expanded authority for a
domestic or foreign bank to establish or acquire a branch in a state
other than the bank's home state (host state). Section 109 requires the
agencies to prescribe uniform rules that prohibit the use of the
authority under the Interstate Act to engage in interstate branching
primarily for the purpose of deposit production.2 The
agencies must also provide guidelines to ensure that banks that operate
such branches are reasonably helping to meet the credit needs of the
communities served by the branches. Congress enacted section 109 to
ensure that the new interstate branching authority provided by the
Interstate Act would not result in the taking of deposits from a
community without banks reasonably helping to meet the credit needs of
that community. See H.R. Conf. Rep. No. 103-651, at 62 (1994).
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    \1\ Pub. L. No. 103-328, 108 Stat. 2338.
    \2\ 12 U.S.C. 1835a.
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Overview of Proposed Rule and Comments

    The agencies published a joint notice of proposed rulemaking on
March 17, 1997 (62 FR 12730). The proposed rule applied to any bank
that established or acquired, directly or indirectly, a branch under
the authority of the Interstate Act or amendments to any other
provision of law made by the Interstate Act. These branches were
referred to as ``covered interstate branches.'' The proposed rule
provided that, beginning no earlier than one year after a bank
established or acquired a covered interstate branch, the appropriate
agency would determine whether the bank satisfied a ``loan-to-deposit
ratio screen'' based on reasonably available data.
    The loan-to-deposit ratio screen compared the bank's loan-to-
deposit ratio within the state where the bank's covered interstate
branches were located (the bank's statewide loan-to-deposit ratio)
3 with the loan-to-deposit ratio of banks whose home state
was that state (host state loan-to-deposit ratio). If the loan-to-
deposit ratio screen indicated that the bank's statewide loan-to-
deposit ratio was at least 50 percent of the host state loan-to-deposit
ratio, no further analysis would be required. If, however, the
appropriate agency determined that the bank's statewide loan-to-deposit
ratio was less than 50 percent of the host state loan-to-deposit ratio,
or determined that reasonably available data did not exist that
permitted the agency to determine the bank's statewide loan-to-deposit
ratio, the agency would perform a ``credit needs determination.''
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    \3\ The proposed rule designated this ratio as the ``covered
interstate branch loan-to-deposit ratio.'' The agencies changed the
term because some commenters mistakenly interpreted the proposed
rule as requiring each covered interstate branch to be tested under
section 109's loan-to-deposit ratio screen. Section 109 requires
consideration of a bank's statewide lending and deposit taking as
determined by the appropriate agency.
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    Under the credit needs determination, the appropriate agency would
review the loan portfolio of the bank and determine whether the bank
was reasonably helping to meet the credit needs of the communities
served by the bank in the host state. Consistent with section 109, the
agencies would consider the following in making a credit needs
determination: (1) Whether the covered interstate branches were
formerly part of a failed or failing depository institution; (2)
whether the covered interstate branches were acquired under
circumstances where there was a low loan-to-deposit ratio because of
the nature of the acquired institution's business; (3) whether the
covered interstate branches have a higher concentration of commercial
or credit card lending, trust services, or other specialized
activities; (4) the ratings received by the bank under the Community
Reinvestment Act of 1977 (CRA); 4 (5) economic conditions,
including the level of loan demand, within the communities served by
the covered interstate branches; and (6) the safe and sound operation
and condition of the bank.
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    \4\ 12 U.S.C. 2901 et seq.
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    A bank that failed the loan-to-deposit ratio screen and that
received a determination that it was not reasonably helping to meet the
credit needs of the communities served by the bank's interstate
branches could be subject to section 109's sanctions after a hearing
under section 8(h) of the Federal Deposit Insurance Act.5
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    \5\ 12 U.S.C. 1818(h).

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[[Page 47729]]

    The proposed rule also recognized that data necessary to perform
the calculations required by the loan-to-deposit ratio screen may not
be reasonably available without imposing additional regulatory burdens
on banks. As discussed in the proposal, data that are currently
reported have limited use in showing the geographic location of
depositors and borrowers that is necessary for calculating the host
state loan-to-deposit ratio. In addition, data storage practices vary
widely from bank to bank, thereby making it difficult to determine how
many multistate banks would have reasonably available data relevant to
calculating the bank's statewide loan-to-deposit ratio in each state in
which the bank has branches. The agencies requested comment on the data
availability issues raised by section 109, including possible sources
of relevant data that would be reasonably available to the agencies and
appropriate methods of calculating the ratios. The agencies also
requested comment on the proposed rule's approach of conducting a
credit needs determination before applying the loan-to-deposit ratio
screen, if data sufficient to calculate the bank's statewide loan-to-
deposit ratio were not reasonably available.
    Collectively, the agencies received 54 comments on the proposal.
Comments were received from bank holding companies (11), individual
banks (17), banking industry representatives (8), state bank
commissioners and an association of state bank commissioners (7),
consumer and community representatives (9), a nonbanking company (1),
and an individual (1). Commenters supporting the proposal noted that
the agencies were limited by section 109's prohibition against imposing
new burdens on banks. Commenters opposing the proposal generally
disagreed with the statutory scheme rather than its proposed
implementation. Other commenters suggested modifications to the
proposal. In developing the final rule, the agencies have carefully
considered all comments in light of the language and legislative intent
of section 109. For the reasons discussed in detail below, the agencies
have adopted the rule substantially as proposed.

Analysis of Comments and Final Rule

Interstate Branches Covered

    Several commenters raised a threshold issue based on a statement in
the proposed rule concerning its coverage. The proposed rule stated
that domestic banks may have branches located outside a bank's home
state that are not within the scope of section 109 because they were
not established or acquired pursuant to authority in the Interstate
Act.6 Several commenters disputed this statement, especially
as applied to any bank not grandfathered under the McFadden Act of
1927.7 These commenters cited, in particular, pending
litigation challenging the legality of branches established under the
main office relocation provision in the National Bank Act.8
Commenters also stated that ``thousands'' of branches retained in
transactions involving the relocation of a national bank's main office
across state lines before June 1, 1997 (retained branches), may be
among the bank branches deemed to be outside the coverage of section
109.
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    \6\ As noted in the proposed rule, limited branches (i.e.,
offices that only accept internationally-related deposits
permissible for an Edge Act corporation to accept) and agencies
operated by foreign banks outside their home state are not subject
to section 109.
    \7\ 12 U.S.C. 36.
    \8\ 12 U.S.C. 30.
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    The coverage of the final rule coincides with the coverage of the
Interstate Act thereby ensuring that the agencies will apply section
109 consistent with the Interstate Act. Consistent with section 109,
and as stated in the proposed rule, the final rule applies to any
branch (1) established or acquired outside a bank's home state pursuant
to the Interstate Act or any amendment made by the Interstate Act to
any other provision of law, or (2) that could not have been established
or acquired outside a bank's home state but for the previous
establishment or acquisition of a branch established pursuant to the
Interstate Act.
    The issue of the applicability of section 109 to branches in
connection with a relocation under the National Bank Act is an issue
within the jurisdiction of the OCC. The OCC notes that a Federal court
of appeals recently issued an opinion in one pending case involving
relocations under the National Bank Act.9 The OCC believes
that the commenters significantly overestimated the potential number of
affected branches. The OCC estimates that by mid-1998, as banks
establish or acquire branches pursuant to the Interstate Act, at most
only a few hundred retained branches, owned by a small number of
community or mid-sized banks, would remain and expects that the number
of these retained branches will continue to decrease as the banks
engage in transactions pursuant to the Interstate Act.
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    \9\ See Ghiglieri v. Sun World Nat'l Ass'n, Nos. 96-50847 and
96-50948 (5th Cir. July 22, 1997).
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Data Availability

    Commenters described in detail the shortcomings of reported data
for calculating the host state loan-to-deposit ratio.10
Other commenters described the significant limitations on currently
available data for providing the geographic location of a depositor or
borrower that is necessary to calculate the bank's statewide loan-to-
deposit ratio. A number of commenters also noted that sampling loan
files to calculate this ratio could significantly increase regulatory
burden by extending the duration of an examination and by requiring a
bank to devote additional resources to the examination
process.11 Some commenters recommended, however, that the
agencies require banks to report publicly additional data on the
geographic locations of their loans and deposits, and requested that
the agencies obtain sufficient data to calculate the bank's statewide
loan-to-deposit ratio in all cases regardless of the regulatory burdens
imposed.
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    \10\ The agencies have also reviewed a report by the Comptroller
General of the United States entitled ``Bank Data: Material Loss of
Oversight Information From Interstate Banking Is Unlikely'' (GAO/
GGD/97049) (March 26, 1997).
    \11\ The commenters also confirmed the agencies' supervisory
experience that sampling at a particular branch would not always
produce reliable data because of wide variations in data collection
practices. For example, a bank may book loans or deposits at
locations outside the state where the borrowers or depositors are
located. Many domestic and foreign institutions often consolidate
commercial loans and deposits at a bank's main office, while
mortgage lending may be booked at a mortgage lending subsidiary.
Although the loans may have been made through a bank's covered
interstate branch, they might not be booked at that branch.
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    The language of section 109 and its legislative history make clear
that the agencies are to administer section 109 without imposing
additional regulatory burdens on banks. Section 109 directs the
agencies to calculate the bank's statewide loan-to-deposit ratio from
reasonably available information, including an agency's sampling of the
bank's loan files during an examination, or other available data. The
agencies also are required to calculate the host state loan-to-deposit
ratio as determinable from relevant sources. The House Conference
Report states that ``[t]he Conferees do not intend that section 109
create any additional regulatory or paperwork burdens for any
institution.'' H.R. Conf. Rep. No. 103-651, at 62 (1994). Therefore,
consistent with the language and intent of section 109, the final rule
does not impose additional data reporting requirements

[[Page 47730]]

nor does it generally require a bank to produce, or assist in
producing, relevant data.
    When data sufficient to calculate a bank's statewide loan-to-
deposit ratio are not reasonably available, the agencies will conduct a
credit needs determination as discussed below. The agencies believe
that this approach accomplishes the purpose of section 109 without
imposing additional burdens on the bank.

Two-Step Analysis

    Commenters generally supported the approach of the appropriate
agency conducting a credit needs determination if reasonably available
data are insufficient to calculate the bank's statewide loan-to-deposit
ratio. Some commenters, however, suggested that a bank should be
allowed to request a credit needs determination before the application
of the loan-to-deposit ratio screen in a section 109 review. Other
commenters stated that the credit needs determination should be
abandoned in favor of testing only with the loan-to-deposit ratio
screen.
    After carefully considering the comments received on this point,
the agencies have concluded that the Interstate Act requires the
agencies to conduct a loan-to-deposit ratio screen--or to determine
that sufficient data are not reasonably available--before making a
credit needs determination.
    Section 109 provides a two-step analysis to confirm a bank's
compliance with its prohibition against deposit production offices. The
first step attempts to measure compliance with the prescribed loan-to-
deposit ratio screen, and the agencies will take into account all
reasonably available data relevant to calculating the bank's statewide
loan-to-deposit ratio on a case-by-case basis in order to determine
whether that ratio can be calculated from such data.
    Relevant data are data that, for example, geocode loans or that can
be used to sort borrowers by zip codes. The agencies also will consider
data that are reasonably determinable from available information, which
would include the agency's sampling of the bank's loan files during an
examination, or data that would be otherwise available from the bank,
such as data currently required to be reported by the bank. In
determining whether to sample a bank's loan files for the purposes of
section 109 during an examination, the agencies will consider the
regulatory burden imposed within the context of the examination. For
example, an undue regulatory burden could result if a bank were
required to expend resources that materially exceeded the resources
required to produce data for sampling for other examination purposes.
Similarly, sampling for the purpose of section 109 that would require a
substantial extension of the scope or duration of the examination could
also produce an undue regulatory burden on the bank. In such cases, the
language and legislative intent of section 109 support proceeding to
the second step in the two-step analysis.
    If the appropriate agency determines that data relevant to
calculating the bank's statewide loan-to-deposit ratio are not
reasonably available without imposing an undue regulatory burden, or if
the bank fails the loan-to-deposit ratio screen based on reasonably
available data, in the second step the appropriate agency will look at
the bank's activities through a credit needs determination. A credit
needs determination therefore will be made in all cases in which the
appropriate agency is unable to readily verify compliance with the
section 109 loan-to-deposit ratio screen. Banks may provide the
agencies with any relevant information, including loan data, if a
credit needs determination is required.
    If the appropriate agency has not determined the bank's statewide
loan-to-deposit ratio and the bank subsequently receives an adverse
credit needs determination, the agency will then apply the loan-to-
deposit ratio screen. Applying the loan-to-deposit screen at this stage
in the process is consistent with the agencies' statutory duty to
determine a bank's compliance with section 109 and to seek sanctions
against a bank that fails to comply, as appropriate. Since a bank must
fail both the loan-to-deposit screen and the credit needs determination
in order to be out of compliance with section 109, the agencies have an
obligation to apply the loan-to-deposit screen before seeking
sanctions. Obtaining sufficient data to calculate the bank's statewide
loan-to-deposit ratio may require the appropriate agency to expand the
scope and duration of its examination and may require the bank to
assist the appropriate agency in producing data that may not be
reasonably available. The agencies conclude that their statutory
responsibility to ensure compliance with the statute after an adverse
credit needs determination must outweigh consideration of regulatory
burden that may be imposed on a bank in order to carry out the
legislative purpose of section 109.

Section 109 Loan-to-Deposit Ratios

A. Host State Loan-to-Deposit Ratio

Relevant Data
    The agencies will use the annual Summary of Deposits (prepared as
of June 30) as the most reasonably available source of reported data on
deposits. The agencies also will use quarterly Consolidated Reports of
Condition and Income (Call Reports), which provide loan data for banks,
as the most readily available source of reported data on loans.
    The agencies recognize that Summary of Deposits and Call Report
data do not provide precise information on the geographic location of
depositors and borrowers for all the reasons detailed in the proposed
rule and the comments. However, these data are the most useful data
that are reasonably available at this time.
Method of Calculating
    Some commenters suggested alternative ways of calculating the host
state loan-to-deposit ratio. One commenter suggested using the
unweighted average loan-to-deposit ratio 12 for all of the
home state banks in the host state. Another commenter recommended using
the average daily balance for loans instead of the actual amount of
loans held at the end of the reporting period. One commenter suggested
using third-quarter data for states with large rural and agricultural
areas to capture the highest loan-to-deposit ratio. The agencies have
also considered using peer group ratios based on the Uniform Bank
Performance Reports, and separating the peer groups into quintiles so
that the banks in the quintiles with unusually high or low loan-to-
deposit ratios could be eliminated.
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    \12\ The unweighted average loan-to-deposit ratio is calculated
by adding the individual banks' loan-to-deposit ratios and dividing
the result by the number of banks. A weighted average loan-to-
deposit ratio is calculated by separately summing loans and deposits
for all of the banks and then dividing the sum of loans by the sum
of deposits.
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    The agencies have determined to adopt the methodology discussed
below which uses a weighted average loan-to-deposit ratio and second-
quarter loan data generally. An unweighted average loan-to-deposit
ratio for home state banks in the host state would fail to account for
the greater lending and deposit-taking activities of the larger banks.
In addition, third-quarter data for loans would not be appropriate
because the Summary of Deposits data are only as of June 30, and loan
and deposit data should be as of the same date. Moreover, available
data are insufficient to

[[Page 47731]]

calculate the average daily balance for all loan categories reported in
the Call Reports, and there is no indication that the purpose of the
section 109 screen was to capture the highest loan-to-deposit ratio of
host state banks. Finally, methodologies based on peer groups require a
sufficient number of institutions in each peer group, and it is likely
that some states would not have sufficiently large peer groups,
particularly for larger banks, to make a methodology using peer groups
and quintiles feasible.
    Several commenters raised concerns that data for specialized banks,
which do not engage in traditional deposit taking or lending, would
distort the host state loan-to-deposit ratio. As noted in the proposed
rule, limited purpose banks, such as credit card banks, and wholesale
banks could have very large loan portfolios, but few, if any, deposits.
The agencies will therefore exclude data from banks designated as
limited purpose or wholesale banks under the CRA regulations of the
appropriate agency in calculating the loan-to-deposit ratio for the
host state.13
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    \13\ See 12 CFR 25.25 (OCC); 12 CFR 228.25 (Board); and 12 CFR
345.25 (FDIC).
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    In addition, certain lending activities of banks with foreign
branches could distort the ratio. The agencies will use a measure of
domestic loans that excludes loans to non-U.S. addressees and loans in
foreign offices to the extent that these adjustments can be made to
data in the Call Reports. A measure of domestic deposits from the
Summary of Deposits does not include foreign deposits so that, to the
maximum extent possible, domestic loans will be divided by domestic
deposits.
Consideration of Multistate Banks
    As discussed in the proposal, banks with branches outside their
home state (multistate banks), in light of the data limitations imposed
by section 109, pose particular problems for purposes of calculating
host state loan-to-deposit ratios. Loan and deposit data from those
banks could distort substantially the host state loan-to-deposit
ratios, unless the data are adjusted to account for the banks' out-of-
state branches' lending and deposit-taking activities. Because the
Summary of Deposits contains data on a branch-by-branch basis, the
agencies can account for the deposit-taking activities of out-of-state
branches of multistate banks by using the aggregate deposit-taking
activities of a multistate banks' home state branches only.
    Accounting for the lending activities of out-of-state branches of
multistate banks is more difficult. Neither the Call Report nor any
other source of loan data contain data on a branch-by-branch or state-
by-state basis. Thus, unless a bank maintains loan data on a state-by-
state basis, there are no reasonably available data to calculate a
multistate bank's home state lending activities.
    In the proposal, the agencies suggested excluding multistate banks
that have more than 50 percent of their branches outside their home
state from the host state loan-to-deposit ratio. Recognizing the
limitations in this approach, the agencies requested comment on this
approach and on any approach that would more accurately reflect a
multistate bank's home state activities.
    In response to the agencies' request for comment, one commenter
supported the exclusion of large multistate banks from the host state
loan-to-deposit ratio because larger banks can maintain higher than
average loan-to-deposit ratios by funding loans without using deposits.
Another commenter suggested using a bank's deposits reported in its
home state and a proportionate amount of the bank's loans based on the
percentage of its total deposits that are reported in the bank's home
state. A third commenter suggested that deposit and loan proration be
based on the number of home state branches as a percentage of the
bank's total number of branches.
    On further consideration of this issue, the agencies have concluded
that the host state loan-to-deposit ratio could be distorted
substantially if multistate banks with 50 percent or more of their
branches outside their home state are excluded, or if large multistate
banks are excluded altogether. As interstate branching becomes more
prevalent, some host states could eventually be left with few, if any,
eligible host state banks 14 to include in the ratio.
Moreover, including all loans and deposits of any multistate bank in
calculating the host state loan-to-deposit ratio for its home state
would give too much weight to that bank's lending and deposit-taking
activities, and excluding all its loans and deposits would give no
weight at all.
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    \14\ Host state banks are banks in a host state that have that
state as their home state.
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    After carefully considering all comments, and given the statutory
limitation on additional data collection, the agencies believe the best
available approach requires assuming that a multistate bank's lending
and deposit-taking activities in its home state correspond to its total
lending and deposit-taking activities (i.e., the percentage of its
total loans that are in-state is the same as the percentage of its
total deposits that are in-state). In particular, the agencies will
calculate the percentage of a multistate bank's deposits that are
attributable to in-state branches (as determined from the Summary of
Deposits), and apply that percentage to the bank's total domestic loans
(as determined from the Call Report) in order to determine a proxy for
the bank's domestic loans attributable to that state. The agencies
believe that this approach is preferable to including or excluding all
loans and deposits of a multistate bank.
    The agencies recognize that this method for calculating the host
state loan-to-deposit ratio makes certain assumptions that may not be
universally true. For example, intrastate banks do not necessarily make
loans only to in-state borrowers. In addition, there is not necessarily
a one-to-one correlation between in-state deposits and in-state loans
for a multistate bank. Nevertheless, the data limitations imposed by
section 109 necessitate these assumptions. The agencies will adjust
this method as appropriate to account for changes in reporting
requirements or additional sources of relevant data. The agencies also
will continue to review ways to improve the calculation of the host
state loan-to-deposit ratio. The agencies will make each state's host
state loan-to-deposit ratio, and any changes in the way the ratio is
calculated, publicly available.

B. A Bank's Statewide Loan-to-Deposit Ratio

Relevant Data
    Several commenters suggested that a ``loan'' under the final rule
should be defined more expansively than that term is defined in the
Call Reports and should include, for example, loans originated and
sold, securitized loans, investments in mortgage-backed securities and
municipal bonds secured by loans, outstanding letters of credit, and
loans booked through a bank's affiliates. Since banks generally do not
report these data, or do not report them in a format that would provide
a differentiation between in-state quantities and out-of-state
quantities, the data could not be used in calculating the host state
loan-to-deposit ratios. Using such data for a particular bank's
statewide loan-to-deposit ratio, and not for the corresponding host
state loan-to-deposit ratio, would distort the loan-to-deposit ratio
screen. Consequently, the agencies will not consider these data in
applying the loan-to-deposit ratio screen. However, the agencies may

[[Page 47732]]

consider such data as appropriate in making a credit needs
determination.

Credit Needs Determination

Consideration of CRA Rating
    Some commenters maintained that a satisfactory or better CRA rating
in a host state should provide a ``safe harbor'' from evaluation under
section 109 in that state. Other commenters, however, believed that
little, if any, reliance should be placed on CRA ratings because these
commenters viewed CRA ratings as inflated and often out-of-date. One
commenter suggested that a less than satisfactory CRA rating should
automatically warrant an adverse credit needs determination.
    The agencies believe that it is consistent with the language and
intent of section 109 to carefully weigh the CRA rating of the bank in
making a credit needs determination under the factors enumerated in
section 109. Section 109 specifies the bank's CRA rating as a factor to
be considered, and most of the other factors listed in section 109 are
taken into account as part of the performance context evaluation
pursuant to the agencies' CRA regulations.15
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    \15\ The CRA regulations specify that the agencies will evaluate
a bank's performance in the context of a number of considerations,
including the nature of the bank's product offerings and business
strategy, the lending opportunities within a bank's assessment area,
and any constraints on the bank such as the financial condition of
the bank, the economic climate (national, regional and local), and
safety and soundness limitations. See 12 CFR 25.21(b) (OCC); 12 CFR
228.21(b) (Board); and 12 CFR 345.21(b) (FDIC).
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    Moreover, section 110 of the Interstate Act (section 110)
16 requires the following separate written evaluations and
CRA ratings of the institution's CRA performance (1) as a whole, (2) in
each state in which it maintains a branch, and (3) in any multistate
metropolitan area in which it maintains a branch in two or more states.
In addition, the statewide written evaluation of a multistate bank must
contain separate discussions of the institution's performance in any
metropolitan area in the state in which it maintains a branch, as well
as in the nonmetropolitan area of the state if a branch is maintained
there. Accordingly, information from a CRA performance evaluation is
particularly relevant in determining compliance with section 109
because it directly evaluates a bank's performance in helping to meet
the credit needs of the communities it serves in a host state. As
discussed below, the agencies expect to conduct the section 109 review
in connection with an evaluation of the bank's CRA performance in the
host state under section 110, as the appropriate agency deems
necessary, thereby ensuring that the section 109 review will be based
on current information.
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    \16\ 12 U.S.C. 2906(b) and (d).
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    In this light, the agencies expect that a credit needs
determination for a bank with CRA performance ratings of
``satisfactory'' or ``outstanding'' in the host state (including any
multistate metropolitan area) would be favorable. The agencies also
expect that a credit needs determination for a bank with less than
satisfactory ratings for CRA performance in the host state (including
any multistate metropolitan area) would be adverse unless mitigated by
the other factors enumerated in section 109.
    Commenters requested that a credit needs determination only
consider the lending component of a large bank's CRA rating, or that
the lending component be given extra weight. The CRA rating for a large
retail bank already weighs lending performance so that a bank may not
receive an overall ``satisfactory'' CRA performance rating unless its
lending performance component is rated at least ``satisfactory.''
Accordingly, the agencies are not adopting the suggested change.
Other Factors
    Commenters also discussed other factors that section 109 requires
the agencies to consider in making a credit needs determination. Some
commenters suggested that, in considering economic conditions, the
agencies should grant multistate banks greater leeway to anticipate
economic trends in the host state and, if these trends are adverse, to
reduce their efforts in helping to meet community credit needs. Another
commenter suggested eliminating all factors that could be used to
mitigate a poor CRA performance record. There also were requests for
more guidance in the regulation on how the statutory factors would be
considered in a credit needs determination.
    The final rule incorporates the statutory factors as they are set
forth in section 109. The agencies intend to apply these factors
consistent with the plain meaning of the language used in section 109,
as discussed above. With respect to institutions designated as
wholesale or limited purpose banks under the CRA regulations, the
agencies will consider the CRA performance for these banks under the
special CRA performance test provided in the CRA regulations and the
banks' specialized operations.
Banks Not Subject to CRA
    Some entities that could be subject to section 109, including
certain special purpose banks and uninsured branches of foreign
banks,17 are not evaluated for CRA performance by the
agencies. Several commenters maintained that, in making a credit needs
determination for such institutions, the agencies should apply the same
standards that are applied to CRA-rated institutions. As discussed in
the proposed rule, neither the language nor the legislative history of
section 109 supports applying the CRA to these institutions. The
agencies intend to use the CRA regulations as guidelines in making a
credit needs determination for these institutions. The CRA regulations
would provide only guidance to assess whether activities identified by
the institution help to meet the community's credit needs, and would
not obligate the institution to have a record of performance under the
CRA or require that the institution pass any performance tests in the
CRA regulations.
---------------------------------------------------------------------------

    \17\ A special purpose bank that does not perform commercial or
retail banking services by granting credit to the public in the
ordinary course of business is not evaluated for CRA performance by
the agencies. See 12 CFR 25.11(c)(3) (OCC); 12 CFR 228.11(c)(3)
(Board); and 12 CFR 345.11(c)(3) (FDIC). In addition, the CRA does
not apply to the branch of a foreign bank unless the branch is
insured or results from an acquisition described in section 5(a)(8)
of the International Banking Act (12 U.S.C. 3103(a)(8)) (IBA, 12
U.S.C. 3101 et seq.). See 12 CFR 25.11(c)(2) (OCC); 12 CFR
228.11(c)(2) (Board); and 12 CFR 345.11(c)(1) (FDIC).
---------------------------------------------------------------------------

    The agencies also intend, as proposed, to give substantial weight
to the factor relating to specialized activities in making a credit
needs determination for institutions not evaluated under the CRA. For
example, most branches of foreign banks derive substantially all their
deposits from wholesale deposit markets, which are generally national
or international in scope.18 This approach

[[Page 47733]]

is consistent with section 109's overall purpose of preventing banks
from using the Interstate Act to establish branches primarily to gather
deposits in their host state without reasonably helping to meet the
credit needs of the communities served by the bank in the host state.
---------------------------------------------------------------------------

    \18\ U.S. branches of foreign banks generally accept only
uninsured wholesale deposits, and are not established primarily to
gather deposits in their host state. In 1991, the Federal Deposit
Insurance Corporation Improvement Act amended the IBA to prohibit
U.S. branches of foreign banks from taking deposits in amounts of
less than $100,000, other than through the relatively few branches
that were already insured by the FDIC in 1991, or to the extent the
OCC or the FDIC determine that the branch is not engaged in domestic
retail deposit taking activities requiring deposit insurance
protection. 12 U.S.C. 3104. Congress reaffirmed this prohibition in
the Interstate Act, directing the OCC and the FDIC to revise their
regulations to reduce further the opportunities for retail deposit-
taking available to these branches.
    See section 107(b) of the Interstate Act (12 U.S.C. 3104,
Historical and Statutory Notes). As a general matter, interstate
branches of foreign banks established under the Interstate Act
therefore cannot take retail deposits or draw a significant level of
deposits from retail-oriented deposit markets where the branches are
located.
---------------------------------------------------------------------------

Other Comments
    Several commenters requested that the public, including
representatives of community organizations and state bank
commissioners, participate in a credit needs determination. Information
provided to examiners through contacts with community representatives
during a CRA examination or through other activities, and the bank's
public comment file provide the agencies substantial information to
assess the views of community organizations, government officials, and
other interested persons. In addition, the agencies encourage written
comments from the public about a bank's CRA performance at any time and
publicly announce their CRA examination schedules. The agencies will
carefully review information provided to examiners from community
contacts or through other activities, and the public comment file in
making a credit needs determination.
    State bank commissioners also requested that the agencies consider
compliance with state CRA laws in making a credit needs determination.
The agencies will take into account state CRA compliance evaluations in
a credit needs determination, as appropriate.
    Some commenters requested the agencies to consider affiliate
lending activities in making a credit needs determination while other
commenters cautioned against giving too much consideration to affiliate
lending activities. The agencies' CRA regulations permit a bank's
affiliate lending to be considered as part of its CRA performance
evaluation. Affiliate lending, therefore, would be relevant to a
section 109 review to the extent that such lending is reflected in the
bank's overall CRA performance rating.

Sanctions

Application of Loan-to-Deposit Ratio Screen
    Before a bank could be sanctioned under section 109, the
appropriate agency would be required to demonstrate that the bank
failed to comply with the section 109 loan-to-deposit ratio screen and
failed to reasonably help in meeting the credit needs of the bank's
communities in the host state. Accordingly, the proposed rule required
the agencies to determine a bank's compliance with the loan-to-deposit
ratio screen. Some commenters suggested that the agencies could impose
sanctions on a bank without verifying noncompliance with the loan-to-
deposit ratio screen and other commenters contended that requiring such
a verification would impose significant regulatory burdens. As
previously discussed, the agencies have concluded that the two-step
compliance analysis in section 109 requires the agencies to verify
noncompliance with both steps before imposing sanctions, and that the
agencies' responsibility to ensure compliance with section 109 after an
adverse credit needs determination outweighs potential regulatory
burdens associated with such a verification.
Consultation and Public Comment
    If a bank fails both steps in the analysis, section 109's sanctions
(1) allow the appropriate agency to order the closing of a covered
interstate branch in the host state unless the bank provides reasonable
assurances to the satisfaction of the agency that it has an acceptable
plan that will reasonably help to meet the credit needs of the
communities served by the bank, and (2) prohibit the bank from opening
a new branch in the host state unless the bank provides reasonable
assurances to the satisfaction of the agency that the bank will
reasonably meet the credit needs of the community to be served by the
new branch.19
---------------------------------------------------------------------------

    \19\ Section 109 requires the appropriate agency to issue a
notice of intent to close a covered interstate branch to the bank
and schedule a hearing in accordance with section 8(h) of the
Federal Deposit Insurance Act (12 U.S.C. 1818(h)) before a branch
can be closed.
---------------------------------------------------------------------------

    State banking commissioners requested consultation before the
agencies ordered a branch closing. Informal consultations with state
banking regulators may assist the agencies in assessing the impact of
branch closures, or a prohibition against new branches, on a state
bank's ability to comply with state CRA laws. Informal consultations
may also assist in assessing the bank's assurances to help meet credit
needs in light of its record with state banking regulators for
addressing supervisory concerns. Accordingly, the agencies intend to
consult with state banking authorities before imposing sanctions, as
appropriate.
    Other commenters requested that the agencies solicit public comment
on any plan proposed by the bank for meeting the credit needs of the
community to avoid a branch closing order. The agencies will review any
proposal by the bank in light of all comments from the public in the
bank's community contacts portion of the CRA examination or through
other activities, and the bank's public comment file. In addition, the
agencies intend to provide an opportunity for public comment on
nonconfidential portions of the bank's proposal.

Timing of Review

    Some commenters stated that section 109 reviews and CRA performance
examinations should be conducted at the same time. One commenter
requested clarification that section 109 reviews would be conducted
more than once, another commenter requested that section 109 reviews be
conducted annually, and a third commenter recommended a two-year grace
period before conducting the reviews.
    As previously noted, the agencies intend to conduct section 109
reviews in connection with an evaluation of a multistate bank's CRA
performance in a host state under section 110 of the Interstate Act.
The appropriate agency will conduct a section 109 review of a
multistate bank during the section 110 review, and a section 109 review
of banks not subject to CRA, when the agency deems such a review to be
necessary. The agencies will also coordinate with state banking
authorities in applying section 109 to state-chartered branches of
foreign banks that may be subject to section 109.

Other Comments

    The agencies also received several recommendations that are
inconsistent with section 109. These suggestions include: (1)
Increasing the loan-to-deposit screen to more than 50 percent; (2)
excluding a covered interstate branch if it does not solicit deposits
from the public, or if it has a loan-to-deposit ratio in the host state
comparable to the bank's overall loan-to-deposit ratio; (3) applying
section 109 to all the bank's interstate branches in a host state
rather than to ``covered interstate branches''; (4) applying the loan-
to-deposit ratio to partial but geographically specific lending data
(for example, home mortgages); and (5) exempting a bank that primarily
lends in a particular state from compliance with the loan-to-deposit
ratio screen and from the calculation of the host state loan-to-deposit
ratio. The agencies believe that it would be inappropriate to implement
these recommendations because they are inconsistent with the agencies'
understanding of the language of section 109 and, accordingly, are not
adopting them in the final rule.

[[Page 47734]]

Regulatory Flexibility Act Analysis

    Consistent with the requirement that the agencies use only
available information to conduct a section 109 review, the final rule
does not impose any additional regulatory burden on banks beyond what
is required by statute. In particular, the final rule does not impose
any additional paperwork or reporting requirements. Thus, the final
rule will not have a significant economic impact on a substantial
number of small entities consistent with the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.). Moreover, the final rule affects only banks
that have branches in more than one state, which are primarily larger
banks. However, the agencies note that some institutions with covered
interstate branches may be subject to more extensive examinations or
requests for information necessary to obtain the relevant data if the
agencies determine to impose sanctions. As noted above, the agencies
believe that this information is required by the two-step analysis
under section 109 before sanctions can be imposed, and that there are
no feasible alternatives to mitigate this potential burden.

Paperwork Reduction Act

    The agencies have determined that the final rule would not increase
the regulatory paperwork burden of banking organizations pursuant to
the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Title II, Pub. L. 104-121) provides generally for agencies to
report rules to Congress and the General Accounting Office (GAO) for
review. The reporting requirement is triggered when a federal agency
issues a final rule. The agencies will file the appropriate reports
with Congress and the GAO as required by SBREFA.
    Because the Office of Management and Budget has determined that the
uniform rule promulgated by the agencies does not constitute a ``major
rule'' as defined by SBREFA, the final rule will take effect 30 days
from publication in the Federal Register.

OCC Executive Order 12866 Determination

    The OCC has determined that this final rule is not a significant
regulatory action.

OCC Unfunded Mandates Reform Act of 1995 Determination

    The OCC has determined that the final rule would not result in
expenditures by state, local, and tribal governments, or by the private
sector, of $100 million or more in any one year. Accordingly, a
budgetary impact statement is not required under section 202 of the
Unfunded Mandates Reform Act of 1995.

List of Subjects

12 CFR Part 25

    Community development, Credit, Investments, National banks,
Reporting and recordkeeping requirements.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.

12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 369

    Banks, banking, Community development.

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the joint preamble, the Office of the
Comptroller of the Currency amends part 25 of chapter I of title 12 of
the Code of Federal Regulations as follows:

PART 25--COMMUNITY REINVESTMENT ACT AND INTERSTATE DEPOSIT
PRODUCTION REGULATIONS

    1. The part heading for part 25 is revised to read as set forth
above.
    2. The authority citation for part 25 is revised to read as
follows:

    Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215,
215a, 481, 1814, 1816, 1828(c), 1835a, 2901 through 2907, and 3101
through 3111.

    3. Section 25.11 is amended by revising paragraph (a)(1) to read as
follows:

Sec. 25.11  Authority, purpose, and scope.

    (a) Authority and OMB control number--(1) Authority. The authority
for subparts A, B, C, D, and E is 12 U.S.C. 21, 22, 26, 27, 30, 36,
93a, 161, 215, 215a, 481, 1814, 1816, 1828(c), 1835a, 2901 through
2907, and 3101 through 3111.
* * * * *
    4. Part 25 is amended by adding a new subpart E to read as follows:

Subpart E--Prohibition Against Use of Interstate Branches Primarily for
Deposit Production

Sec.
25.61  Purpose and scope.
25.62  Definitions.
25.63  Loan-to-deposit ratio screen.
25.64  Credit needs determination.
25.65  Sanctions.

Subpart E--Prohibition Against Use of Interstate Branches Primarily
for Deposit Production

Sec. 25.61  Purpose and scope.

    (a) Purpose. The purpose of this subpart is to implement section
109 (12 U.S.C. 1835a) of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (Interstate Act).
    (b) Scope. (1) This subpart applies to any national bank that has
operated a covered interstate branch for a period of at least one year,
and any foreign bank that has operated a covered interstate branch that
is a Federal branch for a period of at least one year.
    (2) This subpart describes the requirements imposed under 12 U.S.C.
1835a, which requires the appropriate Federal banking agencies (the
OCC, the Board of Governors of the Federal Reserve System, and the
Federal Deposit Insurance Corporation) to prescribe uniform rules that
prohibit a bank from using any authority to engage in interstate
branching pursuant to the Interstate Act, or any amendment made by the
Interstate Act to any other provision of law, primarily for the purpose
of deposit production.

Sec. 25.62  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Bank means, unless the context indicates otherwise:
    (1) A national bank; and
    (2) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and
12 CFR 28.11(j).
    (b) Covered interstate branch means any branch of a national bank,
and any Federal branch of a foreign bank, that:
    (1) Is established or acquired outside the bank's home state
pursuant to the interstate branching authority granted by the
Interstate Act or by any amendment made by the Interstate Act to any
other provision of law; or
    (2) Could not have been established or acquired outside of the
bank's home

[[Page 47735]]

state but for the establishment or acquisition of a branch described in
paragraph (b)(1) of this section.
    (c) Federal branch means Federal branch as that term is defined in
12 U.S.C. 3101(6) and 12 CFR 28.11(i).
    (d) Home state means:
    (1) With respect to a state bank, the state that chartered the
bank;
    (2) With respect to a national bank, the state in which the main
office of the bank is located; and
    (3) With respect to a foreign bank, the home state of the foreign
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR
28.11(o).
    (e) Host state means a state in which a bank establishes or
acquires a covered interstate branch.
    (f) Host state loan-to-deposit ratio generally means, with respect
to a particular host state, the ratio of total loans in the host state
relative to total deposits from the host state for all banks (including
institutions covered under the definition of ``bank'' in 12 U.S.C.
1813(a)(1)) that have that state as their home state, as determined and
updated periodically by the appropriate Federal banking agencies and
made available to the public.
    (g) State means state as that term is defined in 12 U.S.C.
1813(a)(3).
    (h) Statewide loan-to-deposit ratio means, with respect to a bank,
the ratio of the bank's loans to its deposits in a state in which the
bank has one or more covered interstate branches, as determined by the
OCC.

Sec. 25.63  Loan-to-deposit ratio screen.

    (a) Application of screen. Beginning no earlier than one year after
a bank establishes or acquires a covered interstate branch, the OCC
will consider whether the bank's statewide loan-to-deposit ratio is
less than 50 percent of the relevant host state loan-to-deposit ratio.
    (b) Results of screen. (1) If the OCC determines that the bank's
statewide loan-to-deposit ratio is 50 percent or more of the host state
loan-to-deposit ratio, no further consideration under this subpart is
required.
    (2) If the OCC determines that the bank's statewide loan-to-deposit
ratio is less than 50 percent of the host state loan-to-deposit ratio,
or if reasonably available data are insufficient to calculate the
bank's statewide loan-to-deposit ratio, the OCC will make a credit
needs determination for the bank as provided in Sec. 25.64.

Sec. 25.64  Credit needs determination.

    (a) In general. The OCC will review the loan portfolio of the bank
and determine whether the bank is reasonably helping to meet the credit
needs of the communities in the host state that are served by the bank.
    (b) Guidelines. The OCC will use the following considerations as
guidelines when making the determination pursuant to paragraph (a) of
this section:
    (1) Whether covered interstate branches were formerly part of a
failed or failing depository institution;
    (2) Whether covered interstate branches were acquired under
circumstances where there was a low loan-to-deposit ratio because of
the nature of the acquired institution's business or loan portfolio;
    (3) Whether covered interstate branches have a high concentration
of commercial or credit card lending, trust services, or other
specialized activities, including the extent to which the covered
interstate branches accept deposits in the host state;
    (4) The CRA ratings received by the bank, if any;
    (5) Economic conditions, including the level of loan demand, within
the communities served by the covered interstate branches;
    (6) The safe and sound operation and condition of the bank; and
    (7) The OCC's CRA regulations (subparts A through D of this part)
and interpretations of those regulations.

Sec. 25.65  Sanctions.

    (a) In general. If the OCC determines that a bank is not reasonably
helping to meet the credit needs of the communities served by the bank
in the host state, and that the bank's statewide loan-to-deposit ratio
is less than 50 percent of the host state loan-to-deposit ratio, the
OCC:
    (1) May order that a bank's covered interstate branch or branches
be closed unless the bank provides reasonable assurances to the
satisfaction of the OCC, after an opportunity for public comment, that
the bank has an acceptable plan under which the bank will reasonably
help to meet the credit needs of the communities served by the bank in
the host state; and
    (2) Will not permit the bank to open a new branch in the host state
that would be considered to be a covered interstate branch unless the
bank provides reasonable assurances to the satisfaction of the OCC,
after an opportunity for public comment, that the bank will reasonably
help to meet the credit needs of the community that the new branch will
serve.
    (b) Notice prior to closure of a covered interstate branch. Before
exercising the OCC's authority to order the bank to close a covered
interstate branch, the OCC will issue to the bank a notice of the OCC's
intent to order the closure and will schedule a hearing within 60 days
of issuing the notice.
    (c) Hearing. The OCC will conduct a hearing scheduled under
paragraph (b) of this section in accordance with the provisions of 12
U.S.C. 1818(h) and 12 CFR part 19.

    Dated: September 4, 1997.
Eugene A. Ludwig,
Comptroller of the Currency.

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the joint preamble, the Board of
Governors of the Federal Reserve System amends parts 208 and 211 of
chapter II of title 12 of the Code of Federal Regulations as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 is revised to read as
follows:

    Authority: 12 U.S.C. 24, 248(a), 248(c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1820(d)(9), 1823(j), 1828(o), 1831o, 1831p-
1, 1835a, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b,
78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C.
5318.

    2. A new Sec. 208.28 is added to subpart A to read as follows:

Sec. 208.28  Prohibition against use of interstate branches primarily
for deposit production.

    (a) Purpose and scope--(1) Purpose. The purpose of this section is
to implement section 109 (12 U.S.C. 1835a) of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (Interstate
Act).
    (2) Scope. (i) This section applies to any State member bank that
has operated a covered interstate branch for a period of at least one
year, and any foreign bank that has operated a covered interstate
branch licensed by a State for a period of at least one year.
    (ii) This section describes the requirements imposed under 12
U.S.C. 1835a, which requires the appropriate Federal banking agencies
(the Board, the Office of the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation) to prescribe uniform rules that
prohibit a bank from using any authority to engage in interstate
branching pursuant to the Interstate Act, or any amendment made by the
Interstate Act to any other

[[Page 47736]]

provision of law, primarily for the purpose of deposit production.
    (b) Definitions. For purposes of this section, the following
definitions apply:
    (1) Bank means, unless the context indicates otherwise:
    (i) A State member bank as that term is defined in 12 U.S.C.
1813(d)(2); and
    (ii) A foreign bank as that term is defined in 12 U.S.C. 3101(7)
and 12 CFR 211.21.
    (2) Covered interstate branch means any branch of a State member
bank, and any uninsured branch of a foreign bank licensed by a State,
that:
    (i) Is established or acquired outside the bank's home state
pursuant to the interstate branching authority granted by the
Interstate Act or by any amendment made by the Interstate Act to any
other provision of law; or
    (ii) Could not have been established or acquired outside of the
bank's home state but for the establishment or acquisition of a branch
described in paragraph (b)(2)(i) of this section.
    (3) Home state means:
    (i) With respect to a state bank, the state that chartered the
bank;
    (ii) With respect to a national bank, the state in which the main
office of the bank is located; and
    (iii) With respect to a foreign bank, the home state of the foreign
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR
211.22.
    (4) Host state means a state in which a bank establishes or
acquires a covered interstate branch.
    (5) Host state loan-to-deposit ratio generally means, with respect
to a particular host state, the ratio of total loans in the host state
relative to total deposits from the host state for all banks (including
institutions covered under the definition of ``bank'' in 12 U.S.C.
1813(a)(1)) that have that state as their home state, as determined and
updated periodically by the appropriate Federal banking agencies and
made available to the public.
    (6) State means state as that term is defined in 12 U.S.C.
1813(a)(3).
    (7) Statewide loan-to-deposit ratio means, with respect to a bank,
the ratio of the bank's loans to its deposits in a state in which the
bank has one or more covered interstate branches, as determined by the
Board.
    (c) Loan-to-deposit ratio screen--(1) Application of screen.
Beginning no earlier than one year after a bank establishes or acquires
a covered interstate branch, the Board will consider whether the bank's
statewide loan-to-deposit ratio is less than 50 percent of the relevant
host state loan-to-deposit ratio.
    (2) Results of screen. (i) If the Board determines that the bank's
statewide loan-to-deposit ratio is 50 percent or more of the host state
loan-to-deposit ratio, no further consideration under this section is
required.
    (ii) If the Board determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit
ratio, or if reasonably available data are insufficient to calculate
the bank's statewide loan-to-deposit ratio, the Board will make a
credit needs determination for the bank as provided in paragraph (d) of
this section.
    (d) Credit needs determination--(1) In general. The Board will
review the loan portfolio of the bank and determine whether the bank is
reasonably helping to meet the credit needs of the communities in the
host state that are served by the bank.
    (2) Guidelines. The Board will use the following considerations as
guidelines when making the determination pursuant to paragraph (d)(1)
of this section:
    (i) Whether covered interstate branches were formerly part of a
failed or failing depository institution;
    (ii) Whether covered interstate branches were acquired under
circumstances where there was a low loan-to-deposit ratio because of
the nature of the acquired institution's business or loan portfolio;
    (iii) Whether covered interstate branches have a high concentration
of commercial or credit card lending, trust services, or other
specialized activities, including the extent to which the covered
interstate branches accept deposits in the host state;
    (iv) The Community Reinvestment Act ratings received by the bank,
if any, under 12 U.S.C. 2901 et seq.;
    (v) Economic conditions, including the level of loan demand, within
the communities served by the covered interstate branches;
    (vi) The safe and sound operation and condition of the bank; and
    (vii) The Board's Regulation BB--Community Reinvestment (12 CFR
Part 228) and interpretations of that regulation.
    (e) Sanctions--(1) In general. If the Board determines that a bank
is not reasonably helping to meet the credit needs of the communities
served by the bank in the host state, and that the bank's statewide
loan-to-deposit ratio is less than 50 percent of the host state loan-
to-deposit ratio, the Board:
    (i) May order that a bank's covered interstate branch or branches
be closed unless the bank provides reasonable assurances to the
satisfaction of the Board, after an opportunity for public comment,
that the bank has an acceptable plan under which the bank will
reasonably help to meet the credit needs of the communities served by
the bank in the host state; and
    (ii) Will not permit the bank to open a new branch in the host
state that would be considered to be a covered interstate branch unless
the bank provides reasonable assurances to the satisfaction of the
Board, after an opportunity for public comment, that the bank will
reasonably help to meet the credit needs of the community that the new
branch will serve.
    (2) Notice prior to closure of a covered interstate branch. Before
exercising the Board's authority to order the bank to close a covered
interstate branch, the Board will issue to the bank a notice of the
Board's intent to order the closure and will schedule a hearing within
60 days of issuing the notice.
    (3) Hearing. The Board will conduct a hearing scheduled under
paragraph (e)(2) of this section in accordance with the provisions of
12 U.S.C. 1818(h) and 12 CFR part 263.

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for part 211 is revised to read as
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq.,
3101 et seq., and 3901 et seq.

    2. In Sec. 211.22, a new paragraph (d) is added to read as follows:

Sec. 211.22  Interstate banking operations of foreign banking
organizations

* * * * *
    (d) Prohibition against interstate deposit production offices. A
covered interstate branch of a foreign bank may not be used as a
deposit production office in accordance with the provisions in
Sec. 208.28 of the Board's Regulation H (12 CFR 208.28).

    By order of the Board of Governors of the Federal Reserve
System, September 4, 1997.
William W. Wiles,
Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the joint preamble, the Board of
Directors of the Federal Deposit Insurance Corporation adds part 369 to
chapter III of title 12 of the Code of Federal Regulations to read as
follows:

[[Page 47737]]

PART 369--PROHIBITION AGAINST USE OF INTERSTATE BRANCHES PRIMARILY
FOR DEPOSIT PRODUCTION

Sec.
369.1  Purpose and scope.
369.2  Definitions.
369.3  Loan-to-deposit ratio screen.
369.4  Credit needs determination.
369.5  Sanctions.

    Authority: 12 U.S.C. 1819 (Tenth) and 1835a.

Sec. 369.1  Purpose and scope.

    (a) Purpose. The purpose of this part is to implement section 109
(12 U.S.C. 1835a) of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (Interstate Act).
    (b) Scope--(1) This part applies to any State nonmember bank that
has operated a covered interstate branch for a period of at least one
year.
    (2) This part describes the requirements imposed under 12 U.S.C.
1835a, which requires the appropriate Federal banking agencies (the
FDIC, the Office of the Comptroller of the Currency, and the Board of
Governors of the Federal Reserve System) to prescribe uniform rules
that prohibit a bank from using any authority to engage in interstate
branching pursuant to the Interstate Act, or any amendment made by the
Interstate Act to any other provision of law, primarily for the purpose
of deposit production.

Sec. 369.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Bank means, unless the context indicates otherwise:
    (1) A State nonmember bank; and
    (2) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and
12 CFR 346.1(a).
    (b) Covered interstate branch means any branch of a State nonmember
bank, and any insured branch of a foreign bank licensed by a State,
that:
    (1) Is established or acquired outside the bank's home state
pursuant to the interstate branching authority granted by the
Interstate Act or by any amendment made by the Interstate Act to any
other provision of law; or
    (2) Could not have been established or acquired outside of the
bank's home state but for the establishment or acquisition of a branch
described in paragraph (b)(1) of this section.
    (c) Home state means:
    (1) With respect to a state bank, the state that chartered the
bank;
    (2) With respect to a national bank, the state in which the main
office of the bank is located; and
    (3) With respect to a foreign bank, the home state of the foreign
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR
346.1(j).
    (d) Host state means a state in which a bank establishes or
acquires a covered interstate branch.
    (e) Host state loan-to-deposit ratio generally means, with respect
to a particular host state, the ratio of total loans in the host state
relative to total deposits from the host state for all banks (including
institutions covered under the definition of ``bank'' in 12 U.S.C.
1813(a)(1)) that have that state as their home state, as determined and
updated periodically by the appropriate Federal banking agencies and
made available to the public.
    (f) State means state as that term is defined in 12 U.S.C.
1813(a)(3).
    (g) Statewide loan-to-deposit ratio means, with respect to a bank,
the ratio of the bank's loans to its deposits in a state in which the
bank has one or more covered interstate branches, as determined by the
FDIC.

Sec. 369.3  Loan-to-deposit ratio screen.

    (a) Application of screen. Beginning no earlier than one year after
a bank establishes or acquires a covered interstate branch, the FDIC
will consider whether the bank's statewide loan-to-deposit ratio is
less than 50 percent of the relevant host state loan-to-deposit ratio.
    (b) Results of screen. (1) If the FDIC determines that the bank's
statewide loan-to-deposit ratio is 50 percent or more of the host state
loan-to-deposit ratio, no further consideration under this part is
required.
    (2) If the FDIC determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit
ratio, or if reasonably available data are insufficient to calculate
the bank's statewide loan-to-deposit ratio, the FDIC will make a credit
needs determination for the bank as provided in Sec. 369.4.

Sec. 369.4  Credit needs determination.

    (a) In general. The FDIC will review the loan portfolio of the bank
and determine whether the bank is reasonably helping to meet the credit
needs of the communities in the host state that are served by the bank.
    (b) Guidelines. The FDIC will use the following considerations as
guidelines when making the determination pursuant to paragraph (a) of
this section:
    (1) Whether covered interstate branches were formerly part of a
failed or failing depository institution;
    (2) Whether covered interstate branches were acquired under
circumstances where there was a low loan-to-deposit ratio because of
the nature of the acquired institution's business or loan portfolio;
    (3) Whether covered interstate branches have a high concentration
of commercial or credit card lending, trust services, or other
specialized activities, including the extent to which the covered
interstate branches accept deposits in the host state;
    (4) The Community Reinvestment Act (CRA) ratings received by the
bank, if any, under 12 U.S.C. 2901 et seq.;
    (5) Economic conditions, including the level of loan demand, within
the communities served by the covered interstate branches;
    (6) The safe and sound operation and condition of the bank; and
    (7) The FDIC's Community Reinvestment regulations (12 CFR Part 345)
and interpretations of those regulations.

Sec. 369.5  Sanctions.

    (a) In general. If the FDIC determines that a bank is not
reasonably helping to meet the credit needs of the communities served
by the bank in the host state, and that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit
ratio, the FDIC:
    (1) May order that a bank's covered interstate branch or branches
be closed unless the bank provides reasonable assurances to the
satisfaction of the FDIC, after an opportunity for public comment, that
the bank has an acceptable plan under which the bank will reasonably
help to meet the credit needs of the communities served by the bank in
the host state; and
    (2) Will not permit the bank to open a new branch in the host state
that would be considered to be a covered interstate branch unless the
bank provides reasonable assurances to the satisfaction of the FDIC,
after an opportunity for public comment, that the bank will reasonably
help to meet the credit needs of the community that the new branch will
serve.
    (b) Notice prior to closure of a covered interstate branch. Before
exercising the FDIC's authority to order the bank to close a covered
interstate branch, the FDIC will issue to the bank a notice of the
FDIC's intent to order the closure and will schedule a hearing within
60 days of issuing the notice.
    (c) Hearing. The FDIC will conduct a hearing scheduled under
paragraph (b) of this section in accordance with the provisions of 12
U.S.C. 1818(h) and 12 CFR part 308.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 26th day of August, 1997.

[[Page 47738]]

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 97-23950 Filed 9-9-97; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P
Last Updated 07/17/1999 communications@fdic.gov