[Federal Register: July 15, 1997 (Volume 62, Number 135)]
[Proposed Rules]
[Page 37748-37778]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jy97-19]
[[Page 37748]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303, 325, 326, 327, 346, 347, 351 and 362
RIN 3064-AC05
International Banking Regulations; Consolidation and
Simplification
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: As part of the FDIC's systematic review of its regulations and
written policies under section 303(a) of the Riegle Community
Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC is
seeking public comment on its proposal to revise and consolidate its
three different groups of rules and regulations governing international
banking. The first group governs insured branches of foreign banks and
specifies what deposit-taking activities are permissible for uninsured
state-licensed branches of foreign banks. The FDIC's proposal makes
conforming changes throughout this group of regulations to reflect the
statutory requirement that domestic retail deposit activities must be
conducted through an insured bank subsidiary, not through an insured
branch. Also with respect to this group of regulations, the FDIC is
proposing to rescind the provisions concerning optional insurance for
U.S. branches of foreign banks; the pledge of assets formula has been
revised; and the FDIC Division of Supervision's (DOS) new supervision
program--the Case Manager approach--has been integrated throughout the
applicable regulations. The second group of regulations governs the
foreign branches of insured state nonmember banks, and also governs
such banks' investment in foreign banks or other financial entities.
The FDIC's proposal modernizes this group of regulations and clarifies
provisions outlining the activities in which insured state nonmember
banks may engage abroad, and reduces the instances in which banks must
file an application before opening a foreign branch or making a foreign
investment. The third group of regulations governs the international
lending of insured state nonmember banks and specifies when reserves
are required for particular international assets. The FDIC is proposing
to revise this group of regulations to simplify the accounting for fees
on international loans to make it consistent with generally accepted
accounting principles. Consistent with the goals of CDRI, the proposed
rule will improve efficiency, reduce costs, and eliminate outmoded
requirements.
DATES: Comments must be received on or before September 15, 1997.
ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, D.C. 20429. Comments may
be hand delivered to the guard station at the rear of the 17th Street
Building (located on F Street), on business days between 7:00 a.m. and
5:00 p.m. (Fax number (202) 898-3838; Internet address:
comments@fdic.gov). Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, NW,
Washington, D.C. 20429, between 9:00 a.m. and 4:30 p.m. on business
days.
FOR FURTHER INFORMATION CONTACT: Christie A. Sciacca, Assistant
Director, (202/898-3671), Karen M. Walter, Chief, (202/898-3540),
Suzanne L. Williams, Senior Financial Analyst, (202/898-6788), Division
of Supervision; Jamey Basham, Counsel, (202/898-7265), Wendy Sneff,
Counsel (202/898-6865), Karen L. Main, Senior Attorney (202/898-8838),
Legal Division, FDIC, 550 17th Street, NW, Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION: The FDIC is conducting a systematic review
of its regulations and written policies. Section 303(a) of the CDRI (12
U.S.C. 4803(a)) requires the FDIC to streamline and modify its
regulations and written policies in order to improve efficiency, reduce
unnecessary costs, and eliminate unwarranted constraints on credit
availability. Section 303(a) also requires the FDIC to remove
inconsistencies and outmoded and duplicative requirements from its
regulations and written policies.
As part of this review, the FDIC has determined that certain
portions of part 346 are out-of-date, and other provisions of this part
require clarification. Although the FDIC previously made certain
regulatory amendments which took effect as recently as 1996, other
regulatory language contained in part 346 does not accurately reflect
the underlying statutory authority. The FDIC has also determined that
part 347 is outmoded. Part 347 has not been revised in any significant
regard since 1979, when it was originally promulgated.
The FDIC has decided to consolidate its international banking rules
into a single part, part 347, for ease of reference. This proposal
places material on foreign branching and foreign bank investment by
nonmember banks, currently located in part 347, into subpart A of part
347. Material currently located in part 346, governing insured branches
of foreign banks and deposit-taking by uninsured state-licensed
branches of foreign banks, is placed in subpart B of part 347. Part 351
of the FDIC's current rules and regulations, which contains rules
governing the international lending operations of insured state
nonmember banks, is placed in subpart C of new part 347. Part 351 was
originally adopted in 1984 as an interagency rulemaking in coordination
with the Board of Governors of the Federal Reserve System (FRB) and the
Office of the Comptroller of the Currency (OCC). The proposed revisions
to part 351 have been discussed with representatives from the OCC and
FRB and they are in general agreement with the changes. However, as the
other two federal banking agencies are not ready to act on a revised
regulation at this time, the FDIC has decided to unilaterally issue its
proposed revision to part 351 in connection with its consolidation of
the international banking regulations.
In addition, the FDIC is currently processing a complete revision
of part 303 of the FDIC's rules and regulations, which contains the
FDIC's applications procedures and delegations of authority. For ease
of reference, the FDIC will consolidate its applications procedures for
international banking matters into a single subpart of part 303,
subpart J. At this time, the FDIC cannot determine whether this part
347 rulemaking will be finalized before or after the FDIC's part 303
rulemaking. To deal with this uncertainty, the FDIC's part 303 proposal
will contain an ``interim'' version of subpart J, which will set out
application processes compatible with the FDIC's current versions of
parts 346 and 347. In addition, this part 347 proposal includes, as a
separate subpart D of part 347, revised ``permanent'' application
procedures compatible with the substantive provisions of this part 347
proposal. These ``permanent'' application procedures will be located in
subpart J without substantive change, displacing the interim
procedures, once both part 303 and part 347 are issued as final rules.
The FDIC requests public comments about all aspects of the
proposal. In addition, the FDIC is raising specific questions for
public comment, as set out in connection with the analysis of the
proposal below.
[[Page 37749]]
Proposed Revisions to Part 347, Foreign Branches and Investments in
Foreign Banks and Other Entities
Background
Section 18(d)(2) of the Federal Deposit Insurance Act (12 U.S.C.
1828(d)(2)) requires a nonmember bank to obtain the FDIC's consent to
establish or operate a foreign branch. Section 18(d)(2) also authorizes
the FDIC to impose conditions and issue regulations governing the
affairs of foreign branches.
Section 18(l) of the FDI Act (12 U.S.C. 1828(l)) requires a
nonmember bank to obtain the FDIC's consent to acquire and hold,
directly or indirectly, stock or other evidences of ownership in any
foreign bank or other entity. Section 18(l) also states that these
entities may not engage in any activities in the United States except
as the Board of Directors of the FDIC (Board), in its judgment, has
determined are incidental to the international or foreign business of
these entities. In addition, section 18(l) authorizes the FDIC to
impose conditions and issue regulations governing these investments.
Finally, although nonmember banks subject to the interaffiliate
transaction restrictions of sections 23A and 23B of the Federal Reserve
Act, 12 U.S.C. 371c and 371c-1, as expressly incorporated by section
18(j) of the FDI Act, 12 U.S.C. 1821(j), section 18(l) provides that
nonmember banks may engage in transactions with these foreign banks and
other entities in which the nonmember bank has invested in the manner
and within the limits prescribed by the FDIC.
A nonmember bank's authority to establish a foreign branch or
invest in foreign banks or other entities, and the permissible
activities for foreign branches or foreign investment entities, must be
established in the first instance under the law of its state chartering
authority. Congress created sections 18(d)(2) and 18(l) out of a
concern that there was no federal-level review of nonmember banks'
foreign branching and investments. S. Rep. No. 95-323, 95th Cong., 1st
Sess. (1977) at 15. Although the FRB had long held authority over
foreign branching and investment by state member banks and national
banks (member banks) under the Federal Reserve Act, as well as foreign
investment by bank holding companies under the Bank Holding Company
Act, the FDIC did not hold corresponding statutory authority over
nonmember banks until Congress created sections 18(d)(2) and 18(l) as
part of the Financial Institutions Regulatory and Interest Rate Control
Act of 1978, Public Law 95-630 (FIRIRCA).
When the FDIC originally adopted part 347 in 1979, to implement the
Corporation's new authority under sections 18(d)(2) and 18(l), the FDIC
adopted a rule which was virtually the same as the corresponding
provisions of the FRB's rules and regulations at the time. Based on the
above legislative history, the FDIC determined that Congress intended
to bring the international activities of nonmember banks under federal
controls that were similar, but not necessarily identical, to those
contained in the FRB's rules governing the international activities of
member banks and bank holding companies. 44 FR 25194, 25195 (April 30,
1979).
In developing its proposal to revise part 347, the FDIC has
therefore maintained a parity with the substance of the FRB's
corresponding rules on foreign branching and investments by member
banks, contained in subpart A of Regulation K (12 CFR 211.1-211.8). The
permissible activities for foreign branches of nonmember banks and for
foreign entities in which nonmember banks invest are virtually
identical to those authorized for member banks under Regulation K. The
amount limits and extent to which nonmember banks may engage in such
activities without obtaining the FDIC's specific approval are also very
similar, taking into account certain variances attributable to
structural differences between the types of institutions governed.
Where there are substantive differences between the FDIC's proposal and
the FRB's rules under subpart A of Regulation K, the differences are
noted below.
In certain of the few limited instances in which the FDIC is
proposing a different treatment than the FRB's under Regulation K, the
difference raises issues under section 24 of the FDI Act (12 U.S.C.
1831a) and part 362 of the FDIC's rules and regulations (12 CFR part
362). Section 24 and part 362 prohibit a state bank from engaging as
principal in any activity which is not permissible for a national bank,
unless the FDIC first determines that it would not pose a significant
risk of loss to the appropriate deposit insurance fund and the bank
meets its minimum capital requirements. Section 24 and part 362
similarly prohibit a subsidiary of a state bank from engaging as
principal in any activity which is not permissible for a subsidiary of
national bank, unless the FDIC first determines that it would not pose
a significant risk of loss to the appropriate deposit insurance fund
and the bank meets its minimum capital requirements. Section 24 and
part 362 also prohibit a state bank from making an equity investment
which is not permissible for a national bank, unless the investment is
made through a majority-owned subsidiary, the FDIC determines that it
would not pose a significant risk of loss to the appropriate deposit
insurance fund for the subsidiary to hold the equity investment, and
the bank meets its minimum capital requirements. Where these section 24
issues arise, they are discussed below.
Subpart A--Foreign Branches
The most significant revision made by the proposal is the FDIC's
grant of authority to a nonmember bank meeting certain eligibility
criteria to establish foreign branches under general consent or prior
notice procedures. The existing list of foreign branch powers under
current Sec. 347.3(c) has also been redrafted to bring it more in line
with modern banking practice. The proposal also introduces expanded
powers for foreign branches to underwrite, distribute, deal, invest in,
and trade foreign government obligations.
The general consent and prior notice procedures are discussed in
detail in the analysis of subpart D, below, but to summarize them
briefly, proposed Sec. 347.103(b) gives the FDIC's general consent for
an eligible nonmember bank--one which is well-capitalized, well-rated
under certain supervisory assessment benchmarks, has no supervision
problems and has been in operation at least three years--to establish
additional branches within a foreign country or relocate a branch
within a foreign country. An eligible nonmember bank which has
established its international expertise by successfully operating
foreign branches or affiliates in two or more foreign countries may
also establish branches in additional foreign countries upon 45 days
prior notice to the FDIC. There are certain necessary limitations on
these general consent and prior notice procedures, however, as
discussed in the analysis of subpart D.
In an effort to modernize the list of foreign branch powers
currently contained in Sec. 347.3(c), the proposal eliminates
Sec. 347.3(c)(2), containing specific authorization for a foreign
branch to accept drafts or bills of exchange, and Sec. 347.3(c)(5),
containing specific authorization for a foreign branch to make loans
secured by real estate. In addition, the FDIC has not included a
counterpart to the FRB's specific authorization for a foreign branch to
engage in repurchase agreements involving securities that are the
functional equivalent of extensions of credit. In the FDIC's view,
these activities are within the general banking
[[Page 37750]]
powers of a foreign branch, and thus do not require specific mention on
the list of activities which the FDIC is authorizing in addition to
such general banking powers.
The proposal also eliminates Sec. 347.3(c)(6), containing specific
authorization for a foreign branch to pay its foreign branch officers
and employees a greater rate of interest on branch deposits than the
rate paid to other depositors on similar branch deposits. Regulation K
presently contains a similar provision. While section 22(e) of the
Federal Reserve Act (12 U.S.C. 376) generally limits a member bank's
authority to pay employees a greater rate of interest than the rate
paid to other depositors on similar deposits, the FDIC is not aware of
any current regulatory restrictions directly prohibiting a nonmember
bank from doing so, assuming there were no implications of insider
abuse or of evading certain limited regulatory requirements concerning
executive compensation. Thus, in the FDIC's view, this activity is
within the general banking powers of a foreign branch of a nonmember
bank.
In addition, the FDIC has not included a counterpart to the FRB's
specific authorization for a foreign branch to extend credit to an
officer of the branch residing in the foreign country in which the
branch is located to finance the officer's living quarters. In the
FDIC's view, this activity is within the general banking powers of a
foreign branch, provided that the bank observes prudent banking
practices and Regulation O limits on loans to the bank's executive
officers. Given that Regulation O currently makes provisions for a bank
to finance an executive officer's purchase, construction, maintenance,
or improvement of a personal residence, the FDIC need not specifically
authorize it here.
To update the current authorization under Sec. 347.3(c)(3) to hold
the equity securities of the central bank, clearing houses,
governmental entities, and development banks of the country in which
the branch is located, proposed Sec. 347.103(a)(2) adds debt securities
eligible to meet local reserve or similar requirements, as well as
shares of automated electronic payment networks, professional
societies, schools, and similar entities necessary to the business of
the branch. The proposal continues to set the limit for such
investments at 1 percent of the total deposits in all the bank's
branches in that country as reported in the preceding year-end call
report, subject to the same exclusions as currently apply for
investments required by local law or permissible for a national bank
under 12 U.S.C. 24 (Seventh). The FDIC specifically requests public
comment on whether this limit is too high or too low, or should be
calculated on a different basis.
The current authorization under Sec. 347.3(c)(4) to underwrite,
distribute and deal, invest and trade in obligations of the national
government of the country in which the branch is located has been
similarly updated. Proposed Sec. 347.103(a)(3) clarifies that
obligations of the national government's political subdivisions, and
its agencies and instrumentalities if supported by the national
government's taxing authority or full faith and credit, are also
eligible. The proposal also revises the investment limit to make it 10
percent of the nonmember bank's tier 1 capital, instead of the outdated
reference to 10 percent of its capital and surplus.
Finally, the FDIC is considering whether it would be appropriate
and desirable to permit a foreign branch to underwrite, distribute and
deal, invest in and trade obligations of any foreign government, rather
than just the obligations of the country in which it is located.
Proposed Sec. 347.103(a)(3)(ii) would permit this activity, so long as
the issuing country permits foreign enterprises to do so. Since
Regulation K does not currently authorize member (and thus national)
banks to conduct this activity, the proposal presents an issue under
section 24 of the FDI Act and part 362 of the FDIC's rules and
regulations. If adopted as part of the final rule,
Sec. 347.103(a)(3)(ii) would represent the FDIC's determination that
the activity would not create a significant risk to the deposit
insurance fund.1
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\1\ Because section 24 only permits the FDIC to authorize equity
investments which are not permissible for a national bank through a
majority-owned subsidiary, proposed Sec. 347.103(a)(3)(B) would
require any foreign government obligations which constitute equity
interests to be held through a subsidiary of the foreign branch.
However, practically speaking, the vast majority of foreign
government obligations would be debt obligations instead of equity
interests, and could be held at the branch level.
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Proposed Sec. 347.103(a)(3)(ii) would allow nonmember banks to
consolidate these activities, which must currently be carried out in
different branch offices in each country, into a single branch office,
for more convenient administration and oversight. The proposal would
include these activities as part of the 10 percent limit applicable to
local obligation underwriting, distribution, investment and trading,
and would also require the non-local obligations to be investment
grade. The FDIC would expect nonmember banks to make appropriate
periodic independent credit reviews to determine and monitor the
investment-grade quality of issues which are unrated or rated under
comparatively less-rigorous standards than the ones used by U.S.
ratings agencies. The FDIC specifically requests comments on the merits
of the proposal, including comments on appropriate amount limits if the
activity is authorized and any appropriate safeguards which should be
imposed.
Subpart A--Foreign Investments
Overview
The FDIC is completely revising its approach to approvals of a
nonmember bank's investment in the stock or other evidences of
ownership of a foreign bank or other entity. Section 347.4 has not been
revised in any significant regard since the FDIC originally adopted it,
shortly after Congress gave the FDIC statutory responsibility for
reviewing foreign investments. It currently provides little information
about the types of activities in which the FDIC would consider it to be
appropriate for a foreign investment entity to engage. The rule
requires specific FDIC approval of virtually every foreign investment,
and limits total investment in all cases to 25 percent of a nonmember
bank's capital. Nonmember banks affected by the rule have advised the
FDIC that they view the current approach as an impediment to their
ability to compete effectively abroad. While the FDIC must remain
mindful of its supervisory obligations arising from the FDI Act and
international supervisory agreements, and has a responsibility to
address certain issues to ensure that international operations do not
threaten the safety and soundness or financial condition of nonmember
banks, the FDIC agrees that the rule can be significantly revised in
light of the experience the Corporation has gained since Sec. 347.4 was
originally adopted.
The FDIC's proposal adopts an approach like that of the FRB under
Regulation K. The proposed rule lists the various types of financial
activities in which a nonmember bank's foreign subsidiaries and joint
ventures may engage. The proposal also authorizes limited indirect
investment in and trading of the stock of nonfinancial entities.
Securities underwriting and dealing abroad up to specified limits is
permitted, with the FDIC's prior approval. Moreover, the proposed rule
grants eligible nonmember banks the FDIC's general consent to make
investments in conformity with the rule up to specified annual limits,
and
[[Page 37751]]
permits additional investments upon 45 days prior notice.
Investment in Foreign Banks and Other Entities Engaged in Financial
Activities
Proposed Sec. 347.104(b) contains a list of approved activities
which are financial in nature. A foreign subsidiary of a nonmember bank
is limited to conducting these authorized financial activities, unless
the nonmember bank acquires the subsidiary as a going concern, in which
case up to 5 percent of the subsidiary's assets or revenues may be
attributable to activities which are not on the list. Under the
proposed definition of ``subsidiary'' at Sec. 347.102(p), a foreign
organization is a subsidiary of a nonmember bank if the nonmember bank
and its affiliates hold more than 50 percent of the foreign
organization's voting equity securities. It is important to note that
this proposed definition of a subsidiary differs from the commonly-used
subsidiary definitional structure based on section 2(d) of the Bank
Holding Company Act (12 U.S.C. 1841(d)). Under the section 2(d) type of
structure, subsidiary status typically arises upon ownership of 25
percent or more of the subsidiary's voting securities.
Subsidiary status under the section 2(d) type of structure also
arises when the parent controls election of the majority of the
subsidiary's directors in any manner or if the parent has the power to
directly or indirectly exercise a controlling influence over the
management and policies of an organization. In contrast, the FDIC's
proposal separates these elements out into their own definition of
``control'' at Sec. 347.102(b). Section 347.102(b) also provides that
control is deemed to exist whenever a nonmember bank or its affiliate
is a general partner of a foreign organization. As is the case with
subsidiaries, any foreign organization which is controlled by a state
nonmember bank or its affiliates, regardless of the percent of voting
stock owned by the state nonmember bank, is limited to conducting
approved financial activities contained on the Sec. 347.104(b) list,
subject to the same 5 percent exception for going concerns.
The FDIC has proposed the less-inclusive subsidiary definition
which is triggered at 50 percent rather than the more commonly-used 25
percent in order to maintain consistency with the corresponding
provisions of Regulation K. This less-inclusive approach is also
carried through to the definition of an affiliate under proposed
Sec. 347.102(a), also to maintain consistency with Regulation K. The
FDIC has attempted to establish activity and amount limits in this part
347 proposal which take into account any conduct of similar activities
by the nonmember bank's holding company or the holding company's other
affiliates as authorized by Regulation K. The use of consistent
definitional thresholds is of great assistance to this end.
If a nonmember bank and its affiliates hold less than 50 percent of
the voting equity securities of a foreign organization and do not
control the organization, up to 10 percent of the organization's assets
or revenues may be attributable to activities which are not on the
list. If the nonmember bank and its affiliates' holdings are less than
20 percent of a foreign organization's voting equity interests, the
nonmember bank is also prohibited from making any loans or extensions
of credit to the organization which are not on substantially the same
terms as those prevailing at the time for comparable transactions with
nonaffiliated organizations. The FDIC is contemplating whether this 20
percent limit should be somewhat higher, and specifically requests
public comment on this point.
The list of authorized financial activities in proposed
Sec. 347.104(b) is modeled on the FRB's corresponding provision in
Regulation K, 12 CFR 211.5(d). The proposal reorders the activities in
an effort to group similar activities together, and where there are
conditions and limitations on the conduct of a particular activity,
this additional information is separately set out in proposed
Secs. 347.105 and 347.106. Additional activities require the FDIC's
approval.
The proposal does not include six activities which currently appear
in Regulation K. The FDIC has not included these activities, because
they are each authorized under Regulation Y (12 CFR 225.28(b)) as being
closely related to banking under section 4(c)(8) of the Bank Holding
Company Act (Regulation Y list), and the proposal authorizes foreign
investment organizations to engage in any activity on the Regulation Y
list. The omitted activities are: financing; acting as fiduciary;
providing investment, financial, or economic advisory services; leasing
real or personal property or acting as agent, broker or advisor in
connection with such transactions if the lease serves as the functional
equivalent of an extension of credit to the lessee; acting as a futures
commission merchant; and acting as principal or agent in swap
transactions.
In addition, proposed Sec. 347.104(b) contains certain activities--
for example, data processing--which are also authorized by the
Regulation Y list, but are subject to certain additional limitations
and conditions under Regulation Y. In such cases, the activities are
included in Sec. 347.104(b) because a foreign investment entity is
permitted to conduct them under the less restrictive terms of
Sec. 347.104(b). But in cases in which the nonmember bank relies solely
on Sec. 347.104(b)'s cross-reference to the Regulation Y list as
authority to conduct an activity, the foreign investment entity must
comply with the attendant restrictions in 12 CFR 227.28(b).
Also, in the case of one activity authorized by Sec. 347.104(b)'s
cross-reference to the Regulation Y list, acting as a futures
commission merchant (FCM), the FDIC is contemplating imposing one
restriction in addition to the restrictions imposed by Regulation Y at
12 CFR 225.28(b). Under proposed Sec. 347.106(a), a foreign investment
entity could not have potential liability to a mutual exchange or
clearing association of which the foreign investment entity was a
member exceeding an amount equal to 2 percent of the nonmember bank's
tier 1 capital, unless the FDIC has granted its prior approval.
This overall approach, in which part 347 specifies an approved list
of activities applicable to varying degrees depending on the nonmember
bank's proportional ownership of a foreign organization, is a major
change from the approach under current part 347, in which activities
are evaluated on a case-by-case basis in connection with the FDIC's
approval of the investment. The FDIC specifically requests public
comment on this new approach, including whether the limits are
appropriate.
Unlike Regulation K, the FDIC's proposal authorizes nonmember banks
to directly invest in foreign organizations which are not foreign
banks. Under 12 CFR 211.5(b)(2), the only foreign organizations in
which member banks are permitted to invest directly are foreign banks;
foreign organizations formed for the sole purpose of either holding
shares of a foreign bank or for performing nominee, fiduciary, or other
banking services incidental to the activities of the member bank's
foreign branches or affiliates; or subsidiaries of foreign branches
authorized under 12 CFR 211.3(b)(9). Any investment by a member bank in
a foreign organization which is not one of these types of entities must
be made indirectly, through an Edge corporation subsidiary or foreign
bank subsidiary of the member bank. This limitation arises out of the
language of section 25 of the
[[Page 37752]]
Federal Reserve Act, which generally limits the direct investments of
member banks to foreign banks. In contrast, section 18(l) of the FDI
Act permits state nonmember banks, to the extent authorized by state
law, to invest in foreign ``banks or other entities.'' As discussed
above, the legislative history of section 18(l) shows that Congress
was, at the time it created section 18(l), mindful of the FRB's
parallel authority over member banks under section 25. Therefore, the
FDIC interprets the difference between the two statutes to be
significant, and the type of foreign organizations in which a state
nonmember bank may invest directly are not restricted by section 18(l).
A national bank's inability to invest directly in the shares of a
nonbank foreign organization raises issues under section 24 of the FDI
Act and part 362 of the FDIC's rules and regulations. If a nonmember
bank acquires a sufficient stake in a nonbank foreign organization such
that the nonbank foreign organization is a ``majority-owned
subsidiary'' \2\ of the state nonmember bank for purposes of section
24, no section 24 analysis is required. This is because the FDIC's
proposed rule only authorizes foreign organizations to engage in the
same activities which the FRB has authorized for the foreign
subsidiaries of member (and thus national) banks. Therefore, the
nonmember bank's foreign subsidiary could only engage as principal in
the same activities permitted for a foreign subsidiary of a national
bank, and section 24's application requirement is never triggered.
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\2\ Section 24 and part 362 do not set out a separate definition
of ``majority owned subsidiary.'' Part 362 defines a ``subsidiary''
to mean any company directly or indirectly controlled by an insured
state nonmember bank. Part 362 further defines ``control'' to mean
the power to vote, directly or indirectly, 25 percent or more of any
class of the voting stock of a company, the ability to control in
any manner the election of a majority of a company's directors or
trustees, or the ability to exercise a controlling influence over
the management and polices of a company. A state nonmember bank thus
holds a company as a ``majority-owned subsidiary'' when the bank
holds more than 50 percent of the company's stock. This is
equivalent to the definition of ``subsidiary'' in proposed
Sec. 347.102(p).
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If the nonmember bank holds a lesser amount of the nonbank foreign
organization's shares, such that it does not arise to a ``majority-
owned subsidiary'' within the meaning of section 24 and part 362, the
FDIC is required by section 24 and part 362 to determine that the
nonmember bank's equity investment in a nonbank foreign organization
does not pose a significant risk to the appropriate deposit insurance
fund. Moreover, section 24 and part 362 provide that the FDIC may only
permit equity investments to be held by the bank through a majority-
owned subsidiary. Under the proposal, the FDIC would permit such
investments, and require them to be held through some form of U.S. or
foreign majority-owned subsidiary. If adopted as part of the final
rule, this would represent the FDIC's determination that dispensing
with the intermediate foreign bank subsidiary or Edge subsidiary, the
vehicle through which a national bank would be permitted to make this
type of investment, would not create a significant risk to the deposit
insurance fund.
The FDIC is also omitting one activity authorized by Regulation K
concerning a foreign investment entity's ability to underwrite life,
annuity, pension fund-related, and other types of insurance, where the
associated risks have been determined by the FRB to be actuarially
predictable. Under Regulation K, the FRB has not given general
authorization for this activity to be conducted directly or indirectly
by a subsidiary of a U.S. insured bank. Since the activity is thus not
generally permissible for a subsidiary of a national bank, a section 24
issue arises. However, under section 24(b) and 24(d)(2), the FDIC may
not give section 24 approval for a state bank or its subsidiary to
engage in insurance underwriting to the extent it is not permissible
for a national bank, or is not expressly excepted by other subsections
of section 24 covering limited types of insurance underwriting.
Therefore, the FDIC is presently foreclosed from granting general
regulatory authorization for nonmember banks to underwrite life,
pension-fund related, or other types of insurance in this fashion. The
question of permitting nonmember banks to underwrite annuities through
a foreign organization is beyond the scope of this rulemaking.
The FDIC specifically requests public comment on the list of
activities under proposed Sec. 347.104(b), including the scope of such
activities and whether any different conditions or limits would be
appropriate.
Portfolio Investments in Nonfinancial Foreign Organizations
Proposed Sec. 347.104(g) authorizes nonmember banks to make
portfolio investments in a foreign organization without regard to
whether the activities of the organization are authorized financial
activities listed in Sec. 347.104(b). Aggregate holdings of a
particular foreign organization's equity interests by the nonmember
bank and its affiliates must be less than 20 percent of the foreign
organization's voting equity interests and 40 percent of its total
voting and nonvoting equity interests. The FDIC is proposing the latter
restriction to prevent a nonmember bank from, by obtaining a large
equity position albeit a nonvoting one, obtaining a level of influence
over the foreign organization which is inconsistent with the notion of
a portfolio holding. The nonmember bank and its affiliates are not
permitted to control the foreign organization, and any loan or
extensions of credit to the foreign organization are to be on
substantially the same terms as those prevailing at the time for
comparable transactions with nonaffiliated organizations.
The FDIC is considering limiting these investments in nonfinancial
foreign organizations to an amount equal to 15 percent of the nonmember
bank's tier 1 capital. The FDIC seeks to establish a level which will
permit a nonmember bank's foreign subsidiaries to compete effectively
with other financial institutions in their foreign markets. The FDIC
specifically requests public comment on whether this limit is too high,
or too low, and whether any additional safeguards are appropriate. The
FDIC is also considering whether nonmember banks should be permitted to
hold somewhat more than 20 percent of the organization's voting equity
interests, and specifically requests public comment on this issue.
In contrast to its approach with foreign organizations engaged
primarily in financial activities authorized under Sec. 347.104(b),
proposed Sec. 347.104(g) does not displace current limitations
prohibiting member (and thus national) banks from making nonfinancial
portfolio investments at the bank level or through a domestic
subsidiary of the bank. Section 347.104(g) requires these investments
to be held through a foreign subsidiary, or an Edge corporation
subsidiary (subject to the FRB's authorization). The FDIC believes a
nonmember bank's foreign bank and other financial subsidiaries must be
permitted to make such investments in order to compete effectively in
their foreign markets, and since such investments are permissible for a
national bank, no section 24 analysis is required.
U.S. Activities of Foreign Organizations
As discussed above, section 18(l) of the FDI Act states that the
foreign organizations in which nonmember banks invest may not engage in
any activities in the U.S. except as the Board, in its judgment, have
determined are incidental to the international or foreign business of
the foreign
[[Page 37753]]
organization. Proposed Sec. 347.107 addresses what activities may be
engaged in within the United States. The proposal prohibits a nonmember
bank from investing in any foreign organization which engages in the
general business of buying or selling goods, wares, merchandise, or
commodities in the U.S., and prohibits investments totaling over 5
percent of the equity interests of any foreign organization if the
organization engages in any business or activities in the U.S. which
are not incidental to its international or foreign business. A foreign
organization will not be considered to be engaged in business or
activities in the U.S. unless it maintains an office in the U.S. other
than a representative office.
This structure follows the one established by the FRB under
Regulation K. The FDIC is including the 5 percent threshold and the
U.S. office threshold in acknowledgment that the U.S. is a leading
international market and a substantial number of foreign organizations
transact some portion of their business here. If nonmember banks are
prohibited from investing in every foreign organization which does even
a limited amount of its business in the U.S., nonmember banks will be
at a disadvantage vis a vis their international financial institution
competitors.
Beyond these thresholds, the FDIC is proposing to permit a foreign
organization to conduct activities that are permissible in the U.S. for
an Edge corporation, or such other business or activities as are
approved by the FDIC. In approving additional activities, the FDIC will
consider whether the activities are international in character. For
activities proposed by a foreign subsidiary or joint venture of a
nonmember bank, the FDIC will also consider whether the activity would
be conducted through a foreign organization to circumvent some legal
requirement which would apply if the nonmember bank conducted the
activity through a domestic organization.
The FDIC specifically requests comments on this aspect of the
proposal, including whether the thresholds and approved U.S. activities
are appropriate.
Underwriting, Distributing, and Dealing Equity Securities Outside the
United States
Under the proposal, a foreign investment entity of a nonmember bank
would be permitted to underwrite, distribute, and deal equity
securities outside the United States. Briefly summarized, the FDIC is
considering imposition of three main limits as part of proposed
Sec. 347.105:
Underwriting commitments for a single issuer could not exceed an
amount equal to the lesser of $60 million or 25 percent of the
nonmember bank's tier 1 capital.
Distribution and dealing shares of a single entity could not
exceed an amount equal to the lesser of $30 million or 5 percent of
the nonmember bank's tier 1 capital.3
---------------------------------------------------------------------------
\3\ Regulation K currently authorizes the lesser of $30 million
or 10 percent.
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The sum of underwriting commitments, distribution and dealing
shares, and any portfolio investments in nonfinancial foreign
organizations under Sec. 347.104(g) could not exceed an amount equal
to 25 percent of the nonmember bank's tier 1 capital.
Each of these three limits is discussed further below. In determining
compliance with these limits, the nonmember bank would count all
commitments of and shares held by each foreign organization in which
the nonmember bank has invested pursuant to subpart A of part 347. The
nonmember bank would also count all commitments of and shares held by
foreign organizations in which the nonmember bank's affiliates have
invested pursuant to subpart A of Regulation K.
The $60 million/25 percent underwriting commitment limit could be
exceeded to the extent the commitment is covered by binding commitments
from subunderwriters or purchasers. The limit could also be exceeded to
the extent the commitment is deducted from the nonmember bank's capital
and the bank remains well-capitalized after the deduction. At least
half of this deduction would be from tier 1 capital, and the deduction
would be applicable for all regulatory purposes.
The $30 million/5 percent limit on the equity securities of a
single entity which may be held for distribution or dealing would be
subject to two exceptions. First, in order to facilitate underwritings,
any equity securities acquired pursuant to an underwriting commitment
extending up to 90 days after the payment date of the underwriting
would not be included in the limit. Second, up to 75 percent of the
position in an equity security could be reduced by netting long and
short positions in the identical equity security, or by offsetting cash
positions against derivative instruments referenced to the same
security. The provision permitting netting of derivative positions is
intended to recognize the beneficial impact of prudent hedging
strategies, and encourage such strategies where the nonmember bank and
the foreign organization determines they are appropriate. The FDIC
would expect a nonmember bank asserting netting involving derivatives
to be able to establish the validity of the hedging strategy to the
nonmember bank's examiners.
If the nonmember bank's foreign organizations hold the same equity
securities for distribution and dealing as well as for investment or
trading pursuant to Sec. 347.104 or the corresponding provision of
Regulation K, two additional considerations would apply:
The investment or trading securities would be included in
calculating the 5 percent/$30 million per-entity distribution and
dealing limit, in order to prevent securities which are potentially
distribution or dealing inventory from being characterized as
investment or trading shares. Conversely, if the nonmember bank
relies on the general consent provisions under proposed Sec. 347.108
to acquire the securities for investment or trading purposes,
distribution and dealing securities would be counted towards the
general consent investment limits.
In addition, equity interests in a particular foreign
organization held for distribution and dealing would be required to
conform with the limits of proposed Sec. 347.104. Equity interests
held for distribution or dealing by an affiliate permitted to do so
under Sec. 337.4 of the FDIC's rules and regulations (12 CFR 337.4)
or section 4(c)(8) of the Bank Holding Company Act (12 U.S.C.
1843(c)(8)) would be counted for this limit. If the nonmember bank's
foreign organizations hold equity interests in the same entity for
investment and trading purposes, such interests would be included in
determining compliance with these limits. However, in order to
permit 100 percent underwriting, the proposal contains an exception
for equity securities acquired pursuant to an underwriting
commitment for up to 90 days after the payment date for the
underwriting.
The combined limit, under which nonfinancial portfolio shares,
underwriting commitments, and distribution and dealing shares would be
limited to 25% of the nonmember bank's capital, would only include
underwriting commitments net of amounts subject to commitments from
subunderwriters or purchasers or already deducted from the nonmember
bank's capital. Equity securities held for distribution or dealing
would only be counted net of any position reduction through netting, as
permitted in connection with the 5% dealing limit.
The FDIC specifically requests public comments on the underwriting,
distribution, and dealing aspects of the proposal, including comments
on whether the limits and limit adjustments are too low or too high,
the basis upon which limits should be calculated, and any appropriate
[[Page 37754]]
safeguards. The FDIC also requests comments on the proposed netting
provisions and on the type of hedging strategies a nonmember bank might
use pursuant to the proposed netting provisions concerning derivatives.
Approval of Investments
The FDIC is proposing to permit a nonmember bank meeting certain
eligibility criteria to make foreign investments under the rule
pursuant to general consent and prior notice procedures. These
procedures are discussed in detail in the analysis of proposed subpart
D below, but to summarize them briefly, proposed Sec. 347.108 grants
the FDIC's general consent for nonmember banks meeting the same
eligibility criteria as apply in the foreign branching context to
invest up to 5 percent of their tier 1 capital in any twelve month
period, plus up to an additional 5 percent in equity interests for
trading purposes. A sublimit of 2 percent of tier 1 capital per foreign
organization applies. The nonmember bank must already have at least one
foreign organization subsidiary, and at least one nonmember bank must
have a foreign organization subsidiary in the relevant foreign country,
in order for general consent to be applicable. An investment that does
not qualify for general consent, but is otherwise in compliance with
the rule, may be made by an eligible bank upon 45 days prior notice.
There are certain necessary limitations on these general consent and
prior notice procedures, however, as discussed in the analysis of
proposed subpart D.
Extensions of Credit
Proposed Sec. 347.109(a) does not alter the FDIC's current
treatment under Sec. 347.5 of extensions of credit to foreign
investment entities. The limitations of section 18(j) of the FDI Act,
incorporating by reference the interaffiliate transaction restrictions
of sections 23A and 23B of the Federal Reserve Act, do not apply. The
FDIC specifically requests public comment whether it is appropriate to
continue this aspect of the rule without change, in light of the
activities and investments which would be permitted under the proposal.
Debts Previously Contracted
With one exception, proposed Sec. 347.109(b) does not alter the
FDIC's current treatment under Sec. 347.4(b), whereby equity interests
acquired to prevent loss on a debt previously contracted in good faith
are not subject to the limits and approvals of the regulation. The FDIC
is proposing to extend the time period an institution is granted to
dispose of such equity interests without the FDIC's specific approval
under part 347 from one to two years. The extension is not intended to
relieve an institution from its general obligation to dispose of the
investment promptly under the circumstances and make diligent efforts
to such end. However, extending the point at which an application is
required will reduce administrative burden, and the FDIC can monitor
the progress of divestiture efforts as part of the normal examination
cycle. As with the current requirements of Sec. 347.4(b), the proposed
rule is not intended to displace any of the nonmember bank's concurrent
obligations under state law, or extend a state law divestiture or
approval period of less than two years. The FDIC specifically requests
public comment on the merits of extending this time period, and the
appropriate duration of the extension.
Supervision and Recordkeeping for Foreign Branches and Investments
With one exception, proposed Sec. 347.110 does not alter the FDIC's
current requirements for reporting and recordkeeping under current
Sec. 347.6. These requirements are intended to facilitate both the
nonmember bank's oversight of its foreign operations and the FDIC's
supervision of them. The proposal adds one new element. If a nonmember
bank seeks to establish a foreign branch, or acquire a foreign joint
venture or subsidiary, in a country in which applicable law or practice
would limit the FDIC's access to information about the branch or
subsidiary for supervisory purposes, the nonmember bank may not rely on
the FDIC's general consent or prior notice procedures to do so. In such
cases, the FDIC must have an opportunity to evaluate the impact of the
limits on the FDIC's access, and determine whether the FDIC can still
serve its domestic and international supervisory obligations through
measures such as duplicate record-keeping in the U.S., reliance on host
country supervisors, operating policies of the foreign organization, or
reliance on recognized external auditors.
Proposed Revisions to Part 346, Deposit Insurance Requirements for
State Branches and Foreign Banks Having Insured Branches
Background
The FDIC adopted part 346 as a final regulation on July 9, 1979.
This part was originally promulgated to implement various provisions of
the International Banking Act of 1978 (IBA) (Pub. L. 95-369). 12 U.S.C.
3101 et seq. Under the IBA, foreign banks operating in the United
States through branches, agencies or commercial lending companies are
subject to federal supervision and regulation similar to that imposed
on like activities of domestic banks. For example, section 6 of the IBA
requires certain branches of foreign banks to obtain federal deposit
insurance. In particular, deposit insurance is required for a federal
branch that accepts deposits of less than $100,000 and for a state
branch that accepts deposits of less than $100,000 if it is located in
a state which requires deposit insurance for state-chartered banks.
Exemptions from the insurance requirement may be granted either by
regulation or by order of the OCC, in the case of a federal branch, or
the FDIC, in the case of a state branch, if the branch is not engaged
in a domestic retail deposit activity requiring insurance protection.
Section 6 also made numerous amendments to the FDI Act. The amendments
to the FDI Act dealt with in part 346 include: (1) A requirement that
the foreign bank give a commitment for examination; (2) a requirement
that the foreign bank pledge assets to the FDIC; (3) rules for the
maintenance of assets in the branch; and (4) rules for the assessment
of deposits by the FDIC.
In 1991, the IBA was amended with the passage of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) (Pub. L.
102-242); specifically, sections 201-215 of FDICIA were enacted as the
Foreign Bank Supervision Enhancement Act of 1991 (FBSEA). This
legislation made numerous changes to the IBA. Section 6 of the IBA was
amended to require that any foreign bank that intends to conduct
domestic retail deposit activities in the United States must do so by
organizing one or more insured bank subsidiaries in the United States.
Until this legislative change, foreign banks were allowed to accept
initial deposits of less than $100,000 in insured branches. In
addition, section 7 of the IBA was amended by adding a new subsection
(h) which provides that a state-licensed insured branch of a foreign
bank may not engage in any activity which is not permissible for a
federal branch of a foreign bank unless the FRB has determined that the
activity is consistent with sound banking practice, and the FDIC has
determined that the activity would pose no significant risk to the Bank
Insurance Fund (BIF). The statutory amendments to section 7 of the IBA
were implemented in part 346 in final form and became effective on
[[Page 37755]]
January 1, 1995. At that time, a new subpart D was added to address the
application procedures and approval process necessary for an insured
state branch to request permission from the FDIC (and the FRB) to
engage in or continue an activity that is otherwise not permissible for
a federal branch of a foreign bank. The statutory requirement that a
foreign bank only accept domestic retail deposits in the United States
through an insured bank subsidiary was not incorporated into part 346
at that time.
Finally, in 1994, with the enactment of section 107 of the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-
Neal Act) (Pub. L. 103-328), the federal banking agencies were charged
with the obligation of revising their respective regulations adopted
pursuant to section 6 of the IBA to ensure that the regulations are
consistent with the legislative goal of ``affording equal competitive
opportunities to foreign and United States banking organizations in
their United States operations [and to] ensure that foreign banking
organizations do not receive an unfair competitive advantage over
United States banking organizations.'' 12 U.S.C. 3104(a). To this end,
the FDIC reviewed and revised its regulation governing the deposit
insurance exemptions available to state branches under part 346.
Section 346.6. The current list of excepted deposit-taking activities
enumerated in Sec. 346.6(a) became effective on April 1, 1996.
Current Part 346
Subpart A of part 346 contains the definitions of terms which are
relevant to the regulatory provisions set forth in this part. Subpart B
establishes rules for determining which state branches must obtain
deposit insurance. Basically, branches engaged in ``retail'' deposit
activity must be insured while branches engaged in ``wholesale''
deposit activity do not have to be insured. Subpart B also includes a
requirement that where one branch of a foreign bank becomes insured,
every branch of that bank in the same state must become insured (except
for branches which accept only initial deposits in an amount of
$100,000 or greater). This restriction on the operation of insured
branches applies to both federal and state branches. Section 346.6 of
this subpart lists the types of excepted deposit-taking activities
which will not be deemed to be ``domestic retail deposit activity'' and
describes the procedures for a state branch to apply for an exemption
from the deposit insurance requirement; Sec. 346.7 provides depositor
notification requirements for those noninsured branches.
Subpart C of part 346 establishes rules that apply to foreign banks
which operate insured state or federal branches. These rules require a
foreign bank having an insured branch to: (1) Provide the FDIC with
information regarding the bank's activities outside of the United
States and allow the FDIC to examine the foreign bank's activities in
the United States; (2) maintain records in an appropriate manner; (3)
pledge assets under terms acceptable to the FDIC; and (4) maintain
assets at the branch equal in value to the branch's liabilities. Rules
for assessing the deposits of an insured branch are also set out. As
mentioned above, a new subpart D was added in 1995 which provides that
a foreign bank operating an insured state branch which desires to
engage in or continue an activity that is not permissible for a federal
branch, pursuant to statute, regulation, official bulletin or circular,
or any other order or interpretation issued in writing by the OCC,
shall file with the FDIC (and the FRB) a prior written application for
permission to conduct or continue such activity. Subpart D describes
the application contents, the filing procedures and the circumstances
under which a plan of divestiture or cessation must be submitted to the
FDIC.
Subpart B Proposal
Former part 346 will become subpart B of the new, consolidated part
347. Unlike former part 347, former part 346 has been revised several
times since its original adoption to implement various provisions of
the IBA which were amended by FBSEA and the Riegle-Neal Act in 1991 and
1994, respectively. However, one significant change to section 6 of the
IBA which was effected by FBSEA in 1991 has not been implemented by a
revision of the FDIC's regulations. FBSEA amended section 6 of the IBA
to require that foreign banks which intend to conduct domestic retail
deposit activities in the United States must organize insured bank
subsidiaries to conduct those deposit activities after December 19,
1991. (Section 6(c) of the IBA; however, in 1994, the section was re-
designated as section 6(d).) However, any insured branches which were
accepting or maintaining domestic retail deposit accounts on December
19, 1991, are allowed to continue to operate as insured branches
conducting retail deposit activities (grandfathered insured branches).
IBA section 6(d) also provides an exception to the definition of
``foreign bank'' which excludes ``any bank organized under the laws of
any territory of the United States, Puerto Rico, Guam, American Samoa,
or the Virgin Islands the deposits of which are insured by the [FDIC]
pursuant to the [FDI Act]''. IBA section 6(d)(3). This definitional
``carve out'' has the effect of allowing banks organized under the laws
of the territories included therein to continue to conduct domestic
retail deposit activities in the United States through insured branches
rather than be required to charter an insured bank subsidiary. This
statutory framework to authorize and regulate the domestic retail
deposit activities of foreign banks in the United States has been
implemented in proposed Sec. 347.204. Moreover, corresponding revisions
to other relevant sections in subpart B are also being made to
recognize this statutory change to the deposit insurance requirements
for foreign banks.
Proposed Sec. 347.206 addresses exemptions from the deposit
insurance requirement. Paragraph (a)(7) has been revised in an effort
to simplify and clarify the calculation of the regulatory de minimis
exception. The transition rule applicable to time deposits has been
revised by the deletion of the reference to 90 days after the effective
date of the regulation which has been rendered moot with the passage of
time. Finally, the FDIC is proposing to rescind former Sec. 346.8 of
its rules and regulations. Former Sec. 346.8 provides foreign banks
with the opportunity to apply for deposit insurance for their U.S.
branches which would not otherwise be required to be insured pursuant
to proposed Sec. 347.204.
In the portion of former part 346 that addressed the examination
and supervisory requirements for foreign banks having insured branches,
several proposed changes have been made. First, in proposed
Sec. 347.210 which sets out the requirements for foreign banks to
pledge assets for the benefit of the FDIC, the formula for calculating
the amount of assets to be pledged has been simplified and clarified.
Proposed Sec. 347.210(b). Other revisions have been made throughout
proposed Sec. 347.210 to incorporate the FDIC DOS's new supervision
program--the Case Manager approach.
Finally, in connection with the FDIC's CDRI review of part 303 of
its rules and regulations, the application procedures for the exemption
from domestic retail deposit activities for a noninsured branch which
were formerly found in Sec. 346.6(b) of part 346 will be temporarily
transferred to Sec. 347.404, and the application and divestiture plan
procedures set forth in the current section governing FDIC approval for
state insured branches to conduct
[[Page 37756]]
activities not permissible for federal branches will be temporarily
relocated to Sec. 347.405 of this part. Because former part 346 will
become subpart B of the proposed part 347, the two separate scope
sections of the former part have been combined to create a more
cohesive and integrated subpart B. Some technical and non-substantive
changes have been made to several of the definitions in proposed
Sec. 347.202, and the terms have been alphabetized for the reader's
ease of reference.
Insurance of Deposits Sections
As presented above in the general discussion of the proposed
subpart B, one legislative change which must be incorporated throughout
the applicable sections addressing deposit insurance requirements for
state branches is the mandate that domestic deposit retail activity be
conducted through an insured bank subsidiary. The first section in
subpart B which is affected by this statutory change is proposed
Sec. 347.201 which discusses the scope of the new subpart. Proposed
Sec. 347.204, ``Insurance requirement'', is being completely
reorganized to incorporate the statutory requirement that a foreign
bank must organize an insured bank subsidiary to initiate or conduct
domestic retail deposit activity in the United States. This requirement
is set forth in proposed Sec. 347.204(a). Paragraph (b) of that section
sets out the exclusion to the definition of ``foreign bank'' discussed
above, which will allow banks organized under the laws of the U.S.
territories included therein to conduct domestic retail deposit
activities through insured branches rather than being required to
charter an insured bank subsidiary. This exception reflects the fact
that banks organized in these jurisdictions are already subject to more
comprehensive examination and supervision by the U.S. banking
regulatory agencies, and therefore, these banks can engage in retail
deposit-taking in the U.S. through their branch networks. Paragraph (c)
recognizes that there are grandfathered insured branches that are
authorized to continue domestic retail deposit activities because they
were operating prior to the effective date of the FBSEA legislation.
And finally, paragraph (d) authorizes foreign banks to establish or
operate noninsured branches if such branch (i) is only conducting a
``wholesale'' deposit operation, (ii) is only accepting deposits that
are permissible for an Edge Act corporation (pursuant to Sec. section
347.205); or (iii) meets the requirements for an exemption from the
definition of ``domestic retail deposit activity'' pursuant to proposed
Sec. 347.206.
The FDIC is proposing to make minor revisions to Sec. 346.6
(proposed Sec. 347.206)--the section which enumerates the exemptions to
the definition of ``domestic retail deposit activities'' for state
branches of foreign banks. Proposed Sec. 347.206(a) will be amended to
provide that if the state branch conducts deposit-taking activities
which do not fall within the enumerated exceptions in proposed
Sec. 347.206(a), then the parent foreign bank will be required to
organize an insured bank subsidiary to engage in such retail deposit
activities in the U.S. (The foreign bank will still have the option,
however, to operate a noninsured branch which accepts initial deposits
of less than $100,000 that do not otherwise fall within the exceptions
enumerated in paragraphs (a)(1)-(a)(7) of this section by applying for
the FDIC's consent pursuant to proposed Sec. 347.206(b)). Paragraph
(a)(7) of the proposed section, the regulatory de minimis exception, is
being revised to clarify the calculation methodology and to delete the
``average daily basis'' reference. As stated in the preamble to the
final rule when the current exceptions were adopted on April 1, 1996:
[t]he FDIC wishes to make it clear that the numerator is comprised
of the total amount of deposits accepted under the de minimis
exception, not just the amount of the initial deposits of less than
$100,000 which were accepted to open the accounts.
61 FR 5671, 5674 (February 14, 1996). The de minimis calculation
methodology remains unchanged from the current rule. See FDIC Legal
Division Staff Advisory Opinion (unpublished) dated December 16, 1985
from Katharine H. Haygood, Esq. Paragraph (b) of proposed Sec. 347.206
will be revised by transferring the application for an exemption
procedure set forth therein to Sec. 347.404 of proposed subpart D until
the FDIC's proposed part 303 is finalized. Lastly, the transition rule
for time deposits set forth in proposed paragraph (c) is being revised
by deleting the reference to 90 days after April 1, 1996--which was the
effective date of these particular regulatory changes. This transition
period was originally included to afford branches the requisite time to
reclassify or divest time deposits that would mature very soon after
the regulation's effective date. This transition period has expired,
and therefore, this reference will be deleted. The FDIC invites public
comment on the clarification of the calculation methodology.
The FDIC proposes to rescind former Sec. 346.8 which permits a
foreign bank to apply to the FDIC for deposit insurance for a
noninsured federal or state branch when it is not otherwise required to
be insured. When the IBA was initially enacted in 1978, certain
provisions thereof amended the FDI Act to provide that ``[s]ubject to
the provisions of [the FDI Act] and to such terms and conditions as the
Board of Directors may impose, any branch of a foreign bank * * * may
become an insured branch.'' 12 U.S.C. 1815(b). Although the statutory
mandate of FBSEA now requires a foreign bank that proposes to engage in
domestic retail deposit activity to organize an insured bank
subsidiary, noninsured branches are still authorized to operate in the
U.S. because they are not engaged in domestic retail deposit activity.
(Noninsured branches are permitted to conduct wholesale deposit
activities, and are authorized to operate under Secs. 347.205 and
347.206 of the proposed subpart B.) Section 5(b) of the FDI Act is
still, in theory, applicable to these U.S. branches of foreign banks.
12 U.S.C. 1815(b). Because of this statutory underpinning, rescinding
the regulation does not really affect a foreign bank's discretion to
apply to the FDIC for insurance. Former Sec. 346.8 added nothing
substantive to the statutory authorization and, therefore, is redundant
and unnecessary.
Since the enactment of FBSEA in 1991, there can be no de novo
insured branches to conduct domestic retail deposit-taking activities.
It was Congress' intent that foreign banks wishing to conduct domestic
retail deposit activities in the U.S. must do so through an insured
bank subsidiary. The FDIC recognizes that there are regulatory
exemptions which allow noninsured branches to accept initial deposits
of less than $100,000 without being deemed to be engaged in domestic
retail deposit activities. See, proposed Sec. 347.206. Although a
technical reading of section 5(b) of the FDI Act suggests that a
foreign bank may still apply to the FDIC for deposit insurance for a
noninsured branch, as a practical matter the FDIC does not foresee many
circumstances in which it could be appropriate for the FDIC Board of
Directors (Board) to approve such an application. The Board would
review the facts and circumstances in each case, in addition to the
pertinent legal and policy considerations, and would have to determine
whether to actually approve an application for deposit insurance for a
noninsured branch. The FDIC is requesting public comment on its
proposed rescission of former Sec. 346.8 as well as any possible
effects on U.S.
[[Page 37757]]
branches of foreign banks of such an action.
Proposed Sections Addressing Foreign Banks Having Insured Branches
Proposed Sec. 347.210(a) sets forth the FDIC's requirement that an
insured branch pledge assets for the benefit of the FDIC or its
designee. Paragraph (b) of the proposed section will contain a revised
formula for calculating the amount of assets that the insured branch
will be required to pledge to satisfy the requirement in paragraph (a)
of proposed Sec. 347.210. Currently, in order to satisfy the pledge of
assets requirement, an insured branch must pledge assets equal to five
percent of the average of the insured branch's liabilities for the last
30 days of the second and fourth calendar quarters, respectively.
Paragraph (b) then provides detailed instructions for making this
calculation. Proposed Sec. 347.210(b) will provide that the amount of
assets that must be pledged to the FDIC will be equal to ``five percent
of the average of the insured branch's liabilities for the last 30 days
of the most recent calendar quarter.'' This formula will be more
straightforward to apply and the calculation thereof will be easier for
the insured branches. However, the foreign bank will be required to
provide the appropriate FDIC regional director with a written report
regarding the pledged assets on a quarterly basis rather than semi-
annually, in accordance with proposed Sec. 347.210(e)(6)(ii). This new
reporting requirement will be consistent with other FDIC reporting
requirements, such as the filing of Reports of Income and Condition,
and with the FDIC's policy of analyzing financial data on a quarterly
basis. It is the FDIC's belief that the quarterly reporting requirement
will not impose a significant additional burden on affected foreign
banks because the information is already being collected and maintained
by the bank. Submitting it to the FDIC will not require much additional
preparation by the affected banks. However, the FDIC is soliciting
public comment regarding this proposal to require these reports on
pledged assets to be submitted on a quarterly basis rather than semi-
annually.
In proposed Sec. 347.210(c), the restriction that a depository may
not be an affiliate of the foreign bank whose insured branch is seeking
to use the depository has been moved from the definition of
``depository'', proposed Sec. 347.202(d), to this substantive
provision. A requirement that the foreign bank shall concurrently
provide copies of all the documents and instruments delivered to the
depository to the appropriate FDIC regional director has been added in
paragraph (e)(4) of the proposed section. Many of the provisions in
proposed Sec. 347.210(e) will be revised to incorporate references to
the appropriate FDIC regional office or official to fully integrate
DOS's new Case Manager approach to bank supervision. Finally, the
delegation of authority to the Director of DOS (and to the Deputy
Director (DOS)) to enter into or revoke the approval of a pledge
agreement or to require the dismissal of a depository pursuant to
Sec. 303.8(f) of the FDIC's rules and regulations has been transferred
to proposed Sec. 347.210, and will become new paragraph (f) of that
section.
Proposed Sec. 347.213 will retain the substantive requirements and
standards regarding the necessity for an insured state branch to apply
to the FDIC (and the FRB) for their approval to conduct or continue an
activity which is otherwise not permissible for a federal branch.
However, the application and plan of divestiture procedures which were
formerly found in Sec. 346.101 will be temporarily transferred to new
Sec. 347.405 of subpart D until the FDIC's proposed part 303 is
finalized.
Definitions
Some technical and non-substantive changes have been made to
various definitions in proposed Sec. 347.202. As mentioned above, the
definition of ``depository'' has been amended by deleting the
restriction that a depository cannot be an affiliate of the foreign
bank whose insured branch is seeking to use the depository. This
limitation has been moved to proposed Sec. 347.210(c), the substantive
provision which addresses the requirements for a depository which must
be contained in the pledge agreement. In addition, the definition of
``foreign bank'' has been revised by deleting the exclusionary language
which ``carves out'' any banks that are organized under the laws of
U.S. territories from the requirement that a foreign bank organize an
insured bank subsidiary to conduct domestic retail deposit activities
in the U.S. This exclusionary language has been re-located and
designated as proposed Sec. 347.204(b). In this way, the exclusion,
which is found in section 6(d)(3) of the IBA, will be read in
conjunction with the other regulatory language which implements
sections 6(c) and (d) of the IBA in proposed Sec. 347.204. Finally, the
terms in the definitional section have been alphabetized for the
reader's ease of reference.
Subpart C--International Lending
The International Lending Supervision Act of 1983 (ILSA), 12 U.S.C.
3901, et. seq., strengthens supervision of international lending by
requiring each federal banking agency to evaluate the foreign country
exposure and transfer risk of banks within its jurisdiction for use in
examination and supervision of such banks. To implement this provision,
the federal banking agencies, through the Interagency Country Exposure
Review Committee (ICERC), assess and categorize countries on the basis
of conditions that may lead to increased transfer risk. In addition,
section 905(a) of ILSA directs each federal banking agency to require
banks within its jurisdiction to establish and maintain a special
reserve whenever the agency determines that the quality of a bank's
assets has been impaired by a protracted inability of public or private
borrowers in a foreign country to make payments on their external
indebtedness, or no definite prospects exist for the orderly
restoration of debt service. 12 U.S.C. 3904(a). In keeping with the
requirements of ILSA, on February 13, 1984, the FDIC, the Office of the
Comptroller of the Currency and the Board of Governors of the Federal
Reserve System (collectively, the federal banking agencies) issued a
joint notice of final rulemaking requiring banks to establish special
reserves, the allocated transfer risk reserve (ATRR), against the risks
presented in certain international assets.
The current regulation sets forth specific instructions on the
accounting treatment for the ATRR. The instructions for the preparation
of Consolidated Reports of Condition and Income (Call Reports) provide
that a bank which is required by ILSA and the regulations of the
federal banking agencies to establish an ATRR must report the reserve
separately in its Call Report. Currently, persons preparing Call
Reports have to look to the regulations for guidance on the accounting
treatment of ATRRs. In an effort to simplify the task of preparing Call
Reports by gathering all accounting information in one place, some of
the federal banking agencies have been considering whether to amend the
Call Report instructions to include a full description of the
accounting treatment of ATRRs. The agencies are further considering
whether to replace the existing provision in the regulation with a
reference to the amended Call Report instructions or to maintain a full
description of the accounting treatment in both the regulation and the
amended
[[Page 37758]]
Call Report instructions. At present, as ILSA specifically directs the
federal banking agencies to require banks to account for ATRRs in a
particular manner and the instructions for the Call Report do not
currently include such detailed instructions for treatment of ATRRs,
the FDIC has decided to retain the description of the accounting
treatment of the ATRR in its revised regulation. The FDIC is requesting
comment as to whether the instructions for the Call Report should be
amended to include a description of the accounting treatment for ATRRs.
The FDIC is requesting further comment as to whether, if the Call
Report instructions are amended, to retain the detailed description of
the accounting treatment of ATRRs in the revised part 351 or to replace
the existing regulation language with a requirement to follow the
accounting treatment outlined in amended Call Report instructions.
ILSA also requires the federal banking agencies to promulgate
regulations for accounting for fees charged by banks in connection with
international loans. Section 906(a) of ILSA (12 U.S.C. 3905(a)) deals
specifically with the restructuring of international loans to avoid
excessive debt service burden on debtor countries. This section
requires banks, in connection with the restructuring of an
international loan, to amortize any fee exceeding the administrative
cost of the restructuring over the effective life of the loan. Section
906(b) of ILSA (12 U.S.C. 3905(b)) deals with all international loans
and requires the federal banking agencies to promulgate regulations for
accounting for agency, commitment, management and other fees in
connection with such loans to assure that the appropriate portion of
such fees is accrued in income over the effective life of each such
loan. The current regulation provides a separate accounting treatment
for each type of fee charged by banks in connection with their
international lending. When ILSA was enacted in 1983 and the current
regulation on accounting for international loan fees was promulgated on
March 29, 1984, Congress and the federal banking agencies considered
that the application of the broad fee accounting principles for banks
contained in GAAP were insufficient to accomplish adequate uniformity
in accounting principles in this area. Since that time, the Financial
Accounting Standards Board has revised the GAAP rules for fee
accounting for international loans in a manner that accommodates the
specific requirements of section 906 of ILSA. As a result, in order to
reduce the regulatory burden on insured state nonmember banks, and
simplify its regulations, the FDIC has decided, in consultation with
accounting staff from the other federal banking agencies, to eliminate
from the revised version of part 351 the requirements as to the
particular accounting method to be followed in accounting for fees on
international loans and to require instead that state nonmember banks
follow GAAP in accounting for such fees. In the event that the FASB
changes the GAAP rules on fee accounting for international loans, the
FDIC will reexamine its regulation in light of ILSA to assess the need
for a revision to the regulation.
Subpart D--Application Procedures and Delegations of Authority
Overview
This proposed rule includes a separate subpart D containing
application procedures and delegations of authority for the substantive
matters covered by the proposal.4 As discussed above, the
FDIC is currently preparing a complete revision of part 303 of the
FDIC's rules and regulations, which contains the FDIC's applications
procedures and delegations of authority. As part of these revisions to
part 303, subpart J of part 303 will address application requirements
relating to the foreign activities of insured state nonmember banks and
the U.S. activities of insured branches of foreign banks. It is the
FDIC's intent that at such time as part 347 and part 303 are both
final, the application procedures proposed in subpart D of this
proposal will be relocated to subpart J of part 303, in order to
centralize all international banking application procedures in one
convenient place.
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\4\ Under the FDIC's current rules, these application
requirements are located in various sections of three different
regulations: 12 CFR part 303, 12 CFR part 346, and 12 CFR part 347.
---------------------------------------------------------------------------
Establishing, Moving, or Closing a Foreign Branch of a State Nonmember
Bank
Applications for a nonmember bank to establish a foreign branch are
currently treated under the same process applicable for domestic
branches under 12 CFR 303.2. The FDIC proposes to treat foreign
branches separately, since foreign branch applications are not legally
required to be subjected to analysis under the Community Reinvestment
Act or under the factors listed in section 6 of the FDI Act, as is the
case for domestic branches.
Under Secs. 347.103(b) and 347.402 as proposed, the FDIC would give
its general consent for an eligible nonmember bank to establish
additional foreign branches in any country in which the bank already
operates a branch, or to relocate a branch within the country. The
proposal only requires an eligible nonmember bank to notify the FDIC of
its actions within thirty days. In addition, an eligible nonmember bank
that operates branches or affiliates in two or more foreign
jurisdictions may establish additional branches conducting approved
activities in additional foreign jurisdictions upon 45 days prior
notice to the FDIC.
To be eligible, the nonmember bank must be well capitalized, not be
subject to a cease and desist order, consent order, prompt corrective
action directive, formal written agreement, memorandum of
understanding, or other administrative agreement with any U.S. bank
regulatory agency, and must have been chartered and operating for at
least three years. The nonmember bank must also have received an FDIC-
assigned composite rating of 1 or 2 under the Uniform Financial
Institutions Rating System (UFIRS); have received a rating of 1 or 2
under the ``management'' component of the UFIRS at its most recent
examination; have a compliance rating of 1 or 2; and have a
satisfactory or better Community Reinvestment Act rating. An
application to establish a foreign branch is not an ``application for a
deposit facility'' covered by the Community Reinvestment Act, and the
FDIC will therefore only take the nonmember bank's CRA rating into
account for purposes of determining whether the application receives
expedited treatment under the general consent and prior notice
procedures.
The FDIC is proposing these general consent and prior notice
provisions because a nonmember bank meeting the proposed requirements
should ordinarily have sufficient familiarity with the implications of
foreign branching, be well-managed, and be of sufficiently sound
overall condition, that extensive FDIC review is not required. The FDIC
retains the option to suspend these procedures as to any institutions
for which this is not the case. If the FDIC suspends its general
consent or prior notice with respect to a particular nonmember bank, it
means that the nonmember bank must make full application to establish
additional branches. Suspension of general consent or prior notice does
not, in and of itself, require closure of existing foreign branches,
and cases necessitating actual closure of branches would be handled
[[Page 37759]]
under section 8 of the FDI Act (12 U.S.C. 1818) or other relevant
authority. For nonmember banks seeking to establish a branch in an
additional jurisdiction under the prior notice procedure, the FDIC may
remove an applicant from the prior notice process if the FDIC's review
of the notice indicates significant concerns related to supervision,
law or policy, and the nonmember bank will be required to complete the
full application process.
General consent and prior notice are also inapplicable in any case
presenting either of two special circumstances. Since the FDIC must
have access to information about a foreign branch's activities in order
to effectively supervise the institution, general consent or prior
notice do not apply if the law or practice of the foreign jurisdiction
would limit the FDIC's access to information for supervisory purposes.
In such cases, the FDIC must have an opportunity to fully analyze the
extent of the confidentiality conferred under foreign law and whether
it would, in light of all the circumstances, impair the FDIC's ability
to carry out the FDIC's responsibilities as a bank supervisor. In
addition, if the proposed foreign branch would be have a direct adverse
impact on a site which is on the World Heritage List 5 or
the foreign jurisdiction's equivalent of the National Register of
Historic Places, the FDIC may need an opportunity to evaluate the
proposal in light of section 402 of the National Historic Preservation
Act Amendments of 1989 (16 U.S.C. 470a-2).
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\5\ The World Heritage List was established under the terms of
The Convention Concerning the Protection of World Culture and
Natural Heritage adopted in November, 1972 at a General Conference
of the United Nations Education, Scientific and Cultural
Organization. Current versions of the list are on the Internet at
http://www.unesco.org/whc/heritage.htm, or may be obtained from the
FDIC Public Information Center, Room 100, 801 17th Street, NW,
Washington, DC.
---------------------------------------------------------------------------
The proposal also requires a nonmember bank which closes a foreign
branch to notify the appropriate regional director that it has done so.
This notice is strictly for informational purposes, since the FDIC has
previously determined that Congress did not intend section 42 of the
FDI Act (12 U.S.C. 42) on branch closings to apply to foreign branches.
Finally, proposed Sec. 347.402 sets out the procedures for
applications which are not eligible for the general consent or prior
notice provisions.
This proposal is a major change from the FDIC's current procedures
under which an application is required for each foreign branch. The
FDIC specifically requests public comment on the merits of proposed
procedure, and whether its parameters are appropriately designed.
Acquisition of Stock of Foreign Banks or Other Financial Entities by an
Insured State Nonmember Bank
Section 347.4 of the FDIC's current rules contains an investment
ceiling, under which a nonmember bank's investments in foreign
organizations (as well as an Edge corporation) may not exceed 25% of
the bank's capital and surplus. The FDIC is proposing to eliminate this
general limit, and instead monitor the overall investments of each
nonmember bank on an individual basis. In addition, Sec. 347.4
presently requires an application before a nonmember bank may make any
investment in a foreign organization. Under Secs. 347.108(a) and
347.403 of the proposal, the FDIC would give its general consent for an
eligible nonmember bank to make investments in foreign organizations
complying with the activity and other limits of subpart A. Eligibility
of the nonmember bank is determined by the same criteria as for foreign
branch approvals.6 The proposal permits investments in a
single foreign organization of up to 2 percent of the nonmember bank's
tier 1 capital during any twelve-month period. Aggregate investments
for investment purposes may total as much as 5 percent of the nonmember
bank's tier 1 capital during any twelve-month period, and an additional
5 percent for investments acquired for trading purposes. Investments
acquired at net asset value from an affiliate or representing
reinvestments of cash dividends from the foreign organization are not
subject to these limits. The proposal only requires the nonmember bank
to notify the FDIC of its investment within thirty days, and no notice
is required for trading investments.
---------------------------------------------------------------------------
\6\ As is the case under the proposed foreign branch application
procedure, the FDIC will take the nonmember bank's Community
Reinvestment Act rating into account only for purposes of
determining whether the application is eligible for general consent
or prior notice procedures, since an application to make a foreign
investment is not an ``application for a deposit facility'' covered
by the CRA.
---------------------------------------------------------------------------
However, in order to make investments under general consent, the
nonmember bank or an affiliate must already have at least one foreign
organization subsidiary. In addition, if the investment will constitute
a joint venture or a subsidiary, the proposal requires that at least
one other nonmember bank already have a foreign organization subsidiary
in the country in question. This will prevent nonmember banks from
establishing a presence in a jurisdiction in which the FDIC has not had
an opportunity to contact host country supervisory authorities and
establish a working arrangement for cross-border supervision.
The proposal also permits an eligible nonmember bank to make any
investment which complies with the activity and other limits of subpart
A upon 45 days prior notice to the FDIC. The FDIC may remove an
applicant from the prior notice process if the FDIC's review of the
notice indicates significant concerns related to supervision, law or
policy, and a complete application would be required.
As is the case in connection with the foreign branch proposal, the
FDIC is proposing these general consent and prior notice procedures
because a nonmember bank meeting the requirements of the provisions is
of sufficient expertise, is well-managed, and is in sufficiently sound
overall condition, that extensive FDIC review is not required. The FDIC
retains the option to suspend these procedures as to any institutions
for which this is not the case. As with foreign branch applications,
the consequence of suspension is that a full application is required in
the future, and divestiture is not implicated. General consent and
prior notice are also not available in any foreign jurisdiction if its
law or practice would limit the FDIC's access to information for
supervisory purposes, for the same reasons stated above in connection
with foreign branch approvals.
Finally, proposed Sec. 347.403 sets out the procedures for
applications which are not eligible for the general consent or prior
notice provisions.
This proposal is a major change from the FDIC's current procedures
under which an application is required for each foreign investment and
total investment is subject to a 25% limit. The FDIC specifically
requests public comment on the merits of proposed procedure, and
whether its parameters are appropriately designed.
Exemptions From the Insurance Requirement for a State Branch of a
Foreign Bank
From its initial adoption in 1979, Sec. 346.6 of the FDIC's rules
has provided a list of deposit activities in which a state branch could
engage that would not constitute ``domestic retail deposit activity''.
44 FR 23869 (April 23, 1979), 44 FR 40056 (July 9, 1979). ``Domestic
retail deposit activity'' refers to the acceptance by a state branch of
any initial deposit of less than $100,000. In
[[Page 37760]]
1979, the significance of the distinction between ``retail'' deposit-
taking and non-retail deposit activities resulted in the organization
of insured and noninsured state branches, respectively. A state branch
which conducted retail deposit activities was required to be insured by
the FDIC. However, a state branch which limited its deposit-taking
activities to those entities and/or circumstances enumerated in
Sec. 346.6 was not deemed to be engaged in domestic retail deposit
activities and, therefore, was not required to be an insured branch.
With the passage of FBSEA, the significance of the distinction
between retail and non-retail deposit activities became more
pronounced. FBSEA amended section 6 of the IBA to require that foreign
banks that intend to conduct domestic retail deposit activities in the
United States shall organize an insured bank subsidiary for such
purpose. Domestic retail deposit activities can no longer be conducted
through an insured state branch (except for a grandfathered branch).
As originally developed, Sec. 346.6 provided two alternative means
for a state branch to operate as a noninsured branch. This bifurcated
approach to authorizing a state branch to operate as a noninsured
branch was not affected by the enactment of FBSEA which mandated the
chartering of an insured bank subsidiary to engage in retail deposit
taking. If the state branch only conducts deposit-taking activities
which are enumerated in Sec. 346.6(a) (1)-(7), and are carried forward
to proposed Sec. 347.206(a) (1)-(7), then the state branch is deemed to
not be engaged in domestic retail deposit activity, and the deposit
insurance requirement is not triggered. Second, a state branch can
operate as an noninsured branch when it is engaged in deposit-taking
activities which are not otherwise excepted under paragraph (a) of
Sec. 346.6, (proposed Sec. 347.206), if the FDIC Board approves its
application for consent to operate the branch as a noninsured branch
pursuant to Sec. 346.6(b), which has been carried forward as proposed
Sec. 347.206(b). The Board may exempt the state branch from the
insurance requirement if the Board finds that the branch is not engaged
in domestic retail deposit activities requiring insurance protection.
(After FBSEA, if the state branch is engaged in domestic retail deposit
activities, then the foreign bank parent must charter an insured bank
subsidiary to conduct its domestic deposit-taking activities--not an
insured branch.)
The proposal transfers the application procedures currently
contained in Sec. 346.6(b) to proposed Sec. 347.404. These procedures
need no substantive revision at this time, because the procedures were
recently reviewed and amended by the FDIC as a result of amendments to
the IBA which were made by section 107 of the Riegle-Neal Act.
Application by Insured State Branches for FDIC Approval To Conduct
Activities Not Permissible for Federal Branches
Section 202 of FDICIA amended section 7 of the IBA by adding a new
subsection (h) which provides that after December 19, 1992, a state-
licensed insured branch of a foreign bank may not engage in any
activity which is not permissible for a federal branch of a foreign
bank unless the FRB has determined that the activity is consistent with
sound banking practice, and the FDIC has determined that the activity
would pose no significant risk to the Bank Insurance Fund (BIF). The
legislative amendments also addressed application procedures and plans
of divestiture or cessation. The FDIC and the FRB both promulgated
regulations to implement the applicable provisions of the IBA. The FDIC
adopted a new subpart D to part 346, Applications Seeking Approval for
Insured State Branches to Conduct Activities Not Permissible for
Federal Branches, which became effective on January 1, 1995.
Foreign banks are required to seek both the FDIC's and the FRB's
approval for an insured state branch to engage in or continue to engage
in an activity which is not permissible for a federal branch of a
foreign bank. In the event such an application is denied or the foreign
bank elects not to continue the activity, a plan of divestiture or
cessation must be submitted and such divestiture or cessation must be
completed within one year or sooner if the FDIC so directs. As
discussed in the preamble to the final regulation, the FDIC
deliberately chose to model many substantive provisions of current
Sec. 346.101 upon its (then) recently adopted part 362, ``Activities
and Investments of Insured State Banks'' (58 FR 64462, December 8,
1993). 59 FR 60703 (November 28, 1994). For example, the preamble
states that, ``[t]he FDIC is of the opinion that [section] 346.101(a)
of the final regulation should parallel [section] 362.2(b) concerning
the activities of state banks with regard to the determination of
permissible activities.'' Moreover, the FDIC took the position in the
final regulation that activities approved as exceptions for state-
chartered domestic banks on the basis that they pose no significant
risk to the BIF should also be permissible for state-licensed insured
branches of foreign banks without the necessity of filing an
application or notice pursuant to Sec. 346.101 (provided the activity
in question is also permissible for a state licensed branch of a
foreign bank under state law and any other applicable federal law or
regulation). And finally, the definition of ``significant risk to the
deposit insurance fund'' parallels the part 362 definition.
As part of the FDIC's ongoing CDRI review of all of its regulations
and written policies, the FDIC is also conducting a thorough review of
part 362, and is preparing a proposed notice of rulemaking on this
regulation for publication in the Federal Register in the near term. In
view of the many and substantive similarities between Sec. 346.101 and
the FDIC's part 362, the proposed Sec. 347.213 makes no substantive
changes from the requirements of Sec. 346.101 at this time. The
application procedures proposed in Sec. 347.405 also contain no
substantive changes. After the closing of the comment period and the
completion of the final part 362, Sec. 347.213 and/or Sec. 347.405 may
be amended, if necessary, to reflect any changes made to the underlying
regulatory scheme governing the permissible activities of insured state
banks.
Technical and Conforming Changes
The FDIC's rules and regulations currently contain numerous cross-
references to part 346. These would be conformed to the proposed
sections of revised part 347 under the proposal. The proposal would
also eliminate application procedures and delegations under current
part 303 of the FDIC's rules and regulations, to the extent those
procedures and delegations are displaced under the proposal.
Paperwork Reduction Act
The collections of information contained in this proposed rule have
been submitted to the Office of Management and Budget (OMB) for review
and approval in accordance with the requirements of the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.). Comments are
invited on: (a) Whether the collection of information is necessary for
the proper performance of the FDIC's functions, including whether the
information has practical utility; (b) the accuracy of the estimates of
the burden of the information collection; (c) ways to enhance the
quality, utility, and clarity of the information to be collected; and
(d) ways to minimize the burden of the information collection on
respondents, including through the use of automated
[[Page 37761]]
collection techniques or other forms of information technology.
Comments should be addressed to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Attention: Desk
Officer Alexander Hunt, New Executive Office Building, Room 3208,
Washington, DC 20503, with copies of such comments to Steven F. Hanft,
Assistant Executive Secretary (Regulatory Analysis), Federal Deposit
Insurance Corporation, Room F-400, 550 17th Street NW, Washington, DC
20429. All comments should refer to ``Part 347--International
Banking.'' OMB is required to make a decision concerning the
collections of information contained in the proposed regulations
between 30 and 60 days after the publication of this document in the
Federal Register. Therefore, a comment to OMB is best assured of having
its full effect if OMB receives it within 30 days of this publication.
This does not affect the deadline for the public to comment to the FDIC
on the proposed regulation.
The collections of information in this proposed rule are contained
in various proposed sections appearing in subpart A and subpart B of
proposed part 347. The FDIC has asked the OMB to divide the collections
of information into two groups, each with a separate OMB control
number, with one group containing the collections from subpart A
(Foreign Branching and Investment by Insured State Nonmember Banks) and
the other containing the collections from subpart B (Foreign Banks).
For the subpart A group, the FDIC has requested a new OMB control
number. For the subpart B group the FDIC has requested the revision of
one collection already approved by OMB (OMB No. 3064-0114) and the
elimination of a second OMB approved collection (OMB No. 3064-0010).
Each of the collections required by the proposed part 347 is discussed
below.
Subpart A--Foreign Branching and Investment by Insured State Nonmember
Banks
Sections 347.103(b) and 347.402 contain collections of information
in the form of requirements that insured state nonmember banks
(nonmember banks) (1) notify the FDIC if the bank establishes a foreign
branch under certain eligibility criteria in the rule; (2) give the
FDIC 45 days prior notice before establishing a branch under certain
eligibility criteria in the rule; (3) file an application with the FDIC
requesting authorization to establish a foreign branch or to engage in
certain activities through a foreign branch; or (4) notify the FDIC if
the bank closes a foreign branch. The information will be used by the
FDIC to authorize foreign branching as set out in section 18(d)(2) of
the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1828(d)(2)). The
estimated annual reporting burden for the collection of information is
summarized as follows:
Collections (1) and (4)(notice of foreign branch establishment
(347.402(a)) or foreign branch closure (347.402(c)):
Total annual responses: 4
Average hours per response: 2
Collection (2) (prior notice of foreign branch establishment
(347.402(b))
Total annual responses: 3
Average hours per response: 6
Collection (3) (application to establish a foreign branch (347.402(d))
Total annual responses: 3
Average hours per response: 40
Total annual burden hours: 146
Sections 347.108 and 347.403 contain collections of information in
the form of requirements that nonmember banks (1) notify the FDIC if
the bank acquires stock or other evidences of ownership of foreign
organizations under certain eligibility criteria in the rule; (2) give
the FDIC 45 days prior notice before acquiring stock or other evidences
of ownership of foreign organizations under certain eligibility
criteria in the rule; or (3) file an application with the FDIC
requesting authorization to acquire stock or other evidences of
ownership of foreign organizations or to engage in certain activities
through foreign organizations. The information will be used by the FDIC
to authorize foreign investment as set out in section 18(l) of the FDI
Act (12 U.S.C. 1828(l)). The estimated annual reporting burden for the
collection of information is summarized as follows:
Collection (1) (notice of foreign investment (347.403(a)).
Total annual responses: 5
Average hours per response: 2
Collection (2) (prior notice of foreign investment (347.403(b)).
Total annual responses: 4
Average hours per response: 6
Collection (3) (application to make a foreign investment (347.403(c)).
Total annual responses: 3
Average hours per response: 60
Total annual burden hours: 214
Section 347.110 contains collections of information in the form of
a requirement that nonmember banks with foreign branches, or that hold
20 percent or more of a foreign organization's voting equity interests,
or control a foreign organization, maintain certain records, controls,
and reports on the foreign operation's business activities. Sections
18(d)(2) and 18(l) of the FDI Act authorize the FDIC to govern a
nonmember bank's conduct of foreign branching and investment, and the
information will be used by the nonmember bank to monitor the foreign
operations and control its risk. The estimated annual reporting burden
for the collection of information is summarized as follows:
Total annual responses: 63
Average hours per response: 400
Total annual burden hours: 25,200
Summary of Subpart A Collections
Total annual responses: 85
Total annual burden hours: 25,560
Subpart B--Foreign Banks
Sections 347.206(b) and 347.404 contain a collection of information
in the form of a requirement that noninsured state-licensed branches of
foreign banks make an application to obtain the FDIC's permission to
receive deposits of less than $100,000 if the deposits are not
otherwise authorized by Sec. 347.206(a). The information will be used
by the FDIC to determine whether to authorize the deposit taking as set
out in section 6(b) of the International Banking Act (12 U.S.C.
3104(b)). The estimated annual reporting burden for the collection of
information is summarized as follows:
Total annual responses: 1
Average hours per response: 6
Total annual burden hours: 6
Sections 347.216 and 347.405 contain collections of information in
the form of requirements that insured state-licensed branches of
foreign banks (1) file an application with the FDIC requesting
permission to conduct activities which are not permissible for a
federal branch of a foreign bank; or (2) submit a pro forma plan of
divestiture or cessation for activities which are not permissible for a
federal branch of a foreign bank. The information in the application
will be used by the FDIC to determine whether the activity poses a
significant risk to the deposit insurance fund, as required by section
7 of the International Banking Act (12 U.S.C. 3105(h)), and the
information in the plan of divestiture or cessation will be used by the
FDIC to make judgments concerning the reasonableness of the branch's
actions to discontinue activities deemed to pose a significant risk to
the deposit insurance fund. This collection of information has
previously been approved by the OMB under control no. 3064-0114. The
estimated annual reporting burden for the collection of information is
summarized as follows:
Total annual responses: 1
[[Page 37762]]
Average hours per response: 8
Total annual burden hours: 8
Sections 347.209 contains a collection of information in the form
of a requirement that insured branches of foreign banks maintain a set
of accounts and records in English and maintain its records as a
separate entity with assets and liabilities separate from the foreign
bank's head office, other branches, etc. The information will be used
by the insured branch in the same way any banking entity uses such
records, and the FDIC will review such records in connection with
examining and supervising the insured branch (which is an ``insured
depository institution'' for which the FDIC is the ``appropriate
Federal banking agency'' within the meaning of section 3 of the FDI
Act, (12 U.S.C. 1813)). The estimated annual reporting burden for the
collection of information is summarized as follows:
Total annual responses: 32
Average hours per response: 120
Total annual burden hours: 3,840
Sections 347.210(e)(4) and 347.210(e)(6) contain collections of
information in the form of a requirement that insured branches of
foreign banks and their depositories (1) make quarterly reports to the
FDIC identifying the specific securities the foreign bank has pledged
to the FDIC and their value, as well as the average liabilities of the
insured branch; and (2) provide the FDIC copies of documents and
instruments conveyed by the insured branch to the depository to
effectuate the pledge. The information will be used by the FDIC to
verify compliance with the pledge of asset requirements authorized by
section 5(c) of the FDI Act (12 U.S.C. 1815(c)). The collection of
information under item (1) on a semiannual basis has previously been
approved by the OMB, whereas the FDIC is now proposing to collect it
quarterly. The OMB's previous approval was under control no. 3064-0010,
but the FDIC is requesting that it be regrouped under the subpart B
control number for ease of reference. The estimated annual reporting
burden for the collection of information is summarized as follows:
Collection (1) (reports (347.210(e)(6))
Total annual responses: 256
Average hours per response: 2
Collection (2) (copies of documents effectuating pledges
(347.210(e)(4))
Total annual responses: 128
Average hours per response: 0.25
Total annual burden hours: 544
Summary of Subpart B Collections
Total annual responses: 418
Total annual burden hours: 4,398
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that the proposed
rule will not have a significant impact on a substantial number of
small entities. With respect to subparts A and C of the proposed rule,
the FDIC's review of call report data indicates the proposal will
impact only an insubstantial number of small entities. With respect to
subpart B of proposed part 347, the proposed revisions basically
incorporate the legislative requirement first imposed by FBSEA that a
foreign bank which intends to engage in domestic retail deposit
activity in the U.S. must do so through an insured bank subsidiary.
This has been the statutory standard for over 15 years; however, this
requirement was not heretofore addressed in the FDIC's applicable
regulation, part 346. Explicitly including this requirement in subpart
B can not be characterized as having a ``significant impact'' on the
affected entities as they have been required to comply with this
provision of FBSEA for many years. The other revisions which have been
made to proposed subpart B involve adding references to the FDIC's new
supervisory approach--the Case Manager system--where applicable and
simplifying the calculation of the amount of pledged assets required to
comply with proposed Sec. 347.210(a). The formula will be based upon a
quarterly calculation rather than a sem |
