FDIC Federal Register Citations

[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.

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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.

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\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 semi-annual calculation. In the

future, the foreign bank will be required to report the calculation to

the appropriate regional director every quarter. However, the

additional two reports per year will not represent a significant burden

on the affected banks because the foreign banks are already maintaining

the information, and the time required to forward the quarterly

calculation to the FDIC will be nominal. Therefore, the proposed

revisions to subpart B will not have a significant impact on a

substantial number of small entities.

List of Subjects

12 CFR Part 303

Administrative practice and procedure, Authority delegations

(Government agencies), Bank deposit insurance, Banks, banking,

Reporting and recordkeeping requirements, Savings associations.

12 CFR Part 325

Administrative practice and procedure, Banks, banking, Capital

adequacy, Reporting and recordkeeping requirements, Savings

associations, State non-member banks.

12 CFR Part 326

Banks, banking, Currency, Insured nonmember banks, Reporting and

recordkeeping requirements, Security measures.

12 CFR Part 327

Assessments, Bank deposit insurance, Banks, banking, Financing

Corporation, Savings associations.

12 CFR Part 346

Bank deposit insurance, Foreign banking, Reporting and

recordkeeping requirements.

12 CFR Part 347

Bank deposit insurance, Banks, banking, Credit, Foreign banking,

Foreign investments, Insured branches, Investments, Reporting and

recordkeeping requirements, United States investments abroad.

12 CFR Part 351

Foreign banking, Reporting and recordkeeping requirements.

12 CFR Part 362

Administrative practice and procedure, Authority delegations

(Government agencies), Bank deposit insurance, Banks, banking, Insured

depository institutions, Investments, Reporting and recordkeeping

requirements.

For the reasons set forth above and under the authority of 12

U.S.C. 1819(a)(Tenth), the FDIC Board of Directors hereby proposes to

amend 12 CFR chapter III as follows:

PART 303--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF

AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR

REGULATION

1. The authority citation for part 303 continues to read as

follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(j), 1818, 1819

(Seventh and Tenth), 1828, 1831e, 1831o, 1831p-1; 15 U.S.C. 1607.

Sec. 303.2 [Amended]

2. In Sec. 303.2, paragraph (a) introductory text is amended by

removing and reserving footnote 2.

Sec. 303.5 [Amended]

3. In Sec. 303.5, paragraph (d) is removed and reserved.

4. In Sec. 303.6, paragraphs (f)(1)(ii)(A) and (f)(1)(ii)(C) are

revised to read as follows:

Sec. 303.6 Application procedures.

* * * * *

[[Page 37763]]

(f) * * *

(1) * * *

(ii) * * *

(A) Applications to establish a branch, including a remote service

facility. In the communities in which the home office and the domestic

branch to be established are located.

* * * * *

(C) Applications for deposit insurance. In the community in which

the home bank office is or will be located.

* * * * *

5. In Sec. 303.7, the heading for paragraph (a) and paragraphs

(a)(1)(i), (a)(1)(ii)(A), (a)(1)(iii)(D), and (b)(4)(ii) are revised,

the words ``; and'' are removed at the end of paragraph (f)(2)(i) and a

period is added in their place, and paragraph (f)(2)(ii) is removed and

reserved to read as follows:

Sec. 303.7 Delegation of authority to the Director (DOS) and to the

associate directors, regional directors and deputy regional directors

to act on certain applications, requests, and notices of acquisition of

control.

* * * * *

(a) Applications for branches (including remote service facilities,

courier services), relocations, and for trust and other banking

powers--(1) * * * (i) Authority is delegated to the Director (DOS), and

where confirmed in writing by the director, to an associate director,

or to the appropriate regional director or deputy regional director, to

approve applications for consent to establish branch facilities

(including remote service facilities and courier services) or

relocations where the applicant satisfies the requisites listed in

paragraph (a)(1)(iii) of this section and agrees in writing to comply

with any condition imposed by the delegate other than those standard

conditions listed in Sec. 303.0(b)(31).

(ii) * * *

(A) to deny applications for consent to establish branch facilities

(including remote service facilities and courier services) or

relocations; and

* * * * *

(iii) * * *

* * * * *

(D) The requirements of the National Historic Preservation Act (16

U.S.C. 470), the National Environmental Policy Act (42 U.S.C. 4321),

and the Community Reinvestment Act of 1977 (12 U.S.C. 2901-2905) and

its applicable implementing regulation (part 345 of this chapter) have

been considered and favorably resolved: Provided however, That the

authority to approve an application may not be subdelegated to a

regional director or deputy regional director where a protest (as that

term is defined in Sec. 303.0(b)(30)) under the Community Reinvestment

Act is filed.

* * * * *

(b) * * *

(4) * * *

(ii) Where the resulting institution, upon consummation of the

merger transaction, does not meet the capital requirements set forth in

part 325 of this chapter and the FDIC's ``Statement of Policy on

Capital''. (If the applicant is a foreign bank, the delegated authority

to approve does not extend to instances where, upon consummation of the

merger transaction, the foreign bank's insured branch is not in

compliance with subpart B of part 347 of this chapter.)

* * * * *

Sec. 303.8 [Amended]

6. In Sec. 303.8, paragraph (f) is removed and reserved.

PART 325--CAPITAL MAINTENANCE

7. The authority citation for part 325 continues to read as

follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),

1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),

1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.

1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.

2236, 2355, 2386 (12 U.S.C. 1828 note).

8. In Sec. 325.103, paragraph (c) is revised to read as follows:

Sec. 325.103 Capital measures and capital category definitions.

* * * * *

(c) Capital categories for insured branches of foreign banks. For

purposes of the provisions of section 38 and this subpart, an insured

branch of a foreign bank shall be deemed to be:

(1) Well capitalized if the insured branch:

(i) Maintains the pledge of assets required under Sec. 347.210 of

this chapter; and

(ii) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 108 percent or more of the preceding quarter's average

book value of the insured branch's third-party liabilities; and

(iii) Has not received written notification from:

(A) The OCC to increase its capital equivalency deposit pursuant to

12 CFR 28.15(b), or to comply with asset maintenance requirements

pursuant to 12 CFR 28.20; or

(B) The FDIC to pledge additional assets pursuant to Sec. 347.210

of this chapter or to maintain a higher ratio of eligible assets

pursuant to Sec. 347.211 of this chapter.

(2) Adequately capitalized if the insured branch:

(i) Maintains the pledge of assets required under Sec. 347.210 of

this chapter; and

(ii) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 106 percent or more of the preceding quarter's average

book value of the insured branch's third-party liabilities; and

(iii) Does not meet the definition of a well capitalized insured

branch.

(3) Undercapitalized if the insured branch:

(i) Fails to maintain the pledge of assets required under

Sec. 347.210 of this chapter; or

(ii) Fails to maintain the eligible assets prescribed under

Sec. 347.211 of this chapter at 106 percent or more of the preceding

quarter's average book value of the insured branch's third-party

liabilities.

(4) Significantly undercapitalized if it fails to maintain the

eligible assets prescribed under Sec. 347.211 of this chapter at 104

percent or more of the preceding quarter's average book value of the

insured branch's third-party liabilities.

(5) Critically undercapitalized if it fails to maintain the

eligible assets prescribed under Sec. 347.211 of this chapter at 102

percent or more of the preceding quarter's average book value of the

insured branch's third-party liabilities.

* * * * *

PART 326--MINIMUM SECURITY DEVICES AND PROCEDURES AND BANK SECRECY

ACT ¹ COMPLIANCE

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\1\ In its original form, subchapter II of chapter 53 of title

31 U.S.C., was part of Pub. L. 91-508 which requires recordkeeping

for and reporting of currency transactions by banks and others and

is commonly known as the Bank Secrecy Act.

---------------------------------------------------------------------------

9. The authority citation for part 326 continues to read as

follows:

Authority: 12 U.S.C. 1813, 1815, 1817, 1818, 1819 (Tenth), 1881-

1833; 31 U.S.C. 5311-5324.

10. In Sec. 326.1, paragraph (c) is amended by revising the last

sentence to read as follows:

Sec. 326.1 Definitions.

* * * * *

(c) * * * In the case of a foreign bank, as defined in Sec. 347.202

of this chapter, the term branch has the same meaning given in

Sec. 347.202 of this chapter.

11. In Sec. 326.8, paragraph (a) and footnote 3 are revised to read

as follows:

[[Page 37764]]

Sec. 326.8 Bank Secrecy Act compliance.

(a) Purpose. This subpart is issued to assure that all insured

nonmember banks as defined in Sec. 326.1 ³ establish and

maintain procedures reasonably designed to assure and monitor their

compliance with the requirements of subchapter II of chapter 53 of

title 31, United States Code, and the implementing regulations

promulgated thereunder by the Department of Treasury at 31 CFR part

103.

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\3\ In regard to foreign banks, the programs and procedures

required by Sec. 326.8 need be instituted only at an insured branch

as defined in Sec. 347.202 of this chapter which is a State branch

as defined in Sec. 347.202 of this chapter.

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* * * * *

PART 327--ASSESSMENTS

12. The authority citation for part 327 is revised to read as

follows:

Authority: 12 U.S.C. 1441, 1441b, 1813, 1815, 1817-1819; Pub. L.

104-208, 110 Stat. 3009-479 (12 U.S.C. 1821).

13. In Sec. 327.1, paragraph (b)(2) is revised to read as follows:

Sec. 327.1 Purpose and scope.

* * * * *

(b) * * *

(2) Deductions from the assessment base of an insured branch of a

foreign bank are stated in subpart B of part 347 of this chapter.

14. In Sec. 327.4, paragraphs (a)(1)(i)(B)(1), (a)(1)(i)(B)(2),

(a)(1)(ii)(B)(1), and (a)(1)(ii)(B)(2) are revised to read as follows:

Sec. 327.4 Annual assessment rate.

(a) * * *

(1) * * *

(i) * * *

(B) * * *

(1) Maintains the pledge of assets required under Sec. 347.210 of

this chapter; and

(2) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 108 percent or more of the average book value of the

insured branch's third-party liabilities for the quarter ending on the

report date specified in this paragraph (a)(1).

(ii) * * *

(B) * * *

(1) Maintains the pledge of assets required under Sec. 347.210 of

this chapter; and

(2) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 106 percent or more of the average book value of the

insured branch's third-party liabilities for the quarter ending on the

report date specified in this paragraph (a)(1); and

* * * * *

PART 346--[REMOVED]

15. Part 346 is removed.

16. Part 347 is revised to read as follows:

PART 347--INTERNATIONAL BANKING

Subpart A--Foreign Branching and Investment by Insured State Nonmember

Banks

Sec.

347.101 Purpose, authority, and scope.

347.102 Definitions.

347.103 Foreign branches of insured state nonmember banks.

347.104 Investment by insured state nonmember banks in foreign

organizations.

347.105 Underwriting and dealing limits applicable to foreign

organizations held by insured state nonmember banks.

347.106 Restrictions on certain activities applicable to foreign

organizations held by insured state nonmember banks.

347.107 U.S. activities of foreign organizations held by insured

state nonmember banks.

347.108 Obtaining FDIC approval to invest in foreign organizations.

347.109 Extensions of credit to foreign organizations held by

insured state nonmember banks; shares of foreign organizations held

in connection with debts previously contracted.

347.110 Supervision and recordkeeping of the foreign activities of

insured state nonmember banks.

Subpart B--Foreign Banks

347.201 Scope.

347.202 Definitions.

347.203 Restriction on operation of insured and noninsured

branches.

347.204 Insurance requirement.

347.205 Branches established under section 5 of the International

Banking Act.

347.206 Exemptions from the insurance requirement.

347.207 Notification to depositors.

347.208 Agreement to provide information and to be examined.

347.209 Records.

347.210 Pledge of assets.

347.211 Asset maintenance.

347.212 Deductions from the assessment base.

347.213 FDIC approval to conduct activities not permissible for

federal branches.

Subpart C--International Lending

347.301 Allocated transfer risk reserve.

347.302 Accounting for fees on international loans.

347.303 Reporting and disclosure of international assets.

Subpart D--Applications and Delegations of Authority

347.401 Definitions.

347.402 Establishing, moving or closing a foreign branch of a state

nonmember bank; Sec. 347.103.

347.403 Investment by insured state nonmember banks in foreign

organizations; Sec. 347.108.

347.404 Exemptions from insurance requirement for a state branch of

a foreign bank; Sec. 347.206(b).

347.405 Approval for an insured state branch of a foreign bank to

conduct activities not permissible for federal branches;

Sec. 347.213.

Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103,

3104, 3105, 3108; Title IX, Pub. L. 98-181, 97 Stat. 1153.

Subpart A--Foreign Branching and Investment by Insured State

Nonmember Banks

Sec. 347.101 Purpose, authority, and scope.

Under sections 18(d) and 18(l) of the Federal Deposit Insurance Act

(12 U.S.C. 1828(d), 1828(l)), the Federal Deposit Insurance Corporation

prescribes the regulations in this subpart relating to foreign branches

of insured state nonmember banks, the acquisition and holding of stock

of foreign organizations, and loans or extensions of credit to or for

the account of such foreign organizations.

Sec. 347.102 Definitions.

For the purposes of this subpart:

(a) An affiliate of an insured state nonmember bank means:

(1) Any entity of which the insured state nonmember bank is a

direct or indirect subsidiary or which otherwise controls the insured

state nonmember bank;

(2) Any organization which is a direct or indirect subsidiary of

such entity or which is otherwise controlled by such entity; or

(3) Any other organization which is a direct or indirect subsidiary

of the insured state nonmember bank or is otherwise controlled by the

insured state nonmember bank.

(b) Control means the ability to control in any manner the election

of a majority of an organization's directors or trustees; or the

ability to exercise a controlling influence over the management and

policies of an organization. An insured state nonmember bank is deemed

to control an organization of which it is a general partner or its

affiliate is a general partner.

(c) Eligible insured state nonmember bank means one that has an

FDIC-assigned composite rating of 1 or 2 under the Uniform Financial

Institutions Rating System (UFIRS); is well-capitalized; received a

rating of 1 or 2 under the ``management'' component of the UFIRS at its

most recent examination; has a compliance rating of 1 or 2; has a

satisfactory or

[[Page 37765]]

better Community Reinvestment Act rating; is not subject to a cease and

desist order, consent order, prompt corrective action directive, formal

or informal written agreement (excluding any board of directors

resolution addressing corrective action taken pursuant to regulatory

recommendations), or other administrative agreement with any U.S. bank

regulatory authority; and has been chartered and operating for at least

three years.

(d) Equity interest means any ownership interest or rights in an

organization, whether through an equity security, contribution to

capital, general or limited partnership interest, debt or warrants

convertible into ownership interests or rights, loans providing profit

participation, binding commitments to acquire any such items, or some

other form of business transaction.

(e) Equity security means voting or nonvoting shares, stock,

investment contracts, or other interests representing ownership or

participation in a company or similar enterprise, as well as any

instrument convertible to any such interest at the option of the holder

without payment of substantial additional consideration.

(f) FRB means the Board of Governors of the Federal Reserve System.

(g) Foreign bank means a foreign organization that:

(1) Is recognized as a bank by the bank supervisory or monetary

authority of the country of its organization or the country in which

its principal banking operations are located;

(2) Receives deposits to a substantial extent in the regular course

of its business; and

(3) Has the power to accept demand deposits.

(h) Foreign banking organization means a foreign organization that

is formed for the sole purpose of either holding shares of a foreign

bank or performing nominee, fiduciary, or other banking services

incidental to the activities of a foreign branch or foreign bank

affiliate of the insured state nonmember bank.

(i) Foreign branch means an office or place of business of an

insured state nonmember bank located in a foreign country at which

banking operations are conducted, but does not include a representative

office.

(j) Foreign country means any country other than the United States

and includes any territory, dependency, or possession of any such

country or of the United States, and the Commonwealth of Puerto Rico.

(k) Foreign organization means an organization that is organized

under the laws of a foreign country.

(l) Indirectly means investments held or activities conducted by a

subsidiary of an organization.

(m) Loan or extension of credit means all direct and indirect

advances of funds to a person, government, or entity made on the basis

of any obligation of that person, government, or entity to repay funds.

(n) Organization or entity means a corporation, partnership,

association, bank, or other similar entity.

(o) Representative office means an office that engages solely in

representative functions such as soliciting new business for its home

office or acting as liaison between the home office and local

customers, but which has no authority to make business or contracting

decisions other than those relating to the personnel and premises of

the representative office.

(p) Subsidiary means any organization more than 50 percent of the

voting equity interests of which are directly or indirectly held by

another organization.

(q) Tier 1 capital means tier 1 capital as defined in Sec. 325.2 of

this chapter.

(r) Well capitalized means well capitalized as defined in

Sec. 325.103 of this chapter.

Sec. 347.103 Foreign branches of insured state nonmember banks.

(a) Powers of foreign branches. To the extent authorized by state

law, an insured state nonmember bank may establish a foreign branch. In

addition to its general banking powers, and if permitted by state law,

a foreign branch of an insured state nonmember bank may conduct the

following activities to the extent the activities are consistent with

banking practices in the foreign country in which the branch is

located:

(1) Guarantees. Guarantee debts, or otherwise agree to make

payments on the occurrence of readily ascertainable events including

without limitation such things as nonpayment of taxes, rentals, customs

duties, or costs of transport and loss or nonconformance of shipping

documents, if:

(i) The guarantee or agreement specifies a maximum monetary

liability; and

(ii) To the extent the guarantee or agreement is not subject to a

separate amount limit under state or federal law, the amount of the

guarantee or agreement is combined with loans and other obligations for

purposes of applying any legal lending limits.

(2) Local investments. Acquire and hold the following local

investments, so long as aggregate investments (other than those

required by the law of the foreign country or permissible under section

5136 of the Revised Statutes (12 U.S.C. 24 Seventh)) by all the bank's

branches in one foreign country do not exceed 1 percent of the total

deposits in all the bank's branches in that country as reported in the

preceding year-end call report: ¹

---------------------------------------------------------------------------

\1\ If a branch has recently been acquired by the state

nonmember bank and the branch was not previously required to file a

call report, branch deposits as of the acquisition date must be

used.

---------------------------------------------------------------------------

(i) Equity securities of the central bank, clearing houses,

governmental entities, and development banks of the country in which

the branch is located;

(ii) Other debt securities eligible to meet local reserve or

similar requirements; and

(iii) Shares of automated electronic payment networks, professional

societies, schools, and similar entities necessary to the business of

the branch.

(3) Government obligations. Make the following types of

transactions with respect to the obligations of foreign countries, so

long as aggregate investments, securities held in connection with

distribution and dealing, and underwriting commitments do not exceed 10

percent of the insured state nonmember bank's Tier 1 capital:

(i) Underwrite, distribute and deal, invest in, or trade

obligations of:

(A) The national government of the country in which the branch is

located or its political subdivisions; and

(B) An agency or instrumentality of such national government if

supported by the taxing authority, guarantee, or full faith and credit

of the national government.

(ii) Underwrite, distribute and deal, invest in or trade

investment-grade obligations ² of:

---------------------------------------------------------------------------

\2\ If the obligation is an equity interest, it must be held

through a subsidiary of the foreign branch and the insured state

nonmember bank must meet its minimum capital requirements.

---------------------------------------------------------------------------

(A) The national government of any foreign country or its political

subdivisions, to the extent permissible under the law of the issuing

foreign country; and

(B) An agency or instrumentality of the national government of any

foreign country to the extent permissible under the law of the issuing

foreign country, if supported by the taxing authority, guarantee, or

full faith and credit of the national government.

(4) Insurance. Act as an insurance agent or broker.

(5) Other activities. Engage in these activities in an additional

amount, or in other activities, approved by the FDIC.

(b) Establishment of foreign branches. (1) General consent of the

FDIC is

[[Page 37766]]

granted for an eligible insured state nonmember bank to establish

additional foreign branches conducting activities authorized by this

section in any foreign country in which the bank already operates one

or more foreign branches, or to relocate an existing foreign branch

within a foreign country. The insured state nonmember bank must provide

written notice of such action to the FDIC within 30 days of

establishment or relocation.

(2) An eligible insured state nonmember bank with foreign branches

or affiliates in two or more foreign countries may establish a foreign

branch conducting activities authorized by this section in an

additional foreign country 45 days after the insured state nonmember

bank files a completed notice with the FDIC, or upon such earlier time

as authorized by the FDIC.

(3) General consent or prior notice under this paragraph does not

apply:

(i) If the foreign branch would be located on a site on the World

Heritage List or on the foreign country's equivalent of the National

Register of Historic Places, in accordance with section 403 of the

National Historic Preservation Act Amendments of 1989 (16 U.S.C. 470a-

2);

(ii) If the foreign branch would be located in a foreign country in

which applicable law or practice would limit the FDIC's access to

information for supervisory purposes; or

(iii) If the FDIC at any time notifies the insured state nonmember

bank that the FDIC is modifying or suspending its general consent or

prior notice procedure.

(4) An insured state nonmember bank may not otherwise establish a

foreign branch, or engage in a type or amount of foreign branch

activity not authorized by this section, without obtaining the prior

specific consent of the FDIC.

(5) An insured state nonmember bank must notify the FDIC at the

time it closes a foreign branch.

(6) Procedures for notices and applications under this section are

set out in subpart D of this part.

Sec. 347.104 Investment by insured state nonmember banks in foreign

organizations.

(a) Investment authorized. To the extent authorized by state law,

an insured state nonmember bank may directly or indirectly acquire and

retain equity interests in foreign organizations, subject to the

requirements of this subpart.

(b) Authorized financial activities. An insured state nonmember

bank may not directly or indirectly acquire or hold equity interests of

a foreign organization resulting in the insured state nonmember bank

and its affiliates holding more than 50 percent of a foreign

organization's voting equity interests in the aggregate, or the insured

state nonmember bank or its affiliates otherwise controlling the

foreign organization, unless the activities of the foreign organization

are limited to the following financial activities:

(1) Commercial and other banking activities.

(2) Underwriting, distributing, and dealing debt securities outside

the United States.

(3) With the prior approval of the FDIC, underwriting,

distributing, and dealing equity securities outside the United States.

(4) Organizing, sponsoring, and managing a mutual fund if the

fund's shares are not sold or distributed in the United States or to

U.S. residents and the fund does not exercise management control over

the firms in which it invests.

(5) General insurance agency and brokerage.

(6) Underwriting credit life, credit accident and credit health

insurance.

(7) Performing management consulting services provided that such

services when rendered with respect to the United States market must be

restricted to the initial entry.

(8) Data processing.

(9) Operating a travel agency in connection with financial services

offered abroad by the insured state nonmember bank or others.

(10) Engaging in activities that the FRB has determined in

Regulation Y (12 CFR 225.28(b)) are closely related to banking under

section 4(c)(8) of the Bank Holding Company Act.

(11) Performing services for other direct or indirect operations of

a U.S. banking organization, including representative functions, sale

of long-term debt, name saving, liquidating assets acquired to prevent

loss on a debt previously contracted in good faith, and other

activities that are permissible for a bank holding company under

sections 4(a)(2)(A) and 4(c)(1)(C) of the Bank Holding Company Act.

(12) Holding the premises of a branch of an Edge corporation or

insured state nonmember bank or the premises of a direct or indirect

subsidiary, or holding or leasing the residence of an officer or

employee of a branch or a subsidiary.

(13) Engaging in the foregoing activities in an additional amount,

or in other activities, with the prior approval of the FDIC.

(c) Going concerns. If an insured state nonmember bank acquires

equity interests of a foreign organization under paragraph (b) of this

section and the foreign organization is a going concern, up to 5

percent of either the consolidated assets or revenues of the foreign

organization may be attributable to activities that are not permissible

under paragraph (b) of this section.

(d) Joint ventures. If an insured state nonmember bank directly or

indirectly acquires or holds equity interests of a foreign organization

resulting in the insured state nonmember bank and its affiliates

holding 20 percent or more, but not in excess of 50 percent, of the

voting equity interests of a foreign organization in the aggregate, and

the insured state nonmember bank or its affiliates do not control the

foreign organization, up to 10 percent of either the consolidated

assets or revenues of the foreign organization may be attributable to

activities that are not permissible under paragraph (b) of this

section.

(e) Portfolio investment. If an insured state nonmember bank

directly or indirectly acquires or holds equity interests of a foreign

organization resulting in the insured state nonmember bank and its

affiliates holding less than 20 percent of the voting equity interests

of a foreign organization in the aggregate, and the insured state

nonmember bank or its affiliates do not control the foreign

organization:

(1) Up to 10 percent of either the consolidated assets or revenues

of the foreign organization may be attributable to activities that are

not permissible under paragraph (b) of this section; and

(2) Any loans or extensions of credit made by the insured state

nonmember bank and its affiliates to the foreign organization must be

on substantially the same terms, including interest rates and

collateral, as those prevailing at the same time for comparable

transactions between the insured state nonmember bank or its affiliates

and nonaffiliated organizations.

(f) Indirect holding of foreign organizations which are not foreign

banks or foreign banking organizations. Any investment pursuant to the

authority of paragraphs (b) through (e) of this section in a foreign

organization which is not a foreign bank or foreign banking

organization must be held indirectly through a U.S. or foreign

subsidiary of the insured state nonmember bank if the foreign

organization does not constitute a subsidiary of the insured state

nonmember bank, and the insured state nonmember bank must meet its

minimum capital requirements.

(g) Indirect investments in nonfinancial foreign organizations. An

insured state nonmember bank may

[[Page 37767]]

indirectly acquire and hold equity interests in an amount up to 15

percent of the insured state nonmember bank's Tier 1 capital in foreign

organizations engaged generally in activities beyond those listed in

paragraph (b) of this section, subject to the following:

(1) The equity interests must be acquired and held indirectly

through a subsidiary authorized by paragraphs (b) or (c) of this

section, or an Edge corporation if also authorized by the FRB;

(2) The aggregate holding of voting equity interests of one foreign

organization by the insured state nonmember bank and its affiliates

must be less than 20 percent of the foreign organization's voting

equity interests;

(3) The aggregate holding of voting and nonvoting equity interests

of one foreign organization by the insured state nonmember bank and its

affiliates must be less than 40 percent of the foreign organization's

equity interests;

(4) The insured state nonmember bank or its affiliates must not

otherwise control the foreign organization; and

(5) Any loans or extensions of credit made by the insured state

nonmember bank and its affiliates to the foreign organization must be

on substantially the same terms, including interest rates and

collateral, as those prevailing at the same time for comparable

transactions between the insured state nonmember bank or its affiliates

and nonaffiliated organizations.

(h) Affiliate holdings. References in this section to equity

interests of foreign organizations held by an affiliate of an insured

state nonmember bank includes equity interests held in connection with

an underwriting or for distribution or dealing by an affiliate

permitted to do so by Sec. 337.4 of this chapter or section 4(c)(8) of

the Bank Holding Company Act (12 U.S.C. 1843(c)(8)).

Sec. 347.105 Underwriting and dealing limits applicable to foreign

organizations held by insured state nonmember banks.

If an insured state nonmember bank, in reliance on the authority of

Sec. 347.104, holds an equity interest in one or more foreign

organizations which underwrite, deal, or distribute equity securities

outside the United States as authorized by Sec. 347.104(b)(3):

(a) Underwriting commitment limits. The aggregate underwriting

commitments by the foreign organizations for the equity securities of a

single entity, taken together with underwriting commitments by any

affiliate of the insured state nonmember bank under the authority of 12

CFR 211.5, must not exceed the lesser of $60 million or 25 percent of

the insured state nonmember bank's Tier 1 capital unless excess amounts

are either:

(1) Covered by binding commitments from subunderwriters or

purchasers; or

(2) Deducted from the capital of the insured state nonmember bank,

with at least 50 percent of the deduction being taken from Tier 1

capital, and the insured state nonmember bank remains well capitalized

after this deduction.

(b) Distribution and dealing limits. The equity securities of any

single entity held for distribution or dealing by the foreign

organizations, taken together with equity securities held for

distribution or dealing by any affiliate of the insured state nonmember

bank under the authority of 12 CFR 211.5:

(1) Must not exceed the lesser of $30 million or 5 percent of the

insured state nonmember bank's Tier 1 capital, subject to the

following:

(i) Any equity securities acquired pursuant to any underwriting

commitment extending up to 90 days after the payment date for the

underwriting may be excluded from this limit;

(ii) Any equity securities of the entity held under the authority

of Sec. 347.104 or 12 CFR 211.5(b) for purposes other than distribution

or dealing must be included in this limit; and

(iii) Up to 75 percent of the position in an equity security may be

reduced by netting long and short positions in the same security, or

offsetting cash positions against derivative instruments referenced to

the same security so long as the derivatives are part of a prudent

hedging strategy; and

(2) Must be included in calculating the general consent limits

under Sec. 347.108(a)(3) if the insured state nonmember bank relies on

the general consent provisions as authority to acquire equity interests

of the same foreign entity for investment or trading.

(c) Additional distribution and dealing limits. With the exception

of equity securities acquired pursuant to any underwriting commitment

extending up to 90 days after the payment date for the underwriting,

equity securities of a single entity held for distribution or dealing

by all affiliates of the state nonmember bank,³ combined

with any equity interests held for investment or trading purposes by

all affiliates of the state nonmember bank, must conform to the limits

of Sec. 347.104.

---------------------------------------------------------------------------

\3\ This includes shares held in connection with an underwriting

or for distribution or dealing by an affiliate permitted to do so by

Sec. 337.4 of this chapter or section 4(c)(8) of the Bank Holding

Company Act.

---------------------------------------------------------------------------

(d) Combined limits. The aggregate of the following may not exceed

25 percent of the insured state nonmember bank's Tier 1 capital:

(1) All equity interests of foreign organizations held for

investment or trading under Sec. 347.104(g) or by an affiliate of the

insured state nonmember bank under the corresponding paragraph of 12

CFR 211.5;

(2) All underwriting commitments under paragraph (a) of this

section, taken together with all underwriting commitments by any

affiliate of the insured state nonmember bank under the authority of 12

CFR 211.5, after excluding the amount of any underwriting commitment:

(i) Covered by binding commitments from subunderwriters or

purchasers under paragraph (a)(1) of this section or the comparable

provision of 12 CFR 211.5; or

(ii) Already deducted from the insured state nonmember bank's

capital under paragraph (a)(2) of this section, or the appropriate

affiliate's capital under the comparable provisions of 12 CFR 211.5;

and

(3) All equity securities held for distribution or dealing under

paragraph (b) of this section, taken together with all equity

securities held for distribution or dealing by any affiliate of the

insured state nonmember bank under the authority of 12 CFR 211.5, after

reducing by up to 75 percent the position in any equity security by

netting and offset, as permitted by paragraph (b)(1)(iii) of this

section or the comparable provision of 12 CFR 211.5.

Sec. 347.106 Restrictions on certain activities applicable to foreign

organizations held by insured state nonmember banks.

Futures commission merchant. If an insured state nonmember bank, in

reliance on the authority of Sec. 347.104, acquires or retains an

equity interest in one or more foreign organizations which acts as a

futures commission merchant as authorized by Sec. 347.104(b)(10), the

foreign organization may not be a member of an exchange or clearing

association that requires members to guarantee or otherwise contract to

cover losses suffered by other members unless the foreign

organization's liability does not exceed 2 percent of the insured state

nonmember bank's Tier 1 capital, or the insured state nonmember bank

has obtained the prior approval of the FDIC under Sec. 347.108(d).

Sec. 347.107 U.S. activities of foreign organizations held by insured

state nonmember banks.

(a) An insured state nonmember bank may not directly or indirectly

hold the equity interests of any foreign organization pursuant to the

authority of

[[Page 37768]]

this section if the organization engages in the general business of

buying or selling goods, wares, merchandise, or commodities in the

United States.

(b) An insured state nonmember bank may not directly or indirectly

hold more than 5 percent of the equity interests of any foreign

organization pursuant to the authority of this subpart unless any

activities in which the foreign organization engages directly or

indirectly in the United States are incidental to its international or

foreign business.

(c) A foreign organization is not engaged in any business or

activities in the United States for these purposes unless it maintains

an office in the United States other than a representative office.

(d) The following activities are incidental to international or

foreign business:

(1) activities that the FRB has determined in Regulation K (12 CFR

211.4) are permissible in the United States for an Edge corporation.

(2) Other activities approved by the FDIC.

Sec. 347.108 Obtaining FDIC approval to invest in foreign

organizations.

(a) General consent. General consent of the FDIC is granted for an

eligible insured state nonmember bank to make direct or indirect

investments in foreign organizations in conformity with the limits and

requirements of this subpart if:

(1) The insured state nonmember bank or an affiliate presently have

at least one foreign organization subsidiary;

(2) In any case in which the insured state nonmember bank and its

affiliates will hold 20 percent or more of the foreign organization's

voting equity interests, at least one insured state nonmember bank has

a foreign organization subsidiary in the relevant foreign country;

(3) The investment is within one of the following limits:

(i) The investment is acquired at net asset value from an

affiliate;

(ii) The investment is a reinvestment of cash dividends received

from the same foreign organization during the preceding twelve months;

or

(iii) The total investment directly or indirectly in a single

foreign organization in any transaction or series of transactions

during a twelve-month period does not exceed 2 percent of the insured

state nonmember bank's Tier 1 capital, and such investments in all

foreign organizations in the aggregate do not exceed:

(A) 5 percent of the insured state nonmember bank's Tier 1 capital

during a twelve-month period; and

(B) Up to an additional 5 percent of the insured state nonmember

bank's Tier 1 capital if the investments are acquired for trading

purposes; and

(4) Within 30 days, the insured state nonmember bank provides the

FDIC written notice of the investment, unless the investment was

acquired for trading purposes, in which case no notice is required.

(b) Prior notice. An investment that does not qualify for general

consent but is otherwise in conformity with the limits and requirements

of this subpart may be made 45 days after an eligible insured state

nonmember bank files a completed notice with the FDIC, or upon such

earlier time as authorized by the FDIC.

(c) Inapplicability of general consent or prior notice. General

consent or prior notice under this section do not apply:

(1) For foreign investments resulting in the insured state

nonmember bank holding 20 percent or more of the voting equity

interests of a foreign organization or controlling such organization

and the foreign organization would be located in a foreign country in

which applicable law or practice would limit the FDIC's access to

information for supervisory purposes; or

(2) If the FDIC at any time notifies the insured state nonmember

bank that the FDIC is modifying or suspending its general consent or

prior notice procedure.

(d) Specific consent. Any investment that is not authorized under

general consent or prior notice procedures must not be made without the

prior specific consent of the FDIC.

(e) Computation of amounts. In computing the amount that may be

invested in any foreign organization under this section, any

investments held by an affiliate of the insured state nonmember bank

must be included.

(f) Procedures. Procedures for applications and notices under this

section are set out in subpart D of this part.

Sec. 347.109 Extensions of credit to foreign organizations held by

insured state nonmember banks; shares of foreign organizations held in

connection with debts previously contracted.

(a) Loans or extensions of credit. An insured state nonmember bank

which directly or indirectly holds equity interests in a foreign

organization pursuant to the authority of this subpart may make loans

or extensions of credit to or for the accounts of the organization

without regard to the provisions of section 18(j) of the FDI Act (12

U.S.C. 1828(j)).

(b) Debts previously contracted. Equity interests acquired to

prevent a loss upon a debt previously contracted in good faith are not

subject to the limitations or procedures of this subpart; however they

must be disposed of promptly but in no event later than two years after

their acquisition, unless the FDIC authorizes retention for a longer

period.

Sec. 347.110 Supervision and recordkeeping of the foreign activities

of insured state nonmember banks.

(a) Records, controls and reports. An insured state nonmember bank

with any foreign branch, any investment in a foreign organization of 20

percent or more of the organization's voting equity interests, or

control of a foreign organization must maintain a system of records,

controls and reports that, at minimum, provide for the following:

(1) Risk assets. To permit assessment of exposure to loss,

information furnished or available to the main office should be

sufficient to permit periodic and systematic appraisals of the quality

of risk assets, including loans and other extensions of credit.

Coverage should extend to a substantial proportion of the risk assets

in the branch or foreign organization, and include the status of all

large credit lines and of credits to customers also borrowing from

other offices or affiliates of the insured state nonmember bank.

Information on risk assets should include:

(i) A recent financial statement of the borrower or obligee and

current information on the borrower's or obligee's financial condition;

(ii) Terms, conditions, and collateral;

(iii) Data on any guarantors;

(iv) Payment history; and

(v) Status of corrective measures employed.

(2) Liquidity. To enable assessment of local management's ability

to meet its obligations from available resources, reports should

identify the general sources and character of the deposits, borrowing,

and other funding sources, employed in the branch or foreign

organization with special reference to their terms and volatility.

Information should be available on sources of liquidity--cash, balances

with banks, marketable securities, and repayment flows--such as will

reveal their accessibility in time and any risk elements involved.

(3) Contingencies. Data on the volume and nature of contingent

items such as loan commitments and guarantees or their equivalents that

permit analysis of

[[Page 37769]]

potential risk exposure and liquidity requirements.

(4) Controls. Reports on the internal and external audits of the

branch or foreign organization in sufficient detail to permit

determination of conformance to auditing guidelines. Such reports

should cover:

(i) Verification and identification of entries on financial

statements;

(ii) Income and expense accounts, including descriptions of

significant chargeoffs and recoveries;

(iii) Operations and dual-control procedures and other internal

controls;

(iv) Conformance to head office guidelines on loans, deposits,

foreign exchange activities, proper accounting procedures, and

discretionary authority of local management;

(v) Compliance with local laws and regulations; and

(vi) Compliance with applicable U.S. laws and regulations.

(b) Availability of information to examiners; reports. (1)

Information about foreign branches or foreign organizations must be

made available to the FDIC by the insured state nonmember bank for

examination and other supervisory purposes.

(2) If any applicable law or practice in a particular foreign

country would limit the FDIC's access to information for supervisory

purposes, no insured state nonmember bank may utilize the general

consent or prior notice procedures under Secs. 347.103 and 347.108 to:

(i) Establish any foreign branch in the foreign country; or

(ii) Make any investment resulting in the state nonmember bank

holding 20 percent or more of the voting equity interests of a foreign

organization in the foreign country or controlling such organization.

(3) The FDIC may from time to time require an insured state

nonmember bank to make and submit such reports and information as may

be necessary to implement and enforce the provisions of this subpart,

and the insured state nonmember bank shall submit an annual report of

condition for each foreign branch pursuant to instructions provided by

the FDIC.

Subpart B--Foreign Banks

Sec. 347.201 Scope.

(a)(1) Sections 347.203 through 347.207 of this subpart implement

the insurance provisions of section 6 of the International Banking Act

of 1978 (12 U.S.C. 3104). They set out the FDIC's rules regarding

retail deposit activities requiring a foreign bank to establish an

insured bank subsidiary; deposit activities permissible for a

noninsured branch; authority for a state branch to apply for an

exemption from the insurance requirement; and, depositor notification

requirements. Sections 347.204, 347.205, 347.206 and 347.207 do not

apply to a federal branch. The Comptroller of the Currency's

regulations (12 CFR part 28) establish such rules for federal branches.

However, federal branches deemed by the Comptroller to require

insurance must apply to the FDIC for insurance.

(2) Sections 347.203 through 347.207 of this subpart also set out

the FDIC's rules regarding the operation of insured and noninsured

branches, whether state or federal, by a foreign bank.

(b) Sections 347.208 through 347.212 of this subpart set out the

rules that apply only to a foreign bank that operates or proposes to

establish an insured state or federal branch. These rules relate to the

following matters: an agreement to provide information and to be

examined and provisions concerning recordkeeping, pledge of assets,

asset maintenance, and deductions from the assessment base.

Sec. 347.202 Definitions.

For the purposes of this subpart:

(a) Affiliate means any entity that controls, is controlled by, or

is under common control with another entity. An entity shall be deemed

to ``control'' another entity if the entity directly or indirectly

owns, controls, or has the power to vote 25 percent or more of any

class of voting securities of the other entity or controls in any

manner the election of a majority of the directors or trustees of the

other entity.

(b) Branch means any office or place of business of a foreign bank

located in any state of the United States at which deposits are

received. The term does not include any office or place of business

deemed by the state licensing authority or the Comptroller of the

Currency to be an agency.

(c) Deposit has the same meaning as that term in section 3(l) of

the Federal Deposit Insurance Act (12 U.S.C. 1813(l)).

(d) Depository means any insured state bank, national bank, or

insured branch.

(e) Domestic retail deposit activity means the acceptance by a

state branch of any initial deposit of less than $100,000.

(f) Federal branch means a branch of a foreign bank established and

operating under the provisions of section 4 of the International

Banking Act of 1978 (12 U.S.C. 3102).

(g) Foreign bank means any company organized under the laws of a

foreign country, any territory of the United States, Puerto Rico, Guam,

American Samoa, the Northern Mariana Islands or the Virgin Islands,

which engages in the business of banking. The term includes foreign

commercial banks, foreign merchant banks and other foreign institutions

that engage in banking activities usual in connection with the business

of banking in the countries where such foreign institutions are

organized and operating. Except as otherwise specifically provided by

the Federal Deposit Insurance Corporation, banks organized under the

laws of a foreign country, any territory of the United States, Puerto

Rico, Guam, American Samoa, the Northern Mariana Islands, or the Virgin

Islands which are insured banks other than by reason of having an

insured branch are not considered to be foreign banks for purposes of

Secs. 347.208, 347.209, 347.210, and 347.211.

(h) Foreign business means any entity including, but not limited

to, a corporation, partnership, sole proprietorship, association,

foundation or trust, which is organized under the laws of a foreign

country or any United States entity which is owned or controlled by an

entity which is organized under the laws of a foreign country or a

foreign national.

(i) Foreign country means any country other than the United States

and includes any colony, dependency or possession of any such country.

(j) Home state of a foreign bank means the state so determined by

the election of the foreign bank, or in default of such election, by

the Board of Governors of the Federal Reserve System.

(k) Immediate family member of a natural person means the spouse,

father, mother, brother, sister, son or daughter of that natural

person.

(l) Initial deposit means the first deposit transaction between a

depositor and the branch. The initial deposit may be placed into

different deposit accounts or into different kinds of deposit accounts,

such as demand, savings or time. Deposit accounts that are held by a

depositor in the same right and capacity may be added together for the

purposes of determining the dollar amount of the initial deposit.

``First deposit'' means any deposit made when there is no existing

deposit relationship between the depositor and the branch.

(m) Insured bank means any bank, including a foreign bank having an

insured branch, the deposits of which are insured in accordance with

the provisions of the Federal Deposit Insurance Act.

(n) Insured branch means a branch of a foreign bank any deposits of

which

[[Page 37770]]

branch are insured in accordance with the provisions of the Federal

Deposit Insurance Act.

(o) Large United States business means any entity including, but

not limited to, a corporation, partnership, sole proprietorship,

association, foundation or trust which is organized under the laws of

the United States or any state thereof, and:

(1) Whose securities are registered on a national securities

exchange or quoted on the National Association of Securities Dealers

Automated Quotation System; or

(2) Has annual gross revenues in excess of $1,000,000 for the

fiscal year immediately preceding the initial deposit.

(p) A majority owned subsidiary means a company the voting stock of

which is more than 50 percent owned or controlled by another company.

(q) Noninsured branch means a branch of a foreign bank deposits of

which branch are not insured in accordance with the provisions of the

Federal Deposit Insurance Act.

(r) Person means an individual, bank, corporation, partnership,

trust, association, foundation, joint venture, pool, syndicate, sole

proprietorship, unincorporated organization, or any other form of

entity.

(s) Significant risk to the deposit insurance fund shall be

understood to be present whenever there is a high probability that the

Bank Insurance Fund administered by the FDIC may suffer a loss.

(t) State means any state of the United States or the District of

Columbia.

(u) State branch means a branch of a foreign bank established and

operating under the laws of any state.

(v) A wholly owned subsidiary means a company the voting stock of

which is 100 percent owned or controlled by another company except for

a nominal number of directors' shares.

Sec. 347.203 Restriction on operation of insured and noninsured

branches.

The FDIC will not insure deposits in any branch of a foreign bank

unless the foreign bank agrees that every branch established or

operated by the foreign bank in the same state will be an insured

branch; provided, that this restriction does not apply to any branch

which accepts only initial deposits in an amount of $100,000 or

greater.

Sec. 347.204 Insurance requirement.

(a) Domestic retail deposit activity. In order to initiate or

conduct domestic retail deposit activity, which requires deposit

insurance protection, a foreign bank shall:

(1) Establish 1 or more insured bank subsidiaries in the United

States for that purpose; and

(2) Obtain deposit insurance for any such subsidiary in accordance

with the Federal Deposit Insurance Act.

(b) Exception. For purposes of paragraph (a) of this section,

``foreign bank'' does not include 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

Corporation pursuant to the Federal Deposit Insurance Act.

(c) Grandfathered insured branches. Domestic retail deposit

accounts with balances of less than $100,000 that require deposit

insurance protection may be accepted or maintained in a branch of a

foreign bank only if such branch was an insured branch on December 19,

1991.

(d) Noninsured branches. A foreign bank may establish or operate a

state branch which is not an insured branch whenever:

(1) The branch only accepts initial deposits in an amount of

$100,000 or greater; or

(2) The branch meets the criteria set forth in Sec. 347.205 or

Sec. 347.206.

Sec. 347.205 Branches established under section 5 of the International

Banking Act.

A foreign bank may operate any state branch as a noninsured branch

whenever the foreign bank has entered into an agreement with the Board

of Governors of the Federal Reserve System to accept at that branch

only those deposits as would be permissible for a corporation organized

under section 25(a) of the Federal Reserve Act (12 U.S.C. 611 et seq.)

and implementing rules and regulations administered by the Board of

Governors (12 CFR part 211).

Sec. 347.206 Exemptions from the insurance requirement.

(a) Deposit activities not requiring insurance. A state branch will

not be deemed to be engaged in domestic retail deposit activity which

requires the foreign bank parent to establish an insured bank

subsidiary in accordance with Sec. 347.204(a) if the state branch only

accepts initial deposits in an amount of less than $100,000 which are

derived solely from the following:

(1) Individuals who are not citizens or residents of the United

States at the time of the initial deposit;

(2) Individuals who:

(i) Are not citizens of the United States;

(ii) Are residents of the United States; and

(iii) Are employed by a foreign bank, foreign business, foreign

government, or recognized international organization;

(3) Persons (including immediate family members of natural persons)

to whom the branch or foreign bank (including any affiliate thereof)

has extended credit or provided other nondeposit banking services

within the past twelve months or has entered into a written agreement

to provide such services within the next twelve months;

(4) Foreign businesses, large United States businesses, and persons

from whom an Edge Corporation may accept deposits under

Sec. 211.4(e)(1) of Regulation K of the Board of Governors of the

Federal Reserve System, 12 CFR 211.4(e)(1);

(5) Any governmental unit, including the United States government,

any state government, any foreign government and any political

subdivision or agency of any of the foregoing, and recognized

international organizations;

(6) Persons who are depositing funds in connection with the

issuance of a financial instrument by the branch for the transmission

of funds or the transmission of such funds by any electronic means; and

(7) Any other depositor, but only if the branch's average deposits

under this paragraph (a)(7) of this section do not exceed one percent

of the branch's average total deposits for the last 30 days of the most

recent calendar quarter (de minimis exception). In calculating this de

minimis exception, both the average deposits under this paragraph

(a)(7) of this section and the average total deposits shall be computed

by summing the close of business figures for each of the last 30

calendar days, ending with and including the last day of the calendar

quarter, and dividing the resulting sum by 30. For days on which the

branch is closed, balances from the last previous business day are to

be used. In determining its average branch deposits, the branch may

exclude deposits in the branch of other offices, branches, agencies or

wholly owned subsidiaries of the bank. In addition, the branch must not

solicit deposits from the general public by advertising, display of

signs, or similar activity designed to attract the attention of the

general public. A foreign bank which has more than one state branch in

the same state may aggregate deposits in such branches (excluding

deposits of other branches, agencies or wholly owned subsidiaries of

the bank) for the purpose of this paragraph (a)(7).

(b) Application for an exemption. Whenever a foreign bank proposes

to accept at a state branch initial deposits of less than $100,000 and

such deposits

[[Page 37771]]

are not otherwise excepted under paragraph (a) of this section, the

foreign bank may apply to the FDIC for consent to operate the branch as

a noninsured branch pursuant to Sec. 347.404. The Board of Directors

may exempt the branch from the insurance requirement if the branch is

not engaged in domestic retail deposit activities requiring insurance

protection. The Board of Directors will consider the size and nature of

depositors and deposit accounts, the importance of maintaining and

improving the availability of credit to all sectors of the United

States economy, including the international trade finance sector of the

United States economy, whether the exemption would give the foreign

bank an unfair competitive advantage over United States banking

organizations, and any other relevant factors in making this

determination.

(c) Transition period. A noninsured state branch may maintain a

retail deposit lawfully accepted pursuant to this section prior to

April 1, 1996:

(1) If the deposit qualifies pursuant to paragraph (a) or (b) of

this section; or

(2) If the deposit does not qualify pursuant to paragraph (a) or

(b) of this section, no later than:

(i) In the case of a non-time deposit, five years from April 1,

1996; or

(ii) In the case of a time deposit, the first maturity date of the

time deposit after April 1, 1996.

Sec. 347.207 Notification to depositors.

Any state branch that is exempt from the insurance requirement

pursuant to Sec. 347.206 shall:

(a) Display conspicuously at each window or place where deposits

are usually accepted a sign stating that deposits are not insured by

the FDIC; and

(b) Include in bold face conspicuous type on each signature card,

passbook, and instrument evidencing a deposit the statement ``This

deposit is not insured by the FDIC''; or require each depositor to

execute a statement which acknowledges that the initial deposit and all

future deposits at the branch are not insured by the FDIC. This

acknowledgment shall be retained by the branch so long as the depositor

maintains any deposit with the branch. This provision applies to any

negotiable certificates of deposit made in a branch on or after July 6,

1989, as well as to any renewals of such deposits which become

effective on or after July 6, 1989.

Sec. 347.208 Agreement to provide information and to be examined.

(a) A foreign bank that applies for insurance for any branch shall

agree in writing to the following terms:

(1)(i) The foreign bank will provide the FDIC with information

regarding the affairs of the foreign bank and its affiliates which are

located outside of the United States as the FDIC from time to time may

request to:

(A) Determine the relations between the insured branch and the

foreign bank and its affiliates; and

(B) Assess the financial condition of the foreign bank as it

relates to the insured branch.

(ii) If the laws of the country of the foreign bank's domicile or

the policy of the Central Bank or other banking authority prohibit or

restrict the foreign bank from entering into this agreement, the

foreign bank shall agree to provide information to the extent permitted

by such law or policy. Information provided shall be in English and in

the form requested by the FDIC and shall be made available in the

United States. The Board of Directors will consider the existence and

extent of this prohibition or restriction in determining whether to

grant insurance and may deny the application if the information

available is so limited in extent that an unacceptable risk to the

insurance fund is presented.

(2)(i) The FDIC may examine the affairs of any office, agency,

branch or affiliate of the foreign bank located in the United States as

the FDIC deems necessary to:

(A) Determine the relations between the insured branch and such

offices, agencies, branches or affiliates; and

(B) Assess the financial condition of the foreign bank as it

relates to the insured branch.

(ii) The foreign bank shall also agree to provide the FDIC with

information regarding the affairs of such offices, agencies, branches

or affiliates as the FDIC deems necessary. The Board of Directors will

not grant insurance to any branch if the foreign bank fails to enter

into an agreement as required under this paragraph (a).

(b) The agreement shall be signed by an officer of the foreign bank

who has been so authorized by the foreign bank's board of directors.

The agreement and the authorization shall be included with the foreign

bank's application for insurance. Any agreement not in English shall be

accompanied by an English translation.

Sec. 347.209 Records.

(a) Each insured branch shall keep a set of accounts and records in

the words and figures of the English language which accurately reflect

the business transactions of the insured branch on a daily basis.

(b) The records of each insured branch shall be kept as though it

were a separate entity, with its assets and liabilities separate from

the other operations of the head office, other branches or agencies of

the foreign bank and its subsidiaries or affiliates. A foreign bank

which has more than one insured branch in a state may treat such

insured branches as one entity for record keeping purposes and may

designate one branch to maintain records for all the branches in the

state.

Sec. 347.210 Pledge of assets.

(a) Purpose. A foreign bank that has an insured branch shall pledge

assets for the benefit of the FDIC or its designee(s). Whenever the

FDIC is obligated under section 11(f) of the Federal Deposit Insurance

Act (12 U.S.C. 1821(f)) to pay the insured deposits of an insured

branch, the assets pledged under this section shall become the property

of the FDIC to be used to the extent necessary to protect the deposit

insurance fund.

(b) Amount of assets to be pledged. (1) A foreign bank shall pledge

assets 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 average shall be computed by using the sum of the close of

business figures for the 30 calendar days of the most recent calendar

quarter, ending with and including the last day of the calendar

quarter, divided by 30.⁴ In determining its average

liabilities, the insured branch may exclude liabilities to other

offices, agencies, branches, and wholly owned subsidiaries of the

foreign bank. The value of the pledged assets shall be computed based

on the lesser of the principal amount (par value) or market value of

such assets at the time of the original pledge and thereafter as of the

last day of the most recent calendar quarter.

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\4\ For days on which the branch is closed, balances from the

last previous business day are to be used.

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(2) The initial five-percent deposit for a newly established

insured branch shall be based on the branch's projection of liabilities

at the end of the first year of its operation.

(3) The FDIC may require a foreign bank to pledge additional assets

or to compute its pledge on a daily basis whenever the FDIC determines

that the foreign bank's or any insured branch's condition is such that

the assets pledged under paragraph (b)(1) or (b)(2) of this section

will not adequately protect the deposit insurance fund. In requiring a

foreign bank to pledge additional assets, the FDIC will consult with

the insured branch's primary regulator. Among the

[[Page 37772]]

factors to be considered in imposing these requirements are the

concentration of risk to any one borrower or group of related

borrowers, the concentration of transfer risk to any one country,

including the country in which the foreign bank's head office is

located or any other factor the FDIC determines is relevant.

(4) Each insured branch shall separately comply with the

requirements of this section. However, a foreign bank which has more

than one insured branch in a state may treat all of its insured

branches in the same state as one entity and shall designate one

insured branch to be responsible for compliance with this section.

(c) Depository. A foreign bank shall place pledged assets for

safekeeping at any depository which is located in any state. However, a

depository may not be an affiliate of the foreign bank whose insured

branch is seeking to use the depository. A foreign bank must obtain the

FDIC's prior written approval of the depository selected, and such

approval may be revoked and dismissal of the depository required

whenever the depository does not fulfill any one of its obligations

under the pledge agreement. A foreign bank shall appoint and constitute

the depository as its attorney in fact for the sole purpose of

transferring title to pledged assets to the FDIC as may be required to

effectuate the provisions of paragraph (a) of this section.

(d) Assets that may be pledged. Subject to the right of the FDIC to

require substitution, a foreign bank may pledge any of the kinds of

assets listed below; such assets must be denominated in United States

dollars. A foreign bank shall be deemed to have pledged any such assets

for the benefit of the FDIC or its designees at such time as any such

asset is placed with the depository.

(1) Certificates of deposit that are payable in the United States

and that are issued by any state bank, national bank, or branch of a

foreign bank which has executed a valid waiver of offset agreement or

similar debt instruments that are payable in the United States and that

are issued by any agency of a foreign bank which has executed a valid

waiver of offset agreement; provided, that the maturity of any

certificate or issuance is not greater than one year; and provided

further, that the issuing branch or agency of a foreign bank is not an

affiliate of the pledging bank or from the same country as the pledging

bank's domicile;

(2) Interest bearing bonds, notes, debentures, or other direct

obligations of or obligations fully guaranteed as to principal and

interest by the United States or any agency or instrumentality thereof;

(3) Commercial paper that is rated P-1 or P-2, or their equivalent

by a nationally recognized rating service; provided, that any conflict

in a rating shall be resolved in favor of the lower rating;

(4) Banker's acceptances that are payable in the United States and

that are issued by any state bank, national bank, or branch or agency

of a foreign bank; provided, that the maturity of any acceptance is not

greater than 180 days; and provided further, that the branch or agency

issuing the acceptance is not an affiliate of the pledging bank or from

the same country as the pledging bank's domicile;

(5) General obligations of any state of the United States, or any

county or municipality of any state of the United States, or any

agency, instrumentality, or political subdivision of the foregoing or

any obligation guaranteed by a state of the United States or any county

or municipality of any state of the United States; provided, that such

obligations have a credit rating within the top two rating bands of a

nationally-recognized rating service (with any conflict in a rating

resolved in favor of the lower rating);

(6) Obligations of the African Development Bank, Asian Development

Bank, Inter-American Development Bank, and the International Bank for

Reconstruction and Development;

(7) Notes issued by bank holding companies or banks organized under

the laws of the United States or any state thereof or notes issued by

United States branches or agencies of foreign banks, provided, that the

notes have a credit rating within the top two rating bands of a

nationally-recognized rating service (with any conflict in a rating

resolved in favor of the lower rating) and that they are payable in the

United States, and provided further, that the issuer is not an

affiliate of the foreign bank pledging the note; or

(8) Any other asset determined by the FDIC to be acceptable.

(e) Pledge agreement. A foreign bank shall not pledge any assets

unless a pledge agreement in form and substance satisfactory to the

FDIC has been executed by the foreign bank and the depository. The

agreement, in addition to other terms not inconsistent with this

paragraph (e), shall give effect to the following terms:

(1) Original pledge. The foreign bank shall place with the

depository assets of the kind described in Sec. 347.210(d), having an

aggregate value in the amount as required pursuant to Sec. 347.210(b).

(2) Additional assets required to be pledged. Whenever the foreign

bank is required to pledge additional assets for the benefit of the

FDIC or its designees pursuant to paragraph (b)(3) of this section, it

shall place (within two (2) business days after the last day of the

most recent calendar quarter, unless otherwise ordered) additional

assets of the kind described in paragraph (d) of this section, having

an aggregate value in the amount required by the FDIC.

(3) Substitution of assets. The foreign bank, at any time, may

substitute any assets for pledged assets, and, upon such substitution,

the depository shall promptly release any such assets to the foreign

bank. Provided, that:

(i) The foreign bank pledges assets of the kind described in

paragraph (d) of this section having an aggregate value not less than

the value of the pledged assets for which they are substituted and

certified as such by the foreign bank; and

(ii) The FDIC has not by written notification to the foreign bank,

a copy of which shall be provided to the depository, suspended or

terminated the foreign bank's right of substitution.

(4) Delivery of other documents. Concurrently with the pledge of

any assets, the foreign bank shall deliver to the depository all

documents and instruments necessary or advisable to effectuate the

transfer of title to any such assets and thereafter, from time to time,

at the request of the FDIC, deliver to the depository any such

additional documents or instruments. The foreign bank shall provide

copies of all such documents described in this paragraph (e)(4) to the

appropriate regional director concurrently with their delivery to the

depository.

(5) Acceptance and safekeeping responsibilities of the depository.

(i) The depository shall accept and hold any assets pledged by the

foreign bank pursuant to the pledge agreement for safekeeping free and

clear of any lien, charge, right of offset, credit, or preference in

connection with any claim the depository may assert against the foreign

bank and shall designate any such assets as a special pledge for the

benefit of the FDIC or its designees. The depository shall not accept

the pledge of any such assets unless concurrently with such pledge the

foreign bank delivers to the depository the documents and instruments

necessary for the transfer of title thereto as provided in this part.

(ii) The depository shall hold any such assets separate from all

other assets of the foreign bank or the depository. Such assets may be

held in book-entry form but must at all times be segregated

[[Page 37773]]

on the records of the depository and clearly identified as assets

subject to the pledge agreement.

(6) Reporting requirements of the insured branch and the

depository--(i) Initial reports. Upon the original pledge of assets as

provided in paragraph (e)(1) of this section:

(A) The depository shall provide to the foreign bank and to the

appropriate regional director a written report in the form of a receipt

identifying each asset pledged and specifying in reasonable detail with

respect to each such asset the complete title, interest rate, series,

serial number (if any), principal amount (par value), maturity date and

call date; and

(B) The foreign bank shall provide to the appropriate regional

director a written report certified as correct by the foreign bank

which sets forth the value of each pledged asset and the aggregate

value of all such assets, and which states that the aggregate value of

all such assets is the amount required pursuant to paragraph (b) of

this section and that all such assets are of the kind described in

paragraph (d) of this section.

(ii) Quarterly reports. Within ten (10) calendar days after the end

of the most recent calendar quarter:

(A) The depository shall provide to the appropriate regional

director a written report specifying in reasonable detail with respect

to each asset currently pledged (including any asset pledged to satisfy

the requirements of paragraph (b)(3) of this section and identified as

such), as of two business days after the end of the most recent

calendar quarter, the complete title, interest rate, series, serial

number (if any), principal amount (par value), maturity date, and call

date, provided, that if no substitution of any asset has occurred

during the reporting period, the report need only specify that no

substitution of assets has occurred; and

(B) The foreign bank shall provide as of two business days after

the end of the most recent calendar quarter to the appropriate regional

director a written report certified as correct by the foreign bank

which sets forth the value of each pledged asset and the aggregate

value of all such assets, which states that the aggregate value of all

such assets is the amount required pursuant to paragraph (b) of this

section and that all such assets are of the kind described in paragraph

(d) of this section, and which states the average of the liabilities of

each insured branch of the foreign bank computed in the manner and for

the period prescribed in paragraph (b) of this section.

(iii) Additional reports. The foreign bank shall, from time to

time, as may be required, provide to the appropriate regional director

a written report in the form specified containing the information

requested with respect to any asset then currently pledged.

(7) Access to assets. With respect to any asset pledged pursuant to

the pledge agreement, the depository will provide representatives of

the FDIC or the foreign bank access (during regular business hours of

the depository and at the location where any such asset is held,

without other limitation or qualification) to all original instruments,

documents, books, and records evidencing or pertaining to any such

asset.

(8) Release upon the order of the FDIC. The depository shall

release to the foreign bank any pledged assets, as specified in a

written notification of the appropriate regional director, upon the

terms and conditions provided in such notification, including without

limitation the waiver of any requirement that any assets be pledged by

the foreign bank in substitution of any released assets.

(9) Release to the FDIC. Whenever the FDIC is obligated under

section 11(f) of the Federal Deposit Insurance Act (12 U.S.C. 1821(f))

to pay insured deposits of an insured branch, the FDIC by written

certification shall so inform the depository; and the depository, upon

receipt of such certification, shall thereupon promptly release and

transfer title to any pledged assets to the FDIC or release such assets

to the foreign bank, as specified in the certification. Upon release

and transfer of title to all pledged assets specified in the

certification, the depository shall be discharged from any further

obligation under the pledge agreement.

(10) Interest earned on assets. The foreign bank may retain any

interest earned with respect to the assets currently pledged unless the

FDIC by written notice prohibits retention of interest by the foreign

bank, in which case the notice shall specify the disposition of any

such interest.

(11) Expenses of agreement. The FDIC shall not be required to pay

any fees, costs, or expenses for services provided by the depository to

the foreign bank pursuant to, or in connection with, the pledge

agreement.

(12) Substitution of depository. The depository may resign, or the

foreign bank may discharge the depository, from its duties and

obligations under the pledge agreement by giving at least sixty (60)

days' written notice thereof to the other party and to the appropriate

regional director. The FDIC, upon thirty (30) days' written notice to

the foreign bank and the depository, may require the foreign bank to

dismiss the depository if the FDIC in its discretion determines that

the depository is in breach of the pledge agreement. The depository

shall continue to function as such until the appointment of a successor

depository becomes effective and the depository has released to the

successor depository the pledged assets and documents and instruments

to effectuate transfer of title in accordance with the written

instructions of the foreign bank as approved by the FDIC. The

appointment by the foreign bank of a successor depository shall not be

effective until:

(i) The FDIC has approved in writing the successor depository; and

(ii) A pledge agreement in form and substance satisfactory to the

FDIC has been executed.

(13) Waiver of terms. The FDIC may by written order waive

compliance by the foreign bank or the depository with any term or

condition of the pledge agreement.

(f)(1) Authority is delegated to the Director (DOS), the Deputy

Director (DOS), and where confirmed in writing by the Director, to an

associate director, or to the appropriate regional director or deputy

regional director, to enter into pledge agreements with foreign banks

and depositories in connection with the pledge of asset requirements

pursuant to this section. This authority shall also extend to the power

to revoke such approval and require the dismissal of the depository.

(2) Authority is delegated to the General Counsel or designee to

modify the terms of the model pledge agreement used for such deposit

agreements.

Sec. 347.211 Asset maintenance.

(a) An insured branch of a foreign bank shall maintain on a daily

basis eligible assets in an amount not less than 106% of the preceding

quarter's average book value of the insured branch's liabilities or, in

the case of a newly-established insured branch, the estimated book

value of its liabilities at the end of the first full quarter of

operation, exclusive of liabilities due to the foreign bank's head

office, other branches, agencies, offices, or wholly owned

subsidiaries. The Director of the Division of Supervision or his

designee may impose a computation of total liabilities on a daily basis

in those instances where it is found necessary for supervisory

purposes. The Board of Directors, after consulting with the insured

branch's primary regulator, may require that a higher ratio of eligible

assets be maintained if the financial condition of the insured branch

warrants such action. Among the factors

[[Page 37774]]

which will be considered in requiring a higher ratio of eligible assets

are the concentration of risk to any one borrower or group of related

borrowers, the concentration of transfer risk to any one country,

including the country in which the foreign bank's head office is

located or any other factor the FDIC determines is relevant. Eligible

assets shall be payable in United States dollars.

(b) In determining eligible assets for the purposes of compliance

with paragraph (a) of this section, the insured branch shall exclude

the following:

(1) Any asset due from the foreign bank's head office, other

branches, agencies, offices or affiliates;

(2) Any asset classified ``Value Impaired,'' to the extent of the

required Allocated Transfer Risk Reserves or equivalent write down, or

``Loss'' in the most recent state or federal examination report;

(3) Any deposit of the insured branch in a bank unless the bank has

executed a valid waiver of offset agreement;

(4) Any asset not supported by sufficient credit information to

allow a review of the asset's credit quality, as determined at the most

recent state or federal examination; ⁵

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\5\ Whether an asset has sufficient credit information will be a

function of the size of the borrower and the location within the

foreign bank of the responsibility for authorizing and monitoring

extensions of credit to the borrower. For large, well known

companies, when credit responsibility is located in an office of the

foreign bank outside the insured branch, the insured branch must

have adequate documentation to show that the asset is of good

quality and is being supervised adequately by the foreign bank. In

such cases, copies of periodic memoranda that include an analysis of

the borrower's recent financial statements and a report on recent

developments in the borrower's operations and borrowing

relationships with the foreign bank generally would constitute

sufficient information. For other borrowers, periodic memoranda must

be supplemented by information such as copies of recent financial

statements, recent correspondence concerning the borrower's

financial condition and repayment history, credit terms and

collateral, data on any guarantors, and where necessary, the status

of any corrective measures being employed.

Subsequent to the determination that an asset lacks sufficient

credit information, an insured branch may not include the amount of

that asset among eligible assets until the FDIC determines that

sufficient documentation exists. Such a determination may be made

either at the next federal examination, or upon request of the

insured branch, by the appropriate regional director.

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(5) Any asset not in the insured branch's actual possession unless

the insured branch holds title to such asset and the insured branch

maintains records sufficient to enable independent verification of the

insured branch's ownership of the asset, as determined at the most

recent state or federal examination;

(6) Any intangible asset;

(7) Any other asset not considered bankable by the FDIC.

(c) A foreign bank which has more than one insured branch in a

state may treat all of its insured branches in the same state as one

entity for purposes of compliance with paragraph (a) of this section

and shall designate one insured branch to be responsible for

maintaining the records of the insured branches' compliance with this

section.

(d) The average book value of the insured branch's liabilities for

a quarter shall be, at the insured branch's option, either an average

of the balances as of the close of business for each day of the quarter

or an average of the balances as of the close of business on each

Wednesday during the quarter. Quarters end on March 31, June 30,

September 30, and December 31 of any given year. For days on which the

insured branch is closed, balances from the previous business day are

to be used. Calculations of the average book value of the insured

branch's liabilities for a quarter shall be retained by the insured

branch until the next federal examination.

Sec. 347.212 Deductions from the assessment base.

An insured branch may deduct from its assessment base deposits in

the insured branch to the credit of the foreign bank or any office,

branch or agency of and any wholly owned subsidiary of the foreign

bank.

Sec. 347.213 FDIC approval to conduct activities not permissible for

federal branches.

(a) Scope. A foreign bank operating an insured state branch which

desires to engage in or continue to engage in any type of activity that

is not permissible for a federal branch, pursuant to the National Bank

Act (12 U.S.C. 21 et seq.) or any other federal statute, regulation,

official bulletin or circular, written order or interpretation, or

decision of a court of competent jurisdiction (each an impermissible

activity), shall file a written application for permission to conduct

such activity with the FDIC pursuant to Sec. 347.405.

(b) Exceptions. A foreign bank operating an insured state branch

which would otherwise be required to submit an application pursuant to

paragraph (a) of this section will not be required to submit such an

application if the activity it desires to engage in or continue to

engage in has been determined by the FDIC not to present a significant

risk to the affected deposit insurance fund pursuant to 12 CFR Part

362, ``Activities and Investment of Insured State Banks''.

(c) Agency activities. A foreign bank operating an insured state

branch which would otherwise be required to submit an application

pursuant to paragraph (a) of this section will not be required to

submit such an application if it desires to engage in or continue to

engage in an activity conducted as agent which would be a permissible

agency activity for a state-chartered bank located in the state which

the state-licensed insured branch of the foreign bank is located and is

also permissible for a state-licensed branch of a foreign bank located

in that state; provided, however, that the agency activity must be

permissible pursuant to any other applicable federal law or regulation.

(d) Conditions of approval. Approval of such an application may be

conditioned on the applicant's agreement to conduct the activity

subject to specific limitations, such as but not limited to the

pledging of assets in excess of the requirements of Sec. 347.210 and/or

the maintenance of eligible assets in excess of the requirements of

Sec. 347.211. In the case of an application to initially engage in an

activity, as opposed to an application to continue to conduct an

activity, the insured branch shall not commence the activity until it

has been approved in writing by the FDIC pursuant to this part and the

Board of Governors of the Federal Reserve System (Board of Governors),

and any and all conditions imposed in such approvals have been

satisfied.

(e) Divestiture or cessation. (1) If an application for permission

to continue to conduct an activity is not approved by the FDIC or the

Board of Governors, the applicant shall submit a plan of divestiture or

cessation of the activity to the appropriate regional director in

accordance with the terms set forth in Sec. 347.405(d).

(2) A foreign bank operating an insured state branch which elects

not to apply to the FDIC for permission to continue to conduct an

activity which is rendered impermissible by any change in statute,

regulation, official bulletin or circular, written order or

interpretation, or decision of a court of competent jurisdiction shall

submit a plan of divestiture or cessation to the appropriate regional

director in accordance with the terms set forth in Sec. 347.405(d).

(3) Divestitures or cessations shall be completed within one year

from the date of the disapproval, or within such shorter period of time

as the FDIC shall direct.

[[Page 37775]]

Subpart C--International Lending

Sec. 347.301 Allocated transfer risk reserve.

(a) Definitions. For the purposes of this subpart:

(1) Banking institution means an insured state nonmember bank.

(2) Federal banking agencies means the Board of Governors of the

Federal Reserve System, the Office of the Comptroller of the Currency,

and the Federal Deposit Insurance Corporation.

(3) International assets means those assets required to be included

in banking institutions' ``Country Exposure Report'' form (FFIEC No.

009).

(4) Transfer risk means the possibility that an asset cannot be

serviced in the currency of payment because of a lack of, or restraints

on the availability of, needed foreign exchange in the country of the

obligor.

(b) Allocated Transfer Risk Reserve--(1) Establishment of Allocated

Transfer Risk Reserve. A banking institution shall establish an

allocated transfer risk reserve (ATRR) for specified international

assets when required by the FDIC in accordance with this section.

(2) Procedures and standards--(i) Joint agency determination. At

least annually, the federal banking agencies shall determine jointly,

based on the standards set forth in paragraph (b)(2)(ii) of this

section, the following:

(A) Which international assets subject to transfer risk warrant

establishment of an ATRR;

(B) The amount of the ATRR for the specified assets; and

(C) Whether an ATRR established for specified assets may be

reduced.

(ii) Standards for requiring ATRR--(A) Evaluation of assets. The

federal banking agencies shall apply the following criteria in

determining whether an ATRR is required for particular international

assets:

(1) Whether the quality of a banking institution's assets has been

impaired by a protracted inability of public or private obligors in a

foreign country to make payments on their external indebtedness as

indicated by such factors, among others, as whether:

(i) Such obligors have failed to make full interest payments on

external indebtedness; or

(ii) Such obligors have failed to comply with the terms of any

restructured indebtedness; or

(iii) A foreign country has failed to comply with any International

Monetary Fund or other suitable adjustment program; or

(2) Whether no definite prospects exist for the orderly restoration

of debt service.

(B) Determination of amount of ATRR. (1) In determining the amount

of the ATRR, the federal banking agencies shall consider:

(i) The length of time the quality of the asset has been impaired;

(ii) Recent actions taken to restore debt service capability;

(iii) Prospects for restored asset quality; and

(iv) Such other factors as the federal banking agencies may

consider relevant to the quality of the asset.

(2) The initial year's provision for the ATRR shall be ten percent

of the principal amount of each specified international asset, or such

greater or lesser percentage determined by the federal banking

agencies. Additional provision, if any, for the ATRR in subsequent

years shall be fifteen percent of the principal amount of each

specified international asset, or such greater or lesser percentage

determined by the federal banking agencies.

(iii) FDIC notification. Based on the joint agency determinations

under paragraph (b)(2)(i) of this section, the FDIC shall notify each

banking institution holding assets subject to an ATRR:

(A) Of the amount of the ATRR to be established by the institution

for specified international assets; and

(B) That an ATRR established for specified assets may be reduced.

(3) Accounting treatment of ATRR--(i) Charge to current income. A

banking institution shall establish an ATRR by a charge to current

income and the amounts so charged shall not be included in the banking

institution's capital or surplus.

(ii) Separate accounting. A banking institution shall account for

an ATRR separately from the Allowance for Loan and Lease Losses, and

shall deduct the ATRR from ``gross loans and leases'' to arrive at

``net loans and leases.'' The ATRR must be established for each asset

subject to the ATRR in the percentage amount specified.

(iii) Consolidation. A banking institution shall establish an ATRR,

as required, on a consolidated basis. For banks, consolidation should

be in accordance with the procedures and tests of significance set

forth in the instructions for preparation of Consolidated Reports of

Condition and Income (FFIEC Nos. 031, 032, 033 and 034).

(iv) Alternative accounting treatment. A banking institution need

not establish an ATRR if it writes down in the period in which the ATRR

is required, or has written down in prior periods, the value of the

specified international assets in the requisite amount for each such

asset. For purposes of this paragraph, international assets may be

written down by a charge to the Allowance for Loan and Lease Losses or

a reduction in the principal amount of the asset by application of

interest payments or other collections on the asset. However, the

Allowance for Loan and Lease Losses must be replenished in such amount

necessary to restore it to a level which adequately provides for the

estimated losses inherent in the banking institution's loan and lease

portfolio.

(v) Reduction of ATRR. A banking institution may reduce an ATRR

when notified by the FDIC or, at any time, by writing down such amount

of the international asset for which the ATRR was established.

Sec. 347.302 Accounting for fees on international loans.

(a) Restrictions on fees for restructured international loans. No

banking institution shall charge, in connection with the restructuring

of an international loan, any fee exceeding the administrative cost of

the restructuring unless it amortizes the amount of the fee exceeding

the administrative cost over the effective life of the loan.

(b) Accounting treatment. Subject to paragraph (a) of this section,

banking institutions shall account for fees on international loans in

accordance with generally accepted accounting principles.

Sec. 347.303 Reporting and disclosure of international assets.

(a) Requirements. (1) Pursuant to section 907(a) of the

International Lending Supervision Act of 1983 (Title IX, Pub. L. 98-

181, 97 Stat. 1153) (ILSA), a banking institution shall submit to the

FDIC, at least quarterly, information regarding the amounts and

composition of its holdings of international assets.

(2) Pursuant to section 907(b) of ILSA, a banking institution shall

submit to the FDIC information regarding concentrations in its holdings

of international assets that are material in relation to total assets

and to capital of the institution, such information to be made publicly

available by the FDIC on request.

(b) Procedures. The format, content and reporting and filing dates

of the reports required under paragraph (a) of this section shall be

determined jointly by the federal banking agencies. The requirements to

be prescribed by the federal banking agencies may include changes to

existing forms (such as revisions to the Country Exposure Report, Form

FFIEC No. 009) or such other requirements as the federal

[[Page 37776]]

banking agencies deem appropriate. The federal banking agencies also

may determine to exempt from the requirements of paragraph (a) of this

section banking institutions that, in the federal banking agencies'

judgment, have de minimis holdings of international assets.

(c) Reservation of Authority. Nothing contained in this subpart

shall preclude the FDIC from requiring from a banking institution such

additional or more frequent information on the institution's holdings

of international assets as the agency may consider necessary.

Subpart D--Applications and Delegations of Authority

Sec. 347.401 Definitions.

For the purposes of this subpart, the following definitions apply:

(a) Appropriate regional director or appropriate deputy regional

director means the appropriate regional director or appropriate deputy

regional director as defined by Sec. 303.0 of this chapter.

(b) Board of Governors means the Board of Governors of the Federal

Reserve System.

(c) Comptroller means the Office of the Comptroller of the

Currency.

(d) Eligible insured state nonmember bank means an eligible insured

state nonmember bank as defined by Sec. 347.102.

(e) Federal branch means a federal branch of a foreign bank as

defined by Sec. 347.201.

(f) FDIC means the Federal Deposit Insurance Corporation.

(g) Foreign bank means a foreign bank as defined by Sec. 347.201.

(h) Foreign branch means a foreign branch of an insured state

nonmember bank as defined by Sec. 347.201.

(i) Foreign organization means a foreign organization as defined by

Sec. 347.102.

(j) Insured branch means an insured branch of a foreign bank as

defined by Sec. 347.201.

(k) Noninsured branch means a noninsured branch of a foreign bank

as defined by Sec. 347.201.

(l) State branch means a state branch of a foreign bank as defined

by Sec. 347.201.

Sec. 347.402 Establishing, moving or closing a foreign branch of a

state nonmember bank; Sec. 347.103.

(a) General consent. Written notice under Sec. 347.103(b)(1) from

an eligible insured state nonmember bank establishing or relocating a

foreign branch pursuant to the FDIC's general consent procedure must be

provided to the appropriate regional director within thirty days of

such action, and include the location of the foreign branch, including

a street address, and a statement that the foreign branch will not be

located on a site on the World Heritage List or on the foreign

country's equivalent of the National Register of Historic Places, in

accordance with section 402 of the National Historic Preservation Act

Amendments of 1989 (16 U.S.C. 470a-2). The appropriate regional

director will provide written acknowledgment of receipt of the notice.

(b) Prior notice. (1) Prior notice under Sec. 347.103(b)(2) from an

eligible insured state nonmember bank establishing a foreign branch

pursuant to the FDIC's prior notice procedure must be filed with the

appropriate regional director and contain the following information:

(i) The exact location of the foreign branch, including a street

address, and a statement that the foreign branch will not be located on

a site on the World Heritage List or on the foreign country's

equivalent of the National Register of Historic Places, in accordance

with section 402 of the National Historic Preservation Act Amendments

of 1989 (16 U.S.C. 470a-2);

(ii) Details concerning any involvement in the proposal by an

insider of the bank, including any financial arrangements relating to

fees, the acquisition of property, leasing of property, and

construction contracts;

(iii) A brief description of the bank's business plan with respect

to the foreign branch; and

(iv) A brief description of the activities of the branch.

(2) The appropriate regional director will provide written

acknowledgment of the date of receipt of the notice and the bank may

establish the foreign branch 45 days after such date, or upon such

earlier time as authorized by the FDIC, unless the FDIC promptly

provides the bank written notification that the application will be

processed under paragraph (d) of this section because:

(i) The application presents a significant supervisory concern; or

(ii) The application presents a significant legal or policy issue.

(c) Closing. The notice of closing required by Sec. 347.103(b)(5)

should be in letter form to the appropriate regional director and

include the name, location, and date of closing of the closed branch.

(d) Content of branch application. (1) An application by an insured

state nonmember bank required by Sec. 347.103(b) and which is not

eligible for treatment under general consent or prior notice, must be

in writing and contain the following information:

(i) The exact location of the foreign branch, including a street

address;

(ii) Details concerning any involvement in the proposal by an

insider of the bank, including any financial arrangements relating to

fees, the acquisition of property, leasing of property, and

construction contracts;

(iii) A brief description of the bank's business plan with respect

to the foreign branch;

(iv) A brief description of the activities of the branch, and to

the extent any activities are not authorized by Sec. 347.103(a), the

bank's reasons why they should be approved; and

(v) A statement whether the foreign branch would be located on a

site on the World Heritage List or on the foreign country's equivalent

of the National Register of Historic Places, in accordance with section

402 of the National Historic Preservation Act Amendments of 1989 (16

U.S.C. 470a-2).

(2) The appropriate regional director may request additional

information to complete processing.

(3) The application must be filed with the appropriate regional

director.

(e) Delegations of authority. Authority is hereby delegated to the

Director (DOS) and the deputy director, and if confirmed in writing by

the Director, to an associate director, appropriate regional director,

or appropriate deputy regional director, to approve an application

under paragraph (d) of this section so long as:

(1) the requirements of section 402 the National Historic

Preservation Act Amendments of 1989 have been favorably resolved; and

(2) the applicant will only conduct activities authorized by

Sec. 347.103(a).

Sec. 347.403 Investment by insured state nonmember banks in foreign

organizations; Sec. 347.108.

(a) General consent. Written notice under Sec. 347.108(a) from an

eligible insured state nonmember bank making direct or indirect

investments in a foreign organization pursuant to the FDIC's general

consent procedure must be provided to the appropriate regional director

within thirty days of such action. The appropriate regional director

will provide written acknowledgment of receipt of the notice.

(b) Prior notice. (1) Prior notice under Sec. 347.108(b) from an

eligible insured state nonmember bank making direct or indirect

investments in a foreign organization pursuant to the FDIC's prior

notice procedure must be filed with the appropriate regional director

and contain the following information:

(i) Basic information about the terms of the transaction, the

amount of the

[[Page 37777]]

investment in the foreign organization and the proportion of its

ownership to be acquired;

(ii) Basic information about the foreign organization, its

financial position and income, including any available balance sheet

and income statement for the prior year, or financial projections for a

new foreign organization, and a brief description of the foreign

organization's activities, including any incidental activities in the

United States;

(iii) A listing of all shareholders known to hold 10 percent or

more of any class of the foreign bank's or other financial entity's

stock or other evidence of ownership, and the amount held by each; and

(iv) A brief description of the bank's business plan with respect

to the foreign organization, and if the bank seeks approval to engage

in underwriting or dealing activities, a description of the bank's

plans and procedures to address all relevant risks.

(2) The appropriate regional director will provide written

acknowledgment of the date of receipt of the notice and the bank may

make the investment 45 days after such date, or upon such earlier time

as authorized by the FDIC, unless the FDIC promptly provides the bank

written notification that the application will be processed under

paragraph (c) of this section because:

(i) The application presents a significant supervisory concern; or

(ii) The application presents a significant legal or policy issue.

(c) Content of application. (1) An application by an insured state

nonmember bank which is not eligible for treatment under general

consent or prior notice required by Sec. 347.108(d), must be in writing

and contain the following information:

(i) Basic information about the terms of the transaction, the

amount of the investment in the foreign organization and the proportion

of its ownership to be acquired;

(ii) Basic information about the foreign organization, its

financial position and income, including any available balance sheet

and income statement for the prior year, or financial projections for a

new foreign organization;

(iii) A listing of all shareholders known to hold 10 percent or

more of any class of the foreign bank's or other financial entity's

stock or other evidence of ownership, and the amount held by each;

(iv) A brief description of the bank's business plan with respect

to the foreign organization, and if the bank seeks approval to engage

in underwriting or dealing activities, a description of the bank's

plans and procedures to address all relevant risks;

(v) A brief description of the foreign organization's activities,

and to the extent such activities are not authorized by subpart A of

part 347, the bank's reasons why they should be approved; and

(vi) A brief description of any business or activities which the

foreign organization will conduct directly or indirectly in the United

States, and to the extent such activities are not authorized by subpart

A of part 347, the bank's reasons why they should be approved.

(2) The appropriate regional director may request additional

information to complete processing.

(3) The application must be filed with the appropriate regional

director.

(d) Delegations of authority. Authority is delegated to the

Director (DOS) and the deputy director, and if confirmed in writing by

the director, to an associate director, appropriate regional director,

or appropriate deputy regional director to approve or deny applications

under paragraph (c) of this section so long as the investment complies

with the activities restrictions, investment limits, and other

requirements of Sec. 347.104 through Sec. 347.107.

Sec. 347.404 Exemptions from insurance requirement for a state branch

of a foreign bank; Sec. 347.206(b).

(a) Application for an exemption. A foreign bank may apply to the

FDIC for consent to operate a branch as a noninsured branch as required

by Sec. 347.206(b).

(b) Contents of application. The application must be in writing and

include the following information and documentation:

(1) The kinds of deposit activities in which the branch proposes to

engage;

(2) The expected source of deposits;

(3) The manner in which deposits will be solicited;

(4) How this activity will maintain or improve the availability of

credit to all sectors of the United States economy, including the

international trade finance sector;

(5) That the activity will not give the foreign bank an unfair

competitive advantage over United States banking organizations; and

(6) A resolution by the foreign bank's board of directors

authorizing the filing of the application; or if a resolution is not

required by the applicant's organizational documents, the request shall

include evidence of approval by the foreign bank's senior management.

(c) Application filing. The request must be filed with the

appropriate regional director.

(d) Additional information. The appropriate regional director may

request additional information to complete the application processing.

Sec. 347.405 Approval for an insured state branch of a foreign bank to

conduct activities not permissible for federal branches; Sec. 347.213.

(a) Application for permission. A foreign bank operating an insured

state branch which desires to engage in or continue to engage in any

type of activity that is not permissible for a federal branch shall

file a written application for permission to conduct such activity with

the FDIC as required by Sec. 347.213.

(b) Contents of application. An application submitted pursuant to

paragraph (a) of this section shall be in letter form and shall include

the following information and documentation:

(1) A brief description of the activity, including the manner in

which it will be conducted and an estimate of the expected dollar

volume associated with the activity;

(2) An analysis of the impact of the proposed activity on the

condition of the United States operations of the foreign bank in

general and of the branch in particular, including a copy, if

available, of any feasibility study, management plan, financial

projections, business plan, or similar document concerning the conduct

of the activity;

(3) A resolution by the applicant's board of directors or, if a

resolution is not required pursuant to the applicant's organizational

documents, evidence of approval by senior management authorizing the

conduct of such activity and the filing of this application;

(4) A statement by the applicant of whether or not it is in

compliance with Secs. 347.210 and 347.211, Pledge of Assets and Asset

Maintenance, respectively;

(5) A statement by the applicant that it has complied with all

requirements of the Board of Governors concerning applications to

conduct the activity in question and the status of such application,

including a copy of the Board of Governors' disposition of such

application, if applicable; and

(6) A statement of why the activity will pose no significant risk

to the Bank Insurance Fund.

(c) Board of Governors application. An applicant may submit to the

FDIC a copy of its application to the Board of Governors, provided that

such application contains the information

[[Page 37778]]

described in paragraph (b) of this section.

(d) Divestiture or cessation. (1) An applicant that is required to

submit a plan of divestiture or cessation for any of the reasons set

forth in Sec. 347.213(e) shall submit a detailed written plan of

divestiture or cessation within 60 days of the disapproval or the

triggering event.

(2) The divestiture or cessation plan shall:

(i) Describe in detail the manner in which the applicant will

divest itself of or cease the activity in question; and

(ii) Shall include a projected timetable describing how long the

divestiture or cessation is expected to take.

(e) Filing procedures. Applications and divestiture plans pursuant

to this section shall be filed with the appropriate regional director.

(f) Additional information. The appropriate regional director may

request additional information to complete the application or

divestiture plan processing.

(g) Delegation of authority. Authority is hereby delegated to the

Director (DOS) and the deputy director and, where confirmed in writing

by the Director, to an associate director, or to the appropriate

regional director or deputy regional director, to approve plans of

divestiture and cessation submitted pursuant to paragraph (d) of this

section.

PART 351--[REMOVED]

17. Part 351 is removed.

PART 362--ACTIVITIES AND INVESTMENTS OF INSURED STATE BANKS

18. The authority citation of part 362 continues to read as

follows:

Authority: 12 U.S.C. 1816, 1818, 1819 (Tenth), 1831a.

19. In Sec. 362.4, paragraph (c)(3)(i)(A) is revised to read as

follows:

Sec. 362.4 Activities of insured state banks and their subsidiaries.

* * * * *

(c) * * *

(3) * * *

(i) * * *

(A) Directly guarantee the obligations of others as provided for in

Sec. 347.103(a)(1) of this chapter; and

* * * * *

By order of the Board of Directors.

Dated at Washington, D.C. this 24th day of June, 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97-17270 Filed 7-14-97; 8:45 am]

BILLING CODE 6174-01-P