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FDIC Federal Register Citations

Bank of Tokyo-Mitsubishi

April 6, 2004

Mr. Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429
Attention Comments

BY ELECTRONIC MAIL

Re: Proposed Rulemaking on Community Reinvestment Act Regulations

Dear Mr. Feldman:

Thank you for the opportunity to comment on the proposed changes to the CRA regulations. I am writing on behalf of Bank of Tokyo-Mitsubishi Trust Company, which was designated as a wholesale institution in 1996 pursuant to the current CRA regulations and as such, is subject to the community development test.

Investments    With regard to guidance that the federal banking agencies anticipate developing concerning investments:

•  Investments and loans from past examination periods that remain on an institution's books for all or part of the current examination period should be given full credit in an amount equal to either the current outstanding commitment, or if no longer outstanding, the average of the outstanding commitment over the entire examination period. As it stands, the regulation provides a very strong incentive to make only short-term investments and loans, while many community development projects require longer-term, "patient" funding. A short-term loan for a long-term project exposes the borrower to the risk that it will not be able to obtain renewed funding halfway through a project, or that a different rate environment will make the funding unaffordable. A longer-term investment or loan remains at work beyond its first one or two years, and the bank continues to have a legally binding commitment to make that funding available (and thus not available for any other purpose). The bank also continues to be exposed to credit risk and, in the case of fixed rates, which many community development borrowers prefer, interest rate risk that increases the longer the term of the loan. In general, banks tend to prefer shorter-term facilities, since interest rate yield curves, tax positions, and other parameters effecting investment decisions become more subject to uncertainty the further into the future one projects; these factors are among those that contribute to higher risk and higher interest rates for longer-term loans. Thus, banks that meet the community credit need for longer-term funding, despite limited availability of capital for all purposes, including CRA, should be recognized, not discouraged, for doing so.

• The criterion of "innovative or complex" should not be eliminated, but should be regarded as "extra credit" or as one optional factor in assessing the criterion of "responsiveness to community credit needs". Innovation can be important in formulating community development initiatives and should be recognized where it exists in view of the extra effort and risk that often accompanies it. We believe this aspect has value notwithstanding that the "plain vanilla" work of meeting community credit needs is of primary importance. Complexity is necessary at times and the extra effort and risk should be recognized, although it should not be an end in itself.

Loan Purchases vs. Loan Originations  With regard to your proposal to distinguish loan purchases from loan originations, we concur with your intention not to weigh loan purchases less than loan originations. Loan purchases free up capital that can be used to make new originations and result in a more efficient, liquid market and lower rates that directly benefit borrowers. Moreover, we do not see any benefit in distinguishing purchases from originations, and certainly not one that would justify the additional effort required to report the information. Finally, if our above suggestion to fully recognize banks for making long-term investments and loans were to go into effect, any incentive for banks to sell their existing loans in order to purchase new ones for CRA purposes and not for economic reasons would be eliminated, together with the inefficiency and cost of the transactions.

Letters of Credit  Although not proposed for comment, we urge the agencies to consider clarifying that letters of credit that meet the regulatory definition for community development should be included in CRA assessments.  Letters of credit and bank guarantees are vital to projects' obtaining required financing and moving forward, and make it possible for different investors to take part and thereby expand the availability of capital. Because of the credit enhancement provided by the L/C-issuing bank, other investors recognize that the risk has been lowered to a level acceptable to them and are therefore willing to invest and to accept a lower rate of interest. This results in a trend towards more efficient, liquid markets and lower rates that directly benefit borrowers. Like other credit facilities, letters of credit are subject to the same level of risk analysis, expose the bank to credit risk, and represent legally binding commitments of the bank to have dedicated funding ready and available during the term of the facility (and thus not available for any other purpose). Like regulatory requirements for loans, banks must maintain risk reserves and count letters of credit towards loans-to-one-borrower limitations. Because letters of credit fulfill important community credit needs, they should be formally included as a form of credit in the CRA regulations.

Disasters   With regard to the definition of "community development", activities that help revitalize and stabilize areas after natural or man-made disasters (such as the September 11th terrorist attacks) should be considered community development, even if the activity is not located in, or targeted to, low- or moderate-income communities. Depending on the severity and scope, disasters can cause long-lasting harm to formerly vibrant economies, presenting them with many of the challenges and obstacles routinely faced by low- and moderate-income communities. In addition, low- and moderate-income communities located within commuting distance, whose residents were employed in or whose businesses served the disaster area, are also directly affected. We encourage you to broaden this definition to incorporate these concepts.

Thank you for your consideration of these matters.

Sincerely,

Bank of Tokyo-Mitsubishi
1251 Avenue of the Americas
New York, NY 10020

Last Updated 05/18/2004 regs@fdic.gov

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