Federal Deposit
Insurance Corporation

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 4

[Docket No. 99-13]
RIN 1557-AB60

FEDERAL RESERVE SYSTEM

12 CFR Part 211

[Regulation K; Docket No. R-1012]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 347

RIN 3064-AC15

Extended Examination Cycle For U.S. Branches and Agencies of
Foreign Banks

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

ACTION: Joint final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the Agencies) are
adopting as a joint final rule their joint interim rule implementing
section 2214 of the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (EGRPRA). Section 2214 of EGRPRA authorizes the Agencies to
extend the examination cycle for certain United States branches and
agencies of foreign banks. This joint final rule makes United States
branches and agencies of foreign banks with total assets of $250
million or less eligible for an 18-month examination cycle if they meet
certain qualifying criteria.

EFFECTIVE DATE: October 22, 1999.

FOR FURTHER INFORMATION CONTACT: OCC: Martha Clarke, Senior Attorney,
International Activities (202/874-0680); Jose Tuya, Director,
International Banking & Finance (202/874-4730); or Karl Betz, Attorney,
Legislative and Regulatory Activities (202/874-5090), Office of the
Comptroller of the Currency, 250 E Street SW., Washington, D.C. 20219.
Board: Barbara J. Bouchard, Manager, Division of Banking
Supervision and Regulation (202/452-3072); or Jonathan D. Stoloff,
Counsel, Legal Division (202/452-3269), Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, D.C. 20551.
FDIC: Karen Walter, Chief, International Branch, Division of
Supervision (202/898-3540); or Mark Mellon, Counsel, Regulation and
Legislation Section, Legal Division (202/898-3854), Federal Deposit
Insurance Corporation, 550 17th Street NW., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:
Background
The International Banking Act of 1978 (the IBA),<SUP>1</SUP> as
amended by the Foreign Bank Supervision Enhancement Act of
1991,<SUP>2</SUP> prescribed a 12-month examination schedule for U.S.
branches and agencies of foreign banks. Section 2214 of EGRPRA modified
that requirement by amending section 3105(c)(1)(C) of the IBA to
provide that U.S. branches and agencies of foreign banks are subject to
on-site examination as frequently as national banks and state banks are
examined by their appropriate federal banking agencies.<SUP>3</SUP>
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\1\ Pub. L. 95-369, 92 Stat. 607.
\2\ Pub. L. 102-242, 105 Stat. 2286.
\3\ Section 2214 of EGRPRA, Pub. L. 104-208, 110 Stat. 3009.
Section 3105(c)(1)(C) is codified at 12 U.S.C. 3105(c)(1)(C).
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In general, national banks and state banks must be examined every
12 months. However, section 111 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 <SUP>4</SUP> authorized an 18-month
examination cycle for certain national banks and state banks with a
composite rating of 1 under the Uniform Financial Institutions Rating
System (UFIRS) and total assets of $100 million or less. Subsequently,
section 306 of the Riegle Community Development and Regulatory
Improvement Act of 1994 <SUP>5</SUP> expanded the availability of the
18-month examination cycle to certain national banks and state banks
with a composite rating of 1 under UFIRS and total assets of less than
$250 million, as well as to certain national banks and state banks with
a composite rating of 2 under UFIRS and total assets of $100 million or
less. Finally, section 2221 of EGRPRA amended section 10(d) of the
Federal Deposit Insurance Act (FDI Act) <SUP>6</SUP> to provide that at
any time after September 23, 1996, U.S. bank supervisory agencies could
extend the 18-month examination cycle to certain national banks and
state banks with a composite rating of 2 and total assets of $250
million or less. Effective April 2, 1998,

[[Page 56950]]

the Agencies issued a final rule that extended the examination cycle to
18 months for certain national banks and state banks that satisfy the
requirements of section 2221 of EGRPRA. 63 FR 16377 (April 2, 1998). To
be eligible for the extended cycle, the national bank or state bank
must:
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\4\ Pub. L. 102-242, 105 Stat. 2236 (section 111 is codified at
12 U.S.C. 1820(d)).
\5\ Pub. L. 103-325, 108 Stat. 2160.
\6\ Section 10(d) of the FDI Act is codified at 12 U.S.C.
1820(d)(10).
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(a) Have total assets of $250 million or less;
(b) Be rated a composite 2 or better under the UFIRS;
(c) Be well capitalized;
(d) Be well managed;
(e) Not be subject to a formal enforcement action; and (f) Not have
experienced a change of control during the preceding 12-month period in
which a full-scope, on-site examination would have been required but
for section 10(d) of the FDI Act.

Interim Rule

To implement section 2214 of EGRPRA, the Agencies issued a joint
interim rule on August 28, 1998, that similarly extended the
examination cycle for certain U.S. branches and agencies of foreign
banks. 63 FR 46118. Under the joint interim rule, a U.S. branch or
agency of a foreign bank may be considered for an 18-month examination
cycle if the branch or agency meets certain criteria and if there are
no other factors that cause the appropriate federal banking agency to
conclude that more frequent examinations of the branch or agency are
appropriate. To be eligible for an 18-month examination cycle, the U.S.
branch or agency of a foreign bank must:
(a) Have total assets of $250 million or less;
(b) Have received a composite ROCA <SUP>7</SUP> supervisory rating
of 1 or 2 at its most recent examination;
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\7\ The supervisory rating system for branches and agencies of
foreign banks is referred to as ROCA. The four components of ROCA
are: risk management, operational controls, compliance, and asset
quality.
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(c) Satisfy the requirements of either paragraph (1) or (2):
(1) The foreign bank's most recently reported capital adequacy
position consists of, or is equivalent to, Tier 1 and total risk-based
capital ratios of at least 6 percent and 10 percent, respectively, on a
consolidated basis; or
(2) The branch or agency has maintained, on a daily basis over the
past three quarters, eligible assets in an amount not less than 108
percent of third party liabilities (determined consistent with
applicable federal and state law) and sufficient liquidity is currently
available to meet its obligations to third parties;
(d) Not be subject to a formal enforcement action or order by the
Board, FDIC, or OCC; and
(e) Not have experienced a change in control during the preceding
12-month period in which a full-scope, on-site examination would have
been required but for section 3105(c)(1)(C) of the IBA.
The Agencies noted in the joint interim rule that each Agency
retains the authority to examine a U.S. branch or agency of a foreign
bank as frequently as the Agency deems necessary. The joint interim
rule also provided that, in determining whether a U.S. branch or agency
of a foreign bank is eligible for an extended examination cycle, the
Agencies may consider additional factors, including whether:
(a) Any of the individual components of the ROCA rating of the U.S.
branch or agency is rated 3 or worse;
(b) The results of any off-site supervision indicate a
deterioration in the condition of the U.S. branch or agency;
(c) The size, relative importance, and role of a particular U.S.
branch or agency when reviewed in the context of the foreign bank's
entire U.S. operations otherwise necessitate an annual examination
(including, for example, whether the office generates a significant
level of assets that are booked elsewhere); and
(d) The condition of the foreign bank itself gives rise to a need
to examine the U.S. branch or agency every 12 months.
The Agencies noted further that they generally will determine
whether to apply the 18-month examination cycle to a particular U.S.
branch or agency based on the overall risk assessment for that office,
as well as the factors noted in the joint interim rule.
Since U.S. branches and agencies of foreign banks do not receive
separate examination ratings of their management, the Agencies stated
in the joint interim rule that they will use certain criteria as a
proxy for the well managed criterion applicable to U.S. banks,
including the ROCA component and composite ratings, the existence of
any formal enforcement action or order issued by an Agency, and the
other discretionary standards described in the preceding paragraph.
The joint interim rule became effective immediately, but the
Agencies invited public comment on any aspect of the joint interim
rule. As discussed in the following paragraphs, the commenters strongly
favored adopting the expanded examination cycle as set forth in the
joint interim rule.

Comments Received

In response to their request for comment on the joint interim rule,
the Agencies received a total of seven comments, including six from
banks and one from a trade association. The commenters strongly
supported the expanded examination cycle for U.S. branches and agencies
of foreign banks. They agreed that the expanded examination cycle would
reduce regulatory burden on smaller, well-run branches and agencies
that do not pose significant supervisory concerns.
One commenter, while expressing support for the rule, requested
that the Agencies clarify four points.
First, the commenter sought clarification that the two tests for
determining whether a branch or agency is well capitalized are
alternative tests and that use of one test for one examination cycle
does not preclude use of the other test in subsequent exam cycles. The
commenter is correct. The criterion based on capital states that the
U.S. branch or agency must satisfy the requirements of either test.
Reliance on one of the eligibility tests for an extended examination
cycle does not preclude subsequent reliance on the other test. The two
capital adequacy tests contained in this rule are limited in their
applicability to determining whether a branch or agency is eligible for
an extended examination cycle. These two capital adequacy tests have no
effect on special asset maintenance requirements.
Second, the commenter also requested guidance as to how the ``well
capitalized'' criterion will be implemented. Capital adequacy will be
determined using regulatory and supervisory reports, and public
information where appropriate. The foreign bank's capital adequacy may
be assessed on the basis of the home country supervisor's capital
standards if those standards are in all respects consistent with the
Basel Accord.
Third, the commenter requested that the Agencies clarify whether
both eligible assets and average third party liabilities are to be
determined consistent with applicable federal and state law. The
commenter noted that the wording of the alternative capital test using
eligible assets in the interim rule suggested that average third party
liabilities were not to be determined in accordance with applicable
federal and state law. The Agencies have amended that provision in the
final rule to clarify that both eligible assets and average third party
liabilities are to be determined consistent with applicable federal and
state law.

[[Page 56951]]

Finally, the commenter asked how the Agencies would determine the
sufficiency of a branch's or agency's liquidity under the alternative
capital test. The alternative capital test measures eligible assets
against average third party liabilities over the past three quarters.
The requirement that sufficient liquidity is available to meet
obligations to third parties is designed to ensure that the branch or
agency is able to meet unexpected demands in the event of a sudden
economic downturn or other adverse events affecting the foreign bank or
its U.S. offices subsequent to the last quarter measured under the
alternative capital test. Accordingly, determinations regarding the
sufficiency of a branch's or agency's liquidity need to be made on a
case-by-case basis.

Final Rule

In light of the comments received, the Agencies are adopting the
joint interim rule as a joint final rule with the clarifications
discussed above. Under the joint final rule, in order to be eligible
for the extended examination cycle, a U.S. branch or agency of a
foreign bank must:
(a) Have total assets of $250 million or less;
(b) Have a composite ROCA supervisory rating of 1 or 2 at its most
recent examination;
(c) Meet either of the ``well capitalized'' criteria noted above;
(d) Not be subject to a formal enforcement action or order by the
Board, FDIC, or OCC; and
(e) Not have undergone a change in control during the preceding 12-
month period in which a full-scope, on-site examination would have been
required but for section 3105(c)(1)(C) of the IBA. For purposes of this
rule, a branch or agency of a foreign bank will be deemed to have
undergone a change in control if it is sold to another foreign bank or
if there has been a change in control of the foreign bank.
The Agencies may consider other factors in determining whether a
U.S. branch or agency that meets the foregoing criteria should not be
eligible for an extended examination cycle. These discretionary factors
include whether:
(a) Any of the individual components of the ROCA rating of the U.S.
office is rated 3 or worse;
(b) The results of any off-site supervision indicate a
deterioration in the condition of the office;
(c) The size, relative importance, and role of a particular office
when reviewed in the context of the foreign bank's entire U.S.
operations otherwise necessitates an annual examination (including, for
example, whether the office generates a significant level of assets
that are booked elsewhere); and
(d) The condition of the foreign bank itself gives rise to such a
need.
The Agencies will base their determination whether to apply the 18-
month examination cycle to a particular U.S. branch or agency on the
overall risk assessment for that office. Each Agency retains the
authority to examine a branch or agency within its jurisdiction as
frequently as the Agency deems necessary. Thus, for instance, the
appropriate Agency may determine that changes in the level or direction
of risk in a branch or agency or in the level of third party
liabilities may warrant examining the branch or agency before the
expiration of an 18-month exam cycle.
The Agencies believe that an extended examination cycle for
eligible U.S. offices of foreign banks is consistent with principles of
safety and soundness because it will permit the Agencies to focus their
resources on those offices that present the most immediate supervisory
concerns while concomitantly reducing the regulatory burden on smaller
offices that do not pose a similar level of concern. The Agencies will
continue to use off-site supervision techniques, including the
submission of regulatory reports, to monitor the condition and any
changes in the risk profile of offices scheduled to be examined on the
extended 18-month examination cycle.

Immediate Effective Date

The Agencies find good cause for dispensing with the 30-day delayed
effective date prescribed by the Administrative Procedure Act (APA), 5
U.S.C. 551 et seq. The expanded examination cycle was effective upon
publication of the joint interim rule in August 1998. This joint final
rule adopts the interim rule with minor changes. While the Agencies
invited interested parties to comment on the rule at that time, each
Agency already has implemented the expanded examination cycle.
Accordingly, depository institutions will not require any additional
time to adjust their policies or practices in order to comply with the
joint final rule.

Regulatory Flexibility Act

A regulatory flexibility analysis under the Regulatory Flexibility
Act is only required when an agency is required to publish a general
notice of proposed rulemaking for any proposed rule. 5 U.S.C. 603. As
noted previously, the Agencies have determined that it was not
necessary to publish a notice of proposed rulemaking for this joint
final rule. Accordingly, a regulatory flexibility analysis is not
required.

Small Business Regulatory Enforcement Fairness Act

Title II of the Small Business Regulatory Enforcement Fairness Act
of 1996 (SBREFA) <SUP>8</SUP> provides generally for agencies to report
rules to Congress and the General Accounting Office (GAO) for review.
The reporting requirement is triggered when a Federal Agency issues a
final rule. The Agencies filed the appropriate reports with Congress
and the GAO as required by SBREFA. The Office of Management and Budget
has determined that the joint final rule does not constitute a ``major
rule'' as defined by SBREFA.
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\8\ Pub. L. 104-121.
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Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.), the Agencies have determined that no collections of
information pursuant to the Paperwork Reduction Act are contained in
this joint final rule.

OCC Executive Order 12866 Statement

The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.

OCC Unfunded Mandates Act of 1995 Statement

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4, 109 Stat. 48 (March 22, 1995) (Unfunded Mandates Act), requires
that an agency prepare a budgetary impact statement before promulgating
a rule that includes a Federal mandate that may result in the
expenditure by state, local, and tribal governments, in the aggregate,
or by the private sector, of $100 million or more in any one year. If a
budgetary impact statement is required, section 205 of the Unfunded
Mandates Act also requires an agency to identify and consider a
reasonable number of regulatory alternatives before promulgating a
rule. Because the OCC has determined that this joint final rule will
not result in expenditures by state, local, and tribal governments, in
the aggregate, or by the private sector, of $100 million or more in any
one year, the OCC has not prepared a budgetary impact statement or
specifically addressed the regulatory alternatives considered. As
discussed in the preamble, this joint final rule will have the effect
of reducing regulatory burden on certain national banks.

[[Page 56952]]

List of Subjects

12 CFR Part 4

Freedom of information, Organization and functions (Government
agencies), Reporting and recordkeeping requirements.

12 CFR Part 211

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

12 CFR Part 347

Allocated transfer risk reserve, Banks, banking, Bank deposit
insurance, Bank mergers, Credit, Foreign banking, Foreign branches,
Foreign investments, Insured branches, International lending,
International operations, Investments, Reporting and recordkeeping
requirements.

Office of the Comptroller of the Currency, 12 CFR Chapter I, Authority
and Issuance

For the reasons set forth in the joint preamble, part 4 of chapter
I of title 12 of the Code of Federal Regulations is amended as follows:

PART 4--ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF
INFORMATION, CONTRACTING OUTREACH PROGRAM

Accordingly, the interim rule amending 12 CFR Part 4, which was
published at 63 FR 46118 on August 28, 1998, is adopted as a final rule
with the following changes.
1. The authority citation for part 4 continues to read as follows:

Authority: 12 U.S.C. 93a. Subpart A also issued under 5 U.S.C.
552; 12 U.S.C. 481, 1820(d), and 3105(c)(1). Subpart B also issued
under 5 U.S.C. 552; E.O. 12600 (3 CFR, 1987 Comp., p. 235). Subpart
C also issued under 5 U.S.C. 301, 552; 12 U.S.C. 481, 482, 1821(o),
1821(t); 18 U.S.C. 641, 1905, 1906; 31 U.S.C. 9701. Subpart D also
issued under 12 U.S.C. 1833e.

2. In Sec. 4.7, paragraphs (b)(1)(iii)(B) and (b)(2) introductory
text are revised to read as follows:

Sec. 4.7 Frequency of examination of Federal agencies and branches.

* * * * *
(b) * * *
(1) * * *
(iii) * * *
(B) The branch or agency has maintained on a daily basis, over the
past three quarters, eligible assets in an amount not less than 108
percent of the preceding quarter's average third party liabilities
(determined consistent with applicable federal and state law), and
sufficient liquidity is currently available to meet its obligations to
third parties;
* * * * *
(2) Discretionary standards. In determining whether a Federal
branch or agency that meets the standards of paragraph (b)(1) of this
section should not be eligible for an 18-month examination cycle
pursuant to this paragraph (b), the OCC may consider additional
factors, including whether:
* * * * *
Dated: September 17, 1999.
John D. Hawke, Jr.,
Comptroller of the Currency.

Federal Reserve System, 12 CFR Chapter II, Authority and Issuance

For the reasons set forth in the joint preamble, the Board amends
12 CFR Part 211 as follows:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

Subpart B--Foreign Banking Organizations

Accordingly, the interim rule amending 12 CFR Part 211, which was
published at 63 FR 46118 on August 28, 1998, is adopted as a final rule
with the following changes.
1. The authority citation for part 211 continues to read as
follows:

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

2. In Sec. 211.26, paragraphs (c)(2)(i)(C)(2) and (c)(2)(ii)
introductory text are revised to read as follows:

Sec. 211.26 Examination of offices and affiliates of foreign banks.

* * * * *
(c) * * *
(2) * * *
(i) * * *
(C) * * *
(2) The branch or agency has maintained on a daily basis, over the
past three quarters, eligible assets in an amount not less than 108
percent of the preceding quarter's average third party liabilities
(determined consistent with applicable federal and state law) and
sufficient liquidity is currently available to meet its obligations to
third parties;
* * * * *
(ii) Discretionary standards. In determining whether a branch or
agency of a foreign bank that meets the standards of paragraph
(c)(2)(i) of this section should not be eligible for an 18-month
examination cycle pursuant to this paragraph (c)(2), the Board may
consider additional factors, including whether:
* * * * *
By Order of the Board of Governors of the Federal Reserve
System, October 12, 1999.
Jennifer J. Johnson,
Secretary of the Board.

Federal Deposit Insurance Corporation, 12 CFR Chapter III, Authority
and Issuance

For the reasons set forth in the joint preamble, the Board of
Directors of the FDIC amends part 347 of chapter III of title 12 of the
Code of Federal Regulations as follows:

PART 347--INTERNATIONAL BANKING

1. The authority citation for part 347 continues to read as
follows:

Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103,
3104, 3105, 3108; Title IX, Pub. L. No. 98-181, 97 Stat. 1153.

2. Section 347.214 is revised to read as follows:

Sec. 347.214 Examination of branches of foreign banks.

(a) Frequency of on-site examination. Each branch or agency of a
foreign bank shall be examined on-site at least once during each 12-
month period (beginning on the date the most recent examination of the
office ended) by:
(1) The Board of Governors of the Federal Reserve System (Board);
(2) The FDIC, if an insured branch;
(3) The Office of the Comptroller of the Currency (OCC), if the
branch or agency of the foreign bank is licensed by the Comptroller; or
(4) The state supervisor, if the office of the foreign bank is
licensed or chartered by the state.
(b) 18-month cycle for certain small institutions. (1) Mandatory
standards. The FDIC may conduct a full-scope, on-site examination at
least once during each 18-month period, rather than each 12-month
period as provided in paragraph (a) of this section, if the insured
branch:
(i) Has total assets of $250 million or less;
(ii) Has received a composite ROCA supervisory rating (which rates
risk management, operational controls, compliance, and asset quality)
of 1 or 2 at its most recent examination;
(iii) Satisfies the requirement of either the following paragraph
(b)(iii)(A) or (B):
(A) The foreign bank's most recently reported capital adequacy
position consists of, or is equivalent to, Tier 1 and total risk-based
capital ratios of at least 6 percent and 10 percent, respectively, on a
consolidated basis; or

[[Page 56953]]

(B) The insured branch has maintained on a daily basis, over the
past three quarters, eligible assets in an amount not less than 108
percent of the preceding quarter's average third party liabilities
(determined consistent with applicable federal and state law) and
sufficient liquidity is currently available to meet its obligations to
third parties;
(iv) Is not subject to a formal enforcement action or order by the
Board, FDIC, or the OCC; and
(v) Has not experienced a change in control during the preceding
12-month period in which a full-scope, on-site examination would have
been required but for this section.
(2) Discretionary standards. In determining whether an insured
branch that meets the standards of paragraph (b)(1) of this section
should not be eligible for an 18-month examination cycle pursuant to
this paragraph (b), the FDIC may consider additional factors, including
whether:
(i) Any of the individual components of the ROCA supervisory rating
of an insured branch is rated ``3'' or worse;
(ii) The results of any off-site monitoring indicate a
deterioration in the condition of the insured branch;
(iii) The size, relative importance, and role of a particular
insured branch when reviewed in the context of the foreign bank's
entire U.S. operations otherwise necessitate an annual examination; and
(iv) The condition of the parent foreign bank gives rise to such a
need.
(c) Authority to conduct more frequent examinations. Nothing in
paragraphs (a) and (b) of this section limits the authority of the FDIC
to examine any insured branch as frequently as it deems necessary.

By order of the Board of Directors.

Dated at Washington, DC, this 20th day of April, 1999.