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/ 1998
/ April
/ Wednesday, April 08, 1998
[Federal Register: April 8, 1998 (Volume 63, Number 67)]
[Rules and Regulations]
[Page 17056-17090]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08ap98-3]
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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: Final rule.
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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 has
revised and consolidated 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 final rule 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 rescinding the
provisions concerning optional insurance for U.S. branches of foreign
banks; the pledge of assets formula has been revised; and the FDIC
[[Page 17057]]
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 final rule
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 final rule
revises 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 final
rule improves efficiency, reduces costs, and eliminates outmoded
requirements.
DATES: This final rule is effective July 1, 1998. Compliance is
mandatory for all affected institutions on July 1, 1998. Affected
institutions may elect to comply with the final rule voluntarily at any
time after May 8, 1998. If an affected institution elects to comply
voluntarily with any section of subpart A, B, or C of 12 CFR part 347,
the institution or bank must comply with the entire subpart.
FOR FURTHER INFORMATION CONTACT: Christie A. Sciacca, Associate
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), 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
published a proposed rule in the Federal Register on July 15, 1997 (62
FR 37748).
The FDIC has decided to consolidate its international banking rules
into a single part, part 347, for ease of reference. This final rule
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 most significant
revision to part 351 is to require banks to follow GAAP in accounting
for fees on international loans. This change was discussed with
accounting staff at the OCC and FRB as part of an interagency working
group and they are in general agreement with the change. 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 revision to part 351 in connection with its consolidation of
the international banking regulations.
In addition, the FDIC has recently published a notice of proposed
rulemaking (62 FR 52810, October 9, 1997) containing 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. In order to finalize part 347 without waiting for the part
303 proposal to be finalized, this part 347 proposal includes, as a
separate subpart D of part 347, revised application procedures
compatible with the substantive provisions of this final rule. These
application procedures will be transferred to subpart J of part 303
once it is finalized, as is discussed in connection with subpart D,
below.
I. Subpart A--Foreign Branches and Investments in Foreign Banks and
Other Entities
A. 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 are 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
[[Page 17058]]
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, Pub. L.
95-630 (FIRIRCA).
The FRB's rules governing foreign branching and investments by
member banks are contained in subpart A of Regulation K (12 CFR 211.1-
211.8). The FRB has issued a notice of proposed rulemaking to revise
Regulation K (62 FR 68424 (Dec. 31, 1997)). The FDIC's subpart A of
part 347 maintains parity with the substance of the current version of
Regulation K. The FDIC's treatment of permissible activities for
foreign branches and foreign entities in which nonmember banks invest
is virtually identical to Regulation K, and the amount limits and
expedited approval processes are very similar (the differences take
into account certain variances attributable to structural differences
between the types of institutions governed). Substantive differences
between the FDIC's final rule and the current version of Regulation K
are noted below.
In certain of the few instances in which the FDIC is adopting a
different treatment than the FRB's under the current version of
Regulation K, the differences raise 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.
These section 24 issues are discussed below.
Impact of Proposed Revisions to Regulation K
The FDIC has decided to finalize subpart A of part 347 now,
notwithstanding the pendency of the FRB's proposal to modify subpart A
of Regulation K. Nonmember banks affected by the current version of
part 347 have advised the FDIC that they view the FDIC's current rule
as an impediment to their ability to compete effectively abroad. The
FDIC desires to make the improvements provided under its proposed rule
available to nonmember banks without additional delay. If the FRB at
some time in the future adopts some or all of the changes it has
recently proposed to subpart A of Regulation K, the FDIC may propose
additional revisions to subpart A of part 347. The FDIC seeks to
maintain general similarity between the restrictions governing the
international activities of nonmember banks and member banks, but the
FDIC will not be able to assess the advisability of any changes to
subpart A of part 347 until the FRB issues final revisions to
Regulation K.
If the FRB adopts certain of its proposed changes which would
reduce the authority of member banks or their subsidiaries to conduct
certain activities abroad, nonmember banks engaging in those activities
as authorized by part 347 without an application to the FDIC are
cautioned to assess whether an application to the FDIC may nevertheless
be required under section 24 of the FDI Act. The FDIC, in structuring
subpart A, has been mindful of section 24 issues and structured the
rule so that activities authorized by subpart A without application to
the FDIC do not require separate case-by-case authorization under
section 24. However, if the FRB cuts back on what international
activities are permissible for member banks and their subsidiaries
under subpart A of Regulation K, the structure may develop gaps which
the FDIC will need to address by further revisions to subpart A of part
347. Affected nonmember banks assessing such questions in the interim
are encouraged to contact FDIC staff for assistance.
B. Discussion of Comments
The FDIC received two comment letters on subpart A, both from
insured state nonmember banks with numerous foreign investments subject
to current part 347. Both commenters expressed wholehearted support for
the FDIC's efforts to update the rule. Both commenters made suggestions
for additional improvements to the proposal, or alternative treatments
of certain issues thereunder. Most of these related to the procedures
for approving branches or investments. The FDIC has considered each
suggestion in turn.
Comments on Application Processing Times
One comment suggested that the FDIC shorten from 45 to 30 days the
application processing period under Sec. 347.103 for an eligible bank
with branches in two or more countries to establish a branch in an
additional country. The FDIC does not think that a 45-day period is
burdensome, given that the bank itself will know well in advance of its
intention to establish a new branch and can plan accordingly.
This commentor also suggested that the FDIC similarly shorten the
45-day application processing period under 347.108(b) for an eligible
bank to make foreign investments not eligible for general consent. Such
an application would be required if the eligible bank sought to acquire
20 percent or more of an entity in a jurisdiction which is new to the
FDIC as specified in section 347.108(a)(2). In such a case, the FDIC
will need a 45-day period to contact host country supervisors and
establish a working arrangement with them for cross-border supervision.
Moreover, as is the case with the foreign branch application, the FDIC
believes that the eligible bank will have sufficient advance notice of
its desire to make such a significant investment that the bank can give
the FDIC 45 days advance notice. Another situation in which such an
application would be required is if an eligible bank with no existing
foreign banking experience seeks to make a foreign investment. In such
cases, 45 days will give the FDIC necessary time to work with the
applicant to ensure it has appropriate operational and management
systems in place to deal with the unique risks posed by foreign
investments. Finally, such applications are required if an eligible
bank seeks to invest more than five percent of its Tier 1 capital (plus
an additional five percent for trading purposes) in a 12-month period.
While the FDIC has no desire that state nonmember banks be thwarted in
their efforts to obtain sound investment opportunities abroad which
require swift action, given that the total outstanding foreign
investments of even the most internationally active state nonmember
banks is generally in the range of 10-15 percent of Tier 1 capital at
present, it is the FDIC's opinion that the five percent threshold
allows sufficient flexibility for institutions to take advantage of
investment opportunities.
[[Page 17059]]
In addition, as a result of another comment, the FDIC has modified
its application procedures so that applications subject to expedited
processing under the 45-day period may be approved by delegated
authority prior to the expiration of such period. Thus, if the
application presents no special concerns or any such concerns are
resolved promptly, approval can be granted prior to the expiration of
the 45 day period.
In a similar vein, one commenter requested additional information
about what considerations would be involved and what timing would apply
if an application was subject to regular processing because the branch
or foreign organization is located in a country whose laws or practices
limit the FDIC's access to information for examination and other
supervisory purposes. The commenter also requested that the FDIC
consider any precedent regarding the country in question that has been
developed by the OCC or the FRB. The FDIC's concern is that it have
sufficient access to information as is necessary to evaluate the impact
of the foreign operation on the insured state nonmember bank, and to
serve the FDIC's international supervisory obligations as the nonmember
bank's home country supervisor. In conducting this review, the FDIC
will take into account any information obtained from, and experience
gained by, the OCC and the FRB in supervising similar foreign
operations of member banks in the foreign country. The FDIC's approach
to applications involving secrecy jurisdictions will depend on the
facts of the case, but generally speaking, the FDIC is likely to
consider some or all of the following.
The FDIC will assess the nature and extent of the secrecy
restriction, with particular focus on the matters which are to be kept
secret, whether there are appropriate exceptions for regulators, and
whether the FDIC is within the scope of such exception. The FDIC will
also consider whether the host country supervisor possesses, and
exercises when appropriate, a right of access, and whether there is
some other appropriately independent third party, such as an
independent auditor, which has access to, and systematically evaluates,
the relevant operations. The nature and extent of the foreign
operation's dealing with customers will be taken into account. If total
access is not possible, the FDIC will take into account the
practicability of alternate precautions, such as duplicate record-
keeping in the U.S., reliance on host country supervisors and
recognized external auditors, the use of special operating policies at
the foreign organization, and the systematic use of customer
confidentiality waivers.
As for timing, the FDIC has recently approved certain applications
from insured state nonmember banks seeking to establish foreign
operations in secrecy jurisdictions. As the cases were ones of first
impression, and involved issues of significant concern, processing took
longer than would otherwise be the case. Now that the FDIC has begun to
establish a framework for addressing these types of applications,
future applications will be processed more quickly. In the final rule,
the FDIC has also expanded the delegations of authority for approving
foreign branch and foreign investment applications involving secrecy
jurisdictions. These applications may be approved under delegated
authority whenever the approving official is satisfied that adequate
arrangements have been made (through conditions imposed in connection
with the approval and agreed to in writing by the applicant) to ensure
necessary FDIC access to information for supervisory purposes. In
addition, as with any application, processing will be faster to the
extent the applicant discloses sufficient information about its
proposal in the first instance such that the FDIC can identify all
issues raised therein early in the review procedure.
This commenter also appeared to be under the impression that
regular processing is required for an application to establish a
branch, or to acquire 20 percent or more of a foreign organization, in
a country in which there is not already a foreign bank subsidiary of a
state nonmember bank. In actuality, there is no such condition in
connection with general consent or expedited processing for branch
applications. In addition, although Sec. 347.108(a)(2) imposes such a
condition upon general consent approval for investing in 20 percent or
more of a foreign organization, expedited processing is still available
for eligible institutions under Sec. 347.108(b) in the absence of
general consent.
Foreign Experience of Applicants
Regarding the FDIC's general consent under Sec. 347.103(b) for a
nonmember bank to establish or relocate a foreign branch in any country
in which it already maintains a branch, the FDIC received a comment
suggesting the authority be expanded to include any country in which
the bank already controls a foreign organization. The FDIC has not
adopted this suggestion. Such foreign organizations may not necessarily
be engaged in banking, and may not have given the applicant sufficient
familiarity with the conduct of banking in the country in question. For
example, Sec. 347.104(b) authorizes the establishment of foreign
organizations engaged in management consulting, or data processing.
However, in response to this comment, the FDIC has expanded final
Sec. 347.103(b) to include any jurisdiction in which the nonmember bank
already has a foreign bank subsidiary. The FDIC has also decided to
make expedited processing available for a nonmember bank to establish a
foreign branch in a country in which an affiliate has a foreign bank
subsidiary, foreign branch, or Edge or Agreement corporation. Also, the
FDIC has made conforming changes to the category of banks eligible for
expedited processing of foreign branch applications under
Sec. 347.103(c) of the final rule. The FDIC proposed that expedited
processing be available to eligible banks with foreign branches or
foreign affiliates in two or more countries, but the final rule takes
into account other banking-related operations of the bank or its
affiliates.
For the same reason that the FDIC has not extended foreign branch
approval procedures so far as to take all foreign organizations into
account, the FDIC has changed proposed Sec. 347.108(a)(1), which
required a nonmember bank or an affiliate to own a foreign organization
subsidiary before the bank could exercise general consent authority to
invest in foreign organizations. Under the final rule, ``foreign
organization'' subsidiary has been changed to ``foreign bank''
subsidiary. Upon further consideration, the FDIC has become concerned
that foreign organizations may not necessarily be engaged in banking,
and may not have given the applicant sufficient familiarity with the
conduct of banking. However, the FDIC has also expanded
Sec. 347.108(a)(1) to make general consent available if a nonmember
bank has a foreign branch, or an affiliate with a banking-related
office abroad.
This commenter also suggested that proposed Sec. 347.108(a)(2),
which conditioned the availability of general consent authority to
invest in 20 percent or more of a foreign organization upon the
existence of a foreign organization subsidiary of a state nonmember
bank in the country in question, be similarly expanded to include any
country in which a state nonmember bank maintains a foreign branch. The
FDIC is not making this change at this time, out of a concern that many
state nonmember banks currently operate ``nameplate'' branches in
several foreign countries, involving little actual presence in the
[[Page 17060]]
foreign country since all operations are effectively conducted in the
United States. Authorization of free-standing foreign organizations in
such countries may require more extensive analysis by the FDIC and more
extensive coordination with host country supervisors, and it is thus
appropriate to deal with such applications through expedited
processing. In addition, although the FDIC proposed that the
Sec. 347.108(a)(2) condition could be satisfied through the existence
of a ``foreign organization'' subsidiary in the foreign country, upon
further consideration of the issue, the FDIC has decided to require the
existence of a ``foreign bank'' subsidiary. The FDIC is doing this out
of a concern that a foreign organization may not necessarily be engaged
in banking, and the FDIC consequently may not have evaluated all
necessary factors. For example, as noted above, Sec. 347.104(b)
authorizes the establishment of foreign organizations engaged in
management consulting, or data processing.
This commenter also requested that the FDIC adopt some mechanism to
inform the public of the list of foreign countries in which state
nonmember banks have foreign bank subsidiaries, so that affected banks
can easily determine whether the Sec. 347.108(a)(2) condition is
satisfied. The FDIC will make such information available through its
Internet web site, www.fdic.gov, in the near future.
In addition, this commenter pointed out that the preamble to the
proposed rule created confusion as to whether the Sec. 347.108(a)(2)
condition would be satisfied if the state nonmember bank seeking to
exercise general consent authority was the only state nonmember bank
with a foreign bank subsidiary in the foreign country in question. In
such a case, the condition would indeed be satisfied. There is no
requirement that some other state nonmember bank have a foreign bank
subsidiary in the foreign country. The purpose of the
Sec. 347.108(a)(2) condition is to ensure the FDIC has experience with
the jurisdiction and a working relationship with its supervisors. These
goals will be met regardless of whether the state nonmember bank
presence in the foreign country is that of the state nonmember bank
making the investment, or another state nonmember bank.
Delegations of Authority
One commenter suggested that the FDIC Board of Directors should
delegate its authority to authorize foreign branches, or foreign
organizations in which state nonmember banks invest, to engage in
activities not specifically set out in subpart A (including incidental
activities in the United States), or to engage in such activities in a
greater amount. This commenter also suggested delegation of the Board's
authority to approve extensions of the two-year holding period for
nonconforming foreign investments obtained in satisfaction of debts
previously contracted. However, the FDIC feels that these issues are of
such significance that they should be determined by the Board. In
addition, the commenter was under the impression that a state nonmember
bank seeking to invest in a foreign organization which conducts equity
securities underwriting and dealing activity within the limits
contained in subpart A would be required to obtain Board approval.
Under the rule, Board approval would be required from a state nonmember
bank seeking to invest in a foreign organization which would conduct
underwriting and dealing activities in excess of subpart A's limits.
However, for equity securities underwriting and dealing activities
within the limits of Sec. 347.105, the Board has delegated its
authority regarding the prior approval required by Sec. 347.104(b)(3).
Eligible Bank Definition
Regarding the definition of an ``eligible insured state nonmember
bank'' under proposed section 347.102(c), one commenter noted that a
bank must have a satisfactory or better Community Reinvestment Act
(CRA) (12 U.S.C. 2901 et seq.) rating in order to meet the definition,
but that ``special purpose'' banks which are exempt from CRA will not
have been assigned CRA ratings. Under the FDIC's CRA regulations at 12
CFR part 345, special purpose banks that do not perform commercial or
retail banking services by granting credit to the public in the
ordinary course of business, other than as is incidental to their
specialized operations, are not subject to examination under the FDIC's
CRA regulations (12 CFR 345.11(c)(3)). The FDIC does not intend to
apply the CRA element of the definition of an eligible insured state
nonmember bank to a special purpose bank which is not subject to
examination under the FDIC's CRA regulations. Language to this effect
has been added to the definition. The substantive portions of the
definition have also been transferred to Sec. 347.401 of the final
rule, in order to more appropriately locate the definition with the
application processing requirements in subpart D, and Sec. 347.102(c)
now simply cross-references to the definition in Sec. 347.401.
Additional changes to the eligibility definition are discussed in
connection with subpart D, below.
Substantive Comments
The public comments received by the FDIC also addressed three
substantive issues. The first concerns the FDIC's list of authorized
financial activities for a foreign organization in which a state
nonmember bank may invest (Sec. 347.104(b)). One commenter, noting the
FDIC's inclusion of activities 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), suggested the FDIC
also include any activity determined by the OCC to be incidental to the
business of banking under section 24(Seventh) of the National Bank Act
(12 U.S.C. 24(Seventh)). The FDIC has not added such a reference. The
list of financial activities authorized under section 347.104(b) as a
whole is quite extensive, and should be sufficient to permit nonmember
banks to maintain a competitive footing abroad. Adoption of an
additional analytical approach to authorizing activities abroad,
incorporating the ``incidental to the business of banking'' test, seems
unnecessary.
The second substantive comment concerns the FDIC's identification
of specific items on which a state nonmember bank should maintain a
system of records, controls and reports about the activities of its
foreign branches and organizations (Sec. 347.110(a)(1)-(4)). One
commenter was concerned that the list of specific items might be
strictly applied, without making allowances for the nature of the
foreign operation's particular transactions. As an example, the
commenter noted that a recent borrower financial statement, listed in
Sec. 347.110(a)(1)(i), might not be necessary for an extension of
credit collateralized by investment grade securities with a market
value of 150 percent of the outstanding loan amount. To address this
concern, the FDIC has changed the language of the regulation slightly,
so that the detailed list of items to be held in connection with risk
assets (Sec. 347.100(a)(1)(i)-(v)) and to be included in audit reports
(Sec. 347.110(a)(1)(4)(i)-(vi)) is illustrative rather than mandatory.
However, the FDIC cautions bank management that the bank must maintain
a system which, at a minimum, meets the informational objectives
spelled out in Sec. 347.110(a)(1)-(4).
The third substantive comment concerns the FDIC's limitation on
mutual fund activities of a foreign
[[Page 17061]]
organization in which a state nonmember bank invests
(Sec. 347.104(b)(4)). This section permits the foreign organization to
organize, sponsor, and manage a mutual fund, but only 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. The commenter did not object to the latter
restriction concerning control, but suggested that the FDIC should
permit the mutual fund shares to be sold or distributed in the United
States or to U.S. residents so long as the fund was not required to be
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1).
The standard which the FDIC proposed under Sec. 347.104(b)(4) is
consistent with what is permissible for a member bank under the FRB's
current standard in Regulation K. The commenter's proposed modification
raises potential legal and supervisory issues which the FDIC would
prefer not to address in a vacuum, in the absence of specific facts
about the product in question. If a state nonmember bank wishes in the
future to invest in a foreign organization which will organize or
sponsor a mutual fund whose shares will be distributed or sold in the
United States or to U.S. residents, the bank may submit an application
to the FDIC.
C. Other Changes from Proposed Subpart A
In addition to the changes the FDIC has made to proposed subpart A
in response to public comments, the FDIC has made three additional
changes concerning foreign branches of state nonmember banks. First,
the proposal's definition of a ``foreign branch'' in Sec. 347.102(i)
erroneously covered offices located in territories of the United
States, Puerto Rico, Guam, American Samoa, the Trust Territory of the
Pacific Islands, or the Virgin Islands. This is inconsistent with the
current definition in current Sec. 347.2(a) and section 3(o) of the FDI
Act (12 U.S.C. Sec. 1813(o)), and the final definition in
Sec. 347.102(i) has been corrected accordingly.
Second, under proposed Sec. 347.103(b), the FDIC provided its
general consent for an eligible bank to establish additional branches
in a country in which it already maintained a branch, or to relocate an
existing branch within a foreign country. This had the effect of
requiring a bank which did not meet the criteria of an eligible insured
state nonmember bank to go through the full application process to
relocate an existing foreign branch within a foreign country. Upon
further consideration, the FDIC does not see the necessity for a
general rule requiring full applications for such relocations, given
the limited impact they would have on the nonmember bank and the FDIC's
ability to suspend general consent as to any particular institution if
necessary. Therefore, under Sec. 347.103(b)(2) of the final rule, the
FDIC gives its general consent for relocations of existing foreign
branches.
Third, in the proposed rule, the FDIC indicated it was considering
whether to authorize foreign branches to underwrite, distribute and
deal, invest in and trade obligations of any foreign government (as
opposed to the current authorization which extends only to obligations
of the country in which the branch is located). The FDIC has decided to
adopt this proposal, but has added an additional requirement that the
non-local obligations be rated investment grade by at least two
established international rating agencies. In contrast to the situation
in the U.S., foreign sovereign debt is frequently rated. Nonmember
banks still have the option of making an application to the FDIC to
include unrated investment quality obligations as part of their foreign
branch's line of business in this regard.
D. Description of Final Rule, Subpart A
Foreign Branches
The most significant change from current part 347 is the FDIC's
grant of authority to a nonmember bank meeting certain eligibility
criteria to establish foreign branches under general consent or
expedited processing 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 final rule also
introduces expanded powers for foreign branches to underwrite,
distribute, deal, invest in, and trade foreign government obligations.
The general consent and expedited processing procedures are
discussed in detail in the analysis of subpart D, below, but to
summarize them briefly, Sec. 347.103(b) gives the FDIC's general
consent for a nonmember bank to relocate existing foreign branches
within a foreign country, and for an eligible nonmember bank--one which
is well-capitalized, well-rated under certain supervisory assessment
benchmarks, and has no supervision problems--to establish branches
within a foreign country in which the nonmember bank has a branch or a
foreign bank subsidiary. By expedited processing requiring only 45 days
prior notice to the FDIC, an eligible nonmember bank may also establish
additional branches in a country in which an affiliate of the bank
operates a foreign bank subsidiary, or in which an affiliated bank or
Edge or Agreement corporation operate a foreign branch. An eligible
nonmember bank which has established its international expertise by
successfully operating such entities in two or more foreign countries
may also establish branches in additional foreign countries under
expedited processing procedures. There are certain necessary
limitations on these general consent and expedited processing
procedures, however, as discussed in the analysis of subpart D.
Section 347.103(a) of the final rule lists the permissible
activities for a foreign branch. In order to modernize the list of
foreign branch powers currently contained in Sec. 347.3(c), the final
rule eliminates Sec. 347.3(c)(2) (specific authorization for a foreign
branch to accept drafts or bills of exchange), and Sec. 347.3(c)(5)
(specific authorization for a foreign branch to make loans secured by
real estate). 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 powers of a foreign branch, and thus do not require
specific mention on the list of activities which the FDIC has
authorized in addition to such general banking powers.
The final rule also eliminates Sec. 347.3(c)(6) (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
[[Page 17062]]
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 permits 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, final 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. Section 347.103(a)(2) continues to set the limit for such
investments at one percent of the total deposits in all the bank's
branches in that country as reported in the preceding year-end Report
of Income and Condition (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 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. Section 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 final rule
also revises the investment limit to reference ten percent of the
nonmember bank's Tier 1 capital, instead of the outdated reference to
ten percent of its capital and surplus.
Finally, the FDIC has decided 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. Section 347.103(a)(3)(ii) permits 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 FDIC, in adopting the
final rule, has determined that the activity does not create a
significant risk to the deposit insurance fund, as required by section
24 of the FDI Act and part 362 of the FDIC's rules and
regulations.<SUP>1</SUP> Section 347.103(a)(3)(ii) allows 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 non-local
obligations are counted as part of the ten percent limit applicable to
local obligation underwriting, distribution, investment and trading,
and must also be rated as investment grade by at least two established
international rating agencies.
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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) requires
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 are debt obligations instead of equity interests, and
could be held at the branch level.
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Foreign Investments
The final rule completely revises the FDIC's approach to approvals
of a nonmember bank's investment in the stock or other evidences of
ownership of a foreign bank or other entity. The final rule adopts an
approach like that of the FRB under Regulation K. The rule lists the
various types of financial activities in which a nonmember bank's
foreign subsidiaries and joint ventures may engage. The rule 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 rule grants eligible nonmember banks the FDIC's general
consent to make investments in conformity with the rule up to specified
annual limits, and permits additional investments upon 45 days prior
notice.
Investment in Foreign Banks and Other Entities Engaged in Financial
Activities
Section 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 five percent of the subsidiary's assets or revenues may be
attributable to activities which are not on the list. Under the
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 definition
of a subsidiary differs from the commonly-used subsidiary definition
found in section 2(d) of the Bank Holding Company Act (BHCA) (12 U.S.C.
1841(d)). Under section 2(d), subsidiary status typically arises upon
ownership of 25 percent or more of the entity's voting securities. The
FDIC has adopted 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 Sec. 347.102(a), also to maintain
consistency with Regulation K.
Subsidiary status under Sec. 2(d) of the BHCA also arises when the
parent controls in any manner the 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 final rule
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
five percent exception for going concerns.
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' hold less than 20
percent of a foreign organization's voting equity interests, the
nonmember bank is 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 list of authorized financial activities in Sec. 347.104(b) is
modeled on the FRB's corresponding provision in Regulation K, 12 CFR
211.5(d). The final rule reorders the activities in an effort
[[Page 17063]]
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 Secs. 347.105 and
347.106. Additional activities require the FDIC's approval.
The final rule 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 final rule 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, 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 has imposed one restriction in
addition to the restrictions imposed by Regulation Y at 12 CFR
225.28(b). Under Sec. 347.106(a), a foreign investment entity may not
have potential liability to a mutual exchange or clearing association
of which the foreign investment entity is a member exceeding an amount
equal to two percent of the nonmember bank's Tier 1 capital, unless the
FDIC grants its prior approval.
Unlike Regulation K, the FDIC's rule 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 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'' <SUP>2</SUP> of the state nonmember bank for purposes of
section 24, no section 24 analysis is required. This is because subpart
A of part 347 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 can 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 policies 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 rise 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. The
FDIC has determined that dispensing with the intermediate foreign bank
subsidiary or Edge subsidiary, the vehicle through which a national
bank is permitted to make this type of investment, is simply a
structural matter that does not create a significant risk to the
deposit insurance fund. The final rule therefore authorizes nonmember
banks to hold such non-majority equity interests. However, 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. The final
rule therefore requires these investments to be held through some form
of U.S. or foreign majority-owned subsidiary.
The final rule does not include 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 member 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 if 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. This
prohibition does not extend to annuity underwriting, and a nonmember
bank which wishes to underwrite annuities through a foreign
organization may apply to the FDIC
[[Page 17064]]
under the final rule and part 362 for specific approval to do so.
Portfolio Investments in Nonfinancial Foreign Organizations
Section 347.104(g) of the final rule 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 latter restriction prevents
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 must be on substantially the same terms as
those prevailing at the time for comparable transactions with
nonaffiliated organizations.
Section 347.104(g) limits these investments in nonfinancial foreign
organizations to an amount equal to 15 percent of the nonmember bank's
Tier 1 capital. In contrast to the FDIC's approach with foreign
organizations engaged primarily in financial activities authorized
under Sec. 347.104(b), 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
is authorizing these portfolio investments so that a nonmember bank's
foreign bank and other financial subsidiaries can compete effectively
in their foreign markets. It is therefore not necessary to authorize
portfolio investments at the bank or domestic subsidiary level.
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 of Directors, in its
judgment, has determined are incidental to the international or foreign
business of the foreign organization. Section 347.107 of the final rule
addresses what activities may be engaged in within the United States.
The rule 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 five 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 five 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 regulation permits foreign
organizations 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.
Underwriting, Distributing, and Dealing Equity Securities Outside the
United States
Under the final rule, a foreign investment entity of a nonmember
bank is permitted to underwrite, distribute, and deal equity securities
outside the United States. Briefly summarized, the final rule imposes
three main limits as part of Sec. 347.105.
First, underwriting commitments for a single issuer may not exceed
an amount equal to the lesser of $60 million or 25 percent of the
nonmember bank's Tier 1 capital.
Second, distribution and dealing shares of a single entity may not
exceed an amount equal to the lesser of $30 million or five percent of
the nonmember bank's Tier 1 capital.<SUP>3</SUP>
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\3\ Regulation K currently authorizes the lesser of $30 million
or 10 percent.
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Third, the sum of underwriting commitments, distribution and
dealing shares, and any portfolio investments in nonfinancial foreign
organizations under Sec. 347.104(g) may 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 counts 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 also counts 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 may be
exceeded to the extent the commitment is covered by binding commitments
from subunderwriters or purchasers. The limit may 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 must be from Tier 1 capital, and the deduction
applies for all regulatory purposes.
The $30 million/five percent limit on the equity securities of a
single entity which may be held for distribution or dealing is 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 are
not included in the limit. Second, up to 75 percent of the position in
an equity security may 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 expects a
nonmember bank asserting netting involving derivatives to be able to
[[Page 17065]]
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 apply.
First, the investment or trading securities are included in
calculating the $30 million/five percent 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 are counted towards the general consent
investment limits.
Second, equity interests in a particular foreign organization held
for distribution and dealing are required to conform with the limits of
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)) are 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 are
included in determining compliance with these limits. However, in order
to permit 100 percent underwriting, the final rule 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 are
limited to 25 percent of the nonmember bank's Tier 1 capital, only
includes 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 are only counted net of any position reduction through netting,
as permitted in connection with the five percent dealing limit.
Approval of Investments
The final rule permits a nonmember bank meeting certain eligibility
criteria to make foreign investments pursuant to general consent and
expedited processing procedures. These procedures are discussed in
detail in the analysis of subpart D below, but to summarize them
briefly, 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 five percent of their Tier 1 capital
in any 12-month period in foreign investments, plus up to an additional
five percent in equity interests for trading purposes. A sublimit of
two percent of Tier 1 capital per foreign organization applies. The
nonmember bank must already operate at least one foreign branch or
foreign bank subsidiary, or an affiliate of the bank must operate a
foreign bank subsidiary, or an affiliated bank or Edge or Agreement
corporation must operate a foreign branch. In addition, at least one
nonmember bank must have a foreign bank 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 under the expedited processing procedure. There are
certain necessary limitations on these general consent and expedited
processing procedures, however, as discussed in the analysis of subpart
D.
Extensions of Credit
Section 347.109(a) of the final rule 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.
Debts Previously Contracted
With one exception, Sec. 347.109(b) of the final rule 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 extending 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 reduces 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 final 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.
E. Supervision and Recordkeeping for Foreign Branches and Investments
Section 347.110 of the final rule 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 final rule 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 expedited processing 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.
II. Subpart B--Deposit Insurance Requirements for State Branches
and Foreign Banks Having Insured Branches
A. Background
Subpart B, like current part 346 of the FDIC's Rules and
Regulations, implements certain provisions of the International Banking
Act of 1978 (IBA) (Pub. L. 95-369), as amended, and corresponding
provisions of the FDI Act. Subpart B establishes the permissible
deposit-taking activities of uninsured state licensed branches of
foreign banks. Subpart B also establishes certain rules applicable to
insured branches of foreign banks, whose ability to conduct domestic
retail deposit activity is grandfathered under the Foreign Bank
Supervision Enhancement Act of 1991 (FBSEA) (Title II, subtitle A of
the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub.
L. 102-242). These rules cover asset pledge and asset maintenance
requirements for insured branches, approval requirements for any
activities
[[Page 17066]]
not permissible for federal branches, and information-related items.
The FDIC received no public comments on proposed subpart B. The
FDIC is issuing the final version of subpart B without change from the
proposal. As the FDIC discussed in the NPR, the only significant change
from current part 346 is the addition of regulatory language conforming
to FBSEA's requirement that foreign banks conduct all domestic retail
deposit activity through a U.S. insured bank subsidiary. Insured
branches of foreign banks will also be required to calculate and report
compliance with the pledge of asset requirement on a quarterly basis.
These differences, and other changes from current part 346, are
highlighted in the following description of subpart B.
B. Description of Final Rule, Subpart B
The definitions in Sec. 347.202 are unchanged from current part
346, except that substantive limitations contained in some of the
definitions have been moved to the appropriate substantive rule itself.
Section 347.203, requiring all branches of the same foreign bank in
the same state which accept initial deposits in an amount of less than
$100,000 to be insured, is unchanged from current part 346.
Section 347.204 has no counterpart in current part 346. However,
the FDIC is merely implementing FBSEA provisions which have applied by
their own terms since December 19, 1991. Thus, Sec. 347.204 does not
impose any new restrictions on foreign banks. FBSEA amended section
6(c) of the IBA (redesignated section 6(d) in 1994, 12 U.S.C. 3104(d))
to require any foreign bank intending to conduct domestic retail
deposit activities in any state in the U.S. to organize an insured bank
subsidiary to conduct these deposit activities. 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 domestic retail deposit activities. IBA
section 6(d)(3) also exempts 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. This allows insured banks organized under the
laws of the jurisdictions included therein to conduct any domestic
retail deposit activities in the United States through insured
branches, rather than organizing an insured bank subsidiary. This
statutory scheme has been reiterated in Sec. 347.204.
In connection with reiterating this statutory scheme in
Sec. 347.204, the FDIC has included Sec. 347.204(b), mirroring the
exemption for FDIC-insured banks organized under the laws of any
territory of the United States, Puerto Rico, Guam, American Samoa, or
the Virgin Islands set out in IBA section 6(d)(3). The enumerated
jurisdictions are commonwealths and territories of the United States
which are specifically included within the ``foreign bank'' definition
in IBA section 1(b)(7), and which the FDIC has included in the
regulatory definition of ``foreign bank'' under Sec. 347.202(g). In
drafting the Sec. 347.204(b) exemption, the FDIC has stuck closely to
the IBA's statutory language, and has not listed the Northern Mariana
Islands among the specifically-enumerated jurisdictions. The Northern
Mariana Islands is a commonwealth, and, like the commonwealth of Puerto
Rico, is specifically included in the definition of ``State'' for
purposes of the FDI Act under section 3(a)(3) thereof (12 U.S.C.
1813(a)(3)). As such, the FDI Act on its face would permit a bank
chartered by the Northern Mariana Islands to obtain FDIC insurance.
Therefore, there may be an interpretive issue under IBA section
6(d)(3), whether a Northern Mariana Islands bank which had obtained
FDIC insurance fell within the section 6(d)(3) exception and was
permitted to engage in domestic retail deposit taking in the U.S.
through an insured branch. Given that there are currently no Northern
Mariana Islands banks with FDIC deposit insurance, the FDIC sees no
need to express any interpretive position on this issue at this time.
In consideration of section 6(d) of the IBA, the FDIC has decided
it is no longer necessary to have any counterpart to current
Sec. 346.8. Section 346.8 authorized foreign banks to seek insurance
for a foreign branch even though the foreign branch did not engage in
domestic retail deposit activity, and was therefore not required to
obtain insurance. On their face, at least, FBSEA's amendments to
section 6 of the IBA seem only to reach foreign banks conducting
domestic retail deposit activity, and Congress has not repealed section
5(b) of the FDI Act, authorizing deposit insurance applications from
foreign branches. Therefore, it may arguably be possible for a foreign
branch which does not engage in domestic retail deposit activity to
seek deposit insurance from the FDIC. As a practical matter, however,
the FDIC does not foresee many circumstances in which it could be
appropriate for the FDIC Board of Directors to approve such an
application. Moreover, the elimination of Sec. 346.8 does not affect a
foreign bank's ability to argue that it may make an application under
section 5(b) of the FDI Act. The Board would have to determine whether
to actually accept and approve such an application, based upon its
review of the facts and circumstances, in addition to the pertinent
legal and policy considerations.
Section 347.205 permits an uninsured state foreign branch to
operate under an agreement with the FRB which limits the branch to
accepting only those deposits which would be permissible for an Edge
corporation. This is unchanged from current part 346.
Section 347.206 sets out the rules under which uninsured state
foreign branches may, without being deemed to be engaged in domestic
retail deposit activity, accept deposits in an initial amount of less
than $100,000. The FDIC conducted an exhaustive review of these rules
in connection with the enactment of section 107 of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (Pub. L. 103-
328), and revised them to ensure they are consistent with ``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). See 61 FR 5671 (February 14, 1996). These revisions to current
section 346.6 took effect on April 1, 1996, and the FDIC is only
adopting minor, nonsubstantive revisions in connection with this
rulemaking. Regulatory language setting out the one percent ``de
minimis'' exception is being revised to clearly state the calculation
method which the FDIC has long applied in implementing the de minimis
exception, but the calculation method is not changed. The FDIC is also
relocating the application procedure for foreign branches seeking
additional exceptions from the substantive rule to the separate
procedural rules on applications, set out in new subpart D of part 347.
Section 347.207, specifying the notice which uninsured state
foreign branches must give depositors, makes no changes from the
comparable requirements of part 346. The same is true of section
347.208, the agreement by any foreign bank with an insured state branch
to provide the FDIC with certain information about the bank and permit
the FDIC to examine any of its U.S. operations. The same is also true
of
[[Page 17067]]
Sec. 347.209, requiring insured state branches to maintain records on a
separate-entity basis, and to maintain a set of records in English.
Section 347.210(a) of the final rule, setting forth the FDIC's
requirement that an insured branch pledge assets for the benefit of the
FDIC or its designee, contains certain changes from the comparable
provisions of current part 346. The pledge requirement remains at five
percent of the average of the insured branch's liabilities, as is
currently the case, but the final rule requires the pledge to be
calculated quarterly, whereas the current rule only requires it to be
calculated for the last 30 days of the second and fourth calendar
quarters. The final rule provides 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. The final rule also requires the insured branch to provide
the appropriate FDIC regional director with a written report regarding
the pledged assets on a quarterly basis (Sec. 347.210(e)(6)(ii)). The
current rule only requires semiannual reporting. This new reporting
requirement is 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 quarterly calculation and reporting requirements do
not impose a significant additional burden on insured branches because
the information is already being collected and maintained by the bank.
Also, Sec. 347.210(e)(4) of the final rule now requires the foreign
branch to provide the appropriate FDIC regional director with copies of
all the documents and instruments delivered to the depository which
holds the pledged assets. Submitting this information to the FDIC will
not require additional preparation by the affected banks. 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 current rules and regulations has been
transferred to proposed Sec. 347.210 as paragraph (f) of that section.
Section 347.211 of the final rule establishes a requirement for
insured branches to maintain eligible assets in an amount not less than
106 percent of liabilities. The only change from the corresponding
requirements under current part 346 is the addition of language
permitting the FDIC to exclude from the eligible asset pool any asset
which the FDIC considers not to be bankable.
Section 347.212 permits an insured branch to deduct from its
deposit insurance assessment base any deposit to the credit of the
foreign bank or any of its offices, branches, agencies, or wholly-owned
subsidiaries. This is unchanged from part 346.
Section 347.213 will retain part 346's substantive requirements and
standards regarding the necessity for an insured state branch to apply
to the FDIC for 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 transferred to new Sec. 347.405 of
subpart D. Section 347.213, like Sec. 346.101 before it, is modeled in
large part on part 362, ``Activities and Investments of Insured State
Banks.'' As part of the FDIC's ongoing CDRI review of all of its
regulations and written policies, the FDIC has issued a notice of
rulemaking to revise part 362. 62 FR 47,969 (September 12, 1997). After
the closing of the comment period and the completion of the final part
362, Sec. 347.213 and Sec. 347.405 may be the subject of additional
rulemaking proceedings, if necessary, to reflect any changes made to
the underlying regulatory scheme governing the permissible activities
of insured state banks.
Finally, the language of the rule has been revised throughout where
necessary to incorporate references to the appropriate FDIC regional
office or official to fully integrate DOS's new Case Manager approach
to bank supervision.
III. Subpart C--International Lending
A. Background
The International Lending Supervision Act of 1983 (ILSA), 12 U.S.C.
3901, et. seq, was enacted to assure that the economic health and
stability of the United States and the other nations of the world are
not adversely affected or threatened by imprudent lending practices or
inadequate supervision.
ILSA 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 the
examination and supervision of such banks. 12 U.S.C. 3903. Transfer
risk generally refers to the possibility that an asset of a bank 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. 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 promulgate regulations or orders 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). To implement this provision of ILSA, on February 13, 1984, the
FDIC, the Office of the Comptroller of the Currency, and the Federal
Reserve System (collectively, the federal banking agencies) issued a
joint notice of final rulemaking requiring banks to establish special
reserves, called Allocated Transfer Risk Reserves (ATRRs), against the
transfer risks presented in certain international assets. 49 FR 5587
(February 13, 1984), (codified in part 351 of the FDIC's Rules and
Regulations, part 211 (Subpart D of Regulation K) of the Federal
Reserve's Regulations,. and part 20 of the Comptroller of the
Currency's Regulations). These regulations set forth specific
instructions on the accounting treatment for ATRRs. The line item
guidance for reporting ATRRs provided in the instructions for the
preparation of Consolidated Reports of Condition and Income (Call
Reports) refer back to ILSA and the regulations and other guidelines
issued by the federal banking agencies. (Schedule RC, Item 4.c in FFIEC
Forms 031, 032, 033 and 034.)
In order to simplify the task of preparing Call Reports by
gathering all accounting information in one place, the FDIC requested
comment in the Notice of Proposed Rulemaking on whether the
instructions for the preparation of Call Reports should be amended to
include a full description of the accounting treatment of ATRRs. 62 FR
37,748, 37,757-8 (July 15, 1997). The FDIC also requested 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 regulations or to replace the
[[Page 17068]]
regulatory language with a simplified requirement to follow the
accounting treatment outlined in the amended Call Report instructions.
Call Report instructions are not issued unilaterally by each federal
banking agency but are issued under the auspices of the Federal
Financial Institutions Examination Council (FFIEC) in consultation with
staff of the federal banking agencies. As the FFIEC has not, to date,
amended the Call Report instructions to incorporate the detailed
instructions for ATRR accounting, the FDIC has decided to retain the
description of the accounting treatment in its revised regulation.
Section 906 of ILSA requires the federal banking agencies to
promulgate regulations for the accounting for fees charged by banks in
connection with international loans and the restructuring of certain
international loans. 12 U.S.C. 3905. To implement this requirement, on
March 29, 1984, the federal banking agencies issued a joint notice of
final rulemaking concerning the accounting for fees on international
loans, including restructured international loans. 49 FR 12,192 (March
29, 1984), (codified in part 351 of the FDIC's Rules and Regulations,
part 211 (Subpart D of Regulation K) of the Federal Reserve's
Regulations, and part 20 of the Comptroller of the Currency's
Regulations).
Section 906(a) of ILSA deals specifically with the restructuring of
international loans to avoid excessive debt service burden on debtor
countries. 12 U.S.C. 3905(a). This section requires banks, in
accounting for fees on a restructured international loan, to amortize
any fee exceeding the administrative cost of the restructuring over the
effective life of each such loan. In order to distinguish between the
category of restructured international loans described in section
906(a) of ILSA and all other international loans for the purposes of
accounting for fees, the 1984 regulation contained a definition of
``restructured international loan'' designed to meet the particular
scope and purpose of section 906(a).
Section 906(b) of ILSA deals with the accounting for fees on all
other international loans. 12 U.S.C. 3905(b). This section requires the
federal banking agencies to promulgate regulations to account for
agency, commitment, management and other fees in connection with such
loans to assure that the appropriate portion of such fees is accrued to
income over the effective life of each such loan. When ILSA was enacted
in 1983 and part 351 was promulgated on March 29, 1984, Congress and
the federal banking agencies considered that the broad fee accounting
principles for banks then contained in generally accepted accounting
principles (GAAP) were insufficient to accomplish adequate uniformity
in accounting principles in this area. The preamble to the 1984 rule
stated that the agencies would reexamine the need for a discussion of
accounting treatment if the FASB were to issue a final pronouncement or
standard on this subject. Since that time, the FASB has revised the
GAAP rules for fee accounting for loans, including international loans,
in a manner that accommodates the specific requirements of section
906(b) 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 staffs from the other
federal banking agencies, to eliminate from the revised Sec. 347.304(b)
of the regulations 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.
B. Discussion of Comments
Only one comment was received on subpart C of the revised
regulation. The commenter generally supported efforts by the federal
banking agencies to produce greater consistency between the information
collected in regulatory reports and general purpose financial
statements.
The commenter cited Section 37 of the Federal Deposit Insurance Act
(FDIA) for the principle that accounting principles applicable to
reports or statements required to be filed with banking agencies by
insured depository institutions should depart from GAAP only if the
banking agencies determine that the application of GAAP is inconsistent
with the objectives stated in that section of the FDIA <SUP>4</SUP> and
the resulting regulatory accounting principles are no less stringent
than GAAP. 12 U.S.C. 1831n. However, the commenter failed to note that
section 37(a)(2)(A) of the FDIA also provides that any requirement
under that section to apply GAAP in reports to be filed with the
banking agencies is subject to other requirements of the FDIA ``and any
other provision of Federal law.'' 12 U.S.C. 1831n(a)(2)(A). As a
result, to the extent that ILSA mandates a certain accounting treatment
which differs from GAAP, the requirements of ILSA prevail and the
implementing regulation will reflect these requirements.
---------------------------------------------------------------------------
\4\ FDIA Section 37(a)(1) states that accounting principles
applicable to reports filed with banking agencies should (A) result
in financial statements and call reports that accurately reflect the
capital of the institution, (B) facilitate effective supervision of
the institutions, and (C) facilitate prompt corrective action to
resolve the institutions at the least cost to the insurance funds.
12 U.S.C. 1831n(a)(1).
---------------------------------------------------------------------------
The commenter also recommended that instructions for accounting for
international loan fees and ATRRs should be developed on an interagency
basis through proposed changes to the Call Reports rather than in
agency-specific regulations. However, ILSA mandates that the federal
banking agencies promulgate regulations or orders necessary to
implement its provisions. As a result, the FDIC has decided to retain a
regulatory requirement for banks to follow the provisions of ILSA. The
commenter further proposed that the regulatory provisions dealing with
accounting for international loan fees should be replaced with a
requirement to follow the accounting treatment outlined in amended Call
Report instructions. As noted above, amendments to Call Report
instructions are made through the auspices of FFIEC. Call Report
instructions have long had detailed instructions on accounting for loan
fees generally. However, to date, FFIEC has not acted to revise the
Call Report instructions to include detailed information on the
accounting for international loan fees or ATRRs. As a result, the FDIC
has decided to retain the detailed accounting information in its
revised regulation.
The commenter also recommended that the regulatory provisions
dealing with international loan fees should be replaced with a
requirement to account for loan fees in conformity with the provisions
of FASB SFAS No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases and related authoritative pronouncements. The revised
Sec. 347.304(b) dealing with accounting for fees on international loans
states that, except as specifically provided for restructured
international loans, banks should account for fees in accordance with
GAAP. As GAAP changes from time to time to reflect changing conditions,
the FDIC has decided for the sake of flexibility not to specify that
financial institutions follow any particular FASB standard.
The commenter also proposed that the provisions in revised section
347.303 dealing with establishment of ATRRs
[[Page 17069]]
should be reevaluated in light of the criteria established in FASB
Statements No. 5, Accounting for Contingencies, and No. 114, Accounting
by Creditors for Impairment of a Loan (as amended by FASB Statement No.
118, Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures). However, a general reliance on GAAP is
not appropriate in this instance as ILSA directs the federal banking
agencies to require banking institutions to establish and maintain an
ATRR whenever, in the judgment of the appropriate banking agency,
certain conditions enumerated by statute exist. The determination of
the ATRR is conducted on an interagency basis by ICERC.
Lastly, the commenter requested that the Call Report instructions
clarify the alternative accounting treatment for ATRRs. As noted
earlier, amendments of Call Report instructions are made on an
interagency basis through the FFIEC. The commenter also stated that the
description of the alternative accounting treatment for ATRRs would
permit institutions to charge to the allowance for loan and lease
losses (ALLL) impairments of types of international assets which are
not chargeable to the ALLL under GAAP. Under the alternative accounting
treatment, banks may write down the value of specified international
assets by either a reduction in the principal amount of the asset or by
a charge to the ALLL. Banks that elect to take a charge to the ALLL,
however, are required to replenish the ALLL in an 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
in accordance with GAAP. We share the commenter's concern that the
alternative accounting treatment provisions should be consistent with
GAAP. As a result, in response to the comment, we have modified the
description of the alternative accounting treatment to provide that
banks may charge to the ALLL only those international assets that can
be charged to the ALLL pursuant to GAAP.
C. Changes from Proposed Subpart C
Subpart C in the final regulation differs from the proposed
regulation by the addition of Sec. 347.301 dealing with Purpose, Scope
and Authority, and a separate Sec. 347.302 for Definitions and the
renumbering of the subsequent sections. These changes are made to
conform with the format of the other subparts of part 347.
The definitions of ``international loan'' and ``restructured
international loan'' from Sec. 351.2 are retained in the final
regulation. These definitions were deleted in the proposed regulation
from the section on accounting for loan fees in the interest of
simplifying language without any intent to change the applicability of
the regulation. However, in the interest of reducing any ambiguity, the
FDIC has decided to add these definitions back into the final
regulation. Because section 906(a) of ILSA refers to restructurings of
international loans to avoid excessive debt service burden on debtor
countries, the definition of ``restructured international loan,'' as
introduced in the 1984 regulation and retained in this revision,
contains two criteria. First, the borrower whose loan is being
restructured because of debt service difficulties must be a resident of
a foreign country experiencing a generalized inability of public and
private sector obligors to meet their external debt obligations on a
timely basis because of a lack of, or restraints on the availability
of, foreign exchange in that country. As noted above, the
classification of countries according to transfer risk is the
responsibility of ICERC. Second, in a restructuring, the terms of the
loan are revised to extend the original schedule of payments or reduce
stated interest, or the restructuring takes the form of provision of
new funds for the benefit of the borrower that has the same effect as
extending the schedule of payments or reducing stated interest on the
original loan. These criteria are intended to cover loans restructured
to meet debt service difficulties, but not ordinary refinancings.
For any loan that meets the definition of restructured
international loan, Sec. 347.304(a) of the final revised regulation
prohibits any bank from charging 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.
However, consistent with the preamble to the 1984 regulation, if any
restructuring of an international loan would also be a ``troubled debt
restructuring'' under the terms of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 15, as
amended by SFAS 114 or SFAS 118 or a subsequent amendatory standard,
the loan should be accounted for in accordance with that standard. This
definition of ``restructured international loan,'' however, which was
adopted to implement the specific fee accounting rules mandated by
ILSA, is not intended to categorize any particular loan as a ``troubled
debt restructuring.''
The description of administrative cost from the existing
Sec. 351.2(d)(2) is being retained in a new definition of
``administrative cost.'' This description was deleted in the proposed
regulation from the section on accounting for loan fees in the interest
of simplifying language without any intent to change the applicability
of the regulation. However, in the interest of reducing any ambiguity,
the FDIC has decided to add this description back into the final
regulation as a defined term. References to syndication in the
description of administrative cost in the current part 351 were deleted
as the changes to the regulation remove the need to refer to
syndication.
In addition, in response to a comment, we have modified the
alternative accounting treatment to provide that banks may charge to
the ALLL only those international assets that can be charged to the
ALLL pursuant to GAAP.
D. Description of Final Rule, Subpart C
The final rule contains separate provisions for Purpose, Authority
and Scope and for Definitions. The Definitions section retains, among
others, the definitions of ``international loan'' and ``restructured
international loan'' from the current part 351. Definitions of
``international syndicated loan'' and ``loan agreement'' have been
deleted from the current regulation as changes to the regulation remove
the need to define these terms. The description of ``administrative
cost'' from the current part 351 has been retained as a defined term.
The final regulation contains provisions requiring the
establishment of ATRRs that are similar to the existing provisions. The
term ``Allowance for Possible Loan Losses'' in the existing regulation
has been changed to ``Allowance for Loan and Lease Losses'' to reflect
current terminology. As noted above, the FDIC has also modified the
alternative accounting treatment for ATRRs to provide that banks may
charge to the ALLL only those international assets that can be charged
to the ALLL pursuant to GAAP.
The final regulation simplifies the provisions for accounting for
fees on restructured international loans and other international loans.
With respect to restructured international loans, the final regulation
follows the ILSA requirement that banks amortize the amount of any fee
exceeding the administrative cost of the restructuring over the
effective life of the loan. Subject to the provisions for restructured
international loans, banks are directed to account for fees on
[[Page 17070]]
international loans in accordance with GAAP.
IV. Subpart D--Application Procedures and Delegations of Authority
A. Overview
The final rule includes a separate subpart D containing application
procedures and delegations of authority for the substantive matters
covered by part 347 as revised. 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. As discussed above, the FDIC issued a Notice of Proposed
Rulemaking to completely revise 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. In order to permit
part 347 to be issued in final form before the FDIC issues part 303 in
final form, it is necessary to issue the application procedures for
part 347 in this subpart D. However, when part 303 is issued in final
form, the application procedures contained in subpart D to part 347
will be transferred to subpart J of part 303 as part of the same
rulemaking, in order to centralize all international banking
application procedures in one convenient place.
The FDIC has made certain nonsubstantive changes to the language of
subpart D of part 347, in order to make it consistent with the language
of proposed part 303. The FDIC has also made certain changes to the
criteria establishing which applicants are ``eligible depository
institutions'' entitled to processing under general consent or
expedited processing procedures. These changes, discussed below, were
also made to establish consistency with the part 303 proposal. At this
time, it is impossible for the FDIC to determine if it will make
further changes to the language of part 303 or to the eligibility
criteria thereunder. If such changes are made, the FDIC, in connection
with transferring the application procedures in subpart D of part 347
over to subpart J of part 303, will make further changes to these
application procedures in order to maintain consistency.
B. Public Comments and Changes to Subpart D
Public comments on the application procedures were limited to those
concerning foreign branches and investments of nonmember banks under
subpart A. Those comments, and the corresponding changes the FDIC has
made to the application procedures, are discussed in detail above, in
the discussion of comments received in connection with subpart A, and
will not be repeated here.
The FDIC has also eliminated two criteria under the definition of
an eligible depository institution which were not consistent with the
critieria under the definition proposed in connection with part 303.
The final rule, in Sec. 347.401(c), does not contain a requirement that
the applicant have received a rating of 1 or 2 under the ``management''
component of the Uniform Financial Institutions Rating System (UFIRS);
nor does it contain the requirement that the applicant have been
chartered and operating for three years. In addition, in the interests
of consistency with part 303, the FDIC has modified the proposed rule's
criteria requiring that the applicant not be subject to any
enforcement-related agreements. The proposal contained an exception for
any board of directors resolution addressing corrective action taken
pursuant to regulatory recommendations, whereas the final rule has no
such carve-out.
C. Description of Final Rule
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 final rule treats 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 of the final rule, the FDIC has
given its general consent for an eligible depository institution to
establish additional foreign branches in any country in which the bank
already operates a branch or foreign bank subsidiary, or to relocate a
branch within the country. The final rule, only requires an eligible
nonmember bank to notify the FDIC of its actions within 30 days. In
addition, if an eligible nonmember bank seeks to establish a foreign
branch in any country in which the nonmember bank's affiliates operate
certain banking-related offices, the FDIC will give the application
expedited processing within 45 days. Expedited processing also applies
to an eligible nonmember bank that operates branches or affiliates in
two or more foreign countries and seeks to establish additional
branches conducting approved activities in additional foreign
jurisdictions. Certain banking-related offices of the eligible
nonmember bank's affiliates may be counted for these purposes.
To be eligible, the nonmember bank must have received an FDIC-
assigned composite rating of 1 or 2 under the Uniform Financial
Institutions Rating System (UFIRS); have a satisfactory or better
Community Reinvestment Act rating (unless the bank is a ``special
purpose'' bank not subject to examination under the FDIC's CRA
regulations); and have a compliance rating of 1 or 2. The nonmember
bank must also be well capitalized; and it must not be subject to a
cease and desist order, consent order, prompt corrective action
directive, written agreement, memorandum of understanding, or other
administrative agreement with its primary federal regulator or
chartering authority. 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
expedited processing procedures.
The FDIC has adopted these general consent and expedited processing
provisions because a nonmember bank meeting the proposed requirements
will 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 expedited processing as to any
application, for any of the reasons specified in Sec. 347.402(c)(1).
These are the same grounds for suspension as would be applicable under
the general rules contained in the FDIC's part 303 proposal, at
proposed Sec. 303.11. The FDIC may also categorically suspend general
consent or expedited processing for any particular nonmember bank, as
specified in Sec. 347.103(d)(3). If the FDIC suspends its general
consent or expedited processing with respect to a particular nonmember
bank, it means that the nonmember bank must make
[[Page 17071]]
full application to establish additional branches. Suspension of
general consent or expedited processing does not, in and of itself,
require closure of existing foreign branches. Cases necessitating
actual closure of branches would be handled under section 8 of the FDI
Act (12 U.S.C. 1818) or other relevant authority.
General consent and expedited processing 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
expedited processing do not apply if the law or practice of the foreign
country 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,
as described in connection with the discussion of public comments on
subpart A, above. In addition, if the proposed foreign branch would
have a direct adverse impact on a site which is on the World Heritage
List <SUP>5</SUP> or the foreign jurisdiction's equivalent of the
National Register of Historic Places, the FDIC may need an opportunity
to evaluate the application in light of section 402 of the National
Historic Preservation Act Amendments of 1980 (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 20429.
---------------------------------------------------------------------------
Section 347.103(f) and 347.402(d) 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, Sec. 347.402 also sets out the procedures for applications
which are not eligible for the general consent or expedited processing
provisions.
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
percent of the bank's capital and surplus. The FDIC has eliminated this
general limit, and will now 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 final rule, the FDIC grants 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. As is the case under the 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 expedited
processing, since an application to make a foreign investment is not an
``application for a deposit facility'' covered by the CRA.
The final rule permits investments in a single foreign organization
of up to two percent of the nonmember bank's Tier 1 capital during any
twelve-month period. Aggregate investments for investment purposes may
total as much as five percent of the nonmember bank's Tier 1 capital
during any twelve-month period, and an additional five 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 final rule only requires the nonmember bank to notify the
FDIC of its investment within thirty days, and no notice is required
for trading investments.
However, in order to make investments under general consent, the
nonmember bank or an must already have at least one foreign bank
subsidiary or foreign branch, as evidence that the nonmember bank's
management has suitable expertise to address the special considerations
that arise in foreign investments. This experience requirement can also
be satisfied if an affiliate of the nonmember bank has a foreign bank
subsidiary, or if an affiliated bank or Edge or Agreement corporation
has a foreign branch. In addition, if the investment will constitute a
joint venture or a subsidiary or will otherwise be controlled by the
state nonmember, the final rule requires that at least one other
nonmember bank already have a foreign bank 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 final rule also permits an eligible nonmember bank to make any
investment which complies with the activity and other limits of subpart
A through an expedited processing procedure lasting 45 days. Under
Sec. 347.403(c)(1), the FDIC may remove an applicant from expedited
processing if the FDIC's review of the application indicates
significant concerns related to supervision, law or policy. In such a
case, a complete application is required. These are the same grounds
for removal as would be applicable under the general rules contained in
the FDIC's part 303 proposal, at proposed Sec. 303.11.
As is the case in connection with the foreign branch rules, the
FDIC is adopting these general consent and expedited processing
procedures because a nonmember bank meeting the requirements of the
provisions has 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 expedited processing are also not available in any foreign
country 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, Sec. 347.402 also sets out the procedures for applications
which are not eligible for the general consent or expedited processing
provisions.
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''.
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. Pursuant to Sec. 346.6(b), which has been
carried forward as Sec. 347.206(b), the
[[Page 17072]]
FDIC may permit an uninsured state branch to accept additional types of
deposits in an initial amount of less than $100,000. The final rule
transfers the associated application procedures currently contained in
Sec. 346.6(b) to 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 347.405 of the final rule contains the application
procedure for a state-licensed insured branch of a foreign bank seeking
to engage in any activity which is not permissible for a federal branch
of a foreign bank, as required by Sec. 347.213 of the final rule.
Section 347.405 also sets out procedures for filing divestiture plans
in the event such an application is denied or the law changes and a
foreign bank elects not to continue the activity. No substantive
changes have been made from the current application procedures in
Sec. 346.101.
V. Technical and Conforming Changes
The FDIC's rules and regulations currently contain numerous cross-
references to part 346. These have conformed to the appropriate
sections of revised part 347 under the final rule. The final rule also
eliminates 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 final rule.
VI. Paperwork Reduction Act
The collections of information contained in this rule have been
reviewed and approved by the Office of Management and Budget (OMB) in
accordance with the requirements of the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3501 et seq.). The collections of information in this
final rule are contained in various sections appearing in subpart A and
subpart B of part 347. The collections of information into two groups,
each with a separate OMB control number. The collections from subpart A
(Foreign Branching and Investment by Insured State Nonmember Banks)
have been assigned control number 3064-0125, and the collections from
subpart B (Foreign Banks) have been assigned control number 3064-0114.
Both OMB clearances will expire on July 31st, 2000. Each of the
collections required by the final rule is discussed below.
Subpart A--Foreign Branching and Investment by Insured State Nonmember
Banks--OMB Control No. 3064-0125
Sections 347.103(b)-(f) 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(d)):
Total annual responses: 4.
Average hours per response: 2.
Collection (2) (expedited processing for 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(b))
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) (expedited processing for foreign investment
(347.403(b)).
Total annual responses: 4.
Average hours per response: 6.
Collection (3) (application to make a foreign investment
(347.403(b)).
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. Section
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--OMB Control No. 3064-0125 Collections
Total annual responses: 85.
Total annual burden hours: 25,560.
Subpart B--Foreign Banks--OMB Control No. 3064-0114
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
[[Page 17073]]
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 had 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.
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 previous |
