# International Banking > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A04-15757 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** July 19, 2004 - **Citation:** 69 FR 43060 ## Text FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Parts 303, 325, 327, and 347 RIN 3064-AC85 International Banking AGENCY: Federal Deposit Insurance Corporation (FDIC). ACTION: Notice of proposed rulemaking with request for comment. SUMMARY: The FDIC is publishing for notice and comment proposed amendments to subpart J of part 303 on international banking and revisions to subpart A of part 347, relating to the international activities and investments of insured state nonmember banks, and subpart B of part 347, relating principally to insured and noninsured U.S. branches of foreign banks. The proposed amendments address the relocation of grandfathered insured branches. They also reorganize, clarify, and revise subparts A and B of part 347, and address various issues raised as part of the FDIC's ongoing effort under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (12 U.S.C. 3311) to address regulatory burden issues. Included in the revisions affecting grandfathered insured branches are revisions to the FDIC's asset pledge requirement to establish a risk-based system and revision of the FDIC's asset maintenance requirement to calculate the asset maintenance percentage based on the daily third-party liabilities of the branch. In addition, the FDIC is proposing to strengthen FDIC's supervisory processes and make conforming amendments for other FDIC rules as part of the proposal. The FDIC is also requesting comments, as part of this document, on whether deposits in wholesale U.S. branches of foreign banks should be covered by deposit insurance and on the accounting rules contained in subpart C of part 347. DATES: Written comments must be received on or before September 17, 2004. ADDRESSES: You may submit comments, identified by RIN number 3064-AC85, by any of the following methods: • Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. • Hand Delivered/Courier: The guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7 a.m. and 5 p.m. • E-mail: comments@FDIC.gov. Include RIN number 3064-AC85 in the subject line of the message. • Public Inspection: Comments may be inspected and photocopied in the FDIC Public Information Center, Room 100, 801 17th Street, NW, Washington, DC, between 9 a.m. and 4:30 p.m. on business days. Instructions: Submissions received must include the agency name and RIN for this rulemaking. Comments received will be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html, including any personal information provided. FOR FURTHER INFORMATION CONTACT: John Di Clemente, Chief, International Section, Division of Supervision and Consumer Protection, (202) 898-3540 or jdiclemente@fdic.gov or Rodney D. Ray, Counsel, Legal Division, (202) 898-3556 or rray@fdic.gov, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. SUPPLEMENTARY INFORMATION: The FDIC is proposing to amend and revise its rules concerning international banking activities of insured state nonmember banks operating in foreign countries and insured U.S. branches of foreign banks. This is being done to implement the “plain language” requirement contained in section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809). Also, as part of the FDIC's ongoing effort under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (12 U.S.C. 3311) (EGRPRA), the FDIC is proposing amendments to its existing rules to address certain regulatory burden issues raised in public comments. The FDIC is also proposing revisions to existing rules and new rules to update the FDIC's supervisory processes. The proposed changes will be made to subpart J of part 303 and to subparts A and B of part 347 of title 12 of the Code of Federal Regulations. As a result of the proposed changes, conforming changes also will be made to subpart B of part 325, relating to the FDIC's Prompt Corrective Action rules, and subpart A of part 327, regarding the FDIC's assessment rules for insured U.S. branches of foreign banks. Subpart J of part 303 contains the procedural rules that implement part 347. The rules in subpart A of part 347 address issues related to the international activities and investments of insured state nonmember banks. In general, they implement the FDIC's statutory authority under section 18(d)(2) of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1828(d)(2)), regarding branches of insured state nonmember banks in foreign countries, and section 18(l) of the FDI Act, regarding insured state nonmember bank investments in foreign entities. The rules in subpart B of part 347 principally address issues related to insured and noninsured U.S. branches of foreign banks under section 6 of the International Banking Act (IBA) (12 U.S.C. 3104). Although subpart C of part 347 also contains rules regarding accounting and reporting rules relating to international lending activities of insured state nonmember banks, the FDIC is not proposing to revise subpart C at this time. The Office of the Comptroller of the Currency (“OCC”) and Board of Governors of the Federal Reserve System (“FRB”) have similar rules implementing the same statutory provisions for the institutions under their supervision that were originally issued in a joint rulemaking proceeding with the FDIC. Therefore, proposed revisions to the rules in subpart C may require discussion and coordination with the other agencies. Commenters may still comment on the rules contained in subpart C of part 347, however, in order to bring particular issues to the FDIC's attention at this time. I. Background Although the FDIC made significant amendments and consolidated its international banking rules in 1998, various events that have transpired since then have influenced the FDIC's decision to propose further revisions to its international banking rules. First, when the FDIC finalized its international banking rules, the FRB was proposing amendments to Regulation K (12 CFR part 211). The FDIC noted in 63 FR 17056 (April 8, 1998) (1998 Final Rule) that subpart A of part 347 maintained parity with the existing version of Regulation K, governing foreign branching and investments by member banks, and that the FDIC may need to make further revisions to subpart A of part 347 once the FRB finalized its revisions to Regulation K. The revisions of Regulation K that are relevant to this rulemaking proceeding were finalized on October 26, 2001, and the FDIC is proposing certain revisions to the part 347 rules because of changes made to Regulation K. Second, the FDIC has received written comments from the public suggesting that the language in part 347 needs to be simplified and the FDIC believes that some additional reorganization and clarification of the FDIC's rules may be beneficial. It is also believed that strengthening the existing supervisory structure in a few areas is appropriate. In addition, Congress enacted the “plain language” requirement for all proposed and final rulemakings published in the Federal Register after January 1, 2000, in section 722 of the Gramm-Leach-Bliley Act of 1999. Therefore, several revisions to part 347 are included to address this requirement. Finally, the FDIC and the other Federal banking agencies solicited and received public comments in 2003 as part of the ERGPRA regulatory burden reduction process on three categories of agency rules. Part 347 was included in one of those categories, and the comments relating to them have been reviewed and are discussed in greater detail in the section-by-section discussion in this document. In general, FDIC is proposing to revise subpart J of part 303 to provide new cross-references to the appropriate revised rule(s) in subparts A and B of part 347. Since many of the revisions to the text in subpart J merely provide new cross-references to the appropriate sections in subparts A and B of part 347 or make stylistic changes in the text, they will not be further addressed in the subpart J section-by-section analysis. The existing sections in subpart A of part 347 are being reorganized in the proposal by moving, consolidating, and breaking particularly complex sections, such as existing section 347.104, into multiple sections based on the subject matter addressed. The sections addressing general consent, expedited processing, and specific consent for foreign branches and investments, contained in existing sections 347.103 and 347.108, are also being reorganized and consolidated into separate sections addressing each type of approval. The existing sections in subpart B are being reorganized in the proposal by grouping them with other sections that address the same or similar subject matter. In addition, several existing sections in subpart B are being revised in the proposal to update and clarify the regulatory requirements. Finally, a few additional sections are being added to subparts A and B in the proposal to address issues that are not addressed in the existing rules. The proposed amendments and revisions are discussed below, by subpart, in the section-by-section description. The FDIC invites public comments on all aspects of the proposal. In addition, public comments are specifically invited on the following items: • Providing for expedited processing of proposed relocations of insured U.S. branches of foreign banks (section 303.184); • Revising existing sections that address authorized activities for foreign investments and foreign branches to more closely track the sections of Regulation K addressing those issues in connection with member banks. The revisions also address approval of activities requiring consideration under parts 347 and 362 (sections 347.105 and 347.115); • Providing that, except for certain merger and acquisition transactions, the grandfathered status of an insured branch of a foreign bank may not be transferred (section 347.206); • Revising the FDIC's asset pledge requirement for insured branches of foreign banks to a risk-based approach (section 347.209); • Revising the FDIC's asset maintenance rule for insured branches of foreign banks to calculate the asset maintenance percentage based on daily third-party liabilities (section 347.210); and • Providing deposit insurance for wholesale U.S. branches of foreign banks (section V of the preamble). II. Section-by-Section Analysis of Proposed Amendments to Part 303, Subpart J 1. Moving an Insured Branch of a Foreign Bank (Revised § 303.184) Section 303.184 contains the filing procedures and approval criteria applicable to the relocation of an insured U.S. branch of a foreign bank. As part of the EGRPRA process, an industry trade association observed that section 303.41(b), which addresses branch relocations in the context of domestic branches of insured state nonmember banks, differentiates between a branch closing or relocation based upon whether the proposed move is within the same immediate neighborhood. The trade association expressed concern that, if the FDIC applied a similar geographic standard to proposed relocations of grandfathered insured branches, relocations of those branches would effectively be precluded because those branches could not close and reopen as insured branches. This is because of the statutory provision contained in section 6(d) of the International Banking Act (IBA) (12 U.S.C. 3104(d)) requiring foreign banks engaging in domestic retail deposit activities after December 19, 1991 that require deposit insurance protection to do so through one or more insured bank subsidiaries. The FDIC does not believe such a construction was intended by the statute or existing rule but recognizes that the existing rule does not address the geographic proximity of the proposed relocation. Section 303.184(b) is being amended, to address this issue, by making expedited processing available for proposed relocations of grandfathered insured branches within the same state. The FDIC notes that 12 CFR 28.12(e)(1) provides for expeditious processing of intrastate relocations of federal branches regulated by the OCC. Therefore, although the FDIC's processing requirements differ from those utilized by the OCC, the approach of providing expedited processing for proposed relocations of insured branches of foreign banks within the same state is consistent with the OCC's overall approach of expediting proposed relocations of federal branches within the same state. III. Section-by-Section Analysis of Proposed Revisions to Part 347, Subpart A 1. Authority, Purpose, and Scope (Revised § 347.101) The proposal amends section 347.101 to provide a more comprehensive list of the major areas addressed by the rules in the subpart. The order of the subjects mentioned in the section is also revised to correspond to the order in which those subjects are addressed in the revised subpart. 2. Definitions (Revised § 347.102) Four additional definitions are added to this section by the proposal. Proposed revisions to the rules in the subpart use the term “domestic” in sections 347.104 and 347.105, and that term is defined in paragraph (c) of this section. Paragraph (m) defining “insured state nonmember bank” or “bank” is added to minimize the repetitive use of the former term that currently exists in the rules. Paragraphs (o) and (r) are new definitions that would adopt the same definition for “investment grade” and “NRSRO” that the FRB adopted in 12 CFR 211.2(n) and (r). The effect of the inclusion of the latter two terms will be discussed in greater detail in the description of proposed section 347.115. 3. Effect of State Law on Actions Taken Under This Subpart (Revised § 347.103) Section 347.103 combines the requirement contained in paragraph (a) of existing sections 347.103 and 347.104 into a single section. The rule specifies that an insured state nonmember bank may acquire or retain equity interests in foreign organizations or establish a foreign branch, if authorized to do so by the law of the state where the bank is chartered, by complying with the requirements of this subpart. 4. Insured State Nonmember Bank Investments in Foreign Organizations (Revised § 347.104) Section 347.104(a) of the proposal is derived from existing section 347.104(f). The rationale for the requirement was discussed in the preamble to the 1998 Final Rule. That rationale, which is restated below, remains unchanged. Thus, the substance of paragraph (f) of the existing rule is retained. It is placed in a separate section, however, apart from the section addressing authorized activities of foreign organizations, and is reworded and reorganized for clarity. The FDIC recognizes that direct investments in foreign organizations by member banks (and thus national banks) are only permitted for certain types of investments specified in Regulation K, such as investments in foreign banks, because of language in section 25 of the Federal Reserve Act (12 U.S.C. 601) limiting direct foreign investments by member banks. Other types of foreign investments by member banks are required to be made indirectly through an Edge corporation subsidiary or a foreign bank subsidiary of a member bank. In contrast, section 18(l) of the FDI Act (12 U.S.C. 1828(l)) permits state nonmember banks, to the extent authorized by state law, to invest in foreign “banks and other entities.” As a consequence, and because the legislative history of section 18(l) shows that Congress was aware of the FRB's parallel authority over member banks at the time section 18(l) was enacted, the difference in language between the two statutes is significant and deliberate and results in the type of foreign organizations that state nonmember banks may invest in directly not being restricted by section 18(l). Because national banks are unable to invest directly in nonbank foreign organizations, however, the ability of insured state nonmember banks to invest in other types of foreign organizations raises issues under section 24 of the FDI Act (12 U.S.C. 1831a) and 12 CFR part 362. Section 24 prohibits an insured state nonmember bank from acquiring an equity investment that a national bank is not permitted to acquire. Such an investment may be made under section 24, however, if the investment is made through a majority-owned subsidiary of the bank. It may also be made if a company becomes majority-owned by the bank as a result of the investment and the “as principal” activities of the company are ones in which a subsidiary of a national bank could engage. Ownership of more than 50 percent of the equity in a nonbank foreign organization makes that organization a majority-owned subsidiary and, thus, no section 24 analysis is required because such a subsidiary is authorized only to engage in the same activities that the FRB has authorized for subsidiaries of member banks (and thus national banks) under Regulation K. In addition, while it is not necessary for insured state nonmember bank investments of 50 percent or less of the equity of a nonbank foreign organization to be held through an intermediate foreign bank subsidiary or Edge subsidiary as required under Regulation K, those investments are required to be held through some form of U.S. or foreign majority-owned subsidiary in order to comply with the requirements of section 24 and part 362. 5. Permissible Financial Activities Outside the United States (Revised § 347.105) Section 347.105 (a) and (b) of the proposal are derived from existing section 347.104(b). As amended, the language in existing section 347.104(b) that limits the activities of certain types of investments in foreign organizations to those authorized by the section, is restructured, reworded slightly, and placed in section 347.105(a). Under section 347.105(b) the same financial activities will be authorized that are presently authorized under section 347.104(b) of the existing rule. The proposed rule also revises the activities list contained in the existing rule. As the FDIC noted in the preamble to the 1998 Final Rule, the activities contained in existing section 347.104(b) were modeled after the FRB's corresponding provision in Regulation K, but the list of authorized activities was reordered. In addition, the FDIC considered certain activities listed in the FRB's corresponding section of Regulation K to be authorized under Regulation Y and incorporated by the cross-reference to Regulation Y activities contained in section 347.104(b)(10) of the existing rule. Therefore, those activities were not separately listed in existing section 347.104(b). Time has shown this approach to have made the interplay between the FDIC and FRB lists of permissible activities difficult in certain circumstances to understand and apply. The FDIC recognizes that insured state nonmember banks or their subsidiaries may want to engage in activities outside the United States that are not listed by the FDIC as permissible activities but that have been approved for member banks or their subsidiaries under Regulation K. Including those items in the FDIC list of permissible activities facilitates banks doing so. In addition, as discussed in more detail below, the banks or their subsidiaries may want to engage in activities outside the United States, as principal, that have not been authorized for member banks (and thus national banks) in Regulation K. To do so, banks must comply with section 24 of the FDI Act and the requirements of part 362, as well as part 347. Considering these issues, the FDIC is proposing to revise the order of the activities listed in section 347.105(b) to more closely track the order of the activities listed as permissible in 12 CFR 211.10, the corresponding provision in Regulation K. The activities listed in the proposal also include activities that the FDIC did not specifically list as being authorized in the 1998 Final Rule because they were considered to overlap with activities authorized by Regulation Y. 1 Including them makes the comparison easier between activities authorized under section 347.105(b) and those authorized for member banks and their subsidiaries. 2 1 The omitted activities were: financing; acting as a 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. 2 The six activities being added to the list of approved activities are being added, subject to the attendant restrictions contained in section 225.28(b) of Regulation Y, because those activities are considered to be subject to the Regulation Y restrictions by the cross-reference to that authority in existing section 347.104(b)(10). Paragraphs (c) and (d) of section 347.105 are being added for clarification. Paragraph (c) is based on language contained in the preamble to the 1998 Final Rule but not included in the text of the existing rule. Paragraph (d) addresses an issue that was raised in the preamble to the 1998 Final Rule, but not addressed in the existing rule, concerning the applicability in certain instances of section 24 of the FDI Act and part 362 to issues arising under subpart A of part 347. Briefly stated, in relevant part, section 24(a) of the FDI Act and part 362 prohibit a state bank from engaging, as principal, in any type of activity that is not permissible for a national bank, unless the FDIC determines that the activity would not pose a significant risk of loss to the deposit insurance fund and the bank meets its minimum capital requirements. Likewise, section 24(d) of the FDI Act and part 362 prohibit a subsidiary of a state bank from engaging, as principal, in any type of activity that is not permissible for a subsidiary of a national bank, unless the FDIC first determines that it would not pose a significant risk of loss to the deposit insurance fund and the bank meets its minimum capital requirements. Thus, when a state nonmember bank wants to engage in financial activities, as principal, that are not specifically authorized by part 347, the question becomes whether authorization to engage in those types of activities must be obtained under part 347, part 362, or both parts. The FDIC is proposing to add paragraph (d) which would generally address when authorization to engage in activities through a subsidiary other than those specified in paragraph (b) may be authorized by specific consent under part 347 and when authorization for those activities must be obtained under part 362 as well as subpart A of part 347. 3 3 Proposed paragraph (d) is, of necessity, a rule of general applicability. For example, as the FDIC noted in the preamble to the 1998 Final Rule, an activity authorized under 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 previously determined to be actuarially predictable ( see , 12 CFR 211.10(a)(17)) was not included in existing section 347.104. Although Regulation K included these activities on its list of permissible activities abroad, the regulation required specific consent before those activities could be conducted by a subsidiary of an insured U.S. bank. Since no general authorization had been given under Regulation K for this activity to be conducted directly or indirectly by a subsidiary of a member bank, there was an issue under section 24 of the FDI Act. Section 24(b) and 24(d)(2) of the FDI Act do not permit the FDIC to give approval for a state bank or its subsidiary to engage in insurance underwriting if such underwriting is not permissible for a national bank or its subsidiary (unless that activity is expressly excepted by other subsections of section 24 covering limited types of insurance underwriting). Therefore, the FDIC observed when adopting the 1998 Final Rule, that it was foreclosed at that time from granting general regulatory authorization for banks to indirectly underwrite life, pension-fund related and other types of insurance abroad. Insurance underwriting represents an example of specific types of activities that are listed in 12 CFR 211.10 that could not be authorized under either part 347 or part 362. In proposing paragraph (d) the FDIC desires to lend a degree of clarity to this area but also wants to provide banks with more notice that approval to engage in certain foreign activities may require compliance with requirements beyond those contained in part 347. In these situations, for the FDIC to process such applications in a timely manner, the applicants will need to provide sufficiently detailed and relevant information regarding proposed foreign activities for the FDIC to properly evaluate the issues raised by the application. 6. Going Concerns (Revised § 347.106) Section 347.106 of the proposal is derived from the “going concern” provision contained in existing section 347.104(c). The text has been made a separate section and reworded slightly for ease of reference. As under the existing rule, a bank subsidiary (as defined in proposed section 347.102(t)) in a foreign country will be limited to conducting activities authorized under proposed section 347.105(b), unless the bank acquires its subsidiary as a going concern. In this case, under proposed section 347.106, no more than 5 percent of the foreign subsidiary's assets or revenues may be attributable to activities that are not on the list of authorized activities. In addition, any foreign organization which is controlled (as defined in proposed section 347.102(b)) by a bank and its affiliates (as defined in proposed section 347.102(a)), regardless of the percent of voting stock owned by the bank, is limited to conducting financial activities authorized under proposed section 347.105(b), subject to the same 5 percent exception for going concerns. 7. Joint Ventures (Revised § 347.107) Section 347.107(a) of the proposal is derived from the “joint venture” provision contained in existing section 347.104(d). The text has been made a separate section and reworded slightly for ease of reference. As is the case under the existing rule, if a bank and its affiliates hold 20 to 50 percent of the voting equity securities of a foreign organization and do not control the organization, no more than 10 percent of the foreign organization's assets or revenues may be attributable to activities that are not on the section 347.105(b) list of authorized activities. 8. Portfolio Investments (Revised § 347.108) Section 347.108(a) of the proposal is derived from the “portfolio investment” provision contained in existing section 347.104(e). The text has been made a separate section and reworded slightly for ease of reference. As is the case under the existing rule, if a bank and its affiliates' holdings are less than 20 percent of the voting equity securities of a foreign organization and the bank and its affiliates do not control the organization, no more than 10 percent of the foreign organization's assets or revenues may be attributable to activities that are not on the section 347.105(b) list of authorized activities. In addition, the bank is prohibited from making any loans or extensions of credit to the organization that are not on the same terms as those prevailing at the time for comparable transactions with nonaffiliated organizations. 9. Limitations on Indirect Investments in Nonfinancial Foreign Organizations (Revised § 347.109) Section 347.109 of the proposal is derived from existing section 347.104(g). The text of the paragraph is retained but is reworded for clarification, and the references to other sections of subpart A are revised to conform to the new section numbers contained in the proposal. The paragraph is also being made a separate section for ease of reference. Like paragraph (g) of the existing rule, this section authorizes a bank to make indirect portfolio investments in nonfinancial foreign organizations through a foreign subsidiary or an Edge corporation subsidiary, to an amount equal to 15 percent of the bank's Tier 1 capital, without regard to whether the activities of the foreign organization are authorized under section 347.105(b). In addition, the following requirements must be met: • The aggregate holdings of a particular foreign organization's equity interests by the bank and its affiliates must be less than 20 percent of the foreign organization's voting interests and 40 percent of its total voting and nonvoting equity interests; • The bank and its affiliates are not permitted to control the foreign organization; and • Any loan or extension 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. 10. Affiliate Holdings (Revised § 347.110) Section 347.110 of the proposal is derived from existing section 347.104(h). The text of the paragraph is retained, and cross-references to subpart A are added for ease of reference due to other proposed revisions to the rules in subpart A. The reference to section 337.4 in the existing rule is also changed to reflect the removal and replacement of section 337.4 with section 362.8 or, for financial subsidiaries, section 362.18. See , 66 FR 1018 (January 5, 2001). The paragraph also is made a separate section for ease of reference. 11. Underwriting and Dealing Limits Applicable to Foreign Organizations Held by Insured State Nonmember Banks (Revised § 347.111) Section 347.111 of the proposal is derived from existing section 347.105. Cross-references are being added, for ease of reference, to other rules in subpart A that affect this rule because of other revisions being made in this proposal. Appropriate revisions to section citations in Regulation K are also being made. Under the proposed rule, as with existing section 347.105, a foreign investment entity of a bank is permitted to underwrite, distribute, and deal equity securities outside the United States, subject to the three main limitations described generally below: • Underwriting commitments for a single issuer may not exceed an amount equal to the lesser of $60 million or 25 percent of the bank's Tier 1 capital. This underwriting commitment limit may be exceeded, however, to the extent the commitment is covered by binding commitments from sub-underwriters or purchasers. • Distribution and dealing shares of a single entity may not exceed an amount equal to the lesser of $30 million or 5 percent of the bank's Tier 1 capital. This limit is subject to two exceptions. First, 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 sum of underwriting commitments, distribution and dealing shares, and any portfolio investments in nonfinancial organizations under proposed section 347.109 may not exceed an amount equal to 25 percent of the bank's Tier 1 capital. 12. Restrictions on Activities Applicable to Foreign Organizations That Act as Futures Commission Merchants (Revised § 347.112) Section 347.112 of the proposal is derived from existing section 347.106. As proposed, the title to the section is revised, and the text of the existing rule is reorganized and retained. Cross-references are added, for ease of reference, to subpart A that affect this rule because of other revisions made in this proposal. As with existing section 347.106, the proposed rule imposes an additional restriction beyond those imposed by section 225.28(b) of Regulation Y on acting as a futures commission merchant. Under section 347.112, a foreign investment entity may not, without the FDIC's prior approval, have potential liability to a mutual exchange or clearing association of which the foreign investment entity is a member that exceeds 2 percent of the bank's Tier 1 capital. 13. Restrictions Applicable to Activities by a Foreign Organization in the United States. (Revised § 347.113) Section 347.113 of the proposal is derived from existing section 347.107. The title to the section is revised, and the text of the existing rule is reorganized and retained. As with the existing rule, the proposed rule prohibits a state nonmember bank from investing in any foreign organization that engages in the general business of buying or selling goods, wares, merchandise, or commodities in the U.S. It also prohibits investments totaling over 5 percent of equity interests in any foreign organization if the organization engages in any business activities in the U.S. that are not incidental to its international or foreign business. The rule also provides that 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. Beyond these thresholds, foreign organizations are authorized to conduct activities that are permissible in the U.S. for an Edge corporation, or such other business activities as are approved by the FDIC. 14. Extensions of Credit to Foreign Organizations Held by Insured State Nonmember Banks; Shares of Foreign Organizations Held in Connection With Debts Previously Contracted (Revised § 347.114) Section 347.114 of the proposal is derived from existing section 347.109. The text of the existing rule is reorganized and retained with only minor revisions. 15. Activities Permissible for a Foreign Branch of an Insured State Nonmember Bank (Revised § 347.115) Proposed section 347.115 is largely derived from existing section 347.103(a). Although most of the existing text is not being changed substantively, a few revisions are made to incorporate changes made by the FRB in section 211.4 of Regulation K. For example, the reference to “development bank” in existing section 347.103(a)(2)(i) has been changed to “government sponsored development bank” in section 347.115(c)(1)(i). The authorization for an insured state nonmember bank to underwrite, distribute and deal, invest in or trade specified foreign government obligations that are rated as investment grade by at least two established international rating agencies under existing section 347.103(a)(3)(ii) is also being changed. As amended, section 347.115(b)(2) would require only that these obligations be rated as “investment grade.” As mentioned earlier, because the FDIC is proposing to adopt the same definition of “investment grade” that the FRB adopted in its recent revisions to Regulation K, an obligation would qualify as “investment grade” under the proposed rule if it received a rating in one of the four highest investment categories by two or more NRSROs (nationally recognized statistical rating organization, as designated by the Securities and Exchange Commission). If it had only been rated by one NRSRO and received the appropriate rating, it could be considered “investment grade” with only that one rating. In addition, as with section 347.105 of this proposal, in the preamble to the 1998 Final Rule, the FDIC determined that certain activities the FRB had specifically listed as being authorized in the corresponding section of Regulation K for foreign branches of national banks were within the general banking powers of a national bank. Therefore, it was considered unnecessary to separately enumerate them for foreign branches of insured state nonmember banks in existing section 347.103(a). Because the same issues that were previously discussed in connection with the revisions to section 347.105 of the proposal would be applicable to this section regarding the applicability of section 24 of the FDI Act and part 362, the FDIC is including the activities that were previously omitted from the text of the FDIC's existing rule but which are included in the corresponding provision of Regulation K. 4 The activities authorized under the proposed rule also are reorganized to correspond more closely to those activities authorized in 12 CFR 211.4 for foreign branches of member banks. Finally, the paragraph addressing “other activities” is revised to indicate that the FDIC may authorize foreign branches of state nonmember banks to engage in activities that are not specifically listed in the proposed rule, and a new paragraph (h) is being added to clarify when other activities may be approved under this subpart or, alternatively, when they also must be authorized under section 24 of the FDI Act and part 362. 5 4 The omitted activities relevant to this discussion are: engaging in repurchase agreements that are the functional equivalent of extensions of credit and paying branch employees a greater rate of interest on their deposits than the rate paid to other depositors on similar deposits. A third activity, concerning extending credit to an officer of the branch in the foreign country in which the branch is located to finance the officer's living quarters, is not included in the list of activities authorized by the FDIC's existing rule. Considering that this activity was not among the list of permissible activities for foreign branches of member banks in the recent revisions to Regulation K and that the FDIC previously concluded that the activity was within the general banking powers of a foreign branch, the inclusion of this additional activity in the list of activities that are permissible under proposed section 347.115 does not appear to be necessary. It also does not appear to advance the goal of making the comparison of activities authorized under Regulation K and those authorized by the FDIC's corresponding provision easier. Therefore, this particular activity is not being included in the list of permissible activities contained in the proposed rule. 5 As with proposed section 347.105(d), this paragraph is considered a rule of general applicability to provide guidance and notice to banks with an interest in this area. 16. Recordkeeping and Supervision of Foreign Activities of Insured State Nonmember Banks Under This Subpart (Revised § 347.116) Section 347.116 of the proposal is derived from existing section 347.110. The language in section 347.110(b)(2) of the existing rule is eliminated in the proposed rule because it addresses application processing and the requirement for specific consent in jurisdictions that limit access to financial information. Those issues are addressed in section 347.119 of the proposal. 17. General Consent (Revised § 347.117) Section 347.117 of the proposal consolidates the general consent requirements related to foreign branches that are presently contained in section 347.103(b) with the general consent requirements for investments in foreign organizations that are presently contained in section 347.108(a) into a single rule. Under proposed section 347.117(a), as in existing section 347.103(b), general consent is provided for an eligible insured state nonmember bank to establish branches within a foreign country in which it has a branch or a foreign bank subsidiary and for relocation of existing foreign branches within a foreign country. As part of the EGRPRA process, it was suggested that U.S. banks that are well-managed, well-capitalized, maintain at least a satisfactory CRA rating, and have experience operating overseas, such as through one or two branches, should be allowed to branch overseas using procedures available to them for domestic branching. After considering this comment, the FDIC is concerned that such broad authority may allow branching into foreign countries without adequate familiarity with the banking system and regulatory requirements that may exist in the host country. Nonetheless, the proposal introduces some additional flexibility in the branching area, by allowing insured state nonmember banks to branch into a foreign country under general consent in circumstances covered by (a)(1)(ii) or (iii) of the proposed rule. This change will allow an eligible state nonmember bank to establish additional branches in a country in which the bank's holding company operates a foreign bank subsidiary, or in which an affiliated bank or Edge or Agreement corporation operates one or more foreign branches or foreign bank subsidiaries. This will allow for after-the-fact notification to the FDIC in those circumstances, rather than requiring prior approval under expedited processing, as is presently required under section 347.103(c)(1). Under proposed section 347.117(b), general consent for investments in foreign organizations is provided in the same circumstances covered by existing section 347.108(a). In addition, the proposal would grant general consent to invest in a foreign organization, under proposed section 347.117(b)(2), when at least one insured state nonmember bank operates a foreign branch in the relevant foreign country where the organization will be located because of the FDIC's familiarity with the banking laws and practices of that country. This amendment was suggested in a comment on the 1998 Final Rule, but the FDIC declined to adopt it because of concerns that banks could operate “nameplate” branches in foreign countries and, because they would lack a physical presence in those countries, more extensive analysis and coordination with the host country supervisors may be needed before the FDIC authorized free-standing foreign organizations. Upon further consideration of this issue, however, the FDIC believes most nameplate branches would be operated in jurisdictions where authority to invest in foreign organizations by general consent would be inapplicable under section 347.119(a) of the proposal. Therefore, if that issue arises, specific consent would be required to authorize such an investment, and the previously stated concern could be addressed at that time. 18. Expedited Processing (Revised § 347.118) Section 347.118 of the proposal consolidates the expedited processing provisions for foreign branches in existing section 347.103(c)(2) with the expedited processing provisions for investments in foreign organizations in existing section 347.108(b) into a single rule for ease of reference. 19. Specific Consent (Revised § 347.119) Section 347.119 of the proposal consolidates the specific consent requirements for foreign branches in existing section 347.103(d)-(e) with the specific consent requirements for investments in foreign organizations in existing section 347.108(c)-(d) into a single rule for ease of reference and because the existing provisions are largely duplicative. 20. Computation of Investment Amounts (Revised § 347.120) Section 347.120 of the proposal is derived from existing section 347.108(e). It is placed in a separate section in the proposal to indicate its applicability to the general consent, expedited processing, and specific consent sections for foreign investments because those subjects are addressed by separate sections of the proposal. 21. Requirements for Insured State Nonmember Bank to Close a Foreign Branch. (Revised § 347.121) Section 347.121 of the proposal is derived from 347.103(f) and is placed in a separate section for ease of reference and because the approval provisions of that section are separated from the authorized activities section for foreign branches in the proposal. 22. Limitations Applicable to the Authority Provided in This Subpart (New § 347.122) The FDIC is proposing to add a new section 347.122. This section recognizes that the FDIC may, under section 18(d)(2) and 18(l) of the FDI Act, condition the authority granted under this subpart A as it considers appropriate. The section also provides for termination of activities or divestiture of investments permitted under the subpart, after giving the bank notice and a reasonable opportunity to be heard, if a bank is unable or fails to comply with the requirements of the subpart or any conditions imposed by the FDIC regarding transactions under the subpart. IV. Section-by-Section Analysis of Proposed Revisions to Part 347, Subpart B 1. Authority, Purpose and Scope (Revised § 347.201) The FDIC is proposing to revise existing section 347.201 to reflect the authority and coverage of subpart B, as amended. In addition, the scope of the subpart is revised to reflect the grouping of the sections therein based primarily upon whether they apply to both insured state and federal branches or only to state branches. The section also recognizes that section 347.204 applies to foreign banks seeking deposit insurance coverage for their state or federal depository institution subsidiaries. 2. Definitions (Revised § 347.202) The definitions contained in existing section 347.202 are revised by amending an existing paragraph, moving an existing paragraph, and adding three new paragraphs. In the proposal, the definition of “domestic retail deposit activity” contained in paragraph (e) is being amended to add “federal” branches because the prohibition contained in section 347.206 of the proposal, concerning taking domestic retail deposits through U.S. bank subsidiaries or certain grandfathered branches, is applicable equally to state or federal branches of foreign banks. The addition of “federal” branches to section 347.202(e) is not intended, however, to create a discrepancy regarding the application of section 347.216 of the proposal, which also uses the term “domestic retail deposit activity,” because section 347.216, by its own terms, applies specifically to state branches. The corresponding rule for federal branches is 12 CFR 28.16. Paragraph (m) of the proposal revises the definition of “initial deposit” that is contained in paragraph (l) of the existing rule to eliminate the need for the separate definition of “first deposit” that is included at the end of the paragraph in the existing rule. In addition, paragraphs (j) and (s) are added to the section and are consistent with the definitions for the same terms that are utilized in subpart A. 3. Deposit Insurance Required for All Branches of Foreign Banks Engaged in Domestic Retail Deposit Activity in the Same State (Revised § 347.203) Existing section 347.203 is retained in the proposal, but the text is revised to clarify the requirements of the section. The title to the section also is revised to make it more descriptive of the contents of the section. 4. Commitment To Be Examined and Provide Information (Revised § 347.204) Section 347.204 of the proposal substantially revises existing section 347.208 to update the rule and enhance the FDIC's supervisory authority. The existing rule was initially issued in 1979 to implement section 10(b) of the FDI Act (12 U.S.C. 1820(b)) with regard to U.S. branches of foreign banks. Section 10(b) requires a foreign bank, in connection with obtaining deposit insurance for a branch or depository institution subsidiary, to submit a binding written commitment to the FDIC to permit any examination of the affairs of any affiliate of the branch or depository institution subsidiary to the extent necessary to determine: (1) The relationship between the depository institution and the affiliate and (2) the effect of such relationship on such depository institution. Like the existing rule, the proposed rule addresses a foreign bank seeking deposit insurance for a U.S. branch. However, the proposed rule, if adopted, will apply whenever a foreign bank seeks deposit insurance for a banking subsidiary. Accordingly, the rule, as revised, will require a foreign bank applying for deposit insurance for a U.S. branch or depository institution subsidiary to provide the FDIC with a written commitment (including a consent to U.S. court jurisdiction and designation of agent for service of process, acceptable to the FDIC) to: 1. Permit examination, for the reasons specified in section 10(b)(4), of the foreign bank and affiliates located outside the U.S.; 6 6 Unlike the existing section, which requires the foreign bank to provide information regarding the affairs of the foreign bank and its affiliates outside the U.S. and examination of the affairs of any office, agency, branch or affiliate of the foreign bank located in the United States, the proposed section will require the foreign bank to permit examination of itself and its affiliates for the purposes specified in the statute, without regard to their location. This requirement is based on the relevant underlying statutory provisions in the FDI Act. See , sections 3(w)(6) and 10(b)(4) of the FDI Act (12 U.S.C. 1813(w)(6), 1820(b)(4)). 2. Provide information, for the reasons specified in section 10(b)(4), regarding the foreign bank and affiliates located outside the U.S.; and 3. Allow examination and provide information, for the reasons specified in section 10(b)(4), regarding the offices and affiliates of the foreign bank that are located in the U.S. The proposed rule also will allow the foreign examination provision to be waived in instances where the FRB has already made a comprehensive consolidated supervision determination for the foreign bank at issue. In addition, under the proposed rule, if an equivalent commitment has been made by a foreign bank to another Federal banking agency that provides the FDIC with the same rights and privileges that the FDIC would have if it obtained such commitment on its own behalf, the FDIC may waive all or part of the commitment requirements imposed by this section in lieu of requiring its own separate commitment from the foreign bank. If such waiver is granted, however, the foreign bank will be required to provide the FDIC with the commitments required by the section before the foreign bank terminates any commitments provided to any other Federal banking agency which provide a basis for such waiver. The FDIC recognizes that there may be situations when a foreign bank has not been determined to be subject to comprehensive consolidated supervision; has not provided a commitment to any other Federal banking agency that the FDIC finds acceptable; and cannot or will not provide the written commitment to permit examination required under section 347.204(a)(1). In this circumstance, it is envisioned that under section 347.204(a)(3) the deposit insurance application for the U.S. branch or depository institution will not be processed because the application will not be considered substantially complete without the required commitment. It is also recognized, however, that the foreign bank may be willing to provide the required commitment, but obstacles to the FDIC's ability to utilize the commitment may be posed by the laws or regulatory regime governing the foreign bank. In this situation, it is envisioned that the foreign bank would be responsible for addressing and resolving these issues in consultation with the appropriate FDIC staff. To the extent the issues cannot be resolved acceptably, but the foreign bank provides the required commitment, the rule provides for consideration of these issues, in section 347.204(b)(3), in determining whether the deposit insurance application of the foreign bank's U.S. branch or depository institution should be granted or denied. 5. Records Maintenance (Revised § 347.205) Section 347.205 of the proposal addresses record maintenance requirements for insured U.S. branches of foreign banks. The new section reorders and combines the paragraphs of existing section 347.209, which addresses the same issues. 6. Conduct of Domestic Retail Deposit Activity by U.S. Branch of a Foreign Bank (Revised § 347.206) Section 347.206 of the proposal implements section 6(d) of the IBA (12 U.S.C. 3104(d)). Paragraphs (a)-(c) are derived from existing section 347.204(a)-(c) but have been reworded slightly for clarity. Paragraph (a) requires any foreign bank intending to conduct domestic retail deposit activities requiring deposit insurance in any state after December 19, 1991, to establish one or more insured U.S. bank subsidiaries to conduct those deposit activities. Paragraph (b) provides an exception to this general rule, based on section 6(d)(3) of the IBA, for any FDIC-insured bank organized under the laws of any territory of the United States, Puerto Rico, Guam, American Samoa, or the Virgin Islands. This allows insured banks organized under the laws of the specified jurisdictions to conduct any domestic retail deposit activities in the United States through an insured branch, rather than through insured bank subsidiaries. Paragraph (c) is based upon the “grandfathered branch” exception in the statute, which allows any insured branches that were accepting or maintaining domestic retail deposit accounts on December 19, 1991, to continue to operate as insured branches conducting domestic retail deposit activities. Existing section 347.204(d), which authorizes foreign banks to operate noninsured state branches meeting the criteria specified therein, is made into proposed section 347.213 because it only applies to state branches. Paragraph (d) of the proposed rule is added to address an issue raised with the FDIC through the EGRPRA process. In that process, an industry trade association requested that the FDIC clarify that the grandfathered status of an insured branch survives the sale or transfer of the branch from one foreign bank to another foreign bank. The trade association suggested that the transferability of the grandfathered status of a U.S. branch of a foreign bank to a new owner was supported by applying the “plain meaning” rule of statutory construction to section 6(d) of the IBA. The trade association's view was that because the availability of the grandfather exception appears to be conditioned upon a single exception (that the branch was insured as of December 19, 1991), it was inconsistent with the plain meaning of the statute to read into it an additional condition (that the branch was not transferred after December 19, 1991). The trade association also observed that other grandfather provisions enacted by Congress in the same statute expressly state that those grandfather rights terminate upon a change in control. Therefore, the absence of such a provision in the grandfathered branch exception, it was argued, indicates that Congress did not intend that an insured branch would lose its grandfathered status upon its sale or transfer. Additionally, the trade association observed that permitting transfers of grandfathered branches would provide an option for other foreign banks that would like to establish FDIC-insured branches but are constrained from doing so by the subsidiary requirement in section 6(d). Finally, it was observed that depositors would not lose the protections of deposit insurance solely as a result of the sale or transfer of an insured branch. The FDIC has considered these observations and others presented by the trade association. It appreciates the arguments supporting a broad reading of the grandfathered branch exception but the exception has been construed more narrowly in the past 7 and, at this time, the FDIC is not persuaded that a change in position is justified. The broad reading of the grandfather exception requested would be at odds with the distinct preference Congress stated in section 6(d) of the IBA of making foreign banks desiring to engage in new domestic retail deposit activities requiring deposit insurance after December 19, 1991 do so through insured banking subsidiaries. Since it is a well recognized rule of statutory construction that in ascertaining the plain meaning of a statute it is appropriate to look to the particular statutory language at issue, as well as the language and design of the statute as a whole, this construction of paragraph (d) appears to be more appropriate than the alternative construction of the statute advanced by the trade association. 8 It also does not appear to be appropriate, as a matter of policy, to adopt an interpretation that will make the grandfathered status the object of bargain among foreign banks and allow entry to and departure from the insured domestic retail deposit market based on the highest bid for the privilege. 7 See e.g. , FDIC Advisory Opinion 92-12, March 25, 1992, reprinted in [1991-1992 Transfer Binder] Fed. Banking L. Rep. (CCH) P81,482 (The grandfathered branch exception was intended only to permit existing insured branches of foreign banks to continue to operate after the enactment of FDICIA without the requirement of being “rolled up” into a newly chartered subsidiary bank. The provision does not permit a foreign bank with a grandfathered branch to subsequently open additional insured branches which accept and maintain deposit accounts having balances of less than $100,000.) 8 Reading the statute as a whole, the proposed broad reading of the exception also is contrary to the direction provided in section 6(a) of the IBA regarding implementation of the section because purchasers of grandfathered branches could avoid forming and capitalizing banking subsidiaries to engage in domestic retail deposit activity in the U.S., rather than following the same process required for domestic banks of establishing and capitalizing a distinct corporate entity and applying for deposit insurance. The FDIC recognizes that the existing rule does not address this issue. It also recognizes, however, that there may be other situations, such as certain merger and acquisition transactions, that are not designed or motivated by the desire to obtain access to the domestic retail deposit market and avoid compliance with the subsidiary requirement in section 6(d) of the IBA, where the grandfathered status of an insured branch should remain intact. Therefore, the FDIC is addressing the issue in paragraph (d) of the proposed rule and inviting public comments. 7. Disclosure of Supervisory Information to Foreign Supervisors (New § 347.207) Section 347.207 is proposed to facilitate cross-border supervision of insured branches of foreign banks and insured bank subsidiaries by providing for the sharing of supervisory information between the FDIC and foreign bank regulatory or supervisory authorities. It is patterned after section 15 of the IBA (12 U.S.C. 3109) and 12 CFR 211.27. The section also addresses the confidentiality of such information, based upon the FDIC's interpretation of section 8(v) of the FDI Act (12 U.S.C. 1818(v)), by providing that the disclosure or transfer of such information to a foreign bank regulatory or supervisory authority does not waive any privilege applicable to such information. 8. Assessment Base Deductions by Insured Branch (Revised § 347.208) Section 347.208 is revised text of existing section 347.212. 9. Pledge of Assets (Revised § 347.209) The asset pledge requirement contained in existing section 347.210 is revised in proposed section 347.209 by imposing a risk-based asset pledge requirement. The existing 5 percent asset pledge requirement has been in place since 1984. As part of the EGRPRA process, an industry trade association observed that the existing asset pledge requirement fails to take into account the specific circumstances of each insured branch and advances in risk-based bank supervision that have taken place in recent years. The trade association also observed that the asset pledge requirements do not apply to U.S. banks and asserted that the existing asset pledge requirement adversely affects the earnings and liquidity of insured U.S. branches by making them maintain and pledge specific amounts of generally lower yielding assets. The FDIC recognizes that the asset pledge requirement may have competitive implications for foreign banks with regard to their insured branches operating in the United States, but does not believe elimination of the asset pledge requirement is appropriate. Unlike their domestic counterparts, the activities, assets, and personnel of foreign banks operating insured branches in the United States are, in large part, outside the jurisdiction of the United States. While the parent bank may, in theory, add financial support to the branch structure, the FDIC is concerned that indications of financial weakness that become apparent in an insured branch may also be indicative of financial weakness at the parent level that may result in less financial support from the parent of the insured branch in times of financial stress. This could result either from voluntary decisions of the parent or regulatory restrictions imposed by the home country regulator, and may precipitate significant deposit outflows from the insured branch. Therefore, to mitigate this risk and the potential risks associated with providing deposit insurance for deposits in an insured branch, the FDIC continues to believe that an asset pledge requirement in some amount is appropriate. The FDIC recognizes that it may be appropriate, however, to revise the asset pledge requirement to make it more risk-focused and to take into consideration characteristics that may be unique to each insured branch. As revised in the proposal, the asset pledge requirement will be determined in a manner similar to the approach the FDIC has taken with its risk-based deposit insurance assessment system. Under the proposal, any newly insured branch will be subject to a 5 percent asset pledge requirement until the end of the first three years of its operation as an insured branch. This differs from the one-year requirement in paragraph (b)(2) of the existing rule, but the FDIC believes that the standard in the existing rule is outdated and that it is prudent to impose more stringent requirements on newly insured institutions during the first three years of their operations to compensate for potential risks associated with the commencement of insured operations. Three years will also allow a newly insured branch to experience at least one examination cycle, which will result in supervisory information that the FDIC can utilize to adjust the asset pledge requirement for the branch. After the first three years of operation as an insured branch, the rule envisions that the asset pledge amount will be adjusted by taking into consideration the percentage of assets maintained by the insured branch, pursuant to section 347.210, and the supervisory information relative to the branch at issue. It is envisioned that the most recent ROCA rating 9 for the insured branch will be a focal point of such supervisory information but, as with the risk-based premium system, the FDIC could also consider other supervisory information that it believes is appropriate to fully evaluate the potential risk posed by the insured branch in determining the supervisory subgroup assignment for the branch. The appropriate percentage of assets required to be pledged will then be determined based on the supervisory risk subgroup assigned and the asset maintenance level applicable to the branch. The proposal will generally permit the asset pledge to be lowered to not less than 2 percent of third-party liabilities for insured branches that are perceived to pose a lower potential risk and up to 8 percent of liabilities for insured branches that are perceived to pose a higher potential risk to the deposit insurance fund. In addition the FDIC's ability to require a higher percentage of pledged assets in appropriate circumstances will remain unchanged in the proposed rule. Although the proposed rule could potentially increase the asset pledge requirement above the existing 5 percent requirement for some insured branches, most of the existing insured branches traditionally exceed the minimum asset maintenance requirements imposed by existing section 347.210, and most of their supervisory ratings are also favorable. Therefore, if the rule is adopted as proposed, the FDIC's asset pledge requirement for most of the existing insured branches will be reduced from its current level. Moreover, the risk-based proposal is designed to increase the degree of protection provided to the FDIC deposit insurance fund as the risk profile for the insured branch deteriorates. 9 The ROCA system represents the rating of risk management, operational controls, compliance, and asset quality of a Foreign Banking Organization's U.S. operations. The proposed rule also makes amendments and deletions to the existing rule. Paragraph (d)(1) of the existing rule specifies that certificates of deposit may be pledged as collateral. The additional term “negotiable” is being added to the corresponding portion of the proposed rule to clarify this requirement because negotiable certificates of deposit are marketable, while other types of certificates of deposit may exist that could provide less protection to the FDIC in the event they had to be liquidated quickly. Thus, certificates of deposit that are not negotiable will not qualify as acceptable collateral for purposes of the asset pledge requirement. In addition, the FDIC is proposing to amend paragraph (d)(2) to add U.S. Treasury bills as an additional form of eligible collateral. Finally, paragraph (f) of the existing rule is removed in the proposed rule because it is essentially a delegation of authority. Over the past several years the FDIC has removed its delegations of authority for supervisory matters from its rules and now generally addresses these matters by internal delegations of authority from the FDIC's Board of Directors. 10. Asset Maintenance (Revised § 347.210) Proposed section 347.210 contains revisions to existing section 347.211 that are largely related to the asset maintenance calculation for insured branches. As revised, the proposed rule will require insured branches to maintain eligible assets on a daily basis in an amount not less than 106 percent of the insured branch's daily third-party liabilities, rather than based upon the preceding quarter's average book value of the insured branch's liabilities. Although the existing calculation method has been in place for a number of years, there have been some instances where insured branches were winding down their operations and needed to be allowed to calculate their asset maintenance on a daily basis to maintain compliance with the asset maintenance requirement. The FDIC believes that requiring that the calculation be made based on the daily third-party liabilities of the branch will avoid these and other potential anomalies that can be caused by using liability information from the preceding quarter. In addition, although requiring the asset maintenance ratio to be calculated based on the daily assets and liabilities of a branch may require some adjustment of existing processes, the FDIC does not believe it will require much additional preparation by insured branches. The FDIC also believes this formula's application will be more straightforward and the asset maintenance calculation will be easier for the insured branches to determine. Nevertheless, the FDIC is soliciting public comment regarding this proposal. Other revisions to paragraph (a) of the existing rule include elimination of the alternative calculation for newly-established branches and the reference to the “Board of Directors.” Paragraph (d) of the existing rule is revised to require that the asset maintenance calculations for the branch be retained until the next Federal examination. 11. Examination of Branches of Foreign Banks (Revised § 347.211) Section 347.211 of the proposal contains the text of existing section 347.214. 12. FDIC Approval to Conduct Activities That Are Not Permissible for Federal Branches (Revised § 347.212) Section 347.212 revises the text of existing section 347.213. In addition, a specific citation is added to the appropriate section in subpart J that applies to this section for ease of reference. 13. Establishment and Operation of Noninsured Branch (Revised § 347.213) Section 347.213 of the proposal contains the revised text of existing section 347.204(d). As in the existing rule, the section authorizes foreign banks to operate noninsured branches if any such branch: • Is conducting only a wholesale deposit taking operation; • Is accepting only deposits that are permissible for an Edge Act corporation pursuant to proposed rule 347.214; or • Meets the requirements for an exemption from the definition of “domestic retail deposit activity” pursuant to proposed rule 347.215. The paragraph is separated from the other paragraphs in existing section 347.204 because paragraphs (a)-(c) are equally applicable to state and federal branches that are insured. As indicated earlier, paragraphs (a)-(c) of section 347.204 are contained in proposed section 347.206. Because this paragraph addresses only noninsured state branches, it is placed in its own section and grouped with other sections of the subpart that relate only to noninsured state branches. 14. Branch Established Under Section 5 of the International Banking Act (Revised § 347.214) Section 347.214 of the proposal contains the revised text of existing section 347.205. 15. Exemption From Deposit Insurance Requirement (Revised § 347.215) Section 347.215 of the proposal contains revised text of existing section 347.206. Paragraph (c)(2) has been revised to delete the exception for non-time deposits because the timeframe stated in the existing rule has expired. Other revisions to the text are not substantive, and a specific citation has been added to the section of subpart J of part 303 that applies to this section. 16. Depositor Notification (Revised § 347.216) Section 347.216 of the proposal contains the text of existing section 347.207. V. Request for Comments on Deposit Insurance for Wholesale U.S. Branches of Foreign Banks As part of the EGRPRA process, an industry trade association indicated that some foreign banks with U.S. wholesale branches ( i.e., branches that are not engaged in domestic retail deposit activities that require FDIC insurance) may be interested in obtaining deposit insurance and recommended that the FDIC should no longer discourage international banks from applying for “optional” deposit insurance. To place this observation in context, prior to 1998, the FDIC had a rule authorizing “optional insurance” for U.S. branches of foreign banks. In 1998 the optional insurance rule was eliminated as part of the revision and consolidation of various parts of the FDIC rules into part 347. At that time, to summarize the discussion contained in the 1998 Final Rule, the FDIC observed that the subsidiary requirement imposed by section 6(d) of the IBA appeared to reach only domestic retail deposit taking activities of foreign banks. Because section 5(b) of the FDI Act (12 U.S.C. 1815(b)), addressing deposit insurance applications for U.S. branches of foreign banks, had not been repealed, it arguably may be possible for a U.S. branch of a foreign bank that does not engage in domestic retail deposit activity to seek deposit insurance from the FDIC. The FDIC further observed, however, that as a practical matter, it did not foresee many circumstances in which it could be appropriate for the FDIC's Board of Directors to approve such an application, but that the elimination of the optional insurance rule would not affect a foreign bank's ability to argue that it may make such an application under section 5(b) of the FDI Act. Finally, the FDIC observed that the FDIC Board of Directors would have to determine whether to actually accept and approve such an application, based on its review of the facts and circumstances involved, in addition to the pertinent legal and policy considerations. Among the arguments advanced to support an expanded view of the availability of deposit insurance for wholesale branches was that: • A “plain meaning” construction of section 5(b) permits “any branch”—including a wholesale branch—to become insured; • Congress expressly prohibited foreign banks from obtaining FDIC insurance for branches “engaged in domestic retail deposit activities” but did not remove the statutory provisions authorizing foreign banks to apply for deposit insurance for wholesale branches; • The FDIC's approach ignores significant changes in regulatory practices and structures that have occurred since 1991 with regard to foreign banks; broader acceptance of the principle of “investor choice;” and rejection of a broader policy to force foreign banks to operate in the U.S. only through subsidiaries; • Wholesale depositors often seek the benefits of FDIC insurance—even though the full amount of their deposits may not be insured. The ability to offer these benefits through a U.S. branch would provide a benefit to customers and increase a foreign bank's funding options; • Optional FDIC insurance is likely to be attractive primarily to foreign banks already operating FDIC-insured branches and subsidiaries in the U.S. and to a relatively small number of other foreign banks, especially those seeking to serve particular ethnic markets. As a result, a more liberal policy likely would have a minimal effect on the deposit insurance fund; and • Permitting wholesale branches to obtain deposit insurance is consistent with the business model that has been followed by some major U.S. banks that have retained insurance while focusing on wholesale markets. While the FDIC recognizes the arguments advanced by the trade association and appreciates that some foreign banks may be reluctant to file deposit insurance applications, the FDIC believes that it is difficult to reconcile the concept that Congress imposed the subsidiary requirement with regard to domestic retail deposit activity requiring deposit insurance for the protection of the FDIC with the implicit assumption that Congress did not believe such protection was needed with regard to wholesale branches of foreign banks. 10 In this respect, it should be noted that even though the deposits of such branches may be characterized as “wholesale,” the branch deposits would be insured to the same extent as any other deposits maintained in an insured depository institution and that it is possible to obtain more than $100,000 in deposit insurance coverage if the customer accounts are structured correctly. 10 For example, Senator Donald W. Riegle, who introduced the amendment adding the subsidiary requirement to section 6 of the IBA, explained the rationale for the amendment, at 137 Cong. Rec. S18617, S18623 (daily ed. November 27, 1991), as follows: “Another section of the conference report foreign bank subtitle ensures that foreign banks, that wish to accept or maintain insured deposit accounts, do so only in subsidiary banks incorporated in the United States. Although the taking of retail deposits in insured branches is not presently a widespread practice by foreign banks, I pushed for enactment of this provision as a safeguard against any future expansion of this practice in order to better safeguard the bank insurance fund from losses by branches of banks whose full operations we do not oversee or control. In the past the FDIC has expressed concerns that in the event of insolvency of a foreign bank, assets could easily be shifted from the U.S. branch and out of U.S. jurisdiction while deposits could be shifted to the U.S. branch. Such practices, of course, would create new risks for the bank insurance fund and taxpayers who stand behind it. During his September 24, 1991 confirmation hearing William Taylor, Chairman of the FDIC, endorsed this provision.” In addition, many of the reasons offered in the past against insuring retail branches apply equally to wholesale branches. For example, various legal issues arise in the branch context that are more difficult to predict and address than those involving banking subsidiaries and, thus, potentially pose additional risks to the deposit insurance fund. As the FDIC noted even prior to the 1991 statutory amendments regarding insured domestic retail deposit activities by U.S. branches of foreign banks, directors of a foreign bank are not usually subject to the U.S. jurisdiction, and domestic branch personnel essential to explaining certain transactions could be transferred beyond the reach of U.S. authorities. Essential records could also be difficult to reach if they are kept at the head office or at branches in other countries. The FDIC also has recognized in the past that a U.S. branch could be subjected to requirements under foreign laws or to political or economic decisions of a foreign government which conflict with domestic bank regulatory policies. In addition, a recognized advantage of operating through a branch, as opposed to subsidiary structure, is the ability to engage in transactions with the home office without significant operational restrictions that might otherwise be applied to transactions with affiliates of insured U.S. banks. Finally, insolvency of a foreign bank with a multinational branch structure may pose complicated and time-consuming issues regarding the resolution of the branch that could more likely be avoided in situations involving banking subsidiaries. The proposed expansive approach to deposit insurance for wholesale U.S. branches also appears to raise additional concerns, including the following: • The size and legal structure of cross-border wholesale branch operations, as opposed to similar operations through domestic banking subsidiaries, may pose additional risks to the deposit insurance fund. Regarding the size of the operations, for example, the trade association indicated that foreign banks hold over $3 trillion in assets through their U.S. operations, including over $1 trillion in assets in nearly 300 U.S. branches and agencies of foreign banks. Although it has been represented that only a small number of these branches and U.S. subsidiaries would be interested in obtaining deposit insurance, the potential for a larger number of branches seeking the benefit of FDIC deposit insurance could present a considerable and imprudent expansion of the deposit insurance safety net. Regarding the legal structure of cross-border wholesale branches, while the branch structure theoretically can provide more economic support from the foreign bank than a subsidiary structure, the livelihood of a branch is highly dependent on the continued economic viability of the foreign bank. Unlike a subsidiary bank, which is separately capitalized and can continue to operate independently of the foreign bank, if the foreign bank becomes insolvent, in all likelihood the bank's branches will also be rendered insolvent or require intervention. • The potential benefit to the wholesale branch depositors of the liberalized approach may not be as significant for the branch's depositors as the potential benefits that may accrue to the foreign bank, through potentially reduced funding costs as a result of obtaining FDIC deposit insurance. This raises concerns, from a policy perspective, about whether this should be considered a proper use of the deposit insurance funds and about the FDIC's reputation as a deposit insurer. It also raises concerns about the potential for foreign citizens being confused or misled by foreign bank marketing of FDIC deposit insurance coverage for wholesale branch deposits. • It may also be difficult to ensure that deposit insurance for wholesale branches would not be utilized as a mechanism to circumvent or weaken the subsidiary requirement imposed by section 6(d) of the IBA. For example, an argument might be made that an initial deposit for a nominal amount in excess of $100,000 qualifies as a “wholesale deposit,” even thought the balance in the account immediately falls below $100,000 and, even with subsequent deposits, the balance in the account never again exceeds the $100,000. Based on the foregoing discussion, the FDIC continues to believe the statements made in the 1998 Final Rule are appropriate with regard to deposit insurance for wholesale U.S. branches of foreign banks, but welcomes public comments on this issue. The FDIC expects to take appropriate action after consideration of the comments received. VI. Regulatory Flexibility Act Analysis The FDIC is required by section 3(a) of the Regulatory Flexibility Act (5 U.S.C. 603(a)) to publish an initial regulatory flexibility analysis with this rulemaking or certify that the proposed rule, if adopted, will not have a significant economic impact on a substantial number of small entities. For purposes of the analysis or certification, financial institutions with assets of $150 million or less are considered “small entities.” For the reasons stated below, the FDIC certifies, pursuant to 5 U.S.C. 605(b), that the amendments and revisions contained in this proposed rule will not, if promulgated through a final rule, have a significant economic impact on a substantial number of small entities. The proposed rule makes primarily technical revisions to update, reorganize, and clarify the existing rules in subpart A of part 347 and subpart J of part 303. Subpart J of part 303 contains the procedural rules that implement part 347. The rules in subpart A of part 347 address issues related to the international activities and investments of insured state nonmember banks. In general, they implement the FDIC's statutory authority under section 18(d)(2) of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1828(d)(2)), regarding branches of insured state nonmember banks in foreign countries, and section 18(l) of the FDI Act, regarding insured state nonmember bank investments in foreign entities. As of December 31, 2003, there were approximately 4,833 state nonmember banks, but fewer than 50 of those institutions had foreign investments or foreign branches. Available information indicates that state nonmember banks with foreign investments or foreign branches are not small entities. For example, none of the state nonmember banks with foreign branches is a small entity, and none of the foreign investment applications processed in 2003 involved small entities. The proposed rule also makes revisions to update, reorganize, and clarify the existing rules in subpart B of 347, as well as additional revisions and amendments that address supervisory issues. The rules in subpart B of part 347 principally address issues related to insured and noninsured U.S. branches of foreign banks under section 6 of the International Banking Act (IBA)(12 U.S.C. 3104). As of December 31, 2003, there were approximately 237 U.S. branches of foreign banks, including 12 insured branches. Of this number, there were approximately 71 U.S. branches of foreign banks that appear to qualify as small entities, including 6 insured branches. The 12 insured branches are presently subject to the FDIC's asset pledge and asset maintenance requirements, which are revised in sections 347.209 and 347.210 of the proposed rule. Although the revision of the asset pledge requirement to implement a risk-based approach may result in an increase in the amount of assets pledged for insured branches with low supervisory ratings, the FDIC does not believe this will affect the insured branches that qualify as small entities. The FDIC also is simplifying the asset maintenance calculation in section 347.210. The formula will require that third-party liabilities be calculated on a daily basis, rather than based upon the preceding quarter's average book value of the insured branch's liabilities (as required in existing section 347.211). This revision will apply to all insured branches, including the small entities, but the FDIC believes this calculation method will make compliance with the regulatory requirement less difficult for the affected institutions. Although the change may require some modifications to existing computer programs, these should not be significant because there should already be a daily reconcilement of assets and liabilities occurring in the branches. The requirement that the asset maintenance calculations be retained until the next Federal examination also should not result in a significant economic impact on the small entities because retention of each branch's liability calculations until the next Federal examination is already required under the existing asset maintenance rule. Other revisions being proposed to the rules affecting noninsured branches are not substantive and, thus, should have no significant economic impact on noninsured branches that qualify as small entities. Finally, no amendments are being proposed to the rules in subpart C. The public merely is being given an opportunity, in this rulemaking proceeding, to comment on the accounting and reporting rules related to international lending that are contained in subpart C of part 347. VII. Paperwork Reduction Act In accordance with the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ), the FDIC may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The FDIC has two OMB-approved information collections (3064-0125, Foreign Branching and Investment by Insured State Nonmember Banks, and 3064-0114, Foreign Banks) which cover the paperwork burden associated with Subparts A and B of Part 347. The information collections in 3064-0125 consist of applications related to establishing and closing a foreign branch; applications related to acquiring stock of a foreign organization; and records and reports which a nonmember bank must maintain once it has established a foreign branch or foreign organization. The information collections in 3064-0114 consist of applications to operate as a noninsured state-licensed branch of a foreign bank; applications from an insured state-licensed branch of a foreign bank to conduct activities which are not permissible for a federally-licensed branch; internal recordkeeping by insured branches of foreign banks; and reporting requirements related to an insured branch's pledge of assets to the FDIC. This proposal to amend Part 347, Subparts A and B will not result in any change in the current estimated paperwork burden associated with the regulation, therefore no submission has been made to OMB under the Paperwork Reduction Act. VIII. Plain Language Requirement Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the federal banking agencies to use “plain language” in all proposed and final rules published after January 1, 2000. We invite your comments on how to make this proposal easier to understand. For example: (1) Have we organized the material to suit your needs? (2) Are the requirements in the rule clearly stated? (3) Does the rule contain technical language or jargon that isn't clear? (4) What else could we do to make the rule easier to understand? IX. Assessment of Impact of Federal Regulation on Families The FDIC has determined that the proposed rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999, enacted as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 (Public Law 105-277, 112 Stat. 2681). List of Subjects 12 CFR Part 303 Administrative practice and procedure, Authority delegations (Government agencies), Bank deposit insurance, Banks, banking, Reporting and recordkeeping requirements, Savings associations. 12 CFR Part 325 Banks, banking, Reporting and recordkeeping requirements. 12 CFR Part 327 Bank deposit insurance, Banks, banking, Savings associations. 12 CFR Part 347 Authority delegations (Government agencies), Bank deposit insurance, Banks, banking, Credit, Foreign banking, Investments, Reporting and recordkeeping requirements, United States investments abroad. For the reasons set forth above and under the authority of 12 U.S.C. 1819(a)(Tenth), the FDIC Board of Directors hereby proposes to amend 12 CFR chapter III as follows: PART 303—FILING PROCEDURES Subpart J—International Banking 1. The authority citation for part 303 continues to read as follows: Authority: 12 U.S.C. 378, 1813, 1815, 1817, 1818, 1819 (Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1, 1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607. 2. Revise § 303.182 to read as follows: § 303.182 Establishing, moving or closing a foreign branch of an insured state nonmember bank. (a) Notice procedures for general consent. Notice in the form of a letter from an eligible depository institution establishing or relocating a foreign branch pursuant to § 347.117(a) of this chapter must be provided to the appropriate FDIC office no later than 30 days after taking such action. The notice must include the location of the foreign branch, including a street address, and a statement that the foreign branch has not been located on a site on the World Heritage List or on the foreign country's equivalent of the National Register of Historic Places (National Register), in accordance with section 402 of the National Historic Preservation Act Amendments of 1980 (NHPA Amendments Act) (16 U.S.C. 470a-2). The FDIC will provide written acknowledgment of receipt of the notice. (b) Filing procedures for other branch establishment s—(1) Where to file. An applicant seeking to establish a foreign branch other than under § 347.117(a) of this chapter shall submit an application to the appropriate FDIC office. (2) Content of filing. A complete letter application must include the following information: (i) The exact location of the proposed foreign branch, including the street address, and a statement whether the foreign branch will be located on a site on the World Heritage List or on the foreign country's equivalent of the National Register, in accordance with section 402 of the NHPA Amendments Act; (ii) Details concerning any involvement in the proposal by an insider of the applicant, as defined in § 303.2(u) of this part, including any financial arrangements relating to fees, the acquisition of property, leasing of property, and construction contracts; (iii) A brief description of the applicant's business plan with respect to the foreign branch; and (iv) A brief description of the proposed activities of the branch and, to the extent any of the proposed activities are not authorized by § 347.115 of this chapter, the applicant's reasons why they should be approved. (3) Additional information. The FDIC may request additional information to complete processing. (c) Processing —(1) Expedited processing for eligible depository institutions. An application filed under § 347.118(a) of this chapter by an eligible depository institution as defined in § 303.2(r) of this part seeking to establish a foreign branch by expedited processing will be acknowledged in writing by the FDIC and will receive expedited processing, unless the applicant is notified in writing to the contrary and provided with the basis for that decision. The FDIC may remove the application from expedited processing for any of the reasons set forth in § 303.11(c)(2) of this part. Absent such removal, an application processed under expedited processing is deemed approved 45 days after receipt of a substantially complete application by the FDIC, or on such earlier date authorized by the FDIC in writing. (2) Standard processing. For those applications that are not processed pursuant to the expedited procedures, the FDIC will provide the applicant with written notification of the final action when the decision is rendered. (d) Closing. Notices of branch closing under § 347.121 of this chapter, in the form of a letter including the name, location, and date of closing of the closed branch, shall be filed with the appropriate FDIC office no later than 30 days after the branch is closed. 3. In § 303.183, revise the title and paragraphs (a), (b)(1), and (c)(1) to read as follows: § 303.183 Investment by insured state nonmember banks in foreign organization. (a) Notice procedures for general consent. Notice in the form of a letter from an eligible depository institution making direct or indirect investments in a foreign organization pursuant to § 347.117(b) of this chapter shall be provided to the appropriate FDIC office no later than 30 days after taking such action. The FDIC will provide written acknowledgment of receipt of the notice. (b) Filing procedures for other investments —(1) Where to file. An applicant seeking to make a foreign investment other than under § 347.117(b) of this chapter shall submit an application to the appropriate FDIC office. (c) Processing —(1) Expedited processing for eligible depository institutions. An application filed under § 347.118(b) of this chapter by an eligible depository institution as defined in § 303.2(r) of this part seeking to make direct or indirect investments in a foreign organization will be acknowledged in writing by the FDIC and will receive expedited processing, unless the applicant is notified in writing to the contrary and provided with the basis for that decision. The FDIC may remove the application from expedited processing for any of the reasons set forth in § 303.11(c)(2) of this part. Absent such removal, an application processed under expedited processing is deemed approved 45 days after receipt of a substantially complete application by the FDIC, or on such earlier date authorized by the FDIC in writing. 4. In § 303.184, revise paragraph (b)(1) to read as follows: § 303.184 Moving an insured branch of a foreign bank. (b) Processing —(1) Expedited processing for eligible insured branches. An application filed by an eligible insured branch as defined in § 303.181(c) of this part will be acknowledged in writing by the FDIC and will receive expedited processing if the applicant is proposing to move within the same state, unless the applicant is notified to the contrary and provided with the basis for that decision. The FDIC may remove an application from expedited processing for any of the reasons set forth in § 303.11(c)(2) of this part. Absent such removal, an application processed under expedited processing will be deemed approved on the latest of the following: (i) The 21st day after the FDIC's receipt of a substantially complete application; or (ii) The 5th day after expiration of the comment period described in paragraph (c) of this section. 5. In § 303.186, revise the title and paragraphs (a)(1) to read as follows: § 303.186 Exemptions from insurance requirements for a state branch of a foreign bank. (a) Filing procedures —(1) Where to file. An application by a foreign bank for consent to operate as a noninsured state branch, as permitted by § 347.215(b) of this chapter, shall be submitted in writing to the appropriate FDIC office. 6. In § 303.187, revise the title and paragraphs (a)(1), (a)(2)(iv) and (b)(1) to read as follows: § 303.187 Approval for an insured state branch of a foreign bank to conduct activities not permissible for federal branches. (a) Filing procedures —(1) Where to file. An application by an insured state branch seeking approval to conduct activities not permissible for a federal branch, as required by § 347.212(a) of this chapter, shall be submitted in writing to the appropriate FDIC office. (2) * * * (iv) A statement by the applicant of whether it is in compliance with §§ 347.209 and 347.210 of this chapter; (b) Divestiture or cessation —(1) Where to file. Divestiture plans necessitated by a change in law or other authority, as required by § 347.212(e) of this chapter, shall be submitted in writing to the appropriate FDIC office. PART 325—CAPITAL MAINTENANCE 7. The authority citation for part 325 continues to read as follows: Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819 (Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note). 8. In § 325.103, revise paragraph (c) to read as follows: § 325.103 Capital measures and capital category definitions. (c) Capital categories for insured branches of foreign banks. For purposes of the provisions of section 38 and this subpart, an insured branch of a foreign bank shall be deemed to be: (1) Well capitalized if the insured branch: (i) Maintains the pledge of assets required under § 347.209 of this chapter; and (ii) Maintains the eligible assets prescribed under § 347.210 of this chapter at 108 percent of the insured branch's daily third-party liabilities; and (iii) Has not received written notification from: (A) The OCC to increase its capital equivalency deposit pursuant to 12 CFR 28.15(b), or to comply with asset maintenance requirements pursuant to 12 CFR 28.20; or (B) The FDIC to pledge additional assets pursuant to § 347.209 of this chapter or to maintain a higher ratio of eligible assets pursuant to § 347.210 of this chapter. (2) Adequately capitalized if the insured branch: (i) Maintains the pledge of assets required under § 347.209 of this chapter; and (ii) Maintains the eligible assets prescribed under § 347.210 of this chapter at 106 percent of the insured branch's daily third-party liabilities; and (iii) Does not meet the definition of a well capitalized insured branch. (3) Undercapitalized if the insured branch: (i) Fails to maintain the pledge of assets required under § 347.209 of this chapter; or (ii) Fails to maintain the eligible assets prescribed under § 347.210 of this chapter at 106 percent or more of the insured branch's daily third-party liabilities. (4) Significantly undercapitalized if it fails to maintain the eligible assets prescribed under § 347.210 of this chapter at 104 percent of the insured branch's daily third-party liabilities. (5) Critically undercapitalized if it fails to maintain the eligible assets prescribed under § 347.210 of this chapter at 102 percent or more of the insured branch's daily third-party liabilities. PART 327—ASSESSMENTS 9. The authority citation for part 327 continues to read as follows: Authority: 12 U.S.C. 1441, 1441b, 1813, 1815, 1817-1819; Pub. L. 104-208, 110 Stat. 3009-479 (12 U.S.C. 1821). 10. In § 327.4, revise paragraphs (a)(1)(i)(B)(1), (a)(1)(i)(B)(2), (a)(1)(ii)(B)(1), and (a)(1)(ii)(B)(2) to read as follows: § 327.4 Annual assessment rate. (a) * * * (1) * * * (i) * * * (B) * * * (1) Maintains the pledge of assets required under § 347.209 of this chapter; and (2) Maintains the eligible assets prescribed under § 347.210 of this chapter at 108 percent of the insured branch's daily third-party liabilities. (ii) * * * (B) * * * (1) Maintains the pledge of assets required under § 347.209 of this chapter; and (2) Maintains the eligible assets prescribed under § 347.210 of this chapter at 106 percent of the insured branch's daily third-party liabilities; and 11. Revise part 347 to read as follows: PART 347—INTERNATIONAL BANKING Subpart A—Foreign Banking and Investment by Insured State Nonmember Banks Sec. 347.101 Authority, purpose, and scope. 347.102 Definitions. 347.103 Effect of state law on actions taken under this subpart. 347.104 Insured state nonmember bank investment in foreign organizations. 347.105 Permissible financial activities outside the United States. 347.106 Going concerns. 347.107 Joint ventures. 347.108 Portfolio investments. 347.109 Limitations on indirect investments in nonfinancial organizations. 347.110 Affiliate holdings. 347.111 Underwriting and dealing limits applicable to foreign organizations held by insured state nonmember banks. 347.112 Restrictions applicable to foreign organizations that act as futures commission merchants. 347.113 Restrictions applicable to activities by a foreign organization in the United States. 347.114 Extensions of credit to foreign organizations held by insured state nonmember banks; shares of foreign organizations held in connection with debts previously contracted. 347.115 Permissible activities for a foreign branch of an insured state nonmember bank. 347.116 Recordkeeping and supervision of the foreign activities of insured state nonmember banks. 347.117 General consent. 347.118 Expedited processing. 347.119 Specific consent. 347.120 Computation of investment amounts. 347.121 Requirements for insured state nonmember bank to close a foreign branch. 347.122 Limitations applicable to the authority provided in this subpart. Subpart B—Foreign Banks 347.201 Authority, purpose, and scope. 347.202 Definitions. 347.203 Deposit insurance required for all branches of foreign banks engaged in domestic retail deposit activity in the same state. 347.204 Commitment to be examined and provide information. 347.205 Record maintenance. 347.206 Domestic retail deposit activity requiring deposit insurance by U.S. branch of a foreign bank. 347.207 Disclosure of supervisory information to foreign supervisors. 347.208 Assessment base deductions by insured branch. 347.209 Pledge of assets. 347.210 Asset maintenance. 347.211 Examination of branches of foreign banks. 347.212 FDIC approval to conduct activities that are not permissible for federal branches. 347.213 Establishment or operation of noninsured foreign branch. 347.214 Branch established under section 5 of the International Banking Act. 347.215 Exemptions from deposit insurance requirement. 347.216 Depositor notification. Subpart C—International Lending 347.301 Purpose, authority, and scope. 347.302 Definitions. 347.303 Allocated transfer risk reserve. 347.304 Accounting for fees on international loans. 347.305 Reporting and disclosure of international assets. Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103, 3104, 3105, 3108, 3109; Title IX, Pub. L. 98-181, 97 Stat. 1153. Subpart A—Foreign Banking and Investment by Insured State Nonmember Banks § 347.101 Authority, purpose, and scope. (a) This subpart is issued pursuant to section 18(d) and ( l ) of the Federal Deposit Insurance Act (12 U.S.C. 1828(d), 1828( l )). (b) The rules in subpart A address the FDIC's requirements for insured state nonmember bank investments in foreign organizations, permissible foreign financial activities, loans or extensions of credit to or for the account of foreign organizations, and the FDIC's recordkeeping, supervision, and approval requirements. The rules also address the permissible activities for foreign branches of insured state nonmember banks, as well as the FDIC's requirements for establishing, operating, relocating and closing of branches in foreign countries. § 347.102 Definitions. For the purposes of this subpart: (a) An affiliate of an insured state nonmember bank means: (1) Any entity of which the insured state nonmember bank is a direct or indirect subsidiary or which otherwise controls the insured state nonmember bank; (2) Any organization which is a direct or indirect subsidiary of such entity or which is otherwise controlled by such entity; or (3) Any other organization that is a direct or indirect subsidiary of the insured state nonmember bank or is otherwise controlled by the insured state nonmember bank. (b) Control means the ability to control in any manner the election of a majority of an organization's directors or trustees; or the ability to exercise a controlling influence over the management and policies of an organization. An insured state nonmember bank is deemed to control an organization of which it is a general partner or its affiliate is a general partner. (c) Domestic means United States. (d) Eligible insured state nonmember bank means an eligible depository institution as defined in § 303.2(r) of this chapter. (e) Equity interest means any ownership interest or rights in an organization, whether through an equity security, contribution to capital, general or limited partnership interest, debt or warrants convertible into ownership interests or rights, loans providing profit participation, binding commitments to acquire any such items, or some other form of business transaction. (f) Equity security means voting or nonvoting shares, stock, investment contracts, or other interests representing ownership or participation in a company or similar enterprise, as well as any instrument convertible to any such interest at the option of the holder without payment of substantial additional consideration. (g) FRB means the Board of Governors of the Federal Reserve System. (h) Foreign bank means an organization that is organized under the laws of a foreign country, a territory of the United States, Puerto Rico, Guam, American Samoa, or the Virgin Islands that: (1) Is recognized as a bank by the bank supervisory or monetary authority of the country of its organization or the country in which its principal banking operations are located; (2) Receives deposits to a substantial extent in the regular course of its business; and (3) Has the power to accept demand deposits. (i) Foreign banking organization means a foreign organization that is formed for the sole purpose of either holding shares of a foreign bank or performing nominee, fiduciary, or other banking services incidental to the activities of a foreign branch or foreign bank affiliate of the insured state nonmember bank. (j) Foreign branch means an office or place of business located outside the United States, its territories, Puerto Rico, Guam, American Samoa, the Trust Territory of the Pacific Islands, or the Virgin Islands, at which banking operations are conducted, but does not include a representative office. (k) Foreign country means any country other than the United States and includes any territory, dependency, or possession of any such country or of the United States. (l) Foreign organization means an organization that is organized under the laws of a foreign country. (m) Insured state nonmember bank or bank means a state bank, as defined by section 3(a)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(a)(2)), whose deposits are insured by the FDIC and that is not a member of the Federal Reserve System. (n) Indirectly means investments held or activities conducted by a subsidiary of an organization. (o) Investment grade means a security that is rated in one of the four highest categories by: (1) Two or more NRSROs; or (2) One NRSRO if the security is rated by only one NRSRO. (p) Loan or extension of credit means all direct and indirect advances of funds to a person, government, or entity made on the basis of any obligation of that person, government, or entity to repay funds. (q) Organization or entity means a corporation, partnership, association, bank, or other similar entity. (r) NRSRO means a nationally recognized statistical rating organization as designated by the Securities and Exchange Commission. (s) Representative office means an office that engages solely in representative functions such as soliciting new business for its home office or acting as liaison between the home office and local customers, but which has no authority to make business or contracting decisions other than those relating to the personnel and premises of the representative office. (t) Subsidiary means any organization more than 50 percent of the voting equity interests of which are directly or indirectly held by another organization. (u) Tier 1 capital means Tier 1 capital as defined in section 325.2 of this chapter. (v) Well capitalized means well capitalized as defined in section 325.103 of this chapter. § 347.103 Effect of state law on actions taken under this subpart. A bank may acquire and retain equity interests in a foreign organization or establish a foreign branch, subject to the requirements of this subpart, if it is authorized to do so by the law of the state in which the bank is chartered. § 347.104 Insured state nonmember bank investments in foreign organizations. (a) Investment in foreign banks or foreign banking organizations. A bank may directly or indirectly acquire and retain equity interests in a foreign bank or foreign banking organization. (b) Investment in other foreign organizations. A bank may only: (1) acquire and retain equity interests in foreign organizations, other than foreign banks or foreign banking organizations in amounts of 50 percent or less of the foreign organization's voting equity interests, if the equity interest is held through a domestic or foreign subsidiary; and (2) the bank meets its minimum capital requirements. § 347.105 Permissible financial activities outside the United States. (a) Limitation on authorized activities. A bank may not directly or indirectly acquire or hold equity interests in a foreign organization that will result in the bank and its affiliates: (1) Holding more than 50 percent, in the aggregate, of the voting equity interest in such foreign organization; or (2) Controlling such foreign organization, unless the activities of a foreign organization are limited to those authorized under paragraph (b) of this section. (b) Authorized activities. The following financial activities are authorized outside the United States: (1) Commercial and other banking activities. (2) Financing, including commercial financing, consumer financing, mortgage banking, and factoring, subject to compliance with any attendant restrictions contained in 12 CFR 225.28(b). (3) Leasing real or personal property, acting as agent, broker or advisor in leasing real or personal property, subject to compliance with any attendant restrictions in 12 CFR 225.28(b). (4) Acting as a fiduciary, subject to compliance with any attendant restrictions in 12 CFR 225.28(b). (5) Underwriting credit life, credit accident and credit health insurance. (6) Performing services for other direct or indirect operations of a domestic banking organization, including representative functions, sale of long-term debt, name saving, liquidating assets acquired to prevent loss on a debt previously contracted in good faith, and other activities that are permissible for a bank holding company under sections 4(a)(2)(A) and 4(c)(1)(C) of the Bank Holding Company Act. (7) Holding the premises of a branch of an Edge corporation or insured state nonmember bank or the premises of a direct or indirect subsidiary, or holding or leasing the residence of an officer or employee of a branch or a subsidiary. (8) Providing investment, financial, or economic services, subject to compliance with any attendant restrictions in 12 CFR 225.28(b). (9) General insurance agency and brokerage. (10) Data processing. (11) Organizing, sponsoring, and managing a mutual fund if the fund's shares are not sold or distributed in the United States or to U.S. residents and the fund does not exercise management control over the firms in which it invests. (12) Performing management consulting services, provided that such services when rendered with respect to the domestic market must be restricted to the initial entry. (13) Underwriting, distributing, and dealing in debt securities outside the United States. (14) With the prior approval of the FDIC under § 347.120(d), underwriting, distributing, and dealing in equity securities outside the United States. (15) Operating a travel agency in connection with financial services offered outside the United States by the bank or others. (16) Providing futures commission merchant services, subject to compliance with any attendant restrictions in 12 CFR 225.28(b). (17) Engaging in activities that the FRB has determined in Regulation Y (12 CFR 225.28(b)) are closely related to banking under section 4(c)(8) of the Bank Holding Company Act. (18) Engaging in other activities, with the prior approval of the FDIC. (c) Limitation on activities authorized under Regulation Y. If a bank relies solely on the cross-reference to Regulation Y contained in paragraph (b)(17) of this section as authority to engage in an activity, compliance with any attendant restrictions on the activity that are contained in 12 CFR 225.28(b) is required. (d) Approval of other activities. Activities that are not specifically authorized by this section, but that are authorized by 12 CFR 211.10 or FRB interpretations of activities authorized by that section, may be authorized by specific consent of the FDIC on an individual basis and upon such terms and conditions as the FDIC may consider appropriate. Activities that will be engaged in as principal (defined by reference to § 362.1(b) of this chapter), and that are not authorized by 12 CFR 211.10 or FRB interpretations of activities authorized under that section, must satisfy the requirements of part 362 of this chapter and be approved by the FDIC under this part as well as part 362 of this chapter. § 347.106 Going concerns. Going concerns. If a bank acquires an equity interest in a foreign organization that is a going concern, no more than 5 percent of either the consolidated assets or revenues of the foreign organization may be attributable to activities that are not permissible under § 347.105(b). § 347.107 Joint ventures. (a) Joint ventures. If a bank, directly or indirectly, acquires or holds an equity interest in a foreign organization that is a joint venture, and the bank or its affiliates do not control the foreign organization, no more than 10 percent of either the consolidated assets or revenues of the foreign organization may be attributable to activities that are not permissible under § 347.105(b). (b) Joint venture defined. For purposes of this section, the term “joint venture” means any organization in which 20 percent or more but not in excess of 50 percent of the voting equity interests, in the aggregate, are directly or indirectly held by a bank or its affiliates. § 347.108 Portfolio investments. (a) Portfolio investments. If a bank, directly or indirectly, acquires or holds an equity interest in a foreign organization as a portfolio investment and the foreign organization is not controlled, directly or indirectly, by the bank or its affiliates: (1) No more than 10 percent of either the consolidated assets or revenues of the foreign organization may be attributable to activities that are not permissible under § 347.105(b); and (2) Any loans or extensions of credit made by the bank and its affiliates to the foreign organization must be on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions between the bank or its affiliates and nonaffiliated organizations. (b) Portfolio investment defined. For purposes of this section, the term “portfolio investment” means an investment in an organization in which less than 20 percent of the voting equity interests, in the aggregate, are directly or indirectly held by a bank or its affiliates. § 347.109 Limitations on indirect investments in nonfinancial foreign organizations. (a) A bank may, through a subsidiary authorized by § 347.105 or 347.106, or an Edge corporation if also authorized by the FRB, acquire and hold equity interests in foreign organizations that are not foreign banks or foreign banking organizations and that engage generally in activities beyond those listed in § 347.105(b), subject to the following: (1) The amount of the investment does not exceed 15 percent of the bank's Tier 1 capital; (2) The aggregate holding of voting equity interests of one foreign organization by the bank and its affiliates must be less than: (i) 20 percent of the foreign organization's voting equity interests; and (ii) 40 percent of the foreign organization's voting and nonvoting equity interests; (3) The bank or its affiliates must not otherwise control the foreign organization; and (4) Loans or extensions of credit made by the bank and its affiliates to the foreign organization must be on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions between the bank or its affiliates and nonaffiliated organizations. (b) [Reserved] § 347.110 Affiliate holdings. References in §§ 347.107, 347.108, and 347.109 to equity interests of foreign organizations held by an affiliate of a bank include equity interests held in connection with an underwriting or for distribution or dealing by an affiliate permitted to do so by § 362.8 or 362.18 of this chapter or section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)). § 347.111 Underwriting and dealing limits applicable to foreign organizations held by insured state nonmember banks. A bank that holds an equity interest in one or more foreign organizations which underwrite, deal, or distribute equity securities outside the United States as authorized by section 347.105(b)(14) is subject to the following limitations: (a) Underwriting commitment limits. (1) The aggregate underwriting commitments by the foreign organizations for the equity securities of a single entity, taken together with underwriting commitments by any affiliate of the bank under the authority of 12 CFR 211.10(b), may not exceed the lesser of $60 million or 25 percent of the bank's Tier 1 capital, except as otherwise provided in this paragraph. (2) Underwriting commitments in excess of this limit must be either: (i) Covered by binding commitments from subunderwriters or purchasers; or (ii) Deducted from the capital of the bank, with at least 50 percent of the deduction being taken from Tier 1 capital, with the bank remaining well capitalized after this deduction. (b) Distribution and dealing limits. The equity securities of any single entity held for distribution or dealing by the foreign organizations, taken together with equity securities held for distribution or dealing by any affiliate of the bank under the authority of 12 CFR 211.10: (1) May not exceed the lesser of $30 million or 5 percent of the bank's Tier 1 capital, subject to the following: (i) Any equity securities acquired pursuant to any underwriting commitment extending up to 90 days after the payment date for the underwriting may be excluded from this limit; (ii) Any equity securities of the entity held under the authority of §§ 347.105 through 347.109 or 12 CFR 211.10 for purposes other than distribution or dealing must be included in this limit; and (iii) Up to 75 percent of the position in an equity security may be reduced by netting long and short positions in the same security, or offsetting cash positions against derivative instruments referenced to the same security so long as the derivatives are part of a prudent hedging strategy; and (2) Must be included in calculating the general consent limits under § 347.117(b)(3) if the bank relies on the general consent provisions as authority to acquire equity interests of the same foreign entity for investment or trading. (c) Additional distribution and dealing limits. With the exception of equity securities acquired pursuant to any underwriting commitment extending up to 90 days [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A04-15757. Public record. Not legal advice.