FEDERAL RESERVE SYSTEM

SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board

of Governors of the Federal Reserve System (Board), and the Federal

Deposit Insurance Corporation (FDIC) (collectively, the Agencies) are

issuing this joint interim rule with request for comment to implement

the provisions related to an extended examination cycle for U.S.

branches and agencies of foreign banks set out in section 2214 of the

Economic Growth and Regulatory Paperwork Reduction Act of 1996

(EGRPRA). United States branches and agencies of foreign banks with

total assets of $250 million or less are eligible to be considered for

the 18-month examination cycle if they meet the qualifying criteria set

out in this interim rule. The interim rule reduces the regulatory

burden associated with more frequent on-site examinations for certain

small U.S. branches and agencies of foreign banks.

DATES: This interim rule is effective August 28, 1998. Comments must be

received by October 27, 1998.

ADDRESSES: Comments should be directed to: OCC: Communications

Division, Office of the Comptroller of the Currency, 250 E Street SW.,

Washington, DC 20219, Attention: Docket No. 98-11. Comments will be

available for public inspection and photocopying at the same location.

Comments may also be sent by facsimile transmission to (202) 874-5274

or by electronic mail to [email protected].

Board: Jennifer J. Johnson, Secretary, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, NW.,

Washington, DC 20551, and refer to Docket No. R-1012. Comments

addressed to Ms. Johnson may also be delivered to the Board's mail room

between 8:45 a.m. and 5:15 p.m., and to the security control room

outside of those hours. Both the mail room and the security control

room are accessible from the courtyard entrance on 20th Street between

Constitution Avenue and C Street, NW. Comments may be inspected in room

MP-500 between 9:00 a.m. and 5:00 p.m., except as provided in Section

261.14 of the Board's Rules Regarding the Availability of Information.

FDIC: Robert E. Feldman, Executive Secretary, Attention: Comments/

OES, Federal Deposit Insurance Corporation, 550 17th Street, NW.,

Washington, DC 20429. Comments may be hand delivered to the guard

station at the rear of the 550 17th Street Building (located on F

Street) on business days between 7:00 a.m. and 5:00 p.m. (Fax number

(202) 898-3838; Internet address: [email protected]) Comments may be

inspected and photocopied in the FDIC Public Information Center, Room

100, 801 17th Street, NW., Washington, DC between 9:00 a.m. and 4:30

p.m. on business days.

FOR FURTHER INFORMATION CONTACT:

OCC: Martha Clarke, Senior Attorney, International Activities (202/

874-0680); or Howard Blacker, Senior International Advisor,

International Banking & Finance (202/874-4730).

Board: Norah M. Barger, Assistant Director (202/452-2402), or

Joseph J. Sciortino, Supervisory Financial Analyst (202/452-2294),

Division of Banking Supervision and Regulation; or Sandra Richardson,

Managing Senior Counsel (202/452-6406) or Jonathan D. Stoloff, Senior

Attorney (202/452-3269), Legal Division.

FDIC: Karen Walter, Chief, International, Division of Supervision

(202/898-3540); or Mark Mellon, Counsel, Regulation and Legislation

Section, Legal Division (202/898-3854).

SUPPLEMENTARY INFORMATION:

Background

The International Banking Act of 1978 (the IBA),1 as

amended by the Foreign Bank Supervision Enhancement Act of

1991,2 subjected U.S. branches and agencies of foreign banks

to a 12-month examination cycle. Section 2214 of the Economic Growth

and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) 3

amended the IBA to provide that U.S. branches and agencies of foreign

banks shall be subject to on-site examination as frequently as a

national or state bank would be by its appropriate federal banking

agency.

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

\1\ Pub. L. 95-369, 92 Stat. 607.

\2\ Pub. L. 102-242, 105 Stat. 2286.

\3\ Pub. L. 104-208, 110 Stat. 3009 (section 2214 is codified at

12 U.S.C. 3105(c)(1)).

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

In general, national and state banks must be examined every 12

months. However, section 111 of the Federal Deposit Insurance

Corporation Improvement Act of 1991 4 authorized an 18-month

examination cycle for certain national and state banks with a composite

rating of 1 under the Uniform Financial Institutions Rating System

(UFIRS) and total assets of $100 million or less. Section 306 of the

Riegle Community Development and Regulatory Improvement Act of 1994

5 expanded the availability of the 18-month examination

cycle to certain national and state banks with a composite rating of 1

under UFIRS and total assets of $250 million or less, as well as to

certain national and state banks with a composite rating of 2 under

UFIRS and total assets of $100 million or less. Section 2221 of EGRPRA

6 provided that anytime after September 23, 1996, U.S. bank

supervisory agencies could extend the 18-month examination frequency

cycle to certain national and state banks with a composite rating of 2

and total assets of $250 million or less. Effective April 2, 1998, the

Agencies issued a final rule that extended the examination cycle to 18

months for certain national and state banks that satisfy the

requirements of section 2221 of EGRPRA.7 To be eligible for

the extended cycle, the national or state bank must:

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

\4\ Pub. L. 102-242, 105 Stat. 2236 (section 111 is codified at

12 U.S.C. 1820(d)).

\5\ Pub. L. 103-325, 108 Stat. 2160.

\6\ Section 2221 is codified at 12 U.S.C. 1820(d)(10).

\7\ 63 FR 16377 (April 2, 1998).

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

(a) Have total assets of $250 million or less;

(b) Be rated a composite 2 or better under the UFIRS;

(c) Be well capitalized;

(d) Be well managed;

(e) Not be subject to a formal enforcement action; and

(f) Not have experienced a change of control during the preceding

12-month period in which a full-scope, on-site examination would have

been required but for the extended cycle.

[[Page 46119]]

In view of the changes to the examination frequency of national and

state banks, the Agencies are issuing an interim rule that similarly

extends the examination cycle for certain U.S. branches and agencies of

foreign banks. Accordingly, U.S. branches and agencies of foreign banks

with total assets of $250 million or less may be considered for an 18-

month examination cycle provided that they meet the eligibility

criteria described in this interim rule. The Agencies are seeking

comment on any aspect of this rule.

The Agencies believe that an extended examination cycle for

eligible U.S. offices of foreign banks will permit the Agencies to

focus their resources on those offices that present the most immediate

supervisory concern, while concomitantly reducing the regulatory burden

on smaller offices that do not pose a similar level of supervisory

concern. The Agencies will continue to use off-site supervision

techniques, including the submission of regulatory reports, to monitor

the condition and any changes in the risk profile of offices scheduled

to be examined on the extended 18-month cycle. Each agency retains

authority to examine the offices of a foreign bank as frequently as the

agency deems necessary.

Description of the Interim Rule

Under this interim rule, a U.S. branch or agency of a foreign bank

is eligible to be considered for an 18-month examination cycle if the

office meets the criteria listed below and if there are no other

factors that cause the appropriate federal banking agency to examine

the branch or agency more frequently. To qualify for an 18-month

examination cycle, the U.S. branch or agency of a foreign bank must:

(a) Have total assets of $250 million or less;

(b) Have received a composite ROCA supervisory rating of 1 or 2 at

its most recent examination; 8

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

\8\ The supervisory rating system for U.S. branches and agencies

of foreign banks is referred to as ROCA. The four components of ROCA

are: risk management, operational controls, compliance, and asset

quality.

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

(c) Satisfy the requirements of either the following paragraph (1)

or (2):

(1) The foreign bank's most recently reported capital adequacy

position consists of, or is equivalent to, Tier 1 and risk-based

capital ratios of at least 6 percent and 10 percent, respectively, on a

consolidated basis; or

(2) The branch or agency has maintained on a daily basis over the

past three quarters, eligible assets (determined consistent with

applicable federal and state law) in an amount not less than 108

percent of the preceding quarter's average third party liabilities and

sufficient liquidity is currently available to meet its obligations to

third parties;

(d) Not be subject to a formal enforcement action or order by the

Board, FDIC or OCC; and

(e) Not have experienced a change in control during the preceding

12-month period in which a full-scope, on-site examination would have

been required but for the extended cycle.

Each agency retains the authority to examine a U.S. branch or

agency of a foreign bank as frequently as the agency deems necessary.

Factors that the Agencies will consider when deciding whether more

frequent examinations are necessary include, but are not limited to,

whether: (a) Any of the individual components of the ROCA rating of the

U.S. office is rated 3 or worse; (b) the results of any off-site

supervision indicate a deterioration in the condition of the office;

(c) the size, relative importance, and role of a particular office when

reviewed in the context of the foreign bank's entire U.S. operations

otherwise necessitates an annual examination (including, for example,

whether the office generates a significant level of assets that are

booked elsewhere); and (d) the condition of the foreign bank itself

gives rise to such a need. In general, the Agencies will make their

determination whether to apply the 18-month examination cycle to a

particular U.S. branch or agency based on the overall risk assessment

for that office, as well as the factors noted herein.

Section 2214 of EGRPRA directs that the U.S. branches and agencies

of foreign banks should be subject to on-site examinations as often as

U.S. banks. The criteria for determining eligibility of U.S. offices of

a foreign bank for an expanded examination cycle differ in certain

respects from the criteria applicable to U.S. banks for this purpose.

These differences are necessary to adjust for the obvious structural

differences that exist between U.S. banks and U.S. offices of foreign

banks (e.g., the U.S. offices of foreign banks often constitute only a

small part of foreign banks' worldwide operations and the role of the

Agencies with regard to the U.S. offices is limited to that of host

country supervisor), as well as the supervisory implications that flow

from these basic structural differences.

The Agencies will use a number of criteria as a proxy for the well-

managed criterion applicable to U.S. banks, including the ROCA

component and composite ratings, the existence of any formal

enforcement action or order issued by an agency, and the other

discretionary standards described above. With regard to the well-

capitalized criterion applicable to U.S. banks for these purposes, the

Agencies will take into account the foreign bank's capital adequacy

ratios, as well as, in appropriate circumstances, whether the U.S.

offices of the foreign bank have sufficient eligible assets and

liquidity to meet their obligations to third parties. The Agencies

believe that evaluating the U.S. branches and agencies of foreign banks

on the basis of the criteria described above for purposes of

determining eligibility for an expanded examination cycle is consistent

with the requirements of section 2214 of EGRPRA.

Effective Date of Interim Rule

The Agencies find good cause for issuing this interim rule without

prior notice and the opportunity for comment, as well as for dispensing

with the 30-day delayed effective date ordinarily prescribed by the

Administrative Procedure Act (APA), 5 U.S.C. 551 et seq. The interim

rule confers a benefit on certain small U.S. branches and agencies of

foreign banks by reducing the regulatory burden associated with more

frequent on-site examinations. Conversely, this interim rule does not

increase the frequency of examinations or otherwise increase the

regulatory burden for any U.S. branch or agency of a foreign bank. Such

institutions, therefore, are not adversely affected by the interim

rule. Under these circumstances, the Agencies conclude that prior

notice and comment procedures are unnecessary and would be contrary to

the public interest. 5 U.S.C. 553(b)(B).

In addition, the Agencies have determined that this interim rule

relates to examination schedules, which are a matter of internal agency

procedure rather than a rule of substantive effect on bank activities

and authority. See Donovan v. Wollaston Alloys, Inc., 695 F.2d 1, 9

(1st Cir. 1982). Determining when a regulated institution is to be

examined is based, in part, on examiner availability, the Agencies'

need to plan examiner time in advance, and other issues relevant to the

internal operations of the Agencies. Therefore, this interim rule is

exempt from the APA's public notice requirement. 5 U.S.C. 553(b)(3)(A).

Regulatory Flexibility Act

An initial regulatory flexibility analysis under the Regulatory

Flexibility Act is only required whenever an agency is required to

[[Page 46120]]

publish a general notice of proposed rulemaking for any proposed rule.

5 U.S.C. 603. As noted previously, the Agencies have determined that

this proposed rulemaking is exempt from the requirements of the APA.

Accordingly, an initial regulatory flexibility analysis is not

required.

Even if the Act were to apply, the interim rule will not have a

significant economic impact on a substantial number of small entities.

The interim rule will reduce regulatory burden on eligible U.S.

branches and agencies of foreign banks with assets of $250 million or

less. In addition, those entities that are not eligible for the

exemption from the statutorily prescribed 12-month examination cycle

will not be adversely affected by the interim rule.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3506), the Agencies have determined that no collections of information

pursuant to the Paperwork Reduction Act are contained in this interim

rule.

OCC Executive Order 12866 Statement

The OCC has determined that this interim rule is not a significant

regulatory action under Executive Order 12866.

OCC Unfunded Mandates Act of 1995 Statement

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4, 109 Stat. 48 (March 22, 1995) (Unfunded Mandates Act), requires

that an agency prepare a budgetary impact statement before promulgating

a rule that includes a federal mandate that may result in the

expenditure by state, local, and tribal governments, in the aggregate,

or by the private sector, of $100 million or more in any one year. If a

budgetary impact statement is required, section 205 of the Unfunded

Mandates Act also requires an agency to identify and consider a

reasonable number of regulatory alternatives before promulgating a

rule. Because the OCC has determined that this interim rule will not

result in expenditures by state, local, and tribal governments, in the

aggregate, or by the private sector, of more than $100 million in any

one year, the OCC has not prepared a budgetary impact statement or

specifically addressed the regulatory alternatives considered. As

discussed in the preamble, this interim rule will have the effect of

reducing regulatory burden on certain institutions.

List of Subjects

12 CFR Part 4

Banks, banking, Freedom of information, Organization and functions

(Government agencies), Reporting and recordkeeping requirements.

12 CFR Part 211

Exports, Federal Reserve System, Foreign banking, Holding

companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 347

Banks, banking, Bank deposit insurance, Bank mergers, Credit,

Foreign banking, Foreign branches, Foreign investments, Insured

branches, International lending, International operations, Investments,

Reporting and recordkeeping requirements.

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons set forth in the joint preamble, part 4 of chapter

I of title 12 of the Code of Federal Regulations is amended as follows:

PART 4--ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF

INFORMATION, CONTRACTING OUTREACH PROGRAM

1. The authority citation for part 4 is revised to read as follows:

Authority: 12 U.S.C. 93a. Subpart A also issued under 5 U.S.C.

552; 12 U.S.C. 481, 1820(d), and 3105(c)(1). Subpart B also issued

under 5 U.S.C. 552; E.O. 12600 (3 CFR, 1987 Comp., p. 235). Subpart

C also issued under 5 U.S.C. 301, 552; 12 U.S.C. 481, 482, 1821(o),

1821(t); 18 U.S.C. 641, 1905, 1906; 31 U.S.C. 9701. Subpart D also

issued under 12 U.S.C. 1833e.

2. In Subpart A, the heading of Sec. 4.6 is revised to read as

follows:

Sec. 4.6 Frequency of examination of national banks.

3. In Subpart A, a new Sec. 4.7 is added to read as follows:

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

(a) General. The OCC examines Federal agencies and Federal branches

(as these entities are defined in Sec. 28.11 (h) and (i), respectively,

of this chapter) pursuant to the authority conferred by 12 U.S.C.

3105(c)(1)(C). Except as noted in paragraph (b) of this section, the

OCC will conduct a full-scope, on-site examination of every Federal

branch and agency at least once during each 12-month period.

(b) 18-month rule for certain small institutions--(1) Mandatory

standards. The OCC may conduct a full-scope, on-site examination at

least once during each 18-month period, rather than each 12-month

period as provided in paragraph (a) of this section, if the Federal

branch or AGENCY:

(i) Has total assets of $250 million or less;

(ii) Has received a composite ROCA supervisory rating (which rates

risk management, operational controls, compliance, and asset quality)

of 1 or 2 at its most recent examination;

(iii) Satisfies the requirements of either the following paragraph

(b)(1)(iii) (A) or (B):

(A) The foreign bank's most recently reported capital adequacy

position consists of, or is equivalent to, Tier 1 and total risk-based

capital ratios of at least 6 percent and 10 percent, respectively, on a

consolidated basis; or

(B) The branch or agency has maintained on a daily basis, over the

past three quarters, eligible assets (determined consistent with

applicable federal and state law) in an amount not less than 108

percent of the preceding quarter's average third party liabilities and

sufficient liquidity is currently available to meet obligations to

third parties;

(iv) Is not subject to a formal enforcement action or order by the

Federal Reserve Board, the Federal Deposit Insurance Corporation, or

the OCC; and

(v) Has not experienced a change in control during the preceding

12-month period in which a full-scope, on-site examination would have

been required but for this section.

(2) Discretionary standards. In determining whether a Federal

branch or agency is eligible for an 18-month examination cycle pursuant

to this paragraph (b), the OCC may consider additional factors,

including, but not limited to, whether:

(i) Any of the individual components of the ROCA rating of the

Federal branch or agency is rated ``3'' or worse;

(ii) The results of any off-site supervision indicate a

deterioration in the condition of the Federal branch or agency;

(iii) The size, relative importance, and role of a particular

office when reviewed in the context of the foreign bank's entire U.S.

operations otherwise necessitate an annual examination; and

(iv) The condition of the foreign bank gives rise to such a need.

(c) Authority to conduct more frequent examinations. Nothing in

paragraph (a) or (b) of this section limits the authority of the OCC to

examine any

[[Page 46121]]

Federal branch or agency as frequently as the OCC deems necessary.

Dated: August 12, 1998.

Julie L. Williams,

Acting Comptroller of the Currency.

Authority and Issuance

For reasons set forth in the joint preamble, the Board amends 12

CFR Part 211 as set forth below:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

1. The authority citation for part 211 continues to read as

follows:

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

3101 et seq., and 3901 et seq.

Subpart B--Foreign Banking Organizations

2. In Subpart B, Sec. 211.26 is amended by revising paragraph (c)

to read as follows:

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

* * * * *

(c) Frequency of on-site examination--(1) General. Each branch or

agency of a foreign bank shall be examined on-site at least once during

each 12-month period (beginning on the date the most recent examination

of the office ended) by:

(i) The Board;

(ii) The FDIC, if the branch of the foreign bank accepts or

maintains insured deposits;

(iii) The Comptroller, if the branch or agency of the foreign bank

is licensed by the Comptroller; or

(iv) The state supervisor, if the office of the foreign bank is

licensed or chartered by the state.

(2) 18-month cycle for certain small institutions--(i) Mandatory

standards. The Board may conduct a full-scope, on-site examination at

least once during each 18-month period, rather than each 12-month

period as required in paragraph (c)(1) of this section, if the branch

or Agency:

(A) Has total assets of $250 million or less;

(B) Has received a composite ROCA supervisory rating (which rates

risk management, operational controls, compliance, and asset quality)

of 1 or 2 at its most recent examination;

(C) Satisfies the requirement of either the following paragraph

(c)(2)(i)(C) (1) or (2):

(1) The foreign bank's most recently reported capital adequacy

position consists of, or is equivalent to, Tier 1 and total risk-based

capital ratios of at least 6 percent and 10 percent, respectively, on a

consolidated basis; or

(2) The branch or agency has maintained on a daily basis, over the

past three quarters, eligible assets (determined consistent with

applicable federal and state law) in an amount not less than 108

percent of the preceding quarter's average third party liabilities and

sufficient liquidity is currently available to meet its obligations to

third parties;

(D) Is not subject to a formal enforcement action or order by the

Board, FDIC, or OCC; and

(E) Has not experienced a change in control during the preceding

12-month period in which a full-scope, on-site examination would have

been required but for this section.

(ii) Discretionary standards. In determining whether a branch or

agency of a foreign bank is eligible for an 18-month examination cycle

pursuant to this paragraph (c)(2), the Board may consider additional

factors, including, but not limited to whether:

(A) Any of the individual components of the ROCA supervisory rating

of a branch or agency of a foreign bank is rated ``3'' or worse;

(B) The results of any off-site surveillance indicate a

deterioration in the condition of the office;

(C) The size, relative importance, and role of a particular office

when reviewed in the context of the foreign bank's entire U.S.

operations otherwise necessitate an annual examination; and

(D) The condition of the foreign bank gives rise to such a need.

(3) Authority to conduct more frequent examinations. Nothing in

paragraphs (c) (1) and (2) of this section limits the authority of the

Board to examine any U.S. branch or agency of a foreign bank as

frequently as it deems necessary.

By order of the Board of Governors of the Federal Reserve

System, August 24, 1998.

Jennifer J. Johnson,

Secretary of the Board.

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of

Directors of the FDIC amends part 347 of chapter III of title 12 of the

Code of Federal Regulations as follows:

PART 347--INTERNATIONAL BANKING

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

follows:

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

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

2. Section 347.214 is added to subpart B to read as follows:

Sec. 347.214 Examination of branches of foreign banks.

(a) Frequency of on-site examination. Each branch or agency of a

foreign bank shall be examined on-site at least once during each 12-

month period (beginning on the date the most recent examination of the

office ended) by:

(1) The Board of Governors of the Federal Reserve System (Board);

(2) The FDIC, if the branch of the foreign bank accepts or

maintains insured deposits;

(3) The Office of the Comptroller of the Currency (OCC), if the

branch or agency of the foreign bank is licensed by the Comptroller; or

(4) The state supervisor, if the office of the foreign bank is

licensed or chartered by the state.

(b) 18-month cycle for certain small institutions--(1) Mandatory

standards. The FDIC may conduct a full-scope, on-site examination at

least once during each 18-month period, rather than each 12-month

period as provided in paragraph (a) of this section, if the branch or

Agency:

(i) Has total assets of $250 million or less;

(ii) Has received a composite ROCA supervisory rating (which rates

risk management, operational controls, compliance, and asset quality)

of 1 or 2 at its most recent examination;

(iii) Satisfies the requirement of either the following paragraph

(b)(1)(iii) (A) or (B):

(A) The foreign bank's most recently reported capital adequacy

position consists of, or is equivalent to, Tier 1 and total risk-based

capital ratios of at least 6 percent and 10 percent, respectively, on a

consolidated basis; or

(B) The branch or agency has maintained on a daily basis, over the

past three quarters, eligible assets (determined consistent with

applicable federal and state law) in an amount not less than 108

percent of the preceding quarter's average third party liabilities and

sufficient liquidity is currently available to meet its obligations to

third parties;

(iv) Is not subject to a formal enforcement action or order by the

Board, FDIC, or the OCC; and

(v) Has not experienced a change in control during the preceding

12-month period in which a full-scope, on-site examination would have

been required but for this section.

(2) Discretionary standards. In determining whether a branch of a

foreign bank is eligible for an 18-month examination cycle pursuant to

this

[[Page 46122]]

paragraph (b), the FDIC may consider additional factors, including, but

not limited to, whether:

(i) Any of the individual components of the ROCA supervisory rating

of a branch of a foreign bank is rated ``3'' or worse;

(ii) The results of any off-site monitoring indicate a

deterioration in the condition of the branch;

(iii) The size, relative importance, and role of a particular

branch when reviewed in the context of the foreign bank's entire U.S.

operations otherwise necessitate an annual examination; and

(iv) The condition of the parent foreign bank gives rise to such a

need.

(c) Authority to conduct more frequent examinations. Nothing in

paragraphs (a) and (b) of this section limits the authority of the FDIC

to examine any U.S. branch or agency of a foreign bank as frequently as

it deems necessary.

By order of the Board of Directors.

Dated at Washington, DC, this 7th day of July, 1998.

Federal Deposit Insurance Corporation.

James D. LaPierre,

Deputy Executive Secretary.

[FR Doc. 98-23077 Filed 8-27-98; 8:45 am]

BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P