International Banking Regulations: Consolidation and Simplification

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303, 325, 326, 327, 346, 347, 351, and 362

RIN 3064-AC05

International Banking Regulations: Consolidation and

Simplification

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: As part of the FDIC's systematic review of its regulations and

written policies under section 303(a) of the Riegle Community

Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC has

revised and consolidated its three different groups of rules and

regulations governing international banking. The first group governs

insured branches of foreign banks and specifies what deposit-taking

activities are permissible for uninsured state-licensed branches of

foreign banks. The FDIC's final rule makes conforming changes

throughout this group of regulations to reflect the statutory

requirement that domestic retail deposit activities must be conducted

through an insured bank subsidiary, not through an insured branch. Also

with respect to this group of regulations, the FDIC is rescinding the

provisions concerning optional insurance for U.S. branches of foreign

banks; the pledge of assets formula has been revised; and the FDIC

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Division of Supervision's (DOS) new supervision program--the Case

Manager approach--has been integrated throughout the applicable

regulations. The second group of regulations governs the foreign

branches of insured state nonmember banks, and also governs such banks'

investment in foreign banks or other financial entities. The final rule

modernizes this group of regulations and clarifies provisions outlining

the activities in which insured state nonmember banks may engage

abroad, and reduces the instances in which banks must file an

application before opening a foreign branch or making a foreign

investment. The third group of regulations governs the international

lending of insured state nonmember banks and specifies when reserves

are required for particular international assets. The final rule

revises this group of regulations to simplify the accounting for fees

on international loans to make it consistent with generally accepted

accounting principles. Consistent with the goals of CDRI, the final

rule improves efficiency, reduces costs, and eliminates outmoded

requirements.

DATES: This final rule is effective July 1, 1998. Compliance is

mandatory for all affected institutions on July 1, 1998. Affected

institutions may elect to comply with the final rule voluntarily at any

time after May 8, 1998. If an affected institution elects to comply

voluntarily with any section of subpart A, B, or C of 12 CFR part 347,

the institution or bank must comply with the entire subpart.

FOR FURTHER INFORMATION CONTACT: Christie A. Sciacca, Associate

Director (202/898-3671), Karen M. Walter, Chief (202/898-3540), Suzanne

L. Williams, Senior Financial Analyst (202/898-6788), Division of

Supervision; Jamey Basham, Counsel (202/898-7265), Wendy Sneff, Counsel

(202/898-6865), Legal Division, FDIC, 550 17th Street, NW, Washington,

D.C. 20429.

SUPPLEMENTARY INFORMATION: The FDIC is conducting a systematic review

of its regulations and written policies. Section 303(a) of the CDRI (12

U.S.C. 4803(a)) requires the FDIC to streamline and modify its

regulations and written policies in order to improve efficiency, reduce

unnecessary costs, and eliminate unwarranted constraints on credit

availability. Section 303(a) also requires the FDIC to remove

inconsistencies and outmoded and duplicative requirements from its

regulations and written policies.

As part of this review, the FDIC has determined that certain

portions of part 346 are out-of-date, and other provisions of this part

require clarification. Although the FDIC previously made certain

regulatory amendments which took effect as recently as 1996, other

regulatory language contained in part 346 does not accurately reflect

the underlying statutory authority. The FDIC has also determined that

part 347 is outmoded. Part 347 has not been revised in any significant

regard since 1979, when it was originally promulgated. The FDIC

published a proposed rule in the Federal Register on July 15, 1997 (62

FR 37748).

The FDIC has decided to consolidate its international banking rules

into a single part, part 347, for ease of reference. This final rule

places material on foreign branching and foreign bank investment by

nonmember banks, currently located in part 347, into subpart A of part

347. Material currently located in part 346, governing insured branches

of foreign banks and deposit-taking by uninsured state-licensed

branches of foreign banks, is placed in subpart B of part 347. Part 351

of the FDIC's current rules and regulations, which contains rules

governing the international lending operations of insured state

nonmember banks, is placed in subpart C of new part 347. Part 351 was

originally adopted in 1984 as an interagency rulemaking in coordination

with the Board of Governors of the Federal Reserve System (FRB) and the

Office of the Comptroller of the Currency (OCC). The most significant

revision to part 351 is to require banks to follow GAAP in accounting

for fees on international loans. This change was discussed with

accounting staff at the OCC and FRB as part of an interagency working

group and they are in general agreement with the change. However, as

the other two federal banking agencies are not ready to act on a

revised regulation at this time, the FDIC has decided to unilaterally

issue its revision to part 351 in connection with its consolidation of

the international banking regulations.

In addition, the FDIC has recently published a notice of proposed

rulemaking (62 FR 52810, October 9, 1997) containing complete revision

of part 303 of the FDIC's rules and regulations, which contains the

FDIC's applications procedures and delegations of authority. For ease

of reference, the FDIC will consolidate its applications procedures for

international banking matters into a single subpart of part 303,

subpart J. In order to finalize part 347 without waiting for the part

303 proposal to be finalized, this part 347 proposal includes, as a

separate subpart D of part 347, revised application procedures

compatible with the substantive provisions of this final rule. These

application procedures will be transferred to subpart J of part 303

once it is finalized, as is discussed in connection with subpart D,

below.

I. Subpart A--Foreign Branches and Investments in Foreign Banks and

Other Entities

A. Background

Section 18(d)(2) of the Federal Deposit Insurance Act (12 U.S.C.

1828(d)(2)) requires a nonmember bank to obtain the FDIC's consent to

establish or operate a foreign branch. Section 18(d)(2) also authorizes

the FDIC to impose conditions and issue regulations governing the

affairs of foreign branches.

Section 18(l) of the FDI Act (12 U.S.C. 1828(l)) requires a

nonmember bank to obtain the FDIC's consent to acquire and hold,

directly or indirectly, stock or other evidences of ownership in any

foreign bank or other entity. Section 18(l) also states that these

entities may not engage in any activities in the United States except

as the Board of Directors of the FDIC (Board), in its judgment, has

determined are incidental to the international or foreign business of

these entities. In addition, section 18(l) authorizes the FDIC to

impose conditions and issue regulations governing these investments.

Finally, although nonmember banks are subject to the interaffiliate

transaction restrictions of sections 23A and 23B of the Federal Reserve

Act, 12 U.S.C. 371c and 371c-1, as expressly incorporated by section

18(j) of the FDI Act, 12 U.S.C. 1821(j), section 18(l) provides that

nonmember banks may engage in transactions with these foreign banks and

other entities in which the nonmember bank has invested in the manner

and within the limits prescribed by the FDIC.

A nonmember bank's authority to establish a foreign branch or

invest in foreign banks or other entities, and the permissible

activities for foreign branches or foreign investment entities, must be

established in the first instance under the law of its state chartering

authority. Congress created sections 18(d)(2) and 18(l) out of a

concern that there was no federal-level review of nonmember banks'

foreign branching and investments. S. Rep. No. 95-323, 95th Cong., 1st

Sess. (1977) at 15. Although the FRB had long held authority over

foreign branching and investment by state member banks and national

banks (member banks) under the Federal Reserve Act, as well as foreign

investment by bank holding companies under the Bank Holding Company

Act, the FDIC did not hold

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corresponding statutory authority over nonmember banks until Congress

created sections 18(d)(2) and 18(l) as part of the Financial

Institutions Regulatory and Interest Rate Control Act of 1978, Pub. L.

95-630 (FIRIRCA).

The FRB's rules governing foreign branching and investments by

member banks are contained in subpart A of Regulation K (12 CFR 211.1-

211.8). The FRB has issued a notice of proposed rulemaking to revise

Regulation K (62 FR 68424 (Dec. 31, 1997)). The FDIC's subpart A of

part 347 maintains parity with the substance of the current version of

Regulation K. The FDIC's treatment of permissible activities for

foreign branches and foreign entities in which nonmember banks invest

is virtually identical to Regulation K, and the amount limits and

expedited approval processes are very similar (the differences take

into account certain variances attributable to structural differences

between the types of institutions governed). Substantive differences

between the FDIC's final rule and the current version of Regulation K

are noted below.

In certain of the few instances in which the FDIC is adopting a

different treatment than the FRB's under the current version of

Regulation K, the differences raise issues under section 24 of the FDI

Act (12 U.S.C. 1831a) and part 362 of the FDIC's rules and regulations

(12 CFR part 362). Section 24 and part 362 prohibit a state bank from

engaging as principal in any activity which is not permissible for a

national bank, unless the FDIC first determines that it would not pose

a significant risk of loss to the appropriate deposit insurance fund

and the bank meets its minimum capital requirements. Section 24 and

part 362 similarly prohibit a subsidiary of a state bank from engaging

as principal in any activity which is not permissible for a subsidiary

of national bank, unless the FDIC first determines that it would not

pose a significant risk of loss to the appropriate deposit insurance

fund and the bank meets its minimum capital requirements. Section 24

and part 362 also prohibit a state bank from making an equity

investment which is not permissible for a national bank, unless the

investment is made through a majority-owned subsidiary, the FDIC

determines that it would not pose a significant risk of loss to the

appropriate deposit insurance fund for the subsidiary to hold the

equity investment, and the bank meets its minimum capital requirements.

These section 24 issues are discussed below.

Impact of Proposed Revisions to Regulation K

The FDIC has decided to finalize subpart A of part 347 now,

notwithstanding the pendency of the FRB's proposal to modify subpart A

of Regulation K. Nonmember banks affected by the current version of

part 347 have advised the FDIC that they view the FDIC's current rule

as an impediment to their ability to compete effectively abroad. The

FDIC desires to make the improvements provided under its proposed rule

available to nonmember banks without additional delay. If the FRB at

some time in the future adopts some or all of the changes it has

recently proposed to subpart A of Regulation K, the FDIC may propose

additional revisions to subpart A of part 347. The FDIC seeks to

maintain general similarity between the restrictions governing the

international activities of nonmember banks and member banks, but the

FDIC will not be able to assess the advisability of any changes to

subpart A of part 347 until the FRB issues final revisions to

Regulation K.

If the FRB adopts certain of its proposed changes which would

reduce the authority of member banks or their subsidiaries to conduct

certain activities abroad, nonmember banks engaging in those activities

as authorized by part 347 without an application to the FDIC are

cautioned to assess whether an application to the FDIC may nevertheless

be required under section 24 of the FDI Act. The FDIC, in structuring

subpart A, has been mindful of section 24 issues and structured the

rule so that activities authorized by subpart A without application to

the FDIC do not require separate case-by-case authorization under

section 24. However, if the FRB cuts back on what international

activities are permissible for member banks and their subsidiaries

under subpart A of Regulation K, the structure may develop gaps which

the FDIC will need to address by further revisions to subpart A of part

347. Affected nonmember banks assessing such questions in the interim

are encouraged to contact FDIC staff for assistance.

B. Discussion of Comments

The FDIC received two comment letters on subpart A, both from

insured state nonmember banks with numerous foreign investments subject

to current part 347. Both commenters expressed wholehearted support for

the FDIC's efforts to update the rule. Both commenters made suggestions

for additional improvements to the proposal, or alternative treatments

of certain issues thereunder. Most of these related to the procedures

for approving branches or investments. The FDIC has considered each

suggestion in turn.

Comments on Application Processing Times

One comment suggested that the FDIC shorten from 45 to 30 days the

application processing period under Sec. 347.103 for an eligible bank

with branches in two or more countries to establish a branch in an

additional country. The FDIC does not think that a 45-day period is

burdensome, given that the bank itself will know well in advance of its

intention to establish a new branch and can plan accordingly.

This commentor also suggested that the FDIC similarly shorten the

45-day application processing period under 347.108(b) for an eligible

bank to make foreign investments not eligible for general consent. Such

an application would be required if the eligible bank sought to acquire

20 percent or more of an entity in a jurisdiction which is new to the

FDIC as specified in section 347.108(a)(2). In such a case, the FDIC

will need a 45-day period to contact host country supervisors and

establish a working arrangement with them for cross-border supervision.

Moreover, as is the case with the foreign branch application, the FDIC

believes that the eligible bank will have sufficient advance notice of

its desire to make such a significant investment that the bank can give

the FDIC 45 days advance notice. Another situation in which such an

application would be required is if an eligible bank with no existing

foreign banking experience seeks to make a foreign investment. In such

cases, 45 days will give the FDIC necessary time to work with the

applicant to ensure it has appropriate operational and management

systems in place to deal with the unique risks posed by foreign

investments. Finally, such applications are required if an eligible

bank seeks to invest more than five percent of its Tier 1 capital (plus

an additional five percent for trading purposes) in a 12-month period.

While the FDIC has no desire that state nonmember banks be thwarted in

their efforts to obtain sound investment opportunities abroad which

require swift action, given that the total outstanding foreign

investments of even the most internationally active state nonmember

banks is generally in the range of 10-15 percent of Tier 1 capital at

present, it is the FDIC's opinion that the five percent threshold

allows sufficient flexibility for institutions to take advantage of

investment opportunities.

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In addition, as a result of another comment, the FDIC has modified

its application procedures so that applications subject to expedited

processing under the 45-day period may be approved by delegated

authority prior to the expiration of such period. Thus, if the

application presents no special concerns or any such concerns are

resolved promptly, approval can be granted prior to the expiration of

the 45 day period.

In a similar vein, one commenter requested additional information

about what considerations would be involved and what timing would apply

if an application was subject to regular processing because the branch

or foreign organization is located in a country whose laws or practices

limit the FDIC's access to information for examination and other

supervisory purposes. The commenter also requested that the FDIC

consider any precedent regarding the country in question that has been

developed by the OCC or the FRB. The FDIC's concern is that it have

sufficient access to information as is necessary to evaluate the impact

of the foreign operation on the insured state nonmember bank, and to

serve the FDIC's international supervisory obligations as the nonmember

bank's home country supervisor. In conducting this review, the FDIC

will take into account any information obtained from, and experience

gained by, the OCC and the FRB in supervising similar foreign

operations of member banks in the foreign country. The FDIC's approach

to applications involving secrecy jurisdictions will depend on the

facts of the case, but generally speaking, the FDIC is likely to

consider some or all of the following.

The FDIC will assess the nature and extent of the secrecy

restriction, with particular focus on the matters which are to be kept

secret, whether there are appropriate exceptions for regulators, and

whether the FDIC is within the scope of such exception. The FDIC will

also consider whether the host country supervisor possesses, and

exercises when appropriate, a right of access, and whether there is

some other appropriately independent third party, such as an

independent auditor, which has access to, and systematically evaluates,

the relevant operations. The nature and extent of the foreign

operation's dealing with customers will be taken into account. If total

access is not possible, the FDIC will take into account the

practicability of alternate precautions, such as duplicate record-

keeping in the U.S., reliance on host country supervisors and

recognized external auditors, the use of special operating policies at

the foreign organization, and the systematic use of customer

confidentiality waivers.

As for timing, the FDIC has recently approved certain applications

from insured state nonmember banks seeking to establish foreign

operations in secrecy jurisdictions. As the cases were ones of first

impression, and involved issues of significant concern, processing took

longer than would otherwise be the case. Now that the FDIC has begun to

establish a framework for addressing these types of applications,

future applications will be processed more quickly. In the final rule,

the FDIC has also expanded the delegations of authority for approving

foreign branch and foreign investment applications involving secrecy

jurisdictions. These applications may be approved under delegated

authority whenever the approving official is satisfied that adequate

arrangements have been made (through conditions imposed in connection

with the approval and agreed to in writing by the applicant) to ensure

necessary FDIC access to information for supervisory purposes. In

addition, as with any application, processing will be faster to the

extent the applicant discloses sufficient information about its

proposal in the first instance such that the FDIC can identify all

issues raised therein early in the review procedure.

This commenter also appeared to be under the impression that

regular processing is required for an application to establish a

branch, or to acquire 20 percent or more of a foreign organization, in

a country in which there is not already a foreign bank subsidiary of a

state nonmember bank. In actuality, there is no such condition in

connection with general consent or expedited processing for branch

applications. In addition, although Sec. 347.108(a)(2) imposes such a

condition upon general consent approval for investing in 20 percent or

more of a foreign organization, expedited processing is still available

for eligible institutions under Sec. 347.108(b) in the absence of

general consent.

Foreign Experience of Applicants

Regarding the FDIC's general consent under Sec. 347.103(b) for a

nonmember bank to establish or relocate a foreign branch in any country

in which it already maintains a branch, the FDIC received a comment

suggesting the authority be expanded to include any country in which

the bank already controls a foreign organization. The FDIC has not

adopted this suggestion. Such foreign organizations may not necessarily

be engaged in banking, and may not have given the applicant sufficient

familiarity with the conduct of banking in the country in question. For

example, Sec. 347.104(b) authorizes the establishment of foreign

organizations engaged in management consulting, or data processing.

However, in response to this comment, the FDIC has expanded final

Sec. 347.103(b) to include any jurisdiction in which the nonmember bank

already has a foreign bank subsidiary. The FDIC has also decided to

make expedited processing available for a nonmember bank to establish a

foreign branch in a country in which an affiliate has a foreign bank

subsidiary, foreign branch, or Edge or Agreement corporation. Also, the

FDIC has made conforming changes to the category of banks eligible for

expedited processing of foreign branch applications under

Sec. 347.103(c) of the final rule. The FDIC proposed that expedited

processing be available to eligible banks with foreign branches or

foreign affiliates in two or more countries, but the final rule takes

into account other banking-related operations of the bank or its

affiliates.

For the same reason that the FDIC has not extended foreign branch

approval procedures so far as to take all foreign organizations into

account, the FDIC has changed proposed Sec. 347.108(a)(1), which

required a nonmember bank or an affiliate to own a foreign organization

subsidiary before the bank could exercise general consent authority to

invest in foreign organizations. Under the final rule, ``foreign

organization'' subsidiary has been changed to ``foreign bank''

subsidiary. Upon further consideration, the FDIC has become concerned

that foreign organizations may not necessarily be engaged in banking,

and may not have given the applicant sufficient familiarity with the

conduct of banking. However, the FDIC has also expanded

Sec. 347.108(a)(1) to make general consent available if a nonmember

bank has a foreign branch, or an affiliate with a banking-related

office abroad.

This commenter also suggested that proposed Sec. 347.108(a)(2),

which conditioned the availability of general consent authority to

invest in 20 percent or more of a foreign organization upon the

existence of a foreign organization subsidiary of a state nonmember

bank in the country in question, be similarly expanded to include any

country in which a state nonmember bank maintains a foreign branch. The

FDIC is not making this change at this time, out of a concern that many

state nonmember banks currently operate ``nameplate'' branches in

several foreign countries, involving little actual presence in the

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foreign country since all operations are effectively conducted in the

United States. Authorization of free-standing foreign organizations in

such countries may require more extensive analysis by the FDIC and more

extensive coordination with host country supervisors, and it is thus

appropriate to deal with such applications through expedited

processing. In addition, although the FDIC proposed that the

Sec. 347.108(a)(2) condition could be satisfied through the existence

of a ``foreign organization'' subsidiary in the foreign country, upon

further consideration of the issue, the FDIC has decided to require the

existence of a ``foreign bank'' subsidiary. The FDIC is doing this out

of a concern that a foreign organization may not necessarily be engaged

in banking, and the FDIC consequently may not have evaluated all

necessary factors. For example, as noted above, Sec. 347.104(b)

authorizes the establishment of foreign organizations engaged in

management consulting, or data processing.

This commenter also requested that the FDIC adopt some mechanism to

inform the public of the list of foreign countries in which state

nonmember banks have foreign bank subsidiaries, so that affected banks

can easily determine whether the Sec. 347.108(a)(2) condition is

satisfied. The FDIC will make such information available through its

Internet web site, www.fdic.gov, in the near future.

In addition, this commenter pointed out that the preamble to the

proposed rule created confusion as to whether the Sec. 347.108(a)(2)

condition would be satisfied if the state nonmember bank seeking to

exercise general consent authority was the only state nonmember bank

with a foreign bank subsidiary in the foreign country in question. In

such a case, the condition would indeed be satisfied. There is no

requirement that some other state nonmember bank have a foreign bank

subsidiary in the foreign country. The purpose of the

Sec. 347.108(a)(2) condition is to ensure the FDIC has experience with

the jurisdiction and a working relationship with its supervisors. These

goals will be met regardless of whether the state nonmember bank

presence in the foreign country is that of the state nonmember bank

making the investment, or another state nonmember bank.

Delegations of Authority

One commenter suggested that the FDIC Board of Directors should

delegate its authority to authorize foreign branches, or foreign

organizations in which state nonmember banks invest, to engage in

activities not specifically set out in subpart A (including incidental

activities in the United States), or to engage in such activities in a

greater amount. This commenter also suggested delegation of the Board's

authority to approve extensions of the two-year holding period for

nonconforming foreign investments obtained in satisfaction of debts

previously contracted. However, the FDIC feels that these issues are of

such significance that they should be determined by the Board. In

addition, the commenter was under the impression that a state nonmember

bank seeking to invest in a foreign organization which conducts equity

securities underwriting and dealing activity within the limits

contained in subpart A would be required to obtain Board approval.

Under the rule, Board approval would be required from a state nonmember

bank seeking to invest in a foreign organization which would conduct

underwriting and dealing activities in excess of subpart A's limits.

However, for equity securities underwriting and dealing activities

within the limits of Sec. 347.105, the Board has delegated its

authority regarding the prior approval required by Sec. 347.104(b)(3).

Eligible Bank Definition

Regarding the definition of an ``eligible insured state nonmember

bank'' under proposed section 347.102(c), one commenter noted that a

bank must have a satisfactory or better Community Reinvestment Act

(CRA) (12 U.S.C. 2901 et seq.) rating in order to meet the definition,

but that ``special purpose'' banks which are exempt from CRA will not

have been assigned CRA ratings. Under the FDIC's CRA regulations at 12

CFR part 345, special purpose banks that do not perform commercial or

retail banking services by granting credit to the public in the

ordinary course of business, other than as is incidental to their

specialized operations, are not subject to examination under the FDIC's

CRA regulations (12 CFR 345.11(c)(3)). The FDIC does not intend to

apply the CRA element of the definition of an eligible insured state

nonmember bank to a special purpose bank which is not subject to

examination under the FDIC's CRA regulations. Language to this effect

has been added to the definition. The substantive portions of the

definition have also been transferred to Sec. 347.401 of the final

rule, in order to more appropriately locate the definition with the

application processing requirements in subpart D, and Sec. 347.102(c)

now simply cross-references to the definition in Sec. 347.401.

Additional changes to the eligibility definition are discussed in

connection with subpart D, below.

Substantive Comments

The public comments received by the FDIC also addressed three

substantive issues. The first concerns the FDIC's list of authorized

financial activities for a foreign organization in which a state

nonmember bank may invest (Sec. 347.104(b)). One commenter, noting the

FDIC's inclusion of activities authorized under Regulation Y (12 CFR

225.28(b)) as being closely related to banking under section 4(c)(8) of

the Bank Holding Company Act (Regulation Y list), suggested the FDIC

also include any activity determined by the OCC to be incidental to the

business of banking under section 24(Seventh) of the National Bank Act

(12 U.S.C. 24(Seventh)). The FDIC has not added such a reference. The

list of financial activities authorized under section 347.104(b) as a

whole is quite extensive, and should be sufficient to permit nonmember

banks to maintain a competitive footing abroad. Adoption of an

additional analytical approach to authorizing activities abroad,

incorporating the ``incidental to the business of banking'' test, seems

unnecessary.

The second substantive comment concerns the FDIC's identification

of specific items on which a state nonmember bank should maintain a

system of records, controls and reports about the activities of its

foreign branches and organizations (Sec. 347.110(a)(1)-(4)). One

commenter was concerned that the list of specific items might be

strictly applied, without making allowances for the nature of the

foreign operation's particular transactions. As an example, the

commenter noted that a recent borrower financial statement, listed in

Sec. 347.110(a)(1)(i), might not be necessary for an extension of

credit collateralized by investment grade securities with a market

value of 150 percent of the outstanding loan amount. To address this

concern, the FDIC has changed the language of the regulation slightly,

so that the detailed list of items to be held in connection with risk

assets (Sec. 347.100(a)(1)(i)-(v)) and to be included in audit reports

(Sec. 347.110(a)(1)(4)(i)-(vi)) is illustrative rather than mandatory.

However, the FDIC cautions bank management that the bank must maintain

a system which, at a minimum, meets the informational objectives

spelled out in Sec. 347.110(a)(1)-(4).

The third substantive comment concerns the FDIC's limitation on

mutual fund activities of a foreign

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organization in which a state nonmember bank invests

(Sec. 347.104(b)(4)). This section permits the foreign organization to

organize, sponsor, and manage a mutual fund, but only if the fund's

shares are not sold or distributed in the United States or to U.S.

residents and the fund does not exercise management control over the

firms in which it invests. The commenter did not object to the latter

restriction concerning control, but suggested that the FDIC should

permit the mutual fund shares to be sold or distributed in the United

States or to U.S. residents so long as the fund was not required to be

registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1).

The standard which the FDIC proposed under Sec. 347.104(b)(4) is

consistent with what is permissible for a member bank under the FRB's

current standard in Regulation K. The commenter's proposed modification

raises potential legal and supervisory issues which the FDIC would

prefer not to address in a vacuum, in the absence of specific facts

about the product in question. If a state nonmember bank wishes in the

future to invest in a foreign organization which will organize or

sponsor a mutual fund whose shares will be distributed or sold in the

United States or to U.S. residents, the bank may submit an application

to the FDIC.

C. Other Changes from Proposed Subpart A

In addition to the changes the FDIC has made to proposed subpart A

in response to public comments, the FDIC has made three additional

changes concerning foreign branches of state nonmember banks. First,

the proposal's definition of a ``foreign branch'' in Sec. 347.102(i)

erroneously covered offices located in territories of the United

States, Puerto Rico, Guam, American Samoa, the Trust Territory of the

Pacific Islands, or the Virgin Islands. This is inconsistent with the

current definition in current Sec. 347.2(a) and section 3(o) of the FDI

Act (12 U.S.C. Sec. 1813(o)), and the final definition in

Sec. 347.102(i) has been corrected accordingly.

Second, under proposed Sec. 347.103(b), the FDIC provided its

general consent for an eligible bank to establish additional branches

in a country in which it already maintained a branch, or to relocate an

existing branch within a foreign country. This had the effect of

requiring a bank which did not meet the criteria of an eligible insured

state nonmember bank to go through the full application process to

relocate an existing foreign branch within a foreign country. Upon

further consideration, the FDIC does not see the necessity for a

general rule requiring full applications for such relocations, given

the limited impact they would have on the nonmember bank and the FDIC's

ability to suspend general consent as to any particular institution if

necessary. Therefore, under Sec. 347.103(b)(2) of the final rule, the

FDIC gives its general consent for relocations of existing foreign

branches.

Third, in the proposed rule, the FDIC indicated it was considering

whether to authorize foreign branches to underwrite, distribute and

deal, invest in and trade obligations of any foreign government (as

opposed to the current authorization which extends only to obligations

of the country in which the branch is located). The FDIC has decided to

adopt this proposal, but has added an additional requirement that the

non-local obligations be rated investment grade by at least two

established international rating agencies. In contrast to the situation

in the U.S., foreign sovereign debt is frequently rated. Nonmember

banks still have the option of making an application to the FDIC to

include unrated investment quality obligations as part of their foreign

branch's line of business in this regard.

D. Description of Final Rule, Subpart A

Foreign Branches

The most significant change from current part 347 is the FDIC's

grant of authority to a nonmember bank meeting certain eligibility

criteria to establish foreign branches under general consent or

expedited processing procedures. The existing list of foreign branch

powers under current Sec. 347.3(c) has also been redrafted to bring it

more in line with modern banking practice. The final rule also

introduces expanded powers for foreign branches to underwrite,

distribute, deal, invest in, and trade foreign government obligations.

The general consent and expedited processing procedures are

discussed in detail in the analysis of subpart D, below, but to

summarize them briefly, Sec. 347.103(b) gives the FDIC's general

consent for a nonmember bank to relocate existing foreign branches

within a foreign country, and for an eligible nonmember bank--one which

is well-capitalized, well-rated under certain supervisory assessment

benchmarks, and has no supervision problems--to establish branches

within a foreign country in which the nonmember bank has a branch or a

foreign bank subsidiary. By expedited processing requiring only 45 days

prior notice to the FDIC, an eligible nonmember bank may also establish

additional branches in a country in which an affiliate of the bank

operates a foreign bank subsidiary, or in which an affiliated bank or

Edge or Agreement corporation operate a foreign branch. An eligible

nonmember bank which has established its international expertise by

successfully operating such entities in two or more foreign countries

may also establish branches in additional foreign countries under

expedited processing procedures. There are certain necessary

limitations on these general consent and expedited processing

procedures, however, as discussed in the analysis of subpart D.

Section 347.103(a) of the final rule lists the permissible

activities for a foreign branch. In order to modernize the list of

foreign branch powers currently contained in Sec. 347.3(c), the final

rule eliminates Sec. 347.3(c)(2) (specific authorization for a foreign

branch to accept drafts or bills of exchange), and Sec. 347.3(c)(5)

(specific authorization for a foreign branch to make loans secured by

real estate). The FDIC has not included a counterpart to the FRB's

specific authorization for a foreign branch to engage in repurchase

agreements involving securities that are the functional equivalent of

extensions of credit. In the FDIC's view, these activities are within

the general banking powers of a foreign branch, and thus do not require

specific mention on the list of activities which the FDIC has

authorized in addition to such general banking powers.

The final rule also eliminates Sec. 347.3(c)(6) (specific

authorization for a foreign branch to pay its foreign branch officers

and employees a greater rate of interest on branch deposits than the

rate paid to other depositors on similar branch deposits). Regulation K

presently contains a similar provision. While section 22(e) of the

Federal Reserve Act (12 U.S.C. 376) generally limits a member bank's

authority to pay employees a greater rate of interest than the rate

paid to other depositors on similar deposits, the FDIC is not aware of

any current regulatory restrictions directly prohibiting a nonmember

bank from doing so, assuming there were no implications of insider

abuse or of evading certain limited regulatory requirements concerning

executive compensation. Thus, in the FDIC's view, this activity is

within the general banking powers of a foreign branch of a nonmember

bank.

In addition, the FDIC has not included a counterpart to the FRB's

specific authorization for a foreign branch to extend credit to an

officer of the branch residing in the foreign country in which the

branch is located

[[Page 17062]]

to finance the officer's living quarters. In the FDIC's view, this

activity is within the general banking powers of a foreign branch,

provided that the bank observes prudent banking practices and

Regulation O limits on loans to the bank's executive officers. Given

that Regulation O currently permits a bank to finance an executive

officer's purchase, construction, maintenance, or improvement of a

personal residence, the FDIC need not specifically authorize it here.

To update the current authorization under Sec. 347.3(c)(3) to hold

the equity securities of the central bank, clearing houses,

governmental entities, and development banks of the country in which

the branch is located, final Sec. 347.103(a)(2) adds debt securities

eligible to meet local reserve or similar requirements, as well as

shares of automated electronic payment networks, professional

societies, schools, and similar entities necessary to the business of

the branch. Section 347.103(a)(2) continues to set the limit for such

investments at one percent of the total deposits in all the bank's

branches in that country as reported in the preceding year-end Report

of Income and Condition (Call Report), subject to the same exclusions

as currently apply for investments required by local law or permissible

for a national bank under 12 U.S.C. 24 (Seventh).

The current authorization under Sec. 347.3(c)(4) to underwrite,

distribute and deal, invest and trade in obligations of the national

government of the country in which the branch is located has been

similarly updated. Section 347.103(a)(3) clarifies that obligations of

the national government's political subdivisions, and its agencies and

instrumentalities if supported by the national government's taxing

authority or full faith and credit, are also eligible. The final rule

also revises the investment limit to reference ten percent of the

nonmember bank's Tier 1 capital, instead of the outdated reference to

ten percent of its capital and surplus.

Finally, the FDIC has decided to permit a foreign branch to

underwrite, distribute and deal, invest in and trade obligations of any

foreign government, rather than just the obligations of the country in

which it is located. Section 347.103(a)(3)(ii) permits this activity,

so long as the issuing country permits foreign enterprises to do so.

Since Regulation K does not currently authorize member (and thus

national) banks to conduct this activity, the FDIC, in adopting the

final rule, has determined that the activity does not create a

significant risk to the deposit insurance fund, as required by section

24 of the FDI Act and part 362 of the FDIC's rules and

regulations.1 Section 347.103(a)(3)(ii) allows nonmember

banks to consolidate these activities, which must currently be carried

out in different branch offices in each country, into a single branch

office, for more convenient administration and oversight. The non-local

obligations are counted as part of the ten percent limit applicable to

local obligation underwriting, distribution, investment and trading,

and must also be rated as investment grade by at least two established

international rating agencies.

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\1\ Because section 24 only permits the FDIC to authorize equity

investments which are not permissible for a national bank through a

majority-owned subsidiary, proposed Sec. 347.103(a)(3)(B) requires

any foreign government obligations which constitute equity interests

to be held through a subsidiary of the foreign branch. However,

practically speaking, the vast majority of foreign government

obligations are debt obligations instead of equity interests, and

could be held at the branch level.

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Foreign Investments

The final rule completely revises the FDIC's approach to approvals

of a nonmember bank's investment in the stock or other evidences of

ownership of a foreign bank or other entity. The final rule adopts an

approach like that of the FRB under Regulation K. The rule lists the

various types of financial activities in which a nonmember bank's

foreign subsidiaries and joint ventures may engage. The rule also

authorizes limited indirect investment in and trading of the stock of

nonfinancial entities. Securities underwriting and dealing abroad up to

specified limits is permitted, with the FDIC's prior approval.

Moreover, the rule grants eligible nonmember banks the FDIC's general

consent to make investments in conformity with the rule up to specified

annual limits, and permits additional investments upon 45 days prior

notice.

Investment in Foreign Banks and Other Entities Engaged in Financial

Activities

Section 347.104(b) contains a list of approved activities which are

financial in nature. A foreign subsidiary of a nonmember bank is

limited to conducting these authorized financial activities, unless the

nonmember bank acquires the subsidiary as a going concern, in which

case up to five percent of the subsidiary's assets or revenues may be

attributable to activities which are not on the list. Under the

definition of ``subsidiary'' at Sec. 347.102(p), a foreign organization

is a subsidiary of a nonmember bank if the nonmember bank and its

affiliates hold more than 50 percent of the foreign organization's

voting equity securities. It is important to note that this definition

of a subsidiary differs from the commonly-used subsidiary definition

found in section 2(d) of the Bank Holding Company Act (BHCA) (12 U.S.C.

1841(d)). Under section 2(d), subsidiary status typically arises upon

ownership of 25 percent or more of the entity's voting securities. The

FDIC has adopted the less-inclusive subsidiary definition which is

triggered at 50 percent rather than the more commonly-used 25 percent

in order to maintain consistency with the corresponding provisions of

Regulation K. This less-inclusive approach is also carried through to

the definition of an affiliate under Sec. 347.102(a), also to maintain

consistency with Regulation K.

Subsidiary status under Sec. 2(d) of the BHCA also arises when the

parent controls in any manner the election of the majority of the

subsidiary's directors in any manner or if the parent has the power to

directly or indirectly exercise a controlling influence over the

management and policies of an organization. In contrast, the final rule

separates these elements out into their own definition of ``control''

at Sec. 347.102(b). Section 347.102(b) also provides that control is

deemed to exist whenever a nonmember bank or its affiliate is a general

partner of a foreign organization. As is the case with subsidiaries,

any foreign organization which is controlled by a state nonmember bank

or its affiliates, regardless of the percent of voting stock owned by

the state nonmember bank, is limited to conducting approved financial

activities contained on the Sec. 347.104(b) list, subject to the same

five percent exception for going concerns.

If a nonmember bank and its affiliates hold less than 50 percent of

the voting equity securities of a foreign organization and do not

control the organization, up to 10 percent of the organization's assets

or revenues may be attributable to activities which are not on the

list. If the nonmember bank and its affiliates' hold less than 20

percent of a foreign organization's voting equity interests, the

nonmember bank is prohibited from making any loans or extensions of

credit to the organization which are not on substantially the same

terms as those prevailing at the time for comparable transactions with

nonaffiliated organizations.

The list of authorized financial activities in Sec. 347.104(b) is

modeled on the FRB's corresponding provision in Regulation K, 12 CFR

211.5(d). The final rule reorders the activities in an effort

[[Page 17063]]

to group similar activities together, and where there are conditions

and limitations on the conduct of a particular activity, this

additional information is separately set out in Secs. 347.105 and

347.106. Additional activities require the FDIC's approval.

The final rule does not include six activities which currently

appear in Regulation K. The FDIC has not included these activities,

because they are each authorized under Regulation Y (12 CFR 225.28(b))

as being closely related to banking under section 4(c)(8) of the Bank

Holding Company Act (Regulation Y list), and the final rule authorizes

foreign investment organizations to engage in any activity on the

Regulation Y list. The omitted activities are: financing; acting as

fiduciary; providing investment, financial, or economic advisory

services; leasing real or personal property or acting as agent, broker

or advisor in connection with such transactions if the lease serves as

the functional equivalent of an extension of credit to the lessee;

acting as a futures commission merchant; and acting as principal or

agent in swap transactions.

In addition, Sec. 347.104(b) contains certain activities--for

example, data processing--which are also authorized by the Regulation Y

list, but are subject to certain additional limitations and conditions

under Regulation Y. In such cases, the activities are included in

Sec. 347.104(b) because a foreign investment entity is permitted to

conduct them under the less restrictive terms of Sec. 347.104(b). But

in cases in which the nonmember bank relies solely on Sec. 347.104(b)'s

cross-reference to the Regulation Y list as authority to conduct an

activity, the foreign investment entity must comply with the attendant

restrictions in 12 CFR 227.28(b).

Also, in the case of one activity authorized by Sec. 347.104(b)'s

cross-reference to the Regulation Y list, acting as a futures

commission merchant (FCM), the FDIC has imposed one restriction in

addition to the restrictions imposed by Regulation Y at 12 CFR

225.28(b). Under Sec. 347.106(a), a foreign investment entity may not

have potential liability to a mutual exchange or clearing association

of which the foreign investment entity is a member exceeding an amount

equal to two percent of the nonmember bank's Tier 1 capital, unless the

FDIC grants its prior approval.

Unlike Regulation K, the FDIC's rule authorizes nonmember banks to

directly invest in foreign organizations which are not foreign banks.

Under 12 CFR 211.5(b)(2), the only foreign organizations in which

member banks are permitted to invest directly are foreign banks;

foreign organizations formed for the sole purpose of either holding

shares of a foreign bank or for performing nominee, fiduciary, or other

banking services incidental to the activities of the member bank's

foreign branches or affiliates; or subsidiaries of foreign branches

authorized under 12 CFR 211.3(b)(9). Any investment by a member bank in

a foreign organization which is not one of these types of entities must

be made indirectly, through an Edge corporation subsidiary or foreign

bank subsidiary of the member bank. This limitation arises out of the

language of section 25 of the Federal Reserve Act, which generally

limits the direct investments of member banks to foreign banks. In

contrast, section 18(l) of the FDI Act permits state nonmember banks,

to the extent authorized by state law, to invest in foreign ``banks or

other entities.'' As discussed above, the legislative history of

section 18(l) shows that Congress was, at the time it created section

18(l), mindful of the FRB's parallel authority over member banks under

section 25. Therefore, the FDIC interprets the difference between the

two statutes to be significant, and the type of foreign organizations

in which a state nonmember bank may invest directly are not restricted

by section 18(l).

A national bank's inability to invest directly in the shares of a

nonbank foreign organization raises issues under section 24 of the FDI

Act and part 362 of the FDIC's rules and regulations. If a nonmember

bank acquires a sufficient stake in a nonbank foreign organization such

that the nonbank foreign organization is a ``majority-owned

subsidiary'' 2 of the state nonmember bank for purposes of

section 24, no section 24 analysis is required. This is because subpart

A of part 347 only authorizes foreign organizations to engage in the

same activities which the FRB has authorized for the foreign

subsidiaries of member (and thus national) banks. Therefore, the

nonmember bank's foreign subsidiary can only engage as principal in the

same activities permitted for a foreign subsidiary of a national bank,

and section 24's application requirement is never triggered.

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\2\ Section 24 and part 362 do not set out a separate definition

of ``majority-owned subsidiary.'' Part 362 defines a ``subsidiary''

to mean any company directly or indirectly controlled by an insured

state nonmember bank. Part 362 further defines ``control'' to mean

the power to vote, directly or indirectly, 25 percent or more of any

class of the voting stock of a company, the ability to control in

any manner the election of a majority of a company's directors or

trustees, or the ability to exercise a controlling influence over

the management and policies of a company. A state nonmember bank

thus holds a company as a ``majority-owned subsidiary'' when the

bank holds more than 50 percent of the company's stock. This is

equivalent to the definition of ``subsidiary'' in proposed

Sec. 347.102(p).

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If the nonmember bank holds a lesser amount of the nonbank foreign

organization's shares, such that it does not rise to a ``majority-owned

subsidiary'' within the meaning of section 24 and part 362, the FDIC is

required by section 24 and part 362 to determine that the nonmember

bank's equity investment in a nonbank foreign organization does not

pose a significant risk to the appropriate deposit insurance fund. The

FDIC has determined that dispensing with the intermediate foreign bank

subsidiary or Edge subsidiary, the vehicle through which a national

bank is permitted to make this type of investment, is simply a

structural matter that does not create a significant risk to the

deposit insurance fund. The final rule therefore authorizes nonmember

banks to hold such non-majority equity interests. However, section 24

and part 362 provide that the FDIC may only permit equity investments

to be held by the bank through a majority-owned subsidiary. The final

rule therefore requires these investments to be held through some form

of U.S. or foreign majority-owned subsidiary.

The final rule does not include one activity authorized by

Regulation K concerning a foreign investment entity's ability to

underwrite life, annuity, pension fund-related, and other types of

insurance, where the associated risks have been determined by the FRB

to be actuarially predictable. Under Regulation K, the FRB has not

given general authorization for this activity to be conducted directly

or indirectly by a subsidiary of a member bank. Since the activity is

thus not generally permissible for a subsidiary of a national bank, a

section 24 issue arises. However, under section 24(b) and 24(d)(2), the

FDIC may not give section 24 approval for a state bank or its

subsidiary to engage in insurance underwriting if it is not permissible

for a national bank, or is not expressly excepted by other subsections

of section 24 covering limited types of insurance underwriting.

Therefore, the FDIC is presently foreclosed from granting general

regulatory authorization for nonmember banks to underwrite life,

pension fund-related, or other types of insurance in this fashion. This

prohibition does not extend to annuity underwriting, and a nonmember

bank which wishes to underwrite annuities through a foreign

organization may apply to the FDIC

[[Page 17064]]

under the final rule and part 362 for specific approval to do so.

Portfolio Investments in Nonfinancial Foreign Organizations

Section 347.104(g) of the final rule authorizes nonmember banks to

make portfolio investments in a foreign organization without regard to

whether the activities of the organization are authorized financial

activities listed in Sec. 347.104(b). Aggregate holdings of a

particular foreign organization's equity interests by the nonmember

bank and its affiliates must be less than 20 percent of the foreign

organization's voting equity interests and 40 percent of its total

voting and nonvoting equity interests. The latter restriction prevents

a nonmember bank from, by obtaining a large equity position albeit a

nonvoting one, obtaining a level of influence over the foreign

organization which is inconsistent with the notion of a portfolio

holding. The nonmember bank and its affiliates are not permitted to

control the foreign organization, and any loan or extensions of credit

to the foreign organization must be on substantially the same terms as

those prevailing at the time for comparable transactions with

nonaffiliated organizations.

Section 347.104(g) limits these investments in nonfinancial foreign

organizations to an amount equal to 15 percent of the nonmember bank's

Tier 1 capital. In contrast to the FDIC's approach with foreign

organizations engaged primarily in financial activities authorized

under Sec. 347.104(b), Sec. 347.104(g) does not displace current

limitations prohibiting member (and thus national) banks from making

nonfinancial portfolio investments at the bank level or through a

domestic subsidiary of the bank. Section 347.104(g) requires these

investments to be held through a foreign subsidiary, or an Edge

corporation subsidiary (subject to the FRB's authorization). The FDIC

is authorizing these portfolio investments so that a nonmember bank's

foreign bank and other financial subsidiaries can compete effectively

in their foreign markets. It is therefore not necessary to authorize

portfolio investments at the bank or domestic subsidiary level.

U.S. Activities of Foreign Organizations

As discussed above, section 18(l) of the FDI Act states that the

foreign organizations in which nonmember banks invest may not engage in

any activities in the U.S. except as the Board of Directors, in its

judgment, has determined are incidental to the international or foreign

business of the foreign organization. Section 347.107 of the final rule

addresses what activities may be engaged in within the United States.

The rule prohibits a nonmember bank from investing in any foreign

organization which engages in the general business of buying or selling

goods, wares, merchandise, or commodities in the U.S., and prohibits

investments totaling over five percent of the equity interests of any

foreign organization if the organization engages in any business or

activities in the U.S. which are not incidental to its international or

foreign business. A foreign organization will not be considered to be

engaged in business or activities in the U.S. unless it maintains an

office in the U.S. other than a representative office.

This structure follows the one established by the FRB under

Regulation K. The FDIC is including the five percent threshold and the

U.S. office threshold in acknowledgment that the U.S. is a leading

international market and a substantial number of foreign organizations

transact some portion of their business here. If nonmember banks are

prohibited from investing in every foreign organization which does even

a limited amount of its business in the U.S., nonmember banks will be

at a disadvantage vis a vis their international financial institution

competitors.

Beyond these thresholds, the regulation permits foreign

organizations to conduct activities that are permissible in the U.S.

for an Edge corporation, or such other business or activities as are

approved by the FDIC. In approving additional activities, the FDIC will

consider whether the activities are international in character. For

activities proposed by a foreign subsidiary or joint venture of a

nonmember bank, the FDIC will also consider whether the activity would

be conducted through a foreign organization to circumvent some legal

requirement which would apply if the nonmember bank conducted the

activity through a domestic organization.

Underwriting, Distributing, and Dealing Equity Securities Outside the

United States

Under the final rule, a foreign investment entity of a nonmember

bank is permitted to underwrite, distribute, and deal equity securities

outside the United States. Briefly summarized, the final rule imposes

three main limits as part of Sec. 347.105.

First, underwriting commitments for a single issuer may not exceed

an amount equal to the lesser of $60 million or 25 percent of the

nonmember bank's Tier 1 capital.

Second, distribution and dealing shares of a single entity may not

exceed an amount equal to the lesser of $30 million or five percent of

the nonmember bank's Tier 1 capital.3

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\3\ Regulation K currently authorizes the lesser of $30 million

or 10 percent.

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Third, the sum of underwriting commitments, distribution and

dealing shares, and any portfolio investments in nonfinancial foreign

organizations under Sec. 347.104(g) may not exceed an amount equal to

25 percent of the nonmember bank's Tier 1 capital.

Each of these three limits is discussed further below. In

determining compliance with these limits, the nonmember bank counts all

commitments of and shares held by each foreign organization in which

the nonmember bank has invested pursuant to subpart A of part 347. The

nonmember bank also counts all commitments of and shares held by

foreign organizations in which the nonmember bank's affiliates have

invested pursuant to subpart A of Regulation K.

The $60 million/25 percent underwriting commitment limit may be

exceeded to the extent the commitment is covered by binding commitments

from subunderwriters or purchasers. The limit may also be exceeded to

the extent the commitment is deducted from the nonmember bank's capital

and the bank remains well-capitalized after the deduction. At least

half of this deduction must be from Tier 1 capital, and the deduction

applies for all regulatory purposes.

The $30 million/five percent limit on the equity securities of a

single entity which may be held for distribution or dealing is subject

to two exceptions. First, in order to facilitate underwritings, any

equity securities acquired pursuant to an underwriting commitment

extending up to 90 days after the payment date of the underwriting are

not included in the limit. Second, up to 75 percent of the position in

an equity security may be reduced by netting long and short positions

in the identical equity security, or by offsetting cash positions

against derivative instruments referenced to the same security. The

provision permitting netting of derivative positions is intended to

recognize the beneficial impact of prudent hedging strategies, and

encourage such strategies where the nonmember bank and the foreign

organization determines they are appropriate. The FDIC expects a

nonmember bank asserting netting involving derivatives to be able to

[[Page 17065]]

establish the validity of the hedging strategy to the nonmember bank's

examiners.

If the nonmember bank's foreign organizations hold the same equity

securities for distribution and dealing as well as for investment or

trading pursuant to Sec. 347.104 or the corresponding provision of

Regulation K, two additional considerations apply.

First, the investment or trading securities are included in

calculating the $30 million/five percent per-entity distribution and

dealing limit, in order to prevent securities which are potentially

distribution or dealing inventory from being characterized as

investment or trading shares. Conversely, if the nonmember bank relies

on the general consent provisions under proposed Sec. 347.108 to

acquire the securities for investment or trading purposes, distribution

and dealing securities are counted towards the general consent

investment limits.

Second, equity interests in a particular foreign organization held

for distribution and dealing are required to conform with the limits of

Sec. 347.104. Equity interests held for distribution or dealing by an

affiliate permitted to do so under Sec. 337.4 of the FDIC's rules and

regulations (12 CFR 337.4) or section 4(c)(8) of the Bank Holding

Company Act (12 U.S.C. 1843(c)(8)) are counted for this limit. If the

nonmember bank's foreign organizations hold equity interests in the

same entity for investment and trading purposes, such interests are

included in determining compliance with these limits. However, in order

to permit 100 percent underwriting, the final rule contains an

exception for equity securities acquired pursuant to an underwriting

commitment for up to 90 days after the payment date for the

underwriting.

The combined limit, under which nonfinancial portfolio shares,

underwriting commitments, and distribution and dealing shares are

limited to 25 percent of the nonmember bank's Tier 1 capital, only

includes underwriting commitments net of amounts subject to commitments

from subunderwriters or purchasers or already deducted from the

nonmember bank's capital. Equity securities held for distribution or

dealing are only counted net of any position reduction through netting,

as permitted in connection with the five percent dealing limit.

Approval of Investments

The final rule permits a nonmember bank meeting certain eligibility

criteria to make foreign investments pursuant to general consent and

expedited processing procedures. These procedures are discussed in

detail in the analysis of subpart D below, but to summarize them

briefly, Sec. 347.108 grants the FDIC's general consent for nonmember

banks meeting the same eligibility criteria as apply in the foreign

branching context to invest up to five percent of their Tier 1 capital

in any 12-month period in foreign investments, plus up to an additional

five percent in equity interests for trading purposes. A sublimit of

two percent of Tier 1 capital per foreign organization applies. The

nonmember bank must already operate at least one foreign branch or

foreign bank subsidiary, or an affiliate of the bank must operate a

foreign bank subsidiary, or an affiliated bank or Edge or Agreement

corporation must operate a foreign branch. In addition, at least one

nonmember bank must have a foreign bank subsidiary in the relevant

foreign country, in order for general consent to be applicable. An

investment that does not qualify for general consent, but is otherwise

in compliance with the rule, may be made by an eligible bank upon 45

days prior notice under the expedited processing procedure. There are

certain necessary limitations on these general consent and expedited

processing procedures, however, as discussed in the analysis of subpart

D.

Extensions of Credit

Section 347.109(a) of the final rule does not alter the FDIC's

current treatment under Sec. 347.5 of extensions of credit to foreign

investment entities: the limitations of section 18(j) of the FDI Act,

incorporating by reference the interaffiliate transaction restrictions

of sections 23A and 23B of the Federal Reserve Act, do not apply.

Debts Previously Contracted

With one exception, Sec. 347.109(b) of the final rule does not

alter the FDIC's current treatment under Sec. 347.4(b), whereby equity

interests acquired to prevent loss on a debt previously contracted in

good faith are not subject to the limits and approvals of the

regulation. The FDIC is extending the time period an institution is

granted to dispose of such equity interests without the FDIC's specific

approval under part 347 from one to two years. The extension is not

intended to relieve an institution from its general obligation to

dispose of the investment promptly under the circumstances and make

diligent efforts to such end. However, extending the point at which an

application is required reduces administrative burden, and the FDIC can

monitor the progress of divestiture efforts as part of the normal

examination cycle. As with the current requirements of Sec. 347.4(b),

the final rule is not intended to displace any of the nonmember bank's

concurrent obligations under state law, or extend a state law

divestiture or approval period of less than two years.

E. Supervision and Recordkeeping for Foreign Branches and Investments

Section 347.110 of the final rule does not alter the FDIC's current

requirements for reporting and recordkeeping under current Sec. 347.6.

These requirements are intended to facilitate both the nonmember bank's

oversight of its foreign operations and the FDIC's supervision of them.

The final rule adds one new element. If a nonmember bank seeks to

establish a foreign branch, or acquire a foreign joint venture or

subsidiary, in a country in which applicable law or practice would

limit the FDIC's access to information about the branch or subsidiary

for supervisory purposes, the nonmember bank may not rely on the FDIC's

general consent or expedited processing procedures to do so. In such

cases, the FDIC must have an opportunity to evaluate the impact of the

limits on the FDIC's access, and determine whether the FDIC can still

serve its domestic and international supervisory obligations through

measures such as duplicate record-keeping in the U.S., reliance on host

country supervisors, operating policies of the foreign organization, or

reliance on recognized external auditors.

II. Subpart B--Deposit Insurance Requirements for State Branches

and Foreign Banks Having Insured Branches

A. Background

Subpart B, like current part 346 of the FDIC's Rules and

Regulations, implements certain provisions of the International Banking

Act of 1978 (IBA) (Pub. L. 95-369), as amended, and corresponding

provisions of the FDI Act. Subpart B establishes the permissible

deposit-taking activities of uninsured state licensed branches of

foreign banks. Subpart B also establishes certain rules applicable to

insured branches of foreign banks, whose ability to conduct domestic

retail deposit activity is grandfathered under the Foreign Bank

Supervision Enhancement Act of 1991 (FBSEA) (Title II, subtitle A of

the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub.

L. 102-242). These rules cover asset pledge and asset maintenance

requirements for insured branches, approval requirements for any

activities

[[Page 17066]]

not permissible for federal branches, and information-related items.

The FDIC received no public comments on proposed subpart B. The

FDIC is issuing the final version of subpart B without change from the

proposal. As the FDIC discussed in the NPR, the only significant change

from current part 346 is the addition of regulatory language conforming

to FBSEA's requirement that foreign banks conduct all domestic retail

deposit activity through a U.S. insured bank subsidiary. Insured

branches of foreign banks will also be required to calculate and report

compliance with the pledge of asset requirement on a quarterly basis.

These differences, and other changes from current part 346, are

highlighted in the following description of subpart B.

B. Description of Final Rule, Subpart B

The definitions in Sec. 347.202 are unchanged from current part

346, except that substantive limitations contained in some of the

definitions have been moved to the appropriate substantive rule itself.

Section 347.203, requiring all branches of the same foreign bank in

the same state which accept initial deposits in an amount of less than

$100,000 to be insured, is unchanged from current part 346.

Section 347.204 has no counterpart in current part 346. However,

the FDIC is merely implementing FBSEA provisions which have applied by

their own terms since December 19, 1991. Thus, Sec. 347.204 does not

impose any new restrictions on foreign banks. FBSEA amended section

6(c) of the IBA (redesignated section 6(d) in 1994, 12 U.S.C. 3104(d))

to require any foreign bank intending to conduct domestic retail

deposit activities in any state in the U.S. to organize an insured bank

subsidiary to conduct these deposit activities. However, any insured

branches which were accepting or maintaining domestic retail deposit

accounts on December 19, 1991, are allowed to continue to operate as

insured branches conducting domestic retail deposit activities. IBA

section 6(d)(3) also exempts any bank organized under the laws of any

territory of the United States, Puerto Rico, Guam, American Samoa, or

the Virgin Islands the deposits of which are insured by the FDIC

pursuant to the FDI Act. This allows insured banks organized under the

laws of the jurisdictions included therein to conduct any domestic

retail deposit activities in the United States through insured

branches, rather than organizing an insured bank subsidiary. This

statutory scheme has been reiterated in Sec. 347.204.

In connection with reiterating this statutory scheme in

Sec. 347.204, the FDIC has included Sec. 347.204(b), mirroring the

exemption for FDIC-insured banks organized under the laws of any

territory of the United States, Puerto Rico, Guam, American Samoa, or

the Virgin Islands set out in IBA section 6(d)(3). The enumerated

jurisdictions are commonwealths and territories of the United States

which are specifically included within the ``foreign bank'' definition

in IBA section 1(b)(7), and which the FDIC has included in the

regulatory definition of ``foreign bank'' under Sec. 347.202(g). In

drafting the Sec. 347.204(b) exemption, the FDIC has stuck closely to

the IBA's statutory language, and has not listed the Northern Mariana

Islands among the specifically-enumerated jurisdictions. The Northern

Mariana Islands is a commonwealth, and, like the commonwealth of Puerto

Rico, is specifically included in the definition of ``State'' for

purposes of the FDI Act under section 3(a)(3) thereof (12 U.S.C.

1813(a)(3)). As such, the FDI Act on its face would permit a bank

chartered by the Northern Mariana Islands to obtain FDIC insurance.

Therefore, there may be an interpretive issue under IBA section

6(d)(3), whether a Northern Mariana Islands bank which had obtained

FDIC insurance fell within the section 6(d)(3) exception and was

permitted to engage in domestic retail deposit taking in the U.S.

through an insured branch. Given that there are currently no Northern

Mariana Islands banks with FDIC deposit insurance, the FDIC sees no

need to express any interpretive position on this issue at this time.

In consideration of section 6(d) of the IBA, the FDIC has decided

it is no longer necessary to have any counterpart to current

Sec. 346.8. Section 346.8 authorized foreign banks to seek insurance

for a foreign branch even though the foreign branch did not engage in

domestic retail deposit activity, and was therefore not required to

obtain insurance. On their face, at least, FBSEA's amendments to

section 6 of the IBA seem only to reach foreign banks conducting

domestic retail deposit activity, and Congress has not repealed section

5(b) of the FDI Act, authorizing deposit insurance applications from

foreign branches. Therefore, it may arguably be possible for a foreign

branch which does not engage in domestic retail deposit activity to

seek deposit insurance from the FDIC. As a practical matter, however,

the FDIC does not foresee many circumstances in which it could be

appropriate for the FDIC Board of Directors to approve such an

application. Moreover, the elimination of Sec. 346.8 does not affect a

foreign bank's ability to argue that it may make an application under

section 5(b) of the FDI Act. The Board would have to determine whether

to actually accept and approve such an application, based upon its

review of the facts and circumstances, in addition to the pertinent

legal and policy considerations.

Section 347.205 permits an uninsured state foreign branch to

operate under an agreement with the FRB which limits the branch to

accepting only those deposits which would be permissible for an Edge

corporation. This is unchanged from current part 346.

Section 347.206 sets out the rules under which uninsured state

foreign branches may, without being deemed to be engaged in domestic

retail deposit activity, accept deposits in an initial amount of less

than $100,000. The FDIC conducted an exhaustive review of these rules

in connection with the enactment of section 107 of the Riegle-Neal

Interstate Banking and Branching Efficiency Act of 1994 (Pub. L. 103-

328), and revised them to ensure they are consistent with ``affording

equal competitive opportunities to foreign and United States banking

organizations in their United States operations [and to] ensure that

foreign banking organizations do not receive an unfair competitive

advantage over United States banking organizations.'' 12 U.S.C.

3104(a). See 61 FR 5671 (February 14, 1996). These revisions to current

section 346.6 took effect on April 1, 1996, and the FDIC is only

adopting minor, nonsubstantive revisions in connection with this

rulemaking. Regulatory language setting out the one percent ``de

minimis'' exception is being revised to clearly state the calculation

method which the FDIC has long applied in implementing the de minimis

exception, but the calculation method is not changed. The FDIC is also

relocating the application procedure for foreign branches seeking

additional exceptions from the substantive rule to the separate

procedural rules on applications, set out in new subpart D of part 347.

Section 347.207, specifying the notice which uninsured state

foreign branches must give depositors, makes no changes from the

comparable requirements of part 346. The same is true of section

347.208, the agreement by any foreign bank with an insured state branch

to provide the FDIC with certain information about the bank and permit

the FDIC to examine any of its U.S. operations. The same is also true

of

[[Page 17067]]

Sec. 347.209, requiring insured state branches to maintain records on a

separate-entity basis, and to maintain a set of records in English.

Section 347.210(a) of the final rule, setting forth the FDIC's

requirement that an insured branch pledge assets for the benefit of the

FDIC or its designee, contains certain changes from the comparable

provisions of current part 346. The pledge requirement remains at five

percent of the average of the insured branch's liabilities, as is

currently the case, but the final rule requires the pledge to be

calculated quarterly, whereas the current rule only requires it to be

calculated for the last 30 days of the second and fourth calendar

quarters. The final rule provides that the amount of assets that must

be pledged to the FDIC will be equal to ``five percent of the average

of the insured branch's liabilities for the last 30 days of the most

recent calendar quarter.'' This formula will be more straightforward to

apply and the calculation thereof will be easier for the insured

branches. The final rule also requires the insured branch to provide

the appropriate FDIC regional director with a written report regarding

the pledged assets on a quarterly basis (Sec. 347.210(e)(6)(ii)). The

current rule only requires semiannual reporting. This new reporting

requirement is consistent with other FDIC reporting requirements, such

as the filing of Reports of Income and Condition, and with the FDIC's

policy of analyzing financial data on a quarterly basis. It is the

FDIC's belief that quarterly calculation and reporting requirements do

not impose a significant additional burden on insured branches because

the information is already being collected and maintained by the bank.

Also, Sec. 347.210(e)(4) of the final rule now requires the foreign

branch to provide the appropriate FDIC regional director with copies of

all the documents and instruments delivered to the depository which

holds the pledged assets. Submitting this information to the FDIC will

not require additional preparation by the affected banks. Finally, the

delegation of authority to the Director of DOS (and to the Deputy

Director (DOS)) to enter into or revoke the approval of a pledge

agreement or to require the dismissal of a depository pursuant to

Sec. 303.8(f) of the FDIC's current rules and regulations has been

transferred to proposed Sec. 347.210 as paragraph (f) of that section.

Section 347.211 of the final rule establishes a requirement for

insured branches to maintain eligible assets in an amount not less than

106 percent of liabilities. The only change from the corresponding

requirements under current part 346 is the addition of language

permitting the FDIC to exclude from the eligible asset pool any asset

which the FDIC considers not to be bankable.

Section 347.212 permits an insured branch to deduct from its

deposit insurance assessment base any deposit to the credit of the

foreign bank or any of its offices, branches, agencies, or wholly-owned

subsidiaries. This is unchanged from part 346.

Section 347.213 will retain part 346's substantive requirements and

standards regarding the necessity for an insured state branch to apply

to the FDIC for approval to conduct or continue an activity which is

otherwise not permissible for a federal branch. However, the

application and plan of divestiture procedures which were formerly

found in Sec. 346.101 will be transferred to new Sec. 347.405 of

subpart D. Section 347.213, like Sec. 346.101 before it, is modeled in

large part on part 362, ``Activities and Investments of Insured State

Banks.'' As part of the FDIC's ongoing CDRI review of all of its

regulations and written policies, the FDIC has issued a notice of

rulemaking to revise part 362. 62 FR 47,969 (September 12, 1997). After

the closing of the comment period and the completion of the final part

362, Sec. 347.213 and Sec. 347.405 may be the subject of additional

rulemaking proceedings, if necessary, to reflect any changes made to

the underlying regulatory scheme governing the permissible activities

of insured state banks.

Finally, the language of the rule has been revised throughout where

necessary to incorporate references to the appropriate FDIC regional

office or official to fully integrate DOS's new Case Manager approach

to bank supervision.

III. Subpart C--International Lending

A. Background

The International Lending Supervision Act of 1983 (ILSA), 12 U.S.C.

3901, et. seq, was enacted to assure that the economic health and

stability of the United States and the other nations of the world are

not adversely affected or threatened by imprudent lending practices or

inadequate supervision.

ILSA strengthens supervision of international lending by requiring

each federal banking agency to evaluate the foreign country exposure

and transfer risk of banks within its jurisdiction for use in the

examination and supervision of such banks. 12 U.S.C. 3903. Transfer

risk generally refers to the possibility that an asset of a bank cannot

be serviced in the currency of payment because of a lack of, or

restraints on the availability of, needed foreign exchange in the

country of the obligor. To implement this provision, the federal

banking agencies, through the Interagency Country Exposure Review

Committee (ICERC), assess and categorize countries on the basis of

conditions that may lead to increased transfer risk.

In addition, section 905(a) of ILSA directs each federal banking

agency to promulgate regulations or orders to require banks within its

jurisdiction to establish and maintain a special reserve whenever the

agency determines that the quality of a bank's assets has been impaired

by a protracted inability of public or private borrowers in a foreign

country to make payments on their external indebtedness, or no definite

prospects exist for the orderly restoration of debt service. 12 U.S.C.

3904(a). To implement this provision of ILSA, on February 13, 1984, the

FDIC, the Office of the Comptroller of the Currency, and the Federal

Reserve System (collectively, the federal banking agencies) issued a

joint notice of final rulemaking requiring banks to establish special

reserves, called Allocated Transfer Risk Reserves (ATRRs), against the

transfer risks presented in certain international assets. 49 FR 5587

(February 13, 1984), (codified in part 351 of the FDIC's Rules and

Regulations, part 211 (Subpart D of Regulation K) of the Federal

Reserve's Regulations,. and part 20 of the Comptroller of the

Currency's Regulations). These regulations set forth specific

instructions on the accounting treatment for ATRRs. The line item

guidance for reporting ATRRs provided in the instructions for the

preparation of Consolidated Reports of Condition and Income (Call

Reports) refer back to ILSA and the regulations and other guidelines

issued by the federal banking agencies. (Schedule RC, Item 4.c in FFIEC

Forms 031, 032, 033 and 034.)

In order to simplify the task of preparing Call Reports by

gathering all accounting information in one place, the FDIC requested

comment in the Notice of Proposed Rulemaking on whether the

instructions for the preparation of Call Reports should be amended to

include a full description of the accounting treatment of ATRRs. 62 FR

37,748, 37,757-8 (July 15, 1997). The FDIC also requested comment as to

whether, if the Call Report instructions are amended, to retain the

detailed description of the accounting treatment of ATRRs in the

revised regulations or to replace the

[[Page 17068]]

regulatory language with a simplified requirement to follow the

accounting treatment outlined in the amended Call Report instructions.

Call Report instructions are not issued unilaterally by each federal

banking agency but are issued under the auspices of the Federal

Financial Institutions Examination Council (FFIEC) in consultation with

staff of the federal banking agencies. As the FFIEC has not, to date,

amended the Call Report instructions to incorporate the detailed

instructions for ATRR accounting, the FDIC has decided to retain the

description of the accounting treatment in its revised regulation.

Section 906 of ILSA requires the federal banking agencies to

promulgate regulations for the accounting for fees charged by banks in

connection with international loans and the restructuring of certain

international loans. 12 U.S.C. 3905. To implement this requirement, on

March 29, 1984, the federal banking agencies issued a joint notice of

final rulemaking concerning the accounting for fees on international

loans, including restructured international loans. 49 FR 12,192 (March

29, 1984), (codified in part 351 of the FDIC's Rules and Regulations,

part 211 (Subpart D of Regulation K) of the Federal Reserve's

Regulations, and part 20 of the Comptroller of the Currency's

Regulations).

Section 906(a) of ILSA deals specifically with the restructuring of

international loans to avoid excessive debt service burden on debtor

countries. 12 U.S.C. 3905(a). This section requires banks, in

accounting for fees on a restructured international loan, to amortize

any fee exceeding the administrative cost of the restructuring over the

effective life of each such loan. In order to distinguish between the

category of restructured international loans described in section

906(a) of ILSA and all other international loans for the purposes of

accounting for fees, the 1984 regulation contained a definition of

``restructured international loan'' designed to meet the particular

scope and purpose of section 906(a).

Section 906(b) of ILSA deals with the accounting for fees on all

other international loans. 12 U.S.C. 3905(b). This section requires the

federal banking agencies to promulgate regulations to account for

agency, commitment, management and other fees in connection with such

loans to assure that the appropriate portion of such fees is accrued to

income over the effective life of each such loan. When ILSA was enacted

in 1983 and part 351 was promulgated on March 29, 1984, Congress and

the federal banking agencies considered that the broad fee accounting

principles for banks then contained in generally accepted accounting

principles (GAAP) were insufficient to accomplish adequate uniformity

in accounting principles in this area. The preamble to the 1984 rule

stated that the agencies would reexamine the need for a discussion of

accounting treatment if the FASB were to issue a final pronouncement or

standard on this subject. Since that time, the FASB has revised the

GAAP rules for fee accounting for loans, including international loans,

in a manner that accommodates the specific requirements of section

906(b) of ILSA. As a result, in order to reduce the regulatory burden

on insured state nonmember banks and simplify its regulations, the FDIC

has decided, in consultation with accounting staffs from the other

federal banking agencies, to eliminate from the revised Sec. 347.304(b)

of the regulations the requirements as to the particular accounting

method to be followed in accounting for fees on international loans and

to require instead that state nonmember banks follow GAAP in accounting

for such fees. In the event that the FASB changes the GAAP rules on fee

accounting for international loans, the FDIC will reexamine its

regulation in light of ILSA to assess the need for a revision to the

regulation.

B. Discussion of Comments

Only one comment was received on subpart C of the revised

regulation. The commenter generally supported efforts by the federal

banking agencies to produce greater consistency between the information

collected in regulatory reports and general purpose financial

statements.

The commenter cited Section 37 of the Federal Deposit Insurance Act

(FDIA) for the principle that accounting principles applicable to

reports or statements required to be filed with banking agencies by

insured depository institutions should depart from GAAP only if the

banking agencies determine that the application of GAAP is inconsistent

with the objectives stated in that section of the FDIA 4 and

the resulting regulatory accounting principles are no less stringent

than GAAP. 12 U.S.C. 1831n. However, the commenter failed to note that

section 37(a)(2)(A) of the FDIA also provides that any requirement

under that section to apply GAAP in reports to be filed with the

banking agencies is subject to other requirements of the FDIA ``and any

other provision of Federal law.'' 12 U.S.C. 1831n(a)(2)(A). As a

result, to the extent that ILSA mandates a certain accounting treatment

which differs from GAAP, the requirements of ILSA prevail and the

implementing regulation will reflect these requirements.

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

\4\ FDIA Section 37(a)(1) states that accounting principles

applicable to reports filed with banking agencies should (A) result

in financial statements and call reports that accurately reflect the

capital of the institution, (B) facilitate effective supervision of

the institutions, and (C) facilitate prompt corrective action to

resolve the institutions at the least cost to the insurance funds.

12 U.S.C. 1831n(a)(1).

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

The commenter also recommended that instructions for accounting for

international loan fees and ATRRs should be developed on an interagency

basis through proposed changes to the Call Reports rather than in

agency-specific regulations. However, ILSA mandates that the federal

banking agencies promulgate regulations or orders necessary to

implement its provisions. As a result, the FDIC has decided to retain a

regulatory requirement for banks to follow the provisions of ILSA. The

commenter further proposed that the regulatory provisions dealing with

accounting for international loan fees should be replaced with a

requirement to follow the accounting treatment outlined in amended Call

Report instructions. As noted above, amendments to Call Report

instructions are made through the auspices of FFIEC. Call Report

instructions have long had detailed instructions on accounting for loan

fees generally. However, to date, FFIEC has not acted to revise the

Call Report instructions to include detailed information on the

accounting for international loan fees or ATRRs. As a result, the FDIC

has decided to retain the detailed accounting information in its

revised regulation.

The commenter also recommended that the regulatory provisions

dealing with international loan fees should be replaced with a

requirement to account for loan fees in conformity with the provisions

of FASB SFAS No. 91, Accounting for Nonrefundable Fees and Costs

Associated with Originating or Acquiring Loans and Initial Direct Costs

of Leases and related authoritative pronouncements. The revised

Sec. 347.304(b) dealing with accounting for fees on international loans

states that, except as specifically provided for restructured

international loans, banks should account for fees in accordance with

GAAP. As GAAP changes from time to time to reflect changing conditions,

the FDIC has decided for the sake of flexibility not to specify that

financial institutions follow any particular FASB standard.

The commenter also proposed that the provisions in revised section

347.303 dealing with establishment of ATRRs

[[Page 17069]]

should be reevaluated in light of the criteria established in FASB

Statements No. 5, Accounting for Contingencies, and No. 114, Accounting

by Creditors for Impairment of a Loan (as amended by FASB Statement No.

118, Accounting by Creditors for Impairment of a Loan--Income

Recognition and Disclosures). However, a general reliance on GAAP is

not appropriate in this instance as ILSA directs the federal banking

agencies to require banking institutions to establish and maintain an

ATRR whenever, in the judgment of the appropriate banking agency,

certain conditions enumerated by statute exist. The determination of

the ATRR is conducted on an interagency basis by ICERC.

Lastly, the commenter requested that the Call Report instructions

clarify the alternative accounting treatment for ATRRs. As noted

earlier, amendments of Call Report instructions are made on an

interagency basis through the FFIEC. The commenter also stated that the

description of the alternative accounting treatment for ATRRs would

permit institutions to charge to the allowance for loan and lease

losses (ALLL) impairments of types of international assets which are

not chargeable to the ALLL under GAAP. Under the alternative accounting

treatment, banks may write down the value of specified international

assets by either a reduction in the principal amount of the asset or by

a charge to the ALLL. Banks that elect to take a charge to the ALLL,

however, are required to replenish the ALLL in an amount necessary to

restore it to a level which adequately provides for the estimated

losses inherent in the banking institution's loan and lease portfolio

in accordance with GAAP. We share the commenter's concern that the

alternative accounting treatment provisions should be consistent with

GAAP. As a result, in response to the comment, we have modified the

description of the alternative accounting treatment to provide that

banks may charge to the ALLL only those international assets that can

be charged to the ALLL pursuant to GAAP.

C. Changes from Proposed Subpart C

Subpart C in the final regulation differs from the proposed

regulation by the addition of Sec. 347.301 dealing with Purpose, Scope

and Authority, and a separate Sec. 347.302 for Definitions and the

renumbering of the subsequent sections. These changes are made to

conform with the format of the other subparts of part 347.

The definitions of ``international loan'' and ``restructured

international loan'' from Sec. 351.2 are retained in the final

regulation. These definitions were deleted in the proposed regulation

from the section on accounting for loan fees in the interest of

simplifying language without any intent to change the applicability of

the regulation. However, in the interest of reducing any ambiguity, the

FDIC has decided to add these definitions back into the final

regulation. Because section 906(a) of ILSA refers to restructurings of

international loans to avoid excessive debt service burden on debtor

countries, the definition of ``restructured international loan,'' as

introduced in the 1984 regulation and retained in this revision,

contains two criteria. First, the borrower whose loan is being

restructured because of debt service difficulties must be a resident of

a foreign country experiencing a generalized inability of public and

private sector obligors to meet their external debt obligations on a

timely basis because of a lack of, or restraints on the availability

of, foreign exchange in that country. As noted above, the

classification of countries according to transfer risk is the

responsibility of ICERC. Second, in a restructuring, the terms of the

loan are revised to extend the original schedule of payments or reduce

stated interest, or the restructuring takes the form of provision of

new funds for the benefit of the borrower that has the same effect as

extending the schedule of payments or reducing stated interest on the

original loan. These criteria are intended to cover loans restructured

to meet debt service difficulties, but not ordinary refinancings.

For any loan that meets the definition of restructured

international loan, Sec. 347.304(a) of the final revised regulation

prohibits any bank from charging any fee exceeding the administrative

cost of the restructuring unless it amortizes the amount of the fee

exceeding the administrative cost over the effective life of the loan.

However, consistent with the preamble to the 1984 regulation, if any

restructuring of an international loan would also be a ``troubled debt

restructuring'' under the terms of Financial Accounting Standards Board

(FASB) Statement of Financial Accounting Standards (SFAS) No. 15, as

amended by SFAS 114 or SFAS 118 or a subsequent amendatory standard,

the loan should be accounted for in accordance with that standard. This

definition of ``restructured international loan,'' however, which was

adopted to implement the specific fee accounting rules mandated by

ILSA, is not intended to categorize any particular loan as a ``troubled

debt restructuring.''

The description of administrative cost from the existing

Sec. 351.2(d)(2) is being retained in a new definition of

``administrative cost.'' This description was deleted in the proposed

regulation from the section on accounting for loan fees in the interest

of simplifying language without any intent to change the applicability

of the regulation. However, in the interest of reducing any ambiguity,

the FDIC has decided to add this description back into the final

regulation as a defined term. References to syndication in the

description of administrative cost in the current part 351 were deleted

as the changes to the regulation remove the need to refer to

syndication.

In addition, in response to a comment, we have modified the

alternative accounting treatment to provide that banks may charge to

the ALLL only those international assets that can be charged to the

ALLL pursuant to GAAP.

D. Description of Final Rule, Subpart C

The final rule contains separate provisions for Purpose, Authority

and Scope and for Definitions. The Definitions section retains, among

others, the definitions of ``international loan'' and ``restructured

international loan'' from the current part 351. Definitions of

``international syndicated loan'' and ``loan agreement'' have been

deleted from the current regulation as changes to the regulation remove

the need to define these terms. The description of ``administrative

cost'' from the current part 351 has been retained as a defined term.

The final regulation contains provisions requiring the

establishment of ATRRs that are similar to the existing provisions. The

term ``Allowance for Possible Loan Losses'' in the existing regulation

has been changed to ``Allowance for Loan and Lease Losses'' to reflect

current terminology. As noted above, the FDIC has also modified the

alternative accounting treatment for ATRRs to provide that banks may

charge to the ALLL only those international assets that can be charged

to the ALLL pursuant to GAAP.

The final regulation simplifies the provisions for accounting for

fees on restructured international loans and other international loans.

With respect to restructured international loans, the final regulation

follows the ILSA requirement that banks amortize the amount of any fee

exceeding the administrative cost of the restructuring over the

effective life of the loan. Subject to the provisions for restructured

international loans, banks are directed to account for fees on

[[Page 17070]]

international loans in accordance with GAAP.

IV. Subpart D--Application Procedures and Delegations of Authority

A. Overview

The final rule includes a separate subpart D containing application

procedures and delegations of authority for the substantive matters

covered by part 347 as revised. Under the FDIC's current rules, these

application requirements are located in various sections of three

different regulations: 12 CFR part 303, 12 CFR part 346, and 12 CFR

part 347. As discussed above, the FDIC issued a Notice of Proposed

Rulemaking to completely revise part 303 of the FDIC's rules and

regulations, which contains the FDIC's applications procedures and

delegations of authority. As part of these revisions to part 303,

subpart J of part 303 will address application requirements relating to

the foreign activities of insured state nonmember banks and the U.S.

activities of insured branches of foreign banks. In order to permit

part 347 to be issued in final form before the FDIC issues part 303 in

final form, it is necessary to issue the application procedures for

part 347 in this subpart D. However, when part 303 is issued in final

form, the application procedures contained in subpart D to part 347

will be transferred to subpart J of part 303 as part of the same

rulemaking, in order to centralize all international banking

application procedures in one convenient place.

The FDIC has made certain nonsubstantive changes to the language of

subpart D of part 347, in order to make it consistent with the language

of proposed part 303. The FDIC has also made certain changes to the

criteria establishing which applicants are ``eligible depository

institutions'' entitled to processing under general consent or

expedited processing procedures. These changes, discussed below, were

also made to establish consistency with the part 303 proposal. At this

time, it is impossible for the FDIC to determine if it will make

further changes to the language of part 303 or to the eligibility

criteria thereunder. If such changes are made, the FDIC, in connection

with transferring the application procedures in subpart D of part 347

over to subpart J of part 303, will make further changes to these

application procedures in order to maintain consistency.

B. Public Comments and Changes to Subpart D

Public comments on the application procedures were limited to those

concerning foreign branches and investments of nonmember banks under

subpart A. Those comments, and the corresponding changes the FDIC has

made to the application procedures, are discussed in detail above, in

the discussion of comments received in connection with subpart A, and

will not be repeated here.

The FDIC has also eliminated two criteria under the definition of

an eligible depository institution which were not consistent with the

critieria under the definition proposed in connection with part 303.

The final rule, in Sec. 347.401(c), does not contain a requirement that

the applicant have received a rating of 1 or 2 under the ``management''

component of the Uniform Financial Institutions Rating System (UFIRS);

nor does it contain the requirement that the applicant have been

chartered and operating for three years. In addition, in the interests

of consistency with part 303, the FDIC has modified the proposed rule's

criteria requiring that the applicant not be subject to any

enforcement-related agreements. The proposal contained an exception for

any board of directors resolution addressing corrective action taken

pursuant to regulatory recommendations, whereas the final rule has no

such carve-out.

C. Description of Final Rule

Establishing, Moving, or Closing a Foreign Branch of a State Nonmember

Bank

Applications for a nonmember bank to establish a foreign branch are

currently treated under the same process applicable for domestic

branches under 12 CFR 303.2. The final rule treats foreign branches

separately, since foreign branch applications are not legally required

to be subjected to analysis under the Community Reinvestment Act or

under the factors listed in section 6 of the FDI Act, as is the case

for domestic branches.

Under Secs. 347.103(b) and 347.402 of the final rule, the FDIC has

given its general consent for an eligible depository institution to

establish additional foreign branches in any country in which the bank

already operates a branch or foreign bank subsidiary, or to relocate a

branch within the country. The final rule, only requires an eligible

nonmember bank to notify the FDIC of its actions within 30 days. In

addition, if an eligible nonmember bank seeks to establish a foreign

branch in any country in which the nonmember bank's affiliates operate

certain banking-related offices, the FDIC will give the application

expedited processing within 45 days. Expedited processing also applies

to an eligible nonmember bank that operates branches or affiliates in

two or more foreign countries and seeks to establish additional

branches conducting approved activities in additional foreign

jurisdictions. Certain banking-related offices of the eligible

nonmember bank's affiliates may be counted for these purposes.

To be eligible, the nonmember bank must have received an FDIC-

assigned composite rating of 1 or 2 under the Uniform Financial

Institutions Rating System (UFIRS); have a satisfactory or better

Community Reinvestment Act rating (unless the bank is a ``special

purpose'' bank not subject to examination under the FDIC's CRA

regulations); and have a compliance rating of 1 or 2. The nonmember

bank must also be well capitalized; and it must not be subject to a

cease and desist order, consent order, prompt corrective action

directive, written agreement, memorandum of understanding, or other

administrative agreement with its primary federal regulator or

chartering authority. An application to establish a foreign branch is

not an ``application for a deposit facility'' covered by the Community

Reinvestment Act, and the FDIC will therefore only take the nonmember

bank's CRA rating into account for purposes of determining whether the

application receives expedited treatment under the general consent and

expedited processing procedures.

The FDIC has adopted these general consent and expedited processing

provisions because a nonmember bank meeting the proposed requirements

will ordinarily have sufficient familiarity with the implications of

foreign branching, be well-managed, and be of sufficiently sound

overall condition, that extensive FDIC review is not required. The FDIC

retains the option to suspend expedited processing as to any

application, for any of the reasons specified in Sec. 347.402(c)(1).

These are the same grounds for suspension as would be applicable under

the general rules contained in the FDIC's part 303 proposal, at

proposed Sec. 303.11. The FDIC may also categorically suspend general

consent or expedited processing for any particular nonmember bank, as

specified in Sec. 347.103(d)(3). If the FDIC suspends its general

consent or expedited processing with respect to a particular nonmember

bank, it means that the nonmember bank must make

[[Page 17071]]

full application to establish additional branches. Suspension of

general consent or expedited processing does not, in and of itself,

require closure of existing foreign branches. Cases necessitating

actual closure of branches would be handled under section 8 of the FDI

Act (12 U.S.C. 1818) or other relevant authority.

General consent and expedited processing are also inapplicable in

any case presenting either of two special circumstances. Since the FDIC

must have access to information about a foreign branch's activities in

order to effectively supervise the institution, general consent or

expedited processing do not apply if the law or practice of the foreign

country would limit the FDIC's access to information for supervisory

purposes. In such cases, the FDIC must have an opportunity to fully

analyze the extent of the confidentiality conferred under foreign law,

as described in connection with the discussion of public comments on

subpart A, above. In addition, if the proposed foreign branch would

have a direct adverse impact on a site which is on the World Heritage

List 5 or the foreign jurisdiction's equivalent of the

National Register of Historic Places, the FDIC may need an opportunity

to evaluate the application in light of section 402 of the National

Historic Preservation Act Amendments of 1980 (16 U.S.C. 470a-2).

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

\5\ The World Heritage List was established under the terms of

The Convention Concerning the Protection of World Culture and

Natural Heritage adopted in November, 1972 at a General Conference

of the United Nations Education, Scientific and Cultural

Organization. Current versions of the list are on the Internet at

http://www.unesco.org/whc/heritage.htm, or may be obtained from the

FDIC Public Information Center, Room 100, 801 17th Street, NW,

Washington, DC 20429.

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

Section 347.103(f) and 347.402(d) also requires a nonmember bank

which closes a foreign branch to notify the appropriate regional

director that it has done so. This notice is strictly for informational

purposes, since the FDIC has previously determined that Congress did

not intend section 42 of the FDI Act (12 U.S.C. 42) on branch closings

to apply to foreign branches.

Finally, Sec. 347.402 also sets out the procedures for applications

which are not eligible for the general consent or expedited processing

provisions.

Acquisition of Stock of Foreign Banks or Other Financial Entities by an

Insured State Nonmember Bank

Section 347.4 of the FDIC's current rules contains an investment

ceiling, under which a nonmember bank's investments in foreign

organizations (as well as an Edge corporation) may not exceed 25

percent of the bank's capital and surplus. The FDIC has eliminated this

general limit, and will now instead monitor the overall investments of

each nonmember bank on an individual basis. In addition, Sec. 347.4

presently requires an application before a nonmember bank may make any

investment in a foreign organization. Under Secs. 347.108(a) and

347.403 of the final rule, the FDIC grants its general consent for an

eligible nonmember bank to make investments in foreign organizations

complying with the activity and other limits of subpart A. Eligibility

of the nonmember bank is determined by the same criteria as for foreign

branch approvals. As is the case under the foreign branch application

procedure, the FDIC will take the nonmember bank's Community

Reinvestment Act rating into account only for purposes of determining

whether the application is eligible for general consent or expedited

processing, since an application to make a foreign investment is not an

``application for a deposit facility'' covered by the CRA.

The final rule permits investments in a single foreign organization

of up to two percent of the nonmember bank's Tier 1 capital during any

twelve-month period. Aggregate investments for investment purposes may

total as much as five percent of the nonmember bank's Tier 1 capital

during any twelve-month period, and an additional five percent for

investments acquired for trading purposes. Investments acquired at net

asset value from an affiliate or representing reinvestments of cash

dividends from the foreign organization are not subject to these

limits. The final rule only requires the nonmember bank to notify the

FDIC of its investment within thirty days, and no notice is required

for trading investments.

However, in order to make investments under general consent, the

nonmember bank or an must already have at least one foreign bank

subsidiary or foreign branch, as evidence that the nonmember bank's

management has suitable expertise to address the special considerations

that arise in foreign investments. This experience requirement can also

be satisfied if an affiliate of the nonmember bank has a foreign bank

subsidiary, or if an affiliated bank or Edge or Agreement corporation

has a foreign branch. In addition, if the investment will constitute a

joint venture or a subsidiary or will otherwise be controlled by the

state nonmember, the final rule requires that at least one other

nonmember bank already have a foreign bank subsidiary in the country in

question. This will prevent nonmember banks from establishing a

presence in a jurisdiction in which the FDIC has not had an opportunity

to contact host country supervisory authorities and establish a working

arrangement for cross-border supervision.

The final rule also permits an eligible nonmember bank to make any

investment which complies with the activity and other limits of subpart

A through an expedited processing procedure lasting 45 days. Under

Sec. 347.403(c)(1), the FDIC may remove an applicant from expedited

processing if the FDIC's review of the application indicates

significant concerns related to supervision, law or policy. In such a

case, a complete application is required. These are the same grounds

for removal as would be applicable under the general rules contained in

the FDIC's part 303 proposal, at proposed Sec. 303.11.

As is the case in connection with the foreign branch rules, the

FDIC is adopting these general consent and expedited processing

procedures because a nonmember bank meeting the requirements of the

provisions has sufficient expertise, is well-managed, and is in

sufficiently sound overall condition, that extensive FDIC review is not

required. The FDIC retains the option to suspend these procedures as to

any institutions for which this is not the case. As with foreign branch

applications, the consequence of suspension is that a full application

is required in the future, and divestiture is not implicated. General

consent and expedited processing are also not available in any foreign

country if its law or practice would limit the FDIC's access to

information for supervisory purposes, for the same reasons stated above

in connection with foreign branch approvals.

Finally, Sec. 347.402 also sets out the procedures for applications

which are not eligible for the general consent or expedited processing

provisions.

Exemptions From the Insurance Requirement for a State Branch of a

Foreign Bank

From its initial adoption in 1979, Sec. 346.6 of the FDIC's rules

has provided a list of deposit activities in which a state branch could

engage that would not constitute ``domestic retail deposit activity''.

If the state branch only conducts deposit-taking activities which are

enumerated in Sec. 346.6(a)(1)-(7), and are carried forward to proposed

Sec. 347.206(a)(1)-(7), then the state branch is deemed to not be

engaged in domestic retail deposit activity, and the deposit insurance

requirement is not triggered. Pursuant to Sec. 346.6(b), which has been

carried forward as Sec. 347.206(b), the

[[Page 17072]]

FDIC may permit an uninsured state branch to accept additional types of

deposits in an initial amount of less than $100,000. The final rule

transfers the associated application procedures currently contained in

Sec. 346.6(b) to Sec. 347.404. These procedures need no substantive

revision at this time, because the procedures were recently reviewed

and amended by the FDIC as a result of amendments to the IBA which were

made by section 107 of the Riegle-Neal Act.

Application by Insured State Branches for FDIC Approval To Conduct

Activities Not Permissible for Federal Branches

Section 347.405 of the final rule contains the application

procedure for a state-licensed insured branch of a foreign bank seeking

to engage in any activity which is not permissible for a federal branch

of a foreign bank, as required by Sec. 347.213 of the final rule.

Section 347.405 also sets out procedures for filing divestiture plans

in the event such an application is denied or the law changes and a

foreign bank elects not to continue the activity. No substantive

changes have been made from the current application procedures in

Sec. 346.101.

V. Technical and Conforming Changes

The FDIC's rules and regulations currently contain numerous cross-

references to part 346. These have conformed to the appropriate

sections of revised part 347 under the final rule. The final rule also

eliminates application procedures and delegations under current part

303 of the FDIC's rules and regulations, to the extent those procedures

and delegations are displaced under the final rule.

VI. Paperwork Reduction Act

The collections of information contained in this rule have been

reviewed and approved by the Office of Management and Budget (OMB) in

accordance with the requirements of the Paperwork Reduction Act of 1995

(PRA) (44 U.S.C. 3501 et seq.). The collections of information in this

final rule are contained in various sections appearing in subpart A and

subpart B of part 347. The collections of information into two groups,

each with a separate OMB control number. The collections from subpart A

(Foreign Branching and Investment by Insured State Nonmember Banks)

have been assigned control number 3064-0125, and the collections from

subpart B (Foreign Banks) have been assigned control number 3064-0114.

Both OMB clearances will expire on July 31st, 2000. Each of the

collections required by the final rule is discussed below.

Subpart A--Foreign Branching and Investment by Insured State Nonmember

Banks--OMB Control No. 3064-0125

Sections 347.103(b)-(f) and 347.402 contain collections of

information in the form of requirements that insured state nonmember

banks (nonmember banks) (1) notify the FDIC if the bank establishes a

foreign branch under certain eligibility criteria in the rule; (2) give

the FDIC 45 days prior notice before establishing a branch under

certain eligibility criteria in the rule; (3) file an application with

the FDIC requesting authorization to establish a foreign branch or to

engage in certain activities through a foreign branch; or (4) notify

the FDIC if the bank closes a foreign branch. The information will be

used by the FDIC to authorize foreign branching as set out in section

18(d)(2) of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C.

1828(d)(2)). The estimated annual reporting burden for the collection

of information is summarized as follows:

Collections (1) and (4) (notice of foreign branch establishment

(347.402(a)) or foreign branch closure (347.402(d)):

Total annual responses: 4.

Average hours per response: 2.

Collection (2) (expedited processing for foreign branch

establishment (347.402(b))

Total annual responses: 3.

Average hours per response: 6.

Collection (3) (application to establish a foreign branch

(347.402(b))

Total annual responses: 3.

Average hours per response: 40.

Total annual burden hours: 146.

Sections 347.108 and 347.403 contain collections of information in

the form of requirements that nonmember banks (1) notify the FDIC if

the bank acquires stock or other evidences of ownership of foreign

organizations under certain eligibility criteria in the rule; (2) give

the FDIC 45 days prior notice before acquiring stock or other evidences

of ownership of foreign organizations under certain eligibility

criteria in the rule; or (3) file an application with the FDIC

requesting authorization to acquire stock or other evidences of

ownership of foreign organizations or to engage in certain activities

through foreign organizations. The information will be used by the FDIC

to authorize foreign investment as set out in section 18(l) of the FDI

Act (12 U.S.C. 1828 (l)). The estimated annual reporting burden for the

collection of information is summarized as follows:

Collection (1) (notice of foreign investment (347.403(a)).

Total annual responses: 5.

Average hours per response: 2.

Collection (2) (expedited processing for foreign investment

(347.403(b)).

Total annual responses: 4.

Average hours per response: 6.

Collection (3) (application to make a foreign investment

(347.403(b)).

Total annual responses: 3.

Average hours per response: 60.

Total annual burden hours: 214.

Section 347.110 contains collections of information in the form of

a requirement that nonmember banks with foreign branches, or that hold

20 percent or more of a foreign organization's voting equity interests,

or control a foreign organization, maintain certain records, controls,

and reports on the foreign operation's business activities. Section

18(d)(2) and 18(l) of the FDI Act authorize the FDIC to govern a

nonmember bank's conduct of foreign branching and investment, and the

information will be used by the nonmember bank to monitor the foreign

operations and control its risk. The estimated annual reporting burden

for the collection of information is summarized as follows:

Total annual responses: 63.

Average hours per response: 400.

Total annual burden hours: 25,200.

Summary of Subpart A--OMB Control No. 3064-0125 Collections

Total annual responses: 85.

Total annual burden hours: 25,560.

Subpart B--Foreign Banks--OMB Control No. 3064-0114

Sections 347.206(b) and 347.404 contain a collection of information

in the form of a requirement that noninsured state-licensed branches of

foreign banks make an application to obtain the FDIC's permission to

receive deposits of less than $100,000 if the deposits are not

otherwise authorized by Sec. 347.206(a). The information will be used

by the FDIC to determine whether to authorize the deposit taking as set

out in section 6(b) of the International Banking Act (12 U.S.C.

3104(b)). The estimated annual reporting burden for the collection of

information is summarized as follows:

Total annual responses: 1.

Average hours per response: 6.

Total annual burden hours: 6.

Sections 347.216 and 347.405 contain collections of information in

the form of requirements that insured state-licensed branches of

foreign banks (1) file an application with the FDIC requesting

permission to conduct activities which are not permissible for a

federal branch

[[Page 17073]]

of a foreign bank; or (2) submit a pro forma plan of divestiture or

cessation for activities which are not permissible for a federal branch

of a foreign bank. The information in the application will be used by

the FDIC to determine whether the activity poses a significant risk to

the deposit insurance fund, as required by section 7 of the

International Banking Act (12 U.S.C. 3105(h)), and the information in

the plan of divestiture or cessation will be used by the FDIC to make

judgments concerning the reasonableness of the branch's actions to

discontinue activities deemed to pose a significant risk to the deposit

insurance fund. This collection of information had previously been

approved by the OMB under control no. 3064-0114. The estimated annual

reporting burden for the collection of information is summarized as

follows:

Total annual responses: 1.

Average hours per response: 8.

Total annual burden hours: 8.

Sections 347.209 contains a collection of information in the form

of a requirement that insured branches of foreign banks maintain a set

of accounts and records in English and maintain its records as a

separate entity with assets and liabilities separate from the foreign

bank's head office, other branches, etc. The information will be used

by the insured branch in the same way any banking entity uses such

records, and the FDIC will review such records in connection with

examining and supervising the insured branch (which is an ``insured

depository institution'' for which the FDIC is the ``appropriate

Federal banking agency'' within the meaning of section 3 of the FDI

Act, (12 U.S.C. 1813)). The estimated annual reporting burden for the

collection of information is summarized as follows:

Total annual responses: 32.

Average hours per response: 120.

Total annual burden hours: 3,840.

Sections 347.210(e)(4) and 347.210(e)(6) contain collections of

information in the form of a requirement that insured branches of

foreign banks and their depositories (1) make quarterly reports to the

FDIC identifying the specific securities the foreign bank has pledged

to the FDIC and their value, as well as the average liabilities of the

insured branch; and (2) provide the FDIC copies of documents and

instruments conveyed by the insured branch to the depository to

effectuate the pledge. The information will be used by the FDIC to

verify compliance with the pledge of asset requirements authorized by

section 5(c) of the FDI Act (12 U.S.C. 1815(c)). The collection of

information under item (1) on a semiannual basis has previously been

approved by the OMB, whereas the FDIC is now proposing to collect it

quarterly. The OMB's previous approval was under control no. 3064-0010,

but the OMB has approved the FDIC's request to regroup it under control

number 3064-0114 for ease of reference. The estimated annual reporting

burden for the collection of information is summarized as follows:

Collection (1)(reports (347.210(e)(6))

Total annual responses: 256.

Average hours per response: 2.

Collection (2)(copies of documents effectuating pledges

(347.210(e)(4))

Total annual responses: 128.

Average hours per response: 0.25.

Total annual burden hours: 544.

Summary of Subpart B--OMB Control No. 3064-0114 Collections

Total annual responses: 418.

Total annual burden hours: 4,398.

The FDIC has a continuing interest in the public's opinion

regarding collections of information. Members of the public may submit

comments, at any time, regarding any aspect of these collections of

information. Comments may be sent to: Steven F. Hanft, Assistant

Executive Secretary (Regulatory Analysis), Federal Deposit Insurance

Corporation, Room F-4080, 550 17th Street NW, Washington, DC 20429.

VII. Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA) (Title II, Pub. L. 104-121) provides generally for agencies to

report rules to Congress for review. The reporting requirement is

triggered when a federal agency issues a final rule. Accordingly, the

FDIC will file the appropriate reports with Congress as required by

SBREFA.

The Office of Management and Budget has determined that this final

revision of part 347 does not constitute a ``major rule''' as defined

by SBREFA.

VIII. Effective Date

Subject to certain exceptions, 12 U.S.C. 4802(b) provides that new

regulations and amendments to regulations prescribed by a federal

banking agency which impose additional reporting, disclosures, or other

new requirements on an insured depository institution shall take effect

on the first day of a calendar quarter which begins on or after the

date on which the regulations are published in final form. Accordingly,

compliance with the final rule is not mandatory until July 1, 1998.

However, section 4802(b) also permits any person subject to the

regulation to comply with the regulation voluntarily, prior to the

effective date. Consequently, affected insured depository institutions

and foreign banks may elect to comply voluntarily with the final rule,

once the 30-day delay period required by section 553 of the

Administrative Procedure Act (5 U.S.C. 552b) has passed. If an insured

depository institution or foreign bank elects to comply voluntarily

with any section of subparts A, B, or C of part 347, the institution or

bank must comply with the entire subpart.

IX. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.

L. 96-354, 5 U.S.C. 601 et seq.), it is certified that the final rule

will not have a significant impact on a substantial number of small

entities. With respect to subparts A and C of part 347, the FDIC's

review of Call Report data indicates the rule will impact only an

insubstantial number of small entities. With respect to subpart B of

part 347, the revisions incorporate the legislative requirement first

imposed by FBSEA that a foreign bank which intends to engage in

domestic retail deposit activity in the U.S. must do so through an

insured bank subsidiary. This has been the statutory standard for over

five years; however, this requirement was not heretofore addressed in

the FDIC's applicable regulation, part 346. Explicitly including this

requirement in subpart B cannot be characterized as having a

``significant impact'' on the affected entities as they have been

required to comply with this provision of FBSEA for many years. The

other revisions which have been made to subpart B involve adding

references to the FDIC's new supervisory approach--the Case Manager

system--where applicable and simplifying the calculation of the amount

of pledged assets required to comply with Sec. 347.210(a). The formula

will be based upon a quarterly calculation rather than a semi-annual

calculation. In the future, the foreign bank will be required to report

the calculation to the appropriate regional director every quarter.

However, the additional two reports per year will not represent a

significant burden on the affected banks because the foreign banks are

already maintaining the information, and the time required to forward

the quarterly calculation to the FDIC will be nominal. Therefore, the

revisions to subpart B will not have a significant impact on a

substantial number of small entities.

[[Page 17074]]

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

Administrative practice and procedure, Banks, banking, Capital

adequacy, Reporting and recordkeeping requirements, Savings

associations, State non-member banks.

12 CFR Part 326

Banks, banking, Currency, Insured nonmember banks, Reporting and

recordkeeping requirements, Security measures.

12 CFR Part 327

Assessments, Bank deposit insurance, Banks, banking, Financing

Corporation, Savings associations.

12 CFR Part 346

Bank deposit insurance, Foreign banking, Reporting and

recordkeeping requirements.

12 CFR Part 347

Authority delegations (Government agencies), Bank deposit

insurance, Banks, banking, Credit, Foreign banking, Foreign

investments, Insured branches, Investments, Reporting and recordkeeping

requirements, United States investments abroad.

12 CFR Part 351

Foreign banking, Reporting and recordkeeping requirements.

12 CFR Part 362

Administrative practice and procedure, Authority delegations

(Government agencies), Bank deposit insurance, Banks, banking, Insured

depository institutions, Investments, Reporting and recordkeeping

requirements.

For the reasons set forth above and under the authority of 12

U.S.C. 1819(a)(Tenth), the FDIC Board of Directors hereby amends 12 CFR

chapter III as follows:

PART 303--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF

AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR

REGULATION

1. The authority citation for part 303 continues to read as

follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(j), 1818, 1819

(Seventh and Tenth), 1828, 1831e, 1831o, 1831p-1; 15 U.S.C. 1607.

Sec. 303.2 [Amended]

2. In Sec. 303.2, paragraph (a) introductory text is amended by

removing and reserving footnote 2.

Sec. 303.5 [Amended]

3. In Sec. 303.5, paragraph (d) is removed and reserved.

4. In Sec. 303.6, paragraphs (f)(1)(ii)(A) and (f)(1)(ii)(C) are

revised to read as follows:

Sec. 303.6 Application procedures.

* * * * *

(f) * * *

(1) * * *

(ii) * * *

(A) Applications to establish a branch, including a remote service

facility. In the communities in which the home office and the domestic

branch to be established are located.

* * * * *

(C) Applications for deposit insurance. In the community in which

the home bank office is or will be located.

* * * * *

5. In Sec. 303.7, the heading for paragraph (a) and paragraphs

(a)(1)(i), (a)(1)(ii)(A), (a)(1)(iii)(D), and (b)(4)(ii) are revised,

the words ``; and'' are removed at the end of paragraph (f)(2)(i) and a

period is added in their place, and paragraph (f)(2)(ii) is removed and

reserved to read as follows:

Sec. 303.7 Delegation of authority to the Director (DOS) and to the

associate directors, regional directors and deputy regional directors

to act on certain applications, requests, and notices of acquisition of

control.

* * * * *

(a) Applications for branches (including remote service facilities,

courier services), relocations, and for trust and other banking

powers--(1) * * *

(i) Authority is delegated to the Director (DOS), and where

confirmed in writing by the director, to an associate director, or to

the appropriate regional director or deputy regional director, to

approve applications for consent to establish branch facilities

(including remote service facilities and courier services) or

relocations where the applicant satisfies the requisites listed in

paragraph (a)(1)(iii) of this section and agrees in writing to comply

with any condition imposed by the delegate other than those standard

conditions listed in Sec. 303.0(b)(31).

(ii) * * *

(A) To deny applications for consent to establish branch facilities

(including remote service facilities and courier services) or

relocations; and

* * * * *

(iii) * * *

* * * * *

(D) The requirements of the National Historic Preservation Act (16

U.S.C. 470), the National Environmental Policy Act (42 U.S.C. 4321),

and the Community Reinvestment Act of 1977 (12 U.S.C. 2901-2905) and

its applicable implementing regulation (part 345 of this chapter) have

been considered and favorably resolved: Provided however, That the

authority to approve an application may not be subdelegated to a

regional director or deputy regional director where a protest (as that

term is defined in Sec. 303.0(b)(30)) under the Community Reinvestment

Act is filed.

* * * * *

(b) * * *

(4) * * *

(ii) Where the resulting institution, upon consummation of the

merger transaction, does not meet the capital requirements set forth in

part 325 of this chapter and the FDIC's ``Statement of Policy on

Capital''. (If the applicant is a foreign bank, the delegated authority

to approve does not extend to instances where, upon consummation of the

merger transaction, the foreign bank's insured branch is not in

compliance with subpart B of part 347 of this chapter.)

* * * * *

Sec. 303.8 [Amended]

6. In Sec. 303.8, paragraph (f) is removed and reserved.

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, 2386 (12 U.S.C. 1828 note).

8. In Sec. 325.103, paragraph (c) is revised to read as follows:

Sec. 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 Sec. 347.210 of

this chapter; and

[[Page 17075]]

(ii) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 108 percent or more of the preceding quarter's average

book value of the insured branch's 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 Sec. 347.210

of this chapter or to maintain a higher ratio of eligible assets

pursuant to Sec. 347.211 of this chapter.

(2) Adequately capitalized if the insured branch:

(i) Maintains the pledge of assets required under Sec. 347.210 of

this chapter; and

(ii) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 106 percent or more of the preceding quarter's average

book value of the insured branch's 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

Sec. 347.210 of this chapter; or

(ii) Fails to maintain the eligible assets prescribed under

Sec. 347.211 of this chapter at 106 percent or more of the preceding

quarter's average book value of the insured branch's third-party

liabilities.

(4) Significantly undercapitalized if it fails to maintain the

eligible assets prescribed under Sec. 347.211 of this chapter at 104

percent or more of the preceding quarter's average book value of the

insured branch's third-party liabilities.

(5) Critically undercapitalized if it fails to maintain the

eligible assets prescribed under Sec. 347.211 of this chapter at 102

percent or more of the preceding quarter's average book value of the

insured branch's third-party liabilities.

* * * * *

PART 326--MINIMUM SECURITY DEVICES AND PROCEDURES AND BANK SECRECY

ACT 1 COMPLIANCE

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\1\ In its original form, subchapter II of chapter 53 of title

31 U.S.C., was part of Pub. L. 91-508 which requires recordkeeping

for and reporting of currency transactions by banks and others and

is commonly known as the Bank Secrecy Act.

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

9. The authority citation for part 326 continues to read as

follows:

Authority: 12 U.S.C. 1813, 1815, 1817, 1818, 1819 (Tenth), 1881-

1833; 31 U.S.C. 5311-5324.

10. In Sec. 326.1, paragraph (c) is amended by revising the last

sentence to read as follows:

Sec. 326.1 Definitions.

* * * * *

(c) * * * In the case of a foreign bank, as defined in Sec. 347.202

of this chapter, the term branch has the same meaning given in

Sec. 347.202 of this chapter.

11. In Sec. 326.8, paragraph (a) and footnote 3 are revised to read

as follows:

Sec. 326.8 Bank Secrecy Act compliance.

(a) Purpose. This subpart is issued to assure that all insured

nonmember banks as defined in Sec. 326.1 3 establish and

maintain procedures reasonably designed to assure and monitor their

compliance with the requirements of subchapter II of chapter 53 of

title 31, United States Code, and the implementing regulations

promulgated thereunder by the Department of Treasury at 31 CFR part

103.

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\3\ In regard to foreign banks, the programs and procedures

required by Sec. 326.8 need be instituted only at an insured branch

as defined in Sec. 347.202 of this chapter which is a State branch

as defined in Sec. 347.202 of this chapter.

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* * * * *

PART 327--ASSESSMENTS

12. The authority citation for part 327 is revised 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).

13. In Sec. 327.1, paragraph (b)(2) is revised to read as follows:

Sec. 327.1 Purpose and scope.

* * * * *

(b) * * *

(2) Deductions from the assessment base of an insured branch of a

foreign bank are stated in subpart B of part 347 of this chapter.

14. In Sec. 327.4, paragraphs (a)(1)(i)(B)(1), (a)(1)(i)(B)(2),

(a)(1)(ii)(B)(1), and (a)(1)(ii)(B)(2) are revised to read as follows:

Sec. 327.4 Annual assessment rate.

(a) * * *

(1) * * *

(i) * * *

(B) * * *

(1) Maintains the pledge of assets required under Sec. 347.210 of

this chapter; and

(2) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 108 percent or more of the average book value of the

insured branch's third-party liabilities for the quarter ending on the

report date specified in paragraph (a)(1) of this section.

(ii) * * *

(B) * * *

(1) Maintains the pledge of assets required under Sec. 347.210 of

this chapter; and

(2) Maintains the eligible assets prescribed under Sec. 347.211 of

this chapter at 106 percent or more of the average book value of the

insured branch's third-party liabilities for the quarter ending on the

report date specified in paragraph (a)(1) of this section; and

* * * * *

PART 346--[REMOVED]

15. Part 346 is removed.

16. Part 347 is revised to read as follows:

PART 347--INTERNATIONAL BANKING

Subpart A--Foreign Branching and Investment by Insured State Nonmember

Banks

Sec.

347.101 Purpose, authority, and scope.

347.102 Definitions.

347.103 Foreign branches of insured state nonmember banks.

347.104 Investment by insured state nonmember banks in foreign

organizations.

347.105 Underwriting and dealing limits applicable to foreign

organizations held by insured state nonmember banks.

347.106 Restrictions on certain activities applicable to foreign

organizations held by insured state nonmember banks.

347.107 U.S. activities of foreign organizations held by insured

state nonmember banks.

347.108 Obtaining FDIC approval to invest in foreign organizations.

347.109 Extensions of credit to foreign organizations held by

insured state nonmember banks; shares of foreign organizations held

in connection with debts previously contracted.

347.110 Supervision and recordkeeping of the foreign activities of

insured state nonmember banks.

Subpart B--Foreign Banks

347.201 Scope.

347.202 Definitions.

347.203 Restriction on operation of insured and noninsured

branches.

347.204 Insurance requirement.

347.205 Branches established under section 5 of the International

Banking Act.

347.206 Exemptions from the insurance requirement.

347.207 Notification to depositors.

347.208 Agreement to provide information and to be examined.

347.209 Records.

347.210 Pledge of assets.

[[Page 17076]]

347.211 Asset maintenance.

347.212 Deductions from the assessment base.

347.213 FDIC approval to conduct activities not permissible for

federal branches.

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.

Subpart D--Applications and Delegations of Authority

347.401 Definitions.

347.402 Establishing, moving or closing a foreign branch of a state

nonmember bank; Sec. 347.103.

347.403 Investment by insured state nonmember banks in foreign

organizations; Sec. 347.108.

347.404 Exemptions from insurance requirement for a state branch of

a foreign bank; Sec. 347.206(b).

347.405 Approval for an insured state branch of a foreign bank to

conduct activities not permissible for federal branches;

Sec. 347.213.

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

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

Subpart A--Foreign Branching and Investment by Insured State

Nonmember Banks

Sec. 347.101 Purpose, authority, and scope.

Under sections 18(d) and 18(l) of the Federal Deposit Insurance Act

(12 U.S.C. 1828(d), 1828(l)), the Federal Deposit Insurance Corporation

prescribes the regulations in this subpart relating to foreign branches

of insured state nonmember banks, the acquisition and holding of stock

of foreign organizations, and loans or extensions of credit to or for

the account of such foreign organizations.

Sec. 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 which 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) Eligible insured state nonmember bank means an eligible

depository institution as defined in Sec. 347.401(c).

(d) 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.

(e) 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.

(f) FRB means the Board of Governors of the Federal Reserve System.

(g) 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.

(h) 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.

(i) 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.

(j) 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.

(k) Foreign organization means an organization that is organized

under the laws of a foreign country.

(l) Indirectly means investments held or activities conducted by a

subsidiary of an organization.

(m) 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.

(n) Organization or entity means a corporation, partnership,

association, bank, or other similar entity.

(o) 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.

(p) Subsidiary means any organization more than 50 percent of the

voting equity interests of which are directly or indirectly held by

another organization.

(q) Tier 1 capital means Tier 1 capital as defined in Sec. 325.2 of

this chapter.

(r) Well capitalized means well capitalized as defined in

Sec. 325.103 of this chapter.

Sec. 347.103 Foreign branches of insured state nonmember banks.

(a) Powers of foreign branches. To the extent authorized by state

law, an insured state nonmember bank may establish a foreign branch. In

addition to its general banking powers, and if permitted by state law,

a foreign branch of an insured state nonmember bank may conduct the

following activities to the extent the activities are consistent with

banking practices in the foreign country in which the branch is

located:

(1) Guarantees. Guarantee debts, or otherwise agree to make

payments on the occurrence of readily ascertainable events including

without limitation such things as nonpayment of taxes, rentals, customs

duties, or costs of transport and loss or nonconformance of shipping

documents, if:

(i) The guarantee or agreement specifies a maximum monetary

liability; and

(ii) To the extent the guarantee or agreement is not subject to a

separate amount limit under state or federal law, the amount of the

guarantee or agreement is combined with loans and other obligations for

purposes of applying any legal lending limits.

(2) Local investments. Acquire and hold the following local

investments, so

[[Page 17077]]

long as aggregate investments (other than those required by the law of

the foreign country or permissible under section 5136 of the Revised

Statutes (12 U.S.C. 24 (Seventh)) by all the bank's branches in one

foreign country do not exceed 1 percent of the total deposits in all

the bank's branches in that country as reported in the preceding year-

end Report of Income and Condition (Call Report): 1

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\1\ If a branch has recently been acquired by the state

nonmember bank and the branch was not previously required to file a

Call Report, branch deposits as of the acquisition date must be

used.

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(i) Equity securities of the central bank, clearing houses,

governmental entities, and development banks of the country in which

the branch is located;

(ii) Other debt securities eligible to meet local reserve or

similar requirements; and

(iii) Shares of automated electronic payment networks, professional

societies, schools, and similar entities necessary to the business of

the branch.

(3) Government obligations. Make the following types of

transactions with respect to the obligations of foreign countries, so

long as aggregate investments, securities held in connection with

distribution and dealing, and underwriting commitments do not exceed

ten percent of the insured state nonmember bank's Tier 1 capital:

(i) Underwrite, distribute and deal, invest in, or trade

obligations of:

(A) The national government of the country in which the branch is

located or its political subdivisions; and

(B) An agency or instrumentality of such national government if

supported by the taxing authority, guarantee, or full faith and credit

of the national government.

(ii) Underwrite, distribute and deal, invest in or trade

obligations2 rated as investment grade by at least two

established international rating agencies of:

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\2\ If the obligation is an equity interest, it must be held

through a subsidiary of the foreign branch and the insured state

nonmember bank must meet its minimum capital requirements.

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(A) The national government of any foreign country or its political

subdivisions, to the extent permissible under the law of the issuing

foreign country; and

(B) An agency or instrumentality of the national government of any

foreign country to the extent permissible under the law of the issuing

foreign country, if supported by the taxing authority, guarantee, or

full faith and credit of the national government.

(4) Insurance. Act as an insurance agent or broker.

(5) Other activities. Engage in these activities in an additional

amount, or in other activities, approved by the FDIC.

(b) General consent to establish and relocate foreign branches. (1)

General consent of the FDIC is granted for an eligible insured state

nonmember bank to establish foreign branches conducting activities

authorized by this section in any foreign country in which the bank

already operates one or more foreign branches or foreign bank

subsidiaries.

(2) General consent of the FDIC is granted for an insured state

nonmember bank to relocate an existing foreign branch within a foreign

country.

(3) An insured state nonmember bank acting under this paragraph

must provide written notice of such action to the FDIC within 30 days

after establishing or relocating the branch.

(c) Expedited processing of branch applications. (1) Forty-five

days after filing a substantially complete application with the FDIC,

or upon such earlier time as authorized by the FDIC, an eligible

insured state nonmember bank may establish foreign branches conducting

activities authorized by this section in any foreign country in which:

(i) An affiliated bank or Edge or Agreement corporation operates

one or more foreign branches or foreign bank subsidiaries; or

(ii) The bank's holding company operates a foreign bank subsidiary.

(2) If any of the following are located in two or more foreign

countries, an eligible insured state nonmember bank may establish a

foreign branch conducting activities authorized by this section in an

additional foreign country 45 days after the bank files a substantially

complete application with the FDIC, or upon such earlier time as

authorized by the FDIC:

(i) Foreign branches or foreign bank subsidiaries of the eligible

insured state nonmember bank;

(ii) Foreign branches or foreign bank subsidiaries of banks and

Edge or Agreement corporations affiliated with the eligible insured

state nonmember bank; and

(iii) Foreign bank subsidiaries of the eligible insured state

nonmember bank's holding company.

(d) Limitations on general consent and expedited processing.

General consent under paragraph (b) or expedited processing under

paragraph (c) of this section does not apply:

(1) If the foreign branch would be located on a site on the World

Heritage List or on the foreign country's equivalent of the National

Register of Historic Places, in accordance with section 403 of the

National Historic Preservation Act Amendments of 1980 (16 U.S.C. 470a-

2);

(2) If the foreign branch would be located in a foreign country in

which applicable law or practice would limit the FDIC's access to

information for supervisory purposes; or

(3) If the FDIC at any time notifies the insured state nonmember

bank that the FDIC is modifying or suspending its general consent or

expedited processing procedure.

(e) Specific consent required. An insured state nonmember bank may

not engage in a type or amount of foreign branch activity not

authorized by this section, or establish a foreign branch other than as

authorized by paragraphs (b) and (c) of this section, without obtaining

the prior specific consent of the FDIC.

(f) Branch closing. An insured state nonmember bank must notify the

FDIC in writing at the time it closes a foreign branch.

(g) Procedures. Procedures for notices and applications under this

section are set out in subpart D of this part.

Sec. 347.104 Investment by insured state nonmember banks in foreign

organizations.

(a) Investment authorized. To the extent authorized by state law,

an insured state nonmember bank may directly or indirectly acquire and

retain equity interests in foreign organizations, subject to the

requirements of this subpart.

(b) Authorized financial activities. An insured state nonmember

bank may not directly or indirectly acquire or hold equity interests of

a foreign organization resulting in the insured state nonmember bank

and its affiliates holding more than 50 percent of a foreign

organization's voting equity interests in the aggregate, or the insured

state nonmember bank or its affiliates otherwise controlling the

foreign organization, unless the activities of the foreign organization

are limited to the following financial activities:

(1) Commercial and other banking activities.

(2) Underwriting, distributing, and dealing debt securities outside

the United States.

(3) With the prior approval of the FDIC under Sec. 347.108(d),

underwriting, distributing, and dealing equity securities outside the

United States.

(4) 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.

(5) General insurance agency and brokerage.

[[Page 17078]]

(6) Underwriting credit life, credit accident and credit health

insurance.

(7) Performing management consulting services provided that such

services when rendered with respect to the United States market must be

restricted to the initial entry.

(8) Data processing.

(9) Operating a travel agency in connection with financial services

offered abroad by the insured state nonmember bank or others.

(10) 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.

(11) Performing services for other direct or indirect operations of

a U.S. 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.

(12) 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.

(13) Engaging in the foregoing activities in an additional amount,

or in other activities, with the prior approval of the FDIC under

Sec. 347.108(d).

(c) Going concerns. If an insured state nonmember bank acquires

equity interests of a foreign organization under paragraph (b) of this

section and the foreign organization is a going concern, up to five

percent of either the consolidated assets or revenues of the foreign

organization may be attributable to activities that are not permissible

under paragraph (b) of this section.

(d) Joint ventures. If an insured state nonmember bank directly or

indirectly acquires or holds equity interests of a foreign organization

resulting in the insured state nonmember bank and its affiliates

holding 20 percent or more, but not in excess of 50 percent, of the

voting equity interests of a foreign organization in the aggregate, and

the insured state nonmember bank or its affiliates do not control the

foreign organization, up to 10 percent of either the consolidated

assets or revenues of the foreign organizati

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