previously contracted in good faith; but such stock or other evidences of ownership shall be disposed of within 12 months from the date of acquisition unless such time is extended by the Board.

(b) Limitations. Stock or other evidences of ownership in a foreign bank shall be disposed of as promptly as practicable if (1) such bɛnk should engage in the business of underwriting, selling, or distributing securities in the United States or (2) the national bank is advised by the Board that its holding is inappropriate under section 25 of the Act or this part. The terms "stock," "shares," and "evidences of ownership" in this section include any right to acquire stock, shares, or evidences of ownership, except that prior Board consent is not required for the acquisition and exercise of stock rights in lieu of dividends which are declared on shares already held by a national bank and which do not result in an increase in percentage ownership of the foreign bank.

(c) Required information. A national bank applying for the consent of the Board to acquire and hold stock or other evidences of ownership in a foreign bank pursuant to this section shall furnish full information concerning such foreign bank including (unless previously furnished): (1) The cost, number, and class of shares to be acquired, and the proposed carrying value of such shares on the books of the national bank; (2) recent balance sheet and income statement of the foreign bank; (3) brief description of the foreign bank's business (including full information concerning any direct or indirect business transacted in the United States); (4) lists of directors and principal officers (with address and principal business affiliation of each) and of all shareholders known to the issuing bank holding 10 percent or more of any class of the foreign bank's stock or other evidences of ownership, and the amount held by each; and (5) information concerning the rights and privileges of the various classes of shares outstanding.

(d) Reports. A national bank shall immediately inform the Board through the Federal Reserve Bank of its district with respect to any acquisition or disposition of stock in a foreign bank including the cost and number of shares acquired pursuant to this section.

(a) The continued or prospective exercise of any power under this part shall be subject to any notice interpreting or applying it that a national bank may receive from the Board, and such bank shall immediately comply therewith.

(b) The Board may from time to time require a national bank to make reports at such time and in such forms as the Board may prescribe regarding the exercise of any power hereunder and to submit information regarding compliance with this part.

§ 213.7 Reserves against foreign branch deposits.

(a) Transactions with parent bank. During each week of the four-week period beginning May 22, 1975, and during each week of each successive fourweek ("maintenance") period, a member bank having one or more foreign branches shall maintain with the Reserve Bank of its district, as a reserve against its foreign branch deposits, a daily average balance equal to 4 per cent of the daily average total of

(1) Net balances due from its domestic offices to such branches, and

(2) Assets (including participations) held by such branches which were acquired from its domestic offices (other than assets representing credit extended to persons not resident of the United States), during the four-week computation period ending on the Wednesday fifteen days before the beginning of the maintenance period.

(b) Credit extended to United States residents. During each week of the fourweek period beginning May 22, 1975, and during each week of each successive fourweek maintenance period, a member bank having one or more foreign branches shall maintain with the

• Whether through a corporation operating under sec. 25 of the Act or organized under sec. 25(a) of the Act, or otherwise.

Reserve Bank of its district, as a reserve against its foreign branch deposits, a daily average balance equal to 4 percent of the daily average credit outstanding from such branches to United States residents' (other than assets acquired and net balances due from its domestic offices) during the four-week computation period ending on the Wednesday fifteen days before the beginning of the maintenance period: Provided, That this paragraph does not apply to credit extended (1) in the aggregate amount of $100,000 or less to any United States resident, (2) by a foreign branch which at no time during the computation period had credit outstanding to United States residents exceeding $1 million, (3) to enable the borrower to comply with the requirements of the Office of Foreign Direct Investments, Department of Commerce, (4) under binding commitments entered into before May 17, 1973, or (5) to an institution that will be maintaining reserves on such credit under § 204.5 (c) of Regulation D or § 211.7 (c) of Regulation K or to a foreign-owned banking institution that will voluntarily be maintaining member bank reserves on such credit.

[40 FR 17136, Apr. 17, 1975, as amended at 41 FR 7497, Feb. 19, 1976]

§ 213.51 Statement of policy on joint

ventures.

For the text of this statement of policy, see § 211.51 of this subchapter.

(12 U.S.C. 601) [Reg. M, 33 F.R. 4729, Mar. 20, 1968]

7(a) Any individual residing (at the time the credit is extended) in any State of the United States or the District of Columbia; (b) any corporation, partnership, association or other entity organized therein ("domestic corporation"); and (c) any branch or office located therein of any other entity wherever organized. Credit extended to a foreign branch, office, subsidiary, affillate or other foreign establishment ("foreign affiliate") controlled by one or more such domestic corporations will not be deemed to be credit extended to a United States resident if the proceeds will be used in its foreign business or that of other foreign affiliates of the controlling domestic corporation (s).

The branch may in good faith rely on the borrower's certification that the funds will be so used.

§ 213.52 Statement of policy on stock interests in foreign joint ventures.

For text of interpretation, see § 211.52 of this chapter.

[41 FR 7496, Feb. 19, 1976]

INTERPRETATIONS

§ 213.101 Loans to executive officers of foreign branches of national and State member banks.

For text of this interpretation, see § 215.103 of this subchapter.

(Interprets or applies 12 U.S.C. 6048) [Reg. M, 35 F.R. 19962, Dec. 29, 1970]

§ 213.102 Acquisition of rights to acquire shares incident to extensions of credit.

For text of this interpretation, see § 215.103 of this subchapter. (Interprets or applies 12 U.S.C. 601) [34 FR. 9615, June 19, 1969]

§ 213.103 Credit extended by foreign branches of member banks to domestic subsidiaries of Edge Act corporations.

(a) The Board of Governors recently considered the applicability of § 213.7 of Regulation M to credit extended by foreign branch of a member bank to a domestically-chartered financing subsidiary of the member bank's subsidiary Edge Act corporation.1 The financing subsidiary proposed to use the credit to make loans and investments abroad. Such loans would not be to U.S. residents; such investments would not involve the acquisition of assets from the member bank (other than assets described in clause (2) of footnote 7 to § 213.7).

(b) Section 213.7 is designed to affect the flow of foreign funds into the domestic banking system. Section 213.7(b) (2) exempts from reserve requirements credit extended to enable the borrower to comply with requirements of the Office of Foreign Direct Investments, Department of Commerce. The justification for that exemption is that the borrowing does not directly affect the availability of credit for use in the United States.

1 Corporation organized under section 25 (a) of the Federal Reserve Act (12 US.C. 611-631).

90-051-77- -37

§ 213.104 Statement of policy on availability of information to facilitate supervision of foreign operations of member banks.

For the guidance of member banks having foreign operations, the Board publishes the following statement of policy regarding availability of information pertaining to member banks' foreign branches and subsidiaries to enable proper supervision of those operations:

(a) The Board of Governors of the Federal Reserve System, as a central bank, is properly concerned with the preservation and promotion of a sound banking system in the United States. The Board of Governors and other Federal banking supervisory authorities have been given specific statutory responsibilities to assure that banking institutions are operated in a safe and prudent manner affording protection to depositors and providing adequate and efficient banking services to the public on a continuing basis. These responsibilities and concerns are shared by central banks and bank supervisors the world over.

(b) Under sections 25 and 25(a) of the Federal Reserve Act, the Board has particular responsibilities to supervise the international operations of member banks in the public interest. In carrying out these responsibilities, the Board has sought to assure that the international operations of member banks would not only foster the foreign commerce of the United States but that they would also be conducted so as not to encroach on the maintenance of a sound and effective banking structure in the United States. In keeping with the latter consideration, the Board believes it incumbent upon member banks to supervise and administer their foreign branches and subsidiaries in such a manner as to assure that their operations are conducted at all

times in accordance with high standards of banking and financial prudence.

(c) Proper administration and supervision of foreign branches and subsidiaries require the use of effective systems of records, controls, and reports that will keep the bank's management informed of the activities and condition of its branches and subsidiaries. At a minimum, such systems should provide the following:

(1) Risk assets. To permit assessment of exposure to loss, information furnished or available to head office should be sufficient to permit periodic and systematic appraisals of the quality of loans and other extensions of credit. Coverage should extend to a substantial proportion of the risk assets in the branch or subsidiary, and include the status of all large credit lines and of credits to customers also borrowing from other offices of the bank. Information on credit extensions should include (i) a recent financial statement of the borrower and current information on his financial condition; (ii) credit terms, conditions, and collateral; (iii) data on any guarantors; (iv) payment history; and (v) status of corrective measures employed.

(2) Liquidity. To enable assessment of local management's ability to meet its obligations from available resources, reports should identify the general sources and character of the deposits borrowings, etc., employed in the branch or subsidiary with special reference to their terms and volatility. Information should be available on sources of liquiditycash, balances with banks, marketable securities, and repayment flows-such as will reveal their accessibility in time and any risk elements involved.

(3) Contingencies. Data on the volume and nature of contingent items such as loan commitments and guaranties or their equivalents that permit analysis of potential risk exposure and liquidity requirements.

(4) Controls. Reports on the internal and external audits of the branch or subsidiary in sufficient detail to permit determination of conformance to auditing guidelines. Such reports should cover (1) verification and identification of entries on financial statements; (ii) income and expense accounts, including descriptions of significant chargeoffs and recoveries; (ii) operation of dualcontrol procedures and other internal controls; (iv) conformance to head office

1

(a) Under the third paragraph of section 25 of the Federal Reserve Act, as amended (12 U.S.C. 601), any national banking association 1 possessing a capital and surplus of $1,000,000 or more may file application with the Board for permission, upon such conditions and under such regulations as may be prescribed by the Board, "to acquire and hold, directly or indirectly, stock or other evidences of ownership in one or more banks organized under the law of a foreign country or a dependency or insular possession of the United States and not engaged, directly or indirectly, in any activity in the United States except as, in the judgment of the Board shall be incidental to the international or foreign business of such foreign bank; and, notwithstanding the provisions of section 23A of the Federal Reserve Act (12 U.S.C. 371c), to make loans or extensions of credit to or for the account of such bank in the manner and within the limits prescribed by the Board by general or specific regulation or ruling."

(b) Pursuant to its authority under the third paragraph of section 25 of the Federal Reserve Act, the Board has promulgated § 213.4 of this part (Regulation M), which sets forth appropriate conditions and limitations on a member bank's acquisition and holding, directly or indirectly, of the stock or other evidences of ownership in one or more foreign banks, and § 213.5 of this part which allows a member bank, which holds directly or indirectly stock or other evidences of ownership in a foreign bank, to make loans or extensions of credit to or for the account of such foreign bank

2

1 Paragraph 20 of section 9 of the Federal Reserve Act (12 U.S.C. 355) also makes the provisions of section 25 applicable to State member banks.

Whether through a corporation operating under section 25 of the Act or organized under section 25(a) of the Act, or otherwise.

without regard to the provisions of section 23A of the Federal Reserve Act (12 U.S.C. 371c).

(c) In several recent applications filed with the Board by member banks under section 25 of the Act, the issue has arisen as to whether particular foreign institutions can be considered as foreign banks for the purposes of section 25 of the Act and §§ 213.4 and 213.5 of this part. While the Board has by regulation defined the term "foreign bank" to mean a bank organized under the law of a foreign country and not engaged, directly or indirectly, in any activity in the United States except as, in the judgment of the Board, shall be incidental to the international or foreign business of such foreign bank, such definition imposes the statutory limitation on activities in the United States that can be conducted by a foreign bank, the shares of which are owned by a member bank, and does not define as a threshold matter which foreign institutions can be considered as foreign banks eligible for investment and Board exemption from the provisions of section 23A under section 25 of the Act.

(d) Congress in the third paragraph of section 25 of the Act has imposed incorporation and other requirements intended to ensure that a foreign bank acquired under that section is not engaged in a domestic banking business. Congress did not, however, specify in section 25 the criteria a foreign institution must satisfy in order to be considered a foreign bank for purposes of that section. The third paragraph of section 25 was enacted in 1966 in order to give member banks organizational flexibility in conducting their banking operations abroad. Prior to its enactment, the Board had interpreted the "stock purchase" prohibitions of section 5136 of the Revised Statutes as preventing member banks from acquiring directly the shares of foreign banks. Thus, until that time, member banks were limited to conducting their banking operations abroad either through branches established under section 25 or through agencies, branches or subsidiaries of their Edge or Agreement Corporations

Section 213.2 of this part.

While the term "bank" is defined in section 1 of the Federal Reserve Act (12 U.S.C. 221), that definition "* State bank, banking association, and trust company” is not applicable in the context of section 25.

established, respectively, under section 25(a) or section 25 of the Federal Reserve Act. Because the laws of some foreign countries prevented the establishment of branches and because the holding of shares of foreign banks through Edge or Agreement Corporation subsidiaries resulted in an unnecessary layering of organizational relationships, the enactment of the third paragraph of section 25 essentially was intended to allow member banks to hold directly the shares of foreign banks, instead of holding them indirectly through their Edge or Agreement Corporation subsidiaries." The provision in that paragraph which gives the Board the power to waive the restrictions of section 23A on loans or extensions of credit from a member bank to its foreign bank affiliate was supported by the Board because section 23A in such circumstance tends to restrict normal correspondent banking relationships between banks and their foreign bank affiliates.

(e) In the Board's judgment, a foreign bank for purposes of section 25 of the Act and §§ 213.4 and 213.5 of this part should be interpreted to mean, with certain limited exceptions hereinafter described, a foreign institution that is principally engaged in a commercial banking business. The Board believes that such an interpretation is consonant with the limited purposes of section 25 and accords with Congress' intent in enacting that section. This interpretation will apply both for purposes of determining permissible investments for member banks under § 213.4 of this part and for purposes of the regulatory exemption from the provisions of section 23A under § 213.5 of this part. In adopting this interpretation, however, the Board has determined that, in general, certain minimum criteria should be met in every case. Accordingly, in order for a foreign institution to be considered as principally engaged in a commercial banking business, the institution must, at least, receive deposits to a substantial extent in the regular course of its business, and also have the power to accept deposits that the depositor has a legal right to withdraw on demand. In addition, the Board believes that for a foreign institution to be considered as a foreign bank under section 25, the in

5 See 112 Cong. Rec. 11866 (1966) (remarks of Senator Robertson).

stitution should also be supervised, regulated, examined or otherwise recognized as a commercial bank by the appropriate bank supervisory or monetary authority of either the country of its organization or the country of its principal banking operations.

(f) The Board has also determined, however, that notwithstanding the above test and minimum criteria, foreign institutions organized for the sole purpose of holding the shares of a foreign bank, or organized for the sole purpose of performing nominee, fiduciary, or other banking services incidental to the activities of a foreign branch or banking affiliate of a member bank may be considered as foreign banks for purposes of section 25 and §§ 213.4 and 213.5 of this part. The Board may recognize other exceptions to the criteria adopted in this general interpretation if it determines that any such exception would not be inappropriate under section 25 of the Federal Reserve Act and this part (Regulation M).

[40 FR 18412, Apr. 28, 1975]