Donald J. Toumey
Sullivan & Cromwell
125 Broad Street
New York, NY 10004-2498

Dear Mr. Toumey:

This is in response to your letter dated March 21, 1996, regarding the appropriate amount of stock in the Federal Reserve Bank of San Francisco (the Reserve Bank) for [Bank 1]. In particular, you have requested that the Board disregard push-down accounting in calculating the amount of [Bank 1's] capital stock and surplus for purposes of the Board's Regulation I concerning Capital Stock of Federal Reserve Banks (12 CFR Part 209).

As we understand the transactions, on December 31, 1995, [BHC] acquired [Company A], of which [Bank 1] was a part, from its owners, and the [401(k) Division] from [Bank 2]. We presume that these were arms-length transactions and that the prices paid therefore represent the market value of these operations at the time of purchase. After the acquisitions, [BHC] restructured these operations by contributing the [401(k) Division] and the U.S. assets of [Company A] to [Bank 1]. Pursuant to regulations of [Bank 1's] primary supervisor, the Office of the Comptroller of the Currency, [Bank 1's] assets now reflect the prices [BHC] paid for them. These prices considerably exceeded the book value of the assets.

Section 5 of the Federal Reserve Act (Act) provides that:

When a member bank increases its capital stock or surplus, it shall thereupon subscribe for an additional amount of capital stock of the Federal reserve bank of its district equal to 6 per centum of the said increase . . . .

12 U.S.C. � 287. Section 209.3 of the Board's Regulation I, Issue and Cancellation of Capital Stock of Federal Reserve Banks (12 CFR Part 209), accordingly requires that:

Whenever any member bank increases . . . the aggregate amount of its paid-up capital and surplus, it shall file with the Federal Reserve Bank of its District an application . . . for such additional amount . . . of the capital stock of the Federal Reserve Bank of its District as may be necessary to make its total subscription to Federal Reserve Bank stock equal to 6 percent of its combined capital and surplus.

12 CFR 209.3. Section 2 of the Act, dealing with initial subscriptions by national banks to Reserve Bank stock at the formation of the Federal Reserve System refers to "paid-up capital stock and surplus of such bank[s]," and that qualification also has been applied to all increases in capital stock pursuant to section 5 of the Act. 12 U.S.C. � 222. In addition, Board Interpretations and staff opinions have defined the circumstances under which impaired surplus or capital of a member bank should be reduced to the extent of the impairment for purposes of calculating the amount of Reserve Bank stock to be held by the member bank. See Federal Reserve Regulatory Service 3-503, 3-505, 3-506, and 3-516.

The surplus of [Bank 1] is paid-up surplus for both generally accepted accounting and regulatory accounting purposes. In addition, it reflects the price paid by [BHC] for the assets contributed to [Bank 1] in the restructuring of the acquisition as well as the price paid for the [Bank 1] itself. Therefore, staff is of the view that such surplus has been paid in to [Bank 1]. Unless there were some reason for believing that the acquisition was not an arms' length transaction, the prices paid in the two purchase transactions represented the market value of the assets (or, in the case of [Bank 1], net assets) acquired on December 31, 1995. Unless there has been a permanent impairment of such value since the transactions, [Bank 1's] surplus remains paid-in and unimpaired and [Bank 1's] Federal Reserve Stock should reflect this amount.

Your letter states that [Bank 1] received no economic benefit for the difference between book value and market value of the purchased assets. If this refers to the allocation of the difference to goodwill and similar accounts the amortization of which confers no tax benefit, staff believes such allocation to be irrelevant for purposes of calculating unimpaired paid-up surplus. If, on the other hand, this is a statement that [BHC] overpaid for [Bank 1] or the assets purchased and contributed to [Bank 1], then a write-down of the overvalued assets may be appropriate for both regulatory and generally accepted accounting purposes; in this case staff is of the view that a reduction in the amount of Reserve Bank stock required to be held by [Bank 1] commensurate to the reduction in [Bank 1's] capital and surplus would be appropriate.

I hope this information is helpful. If you have further questions, you may contact Rick Heyke of my staff (202/452-3688).

Very truly yours,

(signed) Oliver Ireland

Oliver Ireland