FRB: Supervisory Letter SR 97-13 (APP) on streamlined section 4 procedures for well-capitalized and well-managed banking organizations -- April 24, 1997

TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK

SUBJECT:

Streamlined Section 4 Procedures for Well-Capitalized and Well-Managed Banking Organizations

Purpose and Scope. The final rule adopting changes to Regulation Y is designed to reduce unnecessary regulatory burden while at the same time allowing the System to continue to carry out faithfully its responsibilities under the Bank Holding Company Act. Among the changes that have been adopted are changes to Regulation Y¹ that implement provisions enacted by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 for notices processed under section 4 of the Bank Holding Company Act ("BHC Act") ("section 4"). See section 225.23 of Regulation Y (12 CFR 225.23). In general, these provisions provide streamlined procedures for certain nonbanking proposals that are intended to reduce significantly regulatory burden in the notice review process and to improve the ability of well-run bank holding companies to respond quickly to changes in the market place. These changes reflect the philosophy that a well-run bank holding company that meets objective and verifiable measures for each of the criteria set forth in the BHC Act and the regulation should be able to expect little burden or delay in the application and/or notice review process for routine or small proposals unless special circumstances demonstrate that a closer review is warranted. In addition, the notice process should focus on an analysis of the effects of the specific proposal and should not become a vehicle for comprehensively evaluating and addressing supervisory and compliance issues that can be more effectively addressed in the supervisory process.

Accordingly, the review of a proposal under the streamlined procedures should focus on whether the qualifying criteria have been met. However, if the System is aware, either from information obtained in the review process or from information otherwise available to the System, that a proposal or a notificant warrants closer review to assess any potential adverse effect or other matter related to a statutory factor required to be considered under section 4, the proposal must be processed under the normal 30/60 day procedures.²

Two separate streamlined procedures are available to bank holding companies that meet the qualifying criteria set forth in the regulation. One streamlined procedure permits a well-run bank holding company to engage de novo, directly or indirectly, in any nonbanking activity approved by the Board by regulation (as amended),³ if the bank holding company provides notice to the System within 10 business days after commencing the nonbanking activity (the "10 day post notice procedures"). The other streamlined procedure permits a well-run bank holding company (a) to engage de novo in any nonbanking activity approved by Board order, or (b) to acquire voting shares or assets of a going concern engaged in any nonbanking activity approved by Board order or regulation,⁴ if the bank holding company has provided written notice to the System at least 12 business days prior to commencing the proposed activity (the "12 day prior notice procedures"), and the System has not indicated within that period that a notice would be required under the 30/60 day procedures for a section 4 notice.⁵

The streamlined procedures may only be used in connection with nonbanking proposals by bank holding companies that meet the criteria and other conditions described in Regulation Y. These procedures are not available for section 4 notices that involve a savings association or other insured depository institutions (such as a trust company or credit card bank) that are not considered to be a "bank" under the BHC Act.⁶

Proposals that require approval under both section 3 and section 4 of the BHC Act should be processed under the applicable section 3 procedure (i.e. either the streamlined procedures or the 30/60 day procedures). The Reserve Bank should notify the applicant in writing immediately after receipt of the application that the section 4 portion of the proposal will be processed under the section 3 procedures, and should describe the nonbanking companies to be acquired in the Federal Register notice.

This letter explains the requirements of the streamlined procedures, the criteria that should be reviewed, and the information that must be provided by the notificant. This letter also provides guidance for resolving various issues that may arise under the streamlined procedures.

To be successful in reducing regulatory burden under the new procedures, Reserve Bank and Board staffs should make every effort to determine as early as possible whether a proposal qualifies for the streamlined procedure, and whether an issue is raised that may warrant a more in-depth review of the proposal or the institutions involved. The streamlined procedures clearly contemplate that any proposal that meets the qualifying criteria may nevertheless be processed under the 30/60 procedures if issues are raised. It is essential, however, that such issues be identified early, and that, once identified, the proposal be quickly transferred to the 30/60 day procedures. Reserve Bank staff is urged to discuss potential issues and procedural questions with Board staff at the outset in reviewing cases under the streamlined procedures so that a prompt determination may be made regarding whether the 30/60 day processing procedures should be used.

Criteria for the 10 Day Post Notice and the 12 Day Prior Notice Procedures
Both section 4 streamlined procedures are available only if a proposal clearly meets all of the following criteria.⁷
1. Financial criteria -- The financial criteria must be met by the acquiring bank holding company before and immediately after the proposed transaction.⁸
  1. The acquiring bank holding company must be well-capitalized.⁹
    Definition of well-capitalized -- A bank holding company is well-capitalized for purposes of meeting the qualifying criteria if:
    
              (a) On a consolidated basis, the bank holding company maintains a total risk-based capital ratio of 10.0 percent or more and a Tier 1 risk-based capital ratio of 6.0 percent or more; and
    
              (b) The bank holding company is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board to meet and maintain a specific capital level for any capital measure.
    
    Foreign banking organizations -- The following standards apply for determining whether a foreign banking organization is well-capitalized for purposes of meeting the qualifying criteria:
    
              (a) If the home country supervisor¹⁰ of a foreign banking organization has adopted capital standards consistent in all respects with the Capital Accord of the Basle Committee on Banking Supervision ("Basle Accord"), the foreign banking organization may:
    (b) If the home country supervisor has not adopted capital standards consistent in all respects with the Basle Accord, the foreign banking organization is considered well-capitalized only if the foreign banking organization obtains a determination from the Board, in advance of filing a notice, that its capital is equivalent to the capital that would be required for a U.S. banking organization to be considered well-capitalized. These determinations will be made on a case-by-case basis. Requests by foreign banking organizations for such determinations should be submitted in writing to the Director, Division of Banking Supervision and Regulation.
    
    (c) The regulation requires the provision of pro forma financial information and capital ratios based on the most recent quarter. Unless recent existing consolidated capital ratios are provided by the foreign banking organization or are otherwise available to the System, the Reserve Bank will need to estimate the capital ratios of the foreign banking organization by using the pro forma capital and balance sheet information that is to be included in the notice. In these instances, the Reserve Bank should compare the financial information used in calculating the capital ratios with the capital ratios reported by the foreign banking organization in its most recent Y-7 submission and any other more recent data available to the System. If the Reserve Bank believes that the reported data and the data submitted in the notice may not accurately reflect the current consolidated capital position of the foreign banking organization, the Reserve Bank may request additional information. If the current consolidated capital position of the foreign banking organization does not appear to meet the well-capitalized criterion, the notice should be processed under the 30/60 day procedures.
    
    Small bank holding companies -- A bank holding company that, on a pro forma basis, will continue to have consolidated assets of less than $150 million and that is subject to the Small Bank Holding Company Policy Statement in Appendix C of Regulation Y is well-capitalized for purposes of meeting the qualifying criteria if it meets the requirements for expedited/waived processing contained in the Policy Statement.
  2. The lead insured depository institution of the acquiring bank holding company must be well-capitalized.
    
    Definition of well-capitalized insured depository institution -- An insured depository institution is well-capitalized if the institution maintains at least the capital levels required to be "well-capitalized" under the capital adequacy regulations or guidelines applicable to the institution that have been adopted by the appropriate federal banking agency ("AFBA") for the institution.¹¹ Unlike the definition of "well-capitalized" that applies to a bank holding company, the definition applicable to insured depository institutions typically includes a leverage component as well as risk-based capital requirements.
    
    Definition of lead insured depository institution -- The lead insured depository institution is the largest insured depository institution controlled by the bank holding company as of the quarter ending immediately prior to the proposed filing, based on a comparison of the average total risk-weighted assets controlled during the previous 12-month period by each insured depository institution subsidiary of the holding company.¹²
    
    Foreign banking organizations -- The following principles apply for determining whether the lead insured depository institution for a foreign banking organization is well-capitalized for purposes of meeting the qualifying criteria:
    
              (a) A U.S. branch or agency of a foreign banking organization is considered to be an insured depository institution. The lead insured depository institution for a foreign banking organization that maintains branches (insured and uninsured), agencies, and subsidiary insured depository institutions in the United States is the individual branch, agency, or subsidiary insured depository institution that is largest in terms of average risk-weighted assets.
    
              (b) U.S. branches and agencies of foreign banking organizations are not required to report assets on a risk-weighted basis.  If a foreign banking organization does not provide the actual assets of its U.S. branches and agencies on a risk-weighted basis in its notice, staff should employ the conservative estimation methodology shown in the attachment to this letter to identify the lead insured depository institution of the foreign banking organization.  In any instance where the estimation methodology reveals a close determination, the Reserve Bank should contact the foreign banking organization to obtain more definitive information.
    
              (c) A U.S. branch or agency of a foreign banking organization is deemed to have the same capital ratios as the consolidated foreign banking organization as determined under the well-capitalized criterion discussed above.
  3. Well-capitalized insured depository institutions must control at least 80 percent of the aggregate total risk-weighted assets of insured depository institutions controlled by the acquiring bank holding company.
    
    Calculation of the 80 percent test -- This test identifies insured depository institutions that comprise 80 percent of the risk-weighted assets held by insured depository institutions controlled by the holding company. Nonbanking subsidiaries that are not insured depository institutions are not included in calculating compliance with this criterion. For example, a bank holding company with one subsidiary bank that controls $8 billion in risk-weighted assets, with six other subsidiary banks that each control $200 million in risk-weighted assets, and with uninsured nonbanking subsidiaries with $8 billion in risk-weighted assets would qualify under this criterion if the $8 billion bank is well-capitalized.
    
    Foreign banking organizations -- As noted above, all branches, agencies and subsidiary insured depository institutions operated in the United States by a foreign banking organization must be considered in determining qualification under this criterion.¹³ If the Reserve Bank has concerns that this criterion is not satisfied using the conservative estimation methodology in the attachment to this letter, the Reserve Bank should contact the foreign banking organization to obtain more definitive information.
  4. No insured depository institution controlled by the acquiring bank holding company or foreign banking organization may be undercapitalized.
2. Managerial criteria -- The managerial criteria must be met at the time of the transaction.¹⁴
  1. The acquiring bank holding company must be well-managed.
    
    Definition of well-managed -- The acquiring bank holding company must have received: (a) a composite BOPEC rating of 1 or 2 at the most recent inspection or subsequent review;¹⁵ and (b)a satisfactory rating for management and for compliance, where these ratings are given.
    
    Foreign banking organizations -- A foreign banking organization is deemed to be well-managed if the combined operations of the foreign banking organization in the United States have received a rating of 1 or 2 (derived from the Summary of Condition) at the most recent annual assessment.
    
    If a bank holding company or a foreign banking organization has not received a rating, see the guidance provided in paragraph (B)(5) below.
  2. The lead insured depository institution of the acquiring bank holding company must be well-managed.¹⁶
    
    At its most recent examinations for safety and soundness and consumer compliance or subsequent review by the AFBA, the lead insured depository institution must have received:  (a) a composite rating of 1 or 2; and (b) at least a satisfactory rating for management and for consumer compliance, where these ratings are given.
    
    Foreign banking organizations -- The U.S. branch or agency of a foreign banking organization that meets the lead insured depository institution test must have received:
    
              (a) A supervisory composite rating of 1 or 2 under the ROCA rating system;
    
              (b) A compliance rating of 1 or 2 (i.e., the "C" component in the ROCA rating must be a 1 or 2); and
              (c) A consumer compliance rating of 1 or 2, where these ratings are given.
  3. Insured depository institutions that control at least 80 percent of the total risk-weighted assets of insured depository institutions controlled by the acquiring bank holding company must be well-managed.
    The 80 percent test for the well-managed criteria should be calculated in the same manner as discussed in paragraph (A)(3) above for the well-capitalized criteria.
    
    At the most recent examinations for safety and soundness and consumer compliance or subsequent reviews by the AFBA, the insured depository institutions must have received:  (a) a composite rating of 1 or 2; and (b) at least a satisfactory rating for management and for consumer compliance, where these ratings are given.
    Foreign banking organizations -- U.S. branches and agencies of a foreign banking organization included in the 80 percent test must have received:¹⁷
    
              (a) Supervisory composite ratings of 1 or 2 under the ROCA rating system;
    
              (b) Compliance ratings of 1 or 2 (i.e., the "C" component in the ROCA rating must be a 1 or 2); and
              (c) Consumer compliance ratings of 1 or 2, where these ratings are given.
    
    As noted above, all branches, agencies and subsidiary insured depository institutions operated in the United States by a foreign banking organization must be considered in determining qualification under this criterion.¹⁸ If the Reserve Bank has concerns that this criterion is not satisfied using the conservative estimation methodology in the attachment to this letter, the Reserve Bank should contact the foreign banking organization to obtain more definitive information.
  4. No insured depository institution controlled by the acquiring bank holding company may have received one of the two lowest composite ratings at the later of the institution's most recent safety and soundness examination or subsequent review by the AFBA for the institution.
    
    There is one exception to this criterion.
    
    Any insured depository institution that has been acquired by the bank holding company during the 12 month period preceding the date on which the notice is filed may be excluded from this criterion (but not from the 80 percent criterion in paragraph (B)(3) above) if: (a) the bank holding company has developed a plan acceptable to the AFBA for the insured depository institution to restore the capital and management of the institution; and (b) all insured depository institutions that are excluded, in the aggregate, control less than 10 percent of the aggregate total risk-weighted assets of all insured depository institutions controlled by the acquiring bank holding company.
  5. If a company or insured depository institution has not received an inspection or examination rating, the Reserve Bank, in consultation with Board staff and based on all available information, may determine whether the organization is well-managed.
    
    Applying the well-managed criterion in the absence of an inspection or examination rating requires the exercise of reasonable discretion in light of all available information. For example, the Reserve Bank could reasonably conclude, in the absence of any adverse information, that a shell bank holding with no debt or activities is well-managed if its subsidiary bank is deemed to be well-managed and in satisfactory financial condition. The Reserve Bank also could support a determination that a newly formed organization is well-managed if management's prior record at other insured depository institutions is satisfactory.
    In consulting with Board staff, the Reserve Bank should provide information supporting its position as to whether the organization should be considered well-managed. This should be done as early in the processing period as possible.
3. Supervisory actions criterion -- During the 12 month period ending on the date on which the bank holding company proposes to consummate the proposed transaction, no formal administrative order, including a written agreement, cease and desist order, capital directive, prompt corrective action directive, asset maintenance agreement, or other formal enforcement action is or was outstanding against the bank holding company or any insured depository institution subsidiary of the holding company, and no formal administrative enforcement proceeding involving any such enforcement action, order, or directive is or was pending.
  An administrative enforcement action is outstanding once it is issued or executed. An administrative enforcement proceeding is pending during the period if the bank holding company or insured depository institution is considering agreeing to the formal action or is seeking to contest the issuance of an order or to appeal an already issued order. Reserve Banks should consult with the AFBA of the insured depository institution as needed to confirm compliance with this criterion.
  
  This criterion focuses on formal actions, and a bank holding company is not automatically disqualified based on an informal action, such as a memorandum of understanding or letter agreement. The Reserve Bank or Board may, nevertheless, notify a bank holding company that the 30/60 day procedures should be followed if the circumstances surrounding a memorandum of understanding, letter agreement or other informal action indicate that more in-depth review of the proposal or notificant or company involved is warranted.
Additional Criteria for the 10 Day Post Notice Procedures
1. Regulatory laundry list -- To qualify for the procedure allowing after-the-fact notice, a bank holding company must engage in the relevant activity de novo, and the activity must be on the regulatory laundry list.
2. Compliance with criteria -- A bank holding company must comply with all of the qualifying criteria at the time it commences the nonbanking activity.¹⁹ In addition, the bank holding company must at all times conduct the activity in conformance with the Board's regulations, interpretations and orders governing the particular activity.
3. Notice to the System -- A bank holding company must file written notice with the appropriate Reserve Bank within 10 business days after commencing the de novo regulatory laundry list activity.
Additional Criteria for the 12 Day Prior Notice Procedures
1. Permissible activity criteria -- The Board has determined by regulation or order that each activity proposed to be conducted is so closely related to banking, or managing or controlling banks, as to be a proper incident thereto and the Board has not indicated that proposals to engage in the activity are subject to the notice procedures procedure provided in § 225.24.
  
  The 12 day prior notice procedures are available to a qualifying bank holding company that seeks to engage de novo in a nonbanking activity that is permitted by order, as well as proposals to acquire certain companies engaged in activities that have been found to be permissible either by regulation or by order. A bank holding company that proposes to commence de novo both activities that are on the regulatory laundry list and activities that have been permitted only by order may use the 12 day prior notice procedure for all of the proposed activities.
  
  In general, activities approved by Board order are eligible for the 12 day prior notice procedures if the Board has delegated the authority to approve the activities to the Reserve Banks. Some activities that raise policy and supervisory considerations, like notices to underwrite and deal in corporate debt and equity securities through section 20 subsidiaries, continue, for now, to be subject to the 60 day notice procedures in section 225.24 of Regulation Y. The Reserve Bank should consult with Board staff if questions are raised regarding the eligibility of a particular activity for the streamlined procedures.
2. Competitive criteria for the acquisition of a going concern -- Without regard to any divestitures proposed by the acquiring bank holding company, the acquisition may not cause, in any relevant market, the acquiring bank holding company to control more than 35 percent of the market share or the Herfindahl-Hirschman index to increase by more than 200 points with a post acquisition index of 1800 points or more. In addition, the Board must not have indicated that the transaction is subject to close scrutiny on competitive grounds.
  
  The competitive criteria are not intended to alter the scope of review currently conducted by the Reserve Bank under delegated authority for section 4 proposals. In general, the relevant geographic markets for many nonbanking activities have been determined by the Board to be national. Some relevant markets for nonbanking activities like mortgage lending, however, remain local or regional. Other activities may raise questions regarding the appropriate product market. The Reserve Bank should consult with Board staff on issues regarding the appropriate analysis for considering the competitive effects of a proposal.
3. Size of acquisition criteria
  1. Limited growth -- In the case of an acquisition, the sum of the aggregate risk-weighted assets to be acquired in the proposal and the aggregate risk-weighted assets acquired by the acquiring bank holding company in all transactions approved during the previous 12 months under the streamlined procedures governing acquisitions of banks (section 225.14) and the streamlined procedures governing acquisitions of nonbanking companies (section 225.23) may not exceed 35 percent of the consolidated risk-weighted assets of the acquiring bank holding company at the beginning of the 12 month period.
    
    Transactions that were approved under the 30/60 day procedures are excluded in calculating compliance with the criterion. The 12 month period is a rolling period that looks back from the date that each notice/application is filed under the streamlined procedures and is not restarted from the date that a transaction is approved under the 30/60 day procedures.
    
    Small bank holding companies -- The 35 percent limitation does not apply if, immediately following consummation of the proposed transaction, the consolidated risk-weighted assets of the acquiring bank holding company are less than $300 million.
  2. Consideration paid -- The gross consideration to be paid by the acquiring bank holding company in the proposal may not exceed 15 percent of the consolidated Tier 1 capital of the bank holding company. Gross consideration encompasses all value paid in the proposal, including cash and the value of any stock exchanged or paid.
  3. Size limitation on individual transactions -- The total risk-weighted assets that the holding company proposes to acquire may not exceed $7.5 billion.
4. The Board or Reserve Bank has not notified the bank holding company before action is required under the 12 day prior notice procedures that a notice under the 30/60 day procedures is required in order to permit closer review of any potential adverse effect or other matter related to the factors required to be considered under section 4 of the BHC Act.
  This criterion underscores a key aspect of the streamlined procedures, which is the recognition that a proposal can meet all of the qualifying criteria and nevertheless require a closer review under the 30/60 day procedures. For example, a proposal may raise permissibility issues or issues regarding the form of the proposed commitments. Also, the structure of a transaction may raise a novel interpretative or policy issue under the BHC Act. Some nonbanking activities may raise issues regarding the appropriate product market for evaluating the competitive effect of the proposal. In addition, the proposal may raise supervisory questions about the bank holding company's risk management systems or the managerial resources available to conduct the proposed activity. The level of acquisition debt may also raise supervisory concerns, and information from the primary banking supervisor or the home country supervisor of a foreign banking organization may raise issues regarding the financial or managerial resources of the organization that have not yet been reflected in the organization's most recent rating.
  
  If any issue is raised by a proposal that requires a closer review, the notice should be processed under the 30/60 day procedures. Identifying these issues early in the process will preserve the goals of the streamlined procedures without imposing undue burden on the notificant.
Procedures
1. Filing Requirements -- Notices filed under the streamlined procedures must be in writing and contain the information listed below. A notice is deemed to be "filed" with the Reserve Bank the day it is received if received during normal business hours, or the next business day if received after normal business hours. In light of the expedited nature of the streamlined procedures, the Reserve Bank should not review notices in draft.
  
  The notificant should ensure that any non-public information, including any examination information, that may be provided appear in the confidential portion of the proposal.
  1. Contents of 10 Day Post Notice
    
    (a) A certification that all criteria are met -- The form of the certification may be a single sentence in the notice in which the notificant certifies that all of the criteria in section 225.23 of Regulation Y (12 CFR 225.23) are met. The certification may be provided by anyone with knowledge and authority to bind the applying bank holding company, including legal counsel for or executive officers of the holding company. Certification by the board of directors of the holding company also is acceptable, but is not necessary.
    
    (b) Description of the proposal -- Contents:
  2. Contents of 12 Day Prior Notice
    (a) A certification that all criteria are met -- The form of the certification may be a single sentence in the notice in which the notificant certifies that all of the criteria in section 225.23 of Regulation Y (12 CFR 225.23) are met. The certification may be provided by anyone with knowledge and authority to bind the applying bank holding company, including legal counsel for or executive officers of the holding company. Certification by the board of directors of the holding company also is acceptable, but is not necessary. Notificants are not required to furnish examination ratings as part of the certification or regulatory filing since these ratings are already available to the System.
    
    (b) Description of the proposal -- Contents:
    (c) Financial information -- going concern
    (d) Competition -- Identification of the relevant geographic markets, a description of the effects of the proposal in these markets, a list of the major competitors in the proposed activity (if the relevant geographic market is local), and, if requested, market indexes for the relevant markets.
    
    In reviewing cases under the streamlined procedures, the Reserve Bank should use market definitions approved or adopted by the Board. If a notificant proposes an alternative market definition, the Reserve Bank should consult with Board staff to determine whether the proposal (and the proposed market definition) are more appropriately reviewed under the 30/60 day procedures.
    
    A notificant is not required to provide HHI calculations for nonbanking acquisition proposals. However, the Reserve Bank should request that the notificant provide HHI calculations if other information available indicates that the effect on competition may be significant in any relevant market.
    
    (e) Public Benefits -- A description of the public benefits that can reasonably be expected to result from the proposal.
2. Waiver of unnecessary information -- The Reserve Bank may reduce the financial and competitive information that must be provided in response to paragraphs(A)(2)(c) and (d) above if the information is clearly not needed to assess compliance with the qualifying criteria. For example, a waiver of some of the financial information may be granted if the size and scope of a proposed transaction is clearly insignificant relative to the size and scope of the acquiring bank holding company's existing operations. Waivers of information do not need to be made in writing, though it is advisable that the Reserve Banks document the reasons for granting the waivers. If information is waived, the Reserve Bank must assure that information is contained in the record (e.g., the same information was obtained from another source, the information has already been obtained by the Reserve Bank from notificant in a previous transaction, or sufficient alternate information was provided by notificant) to assure that the qualifying criteria can be verified.
Reserve Bank Processing
1. Determination that criteria are met
  1. 10 day post notice -- The Reserve Bank must determine immediately that the qualifying criteria are met. A notice that conforms to the 10 day post notice procedures must be acknowledged by the Reserve Bank within a reasonable period of time (typically within 7 calendar days), and a copy should be provided to supervisory staff for use in examining the bank holding company. In addition, a copy of the notice and a copy of the acknowledgement letter mailed by the Reserve Bank should be sent to the BS&R Clearing Unit.
  2. 12 day prior notice -- Immediately following the filing of a 12 day prior notice, the Reserve Bank must determine, based on information contained in the notice and other information available to the System, whether all of the qualifying criteria are met. The Reserve Bank should provide copies of the notice to Board staff on receipt in order that copies of the notice may be made publicly available by the Board. In addition, the Reserve Bank should consult with Board staff promptly, as needed, to verify that the proposed activity is consistent in all respects to the particular activity approved by the Board.
    
    (a) No public notice -- No public notice is required for proposals that qualify for the 12 day prior notice procedures.²⁰ However, as noted below, public notice is required for proposals that do not qualify for the 12 day prior notice procedures.
    
    (b) Incomplete notice -- The Reserve Bank may return a notice as incomplete within 3 business days of receipt of the notice if the notificant has not provided all information required by Regulation Y for expedited processing. In general, the bank holding company will not be expected to provide additional information to ensure that the qualifying criteria are satisfied, other than the information required above. If, however, the Reserve Bank determines that more information is necessary to determine whether the notice meets the qualifying criteria, the Reserve Bank may make a specific request for supporting information. It is expected that such requests would be rare, and that the processing would not be tolled, even with the consent of the notificant.
    
    (c) Action on notice -- A notice that meets all the qualifying criteria and does not raise any issues must be approved by the Reserve Bank before the end of the 12 business day period that begins on the day following the day the notice is filed.
2. Failure to meet qualifying criteria
  1. 10 day post notice -- If any of the qualifying criteria are not met, the Reserve Bank should notify the bank holding company of the problem as soon as practicable, and provide guidance, if possible, on what information would be required to bring the notice into compliance. If the notice cannot be conformed because, for example, the activity is not on the regulatory laundry list, the notice is substantially late, or other factors suggest supervisory action is appropriate, the Reserve Bank should take supervisory action that would be appropriate for a bank holding company engaging in unauthorized nonbanking activities. These actions may include ordering immediate termination of the activity, fines, cease and desist orders or other appropriate measures.
  2. 12 day prior notice -- If any of the qualifying criteria are not met, a notice under the 30/60 day procedure in section 225.24 of Regulation Y (12 CFR 225.24), is required.  In this case, the Reserve Bank should notify the bank holding company in writing (and by telephone if appropriate) as soon as possible, and in any event before the expiration of the 12 business day processing period, that a notice under the 30/60 day procedures will be required.
    
    (a) In-depth review -- As noted above, the Reserve Bank may require the filing of a notice under the 30/60 day process if a proposal raises a supervisory, competitive, legal or other issue that warrants in-depth review even if the bank holding company meets the qualifying criteria for streamlined processing.  In this case, the Reserve Bank should notify the notificant immediately.
    
    (b) Processing under normal procedures -- Within one two business days after determining that a proposal requires processing under the 30/60 day procedures, the Reserve Bank shall wire a Federal Register notice to the Board's Legal Division, and the Reserve Bank should confirm receipt of the wire.  The proposal shall be considered to have been accepted under the 30/60 day procedures as of the date that notice was filed under the 12 day prior notice procedures.
    
    For notices that have been transferred from the streamlined to the 30/60 day processing schedule, Reserve Bank and Board staff should determine whether information from the notificant supplementing the streamlined filing is necessary to address relevant issues.  Reserve Bank or Board staff may request the additional information at the time notificant is notified of the processing change, or at any time during the processing period.
3. Processing delegated to Secretary -- Proposals that require action by the Secretary of the Board may be eligible for processing under the streamlined procedures. The Reserve Bank should indicate if a proposal requires processing by Board staff.

Please distribute this letter to all personnel involved in the processing of applications and notices. If there are any questions regarding this letter, please contact Molly S. Wassom, Assistant Director (202/452-2305), Sidney M. Sussan, Assistant Director (202/452-2638), Nicholas A. Kalambokidis, Project Manager (202/452-3830), or David Reilly, Supervisory Financial Analyst (202-452-5214), of the Division of Banking Supervision and Regulation; or Tom Corsi, Senior Attorney (202/452-3275), or Dennis White, Attorney (202/452-2523), of the Legal Division.

Richard Spillenkothen
Director

ATTACHMENT TRANSMITTED ELECTRONICALLY BELOW

Supersedes:

SR 96-35 (APP)

Cross References:

Section 2208 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Pub. L. 104-208, 110 Stat.3009)

Federal Reserve Board Final Rule (62 Federal Register 9,290 (1997))

SR 97-12 (APP), Streamlined Section 3 Procedures for Well-Capitalized and Well-Managed Banking Organizations

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ATTACHMENT

Each bank holding company, including a foreign banking organization, is responsible for certifying compliance with the requirement that the company and insured depository institutions controlled by the company are well-capitalized and well-managed. If a foreign banking organization does not provide the actual assets of its U.S. branches and agencies on a risk-weighted basis in its application, the Reserve Bank should use the conservative estimation methodology, discussed below, to estimate the risk-weighted assets of such institutions. In performing these calculations for U.S. branches and agencies, the Reserve Bank should review existing in-house data filed by the foreign banking organization (i.e., FFIEC 031, 032, 033, 034, and/or 002 reports). If the results of the Reserve Bank's calculations using those data and methodology reveal a close determination, the Reserve Bank should contact the foreign banking organization to obtain more definitive information.

Note: All "due to/due from" items are excluded

FFIEC 002

ITEM	WEIGHT	REPORT LOCATION
ON BALANCE SHEET
Cash items in process of collection and unposted debits	20 percent	Schedule A, item 1, Column A
Currency and coin (U.S. and foreign)	0 percent	Schedule A, item 2, Column A
Balances due from depository institutions in the U.S.: a. U.S. branches and agencies of other foreign banks b. Other depository institutions in the U.S.	20 percent 20 percent	Schedule A, item 3.a., Column A Schedule A, item 3.b., Column A
Balances due from banks in foreign countries and foreign central banks: a. Foreign branches of U.S. banks b. Other banks in foreign countries and foreign central banks	20 percent 20 percent	Schedule A, item 4.a., Column A Schedule A, item 4.b., Column A
Balances due from Federal Reserve Banks	0 percent	Schedule A, item 5, Column A
U.S. Government securities (not held for trading) a. U.S. treasury securities b. U.S. government agency obligations	0 percent 0 percent	Schedule RAL, item 1.b.(1), Column A Schedule RAL, item 1.b.(2), Column A
Other bonds, notes, debentures, and corporate stock (1) Securities of foreign governments and official institutions (2) All other	50 percent 100 percent	Schedule RAL, item 1.c.(1), Column A Schedule RAL, item 1.c.(2), Column A
Federal funds sold and securities purchased under agreements to resell: (1) With U.S. branches and agencies of other foreign banks (2) With other commercial banks in the U.S. (3) With others	20 percent 20 percent 20 percent	Schedule RAL, items 1.d.(1), Column A Schedule RAL, items 1.d.(2), Column A Schedule RAL, items 1.d.(3), Column A
Loans and leases, net of unearned income	100 percent	Schedule RAL, item 1.e., Column A
Trading assets	50 percent	Schedule RAL, item 1.f., Column A
Customers' liability to this branch or agency on acceptances outstanding: (1) U.S. addressees (2) Non-U.S. addressees	100 percent 100 percent	Schedule RAL, items 1.g.(1), Column A Schedule RAL, items 1.g.(2), Column A
Other assets including other claims on nonrelated parties	100 percent	Schedule RAL, item 1.h., Column A
Net due from related depository institutions	0 percent	Schedule RAL, item 2.a., Column A

OFF-BALANCE SHEET (Transactions with non-related depository institutions) (CCF = Credit Conversion Factor)
Commitments to make or purchase loans	(CCF = 50 percent) 100 percent	Schedule L, item 1
Spot foreign exchange contracts N/A	N/A
Standby letters of credit a. Total b. Amount of total conveyed to others	(CCF = 100 percent) 100 percent	Schedule L, item 3.a. minus item 3.b.
Commercial and similar letters of credit	(CCF = 20 percent) 100 percent	Schedule L, item 4
Participations in acceptances conveyed to others by the reporting branch or agency N/A	N/A
Participations in acceptances acquired by the reporting (non-accepting) branch or agency	(CCF = 100 percent) 100 percent	Schedule L, item 6
All other off-balance sheet contingent liabilities greater than or equal to ½ percent of total claims on nonrelated parties as reported on Schedule RAL, item 1.i. N/A	N/A
All other off-balance sheet contingent claims (assets) greater than or equal to ½ percent of total claims on nonrelated parties as reported on Schedule RAL, item 1.i.	(CCF = 100 percent) 100 percent	Schedule L, item 8
Gross amounts (e.g., notional amounts): a. Futures contracts N/A b. Forward contracts c. Exchange-traded option contracts: (1) Written options N/A (2) Purchased options N/A d. Over-the-counter option contracts: (1) Written options N/A (2) Purchased options e. Swaps	(CCF = 0.5 for Column A 1.0 for Column B 6.0 for Column C 10.0 for Column D) 50 percent (for all three items)	Schedule L, item 9.b., Columns A,B,C,D Schedule L, item 9.d.(2), Columns A,B,C,D Schedule L, item 9.e., Columns A,B,C,D

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Footnotes

1. 62 Federal Register 9290 (February 28, 1997). Return to text

2. The 30/60 day section 4 procedures are set forth in section 225.24 of Regulation Y (12 CFR 225.24). Return to text

3. See section 225.28 of Regulation Y (12 CFR 225.28) for the regulatory "laundry list" of approved nonbanking activities. Return to text

4. See section 225.132 of Regulation Y (12 CFR 225.132) for guidance on when the acquisition of assets constitutes the acquisition of a going concern thereby requiring a notice under section 4 of the BHC Act. Return to text

5. In connection with proposals involving acquisitions, Reserve Bank staff should be alert to acquisitions of companies that have foreign operations since it may require a separate filing under the procedures and requirements of Regulation K. If domestic and foreign aspects of the proposal cannot be separated, and the proposal does not qualify for expedited or consent provisions of Regulation K, the proposal may have to be processed under the 30/60 day procedures. Return to text

6. Proposals involving a savings association or other nonbank insured depository institution must be filed under section 4, but may be processed following the streamlined section 3 procedures if the bank holding company and the proposal meet all applicable criteria as if the nonbank institution were a bank. See SR letter on Streamlined Section 3 Procedures for Well-Capitalized and Well-Managed Banking Organizations. A bank holding company may also continue to have these proposals processed under the 30/60 day section 4 procedures. Return to text

7. If a bank holding company is part of a chain banking organization, the criteria for the streamlined procedures will generally apply only to the bank holding company involved in the proposal. There may be circumstances, however, when it is appropriate to evaluate the proposal in light of the entire organization. For example, the overall financial condition of the chain organization may require a closer review of the financial aspects of the proposal under the 30/60 day procedures. In such cases, the Reserve Bank should consult with Board staff on a case-by-case basis. Return to text

8. The financial criteria for streamlined section 4 proposals under section 225.23 of Regulation Y are the same as those used for streamlined section 3 proposals under section 225.14 of the regulation. Return to text

9. A bank holding company must meet the well-capitalized criterion on a consolidated basis. The well-capitalized bank holding company criterion generally will not apply to intermediate-tier bank holding companies involved in the transaction, although the 30/60 day procedures may be used if there are concerns about the financial strength of an intermediate-tier bank holding company. Return to text

10. "Home country supervisor" means the governmental entity or entities in the foreign bank's home country with responsibility for the supervision and regulation of the foreign bank. Return to text

11. AFBA also may include the state supervisory authority where relevant. Return to text

12. Average risk-weighted assets may be calculated using the total risk-weighted assets reported for the previous four quarters. If average risk-weighted assets are not provided in a notice involving a foreign banking organization with a U.S. branch or agency, the calculation may be performed by the Reserve Bank by taking the average of the quarterly risk-weighted assets derived using the conservative methodology appearing in the attachment to this letter. Other methodologies may be appropriate in situations where financial data are limited or not current. Return to text

13. See paragraph (A)(2) above for guidance on calculating risk-weighted assets of U.S. branches and agencies of a foreign banking organization. Return to text

14. The managerial criteria for streamlined section 4 proposals under section 225.23 of Regulation Y are the same as those for streamlined section 3 proposals under section 225.14 of the regulation. Return to text

15. The term "subsequent review" means a rating change by the AFBA between full scope inspections/examinations, where the holding company or insured depository institution has been notified of the rating change. Return to text

16. See paragraph (A)(2) above for definition of lead insured depository institution. Return to text

17. See paragraph (A)(2) above for guidance on calculating risk-weighted assets of U.S. branches and agencies of a foreign banking organization. Return to text

18. If the foreign banking organization operates a subsidiary insured depository institution in the United States, the Reserve Bank should consider the composite rating and rating for management and compliance given at the institution's most recent examination or subsequent review, as discussed in paragraph (B)(3) above. Return to text

19. The 10 day post notice procedure requires a bank holding company to have commenced the activity at the time it provides notice to the System, and therefore may not be used for de novo activities on the regulatory laundry list proposed to be commenced in the future. A bank holding company may use the 12 day prior procedure or the 30/60 day procedures to obtain approval to commence a laundry list activity in the future. Return to text

20. The Reserve Bank should consult with the Board's Legal Division if comments are received on a 12 day prior notice proposal. Return to text

SR letters | 1997