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Background and Summary of Regulation K

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On June 14, 1979, the Board of Governors of the Federal Reserve System revised its regulations governing the international operations of member banks, Edge and agreement corporations, and bank holding companies. The Board was required to revise its regulations governing Edge Corporations in light of several amendments made to section 25(a) of the Federal Reserve Act (12 U.S.C. 611-631) (the Edge Act) by the International Banking Act of 1978 (92 Stat. 607) (IBA). The provisions of old Regulation M*, dealing with the foreign operations of member banks, and of Regulation Y, dealing with foreign investment by bank holding companies, have been combined in a comprehensive regulation entitled “International Banking Operations,” designated Regulation K. On October 2 and December 5, 1980, the Board issued regulations dealing with interstate banking by foreign banks and with nonbanking activities in which foreign banks may engage in the United States. These provisions are found in subpart B of Regulation K.
Section 3 of the IBA contains the first significant amendment of the Edge Act since its enactment in 1919. The purpose of the amendments is to grant Edge corporations powers sufficiently broad to enable them to compete with foreign banks in the United States as well as abroad and to provide all segments of the United States economy with a means of financing international trade, and, in particular, exports. Additionally, Edge corporations are to serve as a means of fostering the participation of regional and smaller banks in international banking and financing and to stimulate competition in making those services available throughout the United States.
*
The Board has since issued a new Regulation M, “Consumer Leasing,” which is in no way connected with the Regulation M referred to here.
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OPERATION OF EDGE CORPORATIONS IN THE UNITED STATES

Edge corporations are not subject to provisions of federal law that limit the branching powers of member banks (12 U.S.C. 36 and 321). The revised regulation permits Edge corporations to establish branches in the United States with the prior approval of the Board. Permitting Edge corporations to establish branches allows a more convenient organizational form by which to conduct business. Reducing the expenses associated with establishing an Edge corporation in a new market may make international banking services available at more locations throughout the United States and encourage banks that do not currently have extensive Edge corporation operations to consider this form of international banking and financing. The Board will publish notice in the Federal Register of any proposal to establish a branch or Edge corporation in the United States, giving interested people an opportunity to express their views on the proposal.
Regulation K permits Edge corporations to finance the production of goods and services that are readily identifiable as being directly for export, or for which export orders have been received. The latter test allows Edge corporations to finance nonsegregable goods for export, that is, those goods which cannot be isolated during the production process as being for export, if export orders have been received. The regulation also permits an Edge corporation to issue negotiable certificates of deposit to foreign governments and foreign persons or in connection with international transactions.
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LENDING LIMITS

The regulation imposes a limit on the direct and indirect loans that an Edge corporation engaged in banking can make to one person. Except as otherwise permitted by the Board, such loans may not exceed 15 percent of the Edge corporation’s capital and surplus. In addition, loans to one person made by a member bank and its direct and indirect subsidiaries formed under this regulation are to be aggregated, and the total may not exceed the amount that the member bank alone may make to that person.
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CAPITAL REQUIREMENTS

The regulation requires that an Edge corporation engaged in banking maintain capital and surplus equal to at least 10 percent of its risk assets. This standard takes into account the composition and quality of an Edge corporation’s assets.
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RESERVE REQUIREMENTS

To allow Edge corporations to compete effectively with foreign-owned banking institutions in the United States, Regulation K treats Edge corporations and branches in generally the same manner as the agencies and branches of foreign banks, for reserve purposes.
Any two or more offices of an Edge corporation operating in the same state must submit aggregated reports of deposits to, and maintain reserves with, the Federal Reserve Bank in whose District they operate. However, Edge corporation offices located in the same state but in different Federal Reserve Districts will separately report deposits and maintain reserves with their Reserve Banks. In reporting deposits for purposes of calculating reserve requirements, Edge corporation offices will exclude transactions with other offices of the same Edge corporation. Federal Reserve services will be made available to Edge corporation offices through the Reserve Banks with which they maintain their accounts. The Federal Reserve discount window, however, is unavailable to Edge corporations.
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INVESTMENT PROCEDURES AND LIMITATIONS

Section 211.5 contains application procedures designed to reduce the number of routine investment applications that must be acted on by the Board. Employing general-consent and prior-notice procedures, the regulation requires specific Board consent for investments that, because of their size or some other aspect, deserve Board consideration. The general consent allows investments of up to $2 million in subsidiaries and joint ventures as long as they are engaged in certain listed activities. The general consent allows portfolio investments in other companies up to the same dollar amount. Beyond that amount, an Edge corporation may invest up to 10 percent of its capital in subsidiaries and joint ventures engaged in listed activities, if it has given 60 days notice to the Board. All other investments, either involving larger amounts or unlisted activities, require specific Board approval.
Before Regulation K became effective, the activities that U.S. banking organizations could engage in abroad could be determined only by referring to individual Board consents to particular investments. The listing of financial activities in the regulation, however, should promote understanding of the investment powers and foreign activities of Edge corporations, member banks, and bank holding companies and should simplify the approval procedure.
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