SUPPLEMENTARY INFORMATION:

The contents of this preamble are listed in the following outline:

I. Background

II. Overview of the Comments Received

III. Analysis of the Joint Final Rule

A. Bank Locations Subject to Section 109 as Amended

1. Coverage of Banks' Main Offices

2. Coverage of Interstate and Intrastate Branches

B. Multi-Tier Bank Holding Companies

C. Definition of “Home State” for a Bank Holding Company

D. Foreign Banks and Branches

E. Impact of the Rule

IV. Regulatory Analysis

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

C. OCC Executive Order 12866

D. OCC Unfunded Mandates Reform Act of 1995

E. The Treasury and General Government Appropriations Act, 1999—Assessment of Impact of Federal Regulation on Families ( printed page 38845)

F. Plain Language

I. Background

The Interstate Act ^[1] provides expanded authority for a domestic or foreign bank to establish or acquire a branch in a State other than the bank's home State. Section 109 of the Interstate Act requires the Agencies to prescribe uniform rules that prohibit the use of the Act's interstate branching authority primarily for the purpose of deposit production.^[2] Congress enacted section 109 to ensure that the new interstate branching authority provided by the Interstate Act would not result in the taking of deposits from a community without banks reasonably helping to meet the credit needs of that community. See H.R. Conf. Rep. No. 103-651, at 62 (1994).

As required by section 109, the Agencies issued a joint final rule implementing section 109, 62 FR 47728 (September 10, 1997). This rule provides that, beginning no earlier than one year after a bank establishes or acquires a covered interstate branch, the appropriate agency will determine whether the bank satisfies a loan-to-deposit ratio screen ^[3] that has been established by section 109.

If the bank's statewide loan-to-deposit ratio is at least 50 percent of the host State loan-to-deposit ratio, no further analysis is required. If, however, the appropriate agency determines that the bank's statewide loan-to-deposit ratio is less than 50 percent of the host State loan-to-deposit ratio, then the agency must perform a credit needs determination.^[4] Under the credit needs determination, the appropriate agency reviews the activities of the bank, such as its lending activity and its performance under the Community Reinvestment Act (CRA), and determines whether the bank is reasonably helping to meet the credit needs of the communities served by the bank in the host State.

A bank that fails the loan-to-deposit ratio screen and that receives a determination that it is not reasonably helping to meet the credit needs of the communities served by the bank's interstate branches could be subject to sanctions under section 109.

Section 106 of the Gramm-Leach-Bliley Act of 1999 (GLBA), Public Law 106-102, 113 Stat. 1338 (November 12, 1999), amends section 109 by changing the definition of an “interstate branch” to include any branch of a bank controlled by an out-of-State bank holding company (as defined in section 2(o)(7) of the Bank Holding Company Act of 1956 (BHC Act)). This joint final rule conforms the Agencies' uniform regulations to the GLBA amendment.

II. Overview of the Comments Received

On April 9, 2001, the Agencies published a notice of proposed rulemaking in the Federal Register (66 FR 18411). The Agencies received four comments on the proposal. Two of the comments were from trade associations and two were from banks.

There were no objections to the proposed rule and three of the comments generally supported it. One commenter noted that the rule simply effectuates the amendments required by the GLBA. Another commenter stated that the amendment supports the efforts of community banks and the needs of businesses and consumers they serve.

One commenter believed that the proposal should cover institutions that use brokers to market their certificates of deposit in communities where the institution has no intention of lending. The Agencies believe that such coverage goes beyond the scope of section 109 of the Interstate Act as amended. Thus, the Agencies have not made any changes from the proposal in response to this comment.

While not objecting to the rule, one commenter raised a question about the definition of a bank holding company's “home State.” Section 106 of the GLBA incorporated by reference the BHC Act definition of “out-of-State bank holding company.” The proposed rule therefore tracked the BHC Act definition. It provided that the home State of a bank holding company is the State where the total deposits of all the banking subsidiaries were the largest as of the later of July 1, 1966 or the date on which the company becomes a bank holding company. The commenter noted that because deposit levels change over time, using this definition to determine the home State of a bank holding company would lead to distortions that would become more and more pronounced. However, as the commenter recognized, the Agencies are obligated to use the Bank Holding Company Act's definition due to its incorporation into section 106 of the GLBA.^[5]

III. Analysis of the Joint Final Rule

As discussed in the Background section, section 109 prohibits the use of the interstate banking and branching authority granted by the Interstate Act to engage in interstate branching primarily for the purpose of deposit production. Prior to the GLBA, this prohibition applied to any bank that established or acquired, directly or indirectly, a branch under the authority of the Interstate Act or amendments to any other provision of law made by the Interstate Act. In accordance with the amendment to section 109 adopted by the GLBA, the final rule broadens this prohibition to apply not only to branches established pursuant to the Interstate Act, but also to any bank or branch of a bank controlled by an out-of-State bank holding company. Thus, the final rule amends the definition of the term “covered interstate branch” to include any bank or branch of a bank controlled by an out-of-State bank holding company. We also have made conforming changes to our respective regulations ^[6] to revise the definition of “host State” and to clarify that the loan-to-deposit ratio screen will be applied to a bank, or branch of a bank, controlled by an out-of-State bank holding company in the same manner as the screen is applied to a covered interstate branch. The final rule is substantively identical to the proposed rule. We have made only technical changes to each agency's proposed regulations.

A. Bank Locations Subject to Section 109 as Amended

Prior to the GLBA, section 109's deposit production office prohibition applied only to an interstate branch in a host State that is acquired or ( printed page 38846) established by an out-of-State bank pursuant to the Interstate Act or any amendment made by the Interstate Act. As amended, the prohibition also applies to any branch of a bank controlled by an out-of-State bank holding company. The legislative history of this amendment indicates that Congress intended that this amendment would expand the scope of section 109 to cover any bank or branch of a bank controlled by an out-of-State bank holding company, as discussed below.

1. Coverage of Banks' Main Offices

Coverage of the final rule extends to banks controlled by out-of-State bank holding companies, including banks consisting only of a main office. The Agencies determined that extension of the regulation to cover a bank's main office, whether or not the bank also has branches, is appropriate because the purpose of the legislation is to prevent out-of-State bank holding companies from taking deposits out of a community without helping to meet the credit needs of that community. See 145 Cong. Rec. H11529 (daily ed. Nov. 4, 1999); 145 Cong. Rec. H5217 (daily ed. July 1, 1999); 144 Cong. Rec. H3133 (daily ed. May 13, 1998). This purpose would be negated if banks consisting only of a main office were excluded. For example, out-of-State bank holding companies could take deposits from a host State simply by establishing separately chartered, single-office banks in a host State. Therefore, banks consisting only of a main office and controlled by an out-of-State bank holding company are subject to the joint final rule.

2. Coverage of Interstate and Intrastate Branches

The amendment to section 109 expands the scope of the rule to include all branches of a bank that is controlled by an out-of-State bank holding company. Indeed, Congress intended to apply the section 109 rule to “all branches of a bank owned by an out-of-State holding company,” not just to previously exempt branches owned by such banks. See H.R. Rep. No. 106-74, pt. 1 at 128 (1999) (emphasis added). Thus, the final rule applies to all branches of a bank when the bank and its controlling bank holding company have different home States.

B. Multi-Tier Bank Holding Companies

Section 106 of the GLBA expands the definition of “interstate branch” to any branch of a bank controlled by an out-of-State bank holding company and incorporates by reference the BHC Act definition of an “out-of-State bank holding company.” 12 U.S.C. 1841(o)(7). We have used the BHC Act definition of “control” to determine the controlling bank holding company. This is the top tier bank holding company in a multi-tier bank holding company structure.

C. Definition of “Home State” for a Bank Holding Company

The BHC Act defines “home State” with respect to a bank holding company as the State where total deposits of all banking subsidiaries of each bank holding company are the largest on the later of July 1, 1966 or the date on which a company becomes a bank holding company. 12 U.S.C. 1841(o)(4). To determine the home State of a bank holding company, the Agencies will determine, from sources available at the Agencies, the State where the total deposits of all the banking subsidiaries were the largest as of the later of July 1, 1966, or the date the bank holding company was formed. We recognize that, in certain cases, the State where the total deposits of all of a bank holding company's subsidiary banks were largest on July 1, 1966, or at the date of formation of the bank holding company, may not be the same State in which the bank holding company's subsidiary banks hold the largest amount of deposits now or at a future date. However, the amendment to section 109 made by the GLBA adopts the BHC Act definition of “out-of-State bank holding company,” and the BHC Act definition of “home State” is incorporated into that definition.

D. Foreign Banks and Branches

Section 106 of the GLBA also necessitates an amendment to the definition of “home State” for foreign banks with banking operations in the United States. Under U.S. banking law and regulation, foreign banks may be treated as banking institutions, bank holding companies, or both, depending on the nature of their operations in the United States. For purposes of determining whether a U.S. branch of a foreign bank is a covered interstate branch, a foreign bank's home State is determined under section 5 of the International Banking Act of 1978 (12 U.S.C. 3103), § 211.22 of the Federal Reserve's Regulation K (12 CFR 211.22), § 28.11(o) of the OCC regulations, and § 347.202(j) of the FDIC regulations. For purposes of determining whether a branch of a U.S. bank controlled by a foreign bank is a covered interstate branch, a foreign bank's home State is determined in accordance with 12 U.S.C. 1841(o)(4) as discussed above in section III. C. of this preamble regarding U.S. bank holding companies. A foreign bank may have different home States with respect to direct offices and subsidiary banks.

E. Impact of the Rule

The final rule is unlikely to have any impact on the vast majority of banks. Consistent with section 109 when it was first enacted, the final rule does not impose any new recordkeeping requirements on affected institutions. We use existing data to determine the loan-to-deposit ratio screen.

Moreover, there is no additional burden imposed as a result of the credit needs determination. In order to make that determination, the appropriate agency will review the activities of the bank, such as its lending activity and its performance under the CRA,^[7] and evaluate whether the bank is reasonably helping to meet the credit needs of the communities served by the bank in the host State.

The only circumstance in which the final rule would impose a burden on a bank is if the bank fails both the loan-to-deposit ratio screen and the credit needs determination. Accordingly, while the statutory amendment and this final rule extend the scope of the DPO rule, this extended scope is unlikely to affect most institutions.

IV. Regulatory Analysis

A. Paperwork Reduction Act

The Agencies have determined that this final rule does not involve a collection of information pursuant to the provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq.

B. Regulatory Flexibility Act

OCC: Pursuant to section 605(b) of the Regulatory Flexibility Act, the OCC ( printed page 38847) certifies that this final rule will not have a significant economic impact on a substantial number of small entities. The rule would extend coverage of section 109 to some additional institutions, including small entities. However, based on previous examination experience, we expect very few institutions will experience any cost in connection with complying with the rule. Review for compliance with section 109 is conducted at the same time that the Community Reinvestment Act review is performed. Section 109 requires that the Agencies use only available information to conduct their analyses. Consistent with this requirement, this final rule does not impose any additional paperwork or regulatory reporting requirements. Accordingly, we have concluded that the final rule would not have a significant economic impact on a substantial number of small entities.

BOARD: Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), the Board certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The rule would extend coverage of section 109 to some additional institutions, including small entities. Review for compliance with section 109 is conducted at the same time that the Community Reinvestment Act review is performed. Consistent with the requirement that the Agencies use only available information to conduct a section 109 review, the final rule does not impose any additional regulatory burden on banks beyond what is required by statute. The burden to conduct the review and use only available data is on the banking regulatory Agencies. Thus, the final rule will not have a significant economic impact on a substantial number of small entities.

FDIC: Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), the FDIC certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The rule would extend coverage of section 109 to some additional institutions, including small entities. However, based on previous examination experience, we estimate that one or fewer institutions per year will experience any cost in connection with complying with the rule. Thus, the final rule will not have a significant economic impact on a substantial number of small entities.

C. OCC Executive Order 12866

The OCC has determined that its portion of the final rule is not a significant regulatory action under Executive Order 12866.

D. OCC Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 104-4 (Unfunded Mandates Act) requires that an agency prepare a budgetary impact statement before promulgating a rule that includes a Federal mandate that may result in expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. The OCC has determined that this final rule will not result in expenditures by State, local, and tribal governments, or by the private sector, of $100 million or more. Accordingly, the OCC has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered.

E. The Treasury and General Government Appropriations Act, 1999—Assessment of Impact of Federal Regulation on Families

The FDIC has determined that this final rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681.

F. Plain Language

Section 722 of the GLBA (12 U.S.C. 4809) requires each federal banking agency to use plain language in all proposed and final rules published after January 1, 2000. Toward this end we have used a variety of “plain language” techniques such as topical headings, a table of contents, and the use of pronouns as appropriate. We specifically invited comments on how to make the changes proposed by this rulemaking easier to understand. No commenters addressed this issue. Accordingly, we made no changes to the proposed style or format.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons set forth in the joint preamble, the Office of the Comptroller of the Currency amends part 25 of chapter I of title 12 of the Code of Federal Regulations as follows:

1. The authority citation for part 25 continues to read as follows:

Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215, 215a, 481, 1814, 1816, 1828(c), 1835a, 2901 through 2907, and 3101 through 3111.

2. In § 25.62:

A. Paragraphs (b), (d), and (e) are revised;

B. Paragraphs (g) and (h) are redesignated as paragraphs (h) and (i), respectively; and

C. A new paragraph (g) is added to read as follows:

3. In § 25.63, paragraph (a) is revised to read as follows:

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of Governors of the Federal Reserve System amends part 208 of chapter II of title 12 of the Code of Federal Regulations as follows:

1. The authority citation for part 208 continues to read as follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318, 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128.

2. In § 208.7, redesignate existing paragraphs (b)(6) and (b)(7) as (b)(7) and (b)(8), respectively, revise paragraphs (b)(2), (b)(3), (b)(4) and (c)(1), and add new paragraph (b)(6) to read as follows:

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of Directors of the Federal Deposit Insurance Corporation amends part 369 of chapter III of title 12 of the Code of Federal Regulations to read as follows:

1. The authority citation for part 369 continues to read as follows:

Authority: 12 U.S.C. 1819 (Tenth) and 1835a.

2. In § 369.2, redesignate paragraphs (f) and (g) as (g) and (h), respectively; revise paragraphs (b), (c) and (d); and add new paragraph (f) to read as follows.

3. In § 369.3, revise paragraph (a) to read as follows: