The Federal Reserve Board proposed Thursday to significantly expand the powers of U.S. banks overseas.
The 131 pages of changes proposed in Regulation K would drop some limits on underwriting and dealing in equities and debt securities, permit more venture capital investments, and expedite branching applications.
"This is wonderful," said James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association. "The whole purpose is to increase the competitiveness of U.S. banks overseas."
"This will be a welcome proposal" in the banking industry, said Rachel F. Robbins, general counsel at J.P. Morgan & Co. "This recognizes that equity underwriting and investing is an important part of banking abroad and that banking organizations can conduct these activities prudently."
The proposal, in the works for more than two years, was approved at a closed-door meeting last week. Comments are due March 14.
The equities underwriting powers of U.S. banks' foreign units would be significantly expanded under the proposal. The Fed would eliminate a $60 million cap on underwriting deals. Instead, a well-managed holding company unit would be allowed to underwrite deals not exceeding 15% of its Tier 1 capital. Edge corporation subsidiaries of banks would be permitted to underwrite deals equal to the lesser 15% of its capital or 3% of the bank's capital.
"This allows, within safety-and-soundness standards, for the more well- capitalized institutions to compete with local entities," Mr. McLaughlin said. "The dollar limit has meant they have had to compete with one hand tied behind their backs."
The central bank also would drop the $30 million limit on dealing in any one company's stock. Instead, holding company subsidiaries could deal in securities worth up to 10% of their capital while edge corporations could hold an amount equal the lesser of 10% of their capital or 2% of the bank's capital.
The limit on venture capital financing also would be eased. The Fed would permit a holding company subsidiary operating overseas to invest up to 2% of its parent's capital in any one investment. The portfolio of venture capital investments could not exceed 25% of the holding company's capital. Venture capital investments by an edge corporation would be limited to $25 million, although the firm could seek permission for larger projects. The Fed also would permit banking companies to control up to 24.9% of a foreign company's voting shares, up from 19.9%.
The Fed proposed dropping a restriction on bond underwriting by foreign branches of U.S. banks. Currently, a branch may only underwrite bonds issued by the country where it is located. The Fed recommended allowing a bank to consolidate underwriting in a single branch, provided all the securities are at least investment-grade.
The central bank also wants to eliminate a requirement that banks apply for permission before opening branches in foreign countries. Instead, the Fed proposed requiring banks to give 30-days notice before opening their first foreign branches and 12 days for subsequent branches.
In addition to covering foreign branches of U.S. banks, Reg K also dictates the U.S. activities of foreign banks. The Fed proposed streamlining the process to open representative offices, liberalizing the test used to determine whether an overseas financial conglomerate legally qualifies as a foreign banking organization, and dropping restrictions that became moot when Congress passed the interstate branching law in 1996.
The proposal received a thumbs-up from Lawrence R. Uhlick, executive director of the Institute of International Bankers, who said the streamlined application procedures would prove particularly beneficial.