[Code of Federal Regulations]
[Title 12, Volume 2]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR208.73]

[Page 248-249]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H)--Table of Contents
 
         Subpart G--Financial Subsidiaries of State Member Banks
 
Sec. 208.73  What additional provisions are applicable to state member banks with financial subsidiaries?

    (a) Capital deduction required. A state member bank that controls or 
holds an interest in a financial subsidiary must comply with the 
following rules in determining its compliance with applicable regulatory 
capital standards (including the well capitalized standard of 
Sec. 208.71(a)(1)):
    (1) The bank must not consolidate the assets and liabilities of any 
financial subsidiary with those of the bank.
    (2) For purposes of determining the bank's risk-based capital ratios 
under Appendix A of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from both the bank's Tier 1 capital and Tier 2 capital; and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's risk-weighted assets.
    (3) For purposes of determining the bank's leverage capital ratio 
under Appendix B of this part, the bank must--
    (i) Deduct 50 percent of the aggregate amount of its outstanding 
equity investment (including retained earnings) in all financial 
subsidiaries from the bank's Tier 1 capital; and
    (ii) Deduct the entire amount of the bank's outstanding equity 
investment (including retained earnings) in all financial subsidiaries 
from the bank's average total assets.
    (4) For purposes of determining the bank's ratio of tangible equity 
to total assets under Sec. 208.43(b)(5), the bank must deduct the entire 
amount of the bank's outstanding equity investment (including retained 
earnings) in all financial subsidiaries from the bank's tangible equity 
and total assets.
    (5) If the deduction from Tier 2 capital required by paragraph 
(a)(2)(i) of this section exceeds the bank's Tier 2 capital, any excess 
must be deducted from the bank's Tier 1 capital.
    (b) Financial statement disclosure of capital deduction. Any 
published financial statement of a state member bank that controls or 
holds an interest in a financial subsidiary must, in addition to 
providing information prepared in accordance with generally accepted 
accounting principles, separately present financial information for the 
bank reflecting the capital deduction and adjustments required by 
paragraph (a) of this section.
    (c) Safeguards for the bank. A state member bank that establishes, 
controls or holds an interest in a financial subsidiary must:
    (1) Establish and maintain procedures for identifying and managing 
financial and operational risks within the state member bank and the 
financial subsidiary that adequately protect the state member bank from 
such risks; and
    (2) Establish and maintain reasonable policies and procedures to 
preserve the separate corporate identity and limited liability of the 
state member bank and the financial subsidiary.
    (d) Application of Sections 23A and 23B of the Federal Reserve Act. 
For purposes

[[Page 249]]

of sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c, 
371c-1):
    (1) A financial subsidiary of a state member bank shall be deemed an 
affiliate, and not a subsidiary, of the bank;
    (2) The restrictions contained in section 23A(a)(1)(A) of the 
Federal Reserve Act (12 U.S.C. 371c(a)(1)(A)) shall not apply with 
respect to covered transactions between the bank and any individual 
financial subsidiary of the bank;
    (3) The bank's investment in a financial subsidiary shall not 
include retained earnings of the financial subsidiary;
    (4) Any purchase of, or investment in, the securities of a financial 
subsidiary by an affiliate of the bank will be considered to be a 
purchase of, or investment in, such securities by the bank; and
    (5) Any extension of credit by an affiliate of the bank to a 
financial subsidiary of the bank will be considered to be an extension 
of credit by the bank to the financial subsidiary if the Board 
determines that such treatment is necessary or appropriate to prevent 
evasions of the Federal Reserve Act and the Gramm-Leach-Bliley Act.
    (e) Application of anti-tying prohibitions. A financial subsidiary 
of a state member bank shall be deemed a subsidiary of a bank holding 
company and not a subsidiary of the bank for purposes of the anti-tying 
prohibitions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971 et seq.).