[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR223.32]

[Page 71-72]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W)--Table of Contents
 
             Subpart D--Other Requirements Under Section 23A
 
Sec. 223.32  What rules apply to financial subsidiaries of a member bank?

    (a) Exemption from the 10 percent limit for covered transactions 
between a member bank and a single financial subsidiary. The 10 percent 
quantitative limit contained in Sec. 223.11 does not apply with respect 
to covered transactions between a member bank and a financial subsidiary 
of the member bank. The 20 percent quantitative limit contained in 
Sec. 223.12 does apply to such transactions.
    (b) Valuation of purchases of or investments in the securities of a 
financial subsidiary. (1) General rule. A member bank's purchase of or 
investment in a security issued by a financial subsidiary of the member 
bank must be valued at the greater of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the security, reduced to 
reflect amortization of the security to the extent consistent with GAAP; 
and
    (ii) The carrying value of the security (adjusted so as not to 
reflect the member bank's pro rata portion of any earnings retained or 
losses incurred by the financial subsidiary after the member bank's 
acquisition of the security).
    (2) Carrying value of an investment in a consolidated financial 
subsidiary. If a financial subsidiary is consolidated with its parent 
member bank under GAAP, the carrying value of the member bank's 
investment in securities issued by the financial subsidiary shall be 
equal to the carrying value of the securities on parent-only financial 
statements of the member bank, determined in accordance with GAAP 
(adjusted so as not to reflect the member bank's pro rata portion of any 
earnings retained or losses incurred by the financial subsidiary after 
the member bank's acquisition of the securities).
    (3) Examples of the valuation of purchases of and investments in the 
securities of a financial subsidiary. The following are examples of how 
a member bank must value its purchase of or investment in securities 
issued by a financial subsidiary of the member bank. Each example 
involves a securities underwriter that becomes a financial subsidiary of 
the member bank after the transactions described below.
    (i) Initial valuation. (A) Direct acquisition by a member bank. A 
member bank pays $500 to acquire 100 percent of the shares of a 
securities underwriter. The initial carrying value of the shares on the 
member bank's parent-only GAAP financial statements is $500. The member 
bank initially must value the investment at $500.
    (B) Contribution of a financial subsidiary to a member bank. The 
parent holding company of a member bank acquires 100 percent of the 
shares of a securities underwriter in a transaction valued at $500, and 
immediately contributes the shares to the member bank. The member bank 
gives no consideration in exchange for the shares. The member bank 
initially must value the investment at the carrying value of the shares 
on the member bank's parent-only GAAP financial statements. Under GAAP, 
the member bank's initial carrying value of the shares would be $500.
    (ii) Carrying value not adjusted for earnings and losses of the 
financial subsidiary. A member bank and its parent holding company 
engage in the transaction described in paragraph (b)(3)(i)(B) of this 
section, and the member bank initially values the investment at $500. In 
the following year, the securities underwriter earns $25 in profit, 
which is added to its retained earnings. The member bank's carrying 
value of the shares of the underwriter is not adjusted for purposes of 
this

[[Page 72]]

part, and the member bank must continue to value the investment at $500. 
If, however, the member bank contributes $100 of additional capital to 
the securities underwriter, the member bank must value the aggregate 
investment at $600.
    (c) Treatment of an affiliate's investments in, and extensions of 
credit to, a financial subsidiary of a member bank. (1) Investments. Any 
purchase of, or investment in, the securities of a financial subsidiary 
of a member bank by an affiliate of the member bank is treated as a 
purchase of or investment in such securities by the member bank.
    (2) Extensions of credit that are treated as regulatory capital of 
the financial subsidiary. Any extension of credit to a financial 
subsidiary of a member bank by an affiliate of the member bank is 
treated as an extension of credit by the member bank to the financial 
subsidiary if the extension of credit is treated as capital of the 
financial subsidiary under any Federal or State law, regulation, or 
interpretation applicable to the subsidiary.
    (3) Other extensions of credit. Any other extension of credit to a 
financial subsidiary of a member bank by an affiliate of the member bank 
will be treated as an extension of credit by the member bank to the 
financial subsidiary, if the Board determines, by regulation or order, 
that such treatment is necessary or appropriate to prevent evasions of 
the Federal Reserve Act or the Gramm-Leach-Bliley Act.