(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 section 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 section 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).
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(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 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.
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(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.
