|December 22, 2004|
Winthrop N. Brown, Esq.
Milbank, Tweed, Hadley & McCloy LLP
International Square Building
1825 Eye Street, N.W.
Washington, D.C. 20006-5417
Dear Mr. Brown:
This is in response to the request by HSBC Bank USA, National Association, New Castle, Delaware (“HSBC Bank”), for an exemption from section 23A of the Federal Reserve Act and Regulation W (12 U.S.C. § 371c and 12 C.F.R. § 223.43) to acquire certain credit card assets from its affiliate, Household International, Inc., Prospect Heights, Illinois (“Household”).1 HSBC Bank’s request is part of a corporate restructuring of its credit card activities by HSBC Holdings, plc, London, United Kingdom, which owns HSBC Bank and Household.
Section 23A limits the amount of “covered transactions” between a bank and any single affiliate to 10 percent of the bank’s capital stock and surplus, and limits the aggregate amount of covered transactions between a bank and all its affiliates to 20 percent of the bank’s capital stock and surplus. Covered transactions include a bank’s loans to an affiliate, investments in the securities of an affiliate, purchases of assets from an affiliate, and certain other transactions.
Section 23A specifically authorizes the Board to exempt “at its discretion . . . transactions or relationships from the requirements of this section if it finds such exemptions to be in the public interest and consistent with the purposes of this section.”2 The Board has approved exemptions in similar cases for one-time transfers that are part of a corporate reorganization and that are structured to ensure the quality of the transferred assets. The proposed transaction would exceed the quantitative limits of section 23A inasmuch as HSBC Bank’s capital stock and surplus totaled approximately $9.7 billion, as of September 30, 2004.
As in previous cases reviewed by the Board, the proposed transaction is a by-product of a one-time corporate reorganization. HSBC Holdings is continuing to restructure its U.S. operations after acquiring Household in March 2003. HSBC Bank states that this transaction will help to expand its own consumer lending business and to diversify its balance sheet to improve the bank’s core earnings.
HSBC Bank and HSBC USA, Inc., New York, New York, have made the following commitments, accepted by the Board in previous exemption requests:
As part of this transaction, Household proposes to transfer [amount deleted] in low-quality assets to HSBC Bank. Section 23A prohibits the purchase of low quality assets from an affiliate. In previous cases, any low-quality assets being transferred to the bank that were held by the affiliate were removed prior to the transfer of the affiliate’s assets. The low-quality assets then were either separately transferred to the bank for no consideration after consummation or retained at the holding company level. In this case, HSBC Bank would not purchase any low-quality assets because HSBC Holdings, plc will transfer [amount deleted] in capital to offset the low-quality assets. This transfer of capital has the same effect as removing the low-quality assets and contributing them separately to the bank (as has been permitted in a previous case) and should not be deemed to be a purchase by the bank of low-quality assets from an affiliate.3
Based on all the facts of record, the proposed transaction appears to be consistent with safe and sound banking practices and on terms that would ensure the quality of the assets transferred. In addition, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have informed the Board that they have no objection to the proposal. Accordingly, the transaction appears to be consistent with the purposes of section 23A, and the Director of the Division of Banking Supervision and Regulation, pursuant to authority delegated by the Board, and with the concurrence of the General Counsel, hereby grants the requested exemption.
This determination is specifically conditioned on compliance by HSBC USA, Inc. and HSBC Bank with all the commitments and representations made by them in connection with the request. These commitments and representations are deemed to be conditions imposed in writing in connection with this request and, as such, may be enforced in proceedings under applicable law. This determination also is based on the specific circumstances surrounding the proposed transaction and may be revoked in the event of any material change in those circumstances or any failure by HSBC Holdings, HSBC USA, Inc., or HSBC Bank to observe any of its commitments or representations.
Granting this exemption does not represent a determination concerning the permissibility of any other transaction that is subject to section 23A or concerning any other affiliate of HSBC Bank.
Very truly yours,
(Signed) Robert deV. Frierson
Deputy Secretary of the Board
|cc:||Federal Reserve Bank of New York|
|Federal Deposit Insurance Corporation|
|Office of the Comptroller of the Currency|
3. See letter dated August 28, 2001, from Robert deV. Frierson to Carl V. Howard (the Board granted an exemption to Citibank, N.A., New York, New York, to permit the transfer of low-quality assets in a similar transaction). Return to text
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