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Release Date: April 1, 1999


For immediate release

The Federal Reserve Board today announced its approval of the application of Banco Santander, S.A., Madrid, Spain, to acquire BCH-USA, New York, New York.

Attached is the Board's Order relating to this action.


Banco Santander, S.A.
Madrid, Spain

Order Approving Acquisition of a Bank Holding Company

Banco Santander, S.A. ("Santander"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 3 of the BHC Act (12 U.S.C. 1842) to acquire BCH-USA, New York, New York ("Bank"), a wholly owned subsidiary bank of Banco Central Hispanoamericano, S.A., Madrid, Spain ("BCH").1

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 9995 (1999)). The time for filing comments has expired, and the Board has considered the application and all comments received in light of the factors set forth in section 3 of the BHC Act.

Santander, with total consolidated assets of approximately $181 billion, is the largest banking organization in Spain.2 In the United States, Santander operates a branch in New York, New York; and an agency and an Edge corporation in Miami, Florida. Santander also controls Banco Santander Puerto Rico, San Juan, Puerto Rico ("Santander-PR"), a subsidiary bank that also maintains a branch in New York, New York. Santander also has an indirect interest in Citizens Financial Group, Inc., Providence, Rhode Island, a registered bank holding company.3 In addition, Santander engages directly and through subsidiaries in a number of permissible nonbanking activities in the United States.

BCH, with total consolidated assets of approximately $95 billion, is the third largest banking organization in Spain. In addition to Bank, BCH's U.S. banking operations consist of branches in New York, New York, and Miami, Florida.

Interstate Analysis
Section 3(d) of the BHC Act allows the Board to approve an application by a bank holding company to acquire control of a bank located in a state other than the home state of such bank holding company if certain conditions are met.4 For purposes of the BHC Act, the home state of Santander is Rhode Island and Santander proposes to acquire control of a bank in New York.5 All the conditions for an interstate acquisition under section 3(d) are met in this case.6 In light of all the facts of record, the Board is permitted to approve the proposal under section 3(d) of the BHC Act.

Competitive Considerations
As noted above, Santander and BCH operate various banking entities that compete in the Metropolitan New York-New Jersey banking market.7 Each of these banking entities is relatively small and consummation of the proposal would result in an increase of less than one point in the Herfindahl-Hirschman Index ("HHI") for the Metropolitan New York-New Jersey banking market. The banking market would remain unconcentrated with numerous competitors operating in the market.8 Based on all the facts of record, the Board concludes that consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of banking resources in the Metropolitan New York-New Jersey banking market or any other relevant banking market.

Financial and Managerial Considerations
The BHC Act also requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in the proposal. Santander's capital ratios exceed the minimum levels that would be required under the Basle Capital Accord, and are considered equivalent to the capital that would be required of a U.S. banking organization. Bank's capital ratios exceed the "well capitalized" thresholds and would be unchanged by this transaction. Based on these and all the other facts of record, including confidential examination and other supervisory information concerning the foreign banks involved in the proposal and their existing U.S. operations and the commitments provided in this case, the Board concludes that financial and managerial factors are consistent with approval.9

Convenience and Needs Considerations
The Board also has carefully considered the effect of the proposal on the convenience and needs of the communities to be served in light of all the facts of record. The Board has long held that consideration of the convenience and needs factor includes a review of the records of the relevant depository institutions under the Community Reinvestment Act (12 U.S.C. 2901 et seq.) ("CRA"). An institution's most recent CRA performance evaluation is a particularly important consideration in the applications process because it represents a detailed on-site evaluation of the institution's overall record of performance under the CRA by the appropriate federal financial supervisory agency.

CRA Performance Examinations
Santander-PR, the only Santander banking operation that is subject to the CRA, received an "outstanding" rating at its most recent CRA performance evaluation from its primary federal financial supervisory agency, the Federal Deposit Insurance Corporation ("FDIC"), as of October 14, 1997.10 Bank received a "satisfactory" rating from the FDIC at its most recent CRA performance evaluation, as of December 31, 1998.11

Santander's CRA Performance Record
According to examiners, Santander-PR's lending activities reflected responsiveness to credit needs in the bank's assessment area.12 From January 1 through September 30, 1997, Santander-PR originated more than 3,200 small business loans, totaling more than $247 million, and more than 100 small farm loans, totaling more than $9 million. Of these loans, Santander originated more than 400 of the small business loans, totaling more than $36 million, and 16 of the small farm loans, totaling more than $700,000 in low- and moderate-income ("LMI") census tracts.

Examiners stated that from October 1, 1996, through September 30, 1997, Santander-PR originated 180 Small Business Administration ("SBA") loans totaling more than $26 million. Examiners noted that Santander-PR had been designated a "Preferred Lender" and "Certified Lender" by the SBA. Examiners also commended the bank on the distribution of its loans to businesses of different sizes. Of the small business loans made by Santander-PR since its last CRA evaluation, 22 percent were to businesses with gross annual revenues of less than $50,000, and 74 percent were to businesses with gross annual revenues of less than $250,000.

Examiners also noted that Santander-PR had made $81 million in qualified community development loans since its October 1995 CRA evaluation, including a loan to a consortium of small poultry processors under the Rural Housing and Community Development Service guarantee program to construct a poultry processing facility in a low-income census tract in Salinas, Puerto Rico; a loan to a builder under the affordable housing guidelines set by the Government Development Bank of Puerto Rico to construct 49 single-family homes in a moderate-income census tract in Barceloneta, Puerto Rico; and a loan to construct a condominium project in a moderate-income census tract in Rio Piedras, Puerto Rico, with one-third of the units designated for affordable housing.

Bank's CRA Performance Record
On May 21, 1998, the FDIC granted Bank's request for designation as a "wholesale institution" for purposes of evaluation under the CRA, and Bank's CRA activities have been focused on lending to community development intermediaries operating in its assessment area.13 At Bank's December 31, 1998 examination, examiners noted that Bank's CRA performance had improved since its previous CRA performance evaluation because the bank had improved its ascertainment and financial support of local community development initiatives consistent with its resources and capabilities.

Examiners noted that Bank's community development lending (including new originations from January 1997 through December 1998 and prior loans funded with outstanding balances) totaled more than $1 million. Examiners stated that, since its last CRA examination, Bank has increased its community development lending by providing six commitments totaling $900,000, representing a 600 percent increase in funding.14 Examiners also stated that Bank's levels of qualified investments and community development service since its prior CRA evaluation were adequate.

Conclusion on Convenience and Needs Considerations
The Board has carefully considered all the facts of record, including the comments received and the public CRA performance records of the institutions involved. In particular, the Board has considered the efforts by Bank to improve its CRA performance, as verified by the FDIC in a recently concluded CRA performance examination, and the fact that this proposal represents an acquisition by an applicant that has maintained a consistently outstanding CRA performance record. Based on a review of the entire record, including the relevant reports of examination, the Board concludes that considerations relating to the convenience and needs of the communities to be served are consistent with approval.

Other Supervisory Considerations
Under section 3 of the BHC Act, the Board may not approve an application involving a foreign bank unless the bank is "subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in the bank's home country."15 The Board previously determined that Santander was subject to such supervision and regulation,16 and based on all the facts of record, the Board has concluded that Santander continues to be subject to comprehensive supervision and regulation on a consolidated basis by its home country supervisor.

The BHC Act also requires the Board to determine that the foreign bank has provided adequate assurances that it will make available to the Board such information on its operations and activities and those of its affiliates that the Board deems appropriate to determine and enforce compliance with the BHC Act and the International Banking Act ("IBA") (12 U.S.C. 3101 et seq.). The Board has reviewed restrictions on disclosure in jurisdictions where Santander has material operations and has communicated with relevant banking authorities concerning access to information. Santander has committed that, to the extent not prohibited by applicable law, it will make available to the Board such information on the operations of Santander and any of its affiliates that the Board deems necessary to determine and enforce compliance with the BHC Act, the IBA, and other applicable federal law. Santander also has committed to cooperate with the Board to obtain any waivers or exemptions that may be necessary to enable Santander to make any such information available to the Board. In light of these commitments and other facts of record, the Board has concluded that Santander has provided adequate assurances of access to any appropriate information that the Board may request. For these reasons, and based on all the facts of record, the Board has concluded that the supervisory factors it is required to consider under section 3(c) of the BHC Act are consistent with approval.17

Conclusion
Based on the foregoing and all other facts of record, the Board has determined that the application should be, and hereby is, approved. The Board's approval of the proposal is expressly conditioned on Santander's compliance with all the commitments made in connection with the application. The commitments and conditions relied on by the Board in reaching this decision are deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

The proposal shall not be consummated before the fifteenth calendar day after the effective date of this order, or later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of New York, acting pursuant to delegated authority.

By order of the Board of Governors,18 effective April 1, 1999.

(signed) Jennifer J. Johnson

Jennifer J. Johnson

Secretary of the Board


Footnotes

1 Santander and BCH are two large foreign banks headquartered in Spain, each with modest operations in the United States. This application involves a review of the proposed combination of the U.S. operations of these banks as part of a merger of BCH with and into Santander, in which Santander would be the surviving corporation. On consummation, Santander would change its corporate name to "Banco Santander Central Hispano, S.A." Santander also has applied under the International Banking Act, 12 U.S.C. 3101 et seq., to retain BCH's direct U.S. branches and other offices. That application will be considered separately.

2 Asset data are as of December 31, 1998, using exchange rates then in effect. Ranking data are as of December 31, 1997.

3 Santander owns its indirect minority interest in Citizens Financial Group, Inc. ("Citizens") through The Royal Bank of Scotland Group plc and its subsidiary, The Royal Bank of Scotland plc, both of Edinburgh, Scotland. See Banco de Santander, S.A. de Credito, 78 Federal Reserve Bulletin 60 (1992).

4 12 U.S.C. 1842(d). A bank holding company's home state is that state in which the total deposits of all banking subsidiaries of such company were the largest on July 1, 1966, or the date on which the company became a bank holding company, whichever is later. 12 U.S.C. 1841(o)(4)(C).

5 For purposes of section 3(d) of the BHC Act, the home state of Santander is Rhode Island by virtue of Santander's indirect ownership interest in Citizens, a bank holding company in Providence, Rhode Island. See The Royal Bank of Scotland Group plc, 82 Federal Reserve Bulletin 428 (1996).

6 12 U.S.C. 1842(d)(1)(A) and (B) and 1842(d)(2)(A) and (B). Santander meets the capital and managerial requirements established by applicable law. On consummation of the proposal, Santander and its affiliates would control less than 10 percent of the total amount of deposits of insured depository institutions in the United States, and less than 30 percent of the total amount of deposits in New York. See N.Y. Banking Law 142-a (McKinney 1999). All other requirements of section 3(d) of the BHC Act also would be met on consummation of the proposal.

7 The Metropolitan New York-New Jersey banking market includes New York City; Nassau, Orange, Putnam, Rockland, Suffolk, Sullivan, and Westchester Counties in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, Warren Counties, and a portion of Mercer County in New Jersey; Pike County in Pennsylvania; and portions of Fairfield and Litchfield Counties in Connecticut.

8 Market share data used to analyze the competitive effects of the proposal are as of June 30, 1997, and are based on calculations in which the deposits of thrift institutions are included at 50 percent. The HHI for the Metropolitan New York-New Jersey banking market would remain at 761 after consummation of the proposal. Under the revised Department of Justice Merger Guidelines, 49 Federal Register 26,823 (1984), a market in which the post-merger HHI is less than 1000 is considered to be unconcentrated. The Department of Justice has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI is at least 1800 and the merger increases the HHI by more than 200 points. The Department of Justice has stated that the higher than normal HHI thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limited-purpose lenders and other nondepository financial entities.

9 On May 18, 1998, the Board issued a temporary cease and desist order (the "Order") pursuant to section 8(c) of the Federal Deposit Insurance Act (12 U.S.C. 1818(c)) against Santander to address deficiencies in its anti-money laundering programs. See Issuance of Enforcement Actions, 84 Federal Reserve Bulletin 539 (1998). The Order arose out of an investigation into the improper activities of two employees of Santander's subsidiary bank in Mexico, Banco Santander Mexicano, S.A. In response to the Order, Santander completed an internal investigation of the subject accounts and transactions and reported its findings to the appropriate U.S. and Mexican authorities. In addition, Santander, with the assistance of outside counsel and independent auditors, conducted a review of its anti-money laundering policies and on June 30, 1998, submitted a confidential report to the Board on the adequacy of its procedures and a plan designed to ensure that the conduct described in the Order would not occur in the future. The Board received a comment from Inner City Press/Community on the Move ("Protestant") stating that the issues raised by the Order were grounds on which the application should be denied. In light of Santander's compliance with the Order to date, and its other efforts, the Board concludes that these matters do not warrant denial of the proposal.

10 Santander-PR also received an "outstanding" rating at its CRA performance evaluation by the FDIC, as of September 18, 1995. Examiners noted in the October 14, 1997, CRA performance evaluation that Santander-PR's branch in New York, New York, does not generally engage in domestic retail deposit or lending activities. The examiners found that the branch had performed in a satisfactory manner under the CRA when the branch was compared to similar institutions in the assessment area.

11 Bank received "needs to improve" ratings from the FDIC in two prior CRA performance evaluations, as of July 15, 1996, and May 31, 1995. Protestant argues that these earlier CRA ratings support a denial of the proposal. Bank's current CRA performance evaluation was recently completed by the FDIC, and its rating of "satisfactory" was announced by the bank after the date of Protestant's comment letter.

12 Examiners noted that Santander-PR did not engage in residential mortgage lending, but that Bank's affiliate, Santander Mortgage Corporation ("SMC"), offered affordable and first-time buyer programs sponsored by the Government National Mortgage Association. In addition, examiners stated that SMC offered Federal Housing Administration and Veterans Administration mortgage products.

13 See 12 C.F.R. 345.25 (community development test for wholesale institutions).

14 These commitments included a $150,000 three-year term loan to a nonprofit community development financial institution to assist with the construction of affordable housing; a three-year, low-interest $200,000 loan to a nonprofit community development support organization that acts as an intermediary by channeling grants, loans, and equity investments to underserved communities; and a two-year, low-interest $150,000 loan to the capitalization program of a nonprofit association that assists community development credit unions serving low-income communities and community groups seeking to form credit unions.

15 12 U.S.C. 1842(c)(3)(B). As provided in Regulation Y, the Board determines whether a foreign bank is subject to consolidated home country supervision under the standards set forth in Regulation K. See 12 C.F.R. 225.13(a)(4). Regulation K provides that a foreign bank may be considered subject to consolidated supervision if the Board determines that the bank is supervised or regulated in such a manner that its home country supervisor receives sufficient information on the worldwide operations of the foreign bank, including the relationship of the bank and its affiliates, to assess the foreign bank's overall financial condition and compliance with law and regulation. See 12 C.F.R. 211.24(c)(1)(ii).

16 See, e.g., Banco Santander, S.A., 82 Federal Reserve Bulletin 833 (1996).

17 Protestant argues that the Board should deny Santander's application because the matters described by the Order referred to in footnote 9 raise questions about whether Santander is subject to comprehensive consolidated supervision by its home country supervisor under section 3 of the BHC Act. As noted above, in light of Santander's compliance with the Order to date, and its other efforts, the Board does not believe that these matters warrant denial of the subject proposal.

18 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Meyer, Ferguson, and Gramlich.

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