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:

1. None of the assets of Household purchased by HSBC Bank will be “low quality” assets within the meaning of Regulation W. Notwithstanding the foregoing, Household may transfer low-quality assets within the meaning of Regulation W to HSBC Bank if, at the time of transfer, HSBC USA, Inc. makes a cash contribution to HSBC Bank equal to the book value of any transferred asset that constitutes a low-quality asset at the time of transfer. These assets will be transferred to HSBC Bank at an amount equal to or less than book value.

2. HSBC USA, Inc. commits for a three-year period following the receivables purchase to make either (i) a cash payment to HSBC Bank within 30 days after the end of each calendar quarter equal to the book value at the end of that quarter plus write-downs during that quarter by HSBC Bank of any transferred assets (other than those that were low quality assets at the time of the initial transfer) that were low quality assets at the end of that quarter; or (ii) quarterly purchases from HSBC Bank of any transferred assets (other than those that were low-quality assets at the time of the initial transfer) that were low quality assets at the end of that quarter at a price equal to the book value at the end of that quarter plus write-downs during that quarter by HSBC Bank of any such transferred assets.

3. HSBC USA, Inc. commits for a three-year period following the purchase of the residual or retained interests in the trusts that hold securitized assets to make cash contributions to HSBC Bank within 30 days after the end of each calendar quarter equal to (i) the amount of any write down during that quarter of any such transferred residual or retained interest and (ii) any amount that HSBC Bank is required to contribute to any such securitization trust to support the performance of that trust.

4. HSBC USA, Inc. commits to indemnify HSBC Bank from any loss resulting from any legal claim asserted during the first three years following the initial transfer, including the legal costs related to the defense of the claims, arising from noncompliance with laws and regulations governing the origination, ownership, or servicing of the transferred assets on the part of Household or Household’s merchant partners that result from acts that occurred before HSBC Bank acquired the transferred assets.

5. A majority of HSBC Bank’s directors will review and approve the transaction before consummation.

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

1. [footnote deleted]  Return to text

2. 12 U.S.C. § 371c(f)(2). Return to text

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