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December 29, 2003

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, Buffalo, New York ("HSBC Bank"), for an exemption from section 23A of the Federal Reserve Act (12 U.S.C. 371c) to acquire certain mortgages from its affiliate, Household International, Inc., Prospect Heights, Illinois ("Household"). HSBC Bank's request is part of a corporate restructuring of its mortgage activities by HSBC Holdings, plc, London, England, 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."1 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 $7.1 billion, as of September 30, 2003.

As in previous cases reviewed by the Board, the proposed transaction is a by-product of a one-time corporate reorganization. HSBC Holdings is restructuring its U.S. operations after acquiring Household in March 2003. HSBC Bank states that this transaction will help it expand its own consumer lending business and diversify its balance sheet to improve its core earnings.

HSBC Bank and HSBC USA, New York, New York, have made the following commitments, accepted by the Board in previous exemption requests:

  1. None of the assets of Household acquired by HSBC Bank will be "low-quality" within the meaning of section 23A and Regulation W.
  2. Prior to the reorganization, HSBC Bank will review the assets to ensure that the reorganization is consistent with safe and sound banking practices.
  3. HSBC USA commits for a five-year period following the loan purchase, to make either (i) quarterly cash payments to HSBC Bank equal to the book value plus write-downs by HSBC Bank of any transferred assets that become low-quality assets; or (ii) quarterly repurchases from HSBC Bank of any transferred assets that become low-quality assets during any quarter at a price equal to the book value plus write-downs by HSBC Bank of any such transferred assets that become low-quality assets.
  4. A majority of the member bank's directors will review and approve the transaction before consummation.
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 Federal Deposit Insurance Corporation has informed the Board that it has 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 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 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) Margaret McCloskey Shanks

Margaret McCloskey Shanks
Assistant Secretary

cc:Federal Reserve Bank of New York
 Federal Deposit Insurance Corporation


1. 12 U.S.C. 371c(f)(2) (emphasis added). Return to text

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