Related Organizations

Edge Act and Agreement Corporations

A depository institution may organize or acquire a separate subsidiary to engage in international banking activities as an Edge Act corporation, which is licensed under federal law by the FRB, or as an Agreement corporation, which is chartered under state law. Congress authorized such subsidiaries principally to encourage foreign trade. An Edge Act or Agreement corporation may not engage, directly or indirectly, in activities in the United States unless they are incidental to its international activities. Incidental activities are described in the FRB’s Regulation K, 12 CFR 211.6.

Under Regulation K, an Edge Act or Agreement corporation’s investment in a foreign organization can be either an investment in a subsidiary, an investment in a joint venture, or a portfolio investment. Two factors determine which type of investment it is: (1) the percentage of the foreign organization’s voting shares or equity owned or controlled by the corporation and (2) whether the foreign organization engages in permissible types of activities and investments. If the Edge or Agreement corporation owns or controls 50 percent or more of the voting shares or equity in an organization, the organization is considered a subsidiary. Generally, an Edge Act or Agreement corporation may invest only in a subsidiary engaged in banking or financial activities and activities incidental to these activities. If the Edge Act or Agreement corporation owns or controls 20 percent but less than 50 percent of the voting shares or equity of an organization, it has invested in a joint venture. A joint venture may have up to 10 percent of its consolidated assets or consolidated revenues attributable to activities that are not banking or financial. An Edge Act or Agreement corporation may make a portfolio investment by owning or controlling up to 20 percent of the voting shares or equity of an organization that may engage in activities that are not banking or financial. These foreign investments are subject to additional limits in the FRB’s Regulation K, which describes permissible activities for these three forms of investments. See 12 CFR 211.9 and 211.10.

Regulation K does not permit a member bank to invest directly in a subsidiary, joint venture, or portfolio investment. Generally, these investments must be made through an Edge Act corporation subsidiary of the bank or through the bank holding company.

The amount of capital and surplus that a member bank may invest in Edge Act and Agreement corporations is limited by 12 USC 618 and Regulation K to 10 percent of capital and surplus or 20 percent with approval of the FRB. The FRB is required to examine Edge Act corporations annually and produce a report of their examination.

As an alternative, a national bank could conduct its international banking activities through a financial subsidiary. In a financial subsidiary, the international activities must comply with 12 USC 24a and 12 CFR 5.39; they are not subject to Regulation K.

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