Order Approving Notice to Engage in Nonbanking Activities.

Istituto Bancario San Paolo di Torino-Istituto Mobiliare Italiano S.p.A. ("San Paolo-IMI"), a foreign banking organization subject to the provisions of the Bank Holding Company Act ("BHC Act"),(1) has requested the Board's approval to engage through Mabon Securities Corp. ("Mabon") and, in certain cases, through Mabon's wholly owned subsidiary, Cedar Street Securities Corp. ("Cedar Street"), both of New York, New York,(2) in the following nonbanking activities:

(1) Extending credit and servicing loans, in accordance with section 225.28(b)(1) of Regulation Y (12 C.F.R. 225.28(b)(1));

(2) Engaging in activities related to extending credit, in accordance with section 225.28(b)(2) of Regulation Y (12 C.F.R. 225.28(b)(2));

(3) Providing financial and investment advisory services, in accordance with section 225.28(b)(6) of Regulation Y (12 C.F.R. 225.28(b)(6));

(4) Providing securities brokerage, riskless principal, private placement, futures commission merchant, and other agency transactional services, in accordance with section 225.28(b)(7) of Regulation Y (12 C.F.R 225.28(b)(7));

(5) Underwriting and dealing in government obligations and money market instruments in which state member banks may underwrite and deal under 12 U.S.C. [subsections] 335 and 24(7) ("bank-eligible securities"), engaging in investing and trading activities, and buying and selling bullion and related activities, in accordance with section 225.28(b)(8) of Regulation Y (12 C.F.R. 225.28(b)(8)); and

(6) Underwriting and dealing in, to a limited extent, all types of debt and equity securities, except ownership interests in open-end investment companies ("bank-ineligible securities") through Mabon.(3)

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (63 Federal Register 67,693 (1998)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.

San Paolo-IMI, with total consolidated assets of approximately $200 billion, is the largest banking organization in Italy.(4) In the United States, San Paolo-IMI operates a federally licensed branch in New York, New York, and a representative office in Los Angeles, California.(5) Mabon engages in securities transactions in the United States on behalf of San Paolo-IMI's European affiliates and provides research and investment management services to both U.S. and foreign investors. Mabon and Cedar Street are and will continue to be broker-dealers registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (15 U.S.C. [sections] 78a et seq.) and members of the National Association of Securities Dealers, Inc. ("NASD"). Accordingly, Mabon and Cedar Street are and will continue to be subject to the recordkeeping and reporting obligations, fiduciary standards, and other requirements of the Securities Exchange Act, the SEC, and the NASD.

Underwriting and Dealing in Bank-Ineligible Securities

The Board previously has determined-subject to the framework of prudential limitations established in previous decisions to address the potential for conflicts of interests, unsound banking practices, or other adverse effects-that underwriting and dealing in bank-ineligible securities is so closely related to banking as to be a proper incident thereto within the meaning of section 4(c)(8) of the BHC Act.(6) The Board also has determined that underwriting and dealing in bank-ineligible securities is consistent with section 20 of the Glass-Steagall Act (12 U.S.C. [sections] 377), provided that the company engaged in the activity derives no more than 25 percent of its gross revenues from underwriting and dealing in bank-ineligible securities.(7) San Paolo-IMI has committed that Mabon will conduct its underwriting and dealing activities using the methods and procedures and subject to the prudential limitations established by the Board in the Section 20 Orders.

San Paolo-IMI also has committed that Mabon will conduct its bank-ineligible securities underwriting and dealing subject to the Board's revenue restriction. As a condition of this order, San Paolo-IMI is required to conduct its bank-ineligible securities activities subject to the revenue restrictions and Operating Standards established for section 20 subsidiaries ("Operating Standards").(8)

Other Activities Approved by Regulation

The Board previously has determined that credit and credit-related activities; financial and investment advisory activities; securities brokerage, riskless principal, private placement, and other agency transactional activities; underwriting and dealing in bank-eligible securities; investing and trading activities; and buying and selling bullion and related activities are all closely related to banking within the meaning of section 4(c)(8) of the BHC Act.(9) San Paolo-IMI has committed that it will conduct these activities in accordance with the limitations set forth in Regulation Y and the Board's orders and interpretations relating to each of these activities.

Other Considerations

In order to approve the notice, the Board also must determine that performance of the proposed activities is a proper incident to banking, that is, that the proposed activities "can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."(10) As part of its evaluation of these factors, the Board considers the financial condition and managerial resources of the notificant and its subsidiaries and the effect of the proposed transaction on those resources.(11) San Paolo-IMI's capital ratios satisfy applicable risk-based standards under the Basle Accord and are considered equivalent to the capital levels that would be required of a United States banking organization. The Board also has reviewed the capitalization of San Paolo-IMI and Mabon in accordance with the standards set forth in the Section 20 Orders and finds the capitalization of each to be consistent with approval. This determination is based on all the facts of record, including San Paolo-IMI's projections of the volume of Mabon's bank-ineligible underwriting and dealing activities. The Board also has reviewed the managerial resources of San Paolo-IMI and Mabon in light of relevant reports of examination and all the facts of record. Based on the foregoing, the Board has concluded that financial and managerial considerations are consistent with approval of the notice.

The Board also has carefully considered the competitive effects of the proposal. Prior to its merger with IMI, San Paolo did not engage in the United States in the nonbanking activities conducted by Mabon. Furthermore, the Board notes that the markets for the proposed activities are unconcentrated and there are numerous existing and potential competitors. As a result, consummation of the proposal would have a de minimis effect on competition, and the Board has concluded that the proposal would not result in a significantly adverse effect on competition in any relevant market.

The Board expects that continuation of the proposed activities would provide added convenience to the expanded customer base of San Paolo-IMI. San Paolo-IMI also has indicated that it intends to expand the product and service offerings of Mabon, thereby increasing competition in the relevant product markets. The Board also has recognized the public benefits of permitting capital markets to operate so that banking organizations may make potentially profitable investments in nonbanking companies and allocate their resources in the manner they believe is most efficient when such investments are consistent, as in this case, with the relevant consideration under the BHC Act.(12)

Under the framework and conditions established in this order and the Section 20 Orders, and based on all the facts of record, the Board concludes that the performance of the proposed activities by San Paolo-IMI can reasonably be expected to produce public benefits that outweigh any adverse effects of the proposal. Accordingly, the Board has determined that the performance of the proposed activities by San Paolo-IMI is a proper incident to banking for purposes of section 4(c)(8) of the BHC Act.

Conclusion

On the basis of the foregoing and all other facts of record, the Board has determined that the notice should be, and hereby is, approved, subject to all the terms and conditions discussed in this order and in the Section 20 Orders, as modified by the Modification Orders. The Board's approval of the proposed underwriting and dealing activities extends only to activities conducted within the limitations of those orders and this order, including the Board's reservation of authority to establish additional limitations to ensure that Mabon's activities are consistent with safety and soundness, avoidance of conflict of interests, and other relevant considerations under the BHC Act. Underwriting and dealing in any manner other than as approved in this order and the Section 20 Orders (as modified by the Modification Orders), is not within the scope of the Board's approval and is not authorized for Mabon.

The Board's approval of the proposal to underwrite and deal in all types of bank-ineligible securities is conditioned on a determination by the Board that San Paolo-IMI and Mabon have established policies and procedures to ensure compliance with the Operating Standards and the other requirements of this order, the Section 20 Orders, and the Modification Orders, including computer, audit, and accounting systems, internal risk management controls, and the necessary operation and managerial infrastructure for underwriting and dealing in all types of debt and equity securities. San Paolo-IMI proposes to expand the existing bank-ineligible securities activities of Mabon, and has requested a delay in conducting the infrastructure review to allow San Paolo-IMI to develop enhanced policies and procedures for the proposed expanded bank-ineligible securities activities of Mabon. As part of the request, San Paolo-IMI has committed not to expand the scope of Mabon's current bank-ineligible securities activities until the Board determines that a satisfactory infrastructure is in place.

The Board's determination also is subject to all terms and conditions set forth in Regulation Y, including those in sections 225.7 and 225.25(c) (12 C.F.R. 225.7 and 225.25(c)), and to the Board's authority to require modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to ensure compliance with, and prevent evasion of, the BHC Act and the Board's regulations and orders issued thereunder. The Board's decision is specifically conditioned on compliance with all the commitments made in connection with the notice, including the commitments discussed in this order and the conditions set forth in this order and the Board's regulations and orders noted above. The commitments and conditions 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 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, effective February 1, 1999.

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

(1.) As a foreign banking organization operating a branch in the United States, San Paolo-IMI is subject to certain provisions of the BHC Act pursuant to section 8(a) of the International Banking Act of 1978. 12 U.S.C. [sections] 3106(a).

(2.) San Paolo-IMI was formed in November 1998 through the merger of Istituto San Paolo di Torino S.p.A., Turin, Italy ("San Paolo"), and Istituto Mobiliare Italiano S.p.A., Rome, Italy ("IMI"). In connection with this merger, San Paolo-IMI received approval under section 4(c)(9) of the BHC Act to retain temporarily the United States subsidiaries of IMI. See Letter dated July 27, 1998, from Robert deV. Frierson, Associate Secretary of the Board, to Randal K. Quarles, Esq.

(3.) Cedar Street currently is an inactive subsidiary of Mabon. San Paolo-IMI has indicated that in the future Cedar Street may commence the activities listed above, except underwriting and dealing in bank-ineligible securities. San Paolo-IMI has agreed to consult with the Federal Reserve System before Cedar Street commences any bank-ineligible underwriting and dealing activities so that it can be determined whether an additional notice pursuant to section 4(c)(8) of the BHC Act would be required.

(4.) Asset and ranking data are as of June 30, 1998.

(5.) Compagnia di San Paolo (the "Foundation"), an Italian public law foundation, previously controlled a majority of the voting shares of San Paolo. See Istituto Bancario San Paolo di Torino. S.p.A., 82 Federal Reserve Bulletin 1147 (1996). The Foundation has significantly reduced its ownership interest in San Paolo over time and currently owns approximately 16 percent of the voting shares of San Paolo-IMI. One director and two other representatives of the Foundation also serve on San Paolo-IMI's current 17-member board of directors. Italian law requires that the Foundation terminate its director interlock with San Paolo-IMI by April 15, 1999, and prohibits the Foundation from being involved in the management of San Paolo-IMI after November 18, 1999. The Foundation also has entered into a shareholders' agreement that permits the Foundation to vote only 5 percent of San Paolo-IMI's shares at the next election of San Paolo-IMI's board of directors. San Paolo-IMI has represented that the Foundation will not have the right or ability to independently elect any director to the future boards of directors of San Paolo-IMI. Based on these and all other facts of record, including the limited nature of the continuing business relationships between the Foundation and San Paolo-IMI, the Board has determined that the Foundation is not required to join this notice.

(6.) See J.P. Morgan & Co., Incorporated, et al., 75 Federal Reserve Bulletin 192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 900 F. 2d 360 (D.C. Cir. 1990); Citicorp, et al., 73 Federal Reserve Bulletin 473 (1987), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 839 F. 2d 47 (2d Cir.), cert. denied, 486 U.S. 1059 (1988); as modified by Review of Restrictions on Director, Officer and Employee Interlocks, Cross-Marketing Activities, and the Purchase and Sale of Financial Assets Between a Section 20 Subsidiary and an Affiliated Bank or Thrift, 61 Federal Register 57,679 (1996); Amendments to Restrictions in the Board's Section 20 Orders, 62 Federal Register 45,295 (1997); and Clarification to the Board's Section 20 Orders, 63 Federal Register 14,803 (1998) (collectively, "Section 20 Orders").

(7.) Compliance with the revenue limitation shall be calculated in accordance with the methods stated in the Section 20 Orders, as modified by the Order Approving Modifications to the Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989); 10 Percent Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 48,953 (1996); and Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 68,750 (1996) (collectively, "Modification Orders"). In light of the fact that Mabon was a going concern on the date of the merger of San Paolo and IMI, the Board believes that allowing Mabon to calculate compliance with the revenue limitation on an annualized basis during the first year after the date that the merger of San Paolo and IMI was consummated and thereafter on a rolling quarterly basis is consistent with the Section 20 Orders. See, e.g., Dresdner Bank AG, 82 Federal Reserve Bulletin 850 (1996); Dauphin Deposit Corporation, 77 Federal Reserve Bulletin 672 (1991).

(8). 12 C.F.R. 225.200. Mabon may provide services that are necessary incidents to the proposed underwriting and dealing activities. Unless Mabon receives specific approval under section 4(c)(8) of the BHC Act to conduct the activities independently, any revenues from the incidental activities must be treated as ineligible revenues subject to the Board's revenue limitation.

(9.) See 12 C.F.R. 225.28(b)(1), (2), (6), (7), and (8).

(10.) 12 U.S.C. [sections] 1843(c)(8).

(11.) See 12 C.F.R. 225.26(b); see also The Fuji Bank , Limited, 75 Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73 Federal Reserve Bulletin 155 (1987).

(12.) See Banc One Corporation, 84 Federal Reserve Bulletin 553 (1998).

ROBERT DEV. FRIERSON

Associate Secretary of the Board