Order Approving the Formation and Acquisition of a Bank Holding Company.

Commerzbank AG ("Commerzbank") has requested the Board's approval under section 3 of the Bank Holding Company Act (12 U.S.C. [sections] 1842) ("BHC Act") to become a bank holding company by retaining control of Korea Exchange Bank, Seoul, Korea ("KEB"). KEB owns all of the voting shares of California Korea Bank, Los Angeles, California ("California Bank").(1)

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (63 Federal Register 47,500 (1998)). 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.

Commerzbank, with consolidated total assets of approximately $386 billion, is the fourth largest banking organization in Germany.(2) Commerzbank engages in banking operations in the United States through branches in New York, New York; Chicago, Illinois; and Los Angeles, California, and an agency in Atlanta, Georgia. Commerzbank also engages in nonbanking activities in the United States through a number of subsidiaries. KEB, with $47 billion in consolidated total assets, is the third largest banking organization in Korea. KEB is the parent of California Bank, which is the 78th largest depository institution in California, controlling less than 1 percent of total deposits in depository institutions in the state.(3) KEB also operates branches in New York, New York; Chicago, Illinois; and Seattle, Washington, and an agency in Los Angeles, California.

The Board has carefully considered the competitive effects of the proposal in each relevant banking market, including the Los Angeles, California, banking market.(4) Commerzbank and KEB each controls less than 1 percent of total deposits in depository institutions in each relevant banking market and numerous competitors would remain in each relevant banking market after consummation of the proposal.(5) Accordingly, the Board concludes that consummation of the proposal is not likely to result in any significantly adverse effects on competition or on the concentration of banking resources in any relevant banking market.(6)

Certain 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."(7) 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 to its affiliates, to assess the foreign bank's overall financial condition and compliance with law and regulation.(8) The Board previously has determined, in applications under the IBA, that certain German commercial banks were subject to comprehensive consolidated supervision by their home country authorities.(9) In this case, the Board has determined that Commerzbank is supervised on substantially the same terms and conditions as those other German commercial banks. Based on all the facts of record, the Board concludes that Commerzbank is 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. The Board has reviewed the restrictions on disclosure in jurisdictions where Commerzbank has material operations and has communicated with the relevant authorities concerning access to information. Commerzbank has committed that, to the extent not prohibited by applicable law, it will make available to the Board such information on the operations of Commerzbank 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. Commerzbank also has committed to cooperate with the Board to obtain any waivers or exemptions that may be necessary in order to enable Commerzbank to make any such information available to the Board. In light of these commitments and other facts of record, the Board has concluded that Commerzbank has provided adequate assurances of access to any appropriate information the Board may request.

Financial, Managerial, and Convenience and Needs Considerations

The BHC Act also requires the Board to consider the financial and managerial resources and future prospects of the banks involved and the convenience and needs of the communities to be served. Commerzbank'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. California Bank's capital ratios exceed the "well capitalized" thresholds and would be unchanged by this transaction. The Board notes, moreover, that the proposal does not involve any expansion of the banking or nonbanking activities of KEB, and that Commerzbank's investment in KEB has strengthened KEB's capital position and made additional financial resources available to California Bank. Based on these and all the facts of record, including confidential examination and other supervisory information concerning the foreign banks involved in the proposal as well as their existing U.S. operations, the Board concludes that financial and managerial factors are consistent with approval, as are the other supervisory factors the Board must consider under section 3 of the BHC Act.

California Bank received a "satisfactory" performance rating at its most recent examination under the Community Reinvestment Act (12 U.S.C. [sections] 2901 et seq.) by the Federal Deposit Insurance Corporation, as of January 22, 1996. In light of all the facts of record, the Board concludes that convenience and needs considerations also are consistent with approval.

Based on the foregoing and all other facts of record, the Board has determined that the application should be, and hereby is, approved.(10) The Board's approval of the proposal is expressly conditioned on Commerzbank'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.

By order of the Board of Governors, effective March 15, 1999.

Voting for this action: Vice Chair Rivlin and Governors Kelley, Meyer, Ferguson, and Gramlich. Absent and not voting: Chairman Greenspan.

ROBERT DEV. FRIERSON Associate Secretary of the Board

The Fuji Bank , Limited Tokyo, Japan

(1.) Commerzbank has requested the Board's approval to control up to 40 percent of KEB's voting shares. In July 1998, Commerzbank acquired newly issued shares of KEB, representing approximately 32 percent of KEB's voting shares. This investment was part of a plan to increase KEB's capital, which was approved by the Korean Financial Supervisory Commission. Before consummation of the investment, and with the approval of the Board and the California Department of Financial Institutions (the "Department"), KEB placed all of its shares of California Bank in a voting trust controlled by an independent trustee pending regulatory approval of Commerzbank's acquisition of California Bank. See Letter from Robert de V. Frierson, Associate Secretary of the Board, to Robert L. Tortoriello, dated July 27, 1998. Under the terms of the trust agreement, the voting trust terminates if the Board and the Department approve Commerzbank's retention of its ownership interest in California Bank. The Department approved Commerzbank's application to acquire control of California Bank on October 19, 1998.

(2.) Asset data are as of September 30, 1998, and use exchange rates then in effect. Ranking data are as of December 31, 1997.

(3.) Deposit data are as of June 30, 1997. In this context, depository institutions include banks, savings and loan associations, and savings banks.

(4.) The Los Angeles banking market is approximated by the Los Angeles Ranally Metropolitan Area.

(5.) Market share data are based on calculations in which the deposits of thrift institutions are included at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant competitors of commercial banks. See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70 Federal Reserve Bulletin 743 (1984). Thus, the Board has regularly included thrift deposits in the calculation of market share on a 50-percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).

(6.) After consummation of the proposed acquisition, California will be the home state of both KEB and Commerzbank for purposes of the BHC Act and, accordingly, the proposed transaction is not barred by section 3(d) of the BHC Act. See 12 U.S.C. [subsections] 1841(o)(4), 1842(d). New York is the home state of both KEB and Commerzbank for purposes of the International Banking Act (12 U.S.C. [sections] 3101 et seq.) and Regulation K, and the continued operation of the existing branches of Commerzbank and KEB is not barred by the International Banking Act or Regulation K.

(7.) 12 U.S.C. [sections] 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).

(8.) In assessing this standard, the Board considers, among other factors, the extent to which the home country supervisors:

   (i) ensure that the bank has adequate procedures for monitoring and
   controlling its activities worldwide;

   (ii) obtain information on the condition of the bank and its subsidiaries
   and offices through regular examination reports, audit reports, or
   otherwise;

   (iii) obtain information on the dealings with and relationship between the
   bank and its affiliates, both foreign and domestic;

   (iv) receive from the bank financial reports that are consolidated on a
   worldwide basis, or comparable information that permits analysis of the
   bank's financial condition on a worldwide consolidated basis;

   (v) evaluate prudential standards, such as capital adequacy and risk asset
   exposure, on a worldwide basis.

These are indicia of comprehensive consolidated supervision. No single factor is essential and other elements may inform the Board's decision. See 12 C.F.R. 211.24(c)(1)(ii).

(9.) See Sudwestdeutsche Landesbank Girozentrale, 83 Federal Reserve Bulletin 937 (1997); West Merchant Bank Limited, 81 Federal Reserve Bulletin 519 (1995).

(10.) Commerzbank currently underwrites and deals in bank-ineligible securities through Commerzbank Capital Markets Corporation, New York, New York, pursuant to grandfather rights established by section 8(c) of the IBA. See 12 U.S.C. [sections] 3106(c)(1). The IBA provides that a foreign bank's grandfather rights under section 8(c) shall terminate two years after the date on which the foreign bank becomes a bank holding company. See id. at [sections] 3106(c)(2). Accordingly, Commerzbank must conform any activities that it engages in pursuant to section 8(c) of the IBA to the requirements of the BHC Act by July 27, 2000.3