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FSC Issued a Ruling for Domestic Banks Extending Credit to Their Foreign Subsidiary Banks



Under Articles 32 and 33 of the Banking Act and Article 44 of the Financial Holding Company Act, when extending credit to its related parties, the bank shall comply with the following:
 
1.      Article 32 of the Banking Act: No unsecured credit shall be extended by a bank to enterprises in which the bank holds three percent (3%) or more of the total paid-in capital of said enterprises, to its own responsible person, to its staff members, to its major shareholders or to any interested party of its own responsible person or of a staff member in charge of credit extensions.
 
2.      Article 33 of the Banking Act: For any secured credit extended by a bank to enterprises in which the bank holds five percent (5%) or more of the total paid-in capital of said enterprises, to its own responsible person, to its staff members, to its major shareholders or to any interested parties of its own responsible person or of a staff member in charge of credit extensions, the terms of such extended credit shall not be more favorable than those terms offered to other same category customers.  If the credit amount to be extended by a bank exceeds the amount prescribed by the competent authority, the bank needs the concurrence of at least three-quarters of all of such bank's directors present at a meeting attended by at least two-thirds of the directors, to extend such credit.
 
3.      Article 44 of the Financial Holding Company Act: The subsidiary bank of a financial holding company shall not extend unsecured credit to the following persons, and Article 33 of the Banking Act shall apply mutates mutandis to secured credit extension to such persons: (1) a responsible person or major shareholder of the financial holding company; (2) an enterprise solely invested in by or a partnership invested in by a responsible person or major shareholder of the financial holding company or an organization in which such responsible person or major shareholders concurrently acts as the responsible person or representative; (3) a company in which more than one half of the directors concurrently act as the directors of the financial holding company or its subsidiary; or (4) the financial holding company’s subsidiary and the responsible persons and major shareholders of such subsidiary.
 
According to Article 4 of the Enforcement Rules of the Banking Act, the "enterprises" as referred to in Articles 32 and 33 of the Banking Act shall not include foreign financial institutions invested by a bank with the approval of the competent authority and which are wholly owned by such bank or in which such bank owns more than fifty percent (50%) of the shares. Comparing to the Banking Act, there are no similar regulations under the Financial Holding Company Act. In practice, financial institutions (domestic and foreign financial institutions within the same financial holding group) often need to seek intercompany/intra-group loans. This is where the question arose whether Articles 32 and 33 of the Banking Act and Article 44 of the Financial Holding Company Act shall apply.
 
The Financial Supervisory Commission (FSC) issued a ruling for clarification pertaining to the Banking Act and the Financial Holding Company Act on Nov 20, 2014:
 
1.      The foreign financial institutions invested by a bank with the approval of the competent authority and which are wholly owned by such bank or in which such bank owns more than fifty percent (50%) of the shares referred to in Article 4 of the Enforcement Rules of the Banking Act mean the foreign subsidiary banks incorporated with the approval of the relevant foreign financial authorities.
 
2.      A subsidiary bank of a financial holding company is exempted from Article 44 of the Financial Holding Company Act, when it extends credit (including interbank overdrafts) to its foreign subsidiary banks incorporated with the approval of the relevant foreign financial authorities in which such bank owns more than fifty percent (50%) of the shares.
 
Based on the aforementioned FSC ruling, a foreign subsidiary bank of a domestic bank (whether or not it is a subsidiary bank of the financial holding company) which is incorporated with the approval of the foreign financial authorities is exempted from Articles 32 and 33 of the Banking Act and Article 44 of the Financial Holding Company Act, when it comes to credit extension between such domestic bank and such foreign subsidiary bank.


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