Outline of International banking regulations

General Principles

– Foreign banks shall receive the same treatment in the US as do its own banks (“national treatment” ) (in contrast to the “reciprocal policy” one that says that a bank of other country will only be treated as well as the other country treats our bank)
– US banks should be able to compete abroad in whatever more flexible environment they might find themselves. However, certain prudent restrictions should be imposed everywhere on US banks.
– Foreign banks should not be permitted to carry into the US practices deemed acceptable abroad but at odds with the US banking policies.

è International Banking Act of 1978: First major step to achieve equality between foreign and domestic banks.
è Series of events around 1991 relating to certain banks doing business in the US (Bank of Credit and Commerce International and Banca Nazionale del Lavoro) led to adoption of certain banking standards by the so-called Group of Ten (ten major commercial countries) meeting in Basel and consistent with legislation and regulations in the US.

American Banks Abroad

– Number of US banks abroad has declined from 266 banks in 1984 to 122 banks in 2004.
– US banks abroad may have more powers than in the US. However, they would generally consider themselves bound by the limitations put upon it by the US (Regulation K).
– If the regulations abroad are stricter than in the US, the US bank abroad is subject to those foreign restrictions.

2. US banks operate abroad through four devices:

Establish a foreign branch (extension of the bank itself)
Acquire or establish a subsidiary bank abroad (foreign bank owned by a domestic bank)
Operate through companies that are not banks but are related to banks through holding companies
“Edge Act banks”

2. Foreign Branching by Federal Instrumentalities:

By federal instrumentalities we mean:
– National Banks: Under the control of two federal agencies: Comptroller of the Currency and the Federal Reserve System for national banks. The federal reserve act its most requirement in Regulation K.
– State Member Banks: Federal Reserve for state member banks.
– Nonbank affiliates in a bank holding company: Subject to federal control since the Federal Reserve governs all that they may do (Bank Holding Company Act)

National banks can branch abroad under the federal National Bank Act if they have a capital and surplus of $ 1,000,000 or more. Further, they must give a 30 days prior written notice for a branch in the first two countries and 12 days prior written notice after establishing branches in two countries. No prior notice is required for additional branches in a country. Foreign branches are subject to the Federal Reserve Regulations (Regulation K).

Other member banks can branch abroad on the same terms upon becoming member of the Federal Reserve System. For them, Regulation K also applies and there has to be at least $ 1,000,000 capital and surplus. Once a member bank has authority to establish a branch in a foreign country, it can without approval establish additional branches in that country. It may have branches in other foreign countries on 45 days prior notice to the Fed (approval is not necessary).

Regulation K (Fed rule): Governs the international banking operations of a member banks. Foreign branches will generally be subject to the Federal Reserve Regulations, principally Regulation K.

Under the National Bank Act, a foreign branch must exist “for the furtherance of the foreign commerce of the US” .

Bank holding company nonbank affiliates: Controlled by the FED in both foreign and domestic activities. Since the Gramm-Leach-Biley Act (“GLB Act” , 1999), the range of permissible activities has been expanded to those that are financial in nature. If the activity is financial in nature or incidental thereto, no Federal Reserve approval is required for domestic and foreign activities. If an approval is required, it must cover the activities and the locations including the foreign locations.

Gramm-Leach-Biley Act (“GLB Act” 1999): Before this act, bank holding companies and their nonbank affiliates were authorized to engage only in activities closely related to banking. The GLB Act created a new company called “financial holding company” (“FHC” ). The GLB Act expanded the range of permissible activities to those that are financial in nature. If the activity is financial in nature or incidental thereto, no Federal Reserve approval is required.

Edge Act bank: This is a corporation to be organized for the purpose of engaging in international or foreign banking or other international or foreign financial operations. They have the power to establish foreign branches, subject to the rules of the Federal Reserve System.

3. Foreign Powers Member Bank, Holding Companies an Edge Act Banks
Revised version of Regulation K (2001): This version expanded the activities that a member bank and its affiliates could conduct abroad. The additional powers include e.g. the ability to guarantee debts, distribute or underwrite obligations of the host country, take liens on foreign real estate to secure loan, act as an insurance agent or broker (see p. 12-13).

A foreign branch of a national bank may, generally, not underwrite securities issued by a foreign state or engage in the production or distribution of merchandise. However, since the GLB 1999, this does not apply for affiliated companies in a bank holding company. They have unrestricted power to underwrite.

In Regulation K, there are further 20 activities, which the Fed considers usual in connection with banking abroad. These activities required specific Fed approval. The activities include: commercial banking activities; leasing real or personal property; underwriting credit life insurance, data processing, underwriting, distributing, and dealing in debt securities outside the US.

For bank holding company business, Regulation K applies under the exceptions for foreign business in essentially the same manner that it applies to member banks. Once a bank holding company qualifies for a foreign exemption, it may engage in activities of any kind.

Foreign Powers Non-member State Banks
The Federal Deposit Insurance Corporation (FDIC) is primary federal regulator of state non-member banks. In general, they follow the pattern of Regulation K.

State Banks are generally unaffected by federal law in their foreign operations. Typically, they apply to their state banking departments for authority to open a foreign branch.

As of 1991, terms of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) limited the activities of insured state banks to those permissible for national banks. Only principal activities are constrained in this manner, not activities conducted as an agent.

New York: Permits foreign branching and the acquisition of foreign banks (they are not allowed to trade with goods or engage in securities). NY served as model for the federal law.

California: State banks are allowed to open foreign “offices” .

Illinois: Has been the most restrictive state. Until 1992, it did not allow branching at all. Since Dec. 1992, they allow unlimited branching. They have a provision known as “wild card” law that allows an Illinois state bank to do any act that is authorized or permitted to national banks by an Act of Congress., but subject always to the same limitations and restrictions as are applicable to national banks by the pertinent federal law.

4. Acquisition of Foreign Banks

An US banking institution, including a member bank or bank holding company may acquire or create a foreign bank. The foreign bank is a foreign entity and operates subject to Foreign Law (although it is a subsidiary of the US bank).

The investment in a foreign bank is governed by Section 25 of the Federal Reserve Act and by Regulation K. Section 25 generally permits national banks and state member banks the purchase of foreign banks. The actual investment is subject to Regulation K. The Fed gives general consent for investments in the lower dollar range. Other investments are subject to a 45 days notice (in special cases to a “specific consent” ).

5. Investment;
The investment can be limited by the local government.

Foreign Banks in the US

Until 1978 foreign banks were virtually unrestricted in the US. In 1978, the International Banking Act (“IBA” ) (amended by the Foreign Bank Supervision Act (“FBSA” ) of 1991) established an umbrella Federal Law on foreign bank entry. The IBA gives the States ability to allow or deny entry to a foreign bank (exception: Riegle-Neal Interstate Banking and Branching Efficiency Act (“IBBEA” ) of 1994. The IBBEA allowed interstate mergers between adequately capitalized and managed banks, subject to concentration limits, and laws).

There are three ways to enter the US:

Branches: A bank place of business at which deposits are received. Most popular way. A pledge of assets is required as assurance that there are sufficient funds available to pay the expenses of liquidation. For banks qualifying under the federal system, there is a minimum of 5 % of liabilities of the affected branches requirement (according to the IBA).
Agencies: A bank office at which credit balances relating to bank business such as the loan of money are maintained. Deposits are not taken. The same pledge regulations apply.
Representative Offices: Bank that is not a branch, an agency, or a subsidiary. Makes contact with US customers but does not make loans or take deposits. Foreign banks must apply to the Federal Reserve to open a representative office.

Dual Banking System: Every foreign bank with branches or agencies in more than one state must select one as its home state. Each branch or agency must be licensed either under federal law or remain subject to State law .

A Federal branch or agency requires approval of the Comptroller of the Currency. It operates with the same rights and privileges as a national bank at the same location including the right to establish branches in the state (“McFadden Act principles” ) and across state lines (“Riegle-Neal” ). However, they are not required to be a member of the Federal Reserve System.

The state-regulated location is subject to State law . However, under the FDICA in 1991, most state bank powers are limited by the powers of a national bank (there are a few exceptions).

All representative offices require prior approval of the Federal Reserve Board (unless the office is solely administrative and does not even meet with bank customers).

The state regulated location is subject to state law. The FED insurance Act FDCIA in 1991 reduced the vitality of the Dual banking system for state banks by making most state bank powers limited by the powers of a national bank. As with state banks themselves, state branches and agencies of foreign banks may not engage in any type of activity that is not permissible for a federal branch with power in the Fed to grant exceptions for activities that it determines are consistent with sound banking practices. There are some qualifications that differ somewhat from the statute that relates to state banks.

1. The limitation as it applies to domestic state banks are to activities conducted as a principal.
2. Both Fed and FDIc approval of exceptions are required for an insured location. Since not all state branches and agencies need federal deposit insurance, the FDIC needs determine risk to the insurance fund only for the insured when an exception is being considered.
3. Since the branch or agency is only a part of a larger institution with a foreign presence, its capital is not considered in evaluating an exception.

Bank Holding Company Act

A foreign bank establishing a US branch may be empowered under its own local banking law to conduct operations beyond the power of American banks. Domestic law attempts to establish a reasonable intermediate between two.

It recognizes additional power to be utilized domestically to the extent that they are permitted by Section 4 of the Bank Holding Company. After GLB, if the US form of operation becomes a financial holding company, those activities that are financial in nature or incidental or complementary thereto.

Further, the foreign bank may qualify for an exemption from domestic regulations to receive powers beyond the reach of a domestic bank. Basically, if its banking business outside the US exceeds its nonbanking business, and its banking business outside the Us exceeds its non banking business inside the US, it qualifies for the exemption.

It may conduct any business in the US that is “incidental” to its business outside the US.

In addition, even if does not meet the test for the exemption, it may apply to the Fed for a special exemption based on a showing that its overall activities would be consistent with the purpose of the BHCA and in the public interest.

“American Express Exception: Under this exception, a bank holding company does not include “an organization that does not do business in the US except as an incident to its activities outside the United States.”

Federal Reserve Supervision: Under the Foreign Bank Supervision Enhancement Act (FBSEA) 1991, the Fed was given powers of examination over foreign banks established in the US and over US banks controlled by a foreign bank. The establishment of a foreign agency, branch, or the acquisition of ownership requires the Fed’s prior approval. Approval is given if the Fed determines among others that the foreign bank is subject to supervision or regulation by its home country and that is has furnished to the board the required information.

Fed must give its approval unless if it determines that:
– The foreign bank engages directly in the business of baking outside of the US and is subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country.
– The foreign bank has furnished to the Board the information it needs to adequately assess the application

Further the fed may take into account:
– Whether the appropriate authorities in the home country of the foreign bank have consented to the proposed establishment of a branch, agency or commercial lending company in the Us by the Foreign Bank;
– The financial and managerial resources of the foreign bank, including the bank’s experience and capacity to engage in international banking
– Whether the foreign bank has provided the Board with adequate assurances that the bank will make available to the board such information on the operations or activities of the foreign banks and any affiliate of the bank that the boards deems necessary to determine and enforce compliance with this chapter
– Whether the foreign bank and the Us affiliates of the bank are in compliance with applicable Us law.

Author: admin

Author: admin

Mentioned in these Entries

Foreign Law, State law, country.