[Federal Register Volume 61, Number 20 (Tuesday, January 30, 1996)]
[Rules and Regulations]
[Pages 2899-2902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1650]
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FEDERAL RESERVE SYSTEM
12 CFR Part 211
[Regulation K; Docket No. R-0754]
Foreign Banking Organizations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is publishing amendments to Subpart B of Regulation
K (Foreign Banking Organizations). The amendments permit the
establishment of U.S. representative offices by certain foreign banks
through prior notice procedures. These prior notice procedures are
designed to permit foreign banks meeting certain requirements to
establish representative offices without the need to file a formal
application with the Board. A foreign bank that is subject to federal
regulation under the Bank Holding Company Act (BHC Act), either
directly or through the International Banking Act (IBA), and that the
Board has previously determined is subject to comprehensive supervision
or regulation on a consolidated basis by its home country supervisor,
or which previously has been approved for a representative office by
Board order, would be permitted to establish a full service
representative office by prior notice. In addition, the amendments
clarify that only those foreign banking organizations subject to the
IBA and the BHC Act may establish under general consent procedures a
representative office to engage in limited administrative functions in
connection with their existing U.S. banking operations. Lastly, the
Board has determined to review and act upon inquiries by ``special
purpose government banks'' seeking exemptions from regulation under the
Foreign Bank Supervision Enhancement Act (FBSEA) on the basis that they
do not fall within the definition of ``foreign bank'' under Regulation
K. Such inquiries would be handled on a case-by-case basis.
EFFECTIVE DATE: January 24, 1996.
FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General
Counsel (202/452-3786), Ann E. Misback, Managing Senior Counsel (202/
452-6406), or Andres L. Navarrete, Attorney (202/452-2300), Legal
Division; William A. Ryback, Associate Director (202/452-2722), Michael
G. Martinson, Assistant Director (202/452-2798), or Betsy Cross,
Manager (202/452-2574), Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System. For the users of
Telecommunication Device for the Deaf (TDD) only, please contact
Dorothea Thompson (202/452-3544), Board of Governors of the Federal
Reserve System, 20th and C Streets NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION: The FBSEA required for the first time that a
foreign bank receive federal approval to establish a representative
office. Prior to the FBSEA, federal regulation provided a limited
definition of a representative office of a foreign bank and only
required a foreign bank to register a representative office established
in the United States with the Treasury Department. Federal law did not
provide for the ongoing oversight or regulation of representative
offices of foreign banks.
To fill these and other gaps in federal regulation of foreign
banks, Congress adopted a broader definition of representative office
in the FBSEA to ensure that all direct operations of a foreign bank are
subject to federal regulation and supervision. The FBSEA expanded the
definition of a representative office of a foreign bank in the IBA to
include any place of business of a foreign bank that is not a branch,
agency, or subsidiary.
[[Page 2900]]
The FBSEA also provided standards for establishing, examining, and
regulating a representative office of a foreign bank. These standards
are less rigorous than the standards governing the establishment,
examination, and supervision of a branch or agency of a foreign bank.
In evaluating an application to establish a representative office, the
FBSEA only requires the Board to take into account the standards that
are mandatory for the establishment of a branch or an agency. Thus, for
example, the Board may permit a foreign bank to establish a
representative office even though its home country supervision or
financial condition might not support the establishment of a branch
oran agency. Similarly, unlike the mandatory, annual examinations
required for a branch or agency, the Board may examine a representative
office as often as deemed appropriate.
The Board has implemented the FBSEA and the provisions governing a
representative office of a foreign bank through two rulemakings. First,
in an interim rule, the Board defined a representative office of a
foreign bank as a limited purpose office that may only engage in
representational and administrative functions on behalf of a foreign
bank. The interim rule also stated that a representative office may not
make any business decision on behalf of the foreign bank. 57 FR 12992
(April 15, 1992). In taking this approach, the Board adhered to the
traditional view that a representative office may only engage in
limited functions that facilitate the banking activities of a foreign
bank, but may not engage in the activities themselves.
Both foreign banks and some state supervisors objected to this
restrictive definition because, in some instances, it would have been
more limiting than state laws on representative offices. In response to
comments received and initial experience gained in implementing these
and other portions of the FBSEA, the Board broadened these interim
provisions in a second, final rulemaking. 58 FR 6348 (January 28,
1993). The Board determined that a representative office is permitted
to perform any activity that is neither a banking activity nor an
activity that is prohibited by state law, Board ruling, or Board order.
The Board also introduced two sub-types of representative offices that
perform activities that raise few regulatory and supervisory issues and
therefore may be established under expedited procedures. Specifically,
the Board granted its general consent to the establishment of a
representative office that solely performs limited administrative
functions for the foreign bank (a general consent office). The foreign
bank must notify the Board of the establishment of a general consent
office. The Board also provided a 45 day prior notice procedure for the
establishment of a regional administrative office that coordinates
operations in a particular geographic region.
In adopting the final rule, the Board recognized that further
experience might warrant future revision of the provisions governing a
representative office of a foreign bank. Therefore, the Board sought
additional comment on these provisions and stated that it would revisit
the regulations after gaining additional information on the matter.
The Board received public comments from the Conference of State
Bank Supervisors, a trade association, and a foreign bank. These
commenters supported the adoption of a broader definition of a
representative office and a wider range of permissible activities
provided in the final rule. Two commenters sought clarification and
expansion of the activities deemed permissible for a representative
office. The commenters also recommended measures to reduce and
streamline the application procedures for establishing a representative
office. Lastly, one commenter requested that representative offices be
permitted to send unsolicited financial instruments through inter-
office mail to a branch or bank subsidiary that is authorized to accept
deposits. The Board is of the view that this activity may constitute
deposit-taking, and is therefore inappropriate for a representative
office to conduct.
Establishment of Representative Offices by Prior Notice
The Board has concluded that the prior notice procedures may be
applied to the establishment of representative offices by foreign banks
that are subject to the BHC Act, either directly or through section
8(a) of the IBA, where the Board has made a previous determination that
the particular foreign bank is subject to comprehensive supervision on
a consolidated basis by its home country supervisor, or previously has
been approved for a representative office by Board order. This expanded
authority is intended to reduce the burden associated with the filing
of a formal representative office application by a foreign banking
organization meeting these requirements.1
\1\ Applications by foreign banks that have received
comprehensive consolidated supervision (CCS) determinations to
establish branches, agencies and commercial lending companies will
continue to be delegated to Reserve Banks. 12 CFR 265.11(d)(11).
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The Board has taken the position that a 45-day prior notice review
period to establish such an office is sufficient where the Board has
made a formal determination that the foreign bank is subject to CCS in
the context of a previous application to establish a branch, agency,
commercial lending company, or to acquire a bank, or previously has
been approved for a representative office by Board order. The Board has
found that the goal of reducing burden for foreign banking
organizations, where possible and prudent, outweighs the limited
additional supervisory benefits of requiring a formal application for a
representative office under these circumstances.
In addition, the final rule clarifies that only foreign banks
subject to the BHC Act, either directly or through section 8(a) of the
IBA, may establish under the Board's general consent authority a
representative office to engage in limited administrative or ``back
office'' functions, and that such ``back office'' functions may only be
performed in connection with the U.S. banking activities of the foreign
bank. General consent representative offices were intended to
facilitate the establishment of limited offices by foreign banks
seeking administrative support for their existing U.S. banking
operations, and not as stand-alone operations. In that regard, the
activities must be clearly defined, performed in connection with the
U.S. banking activities of the foreign bank, and must not involve
contact or liaison with customers or potential customers beyond
incidental contact relating to administrative matters (such as
verification or correction of account information). ``Back office'' and
other administrative functions linked to banking present the fewest
supervisory and prudential concerns in the group of representative
office activities that are linked to banking. These limited activities
reflect a balancing of the Board's desire to reduce regulatory burden
with its need to continue to monitor closely the direct operations of
foreign banks.
By allowing a foreign bank meeting the criteria outlined above to
utilize the Board's prior notice procedures or general consent
authority to establish a representative office, the Board does not
intend to permit a foreign bank to
[[Page 2901]]
expand broadly its U.S. banking and nonbanking activities. The proposed
rule is designed merely to reduce the burden on those foreign banks
seeking to provide additional support for their existing U.S. banking
operations.
Special Purpose Government Banks
The FBSEA requires any foreign bank to obtain prior Board approval
to establish a branch, agency, commercial lending company, or
representative office. In issuing the final rule, the Board exempted
the central bank of a foreign country that does not engage in
commercial banking activities in the Untied States from the definition
of ``foreign bank'' and therefore from regulation under the FBSEA. The
Board has received several requests from government-owned entities that
engage in banking that is not commercial in nature for similar
exemptive treatment. A prototypical example of this type of entity is
an export-import bank of a foreign country. These so-called ``special
purpose government banks'' maintain offices in the United States that,
without this exemption, are representative offices under the FBSEA.
The Board has found that the types of institutions seeking this
exemptive relief vary considerably in their legal structure,
governmental mandate, and actual operations. Creating a regulatory
exemption akin to that provided for central banks in these
circumstances would prove unworkable and imprecise. Furthermore, each
of the requests for an exemption from regulation under the FBSEA is in
fact a request for an interpretation that the entity in question is not
a foreign bank within the meaning of the FBSEA and Regulation K.
Accordingly, the Board has determined to review and act upon each of
these interpretive requests on a case-by-case basis. Among the factors
the Board will consider are whether the foreign organization is: (i)
established and regulated pursuant to a distinct regulatory scheme that
differs from that applied to traditional commercial banks; (ii) owned
and capitalized substantially, if not exclusively, by its home
government; (iii) subject to direct government control and examination;
(iv) engaged exclusively in activities designed to serve specific
government policy goals; and (v) prohibited from accepting deposits.
This approach, in the Board's view, will provide the best mechanism for
determining whether the relief requested is in fact warranted.
Regulatory Review
A full review of Regulation K, as required by the IBA, is underway
and will proceed during the course of the next year. The subject of
representative offices will be revisited at that time, and will provide
additional opportunity for interested parties to express their concerns
regarding these and other relevant issues.
Regulatory Flexibility Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the Board certifies that this final rule will not
have a significant economic impact on a substantial number of small
business entities that are subject to the regulation.
Pursuant to 5 U.S.C. Sec. 553(d), this amendment to Regulation K
will become effective immediately. This final grants an exemption for
certain foreign banking organizations, and, therefore, the Board waives
the 30-day general requirement for publication of a substantive rule.
Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed
the proposed rule under the authority delegated to the Board by the
Office of Management and Budget. No collections of information pursuant
to the Paperwork Reduction Act are contained in the final rule.
List of Subjects in 12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, the Board of Governors
amends 12 CFR Part 211 as set forth below:
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for 12 CFR part 211 continues to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et
seq., 3901 et seq).
2. Section 211.24 is amended by:
a. Revising paragraphs (a)(2)(i) and (a)(2)(ii); and
b. Redesignating paragraph (d)(3) as paragraph (d)(4), and adding a
new paragraph (d)(3).
The revisions and addition read as follows:
Sec. 211.24 Approval of offices of foreign banks; procedures for
applications; standards for approval; representative office activities
and standards for approval; preservation of existing authority.
(a) * * *
(2) * * *
(i) Prior notice for certain representative offices. After
providing 45 days' prior written notice to the Board, a foreign bank
that is subject to the BHC Act, either directly or through section 8(a)
of the IBA (12 U.S.C. 3106(a)), may establish:
(A) A regional administrative office; or
(B) A representative office, but only if the Board has previously
determined that the foreign bank proposing to establish a
representative office is subject to comprehensive supervision or
regulation on a consolidated basis by its home country supervisor, or
previously has been approved for a representative office by Board
order. The Board may waive the 45-day period if it finds that immediate
action is required by the circumstances presented. The notice period
shall commence at the time the notice is received by the appropriate
Reserve Bank. The Board may suspend the period or require Board
approval prior to the establishment of such an office if the
notification raises significant policy, prudential or supervisory
concerns.
(ii) General consent for representative offices. The Board grants
its general consent for a foreign bank that is subject to section 8(a)
of the IBA (12 U.S.C. 3106(a)), to establish a representative office
that solely engages in limited administrative functions (such as
separately maintaining back office support systems) that are clearly
defined, are performed in connection with the United States banking
activities of the foreign bank, and do not involve contact or liaison
with customers or potential customers beyond incidental contact with
existing customers relating to administrative matters (such as
verification or correction of account information), provided that the
foreign bank notifies the Board in writing within 30 days of the
establishment of the representative office.
* * * * *
(d) * * *
(3) Special purpose foreign government banks. A foreign government-
owned organization engaged in banking activities in its home country
that are not commercial in nature may apply to the Board for a
determination that the organization is not a foreign bank for purposes
of this section. A written request setting forth the basis for such a
determination may be submitted to the Reserve Bank of the District in
which the foreign organization's representative office is located in
the United States or to the Board in the case of a proposed
establishment of a representative office.
[[Page 2902]]
The Board will review and act upon each such request on a case-by-case
basis.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, January 24, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-1650 Filed 1-29-96; 8:45 a.m.]
BILLING CODE 6210-01-P
