[Federal Register Volume 61, Number 37 (Friday, February 23, 1996)]
[Rules and Regulations]
[Pages 6918-6921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3910]
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FEDERAL RESERVE SYSTEM
12 CFR Part 211
[Regulation K; Docket No. R-0862]
International Banking Operations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: Section 202(e)(7) of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA or Act) provides that the Board, in
consultation with the Treasury, develop and publish criteria to be used
in evaluating the operations of any foreign bank in the United States
that the Board has determined is not subject to comprehensive
supervision or
[[Page 6919]]
regulation on a consolidated basis. This final rule amends Regulation K
on international banking operations to set out such criteria pursuant
to section 202(e)(7) of FDICIA.
EFFECTIVE DATE: March 25, 1996.
FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General
Counsel (202/452-3786), Sandra L. Richardson, Managing Senior Counsel
(202/452-6406), John W. Rogers, Attorney (202/452-2798); Michael G.
Martinson, Assistant Director (202/452-3640), Elizabeth H. Roberts,
Manager (202/452-3846), Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System. For users of
Telecommunication Device for the Deaf (TDD), please contact Dorothea
Thompson (202/452-3544), Board of Governors of the Federal Reserve
System (Board or Federal Reserve), 20th and C Streets, N.W.,
Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION: Section 7(e)(7) of the International Banking
Act (IBA) was added by the Foreign Bank Supervision Enhancement Act
(FBSEA) and requires the Board, in consultation with the Treasury
Department, to publish criteria to be used in evaluating the operations
of any foreign bank in the United States that the Board has determined
is not subject to comprehensive, consolidated supervision by its home
country supervisor. A determination by the Board that a foreign bank is
not subject to comprehensive, consolidated supervision is a sufficient
ground, in and of itself, for the Board to require, or with respect to
federal branches or agencies to recommend, termination of the foreign
bank's U.S. branches, agencies, or commercial lending company
subsidiaries. However, termination of its U.S. operations is not
mandatory in these circumstances. Instead, in enacting section 7(e)(7)
of the IBA, Congress recognized that there may be factors in particular
cases that militate against termination of a foreign bank's U.S.
operations.
On December 13, 1994, the Board published for comment a proposed
amendment to Regulation K (the Proposed Rule), 59 FR 64171, setting
forth criteria to be used in evaluating whether a foreign bank's U.S.
operations, in the absence of comprehensive, consolidated supervision,
should be terminated or permitted to continue and, if the latter,
whether any supervisory constraints should be placed upon the bank in
connection with those operations.
The Proposed Rule further provided that any foreign bank found not
to be subject to comprehensive, consolidated supervision may be
required to enter into and comply with an agreement to conduct its U.S.
operations in accordance with restrictions the Board may determine to
be appropriate in order to assure the safety and soundness of such
operations. Prior to imposing any such restrictions, whether through
written agreement or otherwise, the Board would consult with the Office
of Comptroller of the Currency (OCC) or the relevant state banking
authorities. In appropriate circumstances, the OCC or the relevant
state banking authorities may join in any such agreement. If any
requirements imposed in such an agreement were not adhered to, the U.S.
banking operations of the foreign bank would be subject to further
enforcement action, including potentially the issuance of an order
terminating the activities of its U.S. offices or transmittal of a
recommendation to the OCC for such termination.
The Board received six public comments with regard to the Proposed
Rule. Comments were submitted by two Members of Congress, an
association of state banking supervisors, three trade associations, and
one domestic bank. The comments focused on the following general
topics: maintaining flexibility in the evaluation process, as well as
in the supervisory responses to a determination that a foreign bank is
not subject to comprehensive, consolidated supervision; taking into
account a country's progress towards a system of comprehensive,
consolidated supervision; excluding representative offices from
evaluation under the criteria; providing notice to a foreign bank prior
to making a comprehensive, consolidated supervision determination;
clarifying relevant state banking regulators for purposes of
consultation under the rule; and evaluating a foreign bank's overall
financial condition. The comments are discussed further below.
Flexibility
The commenters generally endorsed the flexibility indicated by the
Board in proposing to take into account a wide variety of criteria in
evaluating whether a foreign bank's U.S. operations should be
terminated or permitted to continue when that foreign bank is not
subject to comprehensive, consolidated supervision.
Several commenters urged the Board to apply the criteria and
develop any subsequent supervisory response on a case-by-case basis,
taking into account the unique circumstances of the foreign bank
concerned, rather than developing a ``standardized'' response based
upon a foreign bank's country of origin. The commenters further urged
the Board explicitly to endorse the case-by-case approach to such
determinations, either in the final rule or in commentary to the final
rule.
As the Board indicated in the preamble to the Proposed Rule,
determinations with regard to whether a foreign bank is subject to
comprehensive, consolidated supervision will be made in the context of
the supervision and regulation of the foreign bank's existing U.S.
operations. A case-by-case approach to such determinations was
contemplated in the Proposed Rule and the Board continues to believe
that this is the appropriate basis on which such determinations should
be made. That said, an adverse determination with regard to whether a
particular bank is subject to comprehensive, consolidated supervision
will suggest that further inquiry may be appropriate with regard to the
nature and scope of supervision of other banks with the same home
country supervisor.
Progress Towards Comprehensive, Consolidated Supervision
The commenters also noted that many foreign supervisors have
reacted to passage of the FBSEA by undertaking initiatives to institute
systems of comprehensive, consolidated supervision. The commenters
urged the Board to take into account as an additional criterion whether
the foreign bank's home country supervisor was making progress towards
comprehensive, consolidated supervision as outlined in the minimum
standards for the supervision of international banking groups and their
cross-border establishments published by the Basle Committee on Banking
Supervision. The Board considers this to be an appropriate suggestion
and the final rule has been amended to include such a criterion.
Supervisory Response
Several commenters were concerned that imposing a requirement that
a foreign bank conduct its U.S. banking operations on the basis of such
operations being in a net-due-to position vis-a-vis the parent should
not be the standard supervisory response stemming from a determination
that a foreign bank is not subject to comprehensive, consolidated
supervision. The commenters noted generally that such a requirement
could be extremely damaging to the business of a foreign bank. These
commenters also noted that the Board, in the
[[Page 6920]]
preamble to the Proposed Rule, indicated that it was appropriate, in
developing the proposed criteria, to take into account the panoply of
tools available to the Board and other banking regulators to regulate
the operations of foreign banks not yet subject to comprehensive,
consolidated supervision. One commenter recommended that the Board
clarify that it only would use specific supervisory agreements in cases
where it has safety and soundness concerns regarding the U.S.
operations of a foreign bank, not solely on the basis that the foreign
bank's home country supervisor does not exercise comprehensive,
consolidated supervision.
The Proposed Rule provided that any foreign bank that the Board
determines is not subject to comprehensive, consolidated supervision
may be required to conduct its U.S. operations subject to such
restrictions as the Board, having taken into account the criteria,
determines to be appropriate in order to assure the safety and
soundness of the bank's U.S. operations. 59 FR 64173. The Board stated
in the preamble to the Proposed Rule that requiring a foreign bank to
conduct its U.S. banking operations in a net-due-to position vis-a-vis
the rest of the organization would be one means of assuring the safe
and sound operation of the bank's U.S. offices. The Board also noted
that other operational requirements also could be imposed, such as
collateralization of affiliate transactions, asset maintenance
requirements, increased asset pledges, and liquidity requirements.
Which of these operational requirements, if any, would be imposed upon
a foreign bank's offices in the United States following a determination
that the bank is not subject to comprehensive, consolidated supervision
would be determined in light of the circumstances of each case.
Representative Offices
Two commenters asked the Board to consider the implications of the
Proposed Rule as regards representative offices, arguing that the
criteria should not apply to foreign banks that operate only
representative offices in the United States. The Board notes that the
FBSEA permits the approval of applications to establish representative
offices even in the absence of comprehensive, consolidated supervision.
The absence of comprehensive, consolidated supervision would not mean
necessarily that any action would be taken under the criteria in
relation to a bank with only representative offices in the United
States. If, however, supervisory concerns should arise in relation to
such a bank, the criteria would apply.
Notice to Foreign Bank
One commenter noted that language in the preamble to the Proposed
Rule could imply that a Board determination as to comprehensive,
consolidated supervision may be made without notice to the foreign bank
other than when expeditious action is necessary or in connection with
an application requiring such determination. The commenter further
stated that the strength of support assessment to be made in connection
with the Supervisory Program for the U.S. Operations of Foreign Banking
Organizations presents an opportunity for a comprehensive, consolidated
supervision determination to be made unbeknownst to the foreign bank.
This commenter recommended that the final rule confirm that a foreign
bank will always receive notice and an opportunity to provide its views
and relevant information when a comprehensive, consolidated supervision
determination is being made and expeditious action in the public
interest is not necessary.
As the Board indicated in the Proposed Rule, all determinations
with regard to whether a foreign bank is subject to comprehensive,
consolidated supervision will be made in the context of the supervision
of the foreign bank's U.S. operations or, of course, in connection with
an application. Just as is the case with other such determinations, a
foreign bank generally will have an opportunity to provide its views
and any information it considers relevant during the course of the
application, supervision, or examination process. Information gained in
the course of the supervisory process will be available to the Board
when making the determination of whether a foreign bank is subject to
comprehensive, consolidated supervision. Any action that might result
from a determination, such as a decision to terminate or to begin
enforcement proceedings, would provide the foreign bank with an
opportunity to provide further information to the Board.
State Banking Regulators
One commenter noted that the criteria do not specify which state
banking regulator would be the ``relevant'' banking regulator in those
cases where a foreign bank has operations in more than one state. This
commenter, therefore, recommended that the Board clarify that the
``relevant'' state regulator includes all state bank regulators where
the foreign bank in question has offices. This amendment is consistent
with the intention underlying the subject provision of the Proposed
Rule and the final rule has been amended accordingly.
Evaluation of Financial Condition
One commenter indicated that due regard should be accorded
different accounting systems used by the foreign bank when evaluating
the soundness of the foreign bank's financial condition, particularly
if the accounting treatments differ from U.S. generally accepted
accounting principles. The Board considers that no amendment to the
Proposed Rule is necessary to address this point. The Board notes that
it approaches the evaluation of a foreign bank's financial condition
with sufficient flexibility to accommodate such accounting differences,
yet with sufficient rigor to reach a view regarding whether the foreign
bank's overall financial strength is equivalent to that required of
U.S. banks seeking to engage in similar activities.
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 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 rule.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that the final rule
would not have a significant impact on a substantial number of small
entities that are subject to its regulation.
List of Subjects in 12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
For the reasons outlined above, the Board is amending 12 CFR Part
211 as set forth below:
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for 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. A new Sec. 211.30 is added to Subpart B to read as follows:
[[Page 6921]]
Sec. 211.30 Criteria for evaluating the U.S. operations of foreign
banks not subject to consolidated supervision.
(a) General. Pursuant to the Foreign Bank Supervision Enhancement
Act, Pub.L. 102-242, 105 Stat. 2286 (1991), the Board shall develop and
publish criteria to be used in evaluating the operations of any foreign
bank in the United States that the Board has determined is not subject
to comprehensive supervision or regulation on a consolidated basis.
(b) Criteria. Following a determination by the Board that, having
taken into account the standards set forth in Sec. 211.24(c)(1) of this
subpart, a foreign bank is not subject to comprehensive, consolidated
supervision by its home country supervisor, the Board shall consider
the following criteria in determining whether the foreign bank's U.S.
operations should be permitted to continue and, if so, whether any
supervisory constraints should be placed upon the bank in connection
with those operations:
(1) The proportion of the foreign bank's total assets and total
liabilities that are located or booked in its home country, as well as
the distribution and location of its assets and liabilities that are
located or booked elsewhere;
(2) The extent to which the operations and assets of the foreign
bank and any affiliates are subject to supervision by its home country
supervisor;
(3) Whether the appropriate authorities in the home country of such
foreign bank are actively working to establish arrangements for the
comprehensive, consolidated supervision of such bank and whether
demonstrable progress is being made;
(4) Whether the foreign bank has effective and reliable systems of
internal controls and management information and reporting, which
enable its management properly to oversee its worldwide operations;
(5) Whether the foreign bank's home country supervisor has any
objection to the bank continuing to operate in the United States;
(6) Whether the foreign bank's home country supervisor and the home
country supervisor of any parent of the foreign bank share material
information regarding the operations of the foreign bank with other
supervisory authorities;
(7) The relationship of the U.S. operations to the other operations
of the foreign bank, including whether the foreign bank maintains funds
in its U.S. offices that are in excess of amounts due to its U.S.
offices from the foreign bank's non-U.S. offices;
(8) The soundness of the foreign bank's overall financial
condition;
(9) The managerial resources of the foreign bank, including the
competence, experience, and integrity of the officers and directors and
the integrity of its principal shareholders;
(10) The scope and frequency of external audits of the foreign
bank;
(11) The operating record of the foreign bank generally and its
role in the banking system in its home country;
(12) The foreign bank's record of compliance with relevant laws, as
well as the adequacy of its money laundering controls and procedures,
in respect of its worldwide operations;
(13) The operating record of the U.S. offices of the foreign bank;
(14) The views and recommendations of the Office of the Comptroller
of the Currency or the state banking regulators in those states in
which the foreign bank has operations, as appropriate;
(15) Whether the foreign bank, if requested, has provided the Board
with adequate assurances that such information will be made available
on the operations or activities of the foreign bank and any of its
affiliates as the Board deems necessary to determine and enforce
compliance with the International Banking Act, the Bank Holding Company
Act, and other applicable federal banking statutes; and
(16) Any other information relevant to the safety and soundness of
the U.S. operations of the foreign bank.
(c) Restrictions on U.S. operations.--(1) Terms of agreement. Any
foreign bank that the Board determines is not subject to comprehensive
supervision or regulation on a consolidated basis by its home country
supervisor may be required to enter into an agreement to conduct its
U.S. operations subject to such restrictions as the Board, having
considered the criteria set forth in paragraph (b) of this section,
determines to be appropriate in order to assure the safety and
soundness of its U.S. operations.
(2) Failure to enter into or comply with agreement. A foreign bank
that is required by the Board to enter into an agreement pursuant to
paragraph (c)(1) of this section and either fails to do so or fails to
comply with the terms of such agreement may be subject to enforcement
action in order to assure safe and sound banking operations under 12
U.S.C. 1818, or to termination or a recommendation for termination of
its U.S. operations under Sec. 211.25 (a) and (e) of this subpart and
section (7)(e) of the IBA (12 U.S.C. 3105(e)).
By order of the Board of Governors of the Federal Reserve
System, February 15, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-3910 Filed 2-22-96; 8:45 am]
BILLING CODE 6210-01-P
