Purpose This statement discusses the characteristics
of parallel-owned banking organizations, reviews potential risks associated
with these banking organizations, and sets forth the approach of the
Office of the Comptroller of the Currency, Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corporation, and
Office of Thrift Supervision (collectively, “the banking agencies”)
to supervision of those risks. It also provides information on the
applications process for proposals involving parallel-owned banking
organizations.
The banking agencies’ supervisory approach seeks to better
understand how the overall strategy and management of a parallel-owned
banking organization affects a U.S. depository institution within
such a structure, how the activities of foreign affiliates are supervised,
how home-country supervisors view the condition and operations of
foreign affiliates, and how affiliates could affect the U.S. depository
institution. Through this understanding, the banking agencies may
be better able to monitor and address risks affecting a U.S. depository
institution that arise in parallel-owned banking organizations. Enhanced
communication and cooperation with foreign bank supervisors is important
to this process.
The supervisory approach outlined in this statement cannot
eliminate the risks inherent with a parallel-owned banking structure.
However, this supervisory approach may assist the banking agencies
in determining the extent of inter-organizational transactions, for
example, loan participations or sales, insider loans and contractual
obligations for services. The banking agencies may also be better
able to assess the effects that another member of the organization
may have on a U.S. depository institution.
Identifying Parallel-Owned Banking Organizations A parallel-owned banking organization
is created when at least one U.S. depository institution and one foreign
bank
1 are controlled either directly or indirectly
by the same person or group of persons
2 who are
closely associated in their business dealings or otherwise acting
in concert. It does not include structures in which one depository
institution is a subsidiary of the other, or the organization is controlled
by a company subject to the Bank Holding Company Act, 12 U.S.C. 1841
et seq., or the Savings and Loan Holding Company Act, 12 U.S.C.
1467a.
3 The banking agencies
consider
whether a person or group of persons may control a depository institution
if the person or group of persons controls 10 percent or more of any
class of voting shares of the depository institution.
4The characteristics listed below may be indicators that
a U.S. depository institution is directly or indirectly controlled
by a person or group of persons that also controls a foreign bank.
If one or more of the following factors exist, depending upon the
circumstances, the banking agencies may conduct additional inquiries:
- An individual or group of individuals acting in concert
that controls a foreign bank also controls any class of voting shares
of a U.S. depository institution; or financing for persons owning
or controlling the shares is received from, or arranged by, the foreign
bank, especially if the shares of the U.S. depository institution
are collateral for the stock-purchase loan.
- The U.S. depository institution has adopted particular
or unique policies or strategies similar to those of the foreign bank,
such as common- or joint-marketing strategies, sharing of customer
information, cross-selling of products, or linked web sites.
- An officer or director of the U.S. depository institution
either (1) serves as an officer or director5 of
a foreign bank or (2) controls a foreign bank or is a member of a
group of individuals acting in concert or with common ties that controls
a foreign bank.
- The name of the U.S. depository institution is similar
to that of the foreign bank.
Parallel-owned banking organizations are established
and maintained for a variety of reasons, including tax and estate
planning and risks of nationalization. While these reasons may be
legitimate and not prohibited by U.S. or foreign law, the structure
of such organizations creates or increases the risks outlined below
and may make it more difficult for supervisors to monitor and address
such risks.
Supervisory Risks
in Parallel-Owned Banking Organizations Parallel-owned banking organizations present supervisory risks similar
to those arising from chain-banking organizations in the United States.
The fundamental risk presented by these organizations is that they
may be acting in a de facto organizational structure that, because
it is not formalized, is not subject to comprehensive consolidated
supervision. Consequently, relationships between the U.S. depository
institution and other affiliates may be harder to understand and monitor.
This risk can be reduced but not eliminated by (1) working with the
appropriate non-U.S. supervisors to better understand and monitor
the activities of the foreign affiliates and owners; (2) sharing information,
as appropriate, with foreign and domestic banking supervisory agencies
with supervisory responsibility for other entities within the organization;
and (3) imposing special conditions or obtaining special commitments
or representations related to an application or enforcement or other
supervisory action, where warranted.
Parallel-owned banking organizations may raise numerous
management and supervisory risks, including:
- Officers and directors of the U.S. depository institution
may be unable or unwilling to exercise independent control to ensure
that transactions with the foreign parallel bank or affiliates are
legitimate and comply with applicable laws and regulations. As a result,
the U.S. depository institution may be the conduit or participant
in a transaction that violates U.S. law or the laws of a foreign country,
or that is designed to prefer a foreign bank or nonbank entity in
the group, to the detriment of the U.S. depository institution.
- Money-laundering concerns may be heightened due to
the potential lack of arms-length transactions between the U.S. depository
institution and the foreign parallel bank. Specifically, the flow
of funds through wires, pouch activity, and correspondent accounts
may be subject to less internal scrutiny by the U.S. depository institution
than usually is warranted. This risk is greatly increased when the
foreign parallel bank is located in an offshore jurisdiction or other
jurisdiction that limits exchange of information through bank secrecy
laws, especially if the jurisdiction has been designated as a “non-cooperating
country or territory,” or the jurisdiction or the foreign bank has
been found to be of primary money-laundering concern under the International
Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.6
- Securities, custodial, and trust transactions may
be preferential to the extent that assets, earnings, and losses are
artificially allocated among parallel banks. Similarly, low-quality
assets and problem loans can be shifted among parallel banks to manipulate
earnings or losses and avoid regulatory scrutiny. Also, if the foreign
parallel bank were to begin experiencing financial difficulties, the
foreign bank or the common owners might pressure the U.S. depository
institution to provide credit support or liquidity to an affiliate
in excess of the legal limits of 12 U.S.C. 371c, 371c-1.
- The home country of the foreign parallel bank may
have insufficient mechanisms or authority to monitor changes in ownership
or to ensure arms-length intercompany transactions between the foreign
parallel bank and other members of the group, including the U.S. depository
institution, or to monitor concentration of loans or transactions
with third parties that may present safety-and-soundness concerns
to the group.
- Capital may be generated artificially through the
use of international stock-purchase loans. Such loans can be funded
by the U.S. depository institution to the foreign affiliate or to
a nonaffiliate with the purpose of supporting a loan back to the foreign
affiliate and used to leverage the U.S. depository institution or
vice versa. This concern is heightened for parallel-owned banking
organizations if the foreign bank is not adequately supervised.
- Political, legal, or economic events in the foreign
country may affect the U.S. depository institution. Events in the
foreign country, such as the intervention and assumption of control
of the foreign parallel bank by its supervisor, may trigger a rapid
inflow or outflow of deposits at the U.S. depository institution,
thereby affecting liquidity. Foreign events may increase reputational
risk to the U.S. depository institution. In addition, these events
may adversely affect the foreign bank owner’s financial resources
and decrease the ability of the foreign bank owner to provide financial
support to the U.S. depository institution. Foreign law may change
without the U.S. depository institution or the banking agencies becoming
aware of the effect of legal changes on the parallel-owned banking
organization, including the U.S. depository institution.
- Parallel-owned banking organizations may seek to
avoid legal lending limits or limitations imposed by securities or
commodities exchanges or clearinghouses on transactions by one counterparty,
thereby unduly increasing credit risk and other risks to the banking
organizations and others.
To minimize these risks, the banking agencies
will coordinate their supervision of a parallel-owned banking organization’s
U.S. operations. The supervisory approach may include unannounced
coordinated examinations if more than one regulator has examination
authority. Such examinations may be conducted if regulators suspect
irregular transactions between parallel-owned banks, such as the shifting
of problem assets between the depository institutions. Factors to
consider in determining whether to conduct coordinated reviews of
an organization’s U.S. operations include intercompany and related
transactions; strategy and management of the parallel-owned banking
organization; political, legal, or economic events in the foreign
country; and compliance with commitments or representations made or
conditions imposed in the application process or pursuant to prior
supervisory action.
The banking agencies expect the U.S. depository institution’s
board of directors and senior management to be cognizant of the risks
associated with being part of a parallel-owned banking structure,
especially with respect to diversion of depository institution resources,
conflicts of interest, and affiliate transactions. The depository
institution’s internal policies and procedures should provide guidance
on how personnel should treat affiliates. The banking agencies expect
to have access to such policies as well as the results of any audits
of compliance with the policies. The banking agencies will seek an
overview of the entire organization, as well as a better understanding
of how foreign bank affiliates are supervised. Authorized members
of supervisory staff will work with foreign supervisors to better
understand the activities of the foreign affiliates and owners. As
appropriate and feasible, and in accordance with applicable law, authorized
staff members of the banking agencies will share information regarding
material developments with foreign and domestic supervisory agencies
that have supervisory responsibility over relevant parts of the parallel-owned
banking organization.
Application
Process for Proposals Involving Parallel-Owned Banking Organizations A person or group of persons who are
closely associated in their business dealings or otherwise acting
in concert may establish or acquire control of a foreign bank and
subsequently establish or acquire control of a U.S. depository institution,
where one depository institution is not a subsidiary of the other.
This establishment or acquisition of a U.S. depository institution
would be subject to the Change in Bank Control Act, the Bank Holding
Company Act, the Federal Deposit Insurance Act, or the Savings and
Loan Holding Company Act. The banking agencies’ policies and procedures
for processing applications, including filings under the Change in
Bank Control Act, the Bank Holding Company Act, the Federal Deposit
Insurance Act, or the Savings and Loan Holding Company Act may be
found in regulations and guidance issued by the banking agencies.
As with all types of applications, the banking agencies review proposals
involving parallel-owned banking organizations on a case-by-case basis,
including a review of the corporate structure of the proposed transaction.
Therefore, information required, commitments or representations requested,
and the imposition of special conditions in a regulatory decision
may differ for each applicant or notificant. Depending on specific
circumstances, the banking agencies may place additional restrictions
on the U.S. depository institution’s ability to engage in transactions
with foreign affiliates or may impose other restrictions, as applicable.
U.S. depository institutions that learn
of the possibility of becoming part of a parallel-owned banking organization
should promptly advise the appropriate federal banking agency. Experience
shows that obtaining all of the information necessary to gain a complete
understanding of the foreign bank, which may require working with
the foreign bank supervisor, and an understanding of the impact of
the proposal on the U.S. depository institution, can be more complicated
and time-consuming in a potential parallel-owned banking organization
situation than is ordinarily the case.
Acknowledgment to the Appropriate Federal Banking Agency that
a U.S. Depository Institution Has Become Part of a Parallel-Owned
Banking Organization A person or group
of persons may first establish or acquire control of the U.S. depository
institution and then the foreign bank, where one depository institution
is not a subsidiary of the other or the U.S. depository institution
and the foreign bank are not subsidiaries of the
same bank holding company or savings and loan holding company. In
this instance, a parallel-owned banking organization would be formed
without the review of the banking agencies in the application process.
To the extent possible, in order to ensure that the U.S.
depository institution is properly supervised and identified as part
of a parallel-owned banking organization, a U.S. depository institution
should provide an acknowledgment to the appropriate federal banking
agency prior to becoming part of a parallel-owned banking organization.
A U.S. depository institution’s management should advise the individuals
who control the depository institution to inform management before
they obtain control of a foreign bank. If providing this acknowledgment
in advance is not possible, the U.S. depository institution should
inform the banking agency promptly after learning of the acquisition
of control so that the banking agency may adjust its supervisory strategy
expeditiously and assist the U.S. depository institution in identifying
and controlling any risks presented by membership in a parallel-owned
banking organizations.
Interagency statement
of April 23, 2002.
