The Board of Governors has a
number of supervisory responsibilities over the operations of foreign
banking organizations in the United States under the Bank Holding
Company Act and, more recently, under the International Banking Act
of 1978. During the past year the Board has undertaken a major review
of its supervisory and regulatory policies toward foreign bank holding
companies. Major elements underlying that review were the growth in
number and total assets of U.S. banks owned by foreign banks and other
foreign companies and the experience gained in regulating foreign
bank holding companies since the 1970 Amendments to the Bank Holding
Company Act. In the course of the review, the International Banking
Act of 1978 was passed, thereby broadening the Board’s supervisory
responsibilities over the U.S. operations of foreign banks and establishing
certain legislative policies over their operations in this country.
In order to inform the public and the banking industry, the Board
is issuing this statement setting forth its policy toward regulating
foreign bank holding companies in the United States and describing
initiatives that are underway in order to implement this policy more
effectively.
Bank supervision in the United States has as a principal
objective the promotion of the safety and soundness of banking institutions
as going concerns serving depository and credit needs of their communities
and the economy as a whole. To this end, a number of standards have
been established governing domestic entry into the banking
business and ongoing supervision of banking operations of domestic
banks and bank holding companies.
In urging legislation to provide for federal regulation
of foreign banks in the United States, the Board endorsed the principle
of national treatment, or nondiscrimination, as a basis for the rules
governing the entry and subsequent operations of foreign banks in
this country. The International Banking Act of 1978 generally incorporates
that principle in its provisions.
The Board continues to believe that the principle of national
treatment should be the guiding rule in administering the Bank Holding
Company Act and the International Banking Act of 1978 as they affect
foreign banks. Following this rule, the Board believes that in general
foreign banks seeking to establish banks or other banking operations
in the United States should meet the same general standards of strength,
experience and reputation as required for domestic organizers of banks
and bank holding companies. The Board also believes that foreign banks
should meet on a continuing basis these standards of safety and soundness
if they are to be a source of strength to their U.S. banking operations.
At the same time, the Board is cognizant that foreign
banks operate outside the United States in accordance with different
banking practices and traditions and in different legal and social
environments. The Board also recognizes that its supervisory responsibilities
are for the safety and soundness of U.S. banking operations. Its supervisory
concerns for the operations and activities of foreign banks outside
the United States are, therefore, limited to their possible effects
on the ability of those banks to support their operations inside the
United States. As embodied in both the Bank Holding Company Act and
the International Banking Act of 1978, it is the general policy of
the Board not to extend U.S. bank supervisory standards extra-territorially
to foreign bank holding companies. The Board will give due regard
to these factors in applying the principle of national treatment.
The Board has jurisdiction over foreign entry in the case
of foreign organizations seeking to acquire U.S. banks. Whenever a
foreign bank applies to become a bank holding company, the Board will
seek to assure itself of the foreign bank’s ability to be a source
of financial and managerial strength and support to the U.S. subsidiary
bank. In reaching this judgment, the Board will analyze the financial
condition of the foreign organization, evaluate the record and integrity
of management, assess the role and standing of the bank in its home
country, and request the views of the bank regulatory authorities
in the home country. In connection with its financial analysis, the
Board will require sufficient information to permit an assessment
of the financial strength and operating performance of the foreign
organization. Information will consist of reports prepared in accordance
with local practices together with an explanation and reconciliation
of major differences between local accounting standards and U.S. generally
accepted accounting procedures including full information on earnings,
capital, charge-offs, and reserves. The Board will also continue to
work with bank supervisory authorities of other major countries to
improve overall cooperation in international bank regulation.
Since the Board believes that foreign
bank holding companies should be strong reputable organizations with
banking experience, the Board is considering an amendment to tighten
the definition by which a foreign company can qualify under section
4(c)(9) of the Bank Holding Company Act for exemption from the prohibitions
on ownership of nonbanking companies. For the purposes of section
4(c)(9), section 225.4(g) of Regulation Y defines a foreign bank holding
company as a company chartered abroad “more than half of whose consolidated
assets are located, or consolidated revenues derived, outside of the
United States.” The Board will propose for public comment a change
in that regulation which would require the company to be primarily
engaged in banking abroad. This would essentially reserve section
4(c)(9) for foreign organizations that were principally banks or banking
institutions. As a result, both the foreign and domestic operations
of foreign nonbank companies acquiring U.S. banks would either have
to be divested or meet the more restrictive tests for exemption under
section 4(c)(8) or section 4(c)(13) of the act.
In connection with the Board’s overall review
of its regulations and the implementation of the International Banking
Act, a general revision of the regulation governing section 4(c)(9)
will also be proposed later in 1979.
Once a foreign bank holding company has been established,
Board supervisory procedures will be primarily directed at promoting
the safety and soundness of the subsidiary U.S. banks. Examinations
carried out by the relevant federal and/or state supervisory authority
will continue to be the primary instrument for this purpose. Special
attention will be given to transactions and correspondence between
the U.S. subsidiary bank and its foreign parent and to monitoring
credits by the U.S. bank to parties that are also customers of the
parent. In particular, federal bank supervisors will expect the U.S.
bank to maintain sufficient information on all borrowers to permit
both the U.S. bank and bank examiners to make an independent appraisal
of the bank’s credits.
In addition to the examination process, the Board will
require foreign bank holding companies to report quarterly on transactions
between the U.S. subsidiary bank and its foreign parent. This reporting
system is currently under development and will be implemented in the
near future. The report will be similar to one currently required
from domestic bank holding companies but will be designed to take
into account the particular nature of the U.S. operations of foreign
banks.
The Board will also require submission of sufficient financial
information to enable it to assess the operations and general condition
of the parent institution. To this end, the Board is in the process
of amending its Annual Report for Foreign Bank Holding Companies (F.R.
Y-7) to require more financial information on the foreign parent.
In particular, full information on earnings, reserves and capital
will be required along with an explanation of major material differences
between U.S. and foreign accounting practices. In its use and handling
of the information, the Board will take into account the fact that
much of the information required may be confidential commercial information
that is not generally disclosed.
This statement of policy applies to foreign bank holding
companies and their U.S. bank subsidiaries. However, the Board has
directed its staff to review supervisory policy with respect to the
branches, agencies, and commercial lending companies of foreign banks
in the United States in light of the Board’s expanded supervisory
responsibilities under the International Banking Act of 1978. At the
conclusion of this review, the Board will issue a statement addressing
the supervision of these offices. STATEMENT of Feb. 23, 1979.
