[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