Foreign Banks: Implementation of the Foreign Bank Supervision Enhancement
Act of 1991 (Letter Report, 09/30/96, GAO/GGD-96-187).

Pursuant to a congressional request, GAO provided information on the
Federal Reserve's implementation of the Foreign Bank Supervision
Enhancement Act, focusing on: (1) the Reserve's examination process and
process for approving foreign bank applications for U.S. entry and
expansion; and (2) enforcement actions that the Federal Reserve has
taken since 1993.

GAO found that: (1) the act established minimum standards for foreign
bank entry and expansion into the United States, strengthened federal
bank supervision and regulation, and required that the Federal Reserve
approve foreign banks' applications for acquiring bank subsidaries; (2)
although the Federal Reserve approved 45 applications after determining
that the applicant banks met the act's standards, Federal Reserve staff
believed that the application process was too lengthy; (3) new
guidelines, established in 1993, reduced application processing times;
(4) between 1993 and 1995, the Federal Reserve met its mandate to
coordinate with the other federal and state bank supervisors to examine
foreign branches and agencies once every 12 months; (5) the Federal
Reserve also examined over half of the representative offices of foreign
banks operating in the United States even though it did not establish a
time frame for such examinations; (6) the foreign banks examined were
generally in satisfactory condition and only 3 percent of the foreign
branches and agencies received low safety and soundness ratings in 1995;
and (7) of the 40 formal enforcement actions the Federal Reserve issued
against U.S. foreign banks between 1993 and 1995, 6 required voluntary
terminations of deposit insurance, 4 required the use of civil money
penalty authority, and one foreign bank was ordered to terminate its
U.S. banking operations.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-187
     TITLE:  Foreign Banks: Implementation of the Foreign Bank 
             Supervision Enhancement Act of 1991
      DATE:  09/30/96
   SUBJECT:  Banking law
             Banking regulation
             Foreign investments in US
             Bank deposits
             Bank examination
             Fines (penalties)
             Financial institutions
             International economic relations
             Investments abroad
             Bank management

             
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Cover
================================================================ COVER


Report to the Chairwoman and the Ranking Minority Member,
Subcommittee on Financial Institutions and Consumer Credit, House of
Representatives

September 1996

FOREIGN BANKS - IMPLEMENTATION OF
THE FOREIGN BANK SUPERVISION
ENHANCEMENT ACT OF 1991

GAO/GGD-96-187

Implementation of FBSEA 1991

(233486)


Abbreviations
=============================================================== ABBREV

  FBO - Foreign Banking Organization
  FBSEA - Foreign Bank Supervision Enhancement Act of 1991
  FDIC - Federal Deposit Insurance Corporation
  IBA - International Banking Act of 1978
  OCC - Office of the Comptroller of the Currency

Letter
=============================================================== LETTER


B-271055

September 30, 1996

The Honorable Marge Roukema
Chairwoman
The Honorable Bruce F.  Vento
Ranking Minority Member
Subcommittee on Financial Institutions
 and Consumer Credit
Committee on Banking and Financial Services
House of Representatives

This report responds to your request for information on
implementation of the Foreign Bank Supervision Enhancement Act of
1991 (FBSEA).  FBSEA gives the Federal Reserve enhanced supervisory
and regulatory authority over foreign banks operating in the United
States through branches, agencies, commercial lending companies, and
representative offices.\1 The legislation was proposed primarily in
response to the perceived need for more federal oversight resulting
from misconduct by a few foreign banks operating in the United
States. 

You were interested in whether the act is being adequately
implemented.  As agreed with your subcommittee, the objectives of
this report are to describe (1) the Federal Reserve's process for
approving foreign bank applications for entry and expansion into the
United States and (2) the examination process, including the
coordination among U.S.  regulators, and provide statistics on
enforcement actions that have been taken since passage of FBSEA.  In
additional work now under way, we agreed to (1) review the Foreign
Banking Organization (FBO) program, which the Federal Reserve
developed to improve the supervision of foreign banks in the United
States and (2) gather information on internal control problems in the
U.S.  offices of foreign banks and the use of internal and external
audits by foreign banks and federal bank supervisors. 


--------------------
\1 Agencies perform the same functions as branches except that they
cannot generally accept deposits.  Commercial lending companies are
specialized nondepository institutions organized under state law. 
They may engage in borrowing and lending activities and have numerous
other powers.  They may maintain credit balances but may not accept
deposits.  New York Article XII investment companies are the only
current examples.  Representative offices generally are small
marketing and research operations.  Some are similar to the loan
production offices of U.S.  banks.  They allow foreign banks to
attract business for the parent bank and develop correspondent
relationships with local U.S.  banks.  They are prohibited, however,
from engaging in general banking activities, although they may
conduct administrative functions, such as handling the signing of
loan documents. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

FBSEA established minimum standards for foreign bank entry and
expansion into the United States and strengthened federal supervision
and regulation.  Under the act, before foreign banks can establish
offices or acquire banking subsidiaries in the United States, the
Federal Reserve must approve the applications.  Our review of the
Federal Reserve's process for approving such applications showed that
as of January 29, 1996, the Federal Reserve had approved 45
applications after determining that the applicant banks met the
standards specified in FBSEA and its implementing regulations. 
However, Federal Reserve staff have said that the processing of
applications had taken longer than they would have liked.  Federal
Reserve staff told us that new guidelines were established in March
1993 to improve processing time.  Available evidence indicates that
average processing time has been reduced since these new guidelines
became effective. 

The Federal Reserve, as mandated by FBSEA, is to coordinate with the
other federal and state bank supervisors to ensure that foreign
branches and agencies are examined at least once every 12 months. 
Federal Reserve statistics indicated that FBSEA's 12-month mandate
had been met in an average of 97 percent of the cases during 1993,
1994, and 1995.  In addition, the act gave the Federal Reserve
responsibility for examining representative offices of foreign banks
in the United States, although it did not establish a time frame in
which this must be done.  The Federal Reserve examined over half of
the representative offices of foreign banks operating in the United
States during each of the years 1993, 1994, and 1995. 

Examination results indicated that bank supervisors have found
branches and agencies of foreign banks generally to be in
satisfactory condition.  For example, only 3 percent of foreign
branches and agencies received ratings in the lowest two categories
for safety and soundness in 1995.  From 1993 through 1995, federal
banking supervisors issued 40 formal enforcement actions against
foreign banks operating in the United States.\2

Of these actions, the Federal Reserve used its civil money penalty
authority in four cases and ordered that one foreign bank terminate
its banking operations in the United States. 


--------------------
\2 These 40 actions include 6 voluntary terminations of deposit
insurance.  These actions are counted as formal enforcement actions,
even though the termination is voluntary. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Between 1972 and 1990 the presence of foreign banks in the United
States increased rapidly--from 105 offices\3 and subsidiary banks
with $95 billion in assets in 1972 (measured in 1995 dollars) to 737
offices and subsidiary banks with $933 billion in assets (measured in
1995 dollars) at the end of 1990.\4 Since then their number has
fallen and growth in the volume of their assets has slowed.\5 At the
end of 1995, there were 656 foreign bank offices and foreign-owned
subsidiary banks with $974 billion in assets in the United States. 
Including an additional 247 representative offices, 371 foreign banks
had a presence in the United States. 

Branches and agencies\6 are the most common organizational
forms--accounting for about 78 percent of foreign bank assets at the
end of 1995.  (See table 1.) Foreign-owned U.S.  bank subsidiaries
held over 21 percent of foreign bank assets.  Commercial lending
companies and Edge Act/Agreement Corporations accounted for less than
1 percent of foreign bank assets, and representative offices held no
banking assets.\7



                          Table 1
          
          Foreign Bank Organizations Operating in
           the United States as of December 1995

                   (Dollars in billions)

Forms of organization                 Number        Assets
--------------------------------  ----------  ------------
Branches and agencies                    545          $761
Subsidiary banks                          94           208
Commercial lending companies               3             1
Edge Act/Agreement Corporations           14             3
Representative offices                   247            NA
==========================================================
Total U.S. offices\a                     903          $974
----------------------------------------------------------
\a Totals may not add due to rounding. 

NA:  Not applicable. 

Source:  Federal Reserve. 

U.S.  branches and agencies are legal and operational extensions of
their parent foreign banks and as such have no capital of their own. 
They may conduct a wide range of banking activities, including
lending, money

market services, trade financing, and other activities related to the
service of foreign and U.S.  clients.  They can also access the U.S. 
payments system through the Federal Reserve and obtain other Federal
Reserve services. 

Branches and agencies of foreign banks may be either state-licensed
and therefore regulated and supervised by the respective state
banking department, or federally licensed and regulated and
supervised by the Office of the Comptroller of the Currency (OCC). 
As of December 1995, 473 branches and agencies were state-licensed
and 72 were federally licensed.  In addition, 41 of the branches were
insured by the Federal Deposit Insurance Corporation (FDIC) and thus
subject to additional supervision by FDIC. 

U.S.  bank subsidiaries of foreign banks are U.S.-chartered banks
that have all the powers of U.S.-owned banks.  They are insured by
FDIC and are subject to all the rules and regulations governing
U.S.-owned banks.  Their assets and liabilities are separate from
those of their parent foreign banks, and they must maintain their own
capital in accordance with U.S.  laws and regulations.  They may be
either state or federally chartered. 

Branches and agencies of foreign banks were first subject to federal
regulation with passage of the International Banking Act of 1978
(IBA).  Adopting a policy of national treatment, IBA sought to allow
foreign banks with branches and agencies to operate in the United
States on an equal basis with U.S.  banking organizations.  Foreign
banks were to receive neither significant advantages nor incur
significant disadvantages.  The act also gave the Federal Reserve
responsibility for overseeing the combined U.S.  operations of
foreign banks. 

Although IBA substantially equalized the treatment of the U.S. 
operations of foreign and U.S.  banks, it did not require prior
federal review of foreign bank entry into the U.S.  market nor did it
permit a federal role in the termination of a state-licensed branch
or agency.  Cases of fraud and other criminal activity by some
foreign banks in the 1980s and early 1990s convinced the Federal
Reserve and Congress that both state and federal supervisors needed
to increase the attention they paid to foreign banks operating in the
United States.  In particular, Federal Reserve officials believed
that prior federal review of foreign bank entry and expansion in the
U.S.  market was necessary.  They also believed that a federal role
in terminating a state-licensed branch or agency for unsafe and
unsound banking practices was desirable. 

In December 1991, Congress passed FBSEA.  This act, which amended
IBA, increased federal supervision of all foreign bank operations,
giving the Federal Reserve authority to examine all foreign bank
offices in the United States.  FBSEA also mandated uniform standards
for foreign banks establishing operations in the United States. 
Finally, it prohibited U.S.  branches of foreign banks from obtaining
deposit insurance\8 and gave federal supervisors greater enforcement
authority over the U.S.  operations of foreign banks. 

FBSEA also directed the Federal Reserve to levy examination fees on
foreign banks with a U.S.  branch, agency, or representative office. 
However, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 imposed a 3-year moratorium on this provision. 


--------------------
\3 The term foreign bank office refers to an entity of a foreign bank
that is not separately incorporated in the United States. 

\4 Data exclude representative offices.  The Federal Reserve became
responsible for supervising representative offices under FBSEA. 
Prior to this act, the only federal requirement for these offices was
that they register with the U.S.  Department of the Treasury. 

\5 From 1972 to the end of 1990, real assets in these offices grew at
an annual rate of almost 14 percent.  Since then they have grown at
an annual rate of almost 1 percent. 

\6 Because they perform similar functions, branches and agencies are
often discussed together.  In this report we will follow this
convention. 

\7 Edge Act/Agreement Corporations allow U.S.  and foreign banks to
conduct international banking activities in the United States subject
to more limited laws and regulations than those that apply to
domestic banking activities. 

\8 Those branches that already had deposit insurance were allowed to
retain it. 


   APPLICATIONS FOR FOREIGN BANK
   ENTRY
------------------------------------------------------------ Letter :3

FBSEA increased the Federal Reserve's supervisory and regulatory
power over foreign banks by requiring Federal Reserve approval for
all foreign banks seeking to establish U.S.  offices, whether
licensed by state or federal authorities.\9 This requirement was
designed to give the Federal Reserve, as the agency responsible for
overall supervision of foreign banks in the United States, a role in
determining whether such institutions may establish a U.S.  banking
presence. 


--------------------
\9 Foreign banks had previously been required to obtain Federal
Reserve approval for establishment or acquisition of bank
subsidiaries under the Bank Holding Company Act. 


      UNIFORM STANDARDS FOR
      ESTABLISHING A U.S.  OFFICE
---------------------------------------------------------- Letter :3.1

FBSEA established uniform standards for foreign banks entering the
United States, requiring them to meet financial, managerial, and
operational standards similar to those of U.S.  banking
organizations.  The act made the Federal Reserve responsible for
ensuring that these standards are met. 

Under FBSEA, foreign banks must meet two standards in order to
establish a branch or an agency, or to acquire ownership or control
of a commercial lending company.  First, the Federal Reserve must
determine that the foreign bank applicant (and any parent foreign
bank) engages directly in the business of banking outside the United
States and is subject to comprehensive supervision or regulation on a
consolidated basis by its home country supervisor.  Second, the
foreign bank must furnish to the Federal Reserve the information that
the Federal Reserve requires in order to assess the application
adequately. 

In addition to the two mandatory standards, the Federal Reserve also
considers other factors.  Among others, these include (1) whether the
applicant's home country authorities have consented to the
establishment of the proposed office, (2) the applicant's financial
and managerial resources, including its capacity to engage in
international banking, and (3) whether the applicant has provided
adequate assurances that it will provide access to information
sufficient to allow the Federal Reserve to determine its compliance
with applicable U.S.  laws. 

Before FBSEA, the states were responsible for licensing
representative offices and, at the federal level, applicants only had
to register their office with the U.S.  Department of the Treasury. 
FBSEA gave the Federal Reserve authority to approve establishment of
these offices as well.  However, it did not require the Federal
Reserve to apply the standards mandated to establish other banking
offices to its decisions regarding applications for representative
offices.  The Federal Reserve is to take these standards into account
in evaluating a foreign bank's application to establish a
representative office, but it can approve applications where the
parent foreign bank does not meet all of the standards required to
establish a branch or agency.\10


--------------------
\10 The Federal Reserve has stated that the standards that apply to
the establishment of branches and agencies need not apply in every
case to the establishment of representative offices, because
representative offices do not engage in a banking business and cannot
take deposits or make loans. 


      APPLICATION PROCESS
---------------------------------------------------------- Letter :3.2

Before FBSEA, foreign banks wishing to establish a branch or agency
in the United States were required to obtain approval from the
appropriate banking regulator--OCC--for federal branches and
agencies, or the state regulator for state branches and agencies. 
Since FBSEA, a foreign bank must also receive approval from the
Federal Reserve. 

To receive approval from the Federal Reserve, a foreign bank must
submit an application to the reserve bank located in the district
where it plans to establish an office or to its already designated
"responsible" reserve bank.  A copy of its OCC or state application
and any additional information necessary for the Federal Reserve to
determine that the bank meets the standards set out in FBSEA are to
be included in the application.  The application is not to be
accepted (i.e., deemed informationally complete) until these criteria
are met.  Once the application is accepted for processing, it is
reviewed by staff and submitted to the Board for action. 

Before March 1993, applications were reviewed solely by the reserve
bank before they were accepted.  If an application lacked
information, the reserve bank requested the applicant bank to provide
the information.  After the reserve bank determined that it had all
necessary information to process the application, it was accepted and
forwarded to the Board for review and disposition.  At this point the
Board could request additional information.  This process often
resulted in delays and multiple requests for additional information. 

In March 1993, the Federal Reserve issued guidelines changing its
procedures for processing applications to establish U.S.  offices of
foreign banks.  The changes were intended to expedite processing and
reduce the burden on applicants of responding to multiple requests
for additional information.  The guidelines require the reserve bank
to send copies of the application to the Board within one business
day of receiving an application.  Both the reserve bank and Board
staffs are then to simultaneously review the application to ensure
that the information is complete.  If additional information is
needed, coordinated requests are to be made to the applicant bank
before the application is accepted. 

The guidelines also established time limits for Federal Reserve staff
to review applications and ask for additional information.  The
reserve bank and Board staffs are to review an application and
request additional information from the applicant bank within 15
business days of receipt of the application by the reserve bank.  The
applicant bank then has 20 business days to respond to these
requests.  If the applicant bank does not respond within that time,
the application would normally be returned due to insufficient
information.  If the applicant responds within the time limit, the
reserve bank and Board staffs have an additional 10 business days
either to accept the application as complete or to request additional
information.  If additional information is requested, the applicant
bank similarly has 10 business days to respond. 

The Federal Reserve encourages all foreign bank applicants to meet
with reserve bank and/or Board staffs before filing applications. 
These meetings are intended to identify relevant issues, apprise
applicants of required information, and enable Federal Reserve staffs
to obtain necessary information at an early stage of the process. 

Once the reserve bank and Board staffs determine that the application
is complete and it is accepted, the Federal Reserve has an internal
guideline of 60 days to analyze it, have background checks completed,
and make inquiries to home country authorities.  After these tasks
are completed, the application is to be presented to the Board for
action.\11 If the application cannot be presented for Board action
within the 60-day period, the applicant is to be informed in writing
of the reasons. 


--------------------
\11 Under Federal Reserve regulations the Board can delegate certain
approval authority to the reserve bank.  This may occur when a
foreign bank has already received approval to establish an office and
approval is sought for an additional office with equal or lesser
powers based on its license. 


      RESULTS OF FEDERAL RESERVE'S
      REVIEW OF FOREIGN BANK
      APPLICATIONS
---------------------------------------------------------- Letter :3.3

As of January 29, 1996, the Federal Reserve had received 96
applications from foreign banks seeking to establish offices or bank
subsidiaries under FBSEA.  The Federal Reserve had approved 45
applications, had returned or applicant banks had withdrawn 23, and
28 were under review.\12

Of the 45 applications approved by the Federal Reserve, 6 were for
agencies, 15 for branches, 18 for representative offices, and 8 for
bank acquisitions.\13 The approved applications represented banks
from 23 countries.  Taiwan accounted for the most--7 of the 45
applications. 

In its decisions approving the applications for branches and agencies
and subsidiary banks, the Federal Reserve found that the foreign
banks had met the standards required under FBSEA and its implementing
regulations.  The Federal Reserve's decisions indicated that the
applicants had provided the necessary information, had met all
conditions concerning their intended operation, and were in
compliance with the requirements for approval. 

The Federal Reserve's policy, as required by FBSEA, is to use the
standards that apply to branches and agencies as guidance when
considering an application to establish a representative office. 
Federal Reserve regulations do not require these standards to be met
in every case because representative offices differ from branches and
agencies in that representative offices cannot engage in a banking
business and cannot take deposits or make loans. 

Federal Reserve staff told us that, in general, representative office
applicants have not been required to meet the supervision standards
required for branches and agencies.  A review of the orders indicated
that the Federal Reserve examined the home country supervision of the
applicant bank in every representative office case, but a
determination that the applicant bank or its parent foreign bank were
subject to comprehensive consolidated supervision was not always
made.  Similarly, the Federal Reserve has not required foreign bank
applicants wishing to establish representative offices to meet the
same financial standards, including the standard related to capital,
which are required for the establishment of branches and agencies. 
In our review of 17 orders approving representative offices, we found
that in 13 cases the orders did not indicate whether the capital
standards were being met by the parent foreign bank. 

Most of the 23 applications that had not been approved by the Federal
Reserve and were no longer under review were withdrawn by the
applicant bank for various reasons.  (See table 2.)



                                Table 2
                
                    Number of Applications Returned/
                    Withdrawn as of January 29, 1996

------------------------------------------------------------  --------
Applications withdrawn\a                                            17
Applications returned
Insufficient information                                             5
Weaknesses in existing U.S. operations                               1
======================================================================
Total                                                               23
----------------------------------------------------------------------
\a Reasons for withdrawal of applications included:  a change in
strategy, a change in ownership, supervision factors, condition of
U.S.  operations, and financial factors relating to the applicant. 
In many situations, a combination of reasons applied. 

Source:  Federal Reserve. 

Of the 28 applications under review as of January 29, 1996, 3 were
for agencies, 5 were for bank acquisitions, 8 were for branches, and
12 were requests to establish representative offices.  Federal
Reserve staff told us that they had not received any applications to
establish a commercial lending company since FBSEA was passed. 


--------------------
\12 These numbers include one representative office that was approved
by the reserve bank under delegated authority. 

\13 Two applications involved approval of more than one type of
foreign bank office. 


      PROCESSING TIME FOR
      ESTABLISHING BRANCHES,
      AGENCIES, AND REPRESENTATIVE
      OFFICES
---------------------------------------------------------- Letter :3.4

Processing foreign bank applications took more than a year on
average, and this length of time concerned both the Federal Reserve
and applicant foreign banks.  Federal Reserve staff told us that the
length of time it took to process applications can be attributed to
the need for additional time to complete background checks and to
review issues related to comprehensive supervision, bank operations,
and internal controls.  They also cited difficulties in obtaining
translated information from some applicant banks, a lack of
understanding by some applicants about the level of detail required
to review comprehensive consolidated supervision, and some
applicants' unfamiliarity with FBSEA requirements as causes of
delays. 

After the Federal Reserve issued its March 1993 guidelines, there was
a decrease in the amount of time taken to process branch, agency, and
representative office applications.  (See fig.  1.) On average, the
total time it took to process such applications (from date of initial
filing to disposition) dropped from 574 days to 293 days.\14 Of this,
the average time between the date that applications were initially
filed and the date they were accepted decreased from 170 days to 130
days, and the average time between acceptance and approval decreased
from 404 days to 163 days.  Federal Reserve staff attributed this
decline to a number of reasons, including commitment to meet the
guidelines, experience with the process, and improvements in the name
check process. 

   Figure 1:  Average Processing
   Time for 36 Approved
   Applications of Branches,
   Agencies, and Representative
   Offices, as of January 29, 1996

   (See figure in printed
   edition.)

Source:  Federal Reserve. 


--------------------
\14 Processing times were determined from data on 21 applications
that were filed before the March 8, 1993, policy change and the 15
applications that were filed after the change.  Data on the
representative office approved by a reserve bank under delegated
authority were not available. 


   EXAMINATION OF FOREIGN
   BRANCHES, AGENCIES, AND
   REPRESENTATIVE OFFICES
------------------------------------------------------------ Letter :4

FBSEA directed the Federal Reserve to coordinate the supervision of
foreign banking organizations with federal and state bank supervisors
to ensure an efficient and uniform approach in overseeing the
operations of foreign banks in the United States.  The act gave the
Federal Reserve the responsibility for ensuring that branches and
agencies of foreign banks are examined every 12 months and gave it
the power to examine representative offices.\15

It also broadened the enforcement powers of the Federal Reserve and
OCC.  Specifically, the act

  -- permitted the Federal Reserve to terminate the activities of a
     state-licensed branch, agency, commercial lending company, or
     representative office for violations of law or for unsafe or
     unsound banking practices.\16 The Federal Reserve may recommend
     to OCC similar action for federally licensed offices. 

  -- modified and broadened the Federal Reserve's and OCC's
     authorities to assess civil money penalties on specific grounds
     against any foreign bank or office or subsidiary of a foreign
     bank and certain individuals of up to $25,000 for each day
     during which a violation continues. 


--------------------
\15 Examinations of subsidiary banks are governed by other provisions
of federal banking law.  These banks are to be examined every 12 or
18 months, depending on the size and condition of the bank. 

\16 The Federal Reserve must also determine that as a result of such
violation or practice, continued operation of the entity would not be
in the public interest or would be inconsistent with the purposes of
FBSEA or other federal banking laws. 


      COORDINATION AMONG BANK
      SUPERVISORS
---------------------------------------------------------- Letter :4.1

To meet the requirements set out in FBSEA, Federal Reserve staff told
us that each year they develop, in cooperation with OCC, FDIC, and
state bank supervisors, an annual examination plan, to supervise the
U.S.  operations of foreign banking organizations.  This plan
includes branches, agencies, commercial lending companies, Edge
Act/Agreement Corporations, and significant nonbank subsidiaries. 
They said the supervisors discuss the focus of the year's
examinations and when they will be conducted.  Their goal is to
ensure that each branch and agency is examined every 12 months
without undue burden imposed on the entity and that all supervisory
issues are addressed in the examination process. 

To meet this goal, the Federal Reserve may conduct an independent
examination, rely on the other agencies to conduct the examination,
or participate in a joint examination.  Federal Reserve staff told us
that, in order to form a baseline understanding of foreign bank
operations, in 1992, they examined either independently or jointly
all foreign bank branches and agencies in the United States.  In
1993, the Federal Reserve, OCC, FDIC, and state bank supervisors
developed a joint examination manual for branches and agencies.  The
purpose of the manual is to ensure to the extent possible that each
regulatory agency examines branches and agencies of foreign banks in
a consistent manner.  Federal Reserve staff told us that in the
future they intend to examine fewer foreign branches and agencies and
rely more on the examinations conducted by OCC and the states.  Table
3 shows the number of independent and joint examinations conducted by
each agency for 1993 through 1995. 



                                Table 3
                
                 Examinations of Branches and Agencies
                 Done by Each Supervisor, 1993 Through
                                  1995

Type                                          1993      1994      1995
----------------------------------------  --------  --------  --------
Independent examinations
Federal Reserve                                146       167       150
State bank supervisors                         145       122       161
OCC                                             18        36        49
FDIC                                            11        17         7
======================================================================
Total independent examinations                 320       342       367
Joint examinations                             261       246       203
======================================================================
Total examinations\a                           581       588       570
----------------------------------------------------------------------
\a The number of examinations exceeds the number of branches and
agencies because some branches and agencies may be examined more than
once a year. 

Source:  Federal Reserve. 


      MOST BRANCHES AND AGENCIES
      HAVE BEEN EXAMINED ANNUALLY
---------------------------------------------------------- Letter :4.2

Federal Reserve examination data indicated that federal and state
banking supervisors have substantially been meeting the requirement
that all branches and agencies be examined annually.\17 For 1993,
1994, and 1995, we found that, on average, 97 percent of branches and
agencies had been examined at least annually.  In 1995, 542 of the
549 branches and agencies operating in the United States at the
beginning of the year were examined.  Federal Reserve staff reported
that enhanced monitoring tools have been developed to quickly
identify cases where the mandate appears to have been missed. 


--------------------
\17 Although FBSEA mandated that foreign branches and agencies be
examined every 12 months, this period is calculated from the end of
one examination to the beginning of the next.  Thus, start dates
between examinations generally average about 14 months. 


      EXAMINATIONS OF
      REPRESENTATIVE OFFICES
---------------------------------------------------------- Letter :4.3

FBSEA did not establish a required frequency for examinations of
representative offices.  It is currently Federal Reserve policy to
examine all representative offices at least once every 24 months.\18
Examinations of representative offices differ from those of foreign
branches and agencies in that they are intended primarily to verify
that the type of business being conducted by an office is limited to
that customarily viewed as a representative office function and to
ensure that the office is operating in conformance with sound
operating policies.\19

The Federal Reserve conducted a survey in 1992 to determine the
number of representative offices operating in the United States. 
Federal Reserve staff told us that between 1993 and 1994 examiners
visited all representative offices in the United States to verify
that they were engaging only in activities appropriate for
representative offices.  From our review of Federal Reserve data, we
found that for 1993 through 1995, 93 percent of representative
offices, net of closures and new entrants, were examined at least
once.  The examination rates were 87 percent, 54 percent, and 66
percent for 1993, 1994, and 1995, respectively. 


--------------------
\18 It was originally Federal Reserve policy to examine
representative offices on an 12-month cycle.  This was modified to 24
months after experience showed a high degree of compliance with sound
operating policy. 

\19 For this reason, the Federal Reserve refers to these as
visitations rather than examinations. 


      EXAMINATION RESULTS INDICATE
      MOST FOREIGN BRANCHES AND
      AGENCIES HAVE BEEN RATED
      SATISFACTORY
---------------------------------------------------------- Letter :4.4

Examinations by federal and state supervisors are intended to
determine the safety and soundness of foreign branches and agencies. 
They result in a composite examination rating for the entity.  These
ratings range from 1 (fundamentally sound) to 5 (unsatisfactory).  As
table 4 shows, of the foreign branches and agencies examined during
1995, 88 percent received a rating of 1 or 2 at year-end, indicating
that their operations were at least satisfactory and required only
normal supervisory attention.  Nine percent were rated 3 (fair). 
Only 3 percent received a rating of 4 or 5, meaning that they were
considered to have significant weaknesses or were identified as
having so many severe weaknesses that they required urgent attention
by their head offices.  These results are similar to those in 1993
and 1994 in which 79 percent and 85 percent, respectively, were found
to have sound operations. 



                                Table 4
                
                 Composite Ratings of U.S. Branches and
                Agencies of Foreign Banks, 1993 Through
                                  1995

                             1993            1994            1995
                        --------------  --------------  --------------
                                Percen          Percen          Percen
Rating                  Number       t  Number       t  Number       t
----------------------  ------  ------  ------  ------  ------  ------
1                           23      4%      46      9%      59     11%
2                          392      75     400      76     394      77
3                           86      17      70      13      48       9
4                           17       3       8       2      11       2
5                            2      <1       2      <1       3       1
======================================================================
Total\a                    520  100%\b     526    100%     515    100%
----------------------------------------------------------------------
\a The number of ratings is less than the number of foreign bank
branches and agencies because multiple branches or agencies of an
entity operating in the same city may receive a single rating.  The
number of ratings is also lower than the number of branches and
agencies examined because some branches and agencies may have been
examined more than once during the year, and this table reflects only
the latest ratings. 

\b Total does not add due to rounding. 

Source:  Federal Reserve. 


      ENFORCEMENT ACTIONS TAKEN
      AGAINST FOREIGN BANKS
---------------------------------------------------------- Letter :4.5

Federal and state banking supervisors may issue enforcement actions
against foreign banks as well as their U.S.  branches and agencies in
cases where a branch, agency, or other U.S.  office of the parent
bank is determined to be operating in an unsafe or unsound manner in
violation of applicable laws, regulations, or written conditions
imposed during the applications process.  These actions may be either
formal or informal, depending upon the severity of the problem(s) and
the bank's willingness to correct them. 

Although the Federal Reserve had authority to initiate enforcement
actions against foreign banks and their U.S.  branches and agencies
under the IBA and the Federal Deposit Insurance Act, FBSEA enhanced
its enforcement powers.  Specifically, it gave the Federal Reserve
the authority to order a foreign bank with a state-licensed branch,
agency, commercial lending company, or representative office to
terminate its activities in the United States and the authority to
recommend such action to OCC for federally licensed branches and
agencies.  Federal Reserve staff stated that the Federal Reserve had
the authority to levy civil money penalties for violation of IBA and
for failure to make certain reports and FBSEA modified and broadened
this authority for both the Federal Reserve and OCC.  FDIC can issue
formal enforcement actions against foreign banks by virtue of its
authority under the Federal Deposit Insurance Act. 

Between 1993 and 1995, federal banking supervisors issued 40 formal
enforcement actions against foreign banks operating in the United
States.\20 In the most serious case, the Federal Reserve, in
conjunction with FDIC, the New York State Banking Department, and
several other state bank supervisors, used its termination authority
to order Daiwa Bank to cease its U.S.  banking operations.  During
this period, the Federal Reserve also issued three civil money
penalties for failures to file regulatory reports and one for
inadequate Bank Secrecy Act policies and procedures.  Neither OCC nor
FDIC issued any civil money penalties during this time.  The
remaining 35 formal enforcement actions issued by the Federal
Reserve, OCC, and FDIC included 16 cease-and-desist orders.  In
practice, OCC exercises primary enforcement authority over federal
branches and agencies, and the Federal Reserve takes the lead in
issuing formal enforcement actions against state-licensed branches
and agencies. 

In addition to formal enforcement actions, each of the federal and
state banking supervisors may take informal enforcement actions, such
as memorandums of understanding and commitment letters, in which an
institution agrees to remedy specific areas of supervisory concern. 
These actions are taken when supervisory concerns are identified
that, while not overly serious, warrant some type of remedial action. 
In 1995, the Federal Reserve in conjunction with state bank
supervisors issued 50 informal enforcement actions against foreign
banks, OCC issued 9, and FDIC issued 5. 


--------------------
\20 These 40 actions included 6 voluntary terminations of deposit
insurance.  Such actions are counted as formal enforcement actions
even though the termination is voluntary. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :5

To discuss the implementation of FBSEA, we reviewed the act and
focused on those provisions that pertained specifically to the entry
and examination of foreign banks in the United States.  Although
FBSEA contained provisions restricting some activities of foreign
banks and set additional reporting and approval requirements, as
agreed with the subcommittee, we did not do independent work to
determine that these provisions have been followed. 

We focused our work on branches and agencies of foreign banks because
this form of organization accounts for the largest concentration of
foreign bank offices and assets in the United States.  We did limited
work on representative offices because their activities are limited
and they hold no banking assets in the United States.  FBSEA also
applies to commercial lending companies.  However, there are only
three of these companies in the United States and there have been no
applications for this form of entry since FBSEA was implemented. 
Finally, since subsidiary banks are U.S.-chartered, they are governed
by all of the laws and regulations applicable to U.S.  banks and are
supervised and examined in the same way as U.S.  banks.  Accordingly,
FBSEA should have had minimal effect on the regulation and
supervision of these banks. 

To describe the Federal Reserve's applications process for foreign
banks, we reviewed its implementing regulations and other banking
correspondence and regulations.  We also interviewed staff in the
Federal Reserve's Division of Banking Supervision and Regulation and
its Legal Division and officials and staff at the Federal Reserve
Bank of New York, which is where most foreign banks operating in the
United States are located.  They gave us their views on the
applications process and how it corresponds to the requirements set
forth in FBSEA.  We also reviewed all of the Federal Reserve's
decisions approving foreign bank applications since 1992 to determine
whether it addressed the statutory and regulatory requirements of
FBSEA.  In addition, we compared the length of time it took to
process applications to the guidelines set forth by the Federal
Reserve to determine whether the Federal Reserve was in compliance
with its own policies.  We did not attempt to subjectively evaluate
the Federal Reserve's decisions on foreign bank applications.  To do
so, we would have had to analyze and judge the merits of the facts
presented by the foreign bank applicants and the reasoning in each
application. 

To describe the examination process and the results of examinations,
we reviewed examination data for foreign branches, agencies, and
representative offices provided by the Federal Reserve for 1993,
1994, and 1995.  Because the Federal Reserve has overall
responsibility for ensuring that foreign branches, agencies, and
representative offices are examined in a timely manner, it maintains
examination data for all such offices operating in the United States. 
The Federal Reserve did not maintain such data in a summary format
prior to 1993.  We also interviewed staff and officials from the
Federal Reserve, OCC, and FDIC, in both Washington, D.C., and New
York, and officials from the New York State Banking Department to
determine how the Federal Reserve coordinates with other bank
supervisors.  To determine the extent to which federal supervisors
have used enforcement actions against foreign banks operating in the
United States, we collected data on enforcement actions from the
Federal Reserve, OCC, and FDIC. 

Our work was done in Washington, D.C., and New York, NY, between
January and May 1996 in accordance with generally accepted government
auditing standards. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We received both written and oral comments on a draft of this report
from the Federal Reserve.  In its letter, the Federal Reserve stated
that the information provided in the report accurately describes the
policies and processes with respect to applications and examinations
of foreign banks.  The oral comments were technical in nature and
have been incorporated where appropriate. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the House Committee on Banking and Financial
Services and the Senate Committee on Banking and Urban Affairs, the
Chairman of the Federal Reserve Board, the Chairman of the Federal
Deposit Insurance Corporation, the Comptroller of the Currency, and
other interested parties.  We will also make copies available to
others on request. 

Major contributors to this report are listed in appendix II.  If you
have any questions, please call me at (202) 512-8678. 

Thomas J.  McCool
Associate Director,
 Financial Institutions
 and Markets Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE FEDERAL RESERVE
============================================================== Letter 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Susan S.  Westin, Project Director
Lamont J.  Kincaid, Project Manager
Thomas C.  Conahan, Deputy Project Manager
Rose M.  Kushmeider, Deputy Project Manager
Barry L.  Reed, Sr., Social Science Analyst

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Rachel DeMarcus, Assistant General Counsel


*** End of document. ***