Importance of Foreign Banking Institutions
Because foreign banking institutions play an integral role in the U.S. financial system, they are supervised and regulated by U.S. banking authorities. The types of regulations faced by a particular foreign banking institution depend in part on whether its U.S. units are chartered in the United States or abroad. Foreign bank branches and agencies are legal extensions of their parent companies, and not freestanding entities in the United States. They do not have any capital of their own and face somewhat different regulations from other depository institutions in the United States. Edge and Agreement corporations and foreign banks' U.S. subsidiaries, on the other hand, are freestanding legal entities with U.S. or state charters and their own capital.
Regulation and Supervision
Some FBOs, called "qualified foreign banking organizations," are exempt from some Federal Reserve regulations. For an FBO to qualify for the exemptions, more than half its worldwide business must be banking, and more than half its banking activities must be outside the United States. Qualifying FBOs may undertake any activity outside the United States, and, under certain conditions, own voting shares of any foreign company operating in the United States. (Rules regarding FBOs can be found in Federal Reserve System Regulation K: International Banking Operations.)
Under the IBA, supervision of foreign branch and agency offices in the United States was primarily the responsibility of the state licensing authority and the Office of the Comptroller of the Currency (OCC). The Foreign Bank Supervision Enhancement Act of 1991 (FBSEA) switched this responsibility to the Federal Reserve. As a result, the Federal Reserve generally must examine foreign bank branches and agencies annually. Examiners assess branches and agencies based on their Risk management, Operational controls, Compliance, and Asset quality, or ROCA for short. In addition, the Federal Reserve assesses parent banks' financial conditions to ensure that the banks can manage and support their U.S. branches and agencies effectively. In response to the increasing sophistication and diversity of banks' financial practices, examiners pay particular attention to the risk management practices and controls of both domestic and foreign banks.
If the Federal Reserve or other banking supervisors find that a banking institution has problems with compliance, or engages in unsound banking practices, they may take various measures to address the problems. In less serious cases, supervisors usually take informal action, such as requiring letters of commitment from the problem institution. In more serious cases, however, a range of legal measures may be taken, varying in severity. In the most serious cases, the U.S. activities of a foreign banking institution can be terminated, and the institution can be expelled from the United States.
Establishing a Foreign Banking Institution
Types and Activities of Foreign Banking Institutions
Foreign bank branches face certain limitations, however. Although branches may receive deposits of any size from foreigners, they may accept deposits only in excess of $100,000 (wholesale deposits) from U.S. citizens and residents. Furthermore, as a result of the FBSEA, deposits in any foreign bank branch established after December 19, 1991, are not covered by U.S. deposit insurance; deposit insurance is now offered only to U.S.-chartered depository institutions. Foreign agencies specialize in making commercial loans to finance international transactions, and they may accept only short-term deposits related to such transactions.
Edge Act corporations are chartered by the Federal Reserve mainly to engage in international banking activities. Such activities include accepting deposits to finance projects abroad and providing international payment services. Agreement corporations essentially are the same as Edge corporations, but are chartered by states. U.S. subsidiaries of foreign banks, because they are chartered in the United States, may become members of the Federal Reserve and undertake any banking activities permitted U.S.-owned banks.
In December 2006, foreign banking organizations operated or controlled 188 branches, 133 agencies, 62 U.S. commercial banks, and 8 Edge or Agreement corporations. A significant portion of foreign banking institutions' assets is composed of commercial and industrial loans. In December 2006, foreign banking institutions held about $216 billion in commercial and industrial loans, roughly 18 percent of the total in the United States.