Supervision of International Bank Branches-A Global Analysis: United States

Supervision of International Bank Branches-A Global Analysis: United States

  by Kathleen Scott

1. How can international banks operate in your jurisdiction?

Non-US banks can engage in banking activities in the US through direct offices such as branches, agencies and representative offices or through bank subsidiaries. Branches and agencies can engage in banking activities, with more limited activities permissible for agencies (usually with respect to deposit-taking activities). Representative offices cannot engage in actual banking activities and are used for solicitation of certain banking business and liaison with customers.

Since 1991, if a non-US bank wishes to take so-called “retail deposits” ($250,000 per ownership category) and receive federal deposit insurance, it must establish a bank subsidiary and obtain deposit insurance from the Federal Deposit Insurance Corporation. Branches of non-US banks used to be able to obtain federal deposit insurance but that authority was terminated in 1991, although currently there still are a few branches of non-US banks that have federal deposit insurance dating from before the ban took effect.

Since 1991, the Board of Governors of the Federal Reserve System (“FRB”) has been the gatekeeper for non-US banks to enter the United States. However, the FRB does not license direct offices of non-US banks nor charter bank subsidiaries of non-US banks. The Department of the Treasury’s Office of the Comptroller of the Currency (“OCC”) issues licenses for direct branches of non-US banks (“federal branches”) and limited branches (with permissible activities similar to that of an agency office), and charters banks under the National Bank Act (“national banks”) for national bank subsidiaries of non-US banks.

State banking departments also license branches, agencies and representative offices, and charter bank subsidiaries. Most branches and agencies are state-licensed with most of them located in New York City, with Florida, California, Texas, and Illinois also having a number of non-US bank offices.

2. What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?

FRB Level

As noted above, the FRB is the gatekeeper for non-US banks wishing to establish a branch in the US – the key element is that the bank is subject to comprehensive supervision on a consolidated basis (“CCS”), that is, that there is a regulator that supervises the organization on a global basis. It is a two-part test (i) that the home country has a CCS supervisory process and (ii) that the non-US bank is subject to it.

The regulations provide that in determining whether there has been CCS, the FRB will take into account, among other factors, the extent to which the home country supervisor: (A) ensures that the non-US bank has adequate procedures for monitoring and controlling its activities worldwide; (B) obtains information on the condition of the non-US bank and its subsidiaries and offices outside the home country through regular reports of examination, audit reports, or otherwise; (C) obtains information on the dealings and relationship between the non-US bank and its affiliates, both non-US and domestic; (D) receives from the non-US bank financial reports that are consolidated on a worldwide basis, or comparable information that permits analysis of the non-US bank's financial condition on a worldwide, consolidated basis; and (E) evaluates prudential standards, such as capital adequacy and risk asset exposure, on a worldwide basis.

If the FRB cannot make a CCS determination, the FRB nonetheless could approve an application if it determines that the home country supervisor is actively working to establish arrangements for the consolidated supervision of such bank, and other factors consistent with approval. One of those factors is a review of the relevant anti-money laundering laws in the home country, including whether the home country supervisor is developing a legal regime to address money laundering or is participating in multilateral efforts to combat money laundering.

In addition to the CCS determination (or “actively working towards CCS” determination), there are additional factors taken into account:

  • • Whether the home country supervisor of the non-US bank has consented to the proposed establishment of the branch;
  • • The financial resources of the non-US bank (including the non-US bank's capital position, projected capital position, profitability, level of indebtedness, and future prospects) and the condition of any U.S. office of the non-US bank;
  • • The managerial resources of the non-US bank, including the competence, experience, and integrity of the officers and directors; the integrity of its principal shareholders; management's experience and capacity to engage in international banking; and the record of the non-US bank and its management of complying with laws and regulations, and of fulfilling any commitments to, and any conditions imposed by, the FRB in connection with any prior application;
  • • Whether the non-US bank's home country supervisor and the home country supervisor of any parent of the non-US bank share material information regarding the operations of the non-US bank with other supervisory authorities;
  • • Whether the non-US bank has provided the FRB with adequate assurances that information will be made available to the FRB on the operations or activities of the non-US bank and any of its affiliates that the FRB deems necessary to determine and enforce compliance with applicable federal banking statutes.
  • • Whether the non-US bank has adopted and implemented procedures to combat money laundering, whether there is a legal regime in place in the home country to address money laundering, and whether the home country is participating in multilateral efforts to combat money laundering;
  • • Whether the non-US bank and its U.S. affiliates are in compliance with applicable U.S. law, and whether the applicant has established adequate controls and procedures in each of its offices to ensure continuing compliance with U.S. law, including controls directed to detection of money laundering and other unsafe or unsound banking practices; and
  • • The needs of the community and the history of operation of the non-US bank and its relative size in its home country, provided that the size of the non-US bank is not the sole factor in determining whether an office of a non-US bank should be approved.
  • • For a non-US bank that presents a risk to the stability of the US financial system, whether the home country has adopted, or is making demonstrable progress towards adopting, an appropriate system of financial regulation for the financial system to mitigate such risk

The FRB may impose any conditions on its approval as it deems necessary, including a condition that would permit termination of any activities based on the inability of the non-US bank to provide information on its activities or those of its affiliates that the FRB deems necessary to determine and enforce compliance with U.S. banking laws.

Licensing level

As noted above, the FRB acts as gatekeeper but the non-US bank still needs the OCC or a state to give it a license. The OCC (for a federal branch) and the individual state banking regulators have their own criteria for the non-US bank to meet prior to being granted a license. In many instances, the criteria are similar in whole or in part with the FRB’s standards for approval, including CCS, approval of the home office supervisor, and acceptable financial and managerial resources.

3. Is resolution an important factor in your supervisor’s determination of a branch?

Generally speaking, should a licensed branch or agency of a non-US bank be closed by the US regulator, (whether federally licensed or state-licensed), the US office is “ring-fenced” and is liquidated by the particular US regulator as if it were a separate entity. Only claims against the branch/agency would be considered, usually with exclusions for claims from other offices of the non-US bank.

As part of its ability to operate in the United States, branches and agencies of non-US banks must establish accounts pledging liquid assets to the regulator that can be used to cover the initial costs of a liquidation of the branch or agency. Generally, assets of the licensed office, and more importantly, assets of the non-US bank itself within the jurisdiction of the regulator, will become the property of the regulator to use in the liquidation. For example, for a NY state-licensed branch of a non-US bank, title to all the assets of the licensed office wherever located, and all the assets of the non-US bank itself located in NY vests in the Superintendent of Financial Services when he or she closes the NY licensed office. Given New York City’s position as a financial center, the non-US bank and some of its non-US branches may well have US dollar deposit accounts at NY banks. That can result in a large windfall for the Superintendent of Financial Services. If a federal branch or federal limited branch is closed and liquidated by the OCC, the OCC will consolidate all the US assets of the non-US bank and conduct one consolidated US liquidation.

Any funds left over after the approved creditor claims and the costs of the liquidation have been paid will be returned to the head office (or the liquidator of the head office). Some jurisdictions (such as New York) require that the funds first be shared with the liquidator of any other US office of the non-US bank that might need them prior to sending the funds to the home country.

While branches and agencies of non-US banks can be closed for all of the usual reasons one might close a separately chartered bank (e.g. insolvency, illiquidity), there are often ways through a series of regulatory actions to keep the licensed office open under supervision while it is voluntarily liquidating. However, if the non-US bank is closed at the head office, then the US regulator is forced to act accordingly. Most of the recent liquidations of state-licensed branches and agencies of non-US banks (almost all in NY) have resulted from the closure of the bank at the head office. To date, the OCC has not conducted a liquidation of a federal branch or limited branch.

4. What are the regulatory reporting requirements placed on branches?

A branch of a non-US bank must file quarterly reports of condition (Call Report and Instructions) with its regulator and the FRB and an annual report with the FRB (Annual FRB FR-7 Report and Instructions) accompanied by a copy of the annual report for the non-US bank. In addition, other reports might be necessary based on activities conducted by the branch and asset size.

5. Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?

Yes, a foreign bank has the option to enter the United States either through obtaining a license to establish a direct branch or by establishing a separately chartered bank subsidiary. A foreign bank may establish a direct branch initially in the United States to gauge whether it could be successful in the United States, rather than go through the process of establishing a separate bank subsidiary. Then later, it may establish a US bank subsidiary (or buy an existing US bank).

There is no requirement that a foreign bank establish its initial presence through a branch or a bank subsidiary, it depends upon the business plan of the foreign bank. For example, if the foreign bank wanted to take “retail deposits” (US$250,000 or less), it would be required to establish a bank subsidiary.

There is a separate application for each method of entry and the approval process can be complex and lengthy no matter which form (branch v. subsidiary) is chosen. In some ways, approval of a new bank subsidiary can take the most time, particularly if it will need federal deposit insurance, because it adds another regulator to the application process and there will be closer scrutiny of the required draft business plan for a bank subsidiary, which is more complex and lengthy than that for a branch license.

A foreign bank may have direct licensed branch offices in the United States at the same time that it also has a US bank subsidiary and there are several examples in the United States, such as National Bank of Canada (Natbank), Bank of Montreal (Harris Bank), Bank Of Tokyo-Mitsubishi UFJ (MUFG Union Bank). These dual options have been available for many years, and we know of nothing that would indicate a change in law, regulation or policy that would curtail the dual option.

6. Where can I find further information?

  • • US International Banking Act (12 USC 3101-3111)
  • • FRB Regulation K (12 CFR Part 211)
  • • FRB list of non-US bank offices and subsidiaries in the US (as of March 2015)
  • • Annual FRB FR-7 Report and Instructions
  • • Quarterly Call Report and Instructions
  • • OCC International Banking Regulation (12 CFR Part 28)

 For analysis of other countries: Supervision of international bank branches

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