[Federal Register Volume 59, Number 238 (Tuesday, December 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30549]


[[Page Unknown]]

[Federal Register: December 13, 1994]


                                                   VOL. 59, NO. 238

                                         Tuesday, December 13, 1994

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: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board or 
Federal Reserve) is seeking public comment on a proposal to amend its 
regulations to include 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. The Board is required to develop such criteria, in 
consultation with the Secretary of the Treasury (Treasury), and to 
publish them for public comment pursuant to section 202(e)(7) of the 
Foreign Bank Supervision Enhancement Act (the FBSEA or Act).

DATES: Comments must be received by February 13, 1995.

ADDRESSES: Comments should refer to Docket No. R-0862 and may be mailed 
to William W. Wiles, Secretary, Board of Governors of the Federal 
Reserve System, 20th Street and Constitution Avenue, NW., Washington, 
DC 20551. Comments also may be delivered to Room B-2222 of the Eccles 
Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard 
station in the Eccles building courtyard on 20th Street, N.W. (between 
Constitution Avenue and C Street, N.W.) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding availability of information.

FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General 
Counsel (202/452-3786), Sandra L. Richardson, Managing Senior Counsel 
(202/452-6406), Margaret E. Miniter, Attorney (202/452-3900), Legal 
Division; Michael G. Martinson, Assistant Director (202/452-3640), 
Betsy Roberts, Manager (202/452-3846), Division of Banking Supervision 
and Regulation, Board of Governors of the Federal Reserve System. For 
the hearing impaired only, Telecommunication Device for the Deaf [TDD], 
Dorothea Thompson (202/452-3544), Board of Governors of the Federal 
Reserve System, 20th and C Streets, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

The Statute

    Section 202(e)(7) of the FBSEA amended section 7 of the 
International Banking Act of 1978 (IBA) by adding a requirement that 
the Board, in consultation with the Treasury, develop and publish 
criteria to be used in evaluating the operation 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. In 
developing such criteria, the Board is required to allow reasonable 
opportunity for public review and comment. 12 U.S.C. 3105(e)(7). In 
order to implement this statutory provision, the Board is issuing this 
notice of proposed rulemaking pursuant to 12 CFR part 211 of its 
regulations governing international banking operations.
    The Congress in enacting the FBSEA recognized the importance of the 
comprehensive, consolidated supervision of banks operating 
internationally. The FBSEA strengthened the role of U.S. banking 
supervisors as the host country supervisors of foreign banks operating 
in this country. The Act also recognized the importance of home country 
supervision in assuring the overall safety and soundness of foreign 
banks that conduct operations in the United States by requiring the 
Board:
    1. To determine that a foreign bank is subject to comprehensive 
supervision on a consolidated basis by its home country supervisor in 
order to establish a new banking presence in this country; and
    2. To establish, in consultation with the Secretary of the 
Treasury, these criteria in order to evaluate the operation of any 
foreign bank in the United States that the Board has determined is not 
subject to such supervision.
    As provided in sections 7(e) (1) and (5) of the IBA, as amended, a 
determination by the Board that a foreign bank is not subject to 
comprehensive supervision or regulation on a consolidated basis is a 
sufficient ground, in and of itself, for the Board to require or, in 
respect of federal branches or agencies, to recommend, termination of 
the foreign bank's U.S. operations. 12 U.S.C. 3105(e)(1),(5). 
Termination of a foreign bank's U.S. operations in these circumstances 
is not mandatory, however. 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. 
12 U.S.C. 3105(e)(7).
    All determinations with regard to whether a foreign bank is subject 
to comprehensive supervision or regulation on a consolidated basis will 
be made in the context of the supervision and regulation of the foreign 
bank's existing U.S. operations. Just as is the case with other 
supervisory or regulatory determinations, a foreign bank generally will 
have an opportunity to provide its views and any information it 
considers to be relevant in advance of any decision being made with 
regard to question of comprehensive, consolidated supervision, unless 
expeditious action is necessary to protect the public interest.
    The proposed criteria set out below reflect the factors the Board 
considers will be relevant for purposes of evaluating the operations of 
any foreign bank the Board determines is not subject to comprehensive 
supervision or regulation on a consolidated basis by its home country 
supervisors in accordance with 12 CFR 211.24(c)(1).

Criteria

    Following a determination by the Board that a foreign bank is not 
subject to comprehensive, consolidated supervision by its home country 
supervisor in accordance with Sec. 211.24(c)(1) of Regulation K, the 
Board proposes to take into account a number of criteria in reaching a 
view regarding whether the foreign bank's U.S. operations 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. These criteria are:
    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 foreign bank has effective and reliable systems of 
internal controls and management information and reporting, which 
enable management properly to oversee the bank's worldwide operations;
    4. Whether the foreign bank's home country supervisor has any 
objection to the bank continuing to operate in the United States;
    5. 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;
    6. 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 from the foreign 
bank's non-U.S. offices;
    7. The soundness of the foreign bank's overall financial condition;
    8. 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;
    9. The scope and frequency of external audits of the foreign bank;
    10. The operating record of the foreign bank generally and its role 
in the banking system in its home country;
    11. 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;
    12. The operating record of the U.S. offices of the foreign bank 
and any affiliates;
    13. The views and recommendations of the Office of the Comptroller 
of the Currency (``OCC'') or the relevant state banking regulator 
regarding the U.S. offices of the foreign bank;
    14. 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 IBA, the BHC Act, and other applicable federal 
banking statutes; and
    15. Any other information relevant to the safety and soundness of 
the U.S. operations of the foreign bank.
    These criteria address factors relating both to the operations of 
the foreign bank as a whole and to its U.S. operations in particular. 
Evaluations of both of these facets of a foreign bank's operations are 
necessary in order to determine whether the bank's U.S. operations 
should be permitted to continue and, if so, whether these operations 
should be subject to supervisory constraints.
    As subsection (c) of proposed Sec. 211.30 of Regulation K provides, 
any foreign bank that the Board determines is not subject to 
comprehensive, consolidated supervision may be required to enter into 
an agreement 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. Where appropriate, such an 
agreement could require a suitable degree of insulation between the 
foreign bank's U.S. operations and its operations (or those of its 
affiliates) in other countries. For example, one means of accomplishing 
this would be to require the bank to conduct its U.S. banking 
operations in a ``net due to'' position vis-a-vis the rest of the 
organization. Other restraints also could be imposed where appropriate 
(e.g., restricting transactions with other parts of the organization or 
requiring that international transactions of the U.S. offices be 
conducted through a correspondent acceptable to the Board). Prior to 
imposing such restrictions, the Board will consult with the OCC or the 
appropriate state banking authority.
    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 issuance of an order terminating 
the activities of the U.S. offices or transmittal of a recommendation 
to the OCC for such termination, as appropriate in the circumstances.

Request for Comment

    The Board believes that the proposed criteria will be sufficient to 
evaluate the safety and soundness of the U.S. operations of a foreign 
bank, to determine whether its U.S. operations should be permitted to 
continue in the absence of comprehensive, consolidated supervision by 
the home country authority, and, if so, on what basis. At the same 
time, the Board does not wish to impact unduly the existing operations 
of foreign banks, the vast majority of which are operated in a safe and 
sound manner by banks that are subject to a significant degree of 
supervision by their home country authorities. The Board, therefore, 
considers it to be 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 that are 
not yet subject to full consolidated supervision, which fall short of 
the ultimate sanction of termination of their U.S. operations.
    As required by the Act, the Board has consulted with the Treasury 
in the development of the proposed criteria and the Treasury has agreed 
that the criteria may be published for comment. Further consultation 
will take place with the Treasury following the analysis by both 
agencies of the comments received. The Board requests comment on all 
aspects of the proposed criteria.

Paperwork Reduction Act

    No collections of information pursuant to section 3504(h) of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in the 
proposed rule.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. 
L. 96-354, 5 U.S.C. 601 et seq.), the Board certifies that the proposed 
criteria would not have a significant economic 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 set out in the preamble, the Board proposes to 
amend 12 CFR part 211 as set forth below:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for Part 211 is revised to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 1843 et 
seq., 3100 et seq., 3901 et seq.

    2. A new Sec. 211.30 is added to subpart B to read as follows:


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, Public Law 102-242, 105 Stat. 2286 (1991), (the FBSEA) 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 a foreign 
bank is not subject to comprehensive, consolidated supervision by its 
home country supervisor in accordance with Sec. 211.24(c)(1) of this 
subpart, 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 foreign bank has effective and reliable systems of 
internal controls and management information and reporting, which 
enable management properly to oversee the bank's worldwide operations;
    (4) Whether the foreign bank's home country supervisor has any 
objection to the bank continuing to operate in the United States;
    (5) 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;
    (6) 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;
    (7) The soundness of the foreign bank's overall financial 
condition;
    (8) The managerial resources of the foreign bank, including the 
competence, experience, and integrity of the officers and directors and 
the integrity of its principle shareholders;
    (9) The scope and frequency of external audits of the foreign bank;
    (10) The operating record of the foreign bank generally and its 
role in the banking system in its home country;
    (11) 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;
    (12) The operating record of the U.S. offices of the foreign bank;
    (13) The views and recommendations of the Office of the Comptroller 
of the Currency or the relevant state banking regulator regarding the 
U.S. offices of the foreign bank;
    (14) 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
    (15) 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 pursuant to Sec. 211,24(c)(1) of this subpart, 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, December 7, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-30549 Filed 12-12-94; 8:45 am]
BILLING CODE 6210-01-P