Greenberg Traurig Alert

Congress Passes Legislation That Eases Restrictions on Establishing Foreign Bank Offices in United States

October 26, 1996

On October 1, 1996, President Clinton signed into law the Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("Act"). The Act contains a small but significant provision that loosens the Foreign Bank Supervision Enhancement Act of 1991's ("FBSEA's") strict rules regarding the establishment of foreign bank branches and agencies and the acquisition of commercial lending companies in the United States. The new legislation now gives the Board of Governors of the Federal Reserve System ("Board") the discretion to permit foreign banks to establish such offices in the United States even if their home countries do not have comprehensive, consolidated bank supervision, so long as the foreign bank's home country, among other things, is "actively working" toward establishing acceptable levels of regulatory oversight over the bank.

The Act's foreign banking provision became effective October 1, 1996. As a result of the passage of the provision, the Board likely will propose implementing regulations that would amend certain of the Board's current regulations regarding the approval of offices of foreign banks (codified in the Board's Regulation K). As of the date of this ALERT, it was unclear when the Board expected to issue proposed regulations and when those regulations, if adopted, would become final.

Background

Enacted in the wake of the BCCI scandal in 1991, the FBSEA -- which amended the International Banking Act of 1978, 12 U.S.C. ¤¤ 3101 to 3111 -- provides that no foreign bank may establish a branch or agency or acquire ownership or control of a commercial lending company in the United States without the prior approval of the Board.

A "branch" is any office of a foreign bank located in any state of the United States at which deposits are received. An "agency" is any office of a foreign bank located in any state of the United States at which credit balances are maintained incidental to or arising out of the exercise of banking powers, checks are paid, money is lent or deposits are accepted (to the extent permitted by applicable state or federal law) from persons or entities not citizens or residents of the United States. A "commercial lending company" is any organization, other than a bank, that is organized under the laws of any state of the United States and maintains credit balances permissible for an agency and engages in the business of making commercial loans. In addition to the Board's prior approval, in the case of branches and agencies to be licensed under federal law, the approval of the Office of the Comptroller of the Currency would be required and, in the case of branches and agencies to be licensed under state law, the approval of the relevant state banking regulators would be required.

Under the FBSEA, the Board may not approve a foreign bank's application to establish a branch, agency, or commercial lending company unless the Board has determined that the foreign bank: (1) has furnished to the Board the information it needs to assess the application adequately; (2) engages directly in the business of banking outside the United States; and (3) is "subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country." Since the FBSEA's enactment in 1991, the requirement that applicant foreign banks be subject to "comprehensive supervision or regulation on a consolidated basis" by their home countries has seriously limited the number of foreign banks Ð especially Latin American and Caribbean ones Ð that have been given permission to establish an office in the United States. The reason for this is that many home country supervisors simply lack the resources to subject their banks to comprehensive regulation.

The 1996 Legislation

Under the new legislation, however, the Board is given the discretion to approve a foreign bank's application to establish a branch, agency, or commercial lending subsidiary in the United States -- notwithstanding the fact that the Board is unable to conclude that the bank is subject to consolidated home country supervision Ð if: "(i) the appropriate authorities in the home country of the foreign bank are actively working to establish arrangements for the consolidated supervision of such bank; and (ii) all other factors are consistent with approval." The legislation does not elaborate what "factors" would be consistent with approval. It is unclear whether the Board in practice will apply this new standard on a country-by-country basis or a bank-by-bank basis. In addition to these considerations, the Board "shall also consider whether the foreign bank has adopted and implemented procedures to combat money laundering. The Board may also take into account whether the home country of the foreign bank is developing a legal regime to address money laundering or is participating in multilateral efforts to combat money laundering."

Conditional Approval. The new legislation permits the Board to impose conditions or restrictions relating to the operations and activities of the foreign bank's proposed branch, agency, or commercial lending company, including restrictions on sources of funding. Such Board-imposed conditions or restrictions may be modified or withdrawn by the Board at any time.

Expedited Application Processing. Some applications by foreign banks to establish offices in the United States have languished at the Board for years, without any action being taken on them. The new legislation expedites the time the Board has to process such applications. The Board now must take "final action" on such applications no later than 180 days after the Board has received the application. The Board may, however, extend the initial 180-day review period by an additional 180 days "after providing notice of, and the reasons for, the extension to the applicant foreign bank and any appropriate State bank supervisor [for applications to open state-licensed offices] or the Comptroller of the Currency [for applications to open federally-licensed offices], as appropriate." The new legislation authorizes the Board to deny an application if the Board does not receive responses to any of its requests for information from the applicant foreign bank or appropriate home country regulator within the statutorily-prescribed processing times.

Examinations of Foreign Bank Offices. The new legislation requires the Board to take reasonable measures to reduce burdens and avoid unnecessary duplication of foreign bank office examinations. Moreover, federally-licensed branches and agencies are now subject to on-site examination as frequently as national banks; state-licensed branches and agencies are now subject to on-site examination as frequently as state-chartered banks.

Termination of Foreign Bank Offices. Finally Ð but significantly -- the new legislation empowers the Board to terminate a foreign bank's United States office or offices if the foreign bank's home country regulator is not making "demonstrable progress" in establishing comprehensive supervision or regulation of the foreign bank.

The new legislation affects applications for the establishment of foreign bank branches and agencies and applications for the acquisition of ownership or control of commercial lending companies only. Therefore, it appears that the current general standard used by the Board to evaluate foreign bank applications for representative offices Ð i.e., whether the applicant foreign bank is subject to a "significant degree of supervision by its home country supervisor" Ð is left undisturbed by the legislation.