SIC 6081

This industry category includes establishments operating as branches or agencies of foreign banks that specialize in commercial loans, especially in trade finance. They typically fund themselves via large-denomination interbank deposits, rather than through smaller denomination retail deposits. Federally licensed agencies of foreign banks may not accept deposits. Federal branches may accept deposits; however, if they choose to accept deposits in denominations of $100,000 or less, federal deposit insurance is required. Establishments that are owned by foreign banks but primarily engaged in accepting retail deposits from the general public in the United States are classified as commercial banks.

NAICS Code(s)

522293 (International Trade Financing)

522110 (Commercial Banking)

522298 (All Other Nondepository Credit Intermediation)

Industry Snapshot

Historically, banks that were chartered in a particular country conducted most of their business in that domestic market. The long period of prosperity in the 1960s and early 1970s, however, led to substantial increases in global operations of industrial and commercial companies. This, in turn, caused an increase in international banking activity, because banks tend to follow their customers. Since the early 1980s, however, financial institutions in the United States and in other nations have rapidly expanded their overseas offices.

There was little growth in U.S. offices of foreign banks in the early 1990s, but growth increased in the mid-1990s. By 1997, foreign banks had assets totaling $1.12 trillion in the United States, with U.S. offices of Japanese banks holding the largest aggregate assets of all foreign banks operating in the United States and Germany a close second. Growth decreased or remained flat in 1998 and 1999. By the end of June 2002, there were 196 foreign banks from 55 countries with a banking presence in the United States. Those banks had total banking assets of nearly $1.34 trillion.

Organization and Structure

Foreign banks operate in the United States through five types of banking offices: branches, agencies, investment companies, "edge" or "agreement" corporations, and commercial banks.

Foreign Branches. Historically, foreign banks have opened limited branches in more than one state with relative ease, and nearly half of the foreign banks with U.S. offices have established multistate banking facilities. To enter the U.S. financial markets, most foreign banks initially opened offices in New York City; the institutions then opened offices in other parts of the country, particularly in places where a bank's home-country customers had trade or financial relationships. The International Banking Act (IBA) and the Foreign Bank Supervision Act of 1991 govern the establishment of branches at the federal level (licensed by the Comptroller of the Currency) in any state that does not prohibit such a branch. Foreign banks may also obtain branching licenses from certain states. These states usually require the foreign banks to have their deposits insured by the Federal Deposit Insurance Corporation (FDIC). State law also generally requires the foreign bank's home country to offer reciprocity to U.S. banks seeking to branch into that nation. The IBA grandfathers existing multistate branching networks of foreign banks; however, establishing branches in more than one state is prohibited. State banking regulators supervise almost 95 percent of all the U.S. assets of foreign banks. In 1996, New York accounted for more than 58 percent of all foreign branch and agency assets in the United States. California accounted for about 27 percent, with the remaining foreign assets scattered primarily in Florida, Louisiana, Maryland, and Illinois.

Foreign Agencies. A more limited type of banking than that provided by a branch may be engaged in by a foreign bank through an agency. For the most part, agencies and branches offer similar services and enjoy similar powers; however, agencies are not permitted to accept domestic deposits. They can accept credit balances of customers in connection with international activities. Although agencies may not accept domestic deposits, they have more flexibility than branches because they are not subject to reserve requirements or to loan limits for a single borrower. Federal agencies would be subject to loan limits for a single borrower, and they would be required to keep on deposit with a member bank investment securities and deposits equal to the amount of capital that would be required if the agency were being established as a national bank at that location.

Unlike the other types of U.S. offices, which are separate institutions, agencies and branches are integral parts of their parent banks. Both agencies and branches may conduct full-scale lending operations. Agencies and branches generally are wholesale banking offices; that is, their customers are chiefly banks and other nonbank businesses rather than individuals, and they compete primarily with large U.S. banks. By year-end 1996, agencies and branches of foreign banks held almost 83 percent of all assets held by foreign banks in the United States. Nearly half of the credit extended by the agencies and branches was in the form of business loans, with about one-quarter of these loans representing lending to non-U.S. residents.

U.S. Investment Companies. New York State permits the organization of investment companies by foreign banks. Investment companies, like agencies, may not accept domestic deposits but can hold customers' credit balances. They are subject to neither reserve requirements nor limits on loans to a single borrower and operate essentially as commercial finance companies.

Edge or Agreement Corporations. The International Banking Act (IBA) allowed foreign banks to own, with the prior approval of the Board of Governors of the Federal Reserve System, a majority of the stock of an edge corporation. Furthermore, the IBA repealed the stipulation that edge corporation directors be U.S. citizens. Edge corporations are similar to agencies in that they may not accept domestic deposits but may hold credit balances pursuant to international business. They are chartered by the Board of Governors of the Federal Reserve System and may be domiciled anywhere in the United States. Additionally, a bank may establish more than one edge corporation in more than one state. Agreement corporations are state-chartered corporations that have entered an agreement with the Federal Reserve Board to limit their activities to those of an edge corporation.

Commercial Banks. In contrast to agencies and branches, many commercial bank subsidiaries are retail banks whose customers include many individuals and smaller businesses. Unlike agencies and branches, these banks are engaged in consumer and real estate lending in about the same proportions as domestically owned commercial banks. In California and New York in particular, foreign banks have acquired subsidiary commercial banks with large retail branch networks. Large U.S. banks acquired by banks from other industrial countries in the late 1970s and early 1980s include Bank of California, Harris Trust and Savings Bank, LaSalle National Bank, Marine Midland Bank, National Bank of North America, and Union Bank. Chicago-based LaSalle, for example, is a subsidiary of the Dutch ABN AMRO Bank N.V., one of the world's top 20 banks. In 1996, ABN AMRO Bank had 1,800 locations in more than 60 countries. In the early 1990s, a number of banks from developing countries also sought to acquire or establish banks in the United States.

The Bank Holding Company Act (BHCA) regulates the foreign ownership of a United States bank. Any company—including partnerships, but excluding individuals—that owns 25 percent of a U.S. bank is considered a bank holding company and must apply, pursuant to the terms in Section 3 of the BHCA, for permission from the Federal Reserve System to acquire that bank. The tests required by the BHCA relate to competition and the public interest. These requirements are less likely to present problems for a foreign bank holding company, because an application to acquire a U.S. bank is not likely to have an anticompetitive effect unless the holding company already owns another U.S. bank or is in a consortium or joint venture with U.S. banks, or unless the bank to be acquired is active in international banking.

Other Alternatives. There are several other ways in which foreign banks or individuals can participate in a less direct way in U.S. banking markets. For example, they can purchase less than a controlling interest in a U.S. bank merely as an investment. Another way for interested parties to participate is through a correspondent relationship, whereby a U.S. bank will perform various services for the foreign institution. A final approach available to foreign banks and individuals is the representative office. A representative office is merely an office of a representative of the foreign bank. Technically, such an office cannot engage in banking and is supposed to be used only for making contacts and promoting the parent bank. As such, no regulatory approval is needed under present law to establish such an office, although under the IBA all such offices must be registered with the Secretary of the State. These offices are frequently used as forerunners to either a branch or an agency after the representative has surveyed the landscape and cultivated a client base.

Background and Development

Foreign banks typically establish offices in the United States for several reasons: to conduct trade financing activities, to service U.S. activities of home-country operations, to participate in the U.S. interbank market, to manage the dollar assets and liabilities of their parent organizations, to engage in foreign exchange trading, and in some cases to develop a retail banking business. A number of the larger foreign banking institutions have used the contacts and expertise developed through their initial presence in the United States to compete for the business of large U.S. companies. By the 1980s, however, many of these banks had already captured their most natural U.S. business from large national and international companies, and they found establishing a credit business with medium-sized U.S. companies more difficult. As a result, a number of U.S. offices of foreign banks have become actively engaged in new areas of banking and finance, such as merger-related lending, or have begun to place more emphasis on specialized financial areas in which they have expertise.

The activities of U.S. offices of foreign banks grew dramatically in the 1970s, as they tried to establish a foothold in the U.S. market through aggressive price competition. The industry's growth slowed during the early 1980s, but it began to pick up during the latter part of the decade. During the early 1990s, the industry was subjected to increased regulation and supervision. The extraordinary growth in the presence of foreign banks in the United States since the early 1970s, however, has complicated the review and supervision procedures of U.S. regulators. This bureaucratic confusion has contributed to the underlying problem of the international banking industry—the lack of a consolidated supervisory process. However, The Riegle-Neal Interstate Banking and Branching Efficiency Act, signed into law by President Clinton on September 29, 1994, was structured to transform the U.S. banking system, particularly in regards to interstate bank activity and mergers. The act allowed a foreign bank, subject to certain regulatory approvals, to establish de novo branches in states outside the foreign bank's "home state" if a U.S. bank headquartered in the same home state could establish such branches.

By the end of 1996, there were more than 870 foreign banks in the United States with aggregate assets in excess of $994 billion, or 21 percent of total U.S. banking assets. Foreign banks had 493 branch and agency offices, 99 U.S. bank subsidiaries, and 11 Edge Act and Agreement corporations. Indeed, banking transactions have become increasingly global, setting the stage for even greater transnational financial activities in the late 1990s. In 1996, the commercial and industrial loans made by foreign-owned U.S. banks amounted to $461 billion—around 34 percent of all business loans to U.S. borrowers. By comparison, selected assets and liabilities of domestically owned commercial banks and U.S. offices of foreign banks having less than 25 percent foreign ownership totaled more than $3,804 trillion in 1996 with a total of $2,390 trillion in loans. This figure includes assets and liabilities on the books of International Banking Facilities.

Total deposits in 1996 by U.S. offices of foreign banks were $529 billion, representing nearly 17 percent of all deposits made in the United States. Domestically owned commercial banks, U.S. agencies and branches of foreign banks, and commercial banks and New York investment companies with more than 25 percent foreign bank ownership (but not edge or agreement corporations) had a total of $4,795 trillion in assets in 1996. Loans for this group totaled nearly $2,851 trillion. Of these, the total assets of U.S. offices of Japanese banks were almost $362 billion in 1996 with total business loans at nearly $127 billion and deposits near $198 billion. This significant cross-border presence of banks, however, has the disturbing potential to increase the risk of bank failure and reduce the soundness of the international banking system. Major branches and agencies of foreign banks in the United States included French American Banking Corp., Israel Discount Bank Ltd., and Nippon Credit Bank of Los Angeles.

This surge in foreign banking has been accompanied by a variety of questions and concerns on the part of the public, legislators, regulators, and U.S. bankers. Many of these concerns have been addressed by the passage of the International Banking Act of 1978 (IBA), which tightened federal and state control over foreign bank operations in the United States. International bank scandals, most notably the closure of the worldwide operations of the Bank of Credit and Commerce International (BCCI), illustrate the disastrous effects of deficient supervision of the international banking system. The Federal Reserve responded to the corruption with the promulgation of the Foreign Bank Supervision Act of 1991 (FBSEA). The FBSEA greatly expanded the supervisory authority contained in the International Banking Act of 1978 and placed the bulk of this authority in the hands of the Federal Reserve Board. As a result of this act, the entry of foreign banks in the United States slowed down considerably in the early 1990s. In 1992, for example, no foreign bank opened a new branch, agency, or representative office anywhere in the United States. This was attributed to administrative delays in processing the applications required to be submitted to the Board of Governors of the Federal Reserve System for such offices.

As far as Federal Deposit Insurance Corporation (FDIC) deposit insurance was concerned, most federal branches and agencies of foreign banks were not covered. As a result, uninsured U.S. federal branches and agencies were not permitted to accept retail deposits under $100,000. An exemption existed for certain minimal (socalled de minimis) deposits up to 5 percent of branch deposits. The Riegle-Act required the Office of the Comptroller of the Currency (OCC) and the FDIC to reduce that exempted amount from 5 percent to 1 percent of branch deposits. In other words, it could accept retail deposits under $100,000 limited to 1 percent of the daily average of deposits of the last 30 days of the most recent quarter. In 1995, the OCC made a proposal for a transition period of up to 5 years to phase out deposits held in the existing 5 percent de minis accounts.

Another objective of the Riegle-Neal Act was to ensure the competitive equality of foreign and domestic banks, as well as credit availability to various sectors of the U.S. economy, including trade finance. The OCC proposed adopting the exemptions cited in the act, with some modifications and additions. As a result, uninsured federal branches would be allowed to accept deposits under $100,000 from individuals who are neither U.S. citizens or residents; foreign individuals employed by a foreign bank, business, or government, or a recognized international organization; foreign businesses and large U.S. businesses; U.S. and foreign governmental units and international organizations; persons to whom the branch or the foreign bank has extended credit or provided other nondeposit services in the past year, or has agreed to provide credit or nondeposit services in the next year; persons who deposit funds in connection with transmitting funds; and persons who may deposit funds with edge corporations, such as persons engaged in certain international business activities.

The OCC's proposed rule also clarified the permissible activities for agencies of foreign banks. For instance, the proposed rule would implement the provision for the Riegle-Neal Act that addressed the ability of a federal branch or agency of a foreign bank to manage the activities of the bank's offshore offices. The act permitted a federal branch or agency to manage the same offshore activities permissible for U.S. banks to manage offshore.

Legal/Regulatory Framework for U.S. Operations of Foreign Banks. Bank regulation in the United States can be viewed on three levels. The first level involves examination and supervision of individual banking institutions and rules designed to ensure that each banking organization is being operated in a sound manner. The second level of regulation is concerned with competitive conditions and expansion within the banking industry. Its focus is on maintaining not only soundly operated banks but also a competitive banking system that balances economic efficiency with certain political and economic goals. These goals are reflected in legislation governing bank mergers and acquisitions, intrastate and interstate expansion of banking organizations, and monetary control. The third level of regulation involves ownership and other relationships between organizations and other financial, commercial, industrial, and service enterprises operating in the United States. Although this level of regulation includes elements of bank safety and soundness and competitive concerns, its primary focus is on broader policy objectives such as maintaining a separation between banking and commerce. This type of regulation is embodied in the Bank Holding Company Act (BHCA), the Glass-Steagall Act, and the Riegle-Neal Act.

Examination and Supervision. State and federally chartered banks that are subsidiaries of foreign banks are supervised and examined by appropriate federal and state banking authorities and are treated the same as other state or federally chartered banks in virtually all respects. The examination and supervision of U.S. agencies and branches of foreign banks, however, differs in many respects from that of subsidiary banks, because these offices are not separately incorporated legal entities but rather are integral parts of their foreign parent banks. As a result, examination and supervision of a U.S. agency or branch of a foreign bank is generally aimed at ensuring that the office is operated in a safe and sound manner and that local depositors and creditors are protected in the event of any problem with the parent banking institution. Because an agency or branch must rely on the resources of its parent bank for support, lending limits and similar prudential controls applied to branches and agencies are generally based on the capital and surplus resources of the foreign parent bank.

Since the passage of the Riegle-Neal Act, the Institute of International Bankers—a New York association that represents foreign bankers—recommended that the act permit international banks to change their home state more than once, clarify the procedures under which international banks could acquire additional branches or agencies outside of their home states, permit the "upgrade" of existing limited branches and agencies to wholesale branches where permitted under state law, and clarify that a branch or agency can act as an agent for an affiliated depository institution to the same extent that U.S. banks can perform that role.

Regulation of U.S. Banking Activities of Foreign Banks. To open an agency or branch in New York City, for example, a foreign bank must obtain approval from both the New York State banking authorities and the Comptroller of the Currency. Similar conditions apply in other states, although some states permit only agencies, some permit only branches, and some permit neither. Although the IBA gives foreign banks the option of establishing federal agencies or branches, the act also defers to the states by allowing state comptrollers to approve the establishment of a branch or agency by a foreign bank according to state law. If a state does not prohibit foreign bank agencies or branches, but merely sets conditions for their establishment (such as requiring that the state banks have reciprocal privileges in the foreign bank's home country), the comptroller may approve the establishment of a federal branch or agency in that state without regard to such requirements. Thus, as long as there is not an outright prohibition in state law, the foreign bank has the dual-banking system option of proceeding under the more favorable regulatory climate.

Before the IBA was passed, foreign banks were free to establish deposit-taking operations in more than one state as long as state laws permitted such operations. Because Congress determined that this gave foreign banks a competitive advantage over domestic banks, the IBA subjected foreign banks to interstate banking prohibitions on deposit taking designed to parallel those applied to U.S. banks. However, Congress also provided foreign banks with liberal grandfather treatment and permitted the establishment of limited interstate branches. These branches may only accept deposits that are incidental to international or foreign banking activities.

As a result of the IBA enactment, foreign banks are required to designate a home state and may only change their home state designation one time, subject to certain conditions. A foreign bank may not establish outside its home state a branch that takes domestic deposits and may not acquire more than 5 percent of the voting shares of a domestic bank outside its home state if such an acquisition would be prohibited under Section 3 (d) of the Bank Holding Company Act (BHCA). The interstate banking restrictions of the IBA do not apply to state or federally licensed agencies, limited branches, or investment company subsidiaries of foreign banks, because these operations do not accept domestic deposits. Section 3(d) of the BHCA generally prohibits the Federal Reserve Board from approving interstate bank acquisitions by bank holding companies unless such acquisitions are permitted by the law of the state in which the acquired bank is located. Although state laws are increasingly being amended to permit bank holding company acquisitions across state lines on a regional and even national basis, foreign banks are not always able to take full advantage of these opportunities.

A foreign bank seeking to expand in the United States by establishing a de novo subsidiary, branches in states outside the foreign bank's "home state," or by acquiring an existing bank may do so under the Riegle-Neal Act. Like any other bank holding company, a foreign bank's acquisitions must be consistent with inter-state banking restrictions, with restrictions on nonbanking activities, and with competitive safety and soundness, among other public interest criteria.

In addition to placing restrictions on the geographic expansion of deposit-taking activities of foreign banks, Congress also decided to subject such activities to Federal Reserve Board requirements. The purpose was to promote competitive equality between domestic and foreign banking institutions in the United States and to ensure that the effectiveness of monetary policy would not be impaired by the existence of a rapidly growing segment of the banking industry not subject to federal requirements. Subsequent to the enactment of the IBA, Congress extended federal reserve requirements to all depository institutions in the United States in the Monetary Control Act of 1980.

The Foreign Bank Supervision Act of 1991. Although the Federal Reserve Board possessed some form of supervisory authority over foreign banks since the 1978 adoption of the International Banking Act, it had never before been authorized to approve the opening of foreign bank branches, agencies, or representative offices. The enactment of the IBA gave foreign banks the option, similar to that enjoyed by domestic banks, to establish a banking office in the United States by obtaining either a federal license from the Office of the Comptroller of the Currency or a license from the appropriate state regulator. The Foreign Bank Supervision Act of 1991 provided the mechanism for consolidated supervision over such a dual banking structure. The Federal Reserve was given this umbrella supervisory authority. The following issues are the main areas of supervisory concern: the entry of foreign banking institutions into the American market; the application of regulations to foreign banks; and the extent of supervision and examination.

The regulation is applicable whenever a foreign bank seeks to establish an office in the United States. This criterion applies to the first U.S. office opened by a foreign bank, as well as any additional branch, agency, or representative office set up by a foreign bank having a previous U.S. presence. In addition, the regulation requires the submission of an application whenever an existing office is upgraded in status or relocated to another state. In certain limited circumstances, however, an application need not be filed. These situations include the establishment of a branch, agency, commercial lending company, or representative office merely as a by-product of one foreign bank's acquisition of another, without any merger or organic change occurring in the organization.

Another significant mandatory requirement for approval is that a foreign bank applicant must be engaged directly in banking in its home country and be subject to supervision by the appropriate authorities in that country. Because of this requirement, the Federal Reserve Board has been compelled to study in detail the initial application it receives from each country with respect to the adequacy of the country's supervision. The board has indicated that a determination of the adequacy of a particular supervisory scheme will be based on a variety of factors, including whether the home country supervisor performs the following duties: verifying the existence of procedures for monitoring and controlling worldwide risks and operations, obtaining consolidated information on a periodic basis, obtaining information concerning transactions among affiliates, analyzing periodic consolidated financial reports, and evaluating prudential standards on a worldwide basis.

Yet another requirement is that foreign banks must furnish the Federal Reserve Board with such information as the board deems necessary for the application. Additionally, the board has the prerogative to assess whether an applicant has provided it with adequate assurances that it will continue to make available additional information that the board deems necessary. The board is concerned that the prospect of foreign secrecy laws may hamper its supervisory efforts. Therefore, an applicant is required to disclose in its application any laws that may inhibit the board's access to pertinent information.

In evaluating branch and agency applications, the regulation provides the board with the power to assess the following additional issues that are similar to those previously considered by most states: whether home country authorities have consented to the new office; the financial and managerial resources of the applicant, including its experiences and capabilities with respect to international banking; and whether the foreign bank and its U.S. affiliates are in compliance with applicable U.S. laws. The regulation also identifies other relevant factors that the board may consider. The regulation notes that the size of the applicant should not be the sole factor determining approval and states that the board is permitted to consider the needs of the community, the applicant's history and relative size in its home country, and whether the regulator in the applicant's home country shares information with U.S. supervisors.

Regulation of Nonbanking Activities of Foreign Banks. A foreign bank that has a controlling interest in a U.S. bank, whether state or federally chartered, is a bank holding company under U.S. law and is subject to both the banking and nonbanking prohibitions of the BHCA with regard to its activities in the United States. Foreign banks that have established branches, agencies, or investment company subsidiaries in the United States but do not control a domestic bank are not considered bank holding companies. However, they are still subject, under the IBA, to the nonbanking prohibitions of the BHCA and are thereby subject to the regulation by the Federal Reserve Board with regard to their nonbanking activities and investments in the United States.

In an attempt to eliminate unfair competitive advantages in the industry, federal and state agencies require that foreign banks with a branch, agency, commercial bank, or investment company subsidiary in the United States comply with the same binding legislation that applies to domestic holding companies attempting to diversify into nonbanking activities. However, many foreign banks enjoy grandfather privileges with respect to activities or investments in the United States that the banks had initiated before enactment of the IBA. For example, some European banks have grandfathered investment banking subsidiaries in the United States that would otherwise be prohibited under the BHCA.

Moreover, when the IBA was being considered for ratification, Congress was also faced with the problem that many foreign banks were linked through stock ownership in their home or other foreign markets with foreign nonbanking companies that were expanding into the United States. Strict application of BHCA rules in such situations would have either required foreign banks with U.S. banking operations to divest themselves of many non-U.S. stock holdings or blocked investment in the United States by foreign companies in which foreign banks have substantial ownership interests.

Congress decided that neither of these options was in the political or economic interests of the United States and thus granted certain exemptions in the IBA. In general, foreign banks that are principally engaged in the banking business outside the United States are permitted to maintain both their banking operations in the United States and certain investments in foreign nonbanking enterprises that also conduct activities in the United States. The exemption permits foreign banking organizations to own a foreign nonbank company that engages in the same commercial nonbanking activities in the United States that it conducts abroad. Financial nonbanking activities in the United States require prior approval by the Federal Reserve Board and are generally permitted only to the extent that U.S. bank holding companies are allowed to engage in the activities. Legislative proposals before Congress in 1996, however, raised the issue of international banks' ability to expand into new securities and other activities comparable to what U.S. banking organizations are allowed to do even if they do not maintain FDIC insurance.

Policy Issues Affecting Future Entry and Expansion. Despite enactment of the IBA in 1978 and the FBSA in 1991, the role of foreign banks in the U.S. banking system continues to be a subject of much attention and debate. Three issues in particular could have a significant impact on future foreign bank entry and expansion in the United States.

In late 1983, for example, legislation was proposed in the U.S. Senate that would have required the comptroller to consider the home country's reciprocating policies regarding U.S. banks before approving the establishment of a federal agency or branch. This proposal reflected a judgment that, at least in some countries, U.S. banks were not being given equal competitive opportunities with local banks and that reciprocity would be a useful means for opening banking markets abroad to U.S. banks. Although limited in scope and ultimately never enacted, the bill became the focus of considerable debate as to whether reciprocity should be a consideration in U.S. policy toward foreign bank entry and expansion.

Reciprocity is typically used to refer to efforts to assure a precise balancing of the treatment countries accord to each other as trading partners. For example, under a policy of reciprocity, if a foreign bank country limited the presence of U.S. banks to agencies, banks from that country would be able to establish only agencies in the United States. Such "mirror image" reciprocity has been consistently opposed by the U.S. government on the grounds that it would be almost impossible to administer in the United States, would remove flexibility, and would interfere with the role of the United States as a major international financial center. Instead, to attack the problem of discrimination against U.S. banks abroad, the U.S. government has used both bilateral and multinational channels to promote greater liberalization and equality of competitive opportunities in banking markets abroad. The Riegle-Neal Interstate Banking and Branching Efficiency Act was intended to transform the American banking system and remold it to be more in line with those of other industrialized nations.

In addition to establishing the various prudential standards for international lending, the International Lending Supervision Act of 1983 (ILSA) required U.S. bank regulatory authorities to establish minimum capital ratios for U.S. banking institutions. The establishment of such ratios focused increased attention on perceived disparities between U.S. and foreign bank capital requirements, with the larger U.S. banks claiming that many foreign banks enjoy competitive advantages due to lower capital ratios. The Federal Reserve Board addressed these concerns in Section 3 of the BHCA. This section requires the board to ensure that foreign banks establishing banking operations in the United States meet the same general standards of strength, experience, and reputation required of domestic banking organizations. Foreign banks are also expected to serve on a continuing basis as a source of strength to their banking operations in the United States. In this regard, the board has initiated consultations with foreign bank supervisors and has begun work on developing more fully the concept of functional equivalency of capital ratios for banks of different countries. The overall goal is to achieve broader international comparability of capital standards; this emphasis suggests that U.S. authorities may increasingly try to assess the capital adequacy of foreign banks according to functionally equivalent international standards.

Interstate banking in the United States has been growing rapidly as a result of the enactment of laws by a number of states that permit acquisitions of in-state banks by bank holding companies in other states. However, many of these state laws permit interstate acquisitions only among states with regional or historical ties. For example, laws in many northeastern states restrict acquisitions to bank holding companies headquartered in those states. Under the principle of national treatment embodied in the IBA, it would seem that a foreign bank might be treated as if it were a local bank headquartered in the state the foreign bank has chosen as its home state. For example, a Canadian bank with Connecticut as its home state could be treated as a Connecticut bank for purposes of regional interstate banking statutes. Delaware stands out as a particularly progressive state in this regard. In 1999, Governor Tom Carper signed a bill to let foreign banks establish Delaware as their home state, giving banks another economic incentive to open shop in a state that already has an extremely favorable tax environment. However, in some states, regional interstate banking laws have either expressly or implicitly excluded foreign banks or their U.S. bank subsidiaries from taking advantage of regional acquisition opportunities.

Foreign banks have expressed the view that such state laws deny them equal competitive opportunities and are thus inconsistent with national treatment. Prior to the passage of the Riegle-Neal Act, Congress largely deferred to the states in the area of interstate banking and would not address this issue of possible discrimination against foreign banks. With the Riegle-Neal Act, however, a bank holding company in one state became able to acquire a bank in another state after September 29, 1995, without regard to the law of the other state. Under the more recent act, the only significant restriction a state could impose was to restrict the acquisition of a bank that has not been in existence for a specified period of time (up to five years). The purpose of this requirement was to preserve the value of existing banks by discouraging the start-up of new banks merely for the purpose of facilitating entry into a state.

Although foreign banks still enjoyed considerable flexibility in the United States in the early 1990s, a regulatory framework at the federal level began taking shape. That framework eliminated certain advantages foreign banks possessed relative to domestic banks, but also opened the possibility of operating through edge corporations, obtaining funds from the Federal Reserve System, and obtaining deposit insurance. International banks could change their home state more than once and acquire additional branches or agencies outside of their home state.

Current Conditions

There were 196 foreign banks representing 55 countries in the United States by 2002. Those banks had total banking assets of $1.34 trillion and total banking and nonbanking assets of more than $3.3 trillion. Offices of foreign banks in the United States had total deposits in excess of $664 billion and $471.1 billion in total loans in 2002, including $237.8 billion in business loans. Foreign banks accounted for 27 percent of U.S. commercial and industrial loans at the end of June 2002.

In March 2002, the Office of the Comptroller of the Currency (OCC) announced plans to lower the capital requirements for the U.S. branches of well-run foreign banks. In effect, since 1960 the current law required foreign banks to reserve 5 percent of their liabilities in trust accounts at other banks. Under the new law, the formula for qualifying banks would be adjusted and would exclude liabilities booked on a federal branch's international banking facility, a department of the bank only able to accept deposits and extend credits to foreign individuals, companies, and similar institutions. The adjustment would apply to 37 of the 52 federal branches the OCC supervises and free up $1.6 billion. The OCC determined qualifying branches by assessing the financial condition of the branch, the parent bank's financial condition, and the political and financial stability of the country in which the parent bank is located. Qualifying branches would be able to withdraw excess deposits, held to mitigate against losses, without prior approval from the OCC. A $1 million reserve minimum would, however, still be in effect regardless of the fact that it may be more than 5 percent of a branch's liabilities. First instituted in New York, the newly relaxed federal requirements may make the United States more desirable for foreign banks.

In 2001, the Federal Reserve Board revised Regulation K, intended to expand permissible activities abroad for U.S. banking organizations, which also had a positive effect on foreign banks in the United States. The revisions would streamline their application process, liberalize provisions allowing a foreign bank to be exempt from nonbanking prohibitions, and implement provisions of the 1994 interstate banking law that affects foreign banks.

America and the World

Analysts expected that foreign banks interested in securing a significant presence in the United States, both as a source of dollar funding and with a view to active participation in international lending, would focus on establishing a branch or subsidiary bank in a home state and combining it with edge corporations in several other states.

Banks from a group of 10 countries operate about half of the U.S. offices of foreign banks but account for a majority of the assets. The G-10 countries are the 11 participants in the General Arrangements to Borrow of the International Monetary Fund; namely, Belgium-Luxembourg, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. Japanese banks with offices in the United States had nearly $213.6 billion in assets in 1999, a decrease of 23.6 percent from the previous year. Germany had $210.5 billion in assets, up 42.7 percent from 1998. France had $163.8 billion (down 4.4 percent for the year) and Canada $125.1 billion (up 2.1 percent). Although banks from non-G-10 countries, particularly in Latin America and Asia, have also opened many U.S. offices since the early 1980s, they represented a relatively small segment of the industry in the early 1990s.

After the introduction of International Banking Facilities (IBFs) in the United States in December 1981, foreign banks established IBFs at many of their U.S. offices. An IBF is a segregated set of asset and liability accounts that may be established at a banking office located in the United States for the purpose of conducting transactions with foreign residents without being subject to federal reserve requirements or to deposit insurance coverage and assessments. At the end of 1992, about half of the total assets of U.S. agencies and branches of foreign banks were booked as their IBFs. The agencies and branches accounted for more than two-thirds of IBF activity.

The U.S. international banking industry faced a plethora of problems and opportunities at the dawn of the twenty-first century. As transnational financial services have increased, the significance of national borders has decreased. Globalization has also accelerated the speed at which financial transactions take place. Although this has triggered explosive growth in emerging economies, it has also made these states vulnerable to financial crises. The rapid capital outflows made possible by globalization triggered the 1997 Asian meltdown that spread to Brazil and Russia. Banking regulators both within the United States and abroad were called on to coordinate efforts and to cooperate with their international counterparts to deal with these situations. Foreign banks have played a large role in the development and stability of the U.S. banking and financial system. This role, coupled with the growth of international financial services, presents foreign banks with significant growth opportunities in the United States well into the 2000s.

Further Reading

Blackwell, Rob. "Fed Rule Expands U.S. Banks' Activities Abroad." American Banker, 18 October 2001.

Blanden, Michael. "Business as Usual," The Banker, March 1999.

Duran, Nicole. "OCC to Loosen Capital Rule for Foreign Banks." American Banker, 5 March 2002.

The Federal Reserve Board. Share Data for U.S. Offices of Foreign Banks. March 2003. Available from .

Kraus, James R. "U.S. Bankers Fear Laundering Proposals Will Lock Them Out," American Banker, 23 November 1999.

Mandaro, Laura. "Foreign Bank Assets Decrease for First Time in More than Two Years," International Banker, 5 July 1999.

McTaggert, Timothy R. "With New Law, Delaware Opens Door Wider to Foreign Banks," American Banker, 23 July 1999.

"N.Y. Loosening Foreign-Bank Pledge Rule." American Banker, 16 December 2002.

"Selected Assets and Liabilities of Domestically Owned Commercial Banks, Plus U.S. Offices of Foreign Banks." American Banker, 22 March 2000.

Seltzer, Mark D. "Fighting Money Laundering," Boston Globe, 2 November 1999.

"Supervision of Foreign Banks: U.S. Approach." Presentation to Joint World Bank/Federal Reserve Annual Seminar for Senior Bank Supervisors from Emerging Market Economics, 6 November 2002.

"Top Ten Countries in US Offices of Foreign Banks Ranked by Assets On September 30, 1999." American Banker, 22 March 2000.

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