United States General Accounting Office

GAO Report to the Chairwoman and the

Ranking Minority Member,

Subcommittee on Financial Institutions

and Consumer Credit, House of

Representatives

September 1996 FOREIGN BANKS

Implementation of the

Foreign Bank

Supervision

Enhancement Act of

1991

G O A

years

1921 - 1996

GAO/GGD-96-187

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-271055 

September 30, 1996

The Honorable Marge Roukema

Chairwoman

The Honorable Bruce F. Vento

Ranking Minority Member

Subcommittee on Financial Institutions

 and Consumer Credit

Committee on Banking and Financial Services

House of Representatives

This report responds to your request for information on implementation of

the Foreign Bank Supervision Enhancement Act of 1991 (FBSEA). FBSEA

gives the Federal Reserve enhanced supervisory and regulatory authority

over foreign banks operating in the United States through branches,

agencies, commercial lending companies, and representative offices.1

 The

legislation was proposed primarily in response to the perceived need for

more federal oversight resulting from misconduct by a few foreign banks

operating in the United States.

You were interested in whether the act is being adequately implemented.

As agreed with your subcommittee, the objectives of this report are to

describe (1) the Federal Reserve’s process for approving foreign bank

applications for entry and expansion into the United States and (2) the

examination process, including the coordination among U.S. regulators,

and provide statistics on enforcement actions that have been taken since

passage of FBSEA. In additional work now under way, we agreed to

(1) review the Foreign Banking Organization (FBO) program, which the

Federal Reserve developed to improve the supervision of foreign banks in

the United States and (2) gather information on internal control problems

in the U.S. offices of foreign banks and the use of internal and external

audits by foreign banks and federal bank supervisors.

Results in Brief FBSEA established minimum standards for foreign bank entry and

expansion into the United States and strengthened federal supervision and

1

Agencies perform the same functions as branches except that they cannot generally accept deposits.

Commercial lending companies are specialized nondepository institutions organized under state law.

They may engage in borrowing and lending activities and have numerous other powers. They may

maintain credit balances but may not accept deposits. New York Article XII investment companies are

the only current examples. Representative offices generally are small marketing and research

operations. Some are similar to the loan production offices of U.S. banks. They allow foreign banks to

attract business for the parent bank and develop correspondent relationships with local U.S. banks.

They are prohibited, however, from engaging in general banking activities, although they may conduct

administrative functions, such as handling the signing of loan documents.

Page 1 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

regulation. Under the act, before foreign banks can establish offices or

acquire banking subsidiaries in the United States, the Federal Reserve

must approve the applications. Our review of the Federal Reserve’s

process for approving such applications showed that as of January 29,

1996, the Federal Reserve had approved 45 applications after determining

that the applicant banks met the standards specified in FBSEA and its

implementing regulations. However, Federal Reserve staff have said that

the processing of applications had taken longer than they would have

liked. Federal Reserve staff told us that new guidelines were established in

March 1993 to improve processing time. Available evidence indicates that

average processing time has been reduced since these new guidelines

became effective.

The Federal Reserve, as mandated by FBSEA, is to coordinate with the other

federal and state bank supervisors to ensure that foreign branches and

agencies are examined at least once every 12 months. Federal Reserve

statistics indicated that FBSEA’s 12-month mandate had been met in an

average of 97 percent of the cases during 1993, 1994, and 1995. In addition,

the act gave the Federal Reserve responsibility for examining

representative offices of foreign banks in the United States, although it did

not establish a time frame in which this must be done. The Federal

Reserve examined over half of the representative offices of foreign banks

operating in the United States during each of the years 1993, 1994, and

1995.

Examination results indicated that bank supervisors have found branches

and agencies of foreign banks generally to be in satisfactory condition. For

example, only 3 percent of foreign branches and agencies received ratings

in the lowest two categories for safety and soundness in 1995. From 1993

through 1995, federal banking supervisors issued 40 formal enforcement

actions against foreign banks operating in the United States.2

 Of these

actions, the Federal Reserve used its civil money penalty authority in four

cases and ordered that one foreign bank terminate its banking operations

in the United States.

Background Between 1972 and 1990 the presence of foreign banks in the United States

increased rapidly—from 105 offices3

 and subsidiary banks with $95 billion

2

These 40 actions include 6 voluntary terminations of deposit insurance. These actions are counted as

formal enforcement actions, even though the termination is voluntary.

3

The term foreign bank office refers to an entity of a foreign bank that is not separately incorporated in

the United States.

Page 2 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

in assets in 1972 (measured in 1995 dollars) to 737 offices and subsidiary

banks with $933 billion in assets (measured in 1995 dollars) at the end of

1990.4

 Since then their number has fallen and growth in the volume of their

assets has slowed.5

 At the end of 1995, there were 656 foreign bank offices

and foreign-owned subsidiary banks with $974 billion in assets in the

United States. Including an additional 247 representative offices, 371

foreign banks had a presence in the United States.

Branches and agencies6

 are the most common organizational

forms—accounting for about 78 percent of foreign bank assets at the end

of 1995. (See table 1.) Foreign-owned U.S. bank subsidiaries held over

21 percent of foreign bank assets. Commercial lending companies and

Edge Act/Agreement Corporations accounted for less than 1 percent of

foreign bank assets, and representative offices held no banking assets.7

Table 1: Foreign Bank Organizations

Operating in the United States as of

December 1995

Dollars in billions

Forms of organization Number Assets

Branches and agencies 545 $761

Subsidiary banks 94 208

Commercial lending companies 3 1

Edge Act/Agreement Corporations 14 3

Representative offices 247 NA

Total U.S. officesa 903 $974

aTotals may not add due to rounding.

NA: Not applicable.

Source: Federal Reserve.

U.S. branches and agencies are legal and operational extensions of their

parent foreign banks and as such have no capital of their own. They may

conduct a wide range of banking activities, including lending, money

4

Data exclude representative offices. The Federal Reserve became responsible for supervising

representative offices under FBSEA. Prior to this act, the only federal requirement for these offices

was that they register with the U.S. Department of the Treasury.

5

From 1972 to the end of 1990, real assets in these offices grew at an annual rate of almost 14 percent.

Since then they have grown at an annual rate of almost 1 percent.

6

Because they perform similar functions, branches and agencies are often discussed together. In this

report we will follow this convention.

7

Edge Act/Agreement Corporations allow U.S. and foreign banks to conduct international banking

activities in the United States subject to more limited laws and regulations than those that apply to

domestic banking activities.

Page 3 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

market services, trade financing, and other activities related to the service

of foreign and U.S. clients. They can also access the U.S. payments system

through the Federal Reserve and obtain other Federal Reserve services.

Branches and agencies of foreign banks may be either state-licensed and

therefore regulated and supervised by the respective state banking

department, or federally licensed and regulated and supervised by the

Office of the Comptroller of the Currency (OCC). As of December 1995, 473

branches and agencies were state-licensed and 72 were federally licensed.

In addition, 41 of the branches were insured by the Federal Deposit

Insurance Corporation (FDIC) and thus subject to additional supervision by

FDIC.

U.S. bank subsidiaries of foreign banks are U.S.-chartered banks that have

all the powers of U.S.-owned banks. They are insured by FDIC and are

subject to all the rules and regulations governing U.S.-owned banks. Their

assets and liabilities are separate from those of their parent foreign banks,

and they must maintain their own capital in accordance with U.S. laws and

regulations. They may be either state or federally chartered.

Branches and agencies of foreign banks were first subject to federal

regulation with passage of the International Banking Act of 1978 (IBA).

Adopting a policy of national treatment, IBA sought to allow foreign banks

with branches and agencies to operate in the United States on an equal

basis with U.S. banking organizations. Foreign banks were to receive

neither significant advantages nor incur significant disadvantages. The act

also gave the Federal Reserve responsibility for overseeing the combined

U.S. operations of foreign banks.

Although IBA substantially equalized the treatment of the U.S. operations of

foreign and U.S. banks, it did not require prior federal review of foreign

bank entry into the U.S. market nor did it permit a federal role in the

termination of a state-licensed branch or agency. Cases of fraud and other

criminal activity by some foreign banks in the 1980s and early 1990s

convinced the Federal Reserve and Congress that both state and federal

supervisors needed to increase the attention they paid to foreign banks

operating in the United States. In particular, Federal Reserve officials

believed that prior federal review of foreign bank entry and expansion in

the U.S. market was necessary. They also believed that a federal role in

terminating a state-licensed branch or agency for unsafe and unsound

banking practices was desirable.

Page 4 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

In December 1991, Congress passed FBSEA. This act, which amended IBA,

increased federal supervision of all foreign bank operations, giving the

Federal Reserve authority to examine all foreign bank offices in the United

States. FBSEA also mandated uniform standards for foreign banks

establishing operations in the United States. Finally, it prohibited U.S.

branches of foreign banks from obtaining deposit insurance8

 and gave

federal supervisors greater enforcement authority over the U.S. operations

of foreign banks.

FBSEA also directed the Federal Reserve to levy examination fees on

foreign banks with a U.S. branch, agency, or representative office.

However, the Riegle-Neal Interstate Banking and Branching Efficiency Act

of 1994 imposed a 3-year moratorium on this provision.

Applications for

Foreign Bank Entry

FBSEA increased the Federal Reserve’s supervisory and regulatory power

over foreign banks by requiring Federal Reserve approval for all foreign

banks seeking to establish U.S. offices, whether licensed by state or

federal authorities.9

 This requirement was designed to give the Federal

Reserve, as the agency responsible for overall supervision of foreign banks

in the United States, a role in determining whether such institutions may

establish a U.S. banking presence.

Uniform Standards for

Establishing a U.S. Office

FBSEA established uniform standards for foreign banks entering the United

States, requiring them to meet financial, managerial, and operational

standards similar to those of U.S. banking organizations. The act made the

Federal Reserve responsible for ensuring that these standards are met.

Under FBSEA, foreign banks must meet two standards in order to establish

a branch or an agency, or to acquire ownership or control of a commercial

lending company. First, the Federal Reserve must determine that the

foreign bank applicant (and any parent foreign bank) engages directly in

the business of banking outside the United States and is subject to

comprehensive supervision or regulation on a consolidated basis by its

home country supervisor. Second, the foreign bank must furnish to the

Federal Reserve the information that the Federal Reserve requires in order

to assess the application adequately.

8

Those branches that already had deposit insurance were allowed to retain it.

9

Foreign banks had previously been required to obtain Federal Reserve approval for establishment or

acquisition of bank subsidiaries under the Bank Holding Company Act.

Page 5 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

In addition to the two mandatory standards, the Federal Reserve also

considers other factors. Among others, these include (1) whether the

applicant’s home country authorities have consented to the establishment

of the proposed office, (2) the applicant’s financial and managerial

resources, including its capacity to engage in international banking, and

(3) whether the applicant has provided adequate assurances that it will

provide access to information sufficient to allow the Federal Reserve to

determine its compliance with applicable U.S. laws.

Before FBSEA, the states were responsible for licensing representative

offices and, at the federal level, applicants only had to register their office

with the U.S. Department of the Treasury. FBSEA gave the Federal Reserve

authority to approve establishment of these offices as well. However, it did

not require the Federal Reserve to apply the standards mandated to

establish other banking offices to its decisions regarding applications for

representative offices. The Federal Reserve is to take these standards into

account in evaluating a foreign bank’s application to establish a

representative office, but it can approve applications where the parent

foreign bank does not meet all of the standards required to establish a

branch or agency.10

Application Process Before FBSEA, foreign banks wishing to establish a branch or agency in the

United States were required to obtain approval from the appropriate

banking regulator—OCC—for federal branches and agencies, or the state

regulator for state branches and agencies. Since FBSEA, a foreign bank

must also receive approval from the Federal Reserve.

To receive approval from the Federal Reserve, a foreign bank must submit

an application to the reserve bank located in the district where it plans to

establish an office or to its already designated “responsible” reserve bank.

A copy of its OCC or state application and any additional information

necessary for the Federal Reserve to determine that the bank meets the

standards set out in FBSEA are to be included in the application. The

application is not to be accepted (i.e., deemed informationally complete)

until these criteria are met. Once the application is accepted for

processing, it is reviewed by staff and submitted to the Board for action.

Before March 1993, applications were reviewed solely by the reserve bank

before they were accepted. If an application lacked information, the

10The Federal Reserve has stated that the standards that apply to the establishment of branches and

agencies need not apply in every case to the establishment of representative offices, because

representative offices do not engage in a banking business and cannot take deposits or make loans.

Page 6 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

reserve bank requested the applicant bank to provide the information.

After the reserve bank determined that it had all necessary information to

process the application, it was accepted and forwarded to the Board for

review and disposition. At this point the Board could request additional

information. This process often resulted in delays and multiple requests

for additional information.

In March 1993, the Federal Reserve issued guidelines changing its

procedures for processing applications to establish U.S. offices of foreign

banks. The changes were intended to expedite processing and reduce the

burden on applicants of responding to multiple requests for additional

information. The guidelines require the reserve bank to send copies of the

application to the Board within one business day of receiving an

application. Both the reserve bank and Board staffs are then to

simultaneously review the application to ensure that the information is

complete. If additional information is needed, coordinated requests are to

be made to the applicant bank before the application is accepted.

The guidelines also established time limits for Federal Reserve staff to

review applications and ask for additional information. The reserve bank

and Board staffs are to review an application and request additional

information from the applicant bank within 15 business days of receipt of

the application by the reserve bank. The applicant bank then has 20

business days to respond to these requests. If the applicant bank does not

respond within that time, the application would normally be returned due

to insufficient information. If the applicant responds within the time limit,

the reserve bank and Board staffs have an additional 10 business days

either to accept the application as complete or to request additional

information. If additional information is requested, the applicant bank

similarly has 10 business days to respond.

The Federal Reserve encourages all foreign bank applicants to meet with

reserve bank and/or Board staffs before filing applications. These meetings

are intended to identify relevant issues, apprise applicants of required

information, and enable Federal Reserve staffs to obtain necessary

information at an early stage of the process.

Once the reserve bank and Board staffs determine that the application is

complete and it is accepted, the Federal Reserve has an internal guideline

of 60 days to analyze it, have background checks completed, and make

inquiries to home country authorities. After these tasks are completed, the

Page 7 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

application is to be presented to the Board for action.11 If the application

cannot be presented for Board action within the 60-day period, the

applicant is to be informed in writing of the reasons.

Results of Federal

Reserve’s Review of

Foreign Bank Applications

As of January 29, 1996, the Federal Reserve had received 96 applications

from foreign banks seeking to establish offices or bank subsidiaries under

FBSEA. The Federal Reserve had approved 45 applications, had returned or

applicant banks had withdrawn 23, and 28 were under review.12

Of the 45 applications approved by the Federal Reserve, 6 were for

agencies, 15 for branches, 18 for representative offices, and 8 for bank

acquisitions.13 The approved applications represented banks from 23

countries. Taiwan accounted for the most—7 of the 45 applications.

In its decisions approving the applications for branches and agencies and

subsidiary banks, the Federal Reserve found that the foreign banks had

met the standards required under FBSEA and its implementing regulations.

The Federal Reserve’s decisions indicated that the applicants had provided

the necessary information, had met all conditions concerning their

intended operation, and were in compliance with the requirements for

approval.

The Federal Reserve’s policy, as required by FBSEA, is to use the standards

that apply to branches and agencies as guidance when considering an

application to establish a representative office. Federal Reserve

regulations do not require these standards to be met in every case because

representative offices differ from branches and agencies in that

representative offices cannot engage in a banking business and cannot

take deposits or make loans.

Federal Reserve staff told us that, in general, representative office

applicants have not been required to meet the supervision standards

required for branches and agencies. A review of the orders indicated that

the Federal Reserve examined the home country supervision of the

applicant bank in every representative office case, but a determination

11Under Federal Reserve regulations the Board can delegate certain approval authority to the reserve

bank. This may occur when a foreign bank has already received approval to establish an office and

approval is sought for an additional office with equal or lesser powers based on its license.

12These numbers include one representative office that was approved by the reserve bank under

delegated authority.

13Two applications involved approval of more than one type of foreign bank office.

Page 8 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

that the applicant bank or its parent foreign bank were subject to

comprehensive consolidated supervision was not always made. Similarly,

the Federal Reserve has not required foreign bank applicants wishing to

establish representative offices to meet the same financial standards,

including the standard related to capital, which are required for the

establishment of branches and agencies. In our review of 17 orders

approving representative offices, we found that in 13 cases the orders did

not indicate whether the capital standards were being met by the parent

foreign bank.

Most of the 23 applications that had not been approved by the Federal

Reserve and were no longer under review were withdrawn by the

applicant bank for various reasons. (See table 2.)

Table 2: Number of Applications

Returned/Withdrawn as of January 29,

1996 Applications withdrawna 17

Applications returned

Insufficient information 5

Weaknesses in existing U.S. operations 1

Total 23

aReasons for withdrawal of applications included: a change in strategy, a change in ownership,

supervision factors, condition of U.S. operations, and financial factors relating to the applicant. In

many situations, a combination of reasons applied.

Source: Federal Reserve.

Of the 28 applications under review as of January 29, 1996, 3 were for

agencies, 5 were for bank acquisitions, 8 were for branches, and 12 were

requests to establish representative offices. Federal Reserve staff told us

that they had not received any applications to establish a commercial

lending company since FBSEA was passed.

Processing Time for

Establishing Branches,

Agencies, and

Representative Offices

Processing foreign bank applications took more than a year on average,

and this length of time concerned both the Federal Reserve and applicant

foreign banks. Federal Reserve staff told us that the length of time it took

to process applications can be attributed to the need for additional time to

complete background checks and to review issues related to

comprehensive supervision, bank operations, and internal controls. They

also cited difficulties in obtaining translated information from some

applicant banks, a lack of understanding by some applicants about the

Page 9 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

level of detail required to review comprehensive consolidated supervision,

and some applicants’ unfamiliarity with FBSEA requirements as causes of

delays.

After the Federal Reserve issued its March 1993 guidelines, there was a

decrease in the amount of time taken to process branch, agency, and

representative office applications. (See fig. 1.) On average, the total time it

took to process such applications (from date of initial filing to disposition)

dropped from 574 days to 293 days.14 Of this, the average time between the

date that applications were initially filed and the date they were accepted

decreased from 170 days to 130 days, and the average time between

acceptance and approval decreased from 404 days to 163 days. Federal

Reserve staff attributed this decline to a number of reasons, including

commitment to meet the guidelines, experience with the process, and

improvements in the name check process.

14Processing times were determined from data on 21 applications that were filed before the March 8,

1993, policy change and the 15 applications that were filed after the change. Data on the representative

office approved by a reserve bank under delegated authority were not available.

Page 10 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

Figure 1: Average Processing Time for

36 Approved Applications of

Branches, Agencies, and

Representative Offices, as of

January 29, 1996

0

100

200

300

400

117

191

136

239

295

335

Average number of processing days

Time from filing until acceptance by the Federal Reserve

Time from Federal Reserve acceptance

of application until approval

Agency Branch Representative

offices

Types of organizations

Source: Federal Reserve.

Examination of

Foreign Branches,

Agencies, and

Representative

Offices

FBSEA directed the Federal Reserve to coordinate the supervision of

foreign banking organizations with federal and state bank supervisors to

ensure an efficient and uniform approach in overseeing the operations of

foreign banks in the United States. The act gave the Federal Reserve the

responsibility for ensuring that branches and agencies of foreign banks are

examined every 12 months and gave it the power to examine

representative offices.15 It also broadened the enforcement powers of the

Federal Reserve and OCC. Specifically, the act

• permitted the Federal Reserve to terminate the activities of a

state-licensed branch, agency, commercial lending company, or

representative office for violations of law or for unsafe or unsound

15Examinations of subsidiary banks are governed by other provisions of federal banking law. These

banks are to be examined every 12 or 18 months, depending on the size and condition of the bank.

Page 11 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

banking practices.16 The Federal Reserve may recommend to OCC similar

action for federally licensed offices.

• modified and broadened the Federal Reserve’s and OCC’s authorities to

assess civil money penalties on specific grounds against any foreign bank

or office or subsidiary of a foreign bank and certain individuals of up to

$25,000 for each day during which a violation continues.

Coordination Among Bank

Supervisors

To meet the requirements set out in FBSEA, Federal Reserve staff told us

that each year they develop, in cooperation with OCC, FDIC, and state bank

supervisors, an annual examination plan, to supervise the U.S. operations

of foreign banking organizations. This plan includes branches, agencies,

commercial lending companies, Edge Act/Agreement Corporations, and

significant nonbank subsidiaries. They said the supervisors discuss the

focus of the year’s examinations and when they will be conducted. Their

goal is to ensure that each branch and agency is examined every 12

months without undue burden imposed on the entity and that all

supervisory issues are addressed in the examination process.

To meet this goal, the Federal Reserve may conduct an independent

examination, rely on the other agencies to conduct the examination, or

participate in a joint examination. Federal Reserve staff told us that, in

order to form a baseline understanding of foreign bank operations, in 1992,

they examined either independently or jointly all foreign bank branches

and agencies in the United States. In 1993, the Federal Reserve, OCC, FDIC,

and state bank supervisors developed a joint examination manual for

branches and agencies. The purpose of the manual is to ensure to the

extent possible that each regulatory agency examines branches and

agencies of foreign banks in a consistent manner. Federal Reserve staff

told us that in the future they intend to examine fewer foreign branches

and agencies and rely more on the examinations conducted by OCC and the

states. Table 3 shows the number of independent and joint examinations

conducted by each agency for 1993 through 1995.

16The Federal Reserve must also determine that as a result of such violation or practice, continued

operation of the entity would not be in the public interest or would be inconsistent with the purposes

of FBSEA or other federal banking laws.

Page 12 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

Table 3: Examinations of Branches

and Agencies Done by Each

Supervisor, 1993 Through 1995

Type 1993 1994 1995

Independent examinations

Federal Reserve 146 167 150

State bank supervisors 145 122 161

OCC 18 36 49

FDIC 11 17 7

Total independent examinations 320 342 367

Joint examinations 261 246 203

Total examinationsa 581 588 570

aThe number of examinations exceeds the number of branches and agencies because some

branches and agencies may be examined more than once a year.

Source: Federal Reserve.

Most Branches and

Agencies Have Been

Examined Annually

Federal Reserve examination data indicated that federal and state banking

supervisors have substantially been meeting the requirement that all

branches and agencies be examined annually.17 For 1993, 1994, and 1995,

we found that, on average, 97 percent of branches and agencies had been

examined at least annually. In 1995, 542 of the 549 branches and agencies

operating in the United States at the beginning of the year were examined.

Federal Reserve staff reported that enhanced monitoring tools have been

developed to quickly identify cases where the mandate appears to have

been missed.

Examinations of

Representative Offices

FBSEA did not establish a required frequency for examinations of

representative offices. It is currently Federal Reserve policy to examine all

representative offices at least once every 24 months.18 Examinations of

representative offices differ from those of foreign branches and agencies

in that they are intended primarily to verify that the type of business being

conducted by an office is limited to that customarily viewed as a

representative office function and to ensure that the office is operating in

conformance with sound operating policies.19

17Although FBSEA mandated that foreign branches and agencies be examined every 12 months, this

period is calculated from the end of one examination to the beginning of the next. Thus, start dates

between examinations generally average about 14 months.

18It was originally Federal Reserve policy to examine representative offices on an 12-month cycle. This

was modified to 24 months after experience showed a high degree of compliance with sound operating

policy.

19For this reason, the Federal Reserve refers to these as visitations rather than examinations.

Page 13 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

The Federal Reserve conducted a survey in 1992 to determine the number

of representative offices operating in the United States. Federal Reserve

staff told us that between 1993 and 1994 examiners visited all

representative offices in the United States to verify that they were

engaging only in activities appropriate for representative offices. From our

review of Federal Reserve data, we found that for 1993 through 1995,

93 percent of representative offices, net of closures and new entrants,

were examined at least once. The examination rates were 87 percent,

54 percent, and 66 percent for 1993, 1994, and 1995, respectively.

Examination Results

Indicate Most Foreign

Branches and Agencies

Have Been Rated

Satisfactory

Examinations by federal and state supervisors are intended to determine

the safety and soundness of foreign branches and agencies. They result in

a composite examination rating for the entity. These ratings range from 1

(fundamentally sound) to 5 (unsatisfactory). As table 4 shows, of the

foreign branches and agencies examined during 1995, 88 percent received

a rating of 1 or 2 at year-end, indicating that their operations were at least

satisfactory and required only normal supervisory attention. Nine percent

were rated 3 (fair). Only 3 percent received a rating of 4 or 5, meaning that

they were considered to have significant weaknesses or were identified as

having so many severe weaknesses that they required urgent attention by

their head offices. These results are similar to those in 1993 and 1994 in

which 79 percent and 85 percent, respectively, were found to have sound

operations.

Table 4: Composite Ratings of U.S.

Branches and Agencies of Foreign

Banks, 1993 Through 1995

Rating Number Percent Number Percent Number Percent

1 23 4% 46 9% 59 11%

2 392 75 400 76 394 77

3 86 17 70 13 48 9

4 17 3 8 2 11 2

5 2 <1 2 3 1

Totala 520 100%b 526 100% 515 100%

aThe number of ratings is less than the number of foreign bank branches and agencies because

multiple branches or agencies of an entity operating in the same city may receive a single rating.

The number of ratings is also lower than the number of branches and agencies examined

because some branches and agencies may have been examined more than once during the

year, and this table reflects only the latest ratings.

bTotal does not add due to rounding.

Source: Federal Reserve.

Page 14 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

Enforcement Actions

Taken Against Foreign

Banks

Federal and state banking supervisors may issue enforcement actions

against foreign banks as well as their U.S. branches and agencies in cases

where a branch, agency, or other U.S. office of the parent bank is

determined to be operating in an unsafe or unsound manner in violation of

applicable laws, regulations, or written conditions imposed during the

applications process. These actions may be either formal or informal,

depending upon the severity of the problem(s) and the bank’s willingness

to correct them.

Although the Federal Reserve had authority to initiate enforcement

actions against foreign banks and their U.S. branches and agencies under

the IBA and the Federal Deposit Insurance Act, FBSEA enhanced its

enforcement powers. Specifically, it gave the Federal Reserve the

authority to order a foreign bank with a state-licensed branch, agency,

commercial lending company, or representative office to terminate its

activities in the United States and the authority to recommend such action

to OCC for federally licensed branches and agencies. Federal Reserve staff

stated that the Federal Reserve had the authority to levy civil money

penalties for violation of IBA and for failure to make certain reports and

FBSEA modified and broadened this authority for both the Federal Reserve

and OCC. FDIC can issue formal enforcement actions against foreign banks

by virtue of its authority under the Federal Deposit Insurance Act.

Between 1993 and 1995, federal banking supervisors issued 40 formal

enforcement actions against foreign banks operating in the United States.20

In the most serious case, the Federal Reserve, in conjunction with FDIC, the

New York State Banking Department, and several other state bank

supervisors, used its termination authority to order Daiwa Bank to cease

its U.S. banking operations. During this period, the Federal Reserve also

issued three civil money penalties for failures to file regulatory reports and

one for inadequate Bank Secrecy Act policies and procedures. Neither OCC

nor FDIC issued any civil money penalties during this time. The remaining

35 formal enforcement actions issued by the Federal Reserve, OCC, and

FDIC included 16 cease-and-desist orders. In practice, OCC exercises

primary enforcement authority over federal branches and agencies, and

the Federal Reserve takes the lead in issuing formal enforcement actions

against state-licensed branches and agencies.

In addition to formal enforcement actions, each of the federal and state

banking supervisors may take informal enforcement actions, such as

20These 40 actions included 6 voluntary terminations of deposit insurance. Such actions are counted as

formal enforcement actions even though the termination is voluntary.

Page 15 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

memorandums of understanding and commitment letters, in which an

institution agrees to remedy specific areas of supervisory concern. These

actions are taken when supervisory concerns are identified that, while not

overly serious, warrant some type of remedial action. In 1995, the Federal

Reserve in conjunction with state bank supervisors issued 50 informal

enforcement actions against foreign banks, OCC issued 9, and FDIC issued 5.

Scope and

Methodology

To discuss the implementation of FBSEA, we reviewed the act and focused

on those provisions that pertained specifically to the entry and

examination of foreign banks in the United States. Although FBSEA

contained provisions restricting some activities of foreign banks and set

additional reporting and approval requirements, as agreed with the

subcommittee, we did not do independent work to determine that these

provisions have been followed.

We focused our work on branches and agencies of foreign banks because

this form of organization accounts for the largest concentration of foreign

bank offices and assets in the United States. We did limited work on

representative offices because their activities are limited and they hold no

banking assets in the United States. FBSEA also applies to commercial

lending companies. However, there are only three of these companies in

the United States and there have been no applications for this form of

entry since FBSEA was implemented. Finally, since subsidiary banks are

U.S.-chartered, they are governed by all of the laws and regulations

applicable to U.S. banks and are supervised and examined in the same way

as U.S. banks. Accordingly, FBSEA should have had minimal effect on the

regulation and supervision of these banks.

To describe the Federal Reserve’s applications process for foreign banks,

we reviewed its implementing regulations and other banking

correspondence and regulations. We also interviewed staff in the Federal

Reserve’s Division of Banking Supervision and Regulation and its Legal

Division and officials and staff at the Federal Reserve Bank of New York,

which is where most foreign banks operating in the United States are

located. They gave us their views on the applications process and how it

corresponds to the requirements set forth in FBSEA. We also reviewed all of

the Federal Reserve’s decisions approving foreign bank applications since

1992 to determine whether it addressed the statutory and regulatory

requirements of FBSEA. In addition, we compared the length of time it took

to process applications to the guidelines set forth by the Federal Reserve

to determine whether the Federal Reserve was in compliance with its own

Page 16 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

policies. We did not attempt to subjectively evaluate the Federal Reserve’s

decisions on foreign bank applications. To do so, we would have had to

analyze and judge the merits of the facts presented by the foreign bank

applicants and the reasoning in each application.

To describe the examination process and the results of examinations, we

reviewed examination data for foreign branches, agencies, and

representative offices provided by the Federal Reserve for 1993, 1994, and

1995. Because the Federal Reserve has overall responsibility for ensuring

that foreign branches, agencies, and representative offices are examined in

a timely manner, it maintains examination data for all such offices

operating in the United States. The Federal Reserve did not maintain such

data in a summary format prior to 1993. We also interviewed staff and

officials from the Federal Reserve, OCC, and FDIC, in both Washington, D.C.,

and New York, and officials from the New York State Banking Department

to determine how the Federal Reserve coordinates with other bank

supervisors. To determine the extent to which federal supervisors have

used enforcement actions against foreign banks operating in the United

States, we collected data on enforcement actions from the Federal

Reserve, OCC, and FDIC.

Our work was done in Washington, D.C., and New York, NY, between

January and May 1996 in accordance with generally accepted government

auditing standards.

Agency Comments We received both written and oral comments on a draft of this report from

the Federal Reserve. In its letter, the Federal Reserve stated that the

information provided in the report accurately describes the policies and

processes with respect to applications and examinations of foreign banks.

The oral comments were technical in nature and have been incorporated

where appropriate.

We are sending copies of this report to the Chairmen and Ranking

Minority Members of the House Committee on Banking and Financial

Services and the Senate Committee on Banking and Urban Affairs, the

Chairman of the Federal Reserve Board, the Chairman of the Federal

Deposit Insurance Corporation, the Comptroller of the Currency, and

other interested parties. We will also make copies available to others on

request.

Page 17 GAO/GGD-96-187 Implementation of FBSEA 1991
B-271055 

Major contributors to this report are listed in appendix II. If you have any

questions, please call me at (202) 512-8678.

Thomas J. McCool

Associate Director,

 Financial Institutions

 and Markets Issues

Page 18 GAO/GGD-96-187 Implementation of FBSEA 1991
Page 19 GAO/GGD-96-187 Implementation of FBSEA 1991
Contents

Letter 1

Appendix I 

Comments From the

Federal Reserve

22

Appendix II 

Major Contributors to

This Report

23

Tables Table 1: Foreign Bank Organizations Operating in the United

States as of December 1995

3

Table 2: Number of Applications Returned/Withdrawn as of

January 29, 1996

9

Table 3: Examinations of Branches and Agencies Done by Each

Supervisor, 1993 Through 1995

13

Table 4: Composite Ratings of U.S. Branches and Agencies of

Foreign Banks, 1993 Through 1995

14

Figure Figure 1: Average Processing Time for 36 Approved Applications

of Branches, Agencies, and Representative Offices, as of

January 29, 1996

11

Abbreviations

FBO Foreign Banking Organization

FBSEA Foreign Bank Supervision Enhancement Act of 1991

FDIC Federal Deposit Insurance Corporation

IBA International Banking Act of 1978

OCC Office of the Comptroller of the Currency

Page 20 GAO/GGD-96-187 Implementation of FBSEA 1991
Page 21 GAO/GGD-96-187 Implementation of FBSEA 1991
Appendix I 

Comments From the Federal Reserve

Page 22 GAO/GGD-96-187 Implementation of FBSEA 1991
Appendix II 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Susan S. Westin, Project Director

Lamont J. Kincaid, Project Manager

Thomas C. Conahan, Deputy Project Manager

Rose M. Kushmeider, Deputy Project Manager

Barry L. Reed, Sr., Social Science Analyst

Office of the General

Counsel, Washington,

D.C.

Rachel DeMarcus, Assistant General Counsel

(233486) Page 23 GAO/GGD-96-187 Implementation of FBSEA 1991
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