United States General Accounting Office

GAO Report to the Chairwoman and the

Ranking Minority Member,

Subcommittee on Financial Institutions

and Consumer Credit, House Committee

on Banking and Financial Service

May 1997 FOREIGN BANKS

Opportunities Exist to

Enhance Supervision

Program as

Implementation

Proceeds

GAO/GGD-97-80

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-272838 

May 9, 1997

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 the oversight of

the U.S. operations of foreign banking organizations (FBO). The Foreign

Bank Supervision Enhancement Act of 1991 (FBSEA) gave the Federal

Reserve System (FRS) enhanced supervisory and regulatory authority over

foreign banks operating in the United States.1

 Before FBSEA, each such

office was examined by a federal or state supervisor and treated as a

separate entity even if the FBO had multiple offices in the United States.

Although FRS had overall authority for supervising the foreign banks’ U.S.

presence, no formal mechanism existed to enable the various agencies to

share information about an FBO with offices in multiple states and to

coordinate supervisory activities. In keeping with its enhanced authority,

FRS has worked with other supervisory agencies to develop the Foreign

Banking Organization Supervision Program (FBO Program) with the intent

of improving and better coordinating supervision of FBO offices in the

United States.

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

(1) describe the FBO Program and (2) evaluate the banking supervisors’

progress in implementing this program.

Results in Brief The FBO Program focuses on integrating into supervisory procedures a

common understanding of a given FBO in its entirety, including policies and

practices in the FBO’s home country as well as the overall condition of the

FBO’s combined U.S. operations. The program calls for coordinated

development and common use of five new products. We refer to two of

these as “the country reports.” One country report is to provide

information about the financial system and the supervisory and

governmental policies in the FBO’s home country, and the other is to

1

Foreign banks may operate in the United States through bank or nonbank subsidiaries and other types

of offices, including branches, agencies, and representative offices.

Page 1 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

provide information about significant accounting policies and practices in

the home country.

A third product, the Strength-of-Support Assessment (SOSA), which is to be

based on the country reports and other financial data, is to provide

analysis and a ranking to reflect the U.S. supervisors’ judgment about the

FBO’s ability to provide its U.S. operations necessary financial and

managerial support. SOSA reports are to be used along with other

information for reaching decisions regarding the scope and frequency of

exams and for other supervisory and enforcement matters.

A fourth product, the Summary of Condition and Combined Rating, is

designed to provide FBO management and U.S. supervisors with an overall

assessment of the FBO’s U.S. operations. The last new supervisory product,

an annual comprehensive examination plan, is intended to better

coordinate examinations of U.S. offices of FBOs with multiple U.S. banking

operations and/or significant U.S. nonbanking operations. This

examination plan is to be developed from information in the SOSAs, the

results of individual prior examinations, and the overall assessment of the

FBO’s combined U.S. operations.

In our review of the FBO Program, we found that banking supervisors had

made progress in implementing the program and had begun to realize

benefits from it. However, we also identified areas where improvements

could be made. As of December 31, 1996, about 43 percent of the required

SOSA reports and their related home country reports had been finalized.2

Supervisors identified some broad benefits of the program—particularly

increased communication and cooperation among supervisors and

improved access to information about FBOs and their home countries. At

the same time, comments of supervisory officials and staff indicated some

skepticism about how useful the information from the SOSA reports will be

in improving FBO supervision. However, they also said that the various

Federal Reserve Banks are developing different formats and strategies for

integrating the information into the supervisory process. In addition, we

identified a number of weaknesses in SOSA and country reports that could

limit the program’s effectiveness. These included inconsistent, incomplete,

or outdated information, as well as SOSA rankings that did not appear to be

justified by information in the report.

2

Federal Reserve Board officials told us that, as of April 7, 1997, approximately 92 percent of the

SOSAs and their related home country reports were in final or draft form.

Page 2 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Background As of December 31, 1996, a total of 281 FBOs based in 59 countries had

banking operations in the United States that were subject to the

procedural requirements of the FBO program. FBOs operate in the United

States through a number of types of offices with differing powers and

oversight. The most common of these types of entities are described in

table 1.

Table 1: Types of Offices FBOs Operate in the United States

Type of office Description Supervision

Branches and agencies Branches are legal and operational extensions of their parent foreign bank

and have broad banking powers, including accepting limited uninsured

deposits, lending, money market services, trade financing, and other

activities related to the service of foreign and U.S. clients. Agencies have

similar powers but may not accept deposits from U.S. citizens or residents.

FRS and either Office of the

Controller of the Currency

(OCC) if federal license or

states if state license.a

Subsidiary bank Separately capitalized legal entity chartered in the U.S. with shares owned

or controlled by the parent foreign bank. Banking powers and legal or

regulatory restrictions are the same as those of any other domestic bank.

OCC, or FDIC and state

regulators, or FRS and

states.

Representative office A marketing office/liaison between the head office of the foreign bank and

its customers and correspondent banks in a state or region. May engage

in representational and administrative functions, but may not make any

business decisions on behalf of the foreign bank.

FRS and states.

Edge Act Corporation or

Agreement Corporation

Edge Act Corporations are separate subsidiaries limited to international

banking activities specified in the Edge Act. Domestic activities permitted

include receipt of deposits from foreign governments, financing of

contracts, projects performed abroad, financing imports and exports.

Agreement Corporations are limited to essentially the same powers as

Edge Act Corporations by agreement with FRS.

Edge Act corporations: FRS.

Agreement Corporations:

FRS, states.

Commercial lending company Specialized nondepository institution authorized under state law. May

engage in borrowing and lending activities, including accepting deposits

at off-shore facilities.

FRS and states.

Nonbank subsidiary Nonbank subsidiaries of FBOs may engage in activities such as

underwriting or dealing in certain securities to the same extent that U.S.

bank holding companies may engage in such activities.

FRS, states, and other

federal regulators,

depending on activities.

aThere are also a limited number of insured branches that are supervised in part by the Federal

Deposit Insurance Corporation (FDIC).

As shown in table 2, branches and agencies are the most common types of

FBO banking offices in the United States, and they account for about

51 percent of the total foreign bank assets in the United States as of

December 31, 1996.

Page 3 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Table 2: U.S. Operations of FBOs as of

December 31, 1996

Type of office Number of offices

Total assets

(in billions)

Branches and agencies 498 $821

Subsidiary banks 90 226

Edge Act and Agreement Corporations 21 2

Other deposit-taking entitiesa 29 25

Total banking offices 638 1,074

U.S. nonbanking subsidiaries 672 537

Representative offices 138 NA

Total 1,448 $1,611

aIncludes commercial lending companies, savings banks, and trust companies.

Source: Federal Reserve System.

An individual FBO may have a variety of these types of offices operating in

the United States, and each individual office may be supervised by a

different federal or state regulator, with FRS having overall authority.

Figure 1 shows the organizational structure of the U.S. operations of a

hypothetical FBO. It also shows the U.S. supervisor for each office.

Page 4 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Figure 1: Organizational Structure of the U.S. Operations of a Hypothetical FBO

Foreign banking

organization

State licensed

insured branch

(state and FDIC)

Federally 

licensed agency

(OCC)

State licensed

representative

office (state)

Bank holding

company 

(FRS)

State chartered

commercial

bank

(state and 

FDIC)

Federally

chartered

commercial

bank

(OCC)

State chartered

commercial

lending 

company

(state)

Section 20

securities

subsidiary

(FRS)

U.S. operations a

Separately chartered and capitalized subsidiary

Legal and operational extension of the parent FBO

Federally

chartered

Edge Act

Corporation

(FRS)

aFRS has overall authority for all U.S. operations of FBOs.

Source: GAO example developed from FRS documents.

Scope and

Methodology

To address the objectives of this report, we reviewed examination

manuals, relevant laws, and guidance issued by the Board of Governors of

FRS (Federal Reserve Board). We interviewed officials from the Federal

Reserve Board and the Federal Reserve Banks of Atlanta, Chicago, New

York, and San Francisco. We also interviewed state bank supervisors from

Page 5 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

California, Florida, Illinois, and New York, and officials from FDIC, OCC, and

the Institute of International Bankers—an association of foreign banking

organizations with U.S. operations. The Federal Reserve Banks and state

bank supervisors we interviewed are responsible for overseeing most FBO

operations in the United States.

In addition to our interviews, we developed a data collection instrument

(DCI) to help us systematically collect information from each of the FBO

products: the country reports, SOSAs, examinations, overall assessments of

U.S. offices, and the comprehensive exam plans. The type of information

we collected included basic financial information on the FBO and its U.S.

operations, results of past examinations of U.S. operations, and

information on the supervisory and financial system of the foreign

country, among other things. This DCI was designed to help us compare the

content of these reports and determine the extent of use of information

from SOSAs and country reports in comprehensive exam plans.

We used the DCI to review the FBO products from 18 different countries. We

chose countries located in Europe, Asia, and North and South America to

obtain variation in geographic location and levels of financial

development. For each country, we chose two FBOs, if two existed, and

reviewed their SOSAs, comprehensive exam plans, and overall U.S.

assessment, if available. We chose the FBOs included in our judgmental

sample to obtain variation in size, SOSA ranking, and types of offices they

had operating in the United States.

We obtained written comments on a draft of this report from the Federal

Reserve Board. These comments are discussed at the end of this letter and

are reprinted in appendix I. We did our work in Washington, D.C.; New

York; California; Illinois; and Florida in accordance with generally

accepted government auditing standards from September 1996 to

January 1997.

Page 6 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

The FBO Program

Was Designed to

Improve and Better

Coordinate

Supervision of FBO

Operations in the

United States

The FBO Program was designed to provide the U.S. banking supervisory

agencies with a collective mechanism for supervising the U.S. operations

of FBOs in a highly coordinated, thorough, and efficient manner, according

to the Federal Reserve Board. FRS began to implement the FBO Program in

March 1995, when it issued its initial guidance on the program. Federal

Reserve Board officials told us that the program was scheduled to be

implemented over a 3- to 5-year period, but that they hoped to have it fully

operational within 3 years.3

 The interagency program—which consists of a

number of supervisory steps and assessments that each have their

individual requirements regarding content, procedures, and timing—calls

for the development and distribution of six supervisory products.4

The Six Supervisory

Products Are to Provide a

Wide Range of Supervisory

Information

The six supervisory products of the FBO Program are to provide

information about the home countries of the FBOs, the FBOs themselves,

and the FBOs’ operations in the United States. The six products are

• Review of Home Country Financial System,

• Review of Significant Home Country Accounting Policies and Practices,

• Strength-of-Support Assessment,

• Individual Examination Plan,

• Comprehensive Examination Plan, and

• Summary of Condition and Combined Rating.

We refer to the first two products, which focus on a country’s financial

system and accounting policies and practices, as “the country reports.”

The contents of the six supervisory products are summarized in table 3.

3

For the initial implementation phase of the FBO program, Federal Reserve Board officials said they

decided to apply the FBO program only to FBOs with a direct banking presence in the United States

through branches or agencies, Edge or Agreement Corporations, commercial lending companies, or

subsidiary banks. Once the program becomes fully operational, FRS will consider incorporating

foreign banks with a representative office presence only.

4

These products include the five new products discussed earlier and the individual exam plan, which

the regulators have routinely used in the past.

Page 7 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Table 3: Supervisory Products of FRS’

FBO Program Product Summary of contents

Review of Home Country

Financial System

For each country with bank representation in the United

States, the assigned supervisor (usually a Federal

Reserve Bank) is to describe the financial system

structure, process of supervision and regulation,

treatment of problem or failed institutions, and, if

warranted by existing issues, current condition and

operating performance of the financial system.

Review of Significant Home

Country Accounting Policies

and Practices

For each country with bank representation in the United

States, the assigned supervisor (usually a Federal

Reserve Bank) is to highlight accounting policies and

practices that differ significantly from U.S. standards,

including asset valuation, income and expense items,

consolidation rules, off- vs. on-balance sheet items, tax

considerations, and disclosure rules.

Strength-of-Support

Assessment (SOSA)

For each FBO, the assigned supervisor (usually a Federal

Reserve Bank) is to assess internal and external

resources to give U.S. operations necessary (1) financial

and (2) managerial support. Financial support

assessment—summarized by A-E rankings—is to be

based on available information on the financial and

operational condition of the FBO in the context of the

home country reports. Managerial support assessment

requires placement of an asterisk (*) beside the letter

assessment if actual or potential managerial or

operational control risks are apparent.

Individual Exam Plan For each FBO office in the United States, U.S. federal or

state supervisors are to develop examination plans for

individual offices based primarily on the findings and

scope of previous examinations, the results of any off-site

surveillance, the latest assessment of the combined U.S.

operations of the FBO and the role of the office in the

context of the FBO’s overall U.S. business activities, and

the evaluation of the FBO and the assigned SOSA.

Comprehensive Examination

Plan

For all U.S. operations of an FBO except for commercial

banks, the assigned Federal Reserve Bank is to prepare

comprehensive examination plans that describe the

overall scope and frequency for the next series of

examinations.

Summary of Condition and

Combined Rating

For all FBOs with multiple U.S. operations, an assigned

Federal Reserve Bank is to prepare a summary in the

form of a letter to the FBO’s head office management that

highlights areas of overall strength and any systemic

weaknesses in the FBO’s U.S. operations. A rating of the

FBO’s combined U.S. operations, based on a 1-5 scale, is

to be included.

The Federal Reserve has assigned responsibility for preparing the FBO

products to the various Reserve Banks that have offices of foreign banks

Page 8 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

in their districts.5 Responsibility for the products is generally assigned

according to the location of the FBO offices in the United States. Given the

preponderance of FBO offices in New York, the Federal Reserve Bank of

New York was preparing the majority of products. Draft country and SOSA

reports are to be circulated to other relevant U.S. supervisors for

comment. Final versions of the reports are also to be provided to the

relevant U.S. supervisors.6

 Based on FRS guidance issued in August 1996,

SOSA rankings are to be considered final only when they have been

formally reviewed and approved by a committee headed by officials of the

Federal Reserve Board’s international supervision function.

The Country Reports and

the SOSA Are Intended to

Improve U.S. Supervision

of FBO Operations in the

United States

One of the principal goals of the SOSA is to identify FBOs that may pose

risks to their U.S. operations or to U.S. financial markets due to financial,

operational, or other concerns at the FBO as a whole. As table 3 shows, the

SOSA utilizes a two-component assessment ranking system for financial and

managerial support. Financial support is summarized by A to E rankings,

with A representing the lowest level of supervisory concern and E the

highest. An asterisk is to be placed beside the letter assessment on an

as-needed basis to identify whether there are any factors that raise

questions about the ability of the FBO to maintain adequate internal

controls and compliance procedures at its U.S. offices, irrespective of the

overall financial condition of the FBO. The SOSA—which is supported by the

two country reports—is to provide information to the U.S. bank

supervisory agencies that they can take into account in reaching decisions

regarding the scope and frequency of examinations and whether other

supervisory initiatives may be appropriate.7

 The SOSA assessment serves to

categorize all FBOs with U.S. banking operations by levels of supervisory

concern, highlighting those whose U.S. operations are thought to warrant

higher levels of supervisory attention.

An FBO’s SOSA, along with other information, is to be taken into

consideration in setting the examination plan for the FBO’s U.S. operations.

For example, the U.S. operations of FBOs whose assessments are marked

5

OCC also has responsibility for preparing products for nine FBOs in six countries that operate in the

United States only under a national charter or license.

6

For example, copies of draft and final country reports are to be provided to each state supervisor

responsible for a banking office of an FBO from the country, each Federal Reserve Bank in which an

FBO from that country has a banking presence in the district, OCC if an FBO from the country has a

federally licensed office, FDIC if an FBO from the country has an insured office, and the Federal

Reserve Board.

7

Any particular changes that need to be made to the supervisory strategy for the U.S. operations of an

FBO that arise from the SOSA analysis are to be presented in a separate supervisory implications

section of the SOSA. The SOSA is expected to include the specific implications for any examination

plan of a SOSA ranking of C or lower or when an asterisk is included in the ranking.

Page 9 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

by an asterisk, denoting potential internal controls or compliance risks,

may receive examinations in which supervisors investigate those risks.

The FBO’s SOSA analysis and ranking are to be considered in implementing

supervisory follow-up action for the U.S. operations, although specific SOSA

rankings are not linked to mandatory supervisory actions. According to

procedural guidance for the program, an assessment of C or lower is

expected to imply a level of concern that would subject the FBO’s U.S.

offices to at least periodic monitoring of their net due to/due from

positions.8

 Any additional supervisory step, such as imposing an asset

pledge or asset maintenance requirement,9

 is to be implemented largely

based on the condition and nature of the U.S. operations. If an FBO is

accorded an assessment of D or lower, this is generally expected to

indicate a higher level of supervisory concern, with some presumption of

asset maintenance regardless of the condition of the FBO’s U.S.

operations.10

As part of the FBO Program, FRS is to maintain a database containing

information on the financial system and on significant accounting policies

and practices of each country with bank representation in the United

States. The information in the database is to be provided by FRS and other

supervisory agencies, and FRS is to make the information available to all of

the supervisory agencies.

The Comprehensive

Examination Plan and the

Overall Assessment Are to

Help Coordinate Agencies’

Efforts in Supervising

FBOs

The comprehensive examination plan and the overall assessment of an

FBO’s U.S. operations—that is, the Summary of Condition and the

Combined Rating—are designed to help coordinate agencies’ efforts in

supervising FBO offices in the United States. To ensure coordination of

supervisory efforts and avoid duplication, the FBO Program calls for U.S.

banking supervisory agencies to increase interagency communications

regarding their examination plans, examination results, and any proposed

8

Net due to and from positions refer to the flow of funds between an office of the parent foreign bank

and the parent bank or other offices of the bank. For example, if the U.S. offices are in a net due from

position with the parent foreign bank, then once all the transactions between the U.S. offices and the

parent foreign bank are netted, the parent bank owes funds to the U.S. offices.

9

Asset pledges, also called capital equivalency deposits, are required cash deposits or eligible

securities deposits at an approved depository bank. Asset maintenance requirements are to ensure that

a branch or agency maintains “eligible” assets in excess of third party liabilities for protecting

creditors. Eligible assets usually include assets for which there is a reasonable expectation of

liquidation on a timely basis.

10An assessment of A or B is generally expected to imply little if any concern relating to the ability of

the FBO to meet its obligations. If an FBO does raise liquidity or solvency concerns, the FBO should

not be accorded an assessment of A or B, according to the guidance.

Page 10 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

supervisory follow-up actions. Also, to fulfill its responsibilities for the

overall U.S. operations of individual FBOs, FRS is to prepare annually an

overall assessment of the combined U.S. operations of each FBO, based

largely on input from and discussions with the examining agencies. As

noted in figure 2, the comprehensive examination plan is to cover all U.S.

operations of an FBO with the exception of commercial banks, which are to

be treated as domestic institutions for the purpose of examination

planning during the initial implementation of the FBO Program.

Page 11 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Figure 2: Coverage of FBOs and Their U.S. Offices by the FBO Products

Foreign banking

organization

State licensed

representative

office (state)

State chartered

commercial

lending 

company

(state)

Strength-of-Support

Assessment

(SOSA)

Country reports

State licensed

insured branch

(state and FDIC)

Federally 

licensed agency

(OCC)

Comprehensive

exam

plan

Summary

of condition

and combined

rating

Separately chartered and capitalized subsidiary

Legal and operational extension of the parent FBO

U.S. operationsa

State chartered

commercial

bank

(state and

FDIC)

Federally

chartered

commercial

bank

(OCC)

Federally

chartered

Edge Act

Corporation

(FRS)

Section 20

securities

subsidiary

(FRS)

Bank holding

company 

(FRS)

Foreign Country

Shading indicates FBO program products

Page 12 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

aFRS has overall authority for all U.S. operations of FBOs.

Source: GAO example developed from FRS documents.

The FBO Program is to provide for the coordination of examination

schedules through the development of an annual comprehensive

examination plan for each FBO with banking offices licensed by more than

one supervisory agency and/or with significant U.S. nonbanking activities.11

Other U.S. supervisors of FBO offices in the United States are to provide

responsible Federal Reserve Banks with a copy of their preliminary

examination schedules. FRS is to use these, in conjunction with the

preliminary examination schedules of the Reserve Banks, to derive a draft

comprehensive examination schedule for all U.S. operations of individual

FBOs. This draft schedule, to be provided to all the supervisory agencies, is

designed to permit each agency to coordinate its own schedule with those

of other agencies. FRS is to provide the final comprehensive examination

schedule to all the supervisory agencies. Likewise, the various supervisors

are to provide individual examination plans to be used by FRS in drafting a

comprehensive examination plan.

According to FRS officials, FBOs that operate in the United States through

multiple offices often will have all offices examined using the same “as of”

financial statement date; this will provide the supervisory agencies with

increased information on the interrelationship among the various offices

and can enhance the examination of individual offices and the FBO’s

overall operations. The U.S. supervisory agencies have committed to

advising other agencies’ supervising offices of the same FBO of any critical

examination findings prior to the exit meeting with FBO officials for that

examination.

The overall assessment of an FBO’s combined U.S. operations is intended

to provide the FBO and the U.S. supervisory agencies with a view of the

overall condition of the FBO’s U.S. operations and help put into context the

strengths and weaknesses of individual offices. The assessment is to be

prepared by FRS for all U.S. offices supervised by more than one agency.

The assessment is to address all risk factors, including (1) all elements of

the ROCA rating system,12 (2) the quality of risk management oversight

11For FBOs that conduct all or substantially all of their U.S. operations through offices licensed or

chartered by one banking supervisory agency, the timing of the annual examination is to be

established by the licensing authority.

12The ROCA rating system is the system used to rate U.S. branches and agencies of FBOs and is an

assessment of Risk management, Operational controls, Compliance, and Asset quality.

Page 13 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

employed by all levels of management in the FBO’s U.S. operations, and

(3) the examinations of all offices of the FBO conducted during the year.

The system for rating the FBO’s combined U.S. operations is to result in the

assignment of a single-component rating between 1 and 5, with 1 being the

highest. The rating system contains language describing the level of

supervisory concern and required supervisory attention. See table 4 for a

description of the ratings.

Table 4: Definitions of Ratings of the

Combined U.S. Operations of FBOs Numerical rating Definition

1 The overall operations are fundamentally sound in every

respect. They cause no supervisory concern and require

only normal supervisory attention.

2 The combined U.S. operations operate in a basically

sound manner, but may have modest weaknesses that

can be corrected by management in the normal course of

business. They do not require more than normal

supervisory attention.

3 Overall U.S. operations are weak in risk management,

operational controls, and compliance, or have numerous

asset quality problems that, in combination with the

condition of the FBO, cause supervisory concern. U.S.

and/or head office management may not be taking the

necessary corrective actions to address any weaknesses.

This rating may also be assigned when either risk

management, operational controls, or compliance is

individually viewed as unsatisfactory. Generally, these

operations raise supervisory concern and require more

than normal supervision to address their weaknesses.

4 The combined U.S. operations have a significant volume

of serious weaknesses. Serious problems or unsafe and

unsound banking practices or operations exist, which

have not been satisfactorily addressed or resolved by

U.S. or head office management. These operations

require close supervisory attention and surveillance

monitoring and a definitive plan for corrective action by

head office management.

5 The combined U.S. operations have so many weaknesses

or unsafe and unsound conditions that they require urgent

restructuring by head office management.

Source: Federal Reserve Board guidance (SR95-22) issued March 31, 1995.

This composite assessment is intended to apprise the various U.S.

supervisory authorities of the overall condition of the U.S. offices of

individual FBOs. These agencies can then factor this information and that in

Page 14 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

the Summary of Condition into their supervision of the U.S. offices under

their jurisdiction.

The FBO Program Has

Achieved Some

Benefits, but Has

Weaknesses That

Could Limit Its

Effectiveness

Banking supervisors have made progress in implementing the FBO

Program. They have developed and distributed procedural requirements

and guidance. As of December 31, 1996, about 43 percent of the SOSA

reports and their related home country reports had been finalized, and

supervisors were just beginning to use the information in these reports in

developing comprehensive examination plans. Supervisors identified some

broad benefits of the program—particularly increased communication and

cooperation among supervisors and improved access to information about

FBOs and their home countries. At the same time, supervisors told us that

determining how to use this information to improve their supervision was

clearly the biggest challenge they face as they move forward. In addition,

we identified a number of weaknesses in SOSA and country reports that

could limit the program’s effectiveness. These included inconsistent,

incomplete, or outdated information, as well as SOSA rankings that did not

appear to be justified by data in the report.

Supervisors Have Made

Progress in Implementing

the FBO Program

In late March 1995, the Federal Reserve Board distributed to the Reserve

Banks initial guidance for implementing the FBO Supervision Program.

Additional guidance was issued as implementation progressed from

March 1995 to August 1996. As of December 31, 1996, SOSA reports and

accompanying home country reports were completed for 120 (about

43 percent) of the 281 FBOs subject to the requirements of the program.13

We found only limited use of country and SOSA report information in the

comprehensive examination plans that we reviewed. However, at the time

of our review, supervisors had just begun to incorporate SOSA and country

report information into the supervisory process.

Supervisors Identified

Benefits of the Program

Although the FBO Program has not been fully implemented, FRS staff and

other banking supervisors told us of a number of benefits of the

program—most importantly, improved communication and cooperation

among supervisors and bank management, both domestic and foreign, and

improved access to information about FBOs and their home countries.

13FRS is responsible for preparing 272 of the 281 SOSA and accompanying home country reports. FRS

officials told us that, as of April 7, 1997, approximately 92 percent of the SOSAs and their related home

country report were in final or draft form. OCC is responsible for 9 SOSAs, and an official from OCC

told us they had not completed any of these reports or the accompanying country reports as of

December 31, 1996.

Page 15 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Improved Communication and

Cooperation Among

Supervisors and Bank

Management

Regulators reported many instances of increased coordination and

cooperation among federal and state supervisors. Supervisory officials

told us that implementing the FBO Program has, in some cases, required

supervisors from different agencies to coordinate with each

other—whereas before the program, they said coordination was more ad

hoc. For example, because an FBO may have subsidiaries or offices in

several locations across the United States, the development of a

coordinated examination strategy for a given FBO has required supervisors

to work cooperatively, sharing information about the subsidiaries or

offices they individually supervise. This is important because problems

identified at a particular office could manifest themselves at other offices

of an FBO. This improved coordination and communication is intended to

result in improved supervision of the U.S. operations of FBOs.

FRS officials also said preparing home country reports and SOSAs had

helped them develop valuable relationships with foreign regulators and

foreign central banks. These officials said such preparation has helped

them supervise the U.S. operations of foreign banks. They also said the

relationships they have developed with foreign regulators have helped

them obtain better information on how U.S. banks are doing abroad.

Finally, officials at a Federal Reserve Bank told us that providing foreign

bank management with a summary of the condition of the FBO’s U.S.

operations and a combined rating has helped them communicate more

effectively with foreign bank officials and has resulted in quicker and

better compliance by the foreign banks. These summaries are to be sent

directly to the foreign bank’s head office and are to highlight the issues

that need the most attention.

Improved Access to

Information About FBOs and

Their Home Countries

Several supervisors stated that the program has been beneficial in

centralizing information about an FBO and its home country. For example,

staff at one Federal Reserve Bank said the FBO Program helps examiners

by providing a single contact for information about an FBO. The SOSAs and

country reports also have provided a benchmark of information on FBOs

and home countries—so that all supervisors would have access to the

same information about a particular FBO or country. At another Reserve

Bank, staff said the reports have also provided a ready and complete

source of information for U.S. officials in their meetings with foreign

banks and officials from other countries.

Staff at another Federal Reserve Bank stated that the FBO Program has

given “more form” to their system of supervision. For example, this

Page 16 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Reserve Bank has been monitoring the FBOs’ conditions in a particular

country since 1992. However, the staff were not sure whether other

supervisors were doing similar monitoring, and state supervisors told us

they did not have adequate resources for such monitoring. Reserve Bank

officials said the FBO program reduced the likelihood that problems would

fall through the cracks in the supervisory system.

According to supervisory officials, the new program’s products and

information have also helped supervisors get information about FBOs and

countries that is not commonly known. FRS has had long-standing

relationships with most of the central banks and bank regulators of the

major industrialized nations. Particularly for the G-10 countries,14 officials

told us that information sharing has occurred in the past, and that their

accounting standards and practices are generally similar to those in the

United States. FRS officials said such is not the case for other countries,

however, particularly many of the countries with developing financial and

supervisory systems that have banking presences in the United States. For

this reason, some supervisory officials said that the development of SOSAs

and home country reports—including reports on accounting and auditing

standards and practices—have been particularly useful.

Weaknesses Exist That

Could Limit the

Effectiveness of the FBO

Program

An important goal of the FBO Program is to enhance supervision by

integrating the information in SOSAs and country reports into the

supervisory and enforcement processes. Officials told us that this phase of

the program was just starting at the time of our review. However, based on

our review of completed SOSA and country reports and our interviews with

supervisory officials and staff, we identified a number of concerns and

weaknesses that could limit the program’s effectiveness in improving

supervisory and enforcement processes in oversight of U.S. operations of

FBOs.

Supervisors Expressed

Concerns About Use of SOSAs

in Exam Planning and

Enforcement

While supervisors and supervisory staff recognized a variety of benefits of

the FBO Program, as discussed earlier, they also expressed concern about

the usefulness of information in the SOSA and country reports and about

how this information could be integrated into the examination planning

process. Further, they expressed concerns about how to use this

information to help them make enforcement decisions.

14The G-10 countries include the United States and the following foreign countries: Belgium, Canada,

France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the United Kingdom.

Page 17 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Regarding examination planning, some examiners told us that the SOSAs

were useful mainly for general background information, while others said

the information was not particularly useful. Officials from one Federal

Reserve Bank told us they had been experimenting with a new

comprehensive examination plan format that incorporated more

information from the SOSA and country reports, such as key strengths and

weaknesses related to the FBO’s lines of business. Officials from another

Reserve Bank said they were in the process of developing a strategy for

integrating the information from SOSA and country reports into the exam

planning process. They said they were also in the process of considering

how the SOSAs could be improved to make them more useful. They said

some possible improvements might include making the reports shorter

and more user friendly for examiners; updating the reports just before the

beginning of an exam cycle; and focusing the reports more on risk—for

example, analyzing the impact the FBO’s overall business strategy might

have on its U.S. operations.

Many supervisors told us that determining how to use information from

the SOSA and country reports to improve their oversight was clearly the

biggest challenge they face as they move forward. In order to help meet

this challenge, Federal Reserve Board officials told us they commenced

development of an FBO training seminar in late 1996 that will emphasize

that the FBO Program is a process directed towards ensuring an

appropriate supervisory strategy for the U.S. operations of each FBO.

Among other things, they said the seminar will place emphasis on creating

a greater linkage between the SOSAs and the comprehensive examination

planning process.

With regard to enforcement decisionmaking, some supervisors told us that

they would like to be able to use the SOSAs to some extent to adjust their

supervisory requirements, such as capital equivalency deposits. In order to

do this, SOSAs must be accurate, consistent, and up-to-date. However,

officials told us that they have concerns about whether this will be

possible in the future because of the difficulties involved in obtaining

consistent information from FBOs and home country regulators.

Information in an FBO’s SOSA

and Country Reports Was

Sometimes Inconsistent

As we reviewed the 36 SOSAs, we found some examples of inconsistent

information in individual country reports as well as examples of

inconsistency in information between SOSAs and their associated country

reports, as illustrated by the following:

Page 18 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

• A discussion of financial disclosure practices in a certain country report

mentioned that nonperforming loan (NPL) ratios15 provide a limited

indication of the country’s problem loan situation because public

disclosure of substandard loans was not required. In addition, the report

said the monetary authority’s manipulation of accounting practices to ease

pressure on bank performance undermines reported financial figures and

renders year-to-year analysis difficult. Yet, the final SOSA report for an FBO

in that country stated that capital was adequate—with ratios slightly

exceeding Bank for International Settlements (BIS)16 minimum

standards—without providing a clear, explicit qualification of the

statement.

• One country report pointed out that external auditors had not yet

developed the status or the degree of independence they had in the United

States. The report said that qualified audit reports were virtually unheard

of in this country and warned that the lack of independence may

potentially hinder the reliability of audited financial statements. However,

a SOSA for one of the FBOs in the country said that the financial statements

were deemed reliable due to an unqualified opinion rendered by an audit

firm.

• Another report on home country supervision stated that banking

supervision is considered relatively strong. Yet, the same report noted that

reporting of certain key data—such as NPLs, hidden reserves, off balance

sheet items, and risk-based capital ratios—was not a supervisory

requirement in that country.

Information in the SOSA and

Country Reports Was

Sometimes Incomplete

Based on our review of Federal Reserve Board guidance17 and discussions

with staff at the Federal Reserve Board, Reserve Banks, OCC, and select

state banking departments, we developed a basic list of information that

most supervisors would expect in the SOSAs.18 We then reviewed 36 SOSAs

and their corresponding country reports to determine whether this

information was provided. In reviewing SOSA and country reports, we

expected some variation in the types of information provided because of

15Nonperforming loans are loans that are not performing according to the original terms of the

borrower’s loan agreement. In the United States, loans 90 days or more past due are generally

considered to be nonperforming.

16BIS is an organization of central banks that is based in Basle, Switzerland. It is the principal forum for

consultation, cooperation, and information exchange among central bankers.

17Federal Reserve Board guidance describes general categories that must be addressed, but does not

prescribe a list of specific required information.

18Examples of the types of information we looked for in SOSAs include key activities of the FBO; the

operating structure of the FBO; whether the FBO meets the BIS capital standards; financial

information on the FBO’s earnings, asset quality, and liquidity; the likelihood of home country support;

the level of disclosure; and external audit coverage.

Page 19 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

differences in (1) the availability of information and the financial and

supervisory systems in various countries and (2) the weight that

supervisors would place on different types of information.

Although we expected some variation in the information provided, we

found that nearly all of the SOSAs failed to provide all of the information on

our basic list. Moreover, many seemed incomplete in ways that would

reduce the reliability of the reports for supervisory use. For example,

some of the SOSAs lacked information central to the purpose of the reports,

such as statements of the likelihood of home country support.

Important details that we found lacking in some SOSA and country reports

were those to clarify

• the date of the financial data;

• whether the data were consolidated and, if so, at what level;

• the date the reports were written and finalized;

• whether the risk-based capital standards referred to the BIS standards, and

if not, how the capital ratios related to the BIS standards.

Our findings were consistent with statements of some supervisory officials

we interviewed who expressed concern about the usefulness of the

reports to supervisors. For example, an official from one banking

supervisor told us reports lacked important detail. The same official also

said that the reports lacked candor and did not always address

controversial issues.

A staff member of a federal supervisor also told us that relevant

information for planning examinations of some U.S. operations of FBOs

could be almost wholly lacking in the SOSA report. This staff member told

us that the country reports and SOSAs for the banks he supervised were

useless in preparing examination plans because the country and SOSA

reports focused on credit and asset quality, while the primary business of

the banks in this country is trading in financial products.

Information in the SOSA and

Country Reports Was

Sometimes Outdated

Some SOSAs and country reports contained outdated information on the

FBO’s financial condition or the economic or political condition of the FBO’s

home country. In our review, we found that a number of products

completed in 1996 relied on December 1994 or March 1995 data. In

addition, some products presented discussions of outdated political or

economic conditions. In discussing these products and their usefulness,

we found that supervisory officials we interviewed often agreed that

Page 20 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

outdated information is a problem. Also, staff at a Federal Reserve Bank

identified as a problem the time lag between when the information was

being analyzed and receipt of the finished product.

To help correct this problem, the Federal Reserve Board is in the process

of pilot testing a program, called FBO Desktop, with the Federal Reserve

Bank of San Francisco. This program is designed to put all of the FBO

Program products on-line. The goal of the program is to make it more

efficient to share information and review FBO products.19 An official from

the Federal Reserve Board told us the pilot was nearly completed, as of

March 1997, and would be rolled out soon to the other Federal Reserve

Banks and then to the other state and federal supervisors. However,

Federal Reserve Board officials pointed out that, even though this system

is expected to help improve timeliness, timeliness will continue to be

impaired to some degree due to the fact that FBOs are required to file full

financial statements with FRS only on an annual basis, English translations

of such filings are often not available until mid-year, and disclosure

problems may continue to exist.

Some SOSA Rankings Did Not

Appear to Be Supported by

Information Provided in the

Report

During our review of SOSA reports, we found some cases where the SOSA

rankings did not appear to be justified by the information in the SOSA

reports. For example, the program guidance states that an “A” SOSA

ranking would indicate an FBO with a financial profile that is regarded as

strong, with superior risk-based capital ratios, and that is comprehensively

supervised, among other things. Yet, several FBOs that received “A” SOSA

rankings were based in countries in which (1) banks were not required to

disclose asset quality in reports to supervisors and (2) the reports said that

the efficacy of supervision was questionable and that the supervisory

system lacked an effective early warning system to identify financially

weak institutions.

Many of the supervisors we interviewed told us that they expect that the

assignment of all SOSA rankings will eventually be consistent with the

criteria in program guidance. However, they said achieving this level of

consistency may be difficult because of the differences in financial and

supervisory systems and types of information available among countries.

Conclusions Banking supervisors have made progress in implementing the FBO

Program. Supervisors have identified a number of benefits of the

19Federal Reserve Board officials said that data security procedures will be established so that certain

documents can only be reviewed on a “need to know” basis.

Page 21 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

program—most importantly, improved communication and cooperation

among supervisors and improved access to information about FBOs and

their home countries. At the same time, supervisors have just begun to use

the information in SOSA and country reports to improve supervision and

enforcement, and some supervisors indicated some skepticism about how

useful the information from SOSA and country reports will be in improving

FBO oversight. The various Federal Reserve Banks are developing different

formats and strategies for integrating the information into the supervisory

process. In addition, we identified a number of weaknesses in SOSA and

country reports that could limit the program’s effectiveness, including

inconsistent, incomplete, or outdated information, as well as SOSA rankings

that did not appear to be justified by information in the report.

SOSA rankings that are unsupported or inconsistent with the ranking

system criteria and report information that is inconsistent, incomplete,

and out-of-date are obstacles to achieving a principal goal of the SOSA—to

identify FBOs that may pose risks to their U.S. operations or to U.S.

financial markets. Supervisory use of unreliable SOSA rankings could lead

to inefficient levels and types of monitoring and to unequal treatment of

FBOs’ U.S. operations in enforcement actions, as well as potentially leading

to ineffective oversight. The identified weaknesses could also cause

supervisors to doubt the credibility of SOSA rankings and reports and thus

limit supervisory use of the information resources the FBO supervision

program is designed to provide.

Recommendations As FRS continues its implementation of the FBO Program, we recommend

that the Board of Governors of the Federal Reserve System

• identify best practices for using the information in the SOSA and country

reports to improve supervision and enforcement, and disseminate these

best practices to all Federal Reserve Banks; and

• monitor the report process to help ensure that SOSA and country reports

are consistent, complete, and timely, and that the SOSA rankings are

consistent with the ranking system criteria.

Agency Comments

and Our Evaluation

The Federal Reserve Board provided written comments on a draft of this

report, and these comments and our responses are reprinted in appendix I.

It also provided technical comments, which we incorporated where

appropriate.

Page 22 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

The Federal Reserve Board generally agreed with the conclusions reached

regarding the need for certain improvements in the content and use of the

SOSA reports. In a subsequent conversation, a senior Federal Reserve

Board official stated that the Federal Reserve Board had no objection to

the recommendations. In its written comments, the Federal Reserve Board

also noted that its work going forward will be largely concentrated on

refining certain areas of the FBO Program to enhance its overall

effectiveness, particularly in the areas of integration of the SOSA into

examination planning and ensuring that appropriate linkages are

established between all products in the program to promote the program’s

objectives. The Federal Reserve Board noted four steps that are being

taken to help achieve this program improvement, which we have

incorporated into the report.

The Federal Reserve Board also observed that our efforts were directed

principally toward a review of the SOSAs and emphasized that the SOSA is

one of several tools in the FBO Program designed to assist bank supervisors

in meeting the objectives of the program. While we did review a

judgmental sample of finalized SOSAs and discuss the weaknesses we

found, our efforts were not principally directed toward this review. The

report describes each of the products of the FBO program and their

interrelationships, and it discusses the benefits of all parts of the program

realized to date.

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

Minority Members of the Senate Committee on Banking, Housing, and

Urban Affairs and the House Committee on Banking and Financial

Services, 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 23 GAO/GGD-97-80 Foreign Bank Supervision Program
B-272838 

Major contributors to this report are listed in appendix II. Please contact

me at (202)512-8678 if you or your staff have any questions.

Thomas J. McCool

Associate Director, Financial Institutions

 and Markets Issues

Page 24 GAO/GGD-97-80 Foreign Bank Supervision Program
Page 25 GAO/GGD-97-80 Foreign Bank Supervision Program
Contents

Letter 1

Appendix I 

Comments From the

Federal Reserve

Board

28

Appendix II 

Major Contributors to

This Report

32

Tables Table 1: Types of Offices FBOs Operate in the United States 3

Table 2: U.S. Operations of FBOs as of December 31, 1996 4

Table 3: Supervisory Products of FRS’ FBO Program 8

Table 4: Definitions of Ratings of the Combined U.S. Operations

of FBOs

14

Figures Figure 1: Organizational Structure of the U.S. Operations of a

Hypothetical FBO

5

Figure 2: Coverage of FBOs and Their U.S. Offices by the FBO

Products

12

Abbreviations

BIS Bank for International Settlements

DCI Data Collection Instrument

FRS Federal Reserve System

FBO Foreign Banking Organization

FBSEA Foreign Bank Supervision Enhancement Act of 1991

FDIC Federal Deposit Insurance Corporation

NPL Nonperforming loan

OCC Office of the Comptroller of the Currency

SOSA Strength-of-Support Assessment

Page 26 GAO/GGD-97-80 Foreign Bank Supervision Program
Page 27 GAO/GGD-97-80 Foreign Bank Supervision Program
Appendix I 

Comments From the Federal Reserve Board

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.

Page 28 GAO/GGD-97-80 Foreign Bank Supervision Program
Appendix I 

Comments From the Federal Reserve Board

See comment 1.

See comment 2.

See comment 3.

Page 29 GAO/GGD-97-80 Foreign Bank Supervision Program
Appendix I 

Comments From the Federal Reserve Board

See comment 4.

See comment 5.

See comment 6.

Page 30 GAO/GGD-97-80 Foreign Bank Supervision Program
Appendix I 

Comments From the Federal Reserve Board

The following are GAO’s comments on the Federal Reserve Board’s

April 28, 1997, letter.

GAO Comments 1. We added a footnote on page 19 that states that there is no prescribed

list of required information for SOSAs.

2. As we stated on page 19, we expect some variation in the information

provided in SOSA reports and as these reports are updated annually for any

material changes, we expect this variation will continue. However, this

variation is not necessarily a problem provided that important

information—such as the likelihood of home country support or other

details necessary for accurate analysis—is included in the SOSA reports.

3. We added a description of FRS’ training seminar on page 18.

4. We added information on the supervisory implications section of the

SOSA report in footnote 7 on page 9.

5. We added information on the procedures to review SOSAs on page 9.

However, for the case of inconsistency between the country report and

final SOSA we described on page 19, the SOSA had been approved through

these new procedures, and this problem had not been corrected.

6. We added information on the likelihood that some problems with the

timeliness of information will continue on page 21.

Page 31 GAO/GGD-97-80 Foreign Bank Supervision Program
Appendix II 

Major Contributors to This Report

General Government

Division

Susan S. Westin, Assistant Director

Kristi A. Peterson, Evaluator-in-Charge

Charles G. Kilian, Senior Evaluator

Desiree W. Whipple, Communications Analyst

(233499) Page 32 GAO/GGD-97-80 Foreign Bank Supervision Program
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100