[Federal Register Volume 61, Number 20 (Tuesday, January 30, 1996)]
[Rules and Regulations]
[Pages 2899-2902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1650]



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FEDERAL RESERVE SYSTEM

12 CFR Part 211

[Regulation K; Docket No. R-0754]


Foreign Banking Organizations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is publishing amendments to Subpart B of Regulation 
K (Foreign Banking Organizations). The amendments permit the 
establishment of U.S. representative offices by certain foreign banks 
through prior notice procedures. These prior notice procedures are 
designed to permit foreign banks meeting certain requirements to 
establish representative offices without the need to file a formal 
application with the Board. A foreign bank that is subject to federal 
regulation under the Bank Holding Company Act (BHC Act), either 
directly or through the International Banking Act (IBA), and that the 
Board has previously determined is subject to comprehensive supervision 
or regulation on a consolidated basis by its home country supervisor, 
or which previously has been approved for a representative office by 
Board order, would be permitted to establish a full service 
representative office by prior notice. In addition, the amendments 
clarify that only those foreign banking organizations subject to the 
IBA and the BHC Act may establish under general consent procedures a 
representative office to engage in limited administrative functions in 
connection with their existing U.S. banking operations. Lastly, the 
Board has determined to review and act upon inquiries by ``special 
purpose government banks'' seeking exemptions from regulation under the 
Foreign Bank Supervision Enhancement Act (FBSEA) on the basis that they 
do not fall within the definition of ``foreign bank'' under Regulation 
K. Such inquiries would be handled on a case-by-case basis.

EFFECTIVE DATE: January 24, 1996.

FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General 
Counsel (202/452-3786), Ann E. Misback, Managing Senior Counsel (202/
452-6406), or Andres L. Navarrete, Attorney (202/452-2300), Legal 
Division; William A. Ryback, Associate Director (202/452-2722), Michael 
G. Martinson, Assistant Director (202/452-2798), or Betsy Cross, 
Manager (202/452-2574), Division of Banking Supervision and Regulation, 
Board of Governors of the Federal Reserve System. For the users of 
Telecommunication Device for the Deaf (TDD) only, please contact 
Dorothea Thompson (202/452-3544), Board of Governors of the Federal 
Reserve System, 20th and C Streets NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION: The FBSEA required for the first time that a 
foreign bank receive federal approval to establish a representative 
office. Prior to the FBSEA, federal regulation provided a limited 
definition of a representative office of a foreign bank and only 
required a foreign bank to register a representative office established 
in the United States with the Treasury Department. Federal law did not 
provide for the ongoing oversight or regulation of representative 
offices of foreign banks.
    To fill these and other gaps in federal regulation of foreign 
banks, Congress adopted a broader definition of representative office 
in the FBSEA to ensure that all direct operations of a foreign bank are 
subject to federal regulation and supervision. The FBSEA expanded the 
definition of a representative office of a foreign bank in the IBA to 
include any place of business of a foreign bank that is not a branch, 
agency, or subsidiary. 

[[Page 2900]]

    The FBSEA also provided standards for establishing, examining, and 
regulating a representative office of a foreign bank. These standards 
are less rigorous than the standards governing the establishment, 
examination, and supervision of a branch or agency of a foreign bank. 
In evaluating an application to establish a representative office, the 
FBSEA only requires the Board to take into account the standards that 
are mandatory for the establishment of a branch or an agency. Thus, for 
example, the Board may permit a foreign bank to establish a 
representative office even though its home country supervision or 
financial condition might not support the establishment of a branch 
oran agency. Similarly, unlike the mandatory, annual examinations 
required for a branch or agency, the Board may examine a representative 
office as often as deemed appropriate.
    The Board has implemented the FBSEA and the provisions governing a 
representative office of a foreign bank through two rulemakings. First, 
in an interim rule, the Board defined a representative office of a 
foreign bank as a limited purpose office that may only engage in 
representational and administrative functions on behalf of a foreign 
bank. The interim rule also stated that a representative office may not 
make any business decision on behalf of the foreign bank. 57 FR 12992 
(April 15, 1992). In taking this approach, the Board adhered to the 
traditional view that a representative office may only engage in 
limited functions that facilitate the banking activities of a foreign 
bank, but may not engage in the activities themselves.
    Both foreign banks and some state supervisors objected to this 
restrictive definition because, in some instances, it would have been 
more limiting than state laws on representative offices. In response to 
comments received and initial experience gained in implementing these 
and other portions of the FBSEA, the Board broadened these interim 
provisions in a second, final rulemaking. 58 FR 6348 (January 28, 
1993). The Board determined that a representative office is permitted 
to perform any activity that is neither a banking activity nor an 
activity that is prohibited by state law, Board ruling, or Board order. 
The Board also introduced two sub-types of representative offices that 
perform activities that raise few regulatory and supervisory issues and 
therefore may be established under expedited procedures. Specifically, 
the Board granted its general consent to the establishment of a 
representative office that solely performs limited administrative 
functions for the foreign bank (a general consent office). The foreign 
bank must notify the Board of the establishment of a general consent 
office. The Board also provided a 45 day prior notice procedure for the 
establishment of a regional administrative office that coordinates 
operations in a particular geographic region.
    In adopting the final rule, the Board recognized that further 
experience might warrant future revision of the provisions governing a 
representative office of a foreign bank. Therefore, the Board sought 
additional comment on these provisions and stated that it would revisit 
the regulations after gaining additional information on the matter.
    The Board received public comments from the Conference of State 
Bank Supervisors, a trade association, and a foreign bank. These 
commenters supported the adoption of a broader definition of a 
representative office and a wider range of permissible activities 
provided in the final rule. Two commenters sought clarification and 
expansion of the activities deemed permissible for a representative 
office. The commenters also recommended measures to reduce and 
streamline the application procedures for establishing a representative 
office. Lastly, one commenter requested that representative offices be 
permitted to send unsolicited financial instruments through inter-
office mail to a branch or bank subsidiary that is authorized to accept 
deposits. The Board is of the view that this activity may constitute 
deposit-taking, and is therefore inappropriate for a representative 
office to conduct.

Establishment of Representative Offices by Prior Notice

    The Board has concluded that the prior notice procedures may be 
applied to the establishment of representative offices by foreign banks 
that are subject to the BHC Act, either directly or through section 
8(a) of the IBA, where the Board has made a previous determination that 
the particular foreign bank is subject to comprehensive supervision on 
a consolidated basis by its home country supervisor, or previously has 
been approved for a representative office by Board order. This expanded 
authority is intended to reduce the burden associated with the filing 
of a formal representative office application by a foreign banking 
organization meeting these requirements.<SUP>1

    \1\ Applications by foreign banks that have received 
comprehensive consolidated supervision (CCS) determinations to 
establish branches, agencies and commercial lending companies will 
continue to be delegated to Reserve Banks. 12 CFR 265.11(d)(11).
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    The Board has taken the position that a 45-day prior notice review 
period to establish such an office is sufficient where the Board has 
made a formal determination that the foreign bank is subject to CCS in 
the context of a previous application to establish a branch, agency, 
commercial lending company, or to acquire a bank, or previously has 
been approved for a representative office by Board order. The Board has 
found that the goal of reducing burden for foreign banking 
organizations, where possible and prudent, outweighs the limited 
additional supervisory benefits of requiring a formal application for a 
representative office under these circumstances.
    In addition, the final rule clarifies that only foreign banks 
subject to the BHC Act, either directly or through section 8(a) of the 
IBA, may establish under the Board's general consent authority a 
representative office to engage in limited administrative or ``back 
office'' functions, and that such ``back office'' functions may only be 
performed in connection with the U.S. banking activities of the foreign 
bank. General consent representative offices were intended to 
facilitate the establishment of limited offices by foreign banks 
seeking administrative support for their existing U.S. banking 
operations, and not as stand-alone operations. In that regard, the 
activities must be clearly defined, performed in connection with the 
U.S. banking activities of the foreign bank, and must not involve 
contact or liaison with customers or potential customers beyond 
incidental contact relating to administrative matters (such as 
verification or correction of account information). ``Back office'' and 
other administrative functions linked to banking present the fewest 
supervisory and prudential concerns in the group of representative 
office activities that are linked to banking. These limited activities 
reflect a balancing of the Board's desire to reduce regulatory burden 
with its need to continue to monitor closely the direct operations of 
foreign banks.
    By allowing a foreign bank meeting the criteria outlined above to 
utilize the Board's prior notice procedures or general consent 
authority to establish a representative office, the Board does not 
intend to permit a foreign bank to 

[[Page 2901]]
expand broadly its U.S. banking and nonbanking activities. The proposed 
rule is designed merely to reduce the burden on those foreign banks 
seeking to provide additional support for their existing U.S. banking 
operations.

Special Purpose Government Banks

    The FBSEA requires any foreign bank to obtain prior Board approval 
to establish a branch, agency, commercial lending company, or 
representative office. In issuing the final rule, the Board exempted 
the central bank of a foreign country that does not engage in 
commercial banking activities in the Untied States from the definition 
of ``foreign bank'' and therefore from regulation under the FBSEA. The 
Board has received several requests from government-owned entities that 
engage in banking that is not commercial in nature for similar 
exemptive treatment. A prototypical example of this type of entity is 
an export-import bank of a foreign country. These so-called ``special 
purpose government banks'' maintain offices in the United States that, 
without this exemption, are representative offices under the FBSEA.
    The Board has found that the types of institutions seeking this 
exemptive relief vary considerably in their legal structure, 
governmental mandate, and actual operations. Creating a regulatory 
exemption akin to that provided for central banks in these 
circumstances would prove unworkable and imprecise. Furthermore, each 
of the requests for an exemption from regulation under the FBSEA is in 
fact a request for an interpretation that the entity in question is not 
a foreign bank within the meaning of the FBSEA and Regulation K. 
Accordingly, the Board has determined to review and act upon each of 
these interpretive requests on a case-by-case basis. Among the factors 
the Board will consider are whether the foreign organization is: (i) 
established and regulated pursuant to a distinct regulatory scheme that 
differs from that applied to traditional commercial banks; (ii) owned 
and capitalized substantially, if not exclusively, by its home 
government; (iii) subject to direct government control and examination; 
(iv) engaged exclusively in activities designed to serve specific 
government policy goals; and (v) prohibited from accepting deposits. 
This approach, in the Board's view, will provide the best mechanism for 
determining whether the relief requested is in fact warranted.

Regulatory Review

    A full review of Regulation K, as required by the IBA, is underway 
and will proceed during the course of the next year. The subject of 
representative offices will be revisited at that time, and will provide 
additional opportunity for interested parties to express their concerns 
regarding these and other relevant issues.

Regulatory Flexibility Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the Board certifies that this final rule will not 
have a significant economic impact on a substantial number of small 
business entities that are subject to the regulation.
    Pursuant to 5 U.S.C. Sec. 553(d), this amendment to Regulation K 
will become effective immediately. This final grants an exemption for 
certain foreign banking organizations, and, therefore, the Board waives 
the 30-day general requirement for publication of a substantive rule.

Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed 
the proposed rule under the authority delegated to the Board by the 
Office of Management and Budget. No collections of information pursuant 
to the Paperwork Reduction Act are contained in the final rule.

List of Subjects in 12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and recordkeeping requirements.
    For the reasons set out in the preamble, the Board of Governors 
amends 12 CFR Part 211 as set forth below:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for 12 CFR part 211 continues to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et 
seq., 3901 et seq).

    2. Section 211.24 is amended by:
    a. Revising paragraphs (a)(2)(i) and (a)(2)(ii); and
    b. Redesignating paragraph (d)(3) as paragraph (d)(4), and adding a 
new paragraph (d)(3).
    The revisions and addition read as follows:


Sec. 211.24  Approval of offices of foreign banks; procedures for 
applications; standards for approval; representative office activities 
and standards for approval; preservation of existing authority.

    (a) * * *
    (2) * * *
    (i) Prior notice for certain representative offices. After 
providing 45 days' prior written notice to the Board, a foreign bank 
that is subject to the BHC Act, either directly or through section 8(a) 
of the IBA (12 U.S.C. 3106(a)), may establish:
    (A) A regional administrative office; or
    (B) A representative office, but only if the Board has previously 
determined that the foreign bank proposing to establish a 
representative office is subject to comprehensive supervision or 
regulation on a consolidated basis by its home country supervisor, or 
previously has been approved for a representative office by Board 
order. The Board may waive the 45-day period if it finds that immediate 
action is required by the circumstances presented. The notice period 
shall commence at the time the notice is received by the appropriate 
Reserve Bank. The Board may suspend the period or require Board 
approval prior to the establishment of such an office if the 
notification raises significant policy, prudential or supervisory 
concerns.
    (ii) General consent for representative offices. The Board grants 
its general consent for a foreign bank that is subject to section 8(a) 
of the IBA (12 U.S.C. 3106(a)), to establish a representative office 
that solely engages in limited administrative functions (such as 
separately maintaining back office support systems) that are clearly 
defined, are performed in connection with the United States banking 
activities of the foreign bank, and do not involve contact or liaison 
with customers or potential customers beyond incidental contact with 
existing customers relating to administrative matters (such as 
verification or correction of account information), provided that the 
foreign bank notifies the Board in writing within 30 days of the 
establishment of the representative office.
* * * * *
    (d) * * *
    (3) Special purpose foreign government banks. A foreign government-
owned organization engaged in banking activities in its home country 
that are not commercial in nature may apply to the Board for a 
determination that the organization is not a foreign bank for purposes 
of this section. A written request setting forth the basis for such a 
determination may be submitted to the Reserve Bank of the District in 
which the foreign organization's representative office is located in 
the United States or to the Board in the case of a proposed 
establishment of a representative office. 

[[Page 2902]]
The Board will review and act upon each such request on a case-by-case 
basis.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, January 24, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-1650 Filed 1-29-96; 8:45 a.m.]
BILLING CODE 6210-01-P