would not properly take account of home country supervisory structures or regulatory practices. foreign banks have expressed similar concerns about u. s. regulatory initiatives in the past. at the federal reserve, we have found that our open and transparent regulatory process is crucial in helping us to understand how our proposals affect foreign banks and where problems arise, and gives us useful information for evaluating the merits of particular complaints. we have at times proposed regulations on which foreign banks and their governments, including the european commission, filed adverse comments. these comments helped us to reevaluate our regulations and to determine whether our supervisory and regulatory objectives could be achieved in a different way, consistent with the principle of national treatment. with respect to the implementation of the fsap in the european union, the european union has an obligation to ensure that the rules adopted are consistent with the principle of national treatment. it is our expectation that the european commission and the member states will seek to do so. federal reserve staff has met with commission staff to discuss a number of matters, including the application of the financial conglomerates directives to u. s. banking organizations. the federal reserve is committed to continuing the dialogue with the commission on matters of mutual interest, both bilaterally and as part of financial markets discussions led by the treasury department. we understand that the commission has begun to engage in industry consultation as part of the rule writing process and we endorse a process that allows all affected institutions, including those that are foreign - based, to participate actively in the process. the fsap has a far reaching agenda. i will comment briefly on three issues of particular interest to u. s. banking organizations. with respect to the conglomerates directive, we understand that the impetus for the directive came from the joint forum ’ s principles for the supervision of financial conglomerates. the three parent bodies of the joint forum ( the basel committee, iosco and the iais ) were concerned that, although individual financial companies within a group might be subject to prudential supervision, the consolidated financial group might not be subject to appropriate oversight. this in turn could lead to relationships or transactions that could pose financial risk to the regulated parts of the group. the joint forum ’ s principles were developed to help assure that there are no material gaps in supervisors ’ understanding of inter - affiliate relationships within a financial group that could ultimately result in financial instability. we understand that the eu financial conglomerates directive is concerned with this same issue. in the united states, u. s

operations or financial condition. ongoing communication is recognized as critical for effective supervision. home and host countries ’ interests are both furthered by dialogue and strong supervisory relationships. regular contact with commission staff goes back to the 1980s when the eu considered and adopted its second banking directive, aimed at promoting the internal market by establishing the so - called “ european passport ” for banks chartered in the eu. under the passport, a bank chartered in one eu country is entitled to establish branches in any other eu country under the authority and supervision of its home country rules. since that time, several u. s. banks have taken advantage of this early eu regulation by establishing a local bank in a european member state, which then used the “ passport ” to establish branches in other eu member countries. european subsidiaries of u. s. banks are able to take advantage of the passport under the principle of “ national treatment. ” national treatment generally means that a country provides parity of treatment between domestic and foreign - owned firms, resulting in equality of competitive opportunity. national treatment has long been the prevailing practice with respect to foreign banks operating in the united states and this practice was incorporated into statute in 1978 with the enactment of the international banking act ( iba ). this principle has also been incorporated in various trade agreements to which the united states is a party, such as the north american free trade agreement ( nafta ) and the general agreement on trade in services ( gats ). the eu member states are also subscribers to the gats and consequently to the national treatment principle it contains. implementing national treatment can be difficult precisely because one country is trying to adapt its own legal and regulatory structure to a foreign firm that is incorporated in a different home country environment. this is a challenge the federal reserve has faced over the years as we seek to apply u. s. laws that were adopted for a system of bank holding companies to foreign banks that generally do not have a bank holding company structure. the united states also requires that a foreign bank be subject to comprehensive consolidated supervision by its home country supervisor before it can buy a bank in this country. under this law, the federal reserve must evaluate supervision systems that are different from our own and yet ensure that we are fairly applying the principle of national treatment. u. s. private sector firms may be concerned about new regulatory and supervisory initiatives in the eu because such proposals may require changes in existing operations and / or reporting standards. there may also be a concern that initiatives designed for european firms or industries