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. 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. 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. 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 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. 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. 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. 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, 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. The Federal Reserve has assigned responsibility for preparing the FBO products to the various Reserve Banks that have offices of foreign banks in their districts. 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. 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. 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. 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 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. Any additional supervisory step, such as imposing an asset pledge or asset maintenance requirement, 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. 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 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 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. 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.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.