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PR-5-76 (1-28-76)

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Statement on
S. 958, 94th Congress
The ‘'Foreign Bank Act of 1975“

Presented to
Subcommittee on Financial Institutions
Committee on Banking, Housing and Urban Affairs
United States Senate
Frank Wille, Chairman
Federal Deposit Insurance Corporation

January 28, 1976

FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D. C. 20429 •


I appreciate this opportunity to submit the Corporation's views on
S. 958, 94th Congress, the "Foreign Bank Act of 1975."
Presently, foreign banks can operate in the United States through
domestically incorporated banking subsidiaries or through direct branches
or agencies in a few States (primarily New York, California, Illinois
and Massachusetts).
To the extent that a foreign bank chooses to operate
in this country through domestically incorporated banking subsidiaries,
its domestic operations are generally subject to the same rules under the
Bank Holding Company Act which govern the U. S. activities of domestic
bank holding companies, with limited exceptions not here relevant covering
certain nonbanking activities permitted by Federal Reserve regulations
issued under section 4(c)(9) of that Act. However, to the extent that a
foreign bank operates domestically through branches or agencies, it may
escape certain restrictions and requirements applicable to domestic
banking organizations — mainly in the two areas of operating offices
in more than one State and being affiliated with companies engaged in a
securities business.
This is due, essentially, to the fact that under
present law such branches and agencies are not defined as "banks" under
the Bank Holding Company Act.
The bill would attempt to remedy this unequal regulatory treatment
of foreign and domestic banks by defining "bank" under the Bank Holding
Company Act to include "branch," thus subjecting all domestic operations
of foreign banks to Federal Reserve jurisdiction under that Act. The bill
would also require Federal Reserve membership for all U. S. branches,
agencies and subsidiaries of foreign banks having total world-wide bank
assets of more than $500 million and would require that the deposits of a
domestic branch, agency or subsidiary of a foreign bank be insured by the
While the Corporation fully supports the objective of establishing
parity of regulatory treatment between the domestic operations of foreign
banks and those of domestic banking organizations, we believe the Federal
Reserve bill derogates from this principle of equal national treatment by
imposing mandatory Federal Reserve membership and mandatory deposit insurance
upon foreign banks.
There is no comparable requirement under existing law
that all domestic banks with assets exceeding $500 million be Federal Reserve
members, nor is deposit insurance presently required for domestic nonmember
banks unless they are subsidiaries of a bank holding company.
Moreover, by
requiring deposit insurance for domestic branches and agencies of foreign
banks, the bill departs further from the principle of equal national treatment
since the FDIC cannot under either existing law or the proposed bill insure the
deposits of a branch of a domestic bank separately from those of its head office
and other branches of the bank.
The Corporation has serious reservations about the necessity and desirability
of making Federal deposit insurance available, even on an optional basis, for
domestic branches and agencies of foreign banks.
Insofar as these branches
and agencies engage in "wholesale" international banking activities, deposit
insurance is largely unnecessary.
To the extent "wholesale" customers are
concerned with Federal insurance of up to $40,000 on their accounts, a
requirement that the branches and agencies of foreign banks have such
insurance would seem to prefer such foreign bank branches and agencies over





Edge Act corporations owned by U. S. banking organizations which engage
in the same type of business and are not covered by deposit insurance.
The same requirement would also encourage such branches and agencies
to enter or expand their retail banking business in the United States,
an option U.S.-owned Edge Act corporations do not have.
if foreign banks wish to expand their operations in this country into
the retail banking business with the benefit of Federal deposit insurance,
they presently have the option under existing law of doing so through a
domestically incorporated banking subsidiary.
If equal treatment between
foreign and domestic banks is the guiding principle of this proposed
legislation, then as to Federal deposit insurance, the present requirements
that foreign banks operate through a separately chartered domestic banking
subsidiary if they wish to obtain such insurance on their domestic
retail deposits should be continued.
Other considerations militate strongly against insuring the deposits
of domestic branches and agencies of foreign banks and lead us to the
conclusion that the Corporation's supervisory responsibilities could not
be administered as effectively, or the trust fund's exposure contained as
successfully, with the insurance of such branches and agencies — even
under the most carefully drawn legislation — as they can be with the
insurance granted a domestic banking subsidiary.
Some of these considera­
tions are set forth below:
(1) Directors of the foreign bank are not usually subject to
U. S. jurisdiction, and domestic branch personnel essential to
explain certain transactions can be transferred beyond the reach
of U. S. authorities. Also, essential records may be kept at the
head office or at branches in other countries.

(2) The domestic branch may be subjected to requirements
under foreign law or to political and economic decisions of a
foreign government which conflict with domestic bank regulatory
(3) Administrative enforcement proceedings initiated by
domestic regulatory authorities against domestic branch personnel
may be frustrated or nullified as a result of lack of jurisdiction
over the foreign bank's head office and head office personnel.



(4) Many foreign banks are permitted under the law of their
headquarters country to engage in business activities which would
not be permitted to banks chartered in this country.
In addition
to potentially increasing the insurance risk, such foreign activities
could give rise to antitrust, conflict-of-interest and other legal
problems under U. S. law.
(5) In the event of insolvency of the foreign bank, it is
possible that:



Assets could be easily and quickly shifted from
the U. S. branch and out of U. S. jurisdiction,
while deposits could be shifted _to the U. S. branch.
Either move could substantially increase FDIC's
insurance exposure far beyond pre-insolvency estimates.


Legal obstacles and transactions involving other offices
of the foreign bank might prevent FDIC from obtaining
the usual subrogation of deposit claims it normally gets
from depositors in failed U. S. banks before making the
insurance payment.
Even if adequately subrogated,
FDIC's aggregate claim in the failed bank's receivership
estate might be jeopardized by foreign laws and procedures.


Creditors with claims against other offices of the failed
bank — especially banks holding deposits of the U. S.
branch — could attempt offsets against assets in the U. S.
or seek preferences over FDIC based on fpreign law.

Although an elaborate framework of conditions and restrictions might
be imposed by statute upon the foreign bank, premised upon its express or
implied consent thereto as a result of its being permitted to operate
domestically, the value of such requirements depends ultimately upon either
(1) the ability of the U. S. Government to physically enforce such require­
ments by exercising quasi in rem jurisdiction over the foreign bank's domestic
assets and/or obligors or (2) the willingness of foreign governments within
whose jurisdictions the foreign bank operates to enforce such requirements.
Efforts to impose requirements designed to insure the presence in the
United States of adequate assets of the foreign bank to cover its domestic
liabilities could turn out to be of little real value. Just when such
protection is most needed (e .g. , hours, days, or weeks before the foreign
bank's demise or the outbreak of war) is precisely when the temptation to
violate requirements of that kind could become irresistible.
The value
of this approach is particularly limited in situations where the chartering
foreign government condones the foreign bank's efforts to escape U. S.
Even more importantly, a sincere attempt to impose meaningful
restrictions of this type, such as requiring the domestic branch to maintain
a substantial portion of its assets in the custody of a third party or in
the form of obligations of domestic obligors or requiring a fidelity bond to
guarantee the presence in the U. S. of a stipulated amount of the foreign
bank's assets, could prove so onerous or costly for the foreign bank to comply
with as to make such restrictions tantamount to a bar against the foreign
bank's operating through a domestic branch, if deposit insurance is mandatory,
or against opting for insurance, if deposit insurance for branches is optional.


While a substantially greater degree of domestic supervision and regulation
might be imposed on domestic branches of foreign banks if deposit insurance is
made available to them, to do so might restrict the branches' domestic
activities, flexibility, and liquidity, to the point where operating such
branches might become wholly impractical for the foreign bank and the
expense of supervision disproportionate for domestic regulatory agencies.
Even with some grant of extraterritorial power to U. S. examining and
supervisory authorities by foreign governments, legal, cultural and economic
barriers would certainly arise to the exercise abroad of the type of super­
vision generally exercised by the Corporation and other bank regulatory
agencies in this country over insured domestic banks.
With respect to the willingness of foreign governments to enforce
U.S.-imposed restrictions, success in this area could well depend upon the
particular foreign government's interest (or that of its nationals) in the
assets in question.
If such government is essentially a disinterested
stakeholder, a prior agreement by the foreign bank to abide by U.S.-imposed
rules would presumably carry great weight.
In a liquidation or other
in extremis setting, of course, the FDIC might be required to pursue elusive
or illusory assets from one country to another.
Although some of these same problems presently exist in the case of
domestically incorporated subsidiaries of foreign banks, the fact of general
U.S. jurisdiction over the separately incorporated subsidiary and its assets
has been clearly established.
Moreover, at least a majority of the domestic
subsidiary's board of directors are generally required to be local residents
and therefore more readily subjected to domestic civil and criminal sanctions.
In the Corporation's view, there is no certain way of containing the
substantial risks to the FDI fund of insuring the domestic branches of
foreign banks. A "window dressing" statutory framework could be devised,
but we believe that in the final analysis, its protection might well prove
illusory and involve the Corporation in financial loss that cannot be estimated
in advance.
In determining whether to extend deposit insurance to the U. S.
branches and agencies of foreign banks, Congress must balance some conflicting
On the one side there is the desirability of increasing the
protection afforded to domestic depositors at these branches (many of whom
might not be U. S. citizens, and all of whom could be protected under existing
law if the foreign bank organized a domestic subsidiary), and of permitting
foreign banks the organizational simplicity and risk-taking flexibility of
having a branch or agency in this country rather than a separately incorporated
domestic subsidiary, thus encouraging a friendly reception in other countries
to the operation there of branches and agencies of U. S. banks.
On the other
side, the Congress must weigh the substantial potential risks of such
insurance to the accumulated deposit insurance fund, and the apparent
inequity in expecting these risks to be borne primarily by the 15,000
domestic banks which have contributed to that fund over the years since 1933.


One of the principal reasons for subjecting the domestic operations of
foreign banks to the Bank Holding Company Act is functionally to limit their
domestic nonbanking activities to those permissible for bank holding companies
This purpose could be equally as well accomplished — without forcing the
domestic operations of foreign banks into the Bank Holding Company Act mold
and without compromising the goal of equal national treatment between domestic
and foreign banks — by simply prohibiting any foreign bank from engaging in
any activity through its domestic branches, agencies and subsidiaries in
any manner that would not be permissible if the foreign bank were a bank
holding company.
These prohibitions could, we believe, be effectively
enforced by the appropriate Federal and State banking authorities which
regularly examine the foreign bank's domestic branches, agencies and
In conclusion, it is our view that the Federal Reserve has established
no clear need for regulating foreign bank operations in this country
differently from those of domestic banks. We therefore believe that, if
existing law stays as it is for domestic banks, both Federal Reserve member*1"
ship and Federal deposit insurance should be made available to foreign banks'
domestic operations only on an optional basis and that if a foreign bank
wishes to qualify for Federal deposit insurance, it continue to be required,
as at present, to establish a separately incorporated domestic subsidiary.
Domestic branches and agencies of foreign banks should not be made eligible
for Federal deposit insurance without a full appreciation by the Congress
of the substantial financial risks this could entail for the Federal
deposit insurance fund.
As indicated above, however, we would have no objection to restricting
the future nonbank activities of foreign banks to those that would be
permissible for domestic banking organizations.
Likewise, we would not
object to those provisions in the bill which would permit foreign banks
to own Edge Act corporations or which would facilitate their ownership of
national banks by relaxing certain statutory requirements relating to the
citizenship and residence of national bank directors.