View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

TESTIMONY OF

RICKI HELFER
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION

ON

DAIWA BANK AND
THE SUPERVISION OF FOREIGN BANKS
OPERATING IN THE
UNITED STATES

BEFORE THE

SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES

10:00 A.M.
TUESDAY, DECEMBER 5, 1995
2128 RAYBURN HOUSE OFFICE BUILDING

Madam Chairwoman and members of the Subcommittee, I
appreciate the opportunity to testify on the role of the Federal
Deposit Insurance Corporation (the "FDIC") in supervising a
segment of foreign bank operations in the United States, and, in
particular, the Daiwa Bank Trust Company ("Daiwa Trust”), the
only insured U.S. subsidiary of The Daiwa Bank, Limited
("Daiwa”).

The FDIC has evaluated the problems and trading

losses of Daiwa Trust in close cooperation with the New York
State Banking Department ("NYSBD"), the state chartering
authority.

In evaluating the implications of a broader range of

problems stemming from the larger trading losses first reported
at the New York branch of Daiwa, the FDIC has also worked closely
with the Federal Reserve Bank of New York and the Board of
Governors of the Federal Reserve System ("Federal Reserve"),
which has primary supervisory authority, along with the NYSBD,
over that branch.

The Federal Reserve has umbrella supervisory

authority over foreign banking organizations in the United
States.

Acting together, the Federal Reserve, the NYSBD, and the

FDIC concluded that the conduct of Daiwa and Daiwa Trust with
respect to the separate losses in each institution stemming from
unauthorized bond trading activities and the response, given the
continuing safety and soundness concerns, of Daiwa and Daiwa
Trust officials to those losses and to internal control
deficiencies identified at Daiwa, was highly inappropriate and
that the only suitable response to that misconduct was to
terminate Daiwa's privilege to conduct banking business in the
United States.




2

The problems at Daiwa's New York branch and Daiwa Trust were
of three types:

1) the unauthorized activities of traders, 2)

the significant deficiencies in internal controls for monitoring
compliance with laws and regulations and risks, and 3) the long­
term, conscious effort by senior managers to deceive regulators
concerning losses stemming from trading activities.

Simple fraud

was therefore compounded by collusion, which made the detection
of various fraudulent acts more difficult to discover.

On September 18, 1995, Daiwa reported, to the Federal
Reserve Bank of New York, a loss exceeding $1 billion as a result
of trading activities conducted at its New York branch from 1983
to September 1995.

The FDIC was informed of this information by

the Federal Reserve Bank of New York on September 22, 1995.
These losses were not reflected in the books and records of Daiwa
or in its financial statements, and their existence was concealed
through liquidations of securities held in Daiwa's custody
accounts and falsification of its custody records.

Daiwa has indicated that, while its senior management
learned about the trading losses at the New York branch on July
24, 1995, the senior management of Daiwa and its New York branch
directed that those losses be concealed from U.S. bank regulatory
and law enforcement authorities as well as the public for almost
two months and also directed the continuation of transactions
designed to avoid the disclosure of Daiwa's losses.




The Banking

3
Bureau of the Japanese Ministry of Finance was informed of the
losses on August 8, 1995, but unfortunately did not share that
information with U.S. regulatory authorities.

In addition, the senior management of the New York branch of
Daiwa undertook a series of actions in 1992 and 1993 designed to
deceive bank examiners regarding Daiwa1s trading activities,
including providing written notice to the Federal Reserve that
actions had been taken to separate the custody and trading
functions at the branch, while continuing to operate without such
controls in place.

On October 5, 1995, following the issuance of joint cease
and desist orders relative to trading losses incurred by the
Daiwa branch in New York and the commencement of governmental
investigations, Daiwa disclosed to the regulators that, wholly
apart from more than $1 billion in trading losses of Daiwa's New
York branch, Daiwa Trust incurred net losses of approximately $97
million as a result of trading activities, at least some of them
unauthorized, during the approximate period of 1984 through 1987.
These trading losses:

(1) were not reported on the

books and

records of Daiwa Trust; (2) were not reported on its financial
statements; and (3) were concealed from federal and state
examiners and regulatory authorities through a series of
transactions with off-shore entities.




In addition, the senior

4
management of Daiwa and Daiwa Trust participated in the
falsification of records and concealment of those trading losses.

The FDIC's deposit insurance funds will not suffer any loss
from the problems at Daiwa Trust.

As of September 30, 1995,

Daiwa Trust had total assets of $1.1 billion and held
approximately $134 million in insured deposits —
percent of its total deposits.

only 18.3

Daiwa Trust's $97 million in

trading losses, at least some of which were the result of
unauthorized trading by Daiwa Trust employees, were absorbed by
Daiwa in connection with its transactions to conceal the losses.
Daiwa Trust is presently well capitalized, and all present
indications are that the value of its assets are more than
sufficient to satisfy all its liabilities, including its
liabilities to depositors.

In response to the invitation from the Subcommittee, this
testimony describes foreign bank organizations that operate in
our country and the FDIC's role in supervising them.

It

discusses the FDIC's recent actions against Daiwa Trust, in
cooperation with other bank regulators.

It presents a range of

supervisory issues raised by the experience with Daiwa and Daiwa
Trust.

Finally, it discusses the FDIC's continuing response to

those issues.




5
IX.S.- BASED FOREIGN BANK OPERATIONS
SUPERVISED BY THE FDIC

The Federal Reserve, the Comptroller of the Currency (OCC),
the Office of Thrift Supervision (OTS), the FDIC, and state bank
supervisory authorities have varying degrees of supervisory
authority for the United States operations of foreign banking
organizations.

As Chart 1 and Table 1 summarize, there were 845

separately licensed foreign banking organizations1, owned by
foreign parent banks, operating in the United States as of June
30, 1995.

As of that date, these foreign banking organizations

had total assets of about $1.1 trillion, of which 72.0 percent
were in 689 uninsured foreign banking organizations supervised by
the Federal Reserve, the applicable state licensing authorities,
and, to a lesser extent, the OCC and the OTS.

Of the 845 total foreign banking organizations in the United
States, 18 percent are insured.

The FDIC has primary federal

supervisory responsibility over 12 percent of foreign banking
organizations in the United States, which include 68 foreign bank
subsidiaries and 35 state-licensed branches.

As Chart 2

illustrates, the 103 foreign bank organizations, which the FDIC
supervises, had total assets of $109.6 billion as of June 30,
1995, or 10.1 percent of the total foreign banking assets in the

1For purposes of this discussion, the term foreign banking
organization includes foreign nonbank companies that own thrift
institutions in the United States.




6

United States.

The FDIC shares supervisory responsibility for

these organizations with the applicable state authorities.

In

addition, the FDIC has a role in insuring the deposits of the
remaining 53 insured foreign banking organizations operating in
the United States, 45 banks and thrifts and eight branches, which
had total assets of $194.7 billion, or 18 percent of total
foreign banking assets.

Of these 53 organizations, the OCC

primarily supervises 34, with total assets of $130.2 billion; the
Federal Reserve primarily supervises eight, with total assets of
$42.1 billion; and the OTS primarily supervises two subsidiaries
of bank holding companies with total assets of $10.4 billion and
nine subsidiaries of thrift holding companies with total assets
of $12 billion.

As Chart 3 reflects, all FDIC-insured financial institutions
in the United States have estimated total insured deposits of
$2.6 trillion as of June 30, 1995.

Of this amount, an estimated

$125 billion, or 4.8% of total insured deposits, are held by
insured foreign banking organizations.

In addition to supervision by U.S. bank supervisors, foreign
banks operating in the United States are supervised by their home
country bank regulatory authorities.

In a number of countries

that supervision is conducted in accordance with principles
developed by the Basle Committee on Banking Supervision.
Basle Committee has established guidelines covering the




The

7
responsibilities of home and host country supervisory authorities
for the supervision of banks that operate in more than one
national jurisdiction.

These guidelines, known as the Basle

Concordat (adopted in 1975, revised in 1983 and further
supplemented in 1990 and 1992) incorporate the principle of
consolidated supervision.

That principle includes the

requirement that home country regulators receive consolidated
financial information on a home country banking organization's
global operations as well as the requirement that the home
country regulator confirm the reliability of the information
through consolidated supervision.

The Basle Committee guidelines have been embraced by bank
supervisory authorities of almost 100 countries, including the
United States and Japan, which are members of the Basle
Committee.

While the Basle Concordat is not a binding legal

agreement, Basle Committee members and many other countries have
endorsed and adhere to the guidelines.

The Ministry of Finance

of Japan has conceded that the spirit of the Basle Concordat was
broken when it failed to share significant supervisory
information on the trading losses of one of Daiwa's New York
branches with U.S. authorities in a timely basis and has
committed to put in place procedures to assure that such lapses
do not recur.

Adherence to the standards of the Basle Concordat

is critical to effective international supervision of
multinational banking organizations.




8

U.B. OPERATIONS OF DAIWA

Daiwa operates two branches in New York City, which are
licensed to conduct business under New York state law.

These

branches do not have federal deposit insurance, and are subject
to supervision by the New York State Banking Department under
state law and the Federal Reserve under the International Banking
Act of 1978, as amended by the Foreign Bank Supervision
Enhancement Act of 1991.

Daiwa also operates five other branches, seven agency
offices, and 14 representative offices, none of which have
federal deposit insurance.

Each of these branches, agencies, and

offices are licensed to conduct business by the 11 states in
which they are located and are supervised by the individual
states respectively and the Federal Reserve.

In addition, Daiwa owns a U.S. domiciled state-chartered
non-member bank, Daiwa Trust, which has deposits insured by the
FDIC.

The FDIC shares supervisory responsibility for Daiwa Trust

with the state chartering authority, the NYSBD.

Because of Daiwa

Trust's foreign ownership, the Federal Reserve also has
examination authority over the bank.

As a result of separate but similar violations that took
place in one of Daiwa's New York branches and in Daiwa Trust, the




9
state and federal banking agencies issued various orders on
November 1, 1995, terminating all operations of Daiwa and Daiwa
Trust in the United States.
to these orders.

Daiwa and Daiwa Trust have consented

First, the Federal Reserve, joined by the New

York State Banking Department, the California State Banking
Department, the Illinois Commissioner of Banks and Trust
Companies, the Commonwealth of Massachusetts Division of Banks,
the Florida State Controller, and the Georgia Department of
Banking and Finance, issued a consent order terminating Daiwa's
uninsured branches, agencies, and representative offices
nationwide.

Second, the New York State Banking Department

entered a consent order terminating the operations of Daiwa
Trust.

The FDIC has joined in this supervisory action by issuing

a consent order terminating Daiwa Trust's federal deposit
insurance.

The FDIC's decision to terminate Daiwa Trust's insurance was
based upon recently revealed information that Daiwa Trust, with
the assistance of Daiwa, concealed a pattern of unsafe and
unsound banking practices and violations of law over an extended
period of time dating back to 1983.

Daiwa Trust was legally

obligated to report losses from trading activities as well as any
unauthorized trading to the New York State Banking Department and
the FDIC.

Instead, with the participation and planning of senior

management in both Daiwa Trust and Daiwa, these losses were




10

concealed and shifted to off-shore entities in the Cayman
Islands.

The pattern of conduct evidenced by this concealment,
coupled with the fact that Daiwa Trust's parent, Daiwa, again
engaged in concealment of significant trading losses of $1.1
billion from unauthorized trading activities in its New York
branch beginning in 1983, gave the FDIC strong reason to believe
that unsafe and unsound conditions would continue.

In view of

the continuing pattern of misrepresentation to bank regulatory
authorities, the failure to comply with applicable regulatory
reporting requirements, the severe credibility problems of Daiwa
management, and the inability to rely on any assurances from
Daiwa Trust that the unsafe and unsound banking practices would
be corrected, the FDIC was left with no other course but to
terminate Daiwa Trust's deposit insurance.

Under the terms of the New York State Banking Department and
FDIC orders, Daiwa Trust has agreed to terminate its operations
by February 2, 1996, subject to extension by the regulators to
permit an orderly termination of its banking business.

Daiwa

Trust may terminate its operations by selling its business,
including deposits, to another banking institution, or by
liquidating itself and arranging to pay off its liabilities
directly.




The termination process for Daiwa Trust is being

11

carried out under the supervision of the New York State Banking
Department and the FDIC.

ISSUES RAISED BY THE DAIWA EXPERIENCE

From October 1984 to January of 1994, Daiwa Trust was
examined ten times; four times independently by the FDIC, five
times independently by the New York State Banking Department, and
once concurrently by both agencies.

Criticisms related to

inadequate policies and controls were made at each of these
examinations.

These included criticisms at several examinations

of management's failure to adhere to an adequate vacation policy,
which provides that bank officers and employees be absent from
their duties for an uninterrupted two-week period.

Such a policy

has historically been strongly encouraged, as a primary internal
control mechanism to prevent improper activities.

Improper

activities usually require the constant presence of the
perpetrator in order to manipulate records and otherwise prevent
detection.

The failure to adhere to a consistent and adequate

vacation policy could have led to an initial break-down in checks
and balances within Daiwa Trust, thereby facilitating the
origination and concealment of the improprieties.

Although the

FDIC has no supervisory authority over Daiwa's New York branch,
it appears that the same kinds of internal control deficiencies
are relevant to its significant problems.




12

Further, Daiwa Trust also had annual external audits
performed by independent public accountants, including the period
from 1983 to 1987, when the trading losses occurred.

During the

same period, Daiwa Trust maintained an Examining Committee, which
was responsible for the review of internal/external audit
reports.

There is no indication at this time that the

improprieties at Daiwa Trust surfaced in those audits.

The FDIC has instituted a comprehensive analysis of all of
the facts related to Daiwa Trust's losses between 1983 and 1987
and the responses of Daiwa and Daiwa Trust, as well as of the
FDIC7s supervision of Daiwa Trust.

In addition to analyzing the

supervisory records of the FDIC and the NYSBD, interviewing the
examiners, and reviewing all other relevant materials, the FDIC
and New York State Banking Department currently are conducting
examinations of Daiwa Trust.

Also, at the direction of the

Federal Reserve, the New York State Banking Department, and the
FDIC, an outside accounting firm has been retained to perform a
comprehensive review of Daiwa's improper activities, including
the $1.1 billion in trading losses at Daiwa's New York branch and
the $97 million net trading loss at Daiwa Trust as well as
managements' responses to both.

The three bank regulatory agencies have committed to the
U.S. Attorney's office that we will conduct our comprehensive
examinations pursuant to written protocols in a manner that will




13
not impede its ongoing criminal investigations and prosecutions.
We have sought to cooperate fully with the criminal
investigations, and as a result, our examinations have been
slowed somewhat.

These examinations will determine the specific

facts surrounding the improprieties, including the action that
management took to hide them.

As the FDIC conducts its examination, the key issues are the
extent to which Daiwa Trust's problems are the result of: (1) a
breakdown in internal controls, (2) fraudulent conduct designed
to defeat those controls or (3) both.

Every bank in the United States, whether foreign or
domestic, is required to maintain a system of internal controls
adequate to the level of risk raised by the institution's
activities.

A sound system of internal controls includes an

organization plan that segregates functional responsibilities
appropriately.

This separation includes such fundamental

controls as limitations regarding levels of authority for making
and approving lending, investment, and trading activities?
segregation of duties? rotation of personnel? effective policies
on hiring and training personnel? vacation policies? and
provisions for the protection of physical assets.

It also

includes a system of authorizations and recording procedures that
assures reasonable control of assets, liabilities, income and
expenses —




in other words, an effective recordkeeping system

14
capable of generating a wide variety of internal management
reports.

Finally, the system must include an effective audit

program.

Internal controls aimed specifically at, among other things,
protecting institutions from unauthorized trading by their
employees would include such things as segregation of duties
between traders and personnel performing trade-related accounting
and disbursement functions? procedures under which trade
confirmations are sent and recorded independently of the trading
operation; information on charges and authorizations? and
procedures for revaluing trading positions.

Internal controls

should also include documentation of review and approval of all
trading limits, procedures to ensure prompt identification and
reporting of trading limit violations, and daily reconciliation
of individual dealer positions with bank positions.

Internal control systems are reviewed as a part of the bank
examination process.

While the examinations of Daiwa Trust

conducted by the FDIC will continue to be evaulated and any
déficiences in examination procedures will be corrected, in
general, bank examinations are not designed to identify fraud
that is intent on thwarting internal controls and the examination
process.

Rather, bank examinations are designed to evaluate the

overall financial condition of the bank and the adequacy of
management.




Examinations are Conducted to gauge the safety and

15
soundness of an -institution, to ascertain the risks it poses to
the insurance funds, and to protect depositors.

Like a medical

examination, a bank examination is a disciplined look for
discernible warning signs.

The examination is based on the books

and records of the bank, statements made to the examiner by
institution officials, and information obtained from other
reliable sources.

Where the warning signs are actively

concealed, serious problems are less likely to be uncovered.

Unless examiners find evidence of specific deficiencies, the
evaluation of internal controls is conducted as part of an
overall evaluation of the bank's systems.

In assessing the

adequacy of a system of internal controls, examiners perform a
series of examination procedures designed to identify control
weaknesses.

If deficiencies are identified, more intensive tests

are conducted.

Therefore, examiners treat internal controls in

the same way they approach the entire examination process —

the

scope of examination activities is expanded in response to the
"red flags" they find.
foreign or domestic —

If the management of a bank —

whether

is covertly misleading examiners and the

bank's systems are evaluated as adequate, fraud may remain
undetected, at least for a time.

Examinations are sometimes confused with external audits.
External audits are conducted by an independent public accounting
firm retained by an institution to verify the numbers used in the




16
institution's financial statements and accounting records.

In

addition, an audit is designed to provide a more extensive
evaluation of a bank's internal controls than typically occurs
during a regulatory examination.

External audits, for example,

may review and directly confirm transactions to determine whether
bank employees are complying with the institution's system of
internal controls.

External audits, therefore, may have a

somewhat greater tendency to detect fraudulent activity.

It is

still possible, however, for bank insiders to conceal
deliberately improper transactions.

Even a complete and

comprehensive audit may not expose effective deceptive practices.

Constraints of time and resources do not permit a complete
and comprehensive audit during bank examinations nor would the
benefits derived from such audits warrant the increased
regulatory burden of imposing such comprehensive reviews on
healthy, well-managed institutions.

Nevertheless, when examiners

determine there is a need, because of a warning signal or
otherwise, they expand examinations to include the use of more
audit techniques and procedures.

Further, the FDIC encourages every insured depository
institution to undergo external audits.

Since 1993, insured

institutions with total assets of $500 million or more have been
required by regulation to obtain an annual independent audit, to
report annually on management's responsibilities for preparing




17
financial statements and maintaining an internal control
structure, and to assess and report on the effectiveness of the
institution's internal control structure.

The institution's

independent public accountant is also required to attest to, and
to report separately on, management's statement of
responsibilities for preparing the institutions annual financial
statements, for establishing and maintaining an adequate internal
control structure and procedures for financial reporting, and for
complying with laws and regulations relating to safety and
soundness, as well as management's assessment of the
effectiveness of such internal control structure and compliance
with such laws and regulations.

The audit and report are filed

with, and reviewed by, the institution's primary federal
regulator, appropriate state bank supervisors, and the FDIC.
These audit requirements apply to 4 of the 43 insured U.S.
branches of foreign banks, and to 46 of the 113 U.S. institutions
which are subsidiaries of foreign banks.

As of June 30, 1995,

these 50 covered institutions had aggregate total assets of
$285.7 billion, and accounted for 93.9% of the assets of all
insured foreign banking organizations in the United States.
These requirements do not apply to the uninsured offices of
foreign banks in the United States.




18

FDIC RESPONSE TO THE ISSUES

Given the Daiwa experience and other recent well-publicized
trading improprieties, such as Barings, the FDIC is revisiting
its examination methodologies, particularly with respect to
trading activities for both foreign and domestic institutions
over which the FDIC has supervisory responsibility.
Specifically, we are looking into whether we should develop
examination procedures that require greater use of audit
procedures such as obtaining external confirmations of a sampling
of trading transactions during our examinations of active trading
departments.

Such enhancement of examination procedures would

require the use of additional resources, would add to examination
time and would increase the level of regulatory burden on
institutions, so we are weighing this course of action very
carefully.

In any event, we are placing increased emphasis on the
importance of internal controls in our training and guidance of
examiners.

The FDIC will expand its review of internal and

external audit workpapers, particularly in regard to direct
confirmations of trading activities.

We will tailor our

examinations of controls in a bank's trading department to take
into account any deficiencies we find during these reviews of
audit workpapers.

These reviews assist in examination planning,

by potentially streamlining the onsite examination process, and




19
by emphasizing any areas of regulatory concern.

Examiners have

been previously directed to emphasize the review of auditor work
papers for institutions that have exhibited internal control
problems, significant derivatives activities, or a history of
unusual accounting practices.

Going forward, the FDIC will

emphasize that such audit workpaper reviews should also be
conducted with regard to insured institutions having substantial
exposure to higher risk activities, such as trading activities.
Any deficiencies identified during such reviews, coupled with the
adequacy of management's actions to redress them, will then
largely determine the extent of follow-up audit procedures to be
conducted by examiners at the next examination.

Had present pre-examination planning activities been in use
during the mid-1980s, when Daiwa Trust's losses occurred, more
attention would have been given to the trading activities of
Daiwa Trust during the examination.

In particular, we now review

comparative call report information for significant changes
between financial reporting periods.

There were sizeable

increases in holdings of U.S. Treasury bonds between March and
June, 1987, in Daiwa Trust when bank management booked the
securities that covered previously unbooked positions.

Current

pre-examination planning techniques might have noted such an
increase, triggering expanded attention to the transactions and
their consistency with Daiwa Trust's investment policies, asset
and liability management policies, and overall business plans.




20

In particular, we will clarify guidance to our examiners
regarding potential auditing procedures to be conducted by
examiners to review the more risky activities, such as trading.
These will include, but not be limited to, the tracing of trades
from inception through final processing to determine that
appropriate separation of duties are in place; a review of the
audit department's procedures for confirming all trading
instruments held at other institutions in safekeeping accounts;
and ensuring that all traders are operating within established
daily and intra-day limits.

As part of an on-going effort to improve supervision at the
FDIC, this summer, before learning of Daiwa Trust's problems, we
initiated a project to determine the best methodologies and
infrastructure for the FDIC's supervision of international
banking activities conducted by federally insured institutions.

This project is focused both on the U.S. operations of
foreign organizations, primarily U.S. subsidiary banks and
insured domestic branches of foreign banks, and the international
operations of U.S. banks.

We are evaluating the

comprehensiveness of the FDIC's international supervisory
capabilities, comparing and contrasting these processes with
those in place at the Federal Reserve and the OCC.

The FDIC

project team will soon make recommendations to the Director of
the Division of Supervision on whether and to what extent the




21

FDIC should revise its processes and infrastructure to supervise
more effectively and cohesively international banking activities
at federally insured institutions.

As part of this effort, we will establish a separate unit
within the FDIC with expertise in international banking.

Such a

unit will devote its attention to international banking matters,
and will communicate closely with similar units of the Federal
Reserve, the OCC, and the state banking departments.

Foreign bank organizations operate in the United States in
various organizational forms, both insured and uninsured, across
multiple regulatory and geographic boundaries.

To enhance and

coordinate supervision of foreign banking organizations, the FDIC
is participating in the interagency Enhanced Framework for
Supervising the U.S. Operations of Foreign Banking Organizations.
The federal and state regulatory authorities formally presented
the specifics of this program to the foreign banking community in
late 1994, and the interagency program is anticipated to be
initiated by early 1996.

The program promises to enhance

significantly U.S. supervision of foreign banking organizations.

Under the program, the FDIC, the OCC, and the relevant state
supervisor for a particular foreign banking organization will
provide the Federal Reserve with proposed annual examination
schedules for integration with those of the Federal Reserve




22

Banks.

Generally, foreign banking organizations with multiple

U.S. operations will have all the operations examined using the
same financial statement date.

After examination plans are

developed, exchanged and coordinated among the examining
agencies, the Federal Reserve will prepare a comprehensive
examination plan for each foreign banking organization.

The

Federal Reserve will coordinate the sharing of information
relative to examinations of all foreign banking organizations
with multi-state operations.

The Federal Reserve will also

conduct an annual "Summary of Condition" assessment of the
combined U.S. operations of each foreign banking organization.
Such assessment will be furnished to the chief executive officer
at the foreign banking organization's head office, and the
appropriate Federal and state authorities.

In addition, for each foreign banking organization,
supervisory "strength-of-support assessments" will be developed
annually through a process involving all U.S. supervisors that
have licensing, chartering, or examination authority over a
foreign banking organization's U.S. operations.

These

assessments, which will be for internal agency supervisory
purposes, will analyze the ability of the foreign banking
organization to meet its U.S. obligations, as well as any factors
which raise questions about the ability of the foreign banking
organization to maintain adequate internal controls and
compliance procedures at its offices.




23
With respect to insured branches of foreign banks that are
under the FDIC's supervision, as part of the Enhanced Framework
we implemented a new interagency rating system in 1994, commonly
referred to as ROCA.

It focuses on risk management, operational

controls, compliance with applicable state and federal laws and
regulations, and asset quality.

The ROCA rating system provides

a framework for assessing the condition of a branch, both alone
and within the context of the consolidated foreign banking
organization, and pinpoints key areas of concern..

For example,

under ROCA, examiners must determine the extent to which risk
management techniques are adequate to control risk exposures that
result from the branch's activities and to ensure adequate
oversight by branch and head office management, thereby promoting
a safe and sound banking environment.

The ROCA system is

relatively new, and may require some additional refinements;
nevertheless, over time it appears likely to be an effective
mechanism for enhancing the supervision of the branch operations
of foreign banks in this country.

CONCLUSION

The ability of any bank, including foreign banks, to operate
in the United States is a privilege.

This privilege carries with

it certain fundamental requirements:

accurate records and

financial reporting on an institution's operations, activities,
and transactions; adequate internal controls for assessing risks




24
and compliance with laws and regulations? as well as the utmost
credibility in the institution's management.
were missing in the case of Daiwa.

These requirements

A failure to comply with

reporting requirements, inadequate internal controls, a
continuing pattern of misrepresentation to regulatory
authorities, deliberate concealment of material events, and the
potential for the continuation of unsafe and unsound practices
left U.S. regulators with no choice but to terminate the
operations of Daiwa Bank in this country.

Foreign banks must

meet the same supervisory and regulatory standards applicable to
domestic U.S. banks.
—

The approach we take in examinations today

had it been in place in the 1980s —

would have made it more

likely that we would have found problems at Daiwa Trust closer to
the time when they occurred, but fraud is difficult to detect.

Moreover, the FDIC, along with other federal and state bank
supervisory and law enforcement authorities, is continuing to
investigate in detail what went wrong at Daiwa and why.

The FDIC

is evaluating whether its examination procedures applicable to
internal and risk controls for trading activities for foreign and
domestic institutions over which the FDIC has supervisory
responsibility should be enhanced.

What we have learned from the

Daiwa and Daiwa Trust experience is already leading to revisions
in our supervisory and examination processes.

In addition, even

before Daiwa Trust's problems came to light, the FDIC had
instituted a comprehensive review of its supervisory role with




25
respect to foreign banks.

Moreover, the FDIC will continue to

work on an interagency basis to implement a comprehensive
approach to ensuring effective supervision of foreign bank
operations in the United States.

Finally, the FDIC, as a member

of the Basle Committee on Banking Supervision, will continue to
work with the Committee to ensure greater international
cooperation and coordination in the supervision of multinational
banking organizations.




*********

Chart 1

Total U.S. Assets of Insured and Uninsured
Foreign Banking Organizations (FBO)




Total Assets of $1.1 Trillion
As Of June 30,1995

u rn c e or I n rin su p ervision

Table 1




SUMMARY OF U.S. FOREIGN BANKING ORGANIZATIONS
As of June 30, 1995

F D IC In s u re d In s titu tio n s

FDIC Insured Branches
FDIC Insured Banks and Thrifts
Total FDIC Insured Institutions

Number

Total
Assets
(Sbillions)

43

10.9

113
156

2 9 3 .4
3 0 4 .3

221

134.1
6 4 4 .9
4 .4

U n in s u re d In s titu tio n s

Agencies
Uninsured Branches
All Other
Representative Offices
Total Uninsured Institutions

288
41
139
689

7 8 3 .4

T o ta l F o re ig n B an k O rg a n iz a tio n s

845

1,087.7

0.0

Source: Federal Reserve and
Office of Thrift Supervision

Chart 2

Total U.S. Assets of Foreign Banking
Organizations - By Federal Supervisor
Total Assets of $1.1 Trillion
As of June 30,1995
Insured (OTS)

Supervisor

Assets in
$ Billions

OTS
OCC
FRB
FDIC
OCC
FRB

22.4
130.2
42.1
109.6
49.3
734.1

2 . 1%

Insured (OCC)
12.0%
Insured (FRB)
3.9%

(a)
(a)
(a)
(a)
(b)
(b)

Insured (FDIC)
10. 1%

Uninsured (OCC)
4.5%

(a ) F D IC in s u re d
(b ) U n in s u re d




Uninsured (FRB)
67.5%

Source: Federal Reserve and
Office of Thrift Supervision

C hart 3

Estimated Insured Deposits of Foreign Banking Organizations
Compared To All FDIC Insured Deposits
Total Estimated Insured Deposits of $2.6 Trillion (as of June 30,1995)

Domestic Insured
95.2%




Source: FDIC