Foreign Banking Organizations- Do They Play By the Same Rules?

Foreign Banking Organizations, or FBO’s as they are called by the Federal Reserve, operate a variety of banking institutions in the U.S.  In December of 2006, foreign banks held over $1 trillion in assets, approximately 11% of our total commercial banking assets. 

Obviously, they are important to our financial system.  Because of this, they are supervised and regulated by the U.S. banking authorities. However, the type of regulation(s) faced by any particular foreign banking institution is dependent in part on whether its U.S. units are chartered in the U.S. or abroad. 

The Federal Reserve says, “Foreign bank branches and agencies are legal extensions of their parent companies, and not freestanding entities in the United States. They do not have any capital of their own and face somewhat different regulations from other depository institutions in the United States.”  But, foreign banks’ U.S. subsidiaries “are freestanding legal entities with U.S. or state charter and their own capital.”  These institutions must follow the U.S. rules.

Prior to the passage of the International Banking Act of 1978 (IBA), the rules governing foreign banking institutions varied significantly from those governing U.S. institutions.  The act brought a closer alignment of those rules particularly in the areas of chartering, branching and reserve requirements. 

This was further refined in 1980 when the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was passed.  With DIDMCA came the ability by foreign branches and agencies to directly access the services of the Federal Reserve.  Privileges such as check clearing, Fedwire and the discount window were now available to FBO’s.  These services are offered under the same cost structure and rules as are offered to other U.S. depository institutions.

One of the most important provisions of DIDMCA was to subject all FBO’s, who accept deposits, to the Federal Reserve reserve requirements. However, as with any rule, there are exceptions. Some FBO’s, referred to as “qualified foreign banking organizations,”  are exempt from the reserve requirements. They are “qualified” if more than half of their worldwide business is in banking, and more than half of the banking activities are outside the United States.

So, do FBO’s play by the same rules?  Well yes, no and maybe.  To determine if a particular institution is subject to the U.S. rules requires the questioning party to research the origin of the institution’s business in the U.S.  After doing so, one can hope to unravel the requirements.

More information regarding the rules for FBO’s can be found in the Federal Reserve System Regulation K: International Banking Operations.