Fed May Close Offices of Foreign Banks From Countries Where Oversight

WASHINGTON - Some foreign bank branches that are not adequately supervised by their home countries may have to close under new rules the Federal Reserve Board is considering.

The rules, mandated by Congress in the wake of the Bank of Credit and Commerce International scandal, are aimed at forcing foreign countries to regulate their banks on a global basis.

The rules require regulators to examine 15 separate criteria before deciding if the U.S. affiliates of such institutions can remain open.

The Fed said in the proposed rules that it would only re-evaluate foreign banks that suffer from regulatory problems.

Foreign banking groups generally approved of the rules, although they did ask in comment letters that the Fed give more leeway to banks whose home countries are moving toward comprehensive supervision.

"Adding this criterion would give the board additional flexibility in the applying the proposal to specific banks," wrote David E. Bodner, chairman of the Institute of International Bankers.

All the commenters urged the Fed to apply these criteria on a "case by case" rather than a "country by country" basis.

"This approach will recognize the differences among individual institutions as well as the differences in the home country's supervisory treatment of different types of financial institutions," Conference of State Bank Supervisors president James B. Watt wrote.

Florida International Bankers Association president Percy Elbrecht urged the Fed to subject representative offices, which cannot take deposits, to more lenient standards.

"The proposed rules should apply with respect to a foreign bank's U.S. representative offices only in the event that the foreign bank is deemed not be to subject to a 'significant degree' of supervision by its home country supervisor," Mr. Elbrecht wrote.

Mr. Watt asked the Fed to clarify that the state regulator in each state where the foreign bank operates can examine the institution.

The conference also urged the Fed to consult more regularly with state officials.

"State bank regulators issue the licenses for the offices and ultimately would be responsible for liquidating them, should that be necessary," Mr. Watt wrote.

The Foreign Bank Supervision Enhancement Act of 1991 requires the Fed to determine that a bank's home country subjects it to comprehensive supervision before it can allow the institution to branch or acquire a bank here. The Fed so far has ruled that Mexico and Turkey meet the standard.

The current proposal addresses what the Fed should do when an existing foreign bank is not subject to comprehensive supervision. Specifically, the Fed proposed looking at: the proportion of assets located in the United States, the extent of the home country's supervision, the nature of the bank's internal controls, the relationship between the U.S. and non-U.S. operations, and the institution's regulatory compliance record.

Comments were due Feb. 13 on the mid-December proposal.

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