Fed Sets Tougher Rules for Foreign Banks As It Takes Over Regulation

WASHINGTON - The Federal Reserve Board has released a supervisory letter that completes the shift of foreign bank supervision from state to national regulators.

"The guidelines clearly place the Federal Reserve in the primary position as the supervisor of foreign banks engaging in business in the United States," said Bowman Brown, a partner at Shutts & Bowen. "This completes the federalization of the regulation and supervision of foreign banks operating in the United States."

States had taken the lead in foreign bank supervision. But the scandal involving the Bank of Credit and Commerce International in the early 1990s convinced Congress to intervene and require greater federal oversight.

The enhanced oversight will increase the regulatory burden on foreign banks and on the banking agencies, Mr. Brown said.

They will also provide some needed clarifications.

The letter, SR 95-22 (SUP.IB), memorializes a previously released new rating system. The Fed will now award a foreign bank's entire U.S. operation a single rating, regardless of how many units exist. The change diminishes the negative impact on the entire institution of a poor rating at a small unit, said Paul Pilecki, a partner at Shaw, Pittman, Potts & Trowbridge.

The letter also expands upon a previously released new rating system for foreign bank branches and agencies. The Fed now will give greater emphasis to the foreign bank's risk management, internal controls, and compliance activities.

Finally, the guidelines require foreign banks to be a source of strength to their U.S. operations.

"A bank that has a strong source-of-strength grade will probably not be of the same grade of supervisory concern as banks with less support from the home office," Mr. Pilecki said.

Mr. Pilecki said "strength of support" rules are particularly important because the Fed finally acknowledges that it must base its ratings on a bank's global operations.

Part one of the strength-of-support guidelines focuses on five criteria. First, the Fed will examine the foreign bank's financial profile, including credit ratings, capital levels, asset quality, and profitability.

Second, the agency will review how the home country regulates the parent bank. The Fed will look for periodic financial reporting requirements, capital adequacy requirements, and enforcement mechanisms.

Then the Fed will look at the foreign bank's record of support to its U.S. operations and at its access to U.S. dollars. Finally, the Fed will examine managerial or operational risks to prevent a problem at one of the foreign bank's other international subsidiaries from spilling into the United States.

The new policies are effective immediately.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER