Foreign Banks Fear Burdens

The new year will see foreign banks in the United States resigned to the expense of another layer of regulatory oversight stipulated by new federal law.

"For foreign banks the big question is, will the added federal supervision be well coordinated with [state] supervisors, or is it going to be duplicate?" said one foreign banker who asked not to be named.

A Drag on Expansion

Foreign bankers also said that the increased caution about foreign banks in the wake of the Bank of Credit and Commerce International scandal could make it more difficult for foreign banks to enter or expand in the U.S. market.

Non-U.S. banks are especially horrified by a new rule in the Federal Deposit Insurance Corp. Improvement Act mandating federal insurance for all deposits under $100,000. However, it appears that the provision was intended for retail deposits only and is likely to be corrected early next year.

The single biggest change included in the act is the Foreign Bank Supervision Enhancement Act, which requires foreign banks to obtain Federal Reserve Board approval before opening a state-supervised office, and permits the Fed to examine and close such offices.

The main effect of the law is to turn the Fed into the overall supervisor of foreign banks, supplanting state banking departments as the main regulator.

Other Provisions

The law also:

* Requires foreign banks to report loans secured by more than 25% of the stock of a U.S. bank

* Imposes a criminal penalty for violations of the International Banking Act.

* Requires U.S. regulators to carry out studies on the capital adequacy and desirability of requiring foreign banks to operate in the U.S. through subsidiaries rather than through branches.

* Subjects foreign banks to increased consumer protection statutes.

* Allows the Fed to share information with home country regulators.

* Increases civil penalties for filing false and misleading reports.

Foreign bankers have few objections to the law, but say they are concerned about added paperwork, possible duplicate examinations by federal and state regulators, and increased fees for legal advice needed to comply with the new legislation.

Few Changes Are Found

A spokeswoman for the New York State Banking Department added that the law will create few changes but adds an extra layer of regulation.

Federal and state regulators are already discussing how to do joint examinations and working on a new joint examination report to minimize the burden on foreign banks, she said.

"Everything stays the same," she said.

"What we're doing is trying not to make it more onerous and difficult."

Regret over Powers

Foreign bankers add they are more concerned by the inability of Congress to pass broader legislation that would have allowed U.S. and foreign banks to engage in a wider range of activities.

"The whole thing keeps us in limbo, so we can't really get excited over it," said Hermann Buerger, executive vice president in New York with Germany's Commerzbank.

"Instead of having a stable legislative environmental, we still have legislative uncertainty hanging over us, and that puts us in a difficult position to make any move."

One issue that will have to be addressed is a provision prohibiting foreign banks from "accepting or maintaining deposit accounts having balances of less than $100,000" except through FDIC insured U.S. bank subsidiaries.

Separate Units Needed

Since most foreign banks take in corporate deposits that frequently fall below $100,000, this means foreign banks will have to set up separately capitalized U.S. subsidiaries and get FDIC insurance to do business in this country - the one thing they had been strenuously seeking to avoid since debate on a banking bill began earlier this year.

But bankers and congressional staffers said that the original intent was that the amendment would apply only to retail deposits; the word "retail" was inadvertently dropped early in the morning of Nov. 27 as the final text of the bill was being prepared.

If the error is not corrected, they said, the provision could open a Pandora's box of problems for foreign banks, they said.

"This could interfere with all the big European corporate customer transaction accounts, taking away transaction accounts because balances fluctuate, said Lawrence Uhlick, executive director and general counsel of the Institute of International Bankers, the main association representing foreign banks in the United States.

"It raises questions whether foreign banks are being given fair opportunity to compete in the U.S. market if they can't have these accounts and do transaction services for their corporate customers."

Knockout Punch?

"It could knock us out of the U.S. market," said a French banker in New York who declined to be identified.

Earlier this month, senior foreign bankers met with J. Virgil Mattingly, general counsel at Federal Reserve Board, and senior Fed officials in an effort to clarify the law.

"There's a general recognition that something's going to have to be clarified as far as statutory intent is concerned." said one Washington-based lawyer representing foreign banks.

Quick Solution Sought

He and other lawyers for foreign banks expressed the hope that the confusion will soon be cleared up.

The problem is that Congress is not due to come back until Jan. 20. Until then, foreign banks face stiff penalties for failing to comply with the legislation.

"It's serious and it can be corrected," said John Hardage, a legislative assistant to Rep. Stephen L. Neal, D-NC, "The question is how fast."

One possibility is that a change could be inserted in a technical correction issued when Congress reconvenes.

Clarification Wanted

In the meantime, foreign bankers are hoping that the Fed will issue clarifying guidelines to avoid possible penalties for violating the new law.

"We're hopeful that the Fed may provide some guidance over the next week or two and confirm the clear legislative intent that it does not apply to wholesale activities," said Mr. Uhlick.

"The fact is that the law was written in such haste that no one knows what it means," the New York State Banking Department spokeswoman said.

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