Robert H. McCormick is supervisor of foreign banks at the New York State Banking Department, the oldest bank regulatory agency in the nation.

Almost 95% of all the U.S. assets of foreign banks are supervised by state, banking regulators New York alone supervises 207 licensed foreign banking offices, with some 70% of all foreign branch and agency assets in the United States.

The state Banking Department also supervises 42 foreign-owned banks and trust companies, nine Article XII investment companies, and 106 representative offices from over 50 countries.

Established in 1852, New York's Banking Department currently supervises some 4,000 entities and institutions with total assets of about $1 trillion.

In addition to domestic banks and foreign banks, branches, and agencies, the department supervises savings banks, savings and loans, credit unions, investment companies, and mortgage bankers and brokers. It also oversees check cashers. loan and sales finance companies, money transtmitters, and several other financial entities.

The department has a staff of over 600, five regional offices in New York State, and one office in London.

Mr. McCormick expressed some of his views on the state of foreign banks in the United States.

Q.: What measures do you think foreign banks should take to prepare themselves for dealing with the recent changes in banking laws?

McCORMICK: Foreign bankers should review their systems and operations before examinations by regulatory agencies, in order to identify potential problems and avoid supervisory action.

We are acutely aware that there are some shortcomings in the examination approach, but I want to emphasize that the new policy of joint examinations by the Federal Reserve Board and state banking departments is going well.

The New York State Banking Department is also meeting regularly with other local regulatory agencies to make the examination process more effective.

Q.: What sort of problems have cropped up? And is anything being done to iron them out?

McCORMICK: From a legislative perspective, I doubt if there will be additional significant changes on a state or federal level.

Still, there are things that remain to be worked out between the different regulators, including state regulators, the Fed, and the Office of the Comptroller of the Currency, in order to develop a more comprehensive and effective examination manual and methodology for factoring in the strength of a foreign bank's parent institution.

One of the shortcomings of the current exam system is it does not factor into the rating equation the strength of the parent company with regard to U.S. branches and agencies.

Another issue is that there is still no uniform policy on exams between, say, regulators on the East Coast and the West Coast.

Banks examined on one coast are examined in one way and on another coast in a different way. We need to make the system more uniform.

Still another issue that needs to be resolved is the question of loan-loss reserves, where we have philosophical differences with the Fed.

The Fed's approach was to require more local loan-loss reserves.

Under an interim agreement with the Fed, foreign banks will need to make specific reserves or write off problem loans, but will need to set aside general reserves only when they receive an overall "poor" rating of [Camel] 4 or 5.

Nationally we are also working actively through the Conference of State Bank Supervisors on several task forces that are working toward a more efficient examination manual, a new and more meaningful rating system, and an effort to factor into the process an evaluation of the financial condition of the foreign banking organization, including analysis of the home-country banking system.

Q.: Recently, you and other state regulators criticized the Fed as not moving fast enough to implement the new national banking legislation and expedite applications for new offices by foreign banks. Do you still feel the Fed is not doing enough?

McCORMICK: I think the Federal Reserve Board people are very much aware of the problem and are making a real effort to improve the process. But they also need to meet the requirements of the new laws, which are somewhat restrictive.

Q.: What are the salient points of the new state banking legislation that was recently approved? McCORMICK: We've learned some lessons from BCCI, and these legislative changes are intended to clear the decks.

They include power to clarify the activities of offshore offices such as those in the Cayman Islands and require the filing of a change-of-control notification promptly after a change in control or merger.

If there's a change of control and a bad player comes on board a particular bank, we'll have the grounds to revoke that bank's license.

The other main points of the new state legislation will:

* Clarify the power of the superintendent of banks to examine records of actions taken in New York by employees of the foreign bank on behalf of offshore offices.

* Expand the grounds of license revocations if a foreign bank fails to continue to meet certain entry standards.

* Permit the superintendent to immediately suspend the bank's activities to protect the interest of depositors or the public.

* Clarify that in a liquidation, only claims arising out of transactions with a New York branch or agency shall be accepted, and not claims of affiliates.

The last item is important because when BCCI collapsed, for example, we had claims coming in from creditors of affiliates of the bank around the world who had no dealings with the New York branch.

One hot topic is the revised banking legislation requiring representative offices of foreign banks to obtain a New York State banking license, something which came about after some foreign banks misused their representative office to take in deposits.

However, the first licenses have already been issued, and more will be shortly forthcoming, and all representative offices are now subject to examination by both the banking department and the Federal Reserve.

These examinations are more in the nature of a compliance review, as opposed to the much more involved safety-and-soundness examinations conducted at branches and agencies.

Last but not least, we've also revised the rates for asset pledge, or that portion of assets a foreign bank must keep available to cover the costs of its liquidation, should this be necessary.

Q.: Some foreign banks have said they feel under increasing pressure to meet requirements of the Community Reinvestment Act, even though they are not insured by the Federal Deposit Insurance Corp. and do not take in consumer deposits. What is your department's position on this topic?

McCORMICK: Contrary to the position being adopted by some supporters of CRA in Washington for extending the requirements to nonbanks and lending institutions not insured by the Federal Deposit Insurance Corp., we do not seek to apply CRA requirements on uninsured foreign branches and agencies.

We do not believe that such requirements should be imposed on them, since uninsured foreign bank branches and agencies do not accept retail deposits or engage in consumer banking.

Q.: Are you worried about derivatives?

McCORMICK: Derivatives are new and mystifying, and a lot of people are still on the learning curve.

That doesn't means they're bad, but you do have to be cautious and understand that there might be risks involved.

Based on discussions with senior bankers, I sometimes sense that while they have made a great effort to take all the necessary steps expected of good financial management in setting out the guidelines and parameters for these activities, they still remain a little uncomfortable.

At this point, from the viewpoint of a conservative regulator, I would simply urge the participating bank management to pursue the activity with a large dose of due diligence until everyone has a better feel for what may happen, or not happen, and until there is more actual experience out there to review.

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