When a company in the United States wants to acquire even part of a bank with domestic operations, it must seek the prior approval of the Federal Reserve Board, including a public comment period. So it’s surprising that the Fed has carved out an exemption from this requirement for foreign governments — especially since this loophole is not to be found in the Bank Holding Company Act.

In support of its proposition that foreign governments are not subject to that 1956 law, the regulator has only a speech given decades ago by a former Fed Governor, the late John LaWare, and more recent testimony to Congress by the Board’s current general counsel, Scott Alvarez.

The question has come up in connection with an application by China Investment Corp., a sovereign wealth fund wholly owned by the Chinese government, to acquire 80% of Bank of East Asia, a commercial bank in New York. When I requested and obtained a copy of the application two months ago, I was surprised to see that the Chinese government, CIC's parent, was not listed as a co-applicant.

In just the last few years, ultimate parents like Credit Agricole, Allied Bank of Ireland and Banco Santander have applied by name for Fed approval of even partial acquisitions, by subsidiaries which they in some cases only partially owned, allowing the public to comment on the records of these upstream owners.

In CIC’s application, the only precedent cited for omitting the Chinese government as an applicant was the 1992 speech by then-Fed Governor LaWare.

I raised this omission, as well as Bank of East Asia's monochromatic lending patterns in this country (its current parent is in Hong Kong), in a timely comment to the Fed. The applicants’ attorney responded with a second citation. But it was not to any provision of the BHC Act or any court case, only a statement to Congress in 2008 by Fed counsel Alvarez.

“The [BHC] Act specifically excludes investments made by the U.S. government or by any state government,” Alvarez told lawmakers. “On this basis, the Board has long held that the provisions of the BHC Act do not apply to direct investments made by foreign government.”

Alvarez did not provide any citation to the BHC Act in his testimony. That may be because the law contains no such provision. Congress did not provide an exemption to foreign governments when it passed the BHC Act in 1956 or in any amendment since. The Fed has simply read this amendment in, and cites its own statements as authority. In Latin this is called ipse dixit: it is so because we say it is so.

Ownership of U.S. banks by foreign governments presents unique issues. Given the role that lack of regulatory oversight played in a financial meltdown that went global, it seems unwise to allow acquisitions without the real party in interest submitting a public application. Here that party is the government of China; imagine if the applicant were a more hostile regime like Iran.

What does the current Congress, and what would a court asked to review the question, think of the Fed exempting foreign governments from U.S. law by fiat? Diplomatic immunity may now be invoked in the case against Dominique Strauss-Kahn, but it can't be invoked here.

One problem is the Fed's position that public interest and community groups like mine have no standing to get court review of the regulator’s decisions under the Bank Holding Company Act. This makes the Fed unaccountable.

But even before Congress fixes that, presumably one or more U.S. banks could challenge the Fed's exemption for foreign governments. Will they?

Matthew R. Lee is the founder of Inner City Press, based in Bronx, N.Y., which has sought judicial review of several Federal Reserve Board actions including merger approvals. He is the author of Predatory Bender: A Story of Subprime Finance.