ABC's of Banking

Provided by the State of Connecticut, Department of Banking, based on information from the Conference of State Bank Supervisors (CSBS)

What is a Foreign Bank?

The term "foreign bank" generally refers to any United States operation of a banking organization headquartered outside of the U.S.The first foreign banks established their presence in the United States in the mid-1800's, with New York being the first state to license or regulate these institutions. While state governments took the lead in welcoming foreign banks to the United States, the federal government has also acted to ensure that American markets are open to banks from all nations. 

Today foreign banks are a significant presence in the American financial system, providing many important benefits to individuals, businesses and the general economy.  In fact, foreign banks make almost 40% of all loans to American businesses. As of December 31, 2000, state-licensed foreign banks held $1.132 trillion in assets*.

Foreign banks most often come to the United States to provide services to American subsidiaries of clients in their home countries or to a specific group of individuals. Once here, however, they provide a wide range of wholesale banking services. They are most active in New York, California, Florida, Illinois and Georgia, but also maintain operations in our own state, Connecticut, as well as several other states.  Foreign banks operating in Connecticut currently include UBS AG (Switzerland), Bank Austria AG, the Bank of Ireland, Société Géneralé (France) and the Royal Bank of Canada.

Foreign banking organizations can acquire or establish freestanding banks or bank holding companies in the United States; these banks are regulated and supervised as domestic institutions. Generally, however, it is more cost-effective and productive for foreign banking organizations to operate as another of several available structures: branches, agencies, loan production offices, representative offices, Edge Act or agreement corporations. Each of these business structures has a different set of powers and regulatory requirements.

Branches and agencies are the most common structures of foreign banking organizations in the United States. The major difference between these two types of banking offices is that branches may accept deposits, while agencies generally may not.  Both structures can make and manage loans, conduct foreign exchange activities and trade in securities and commercial paper. These offices may conduct most of the activities a domestic bank performs. The primary exception is that foreign banks and branches may not accept deposits of less than $100,000 unless they had FDIC insurance prior to December 19, 1991.  State governments and the Office of the Comptroller of the Currency separately license and supervise foreign bank branches and agencies. The Federal Reserve serves as the federal regulator of state-licensed foreign bank branches and agencies, in a system similar to that for domestic banks. More than 85% of the foreign bank branches and agencies in the U.S. are state licensed/chartered.

Foreign banks may also establish representative offices in the United States. Representative offices have more limited powers than branches or agencies. Foreign banks often open representative offices as a first step in establishing a presence in America. These offices serve as a liaison between the parent bank and its clients and correspondent banks in the U.S. They may develop relationships with prospective clients, but they cannot conduct any banking transactions themselves. Representative offices must register with the Federal Reserve, and may be licensed by states as well.

Edge Act and agreement corporations are foreign bank offices chartered by the Federal Reserve (Edge Act) or states (representative corporations) to provide financing for international trade. Domestic banking organizations may also establish Edge Act or agreement corporations. These offices have a broader range of powers than other banking organizations, but all of their activities must relate to international trade. Other structures available to foreign banks are commercial lending corporations, licensed by New York State, and export trading companies.

In order to protect American consumers and the overall stability of the U.S. financial system, states and federal banking agencies regulate and supervise foreign banking operations in the United States. The major Federal laws affecting foreign banks in the United States are the International Banking Act (IBA) of 1978 and the Foreign Bank Supervision Enhancement Act (FBSEA) of 1991. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Gramm-Leach-Bliley Financial Modernization Act of 1999 also address foreign bank operations in the U.S.

State and federal bank supervisors recently unveiled a new system for supervising and examining foreign banks in the United States. Under this system, state and federal bank regulators work together to provide a seamless overview of a foreign bank's entire U.S. operations which may encompass several states. Since foreign bank branches and agencies are arms of their parent banks, their supervisory structure must be slightly different from that used for domestic institutions. Supervisors evaluate an office's risk management, operational controls, compliance with state and federal laws, and asset quality. The Federal Reserve also looks at the overall support U.S. offices receive from their parent banks. Foreign-owned banks that have deposit insurance must comply with all U.S. consumer laws and pay premiums to the FDIC. All lenders must comply with federal fair lending issues.

Foreign banks in the United State are an important source of new capital for American businesses. Since their parents are not as deeply affected by fluctuations in the U.S. economy as their domestic counterparts, U.S. offices of foreign banks can provide credit even during domestic "credit crunches." In short, foreign banks in the United States are valuable corporate citizens and an essential part of the American financial system.

* Source: CSBS