Industry Letters

Foreign Banks in New York

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June 1996

This presentation is intended to provide an overview of foreign bank activity in New York. It includes an historical perspective, a description of the current banking environment, a review of the forms of corporate organization that are available, and a discussion of regulation and supervision.

The New York State Banking Department has a long and distinguished history of supervising foreign banks. Soon after the establishment of the Department in 1851, Canadian banks entered the New York market. Laws incorporating agencies of foreign banks were introduced in 1910 and full branches were authorized in 1961. During the early periods of this century, however, the foreign banking presence in New York was not a significant factor in the financial markets. The main focus of their business was servicing the U.S. financial needs of customers with whom they had relationships in their home countries. In 1960, the foreign bank presence in New York was essentially limited to 36 agencies with total assets of $3.1 billion, eight foreign-owned banks and trust companies, and two investment companies with combined assets of $133 million.

In the 1960s, the appeal of overseas markets increased, causing U.S. banks, led by the New York money center institutions, to aggressively expand their worldwide operations. The growing strength of the dollar made U.S. investments in foreign markets increasingly attractive, and as U.S. corporations expanded their activities abroad, U.S. banks soon followed. An unfavorable regulatory environment for domestic financing also contributed to overseas expansion. Both the voluntary credit restraint program and the interest equalization tax imposed restrictions on the financing of foreign transactions using domestic funds. In addition, the ability to branch or acquire other banks within the United States was limited by statutory or antitrust restrictions.

The dramatic expansion of American banks during this period changed the character of banking markets around the world and compelled major banks in Europe and Japan to increase their own international activity. As the U.S. dollar became the dominant currency in world trade, banks in other countries soon required a dollar base in the United States. In addition, as foreign corporations turned to the growth-oriented economy of the United States for expansion, their home- country banks recognized the need to follow. As the United States" principal financial center, New York logically became the entry point for foreign banks. By 1970, there were 28 agencies and 19 branches of foreign banks in New York with aggregate assets of $10.5 billion. While the decade's growth was substantial, it was only a preview of what was to come.

Branches, which are allowed to accept deposits, became a relatively more important component of the U.S. activities of foreign banks during the 1970s. This was due primarily to the rapid development of branches of European banks and the conversion to branches of most of the Japanese agencies, which had limited funding capabilities.

By the middle of the decade, the activities of foreign banks in the domestic markets drew the attention of Congress, which perceived that foreign banks enjoyed a competitive advantage over their U.S. counterparts. It was possible, for example, for foreign banks to conduct banking in more than one state, while, at the same time, interstate opportunities were denied to domestic banks. Also, agencies and branches were not required to maintain reserves with the Federal Reserve System, while domestic banks were, a situation that complicated the implementation of monetary policy.

Congress considered legislation to remedy these inequities for four years, ultimately enacting the International Banking Act of 1978 ("IBA"). The IBA created a federal regulatory structure for agencies and branches, thereby promoting competitive equality between domestic and foreign banking institutions in the United States.

In achieving such parity the IBA:

• limited interstate deposit-taking activities;

• imposed reserve requirements for monetary policy purposes;

• required federal deposit insurance for branches engaging in retail deposit-taking; and

• imposed the non-banking prohibitions of the Bank Holding Company Act.

In addition to these restrictions, it permitted foreign banks to directly own Edge Act Corporations.

The IBA also created a dual banking system for branches and agencies of foreign banks. Prior to passage of the Act, authorization for foreign banks to conduct business in the United States and the subsequent responsibility for their supervision was vested solely in the state regulatory agencies. There was no federal option, unlike the choice available to domestic banks. The IBA allowed a foreign bank wishing to open a U.S. office to choose between a federal (Federal branches are licensed and supervised by the Office of the Comptroller of the Currency (OCC), an arm of the Treasury Department) or state licensed facility. The IBA also gave the Federal Reserve System a residual role, behind the state or federal licensing entity, in regulating the activities of foreign bank branches and agencies.

While the IBA curtailed certain activities of branches and agencies, foreign banks continued to flourish in New York. The rapidly evolving American banking marketplace attracted increasing numbers of foreign institutions. By 1980, New York State-licensed branches and agencies numbered 145, more than triple that of 1970. Aggregate assets were $138.7 billion, some 13 times greater than 10 years earlier. This growth in state-licensed institutions was achieved despite the available federal option.

The expansion of foreign banking in New York was even more dramatic in the 1980s, fueled by the unrelenting globalization and interdependence of financial markets. Foreign-based financial intermediaries continued to play an increasingly prominent role in the United States. Technological change and other innovations tied international economies more closely together. Because the U.S. dollar remained the key international currency, many foreign financial institutions significantly expanded their New York banking offices, while others, not here previously, felt the virtual necessity of establishing a New York office. Changes in the banking laws of certain countries, notably Japan, Taiwan and the Scandinavian nations, also facilitated the ability to establish offices overseas and New York was the obvious choice.

More recently, and equally significant, was the passage of the Foreign Bank Supervision Enhancement Act of 1991 ("FBSEA") which took effect on December 19, 1991. This act was passed as a direct reaction to the well- publicized improprieties of two foreign banks namely the Bank of Credit and Commerce International ("BCCI"), a Middle Eastern bank chartered in Luxembourg, and Banca Nazionale Del Lavoro ("BNL"), an Italian bank. To date, no third party liability holders in this country have lost money because of the activities of these institutions and none is expected to. In fact, no one in this country has ever lost a penny at a U.S. branch or agency of a foreign bank.

FBSEA gave the Board of Governors of the Federal Reserve a more direct role in the supervision of foreign bank activity in the United States. It mandates, among other things, annual on-site examinations of all foreign branches and agencies. (Although the act mandates annual examinations, it does not require that such examination be conducted by the Federal Reserve. The requirement may be fulfilled by examinations conducted by the licensing authority (the states or the OCC), the Federal Reserve, or in the case of insured branches, the FDIC. Examinations may also be conducted on a joint basis.) Although the Federal Reserve Banks were given examination authority by the IBA, it was the late 1980s before such authority was regularly exercised by the Federal Reserve Bank of New York, (Several of the other Federal Reserve District banks, however, did regularly examine foreign branches and agencies.) which previously had accepted copies of the New York State examination reports. FBSEA also, for the first time, imposed a requirement of Federal Reserve Board approval for the establishment of any new branch, agency, subsidiary, or representative office.

During the fall of 1991, the New York Superintendent of Banks convened the Advisory Committee on Transnational Banking Institutions (the "Committee"), composed of representatives of the banking industry, the legal and accounting professions, law enforcement and academia. Its report, issued in March 1992, attracted much attention here and abroad. The report focused on local, national and international issues facing the banking community and its regulators. Specifically, the Committee was asked to analyze the risks inherent in transnational banking and recommend actions to tighten supervision of foreign banks, while still encouraging those institutions to maintain offices in New York. Although the Committee "found the banking laws and the Banking Department's policies on transnational banks to be in generally good order," (Letter to Superintendent of Banks Derrick D. Cephas dated March 20, 1992, page ix of the Report of the Superintendent's Advisory Committee on Transnational Banking Institutions) it made numerous recommendations for improvements. Most of these suggestions have already been adopted by changes to statutes, policies or regulations.

One of these recommendations was that the Department seek legislation to require the licensure, examination and supervision of all representative offices of foreign banking corporations in New York. This became law in 1992. The Department now conducts regular examinations of representative offices to ensure they perform only those activities that are permissible in such offices.

In 1993, the Banking Law was amended to improve the process of liquidating a branch or agency and to clarify which obligations must be paid as part of the liquidation process.

The Department also adopted and amended several Supervisory Policies and Procedures. Supervisory Policy FB 1 sets forth licensing policy for branches and agencies of foreign banking corporations. Supervisory Policy FB 2 deals with the permissible activities of and licensing policy for representative offices. Supervisory Procedures FB 101 and FB 102 deal with applications by a foreign banking corporation for a license to establish a branch or agency or representative office.

More recently, the Department worked closely with the Federal Reserve and the Conference of State Bank Supervisors in developing an enhanced system for the supervision of foreign banks in the U.S. This includes a new foreign branch and agency rating system, known as "ROC-A", ( 5Risk management, Operations (including audit and internal controls), Compliance (with state and federal law and regulation, regulatory reporting and supervisory actions), and Asset quality) a new report format using this rating system and a detailed examination manual. The rating system provides for a Strength of Support Assessment ("SOSA") to review the ability of a foreign banking organization to continue to meet its U.S. obligations. Foreign banks which operate through multiple offices throughout the country will also have a rating assigned to their combined U.S. operations. The regulators" goal is to insure consistent supervision of foreign bank activities throughout the country.

Size of Foreign Bank Market in New York

The increasing integration of foreign banks into the U.S. banking market has led to a growing market share. According to a recent survey by the American Banker, foreign banks control over 20 percent of U.S. banking assets. In most cases, New York has been the focal point of this expansion. At December 31, 1995, there were 196 New York State licensed branches and agencies, with total assets of $544 billion.

As the world's leading financial center, New York has attracted most of the world's major international banks. Of the 50 largest banks outside the United States, ranked according to asset size, 44 maintain state-licensed branches or agencies in New York and an additional three have federally licensed branches. Of the 100 largest non-U.S. banks, 86 have state-licensed facilities, with another nine opting for federal status. In total, as of December 31, 1995, 244 foreign banks maintained state or federal branches or agencies in New York with total assets of $590 billion. These figures do not include the additional assets booked in offshore offices of the banks, which are managed out of New York.

Most of these U.S. assets are maintained by New York State licensees. As of December 31, 1995, the Banking Department had licensed 141 branches and 55 agencies of foreign banks to conduct business in New York. These State licensees have combined net total assets of $544 billion or 92 percent of the total foreign branch and agency assets in New York. Foreign banks maintain 48 federally licensed branches in New York, four of which have limited powers, analogous to agency status under the state's regulatory scheme. The total assets of these offices aggregated $46 billion at December 31, 1995.

The importance of New York as a center for foreign banks becomes apparent when one looks at all the foreign assets held in the United States. According to data published by the Federal Reserve Board, at December 31, 1995, foreign institutions maintained a total of 525 branch and agency offices in the United States with total assets of $762 billion. When U.S. banks, Edge Act corporations and Article XII investment companies owned by foreign banks are added in, there are 629 entities with $1 trillion in total assets. New York State accounts for 64 percent of total foreign bank assets held in the United States.

Japan has the largest country representation in New York with 52 branches and agencies and 19 banking subsidiaries. The combined total assets of these entities were $256 billion at December 31, 1995. The 34 largest Japanese banks and 45 of the largest 50 maintain offices in New York. In addition to those institutions conducting a banking business, 17 Japanese banks have representative offices. All of the Japanese branches, agencies, and subsidiary banks are licensed or chartered by New York State.

European banks also have significant representation in New York with a total of 95 federal and state branches, agencies and banking subsidiaries. At December 31, 1995 the total assets of these facilities were $311 billion. In terms of offices and business, (A statistical breakdown, with numbers updated to December 31, 1995 (where available) appears in Appendix 5) banks from France (13), Italy (12), Germany (12), Spain (10), Switzerland (5) and the United Kingdom (14) have the most significant presence. In total, banks from 62 countries maintain banking facilities or representative offices in New York (A complete listing of countries represented in New York appears in Appendix 2).

Economic Impact On New York

The importance of the foreign bank presence to the New York economy cannot be overemphasized. As of year-end 1992, foreign banks in New York employed over 50,000 persons with a total payroll close to $4 billion (All statistics in this section come from "Banking in a Global Economy: Economic Benefits to the United States from the Activities of International Banks" published by the Institute of International Bankers in September 1993. Numbers were derived from a survey conducted by the Institute, except for the New York City tax figure which was obtained from the Office of Tax Policy, New York City Department of Finance.) These businesses own or rent 25 million square feet of office space with annual rent payments of nearly $750 million. Total taxes paid to New York City alone, for fiscal year 1992, amounted to $197 million.

Organizational Forms and Powers

When deciding to establish a New York presence, foreign banks have several options with respect to organizational form. An overview of each type of facility follows.

Foreign Bank Branches and Agencies

Foreign bank branches and agencies are authorized under Article V of the Banking Law. The reasons for opening a New York office are extremely diverse. Many branches and agencies are involved in home country trade financing and lending to the U.S. subsidiaries of home country corporations. Some also invest in the securities markets and participate in large syndicated credits. Larger, more established branches and agencies deal with U.S. multinational companies, engage in U.S. corporate lending, and originate or manage large syndicated credits. Many New York branches participate in the interbank and foreign exchange markets. Some have decided to focus on trading and capital markets activities, as opposed to more traditional banking activities.

In New York State, a foreign bank may not maintain both an agency and a branch. Except for a branch's ability to accept domestic deposits, the difference between the two organizational forms is no longer significant. Under federal law, a foreign bank may branch only in its designated home state, but may open agencies elsewhere (Federal legislation enacted during 1994 may permit foreign banks to branch in multiple states in the future.)

Foreign bank branches and agencies possess investment and loan powers similar to those of domestic commercial banks. While Congress limited the activities of state-licensed branches and agencies to those permitted of federal branches by FBSEA, no significant banking activities appear affected by that limitation.

Legal Lending Limit

Before FBSEA, state-licensed branches had legal lending limits similar to those imposed on state-chartered banks and trust companies, while agencies had no statutory lending limitations. Under FBSEA, however, legal lending limits for both branches and agencies are now the same as those applicable to federal branches, which are similar to those imposed on national banks. In general, this means that credit extensions are limited to 15 percent of parent bank capital, plus an additional 10 percent, if secured. For the purposes of these limits, loans and other credit extensions to the same borrower made by all U.S. branches or agencies of a bank must be aggregated with New York credit extensions. However, extensions made by the head office, offshore branches or other branches located outside the United States need not be included for the purpose of any U.S.-imposed lending limitations.

Branches - Deposit Powers

Under the IBA, foreign bank branches that have selected New York as their home state enjoy a full range of deposit-taking powers equal to those of domestic banks. They may not, however, engage in domestic retail deposit activity (Under Part 346 of the FDIC Rules and Regulations, a foreign bank branch is exempt from the insurance requirement if its retail deposits, exclusive of deposits of non-U.S. citizens or residents or other foreign source deposits, do not exceed 5 percent of total third-party deposits based on monthly averages. This threshold was reduced to 1 percent of deposits by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. An uninsured branch is also prohibited from soliciting deposits from the general public and must notify each account holder of the non-insured status) unless they had FDIC insurance prior to December 19, 1991 (the effective date of FBSEA). Under FBSEA, foreign banks wishing to engage in retail deposit-taking in the United States may do so only through an insured, domestically-chartered subsidiary bank, which is discussed in more detail below. Branches that had FDIC insurance prior to FBSEA may continue to accept retail deposits, but no new insured branches may be established.

Foreign bank operations in New York, however, are primarily wholesale in nature. Most of those with insured branches serve a local ethnic constituency. As of December 31, 1995, only 15 state-licensed branches of foreign banks, with less than two percent of the aggregate resources of all foreign branches, carried FDIC insurance.

Agencies - acceptance of credit balances and deposits

• The powers of agencies of foreign banks are similar in many respects to those of branches, with the principal distinction involving the ability to accept domestic deposits. The Banking Law generally bars agencies from receiving deposits. However, there are three significant exceptions to the general prohibition:
• Agencies have the authority to maintain credit balances incidental to or arising from the exercise of their lawful powers.
• The statute also permits agencies to issue large-denomination obligations (i.e., $100,000 or more) to corporations, partnerships and unincorporated associations. These obligations may be evidenced by a promissory note, a certificate of deposit, a statement, or a book entry. Thirty days before the initial issuance of large-denomination obligations the agency must notify the Superintendent of such intention. (Under federal rules, agencies which issue such large denomination obligations to U.S. entities are classified as branches. Foreign banks for which New York is not their home state cannot, under federal law, have a branch in New York and therefore cannot issue large denomination obligations).
• The Banking Law also permits a foreign agency to accept deposits from non-U.S. citizens who are non-residents. The amounts may be less than $100,000 and may be taken from individuals. However, each depositor must be notified that accounts are not insured by the FDIC.

Fiduciary Activities

Both foreign branches and agencies are authorized to conduct fiduciary activities. However, the exercise of such powers must be specifically approved by the Superintendent. Thus far, 38 branches and agencies have obtained such permission, although not all currently engage in these activities.

Asset Pledge Requirement

Non-insured branches and agencies (Agencies were made subject to the asset pledge requirement early in 1994) are required to pledge assets with a depository approved by the Superintendent of Banks in an amount equal to the higher of: (i) five percent of third party liabilities (i.e., exclusive of amounts due to head office, other branches, subsidiaries or affiliates), excluding the branch or agency's International Banking Facility ("IBF"); (ii) one percent of total third party liabilities including the IBF; or (iii) $1 million.

Section 202-b(1) of the Banking Law stipulates certain high quality securities that may be deposited, and Part 322 of the Superintendent's Regulation expands the list to include highly rated commercial paper, certificates of deposit, bankers" acceptances and reserves held at the Federal Reserve Bank.

In the event the Superintendent takes possession of an uninsured foreign bank branch or agency, the pledged assets may be liquidated to provide funds for the liquidation and to begin repayment of deposits and credit balances as soon as practicable.

Asset Maintenance

Branches and agencies are subject to asset maintenance requirements which are imposed by the Superintendent on a case-by-case basis, as circumstances warrant. This provision of the Banking Law and General Regulations of the Banking Board require that an institution maintain eligible assets in excess of third party liabilities as a means of protecting creditors, and for the benefit of the public.

In general, eligibility refers to those assets for which there is a reasonable expectation of liquidation on a timely basis. The specific qualifications for eligibility for most classes of assets are defined in the Superintendent's Regulations. Amounts due from the head office, other non-U.S. offices and wholly-owned subsidiaries within the parent organization are not eligible. Thus, imposition of asset maintenance precludes a New York branch or agency from being a net provider of funds to non-U.S. segments of its organization.

For many years, all branches and agencies were required to maintain eligible assets equal to 108 percent of third party liabilities. In 1981, the Banking Board reduced the coverage to 105 percent and, in 1983, it further lowered the requirement to zero percent, with the allowance for a Superintendent's action to impose asset maintenance where appropriate.

Asset maintenance is typically imposed in situations in which there is a perceived weakness in the financial condition of the bank or in which it is perceived that circumstances in the home country may adversely affect the New York office. The SOSA reviews, mentioned earlier, are also used to identify situations where an asset maintenance requirement may be appropriate. Only a small percentage of New York State licensed branches and agencies are currently subject to an asset maintenance requirement.

Banks and Trust Companies

Foreign-owned banks and trust companies are established under Article III of the New York Banking Law or under the National Bank Act. These institutions are separately capitalized and have all the banking powers exercised by domestic banks. The regulation and supervision of foreign-owned banks and trust companies are identical to their domestic counterparts, except that under FBSEA, in addition to the chartering entity, the Federal Reserve has supervisory authority over subsidiaries of foreign banks, even if they are not Fed members and no domestic bank holding company is involved.

State-chartered, foreign-owned banks are a diverse group of 43 institutions. Included are: six full service banks, each with assets over $1 billion at December 31, 1995, and five other banks concentrating on corporate and interbank activities, each also exceeding $1 billion in total assets. Of the remaining 32 banks, 10 are not insured by the FDIC. In general, the activities of uninsured banks are confined to corporate trust operations and other fiduciary services, restrictions which are stipulated in their organization certificates.

Eighteen banks and trust companies, with aggregate assets of $20.9 billion at December 31, 1995, are subsidiaries of Japanese banks. Marine Midland Bank, with total assets of $20 billion, a subsidiary of HSBC Holdings plc, the holding company of The Hongkong and Shanghai Banking Corporation Limited, converted to state charter at year-end 1993. Three Israeli-owned banks have combined assets of over $6 billion. Dutch-owned European American Bank has total assets of about $8.5 billion. In aggregate, the 43 foreign-owned, domestically chartered banks and trust companies have assets of $61 billion. Foreign banks also own several federally-chartered banks operating in New York.

Investment Companies

Investment companies, which are chartered under Article XII of the Banking Law, are an organizational form unique to New York State. These institutions combine the powers of a stock and bond investor or trader with those of a commercial lender. Laws providing for the establishment of investment companies date from 1890.

The investment company universe represents a diverse mix of organizations. Although the statutes permit a wide variety of powers, investment companies have confined their investment and loan activities to specialized areas of finance and banking.

For many years, Banking Department policy, in general, had been that foreign banks were allowed to establish investment companies only if there were no other practicable means of entering the New York market. This explains the existence of a number of the existing Article XII corporations.

The foreign bank-owned investment companies have generally confined their businesses to activities ordinarily conducted by internationally-oriented commercial banks, including lending to foreign borrowers, foreign exchange trading and the issuance of standby and commercial letters of credit. With rare exception, investment companies have refrained from purchasing equities.

The principal restrictions on investment companies involve deposit taking, i.e., they may not engage in the business of receiving deposits in New York, and may only do so outside the state with the approval of the New York State Banking Board. However, investment companies may maintain credit balances in the same manner as foreign bank agencies. They are supervised similarly to Article III banks, but do not have the same restrictions as to business transacted with affiliated organizations.

At December 31, 1995, the aggregate total assets of the foreign-owned investment companies were $1.0 billion.

Representative Offices

Foreign banks may also maintain representative offices in New York. While such offices may not conduct a banking business, they nevertheless enable foreign banks to establish a presence in New York and become acquainted with the market. Often, a representative office leads to the establishment of another type of organization which engages in a banking business.

The application process for a representative office license includes, among other factors, a review of the applicant's financial condition and its home country supervision. Such banks, however, need not meet the standards required for a branch or agency license. Small banks, new banks, and banks from emerging countries with developing systems of bank supervision, that desire a New York presence, but which do not qualify for a branch or agency, may be able to satisfy the requirements for a representative office.

In mid-1992, New York State legislation was passed which required the licensure of all foreign bank representative offices. Before 1992, only banks with worldwide assets of less than $500 million had to be licensed. Larger institutions needed only to register with the Banking Department. Under the revised statute, all existing offices were grandfathered until September 1, 1994, by which date they had to be licensed. New entrants to the market must obtain a license from the state (There is no provision for federal licensure of representative offices) and must also be approved by the Federal Reserve Board. Representative offices are now subject to examination by the Banking Department and by the Federal Reserve.

At present, there are approximately 75 foreign banks in New York whose banking presence is limited to only a representative office. Several banks with New York branches, agencies or banking subsidiaries also maintain a representative office.

There are also a number of representative offices of foreign central banks and other specialized institutions in New York. These offices, however, are not subject to our supervision, nor are they considered to be foreign bank representative offices under federal rules.

Supervision

The New York State Banking Department's role in the supervision of foreign banks in New York begins with the application to establish a branch, agency, bank, investment company, or representative office. All organizations must receive the approval of the New York State Banking Board before commencing business. The screening process involves an extensive analysis of various factors, such as the business purpose of the proposed institution, the financial history and standing of the bank, home country supervision, the character and ability of proposed management, forecasts of expected operations, and the public needs that are to be served. A philosophy of national treatment governs foreign banking in the United States, meaning that foreign banks are given the same opportunity to enter New York State and the same powers, once established, as U.S. banks.

Until 1984, the New York State Banking Law provided that, for a foreign bank to establish a branch or subsidiary in New York, there had to be reciprocity for New York banks in the applicant's home country. This meant that a foreign bank could be licensed to maintain a deposit-taking branch in New York only if, under the laws of its home country, a New York bank could be authorized to maintain a branch or to own a bank. Once standards were satisfied for entry purposes, a policy of national treatment applied, in that foreign owned banks and branches of foreign banks were accorded the same treatment as domestic banks.

The entry-reciprocity requirement was eliminated from New York law in 1984, principally to bring the statute in line with the IBA which embraced the policy of national treatment. IBA ensures that New York and foreign-owned banks are regulated in an equitable manner. A major benefit of this policy is that it allows open entry into the U.S. market and permits a free and efficient flow of capital.

Once established in New York, foreign institutions are subject to the examination and supervision process of the Banking Department. The Banking Law in New York mandates annual examinations for all banks and trust companies, and for those investment companies which have received permission to conduct an out-of-state deposit business. Before December 17, 1991, there was no specific statutory examination interval for foreign branches and agencies. As a matter of policy, branches and agencies were examined annually for many years. However, examination intervals were made more flexible in 1985, prompted by the establishment of the Revised Basle Concordat. This agreement outlined the responsibilities for the supervision of banks" foreign offices by both parent and host authorities. With the passage of FBSEA, however, Congress mandated that all branches and agencies be examined every 12 months. Although the statutory requirement is met through examinations conducted by either the licensing authority, New York State, or by the Federal Reserve, the policy in New York during the past few years has been to conduct annual joint examinations of all foreign branches and agencies with the Federal Reserve Bank of New York. While most branches and agencies will continue to be examined jointly, beginning in 1995, a number of these entities will be examined on an alternate year basis by either New York State or the Federal Reserve.

Formal examinations are supplemented by periodic visits, which provide an update of the condition of the branch or agency since the previous, comprehensive examination. These visits are performed by representatives of the Banking Department's Foreign Commercial Banks Division who are responsible for maintaining the relationship with the individual institutions.

The Foreign Commercial Banks Division was established in 1980 as a result of the dramatic expansion of foreign bank activities. By creating a unit devoted solely to the supervision of foreign banks, the Department was able to develop expertise in this area, enhancing its ability to administer its regulatory responsibilities. Headed by a deputy superintendent of banks and assisted by a staff of 24, division personnel have acquired an intimate working knowledge of individual institutions and parent organizations. An ongoing dialogue with regulatory agencies in other countries has further enhanced the supervisory process, and the exchange of information among all parties has proven invaluable in handling potential problem situations.

The Basle Concordat stresses the importance of close cooperation between host and parent country banking authorities. While only central banks and other national authorities are members of the Basle Supervisors Committee, the New York State Banking Department, because of its location in a preeminent banking center, is kept informed of the Committee proceedings.

The primary tool used in the supervision process is the on-site examination. The scope of the review of foreign bank offices includes an evaluation of risk management, assets, credit administration, credit documentation, internal operating procedures and controls, external and internal auditing, funding sources, off-balance sheet activities and compliance with laws and regulations. In addition, an evaluation of local management and parent bank supervision is made.

Many of the general concepts and techniques utilized in the examination of banks and trust companies are also used in foreign branches and agencies. The report format used in the examination of branches and agencies of foreign banks was developed jointly with federal bank regulatory agencies. When an examination is completed, copies of the report reflecting the examiners" findings are supplied to the licensed entity in New York and to the head office of the bank. Findings are also shared with the Federal Deposit Insurance Corporation, for insured institutions, and, in instances where examinations are conducted independently, with the Federal Reserve Bank of New York.

Conclusion

The dual banking system for foreign banks was established with the passage of the IBA in 1978. The choice of federal or state license depends upon the individual institution. In general, larger institutions have opted for the state alternative.

During the late 1970s and very early 1980s, there was some preference for federal licensure due to New York State's reciprocity and asset maintenance rules. Since these rules were amended in the mid-1980s, foreign banks entering the New York market have overwhelmingly chosen the state option. Between December 31, 1987 and December 31, 1995, the number of state licensees has risen from 171 to 196, while federal licensees have fallen from 56 to 48. Currently, there is little or no difference between what state and federal licensees can do. In most instances, however, New York State examination charges and assessments are considerably lower than for similarly sized federally licensed counterparts.

During its long history of regulation and supervision of foreign banks, the Banking Department has generally encouraged the entry of foreign banks into the New York market and has been responsive to the needs of the industry. The origin by the New York State Banking Department of the concept of the International Banking Facility ("IBF") is a case in point. The dual purpose of the IBF proposal was to reestablish New York as the premier international financial center and stimulate the local economy. By exempting certain liabilities of non-residents of the United States from reserve requirements and interest rate restrictions, and permitting certain classes of assets to be free of New York State and City taxes, jobs that had previously been siphoned off to London and offshore money centers were returned to New York.

The Department was the first supervisory agency to promote passage of IBF legislation. New York legislation exempting IBF income from state or local taxation paved the way for action by the Federal Reserve Board to waive interest rate ceilings and reserve requirements for IBF transactions.

The Banking Department has supported and instituted a host of changes in the banking law and regulations. While not putting at risk the concept of safety and soundness, the changes are in line with the deregulation movement, and have permitted licensees to compete more effectively. For example, the Omnibus Banking Law of 1984 permitted agencies to accept deposits other than from citizens and residents of the United States, eliminated the need for reciprocity for branches, and removed the requirement of separate money transmitter licenses. Other actions have been an elimination of the asset maintenance requirement, excepting certain situations, and a broadening of the definition of eligible assets.

The Department continues to be most concerned with the safety and soundness of foreign banks doing business in New York State. There is also a genuine recognition of the cultural and economic contributions these banks make both to New York and to the United States. The Department will continue its efforts to encourage a hospitable environment and a stable regulatory climate for those foreign banks electing to do business here.

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