Industry Letters

Foreign Branches and Agencies Establishing Operating Subsidiaries - Guidance Letter

June 4, 2001

TO EACH INSTITUTION ADDRESSED:

This letter provides guidance to those foreign bank branches and agencies licensed by the New York State Banking Department (the "Department") that may wish to establish one or more subsidiaries to conduct business in which the branch or agency itself is authorized to engage.

The Department recognizes that various legal, business or tax reasons often make it desirable for foreign banking organizations ("FBOs") to conduct certain activities or hold investments through a separate legal vehicle. In some instances, a FBO may want its New York-licensed branch or agency to own a subsidiary. For example, some asset-securitization transactions may involve formation of a special purpose vehicle by the New York branch or agency. Similarly, legal restrictions, such as the "securities push-out" provisions of the Federal Gramm-Leach-Bliley Act, may make it necessary or desirable to conduct certain activities in a separate company held as a subsidiary of the New York branch or agency.

The Department is committed to maintaining a regulatory environment that offers FBOs flexibility to structure their businesses to achieve efficiency and functionality. To that end, the Department herein expresses its formal view that New York-licensed foreign branches and agencies have the authority to establish subsidiaries, and this letter provides guidance pertaining to the establishment of such operating subsidiaries by FBOs.

In general, FBOs seeking to acquire, establish, or make an additional investment in a branch or agency subsidiary (whether such subsidiary is a corporation, or other type of legal entity such as a limited liability company), are advised to follow the procedures applicable to the establishment of operating subsidiaries by New York banks and trust companies set forth in Part 14.3 of the General Regulations of the Banking Board. Part 14.3(a) provides prior notice procedures for certain subsidiary investments exceeding the lesser of one percent of a bank's or trust company's capital stock, surplus fund and undivided profits, or five million dollars. Since a foreign bank's worldwide capital stock, surplus fund and undivided profits do not provide a comparable measure of the proportionality of the investment in the subsidiary to the totality of the foreign bank's New York assets, FBOs are advised to follow the procedures in Part 14.3(a) when the investment in a subsidiary will exceed the lesser of one-tenth of one percent (0.1%) of New York assets or five million dollars.

FBOs may use the after-the-fact notice procedures in Part 14.3(c) if the requirements of that section are met. For purposes of meeting the requirement in Part 14.3(c)(1), a branch or agency would need to meet the definition of "well capitalized" that the Federal Reserve Board ("FRB") uses when authorizing an extended examination cycle for branches and agencies (see 12 CFR 211.26(c)(2)(i)(C)). This requirement is that a FBO’s most recently reported capital adequacy position consists of, or is equivalent to, Tier 1 and total risk-based capital ratios of at least 6 percent and 10 percent, respectively, on a consolidated basis; or the branch or agency has maintained on a daily basis, over the past three quarters, eligible assets in an amount not less than 108 percent of the preceding quarter's average third party liabilities, and sufficient liquidity currently available to meet obligations to third parties.

For purposes of Part 14.3(c)(2), a comparable examination rating for a foreign branch or agency will be a composite Risk Management, Operational Controls, Compliance, and Asset Quality (ROCA) rating of at least "1" or "2" at its most recent examination, or in the case of a branch or agency that has not yet been examined, the branch or agency has managerial resources that the Department otherwise determines are satisfactory.

The Department will apply other relevant regulatory standards to branches and agencies that maintain operating subsidiaries in light of the differences in corporate structures between New York-chartered banks and trust companies and foreign branches or agencies. Generally speaking, a foreign branch or agency and its subsidiary or subsidiaries will be viewed as a consolidated entity when such consolidation is necessary to calculate a limitation or otherwise give effect to the intent of a statute or regulation, including, for example, for purposes of calculating asset pledge or asset maintenance requirements, or branch or agency assessments.

While the Department will permit foreign branches and agencies to invest in subsidiaries, FBOs should consult with the FRB concerning their proposed investments in such subsidiaries. The FRB, under the International Banking Act, has general supervisory authority over the operations of FBOs in the United States, including the investments booked in FBO branches and agencies in the U.S. It is the FRB's position that a branch or agency of a FBO has no existence separate and apart from the FBO itself. Thus, any investment by a branch or agency is a direct investment by the FBO and as such is subject to the Federal Bank Holding Company Act. Therefore, FBOs are advised to assure themselves that any investment in a subsidiary by a New York-licensed branch or agency is permissible under the FRB's regulations governing FBO investments, and complies with any approval or notice requirements of the FRB under, for example, the Bank Holding Company Act or the FRB's Regulation K. The Department intends to consult with the FRB concerning such investments.

The Department may in the future issue regulations or propose modifications to Part 14 of the Banking Board's regulations specifically to cover investments in subsidiaries by FBOs. However, until further notice, this letter and Part 14 should be used as general guidance for FBOs' investments in operating subsidiaries. Please direct any questions concerning this guidance to the Department's Legal Division at (212) 618-6591.

Very truly yours,

Elizabeth McCaul
Superintendent of Banks