Section 11.1 International Banking
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INTERNATIONAL BANKING Section 11.1 INTRODUCTION.............................................................. 2 U.S. Banking Activities Abroad .................................. 28 Overview of International Bank Activities .................... 2 Offshore U.S. Branches ........................................... 28 Examination Objectives ................................................. 2 International Banking Facilities (IBF) ..................... 28 COUNTRY RISK MANAGEMENT ................................. 3 LAWS AND REGULATIONS ....................................... 29 Concept of Country Risk ................................................ 3 Part 347-International Banking .................................... 29 Country Risk Management System ................................ 3 Part 349-Retail Foreign Exchange Transactions .......... 29 Policies and Procedures .................................................. 4 Dodd-Frank Act ........................................................... 29 Rating Country Risk ....................................................... 4 Regulation YY - Enhanced Prudential Standards ........ 30 Country Exposure Concentrations.................................. 5 Capital Stress Tests .................................................. 30 Risk Mitigation - Exit Strategies .................................... 5 Increased Requirements ........................................... 30 Transfer Risk .................................................................. 6 Regulation K - International Banking Operations ....... 30 Interagency Country Exposure Review Committee Joint Agency Statement on PBOs ................................ 30 (ICERC) ......................................................................... 6 USA PATRIOT Act..................................................... 30 Transfer Risk Reserve Requirements ............................. 6 Financial Crimes Enforcement Network (FinCEN) and Country Risk Exposure Report ...................................... 7 Office of Foreign Assets Control (OFAC) .................. 31 INTERNATIONAL ACTIVITIES..................................... 7 Foreign Corrupt Practices Act ..................................... 31 International Lending ..................................................... 7 GLOSSARY .................................................................... 32 International Lending Risks ........................................... 8 Forms of International Lending ...................................... 9 Trade Finance ............................................................. 9 Letters of Credit ......................................................... 9 Bankers Acceptances ............................................... 10 Acceptances Discounted .......................................... 11 Foreign Receivable Financing .................................. 11 Government-guaranteed Trade Finance ................... 11 Loans to Foreign Banks ........................................... 12 Domestic Loans ........................................................ 13 Loans to Foreign Business or Individuals ................ 13 Loan Syndications .................................................... 13 Placements ............................................................... 14 International Lending Policies ..................................... 14 Other International Activities ....................................... 15 Investments .............................................................. 15 Private Banking ........................................................ 15 Correspondent Banking ............................................ 16 Deposit Accounts ..................................................... 17 Borrowings ............................................................... 18 FOREIGN EXCHANGE.................................................. 18 The Foreign Currency Exchange Market ..................... 18 Foreign Exchange Trading ........................................... 19 Foreign Exchange Risks ............................................... 19 Due-From Nostro Accounts ......................................... 20 Examination Guidance for Foreign Exchange ............. 21 STRUCTURE AND SUPERVISION .............................. 21 Foreign Banking Organizations (FBOs) in the U.S. ..... 21 Branches and Agencies of Foreign Banks ................ 22 Edge and Agreement Corporations .......................... 22 Representative and Commercial Lending Offices .... 22 FBO Supervision and Examination Guidance .............. 22 Insured Branches ...................................................... 23 FBO Reporting Requirements ...................................... 24 Parallel-Owned Banking Organization (PBO) ............. 24 Supervisory Control Definition ................................ 24 PBO versus Affiliate Relationships .......................... 25 Business Structure of PBOs ..................................... 27 Supervisory Risks..................................................... 27 RMS Manual of Examination Policies 11.1-1 International Banking (1/18) Federal Deposit Insurance Corporation INTERNATIONAL BANKING Section 11.1 INTRODUCTION extend credit, issue and confirm letters of credit, maintain cash and collection items, maintain correspondent bank This section of the Manual of Examination Policies accounts, accept and place deposits, and borrow funds. provides a broad perspective of international banking. It Other activities are more closely associated with begins by addressing the concept of country risk, which is international banking, such as creating acceptances and the primary risk associated with international banking trading foreign currencies. activities. The section then discusses common international banking products and services such as foreign The most important element of international banking not loans, investments, placements,1 currency exchange, and found in domestic banking is country risk, which involves funds management. the political, economic, and social conditions of countries where a bank has exposure. Examiners must consider Within the discussion on foreign loans, significant country risk when evaluating a bank’s international attention is given to trade finance, which is an important, operations. yet declining, segment of U.S. banks’ international credit exposures. Due to increased globalization of international Despite similarities between domestic and international markets and competition from non-bank intermediaries, activities, banks often conduct international operations in a U.S. banks have become less involved in trade finance and separate division or department. Large banks typically more involved in direct loans to foreign banks, operate an independent international division, which may participations in syndicated credit facilities, and loans to include a network of foreign branches, subsidiaries, and individuals and foreign businesses. affiliates. Smaller banks, or banks with limited international activity, often use a separate section that This section also discusses the international banking works with a network of foreign correspondent banks or operations of foreign banks in the U.S., the operational representative offices. In either case, international activity structures established by U.S. banks in order to conduct is usually operated by separate management and staff banking activities in foreign jurisdictions, and parallel- using distinct accounting systems and internal controls. owned banking organizations (PBOs). A PBO exists where there is common control or ownership of domestic Given the risks introduced by doing business in a foreign and foreign banks outside of a traditional bank holding country, particularly in emerging markets, examiners must company structure (similar to chain banks). The PBO review and understand international activities when structure results in a global financial organization that may assessing a bank’s overall condition. Furthermore, not be subject to comprehensive, consolidated supervision examiners should coordinate international reviews with standards and could present unique supervisory concerns. Bank Secrecy Act (BSA), Anti-Money Laundering (AML), and Office of Foreign Assets Control (OFAC) Finally, this section discusses supervisory methods and reviews. examination guidance relating to the supervision of foreign banking organizations (FBOs) and provides references to Examination Objectives applicable laws and regulations. The section concludes with a glossary of international banking terms. The objectives of examining international activities are largely the same as those of examining domestic activities. Overview of International Bank Activities However, the specialized nature of international banking may require modification of some examination activities While the number of U.S. banks involved in international due to different accounting procedures, documentation finance is relatively small in comparison to the overall requirements, or laws and regulations. For example, number of U.S. banks, many large institutions have notable access to information at foreign branches varies according cross-border exposure and significant international to foreign laws governing such access and the FDIC’s activities. Moreover, in certain markets, a considerable relationships with foreign supervisors. number of smaller banks continue to allocate significant resources to international banking. The examination of international activities is usually conducted concurrently