Examination Manual for U.S. Branches and Agencies of Foreign Banking Organizations Second Printing, September 1997 Inquiries or comments relating to the contents of this manual should be addressed to: Director, Division of Banking Supervision and Regulation Board of Governors of the Federal Reserve System Washington, D.C. 20551 Copies of this manual may be obtained from: Publications Services Mail Stop 127 Board of Governors of the Federal Reserve System Washington, D.C. 20551 The price is $40.00 per copy. Remittance should be made payable to the Board of Governors of the Federal Reserve System by check or money order, drawn on a U.S. bank; or by VISA or Master Charge. Updates are available at an additional charge. For information about updates or to order by credit card, call 202-452-3244. Table of Contents Section Section 1000 INTRODUCTION 3230 Deposit Accounts 3240 Due From/Due to Related Offices 1000 Acknowledgements 1010 General Introduction OFF-BALANCE SHEET 1020 Format and Use of Manual ACTIVITIES 3300 Off-Balance-Sheet Activities 3310 Guarantees Issued 2000 GENERAL 3320 Letters of Credit 3330 Trading Activities 2000 Enhanced Framework for Supervising the U.S. Operations of Foreign OTHER Banking Organizations 3400 Income and Expenses 2001 Strength-of-Support Assessment for 3410 Management Information Systems Foreign Banking Organizations 3420 Other Assets and Other Liabilities with U.S. Operations 3430 Private Banking 2002 Examination Planning and the Assessment of the U.S. Operations of Foreign Banking Organizations 2003 Rating System for U.S. Branches 4000 OPERATIONAL CONTROLS and Agencies of Foreign Banking Organizations 4000 Introduction 2010 Risk-Focused Approach to 4010 Internal and External Audits Pre-Examination Planning 4020 Internal Control 2020 Loan Sampling 4030 Emergency Preparedness Measures 2030 Workpapers 4040 Cash Accounts 2040 Supervisory Follow-up Actions 4050 Consigned Items and Other Nonledger Control Accounts 4060 Payment System Risk and Electronic 3000 RISK MANAGEMENT Funds Transfer Activities 3000 Introduction 3010 Credit Risk Management 5000 COMPLIANCE 3020 Asset-Based Lending 3030 Asset Securitization 5000 Introduction 3040 Bankers’ Acceptances 5010 Financial Recordkeeping and 3050 Commercial Loans Reporting Regulations 3060 Corporate Restructurings 5020 Asset Maintenance 3070 Due From Nonrelated Banks 5030 Asset Pledge and Capital Equivalency 3080 Financing Foreign Receivables Deposit 3090 Other Real Estate Owned 5040 Suspicious Activities 3100 Real Estate Loans 5050 International Banking Facilities 3110 Real Estate Construction Loans 5060 Review of Regulatory Reports 3120 Securities and Broker Dealer Loans 5070 Other Compliance Matters 3130 Securities Activities ASSET AND LIABILITY 6000 ASSET QUALITY MANAGEMENT 3200 Funds Management and Liquidity 6000 Introduction 3210 Interest Rate Risk Management 6010 Classification of Credits 3220 Borrowed Funds 6020 Transfer Risk Branch and Agency Examination Manual September 1997 Page 1 Table of Contents Section Section 7000 APPENDICES 7030 Survey of Foreign Regulation in Selected States 7010 Federal Deposit Insurance—Uninsured & Insured Branches 7020 Subsequent Events, Litigation, and 8000 SUBJECT INDEX Other Legal Matters September 1997 Branch and Agency Examination Manual Page 2 Acknowledgements Effective date July 1997 Section 1000.1 The Examination Manual for U.S. Branches and opment of the manual. Accordingly, this manual Agencies of Foreign Banking Organizations was reflects general policies and procedures to be prepared under the direction of the Federal used in conducting examinations of individual Reserve Board and Reserve Bank supervision branches and agencies of foreign banking personnel. Federal Reserve staff acknowledge organizations. and thank the staff of the New York State The manual will be updated periodically to Banking Department, the Federal Deposit Insur- reflect changes in examination policies and pro- ance Corporation, the Office of the Comptroller cedures. We solicit the input and contribution of of the Currency, and the Conference of State all supervisory staff and others in the refining Bank Supervisors for contributing to the devel- and modification of its contents. Branch and Agency Examination Manual September 1997 Page 1 General Introduction Effective date July 1997 Section 1010.1 Foreign banking organizations have had a long- International Banking Act of 1978 instructed the standing presence in the United States. Their Federal Reserve to use, to the extent possible, operations encompass a wide variety of banking the examination reports of other state and fed- and nonbanking activities, through subsidiaries, eral regulators in carrying out its responsibility branches, agencies, and representative offices. for overseeing the U.S. operations of foreign These activities are located primarily in the banking organizations. Enactment of FBSEA major U.S. cities where finance and international was intended to fill gaps in the supervision and trade are most actively conducted. regulation of the U.S. operations of foreign Branches of foreign banking organizations banks and to ensure that the banking policies are licensed by the state banking authorities or established by Congress are implemented in a the Office of the Comptroller of the Currency. In fair and consistent manner with respect to all addition, certain grandfathered branches may be entities (domestic and foreign) conducting a insured by the Federal Deposit Insurance Cor- banking business in the United States. FBSEA poration. Agencies are licensed by the state established uniform federal standards for entry banking authorities. The Federal Reserve, there- and expansion of foreign banks in the United fore, shares its regulatory responsibility with States and substantially increased the role of the other state and federal supervisory authorities. Federal Reserve in the supervision and regula- Separately, the Board of Governors delegates tion of their U.S. activities. Under FBSEA, the certain of its supervisory and regulatory func- Federal Reserve may examine any office or tions to the Reserve Banks and directs, coordi- affiliate of a foreign bank in the United States nates, and reviews actions taken by the Reserve and is to coordinate such examinations with the Banks. OCC, FDIC, and appropriate state banking Prior to the December 1991 passage of the supervisors to the extent possible. A comprehen- Foreign Bank Supervision Enhancement Act sive set of procedures has been developed to (FBSEA), the examination of federal and state provide a uniform framework to be used in branches and agencies of foreign banks was examining branches and agencies of foreign largely the responsibility of the respective licens- banking organizations. ing authorities (the states and the OCC). The Branch and Agency Examination Manual September 1997 Page 1 Format and Use of Manual Effective date July 1997 Section 1020.1 FORMAT In general, key examination objectives are designed to determine how well risk is managed This manual is divided into sections dealing by: (1) determining the adequacy of the system with particular banking activities that relate of internal control and of policies, practices, and specifically to the examination and evaluation of procedures; (2) evaluating the scope and adequacy U.S. branches and agencies1 of foreign banking of the internal control environment and audit organizations (FBOs). Each section, in turn, function; (3) determining compliance with laws, may be divided into up to five subsections, regulations, and rulings; and (4) evaluating depending upon the topic of discussion. These adherence with internal policies and procedures. subsections are: These objectives all relate to the overall assess- ment of the branch as described in the ROCA • Overview. rating system and ultimately could result in • Examination Objectives. the implementation of corrective action, if • Examination Procedures. appropriate. • Internal Control Questionnaire. • Audit Guidelines. Examination Procedures The manual is intended to provide a compre- hensive overview of banking activities that may These subsections include procedures to be be conducted in a wide variety of branches. Not performed during a comprehensive examination all activities will be conducted by every branch. of the particular area of examination interest. Accordingly, the examiner-in-charge should plan There may be instances where the procedures the examination, particularly as it relates to will not apply in their entirety to a particular examination procedures and internal control branch; thus, the examiner-in-charge should questionnaires, based on the range of activities exercise judgement as to which procedures will of the particular branch under examination. be conducted during the on-site examination. (This point is discussed in greater detail below.) The procedures to be addressed should be based upon the particular characteristics of the branch under examination, such as size, range, and Overview complexity of activities and condition. The materiality and significance of a given area of a The Overview section presents background branch’s operations are primary considerations information on the respective topics. This infor- in determining the scope of the examination and mation will be supplemented and reinforced the procedures to be performed. Examiner flex- through the supervisory agencies’ educational ibility in this respect will result in examinations programs, updates to existing supervisory poli- that are tailored to fit