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Bank Holding Company Supervision Manual

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Bank Holding Company Supervision Manual International Banking Activities Section 2100.0 2100.0.1 FOREIGN OPERATIONS OF banking and financing operations, some of U.S. BANKING ORGANIZATIONS which the parent banks themselves are not per- mitted to undertake under existing laws. These U.S. banking organizations may conduct a wide corporations may act as holding companies, pro- range of overseas activities. The Federal vide international banking services, and finance Reserve has broad discretionary powers to regu- industrial and financial projects abroad, among late the foreign activities of member banks and other activities. bank holding companies (BHCs) so that, in Sections 25 and 25A of the Federal Reserve financing U.S. trade and investments abroad, Act grant Edge Act and agreement corporations these U.S. banking organizations can be com- authority to engage in international banking and petitive with institutions of the host country foreign financial transactions. The Board’s without compromising the safety and soundness Regulation K (12 CFR 211.6) also outlines the of their U.S. operations. permissible activities of Edge and agreement Some of the Federal Reserve’s responsibili- corporations in the United States. Among other ties over the international operations of member activities, these corporations may (1) make for- banks (national and state member banks) and eign investments that are broader than those BHCs include permissible for member banks, and (2) conduct a deposit and loan business in states, including • authorizing the establishment of foreign those where the parent of the Edge or agreement branches of national banks and state member corporation does not conduct such banking banks and regulating the scope of their activi- activities, provided that the business is strictly ties; related to international or foreign business. For- • chartering and regulating the activities of eign banks may own Edge Act and agreement Edge Act and agreement corporations, which corporations. These corporations are examined are specialized institutions used for interna- by the Federal Reserve annually.1 tional and foreign business; • authorizing foreign investments of member banks, Edge Act and agreement corporations, 2100.0.3 SUPERVISION OF FOREIGN and BHCs and regulating the activities of BANKING ORGANIZATIONS foreign firms acquired by such investors; and OPERATING IN THE UNITED STATES • establishing supervisory policy and practices regarding foreign lending by state member Although foreign banks have been operating in banks. the United States for more than a century, before 1978 the U.S. branches and agencies of these The Federal Reserve examines the interna- banks were not subject to supervision or regula- tional operations of state member banks, Edge tion by any federal banking agency. The Interna- Act and agreement corporations, and BHCs tional Banking Act of 1978 (IBA) created a principally at the U.S. head offices of these federal regulatory structure for the activities of organizations. When appropriate, the Federal foreign banks with U.S. branches and agencies. Reserve conducts examinations at the foreign The IBA also established a policy of “national operations of a U.S. banking organization in treatment” for foreign banks operating in the order to review the accuracy of financial and United States to promote competitive equality operational information maintained at the head between them and domestic institutions. This office as well as to test the organization’s adher- policy generally gives foreign banking organiza- ence to safe and sound banking practices and to tions operating in the United States the same evaluate its efforts to implement corrective mea- powers as U.S. banking organizations and sub- sures. Examinations abroad are conducted in jects them to the same restrictions and obliga- cooperation with the responsible host-country tions that apply to the domestic operations of supervisor. U.S. banking organizations. 2100.0.2 EDGE ACT AND 1. 12 CFR 211.13(b). See also SR letter 90-21, “Rating AGREEMENT CORPORATIONS System for International Examinations.” Edge Act and agreement corporations are U.S. BHC Supervision Manual February 2019 financial institutions that carry out international Page 1 International Banking Activities 2100.0 The Foreign Bank Supervision Enhancement dential standards for large U.S. BHCs) to Act of 1991 (FBSEA) increased the responsibil- strengthen supervision and regulation of foreign ity and the authority of the Federal Reserve to banking organizations.4 The final rule recog- regularly examine the U.S. operations of foreign nized that the U.S. operations of foreign banking banks. Under the FBSEA, U.S. branches and organizations had become increasingly com- agencies of foreign banks must be examined plex, interconnected, and concentrated, and on-site at least once every 12 months, although established a number of enhanced prudential this period may be extended to 18 months if the standards for foreign banking organizations to branch or agency meets certain criteria.2 Super- help increase the resiliency of their operations. visory actions resulting from examinations may The requirements of the final rule will bolster be taken by the Federal Reserve alone or in the capital and liquidity positions of the U.S. conjunction with other agencies. Representative operations of foreign banking organizations and offices of these institutions are also subject to promote a level playing field among all banking examination by the Federal Reserve.3 firms operating in the United States. A foreign The Federal Reserve coordinates the supervi- banking organization with U.S. non-branch sory program for the U.S. operations of foreign assets of $50 billion or more is required banking organizations with other federal and to establish an intermediate holding company state banking agencies. Since a foreign banking over its U.S. subsidiaries, which will facilitate organization may have both federally chartered consistent supervision and regulation of the and state-chartered offices in the United States, U.S. operations of the foreign bank.5 The the Federal Reserve plays a key role in assess- foreign-owned U.S. intermediate holding com- ing the condition of the organization’s entire pany is generally subject to the same risk-based U.S. operations and the foreign banking organi- and leverage capital standards applicable to U.S. zation’s ability to support its U.S. operations. BHCs. The intermediate holding companies In 2014, the Federal Reserve Board approved are also subject to the Federal Reserve’s rules a final rule required by section 165 of the Dodd- pertaining to regular capital plans and stress Frank Act (which also requires enhanced pru- testing. 4. See 79 Fed. Reg. 17,240 (March 27, 2014) and the Federal Reserve Board’s Regulation YY (12 CFR part 252); and Dodd-Frank Act, Pub. L. No. 111-203, July 21, 2010; 124 Stat. 1376. 5. The Economic Growth, Regulatory Relief, and Con- sumer Protection Act (EGRRCPA) increases the $50 billion asset threshold in section 165 in two stages. Immediately on the date of enactment, bank holding companies with total consolidated assets of less than $100 billion were no longer subject to section 165.6. Eighteen months after the date of enactment, the threshold is raised to $250 billion. EGRRCPA also provides that the Board may apply any enhanced pruden- 2. 12 CFR 211.26(c). tial standard to bank holding companies between $100 billion 3. 12 CFR 211.26(a)2. and $250 billion in total consolidated assets. See the Board’s July 6, 2018, “Statement regarding the impact of the Eco- BHC Supervision Manual February 2019 nomic Growth, Regulatory Relief, and Consumer Protection Page 2 Act (EGRRCPA).” Formal Corrective Actions Section 2110.0 WHAT’S NEW IN THIS REVISED 4. the elements of a corrective order SECTION 5. temporary orders 6. written agreements This section has been updated for the various 7. suspensions and removals types of formal supervisory actions—corrective 8. enforcement of orders actions (i.e., cease and desist orders (including 9. civil money penalties placing limits on the activities or functions of a 10. termination of certain nonbank subsidiary BHC or institution-affiliated party), written activities or ownership agreements, suspensions (also removals and prohibitions), nonbank activity termination, vio- lations of orders and written agreements, civil- 2110.0.2 TYPES OF CORRECTIVE money penalties (revised penalty amounts), etc. ACTIONS In addition, the cease-and-desist order dis- cussion has been expanded to include what an Generally, under section 8 of the Federal order may require from a BHC or person, and it Deposit Insurance Act (FDI Act), 12 U.S.C. provides a discussion of the nature of affirma- 1818(b), the Board may use its cease and desist tive actions by a BHC or person that may need authority and other enforcement tools against to be taken to restore the BHC to a safe and (1) a BHC1, (2) a nonbank subsidiary of a BHC, sound condition. The prohibition and removal and (3) any institution-affiliated party. The term discussion has been expanded to detail what ‘‘institution-affiliated party’’ includes any direc- entities or individuals that the Board may take tor, officer, employee, controlling shareholder action against. It also discusses the prohibition (other than a BHC), or agent, and any other against any individual who has been convicted person who has filed or is required to file a of a crime involving dishonesty, breach of trust, change in control notice. It also includes any or money laundering, from serving, participat-
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