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This paper addresses the issue of entry of foreign banks into the United States. Laws regulating foreign banks activity differ from country to country depending on policies and objectives. Some countries impose restrictions and limitations on foreign banks operations on their territory in order to protect local banking system against strong competitors. Some countries due to their political system and local traditions are very hostile to foreign banks. For example former Soviet Union and socialist countries were absolutely unattractive for the foreign banks just because political and economic systems of these countries did not treat favorably private property and entrepreneurial activity. Emerging market of the Russian Federation in contrary is a very attractive piece of cake for the foreign banks, but due to the weakness of the local bank institutions and necessity to protect them the Government has imposed certain imitation on foreign banks activity, the major of which is that aggregated assets of all foreign banks in Russia in a given period of time may not exceed 12% of the sum of assets of all banks in Russia.

Highly industrialized countries, with highly developed banking industry are more concerned with problems of safety and soundness of the foreign banks structures on their territory and regulatory equality for the local and foreign banks.

This paper will review the foreign banks entry requirements and restrictions which exist both on federal and state levels of the United States, organizational forms in which foreign bank may establish their presence in US, scope of the allowed banking operations depending on organizational form.

Foreign Banks In The United States

The United States belong to that category of countries that treats foreign bank operations on its territory as factor for sound competition in banking industry and does not impose any discriminative restrictions on foreign banks entry into US market. Moreover, the concept of reciprocity which existed in US prior to enactment of the International Banking Act of 1978, was replaced by the concept of national treatment. National treatment allows entry of foreign banks on regulatory basis comparable to that applied to domestic banks in the United States, while in contrast, reciprocity allows entry on a regulatory basis comparable to that applied to U.S. banks in the foreign banks home country. In other words, when a foreign bank enters the U.S. banking regulatory system it will be treated as a domestic U.S. bank and not analogous to the way U.S. banks are regulated in the foreign banks home country. In this way, the policy of competitive equality is fulfilled. The policy was described as being to establish a federal regulatory framework which is non-discriminatory in its effects on domestic and foreign banks and achieves essential equality of competitive opportunity vis--vis domestic institutions in similar circumstances.

By way of comparison, the European Union decided that the policy of nation treatment would not be adequate to achieve the goal of a single unified market within the European Community. It was believed that if twelve countries of the European Community adopted the policy of national treatment with respect to each other, even if each applied the policy without discrimination, ultimately the progress could only rise to a point where there would be twelve separate jurisdictions in which different rules would continue to exist. Accordingly, the members of the European Community decided not to adopt national treatment policy with respect to each other. Instead, they decided in favor of different policy interfacing.

Why did US elected to apply the national treatment policy and not reciprocity or interfacing. The main reason for this decision was an administrative simplicity. That means that US regulatory authorities avoid a necessity to adjust their banking policy to every particular country and every foreign bank in question. This policy also facilitates entry of the foreign banks in US, as it allows foreign banks entry on national level, rather than entry on a State level and tends to deepen US financial markets.

Domestic and international financial markets continued to grow in size and complexity throughout the 1980th. The number of foreign bank operations in the United States continued to grow rapidly. Foreign banks U.S. assets surged 9% in the year ended last June 30 [June 1989,] more than twice the growth at U.S. banks... As a result, foreign banks increased their market share of U.S. banking assets by almost a full percentage point, to 22.6%. Foreign banks hold an even bigger share of a key component of U.S. banking assets - commercial and industrial loans. An 8.9% growth rate increased those holdings to 28.5% of the US market. And for the first time, the survey found , the U.S. holdings of a foreign bank - Bank of Tokyo - would rank it among the nations top 15 bank holding companies.

While the International Banking Act regulatory framework provided favorable treatment for the foreign banks and remained relatively unchanged since the time of its enactment, some foreign banks began to actively use certain gaps in that regulation. The best example of this is the Bank of Credit and Commerce International (BCCI.) Lack of supervision enabled BCCI to engage in the biggest financial fraud in a banking history. Largely in response to this the US Congress enacted in 1991 the Foreign Bank Supervision Enhancement Act (FBSEA). The key to the FBSEA is comprehensive consolidated supervision standards, including review of the foreign banks home country regulatory regime and requirements.

This is a general outline and key points of regulatory framework within which the foreign banks in US operate. More detail on how this regulatory mechanism works is provided hereunder in format of comparative analyses of the prior system and system which in operation now.

Federal vs. State Regulation

Prior to enactment of the International Banking Act foreign banks established their business in US primarily under the State laws and were under the control and supervision of the state regulatory authorities. The US dual banking system allowed foreign banks successfully escape restrictions set forth on the federal level. For example foreign bank could establish its branch or branches under state laws, thus escaping federal regulation. Foreign banks could cross state line engage in non-banking activities, hold equity in U.S. securities firms, benefit from lower capitalization requirements, ignore federal reserve requirements and interest rate ceilings, and decline FDIC insurance and related assessments. Domestic US banks could not enjoy the same benefits, they were restricted from interstate banking, while foreign banks could establish their branches nearly ever they want. Along with obvious benefits the foreign banks very often experienced difficulties on a state level due to inconsistency of regulatory systems of the individual states. State regulations varied and still vary widely with respect to both privileges and the extent of the allowed operations. Several states completely restricted foreign banks from operations on their territory. Some states allowed foreign banks to operate only through agencies, while other states allowed also branch banking. However, the bureaucratic and formal difficulties associated with foreign banks establishment in states were outweigh by obvious benefits of interstate banking (McFadden Act allowed cross state operations of the foreign banks), interstate branching and possibility to operate on securities market. This obvious inequality with regard to the domestic banks along with growth of market share of the foreign banks forced the Congress to respond these concerns with the International Banking Act, which seriously changed the situation. The International Banking Act, for the first time introduced statutory federal jurisdiction over the activity of foreign banks. It empowered the Board of Governors of the Federal Reserve System (the Board) to regulate both the bank reserves and the examination of branches and agencies of foreign banks. It made the previous domestic only regulations applicable to the activity of foreign banks (For example: the Bank Holding Company Act, the Glass-Steagall Act.)

Section 4 of the International Banking Act permitted foreign banks to set up federal branches and agencies in any state unless: (i) foreign bank operates as a branch under the state license, or (ii) state law prohibits foreign banks from establishing branches or agencies. Under this provision both foreign and domestic banks could elect their primary regulator and in the event foreign bank decided to be federally chartered it could enjoy the privileges granted to the national banks.

Another measure to equalize foreign and domestic banks introduced by the International Banking Act was requirement for the foreign bank to choose a home state where a foreign bank could be engaged in banking activities. Establishment of branches in other states became subject to the same restrictions as for domestic banks.

The International Banking Act contains some other provisions designed to promote competitive equality between foreign and domestic banks. For example, Section 6 of the Law requires the foreign banks to obtain FDIC insurance in the event bank accepts retail deposits and Section 7 of the Law subjected federal agencies and branches to the same reserve requirements that earlier had been required only for FDIC member banks.

The enactment of the FBSEA gave the Board additional authority for supervision of establishment and activities of the foreign banks. The Board and various Federal and State regulatory agencies started to work in close cooperation to devise a program for consistent control over the activities of international banking structures. This program was aimed at enabling the regulators to supervise more efficiently foreign banks, while international banking community could benefit from consistent and more predictable oversight.

The program was introduced to the international banking community by the fall of 1994 and consisted of two main components (i) a supervisory strategy based on an assessment of the condition of both the individual offices and the combined U.S. operations of the international bank, and (ii) on assessment of the strength-of-support available for the U.S. operations of the international bank, considering the strength of the parent bank, quality of its home country supervision and economic conditions and prospects in the parents primary markets... This program marks the beginning of an era of further coordination and improvement of international bank supervisory functions among US bank regulators... over the foreign banks operating in US.

After enactment of FDCIA a foreign bank still is able to choose between federal and state licenses, but it can no longer avoid supervision by a federal bank regulatory agency. The Board now approves all new foreign bank licenses. Although the United States continues to have a dual banking system, there are no longer two separate and distinct licensing tracks for foreign banks because of the new regulatory and licensing powers granted the Board under FDCIA.

In 1995, the Board continued to tighten control over the foreign banking institutions in US. The Board issued a new foreign bank examination manual and instructive letter to all Federal Reserve banks which outlined the supervision process

over the foreign banks in the following areas: examination schedules, strength of support assessments, and the rating systems. Under these documents the foreign banks in US are subject to annual safety and soundness examination. Examination findings are integrated into Summary of Condition. The Strength of Support Assessment enables the Board to better evaluate an ability of the foreign bank to support its US operations. For determining a foreign banking organization rate the Board has introduced a special examination which is known as ROCA. The ROCA examination focuses on risk management, operational control compliance and asset quality. The composite rating of all elements indicates soundness of the foreign bank organization if the rate assigned is 1. If the rate is 2 an organization is considered to be basically sound with some modest and easily correctable deficiencies. A combined rating of 3 although is still satisfactory, but suggest a greater banking agency supervision. 4 indicates the existence of serious problems, which require close supervision and adequate treatment and the implementation of the corrective plan. Rating 5 is assigned when banking organization is determined as unsound and unsafe. 5 means that immediate restructuring of the foreign banking organization is required.

Congress also has adopted amendments to the Annual Report of Foreign Banking Organization and the Foreign Banking Organization Confidential Report of Operations, based on the proposals made by the Board. These amendments also are aimed at further tightening of control over the foreign banking organizations in US.

Current Situation

In November 1995 both the state and federal regulators pursuant to a grand jury indictment, ordered Japanese Daiwa Bank Ltd. to cease its US operations. The federal grand jury charged Daiwa with failure to report over $1.1 billion in losses from unauthorized bond trading, including conspiracy, mail and wire fraud, obstructing an examination of financial institution, falsification of bank records and the failure to disclose federal crimes.

In October 1997 the General Accounting Office (GAO) reported that despite the government warnings, many foreign banks failed to install adequate risk-management systems in their U.S. branches. Audits of 34% of the 498 foreign bank branches did not cover all of the activities at the branches of the foreign banks and that makes it impossible to ensure compliance of these branches with US laws. 104 branches did not conduct audits frequently enough. Internal control of the foreign bank branches is insufficient. 72 branches, or 14% of the branches failed to separate duly their trading and securities settlements duties. The Board, being a primary regulator for most foreign bank branches does not collect enough data to know whether the foreign banks branches operate in accordance with the law. The Federal Reserve Board and other regulators are better at finding problems, but the question is whether they are able to improve things, said Thomas J. McCool, GAO director of financial institutions and markets.

In accordance with survey provided by the American Banker, in June 1996 foreign banking organizations had established in US 505 branches and agencies (534 in June 1995), 91 commercial bank (97 in June 1995), 14 Edge Act Corporations, 4 thrift companies (5 in June 1995). Despite the decline in numbers of established banking organizations, the ratio of foreign to all US banks continued to grow and was 6% in 1995 and 1996 (5.8% in 1993 and 5.9% in 1994.) Situation with assets held by foreign banking organizations in US and deposits accepted is a little bit different from the number of offices. In 1996 both the absolute figures and foreign banks/domestic banks ratio indicated a decrease in assets and deposits held by the foreign banking organizations. The asset ratio of the foreign banking organizations to the US domestic banks was 18.6% in 1996 (20.7% in 1995), the deposit ratio was 22.1% (22.6% in 1995). However, foreign banks still hold a bigger share of a key component of US banking assets - commercial and industrial loans 33.5% in 1996 (33.3% in 1995.)

The financial experts say that holding of 18.6% share of assets does not mean foreign banks earned 18.6% of the banking income. Foreign banks less skilled than the domestic banks.

Mr. L. Bryan banking analyst with McKinsey & Co. points out that Foreign banks behave differently in a crisis than US banks. They are more likely to precipitously panic at the same time and withdraw from markets, causing a credit crunch.

The major share of the foreign banking in US belongs to the Japanese banks. Canada, UK, France, Italy, Netherlands, Switzerland, Korea, Germany and Israel are on the list of top ten countries actively represented by their banking institutions in US. China, Taiwan, Venezuela, Belgium and Australia have joined already the list. But not all foreign banks have been expanding. Some foreigners cut back.

Foreign Bank Organizational Forms

Foreign banker considering entry into US market unavoidably faces the question of organizational form in which his wishes to establish his initial presence in US. To the most extent the choice of organizational form depends on the scope of banking activity the foreign banker is willing to be involved.

Firstly, this banker shall elect whether he will purchase already existing domestic organization or establish a new one. Experience and statistics indicate that as a general rule foreign bankers prefer to establish new operations rather than acquire existing structure. Although this choice is associated with substantial start-up expenses it provides a best chance for the foreign bank to get acquainted with regulatory environment of the US and set up its own distinctive approach to the banking business. Thus it would be reasonable to limit the scope of this paper by description of de novo entry of the foreign bank into US market.

Under the current International Banking Act foreign banks may gain entry into the unique dual US banking system by virtue of state or national certification or as a bank holding company. This may done in one of the 10 forms distinguished currently by the banking experts. These forms are: (1) representative office, (2) loan production office, (3) federal agency, (4) federal branch, (5) state agency, (6) state branch, (7) non-banking subsidiary (Article XII Investment Company), (8) national bank, (9) state bank, (10) an Edge Act corporation.

Every State in the US has its own banking regulation, and though they differ in detail the main features of these regulations are similar. This article provides a review of the New York state bank regulation, as New York is one of the biggest world banking centers with more than two hundred branches and agencies operating under both federal and New York State licenses.

1. Representative Office

Representative office of a foreign bank may be defined as any office which is located in any states and does not fall within the definition of branch, agency or subsidiary. Many foreign bankers consider representative office as the most flexible and least expensive business vehicle of entering into the US market. Representative office does not constitute a separate legal entity. Very often representative office is just an individual who gathers and analyses information about the market, serves as a contact point, develops necessary business relations. Representative office, however, may not be considered as a functional unit of the bank, as it is not permitted to accept deposits, extend loans, disburse funds. Depending on tax considerations representative office may be or may be not involved in negotiation of cross-boarder transactions. Under the standard tax treaty on avoidance of double taxation, representative office becomes subject to the income taxation in the country of its presence as long as it has become involved in business activity overstepping the line of auxiliary and preparatory activity.

1.1. State Representative Office

Under New York regulations representative office of a foreign bank is any office of a foreign banking corporation of affiliate thereof that engages in representational functions, including soliciting business, marketing services or making contact with customers on behalf of the foreign banking corporation.

Prior to enactment of FBSEA representative office establishment procedure was not burdensome. For example New York State Banking Law required foreign banks with consolidated worldwide assets of less than $500 million to obtain a license from the superintendent, while banks with assets value over $500 million had to register only with the New York State Banking Department. General information about the bank must be supported by an opinion of counsel that office activity would not constitute a business of banking under the Banking Law of NewYork State.

In 1991 New York approved a new more restrictive regulation on establishment and maintenance of representative offices of the foreign banks. The prior New York Banking Law was revised and amended by the requirements for all representative offices to obtain a license from the Banking Department. Moreover, Federal authorities introduce a requirement under which all representative offices may operate only having obtained a prior approval of the Board.

1.2. Federal Regulation

Before 1991 representative office of a foreign bank had to be reregistered only with U.S. Secretary of Treasury. However, with enactment of FBSEA representative offices were placed under the close supervision of both state and federal authorities. Now, in order to establish and operate representative office an applicant must file application with the Board and announce application to the public. The procedure, scope of review and application requirement are set forth in the Regulation K, which is the basic regulatory document for the Board.

Another feature of the state and federal representative office regulations issued pursuant to FBSEA is a greater attention to the extent and quality of home country supervision.

1.3. Scope of Permissible Activities

New regulations on both Federal and State levels, issued after enactment of FBSEA provide more precise list of activities in which RO may be involved. These activities are the following:

- soliciting loans and credit information;

- making property inspections and appraisals;

- securing title information and preparing applications for loans;

- soliciting investors to purchase loans form the foreign bank and searching for investors to contract with the foreign bank for the servicing loans;

- soliciting business on behalf of a foreign bank;

- acting as liaison with customers;

- executing loan documents for loans in principal amounts of $1 million or more pursuant to a power of attorney.

Representative office is allowed to apply to the superintendent to expand the list of the permitted activities.

Certain types of activities are absolutely prohibited for representative office by the both federal and state authorities. Thus, representative office may not be engaged in (i) trading activities, (ii) dealing with loans less than $1 million, (iii) taking any deposit or deposit-like liability, (iv) lending money.

2. Loan Production Office

The term loan production office has been developed for the representative office which is involved in maximum allowed range of allowed activities without constituting branch or subsidiary. Establishment and operation requirements to the Loan Production Office are the same as for representative office. This form of activity is a product of activity of domestic banks, which actively use it to bypass branching restrictions and conduct bank-related activities. Loan Production Office is barred from: (a) acting as a branch of a bank, (b) approving loans, (c) securing title information, (d) disbursing funds, (e) taking deposits (f) accepting loan repayments. The scope of the allowed activities is similar to that of representative office.

3. State Agency

An agency is defined as any office or place of business of a foreign bank located in the United States where the office may pay checks, make loans, and maintain credit balances incidental to or arising out of banking powers, but such an office may not accept deposits from citizens of residents of US.

Similar to the representative office Agency is not considered a legal entity separate from the bank.

In order to establish agency under the state law a foreign bank should apply for a license to the state authorities supervising banking activity (for example - Superintendent in New York).

In New York the application for a license is subject to close examination and investigation in course of which the Superintendent must establish the character, responsibility and general fitness of the applicant. The next stage for the applicant is obtaining of approval from New York Banking Board, which takes a decision by a three-fifths of votes.

Usually, state banking agencies are allowed to (i) make loans, (ii) buy, sell, pay and collect bills of exchange, (iii) issue letters of credit, pay and collect for the foreign bank, (iv) issue certificates of deposit in principal amounts of $100,000 or more (v) sell or issue checks, drafts, travelers checks, money orders or other similar instruments; and pursuant to special approval by the Superintendent, exercise fiduciary powers.

As a general rule, New York banking authorities do not require the agency to satisfy lending limits and reserve requirements, however, on the basis of a special decision of the superintendent the agency may be obligated to hold liquid assets within the state territory. Agencies may be subjected to the reserve requirements under the International Banking Act, provided that the foreign bank which has established the agency has worldwide consolidated assets in excess of $1 billion, or this bank is controlled by group of foreign companies with consolidated assets of more than $1 billion.

State agency is not eligible for the insurance of Federal Deposit Insurance Corporation (FDIC), as it does not fall within the definition of insured bank for FDIC purposes.

State agency are prohibited from acceptance of deposits in principal amounts less than $100,000.

If a foreign bank finds that the state agency becomes disadvantageous, it may convert it into the federal agency at any time with the approval of the Comptroller.

4. Federal Agency

Foreign bank has right to elect between licensing agency on state or on federal level. Procedure of establishing, reporting requirements, the scope of the allowed operations, in general, are similar to that existing on a state level. However, in contrast to the New York agency, an agency licensed on federal level is totally restricted from taking a deposits and may not exercise fiduciary powers. It, however, is permitted to maintain credit balances.

The principal authority for the federal agency is Comptroller of the Currency, who has right to revoke the license of agency if he finds that the agency has failed to comply with the applicable laws.

Fully operating under the federal regulations the federal agencies are subject to 15% of capital funds limit for unsecured loans, 10% of capital fund limit on secured loans to one borrower. In the event, a foreign bank maintains several agencies and branches, 15% and 10% limits are computed on the aggregated basis of all loans extended by these agencies and branches.

The Comptroller has right to require the federal agency to maintain assets in certain proportion to its liabilities. Unlike a New York Agency, a federal agency is required to maintain dollar deposits or certain investment securities with a Federal Reserve member bank in the state where the agency is located. The amount of these assets placed with the member bank must be no less than the greater of (a) the amount of capital (exclusive of surplus) required of a federally chartered bank in the same geographic location or (b) five percent of the total liabilities of the agency, excluding accrued expenses and amounts owed to offices, branches agencies, and subsidiaries of the foreign bank.

Federal Agency is not required to obtain FDIC insurance.

Under the regulation D a federal agency is obligated to keep reserves calculated by the method similar to a Federal Reserve member bank, if the value of the world-wide consolidated assets of the foreign bank is more than $1 billion.

Both federal and state agencies being just divisions of the foreign bank institution are restricted in general from non-banking activities under the Bank Holding Companies Act of 1956. Some limited exemptions may be granted on individual basis by the relevant banking authority.

5. State Branch

A branch of the foreign bank means an office or place of business in the United States which is allowed to accept deposits. Branches are created under Section 3102 of Title 12 or under applicable state laws. In New York for example a procedure of establishing a branch and obtaining license is the same as that for New York agency (see above).

A New York branch of a foreign bank may engage in full range of banking operations.

Being a part of the foreign bank and not separate legal entity, branch therefore, is not required to have a capital. The capital requirement, however, is substituted by the 5 percent rule under which a branch must deposit in another New York bank liquid assets equal to 5% of the total branch liabilities, excluding liabilities to other branches or agencies of the parent foreign bank in US. Initial 5%, upon the establishment, must be assessed on the basis of one-year estimated liabilities of the branch.

New York banking authorities have subjected branches to the lending limits. But because a branch does not have its own capital, the lending limits are determined on the basis of capital the foreign bank.

New York branch has to comply also with the reserves requirements, which are similar to those for the New York banks. The source for the reserves requirements is the General Regulations of the Banking Board (Reserves Against Commercial Bank Deposits).

As long as a new York branch is not involved in acceptance of deposits from the general public and deposits less than $100,000 it is not required to obtain FDIC insurance.

6. Federal Branch

Federal branch establishment procedure and operation requirements are the same as for the federal agency. There are only two distinctions between federal agency and federal branch of the foreign bank: federal agency can not accept deposits and is not required to be insured by FDIC. Federal branch may accept deposits and in the event it accepts deposits of less than $100,000 it must become an insured branch, or unless the Comptroller determines by order or regulation that the branch is not engaged in domestic retail deposit activities requiring deposit insurance protection, taking account of the size and nature of depositors and deposit accounts.

Please note, that in 1992 the retail deposit taking was restricted for branches of the foreign banks. This kind of operations were allowed only to the branches which had been FDIC insured on December 19, 1991. Otherwise foreign banks can be involved in retail deposit taking only through their US subsidiaries.

7. Article XII Investment Company

Article XII of the New York Banking Law allows to create an investment company which may engage both in commercial banking and non-banking activities which are normally prohibited for the banking institutions. Article XII investment company is a legal entity separate from its parent foreign bank and may be considered as subsidiary of the foreign bank. This organizational form is broadly used not only by the foreign banks to establish banking activity in US, but also by US big corporations for their financial operations. For example: General Electric Capital Corp. and General Motors Acceptance Corp. However, when Article XII investment company operates as a bank it must comply with certain additional requirements:(i) it must have paid-up capital of at least $2 million, (ii) it must obtain approval of the New York Superintendent of Banks and the New York Banking Board, (iii) it must pay special tax assessed on the basis of the company capital at the rate 0.0005%.

With regard to its operational capacity article XII investment company may exercise the usual commercial banking powers including maintenance of credit balances. It is prohibited, however, from deposit taking activity in New York.

As a matter of practice and regulatory activity, New York Banking Department supervises Article XII investment companies applying general banking law provisions which are applied to the normal banking institutions. This practice, however, is not expressly authorized by any New York statute.

Theoretically, Article XII of the New York Banking Law allows the investment companies to be involved in broad range of non-banking activities, but as a matter of practice the Superintendent traditionally has a very negative approach to non-banking activities of Article XII investment companies involved in banking and sometimes even in contrary to the Banking Law provisions imposes certain restrictions on them as if they were banking institution.

Article XII investment companies are not subject to the reserve requirements and are not obligated to be insured by FDIC.

8. State Bank

Foreign bank may establish its operations in the US through its state banking subsidiary. This subsidiary is considered to be totally separate from its foreign parent in terms of organizational structures. Such a subsidiary has right to carry on all scope of the banking operations allowed in the US for the banking institutions.

Establishing procedure of subsidiary of the foreign bank in New York , is, in general the same as procedure of establishing a state branch. Foreign bank applies to the Superintendent for a license. The superintendent having studied the filed documents submits this application to the Banking Board with his conclusions and recommendations. The Board then, decides whether to grant the license or not. The decision is usually is based on the Superintendent findings that (1) the character, responsibility and general fitness of the person or persons named in the certificate are such as to command confidence that the business of the proposed bank will be honestly and efficiently conducted in accordance with the intent and purpose of the banking law and (2) the interests of the public will be promoted. The Board makes a decision by three fifth of the votes.

Being separate legal entity a New York bank is required to have its own capital fund.

The initial minimum capital stock is prescribed by the New York Banking Board. For a new bank it is $1.2 million. However, if the bank will be involved in full range of banking services, the capital requirement may be five times as much as the initial minimum.

Unlike agency or branch lending limits imposed on US bank subsidiary of a foreign bank are based on its own capital funds. But the state reserve requirements remain the same as for the state branches. In the event reserve requirements imposed by the Federal Reserve Board differ from those on state level banks must comply with the federal requirements in any case.

If a New York bank provides full service deposit-taking it must obtain FDIC insurance and satisfy all terms and requirements set forth by FDIC.

Theoretically New York bank is eligible for membership in the Federal Reserve System, although it is not obligatory.

Establishing New York bank foreign founders should take into account that in accordance with the New York Banking law at least one half of the board directors must be US citizens.

9. National Bank

National bank is a bank chartered on the federal level. It may provide the full range of banking services. National bank may be set up by the foreign bank institution with approval of the Comptroller of the Currency.

Minimum capital requirement is $200,000, but similar to the state bank, the capital requirements may vary depending on the scope of banking operations the bank is planning to be involved in.

Lending limits imposed on national bank are based on the banks capital fund.

National bank is required to be a member of the Federal Reserve System and be insured by FDIC.

All the Directors on banks board must be citizen of the United States. Moreover, two thirds of the directors must reside in the state in which the bank is located or within 100 miles of the banks office.

In the event the shares of the national Bank are owned by a foreign bank, the Comptroller, upon special application, may permit to have on board directors who are not US citizens, however, not more than 49 percent of all the directors.

10. Edge Act Corporation

Edge Act corporation takes its name from Senator Walter Edge (New Jersey), who actively sponsored adoption of the Edge Act in 1919. This organizational form is designed to solicit US bankers to be engaged in international banking business and financial operations, however, it also proved to be very convenient organizational form for the foreign banks, if the primary goal of their entry into US is to facilitate international business transactions.

Section 25 (a) of the Federal Reserve Act regulates a procedure of an Edge Act corporation establishment. Applying to the Federal Reserve Board for permission to establish corporation foreign founding bank must provide information on the head office of the corporation. The scope of the allowed activity will be subject for separate consideration of the Federal Reserve Bank of New York.

The major benefit of this organizational form is that there is no restriction on interstate branching of the corporations and it allows the Edge Act corporations to have their branches and offices all over the country, as well as in other countries.

There are two basic kinds of the Edge Act corporations. Banking Edges accept deposits, provide foreign exchange services, and offer financing for international trade. Investment Edges dont accept deposits, but rather make investments in foreign firms that are not engaged in the business of buying or selling goods in the United States.

Edge Act corporation may finance the following activities:

- contracts, projects or activities performed substantially outside the United States;

- United States import and export transactions;

- the domestic shipment or temporary storage of goods being imported or exported;

- the assembly or repacking of imported goods to be exported;

- the costs of production of goods and services for which export orders have been received or which are direct export.

Edge Act corporations are prohibited from deposit- taking and lending activities except when connected with an international transaction or for a customer whose business is of international character. The Edge Act corporations may accept deposits from foreign governments, offices and establishments located outside the United States, foreign individuals and residents of the United States if these deposits are to be transmitted abroad or they associated with international transaction. Edge Act corporation lending activity is subject to certain limits. Thus, the corporation may not extend loans to one person in excess of 15% of its capital and surplus.

The Edge Act corporations are allowed to issue guarantees, notes, drafts, checks, to maintain saving and transaction accounts for its customers so long as these operations are related to international transactions.

With regard to the reserve requirements an Edge Act corporations must apply the same rules as the Federal Reserve System member bank.

The corporations may keep its liquid assets in form of cash, money market instruments, federal or state financial instrumentalities and commercial paper.

The corporation own capital and surplus may not be less than 7% of risk assets of corporation. Risk assets are defined as assets other than cash, amounts due from the US banking institutions, US government securities and Federal Funds sold.

There are no asset maintenance or asset pledge requirements imposed on the Edge Act corporations.


Organizational forms section of this paper has outlined only general regulatory restrictions and requirements imposed on foreign banks operating in US. There is, however, a number of other serious factors which must be taken into account by a foreign banker while entering into US market. These factors are: taxation, marketing objectives, personnel considerations, start up funds and operational funds availability, and the length of time to start activities.

Speaking about regulatory framework in which the foreign bank operates in this country, it may be concluded that, the International Banking Act was the first serious attempt of the Congress to regulate foreign banks operations in the US and put them under control of banking supervisory agencies. It turned out that the International Banking Act was not enough to control increasingly sophisticated international financial market. BCCI- like scandals and experience of dealing with international financial institutions indicated that US regulatory agencies should work in close cooperation with other nations in regulating international bank operations. The FBSEA is intended to modernize and improve the IBA by adding certain supervisory powers to the federal agencies and authorizing the Board to work with foreign regulatory agencies. FBSEA attempted to minimize unsound banking practices among foreign banks in US by consolidating the regulatory powers in the Board. The Board began to exercise actively this power by adopting various managerial and informational standards, introducing rating systems and reporting requirements. Nevertheless, the Boards supervisory activity over the foreign banks is subject to criticism. That all, including continuing Daiwa-like facts, indicate that banking supervisory agencies will continue their efforts to devise more efficient foreign banks controlling mechanisms.


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