What is a Foreign Bank?

The term "foreign bank" generally refers to any U.S. operation of a banking organization headquartered outside the United States. The first foreign banks established their presence in the mid-1800s: New York State was the first government in the United States to license or regulate these institutions. While state governments took the lead in welcoming foreign banks to the United States, the federal government also has acted to make sure that American markets are open to banks from all nations. Today, foreign banks are a significant presence in the American financial system, providing many important benefits to individuals, businesses, and the economy as a whole. They are most active in New York, California, Florida, Illinois, and Connecticut, but also maintain operations in Georgia, Texas, New Jersey, North Carolina, and a number of other states. The vast majority are state-licensed institutions.

Foreign banks most often come to the United States to provide services to U.S. subsidiaries of clients in their home countries. Once here, however, they provide a wide range of wholesale banking services to U.S. businesses and individuals. In fact, foreign banks make almost 40% of all loans to American businesses. As of December 31, 2003 state-licensed foreign banks held more than $1.16 trillion in assets, accounting for about 85% of all foreign bank assets in the United States. Consequently, foreign banks play a critical role in the economy and the U.S. banking systems.

Foreign banking organizations can acquire or establish freestanding banks or bank holding companies in the United States. These entities are regulated and supervised as domestic institutions. For most foreign banking organizations, however, it is more cost-effective and productive to operate as one of several other available structures: branches, agencies, loan production offices, representative offices, Edge Act or agreement corporations. Each structure has a different set of regulatory requirements and powers.

Branches and agencies are the most common structures for commercial lending by foreign banking organizations in the United States. Of the 499 foreign banking organizations in America, nearly 300 are branches or agencies. The major difference between these two types of banking offices is that branches may accept deposits, but agencies generally may not. Both structures can make and manage loans, conduct foreign exchange activities, and trade in securities and commercial paper. These offices may conduct most of the activities a domestic bank performs. The primary exception is that foreign branches and agencies may not accept deposits of less than $100,000 unless they had FDIC insurance before December 19, 1991. State bank supervisors and the Office of the Comptroller of the Currency separately license and supervise foreign bank branches and agencies. About 84% of foreign banks are state-licensed, accounting for about 85% of all foreign bank assets. The Federal Reserve serves as the federal regulator of state-licensed foreign bank branches and agencies, in a system similar to that for domestic banks.

Foreign banks may also establish representative offices, which have more limited powers than branches or agencies. Foreign banks often open representative offices as a first step to establish a presence in the United States. These offices serve as liaison between the parent bank and its clients and correspondent banks in the United States. They may develop relationships with prospective clients, but they cannot conduct any banking transactions themselves. Representative offices must register with the Federal Reserve, and may be licensed by the states as well.

Edge Act and agreement corporations are foreign bank offices chartered by the Federal Reserve (Edge Act) or the states (agreement corporations) to provide financing for international trade. Domestic banking organizations may also establish Edge Act or agreement corporations. These offices have a broader range of powers than other banking organizations, but all their activities must relate to international trade. Other structures available to foreign banks are commercial lending companies, licensed by New York State, and export trading companies.

To protect American consumers and the overall stability of the U.S. financial system, the states and the Federal banking agencies regulate and supervise foreign banking operations in the United States. The major Federal laws affecting foreign banks in the United States are the International Banking Act (IBA) of 1978 and the Foreign Bank Supervision Enhancement Act (FBSEA) of 1991. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 also addresses foreign banks' operations in the United States.

State and federal foreign bank supervisors have developed a coordinated system for supervising and examining foreign banks in the United States. Under this system, state and federal bank regulators work together to provide a seamless overview of the entire U.S. operations of a foreign bank, which may include operations in several states. Because foreign bank branches and agencies are arms of their parent banks, their supervisory structure must be slightly different from that used for domestic institutions. Supervisors evaluate the office's risk management, operational controls, compliance with federal and state laws, and asset quality. The Federal Reserve also looks at the overall support the U.S. offices receive from their parent banks.

Foreign banks in the United States are an important source of new capital to American businesses. Because their parents are not as deeply affected by fluctuations in the U.S. economy as domestic institutions are, U.S. offices of foreign banks can provide credit even during domestic "credit crunches". Foreign-owned banks that have deposit insurance must comply with all U.S. consumer laws and pay premiums to the FDIC. All lenders must comply with federal fair lending statues. In short, foreign banks in the United States are valuable corporate citizens, and an essential part of the American financial system.