New York Regulation of Foreign Branch Offices Foreign Agencies Foreign Rep Offices

1
New York Regulation of Foreign Branch
OfficesForeign AgenciesForeign Rep Offices

• Marjorie E. Gross
• Deputy Superintendent and Counsel
• New York State Banking Department
• July 16, 2007

2
Rep Office Permitted Activities

• Soliciting loans of 250,000 or more
• Assembling credit information
• Making property inspections and appraisals
• Securing title information
• Preparing loan applications, including making
  recommendations for action on them
• Soliciting investors to buy loans from the bank
• Soliciting new business on behalf of FBC
• Conducting research on U.S. markets

3
Rep OfficePermitted Activities

• Acting as liaison with customers and
  correspondents of FBC
• Executing loan documents for loans of 250,000 or
  more under written authorization from FBC
• In case of regional administrative office,
  manage, supervise or coordinate operations of FBC
  or its affiliates in a designated geographic
  region
• Other activities only with prior written approval
  of the Superintendent

4
Rep OfficeProhibited Activities

• Engaging in banking business or trading
  activities
• Soliciting or accepting deposits
• Approving business transactions or making final
  credit decisions on behalf of head office
• Except in case of regional administrative office

5
Rep Office of License Application

• Opening a rep office requires a license from the
  Superintendent of Banks
• Rep offices are subject to examination by the
  Banking Department
• Including examination of books, accounts, records
  and files relating to offices activities
• See Banking Law Article V-B (Section 221-a and
  following sections)

6
Rep Office License Application

• Application forms available on Banking Department
  website
• As part of application, must designate
  Superintendent of Banks as agent for service of
  process (i.e. you are subject to lawsuits in US
  arising out of US business)
• Superintendent must find that the financial
  responsibility, experience, character and general
  fitness of the FBC and its rep are such as to
  command confidence and warrant belief that the
  rep will operate honestly, fairly and efficiently

7
Branch or Agency Permitted Activities

• Permitted activities are similar to NY-chartered
  banks
• Buy, sell, pay or collect bills of exchange
• Issue letters of credit
• Receive money for transmission or transmit money
  by draft, check, cable or otherwise
• Make loans
• Receive deposits and/or credit balances
• Exercise fiduciary powers (with approval of
  Banking Department)

8
Branch Authority to Take Deposits

• Branch allowed to accept deposits to extent
  permitted by FDIC without becoming FDIC-insured
  under FDIC Rules 347.213, 34.214 and 347.215,
  i.e. (with disclosure of non-insured status)
• Branch may accept initial deposits in an amount
  of 100,000 or greater     
• Branch may enter agreement with the FRB to accept
  only those deposits permissible for Edge Act
  Corporations under (12 U.S.C. 611 et seq.) and
  implementing rules and regulations administered
  by the FRB (12 CFR 211).
• Branch may accept initial deposits in an amount
  less than 100,000 only if derived solely from
  the following

9
Branch Authority to Take Deposits

1. Individuals who are not citizens or residents of
   the United States at the time of the initial
   deposit
2. Individuals who are residents but not US citizens
   and are employed by a foreign bank, foreign
   business, foreign government, or recognized
   international organization
3. Persons to whom the branch or foreign bank
   (including any affiliate) has extended credit or
   provided other nondeposit banking services within
   the past twelve months or has a written agreement
   to provide such services within the next twelve
   months
4. Foreign businesses, large United States
   businesses, and persons from whom an Edge or
   agreement corporation may accept deposits under
   12 CFR 211.6(a)(1)

10
Branch Authority to Take Deposits

• 5. Any governmental unit, including the United
  States government, any state government, any
  foreign government and any political subdivision
  or agency of any of the foregoing, and recognized
  international organizations
• 6. Persons who are depositing funds in connection
  with the issuance of a financial instrument by
  the branch for the transmission of funds or the
  transmission of such funds by any electronic
  means and
• 7. Any other depositor, but only if branch's
  average deposits under this paragraph do not
  exceed one percent of the branch's average total
  deposits, as calculated under paragraph
  (a)(7)(ii) (de minimis exception).
• Branch may exclude deposits in the branch of
  other offices, branches, agencies or wholly owned
  subsidiaries of the bank to determine its average
  deposits

11
Agency Authority to Take Deposits

• May not take most deposits, but may
• Maintain credit balances arising out of the
  exercise of its lawful powers
• Issue obligations of 100,000 or more to a
  corporation, partnership, trust, unincorporated
  association or similar association, with notice
  to Banking Department
• May accept deposits from non-U.S. citizen or
  resident, even in amounts below 100,000, with
  written disclosure of non-insured status

12
Agency Authority to Take Deposits

• Resident of U.S., defined
• Individual residing in U.S.
• Corporation, partnership, association organized
  in U.S.
• Branch or office in U.S. of entity organized
  outside U.S.
• Disclosure requirement
• Written disclosure may be on signature card or
  other documents used for account opening
• See 202-a(11)(c) of BL Part 323.1

13
Branch or Agency - Lending Limit

• Lending Limit same as for NY-chartered bank
• 15 of parent bank capital
• additional 10 if secured
• loans and credit extensions to same borrower made
  by all U.S. branches or agencies must be
  aggregated in determining limit
• but extensions to head office and branches
  outside US are not included

14
Branch or AgencyLicense Application

• Opening a branch or agency requires a license
  from the Superintendent of Banks
• Branch or agency is subject to examination by the
  Banking Department
• Including examination of books, accounts, records
  and files relating to offices activities
• See Banking Law Article V (Section 200 and
  following)

15
Branch or Agency Displaying the License

• License must be conspicuously displayed in the
  office

16
Maintenance of books and records

• Although branches, agencies and rep offices are
  not usually separate entities from home country
  bank, must maintain at the NY office separate
  books, accounts and records reflecting
• all transactions effected by or on behalf of the
  branch, agency or rep office
• all actions taken by its NY employees to effect
  transactions for FBC offices outside NY

17
Pledge of Assetsby Branch or Agency

• Upon opening (and at all times thereafter), must
  keep liquid assets on deposit with a NY
  depository approved by NYSBD, unless its deposit
  accounts are insured by FDIC.
• See Section 202-b of Banking Law and Parts 51
  (terms of deposit agreement) and 322
  (requirements of deposit) of NYSBD Regs.
• Purpose For use if NYSBD needs to close the
  office
• Because branch or agency not separately
  capitalized
• Pledged assets would be sold to cover cost of
  liquidation and repay deposits and credit balances

18
Pledge of Assetsby Branch or Agency

• Subject to the cap below, amount of deposit is
  greater of (1) 2 million or (2) 1 of average
  total liabilities of branch or agency for the
  previous month (including IBFs but not amounts
  due to other offices, agencies, branches and
  affiliates of FBC),
• In case of initial branch or agency, amount based
  on projected total liabilities at end of first
  operating year
• Liabilities calculated as for quarterly averages
  under instructions to FFIEC 002 report of assets
  and liabilities of US branches and agencies of
  Foreign Banks (call report)

19
Pledge of Assets by Branch or Agency

• Liabilities arising from qualified financial
  contracts are excluded from total liabilities if
  secured by collateral. See BL 618-a(2)(d) (e).

20
Pledge of Assets - Cap

• If FBC is well-rated as defined in Part 322.7,
  maximum deposit as a percentage of average total
  liabilities for previous month is
• One percent of first 1 billion
• ¾ of 1 of next 4 billion
• ½ of 1 of next 5 billion
• ¼ of 1 of any additional liabilities
• But in no event more than 100 million

21
Pledge of Assets Eligible Assets

• 202-b(1) of NY Banking Law requires that
  pledged deposit consist of specified high quality
  securities (Specified Assets)
• Part 322.2 of NYBD regulations adds (i) highly
  rated commercial paper, negotiable CDs, BAs and
  (ii) additional assets listed on Superintendents
  Asset Pledge List (APL)
• APL http//www.banking.state.ny.us/legal/322apl2.
  htm

22
Pledge of AssetsEligible Assets

• CDs, BAs must be issued by unaffiliated banks
  that are U.S. banks or U.S. office of
  unaffiliated FBO
• Additional Assets may not exceed 50 of the total
• All assets must be payable in U.S. in USD
• Obligations issued or guaranteed by entities
  located or domiciled in home office country are
  not permitted
• Failure of foreign bank branch often linked to
  problems in home country

23
Branch or AgencyAsset Maintenance Requirement

• Superintendent may impose an asset maintenance
  requirement where he/she deems it necessary for
  protection of the public interest and interest of
  depositors and creditors

24
Branch or AgencyAsset Maintenance Requirement

• Asset maintenance imposed where Superintendent
  perceives
• weakness in financial condition of the bank
• circumstances in home country that may adversely
  affect New York office
• Only small percentage of banks normally are
  subject to maintenance requirement

25
Subsidiary Banks or Non-banks

• Non-U.S. bank may establish U.S. bank or trust
  company subsidiary
• charter may be from a state or from OCC
• separate entity w/ own capital, board, officers
• entity has all banking powers of domestic banks
  and deposits must be insured by FDIC
• regulation and supervision similar to U.S. bank
  (incl. consumer protection regulation)
• Federal Reserve Board also has supervisory
  authority, even if bank not a Fed member

26
Subsidiary Banks or Non-banks

• Non-U.S. bank may establish non-bank subsidiary
• Broker-dealer registered with SEC
• Futures broker registered with CFTC
• Investment Adviser registered with SEC
• Insurance broker or underwriter regulated by
  state insurance regulator(s)

27
Article XII Investment Company

• Form of organization unique to New York
• Banking Department charters an Article XII
  company only where applicant has no other
  practicable means to enter NY market

28
Article XII Investment Company Powers

• Combines powers of (i) stock and bond
  investor/trader and (ii) commercial lender
• May not take deposits in NY, except
• credit balances to same extent as an Agency
• may take deposits outside NY with approval of NYS
  Banking Board

29
Article XII Investment Company Powers

• Supervision similar to banks
• Supervisory Article XII does not prohibit
  transactions with affiliates, but Supervisory
  Agreement may

30
Ongoing Supervision

• There are annual examinations of branches,
  agencies
• Policy is to conduct joint examinations with
  Federal Reserve Bank of NY for most banks
• Some are examined on an alternate year basis by
  either NYSBD or FRBNY
• Largest most complex organizations receive
  continuous supervision
• Exam ends with close-out meeting to report our
  findings, and a written report

31
Ongoing Supervision

• Examining compliance with BSA and AML laws,
  especially Title III of USA Patriot Act, is
  important part of examinations
• KYC is not enough
• Emphasis on private banking and correspondent
  banking business
• Sometimes you need to do enhanced due diligence
  on clients of a correspondent bank and may not do
  business with shell corps

32
Ongoing Supervision

• NYSBD maintains close cooperation with parent
  country banking authorities
• Home country supervisor has responsibility for
  the consolidated entity
• But there is close cooperation with home and host
  country supervisors
• We have information sharing agreements with 17
  countries