CTQ-2014-00001 Court of Appeals of the State of New York MOTOROLA CREDIT CORPORATION, Appellant-Respondent, - against - STANDARD CHARTERED BANK, Respondent-Appellant. ------------------------------ On Question Certified by the United States Court of Appeals for the Second Circuit (USCOA Docket Nos. 13-2535-cv(L) and 13-2639-cv(con)) BRIEF OF INSTITUTE OF INTERNATIONAL BANKERS, THE CLEARING HOUSE ASSOCIATION L.L.C., EUROPEAN BANKING FEDERATION AND NEW YORK BANKERS ASSOCIATION AS AMICI CURIAE IN SUPPORT OF RESPONDENT-APPELLANT DWIGHT A. HEALY ERNEST T. PATRIKIS OWEN C. PELL MARIKA M. LYONS WHITE & CASE LLP 1155 Avenue of the Americas New York, New York 10036 Tel.: (212) 819-8200 Fax: (212) 354-8113 Attorneys for Amici Curiae Date Completed: July 21, 2014 i CORPORATE DISCLOSURE STATEMENT Pursuant to New York Court of Appeals Rule of Practice 500.1(f), the Institute of International Bankers states that it is a not-for-profit corporation and that it has no parent, subsidiary or affiliate. The Clearing House Association L.L.C. (“The Clearing House”) states that it has no parent or subsidiary corporations. The Clearing House is affiliated with The Clearing House Payments Company L.L.C. and New York Clearing House Building Company. The New York Bankers Association (“NYBA”) states that it has no parent, that it has two subsidiaries, New York Bankers Service Corporation and the Circuit Agency, Inc., and that it is affiliated with the New York State Bankers Group Creditors Trust (the “Group Creditors Trust”) and the New York State Bankers Group Employee Insurance Trust. NYBA further states that its affiliate the Group Creditors Trust owns the Trustees Life Insurance Company. The European Banking Federation states that it is incorporated in Belgium as an international non-profit association and that it has no parent, subsidiary, or affiliate. ii TABLE OF CONTENTS CORPORATE DISCLOSURE STATEMENT ......................................................... i TABLE OF AUTHORITIES ................................................................................... iv STATEMENT OF INTEREST OF AMICI CURIAE ............................................... 1 PRELIMINARY STATEMENT ............................................................................... 3 ARGUMENT ............................................................................................................. 9 I. THERE ARE SIGNIFICANT POLICY CONSIDERATIONS THAT SUPPORT THE SEPARATE ENTITY RULE AND THOSE POLICY CONSIDERATIONS APPLY WITH EQUAL FORCE IN THE CONTEXT OF POST-JUDGMENT RESTRAINTS ............................................................. 9 A. The Separate Entity Rule Recognizes That Banks Operating Internationally Are Subject To Multiple And Frequently Conflicting Laws ........................................................................................................... 10 1. The Separate Entity Rule Allows Banks To Avoid Having To Choose Among Competing Legal Regimes ...................................... 10 2. The Separate Entity Rule Is Consistent With And Supported By The Local Action Doctrine ....................................................................... 15 3. Limiting The Reach Of A Post-Judgment Asset Restraint In A Manner Consistent With The Separate Entity Rule Is Consistent With The Presumption Against Extraterritorial Application Of New York Statutes ..................................................................................... 17 4. Overturning The Separate Entity Rule Would Subject Banks To The Risk Of Double Liability ................................................................... 19 B. International Banks Would Be Unduly Burdened If Required To Address Global Asset Restraints Issued In New York Proceedings ....................... 25 C. The Separate Entity Rule Encourages Banks To Operate In New York Through Branches, Which Is Important To The New York And U.S. Economies ................................................................................................. 31 II. DAIMLER HIGHLIGHTS THE APPROPRIATENESS AND IMPORTANCE OF THE SEPARATE ENTITY RULE, PARTICULARLY FOR BANKS HEADQUARTERED OR INCORPORATED IN NEW YORK ..................... 35 iii A. Under Daimler, International Banks Incorporated And Headquartered Outside Of New York Are Not Subject To General Jurisdiction Here .... 35 1. Daimler Sets Forth A General Rule That Entities Are Only Subject To Jurisdiction In The Fora Where They Are Incorporated Or Have Their Principal Place Of Business .................................................... 36 2. The Comity Considerations Highlighted In Daimler Also Support Limiting The Jurisdictional Reach Of U.S. Courts ........................... 38 B. Daimler Is Directly Relevant To This Appeal And The Certified Question .................................................................................................... 39 C. The Separate Entity Rule Remains Important After Daimler To Provide A Level Playing Field For New York Banks ........................................... 45 III. MOTOROLA’S EFFORTS TO DIMINISH THE LONG-STANDING RECOGNITION OF THE SEPARATE ENTITY RULE ARE MISPLACED ..................................................................................................... 47 A. The Separate Entity Rule Has Been Historically Recognized In The Pre- Judgment And Post-Judgment Context, And The Legislature Did Not Override The Rule When It Enacted The C.P.L.R. In 1962 .................... 48 B. The Cases Motorola Cites Did Not Abrogate The Separate Entity Rule ............................................................................................................ 56 CONCLUSION ........................................................................................................ 59 iv TABLE OF AUTHORITIES CASES Abuhamda v. Abuhamda, 236 A.D.2d 290 (1st Dep’t 1997) .................................... 35 Allied Mar., Inc. v. Descatrade SA, 620 F.3d 70 (2d Cir. 2010) ......................... 50, 54 Anderson Nat’l Bank v. Luckett, 321 U.S. 233 (1944) ............................................. 23 Arbegast v. Board of Educ. of S. New Berlin Cent. School, 65 N.Y.2d 161 (1985) ........................................................................................... 54 Ayyash v. Koleilat, 38 Misc. 3d 916 (N.Y. Sup. Ct. 2012), aff’d on other grounds, 115 A.D.3d 495 (1st Dep’t 2014) ................................................................... 10, 13 Barrow S.S. Co. v. Kane, 170 U.S. 100 (1898) ................................................... 37, 42 Bluebird Undergarment Corp. v. Gomez, 139 Misc. 742 (N.Y. City Ct. 1931) ....... 51 Byblos Bank Europe, S.A. v. Syrketi, 12 Misc. 3d 792 (N.Y. Sup. Ct. 2006) .......... 43 Cala Rosa Marine Co. v. Sucres Et Deneres Grp., 613 F. Supp. 2d 426 (S.D.N.Y. 2009) ..................................................................................................................... 29 Clarkson Co. v. Shaheen, 544 F.2d 624 (2d Cir. 1976) ............................................. 16 Clinton Trust Co. v. Campania Azucarera Central Maybay S.A., 172 Misc. 148 (N.Y. Sup. Ct.), aff’d, 258 A.D. 780 (1st Dep’t 1939) ................................... 11, 49 Commonwealth of the N. Mariana Islands v. Canadian Imperial Bank of Commerce, 21 N.Y.3d 55 (2013) ............................................................... 4, 55, 58 Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 94 N.Y.2d 541 (2000) .......... 35 Cronan v. Schilling, 100 N.Y.S.2d 474 (N.Y. Sup. Ct. 1950), aff’d, 282 A.D. 940 (1st Dep’t 1953) .................................................................................. 15, 25, 48, 52 Daimler AG v. Bauman, 134 S. Ct. 746 (2014).................................................. passim Det Bergenske Dampskibsselskab v. Sabre Shipping Corp., 341 F.2d 50 (2d Cir. 1965) ......................................................................................................... 49, 50, 51 v Dietrich v. Bauer, No. 95 Civ. 7051 (RWS), 2000 WL 1171132 (S.D.N.Y. Aug. 16, 2000) ............................................................................................................... 38 Digitrex, Inc. v. Johnson, 491 F. Supp. 66 (S.D.N.Y. 1980) ............................... 27, 51 Disconto Gesellschaft v. Umbreit, 208 U.S. 570 (1908) ........................................... 16 Doctors Council v. New York City Emps.’ Ret. Sys., 71 N.Y.2d 669, 674-675 (1988) .................................................................................................................... 55 Doubet LLC v. Trustees of Columbia University in City of New York, 99 A.D.3d 433 (1st Dep’t 2012) ............................................................................................. 42 Embree v. Hanna, 5 Johns 101 (1809) ....................................................................... 23 Engle v. Talarico, 33 N.Y.2d 237 (1973) .................................................................. 54 F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004) .......... 12, 14, 18 Fid. Partners, Inc. v. Philippine Export & Foreign Loan Guarantee Corp., 921 F. Supp. 1113 (S.D.N.Y. 1996) ................................................................................. 49 Frummer v. Hilton Hotels Int’l, Inc., 227 N.E.2d 851 (N.Y. 1967) .......................... 38 Gager v. White, 53 N.Y.2d 475 (1981) ..................................................................... 41 Global Reinsurance Corp. v. Equitas Ltd., 18 N.Y.3d 722 (2012) ............................ 17 Global Tech., Inc. v. Royal Bank of Can., No. 150151/2011, 2012 WL 89823 (N.Y. Sup. Ct. Jan. 11, 2012) .............................................................. 10, 35, 36, 52 Gryphon Domestic VI, LLC vol. APP Int’l Fin. Co., 41 A.D.3d 25, 37 (1st Dep’t 2007) ..................................................................................................................... 50 Harris v. Balk, 198 U.S. 215 (1905) .......................................................................... 22 Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55 (2d Cir. 1985) ............... 37, 38 In re Amorosi, 9 N.Y.3d 367 (2007) .......................................................................... 55 In re Teachers Ins. & Annuity Ass’n of Am. v. City of N.Y., 82 N.Y.2d 35 (1993) 10 In re Thelen LLP, __ N.E.3d __, 2014 WL 2931526 (N.Y. July 1, 2014) ................ 10 In re Union Bank of Switz., 158 Misc. 2d 222 (N.Y. Sup. Ct. 1993) ....................... 13 vi In re Waite, 99 N.Y. 433 (1885) ................................................................................ 16 Indosuez Int’l Finance B.V. v. Nat’l Reserve Bank, 98 N.Y.2d 238 (2002) ............. 43 Ings v. Ferguson, 282 F.2d 149 (2d Cir. 1960) .......................................................... 12 Ins. Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694 (1982) .. 42 Int’l Multifoods Corp. v. Commercial Union Ins. Co., 98 F. Supp. 2d 498 (S.D.N.Y. 2000) .................................................................................................... 30 Intercont’l Credit Corp. v. Roth, 152 Misc. 2d 751 (N.Y. Sup. Ct. 1990), rev’d on other grounds, 154 Misc. 2d 639 (N.Y. Sup. Ct. 1991) ....................................... 48 John Wiley & Sons, Inc. v. Kirtsaeng, No. 08 Civ. 7834, 2009 WL 3003242 (S.D.N.Y. Sept. 15, 2009) ..................................................................................... 27 JPMorgan Chase Bank, N.A. v. Motorola, Inc., 47 A.D.3d 293 (1st Dep’t 2007) ..................................................................... 23, 25 K2 Inv. Grp. v. Am. Guar. & Liab. Ins. Co., 22 N.Y.3d 578 (2014) ........................ 57 Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013) ................................ 17 Koehler v. Bank of Bermuda, 12 N.Y.3d 533 (2009) ...................................... 4, 18, 56 Koehler v. Bank of Bermuda Ltd., 577 F.3d 497 (2d Cir. 2009) .............................. 57 Koehler v. Bank of Bermuda Ltd., No. M18-302, 2005 WL 551115 (S.D.N.Y. Mar. 9, 2005) ......................................................................................................... 57 Landoil Resources Corp. v. Alexander & Alexander Services, Inc., 77 N.Y.2d 28 (1990) .................................................................................................................... 37 Licci v. Lebanese Canadian Bank, SAL, 20 N.Y.3d 327 (2012) ........................ 44, 45 Licci v. Lebanese Canadian Bank, SAL, 673 F.3d 50 (2d Cir. 2012) ....................... 41 Lok Prakashan Ltd. v. India Abroad Publ’s, Inc., No. 00 Civ. 5852, 2002 WL 1585820 (S.D.N.Y. July 16, 2002) ................................................................. 28, 49 McCloskey v. Chase Manhattan Bank, 11 N.Y.2d 936 (1962) ................................. 49 vii Milan Indus. v. Wilson, 2011 N.Y. Misc. LEXIS 6842 (N.Y. Sup. Ct. June 1, 2011) ..................................................................................................................... 44 Morgenthau v. Avian Res. Ltd., 49 A.D.3d 50 (1st Dep’t 2007) .............................. 50 Morrison v. Nat’l Australia Bank, Ltd., 130 S. Ct. 2869 (2010) ............................... 17 Motorola Credit Corp. v. Uzan, 288 F. Supp. 2d 558 (S.D.N.Y. 2003) .................... 49 Motorola Credit Corp. v. Uzan, 388 F.3d 39 (2d Cir. 2004) ..................................... 12 Motorola Credit Corp. v. Uzan, 978 F. Supp. 2d 205 (S.D.N.Y. 2013) .............. 12, 28 Nat’l Union Fire Ins. Co. v. Advanced Employment Concepts, Inc., 269 A.D. 2d 101 (1st Dep’t 2000) ...................................................................................... passim Oppenheimer v. Dresdner Bank A.G., 50 A.D.2d 434 (2d Dep’t 1975) ................... 23 Parbulk II AS v. Heritage Maritime, SA, 35 Misc. 3d 235 (N.Y. Sup. Ct. 2011) ............................................................ 15, 52 People v. Finnegan, 85 N.Y.2d 53 (1995) ................................................................. 55 People v. Peque, 22 N.Y.3d 168 (2013) .................................................................... 55 Petersen v. Chem. Bank, 5 Tiffany 21, 32 N.Y. 21, 29 How. Pr. 240 (N.Y. 1865) .. 12 Pultz v. Economakis,10 N.Y.3d 542 (2008) .............................................................. 55 Richardson v. Richardson & The National Bank of India, Ltd., [1927] P.228 (England) (SCB-ADD-011) .................................................................................. 51 S&S Mach. Corp. v. Mfrs. Hanover Trust Co., 219 A.D.2d 249 (1st Dep’t 1996) ............................................................................................................... 27, 28 Samsun Logix Corp. v. Bank of China, No. 105262/10, 2011 WL 1844061 (N.Y. Sup. Ct. May 12, 2011) .................................................................................. passim Scanscot Shipping Services v. Metales Tracomex LTDA, 617 F.3d 679 (2d Cir. 2010) ..................................................................................................................... 54 Sec. Savs. Bank v. California, 263 U.S. 282 (1923) .................................................. 23 viii Shaheen Sports, Inc. v. Asia Ins. Co., No. 98 Civ. 5951 (LAP), No. 11 Civ. 920 (LAP), 2012 WL 919664 (Mar. 14, 2012)..................................................... passim Shipping Corp. of India v. Jaldhi Overseas PTE Ltd., 585 F.3d 58 (2d Cir. 2009) .. 29 Tauza v. Susquehanna Coal Co., 220 N.Y. 259 (1917) (Cardozo, J.) ................. 37, 42 Therm-X-Chemical & Oil Corp. v. Extebank, 84 A.D.2d 787 (2d Dep’t 1981) . 48, 50 Tiffany (NJ) LLC v. Qi Andrew, 276 F.R.D. 143 (S.D.N.Y. 2011) ................... 13, 26 Tire Eng’g and Distrib. L.L.C. v. Bank of China Ltd., 740 F.3d 108 (2d Cir. 2014) .......................................................................... passim Trade Dev. Bank v. Cont’l Ins. Co., 469 F.2d 35 (2d Cir. 1972) .............................. 13 Unicredito Italiano v. JPMorgan Chase Bank, No. 2-104, 2002 WL 1378226 (D. Del. June 26, 2002) ............................................................................................... 30 W. Union Tel. Co. v. Pennsylvania, 368 U.S. 71 (1961) .................................... 22, 23 Walden v. Fiore, 134 S. Ct. 1115 (2014) ................................................................... 45 Walsh v. Bustos, 46 N.Y.S.2d 240 (N.Y. City Ct. 1943) .................................... 49, 51 Zemo Leasing Corp. v. Bank of N.Y., 158 Misc. 2d 991 (N.Y. Sup. Ct. 1993) ....... 27 STATUTES AND RULES 12 C.F.R. § 210.2(d) .................................................................................................. 21 12 C.F.R. § 210.25(b) ................................................................................................ 21 12 C.F.R. § 252.157 ................................................................................................... 14 17 C.F.R. § 230.902(k) .............................................................................................. 21 79 Fed. Reg. 17240 (Mar. 27, 2014) .................................................................... 14, 34 79 Fed. Reg. 5536, 5786 (Jan. 31, 2014) .................................................................. 21 12 U.S.C. § 84 ............................................................................................................ 32 12 U.S.C. § 3102 ........................................................................................................ 13 ix 12 U.S.C. § 3102(b)(1)............................................................................................... 32 12 U.S.C. §§ 3105-3111 ............................................................................................ 13 A.I.R. 1963 S.C. 1 (India) .......................................................................................... 20 Bus. Corp. Law .......................................................................................................... 42 Bus. Corp. Law § 304 ................................................................................................ 43 Bus. Corp. Law § 1314 .............................................................................................. 43 C.P.L.R. Article 52 .............................................................................................. passim C.P.L.R. § 302 ............................................................................................................ 44 C.P.L.R. § 302(a) ....................................................................................................... 44 C.P.L.R. § 5209 .............................................................................................. 21, 22, 24 C.P.L.R. § 5222 ........................................................................................ 18, 52, 54, 55 C.P.L.R. § 5224 .......................................................................................................... 58 C.P.L.R. § 5225 .................................................................................................... 55, 59 C.P.L.R. § 5227 .......................................................................................................... 55 C.P.L.R. § 5232 .......................................................................................................... 55 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 165 124 Stat. 1423-1432 (2010) ..................................................................... 13, 34 Fed. Rule Civ. Proc. 4(k)(1)(A) ................................................................................. 41 FOREIGN JUDGMENT ACT 1991, § 7(3)(b) .................................................................. 20 N.Y. Banking Law § 103 ..................................................................................... 32, 33 N.Y. Banking Law § 200(3) ................................................................................ 41, 42 N.Y. Banking Law §§ 200-209 .................................................................................. 13 N.Y. Banking Law § 200-b ........................................................................................ 43 x N.Y. Banking Law § 202-f ........................................................................................ 32 N.Y. CONST. Article I, § 14 ..................................................................................... 55 N.Y. U.C.C. § 4-106 .................................................................................................. 53 N.Y. U.C.C. § 4-A-105(1)(b) ..................................................................................... 53 RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 195, comment d. (1971) ............ 15 RESTATEMENT (SECOND) OF JUDGMENTS § 8 (1982) .................................................. 15 RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES § 441 (1987) ............................................................................................................. 12 MISCELLANEOUS Bill Jacket, L. 1994, Chapter 264 ........................................................................ 34, 47 Brian Rosner and Natalie A. Napierala, ‘Daimler’ Mostly Resolves New York’s ‘Separate Entity’ Dispute, N. Y. Law Journal, March 18, 2014 .......................... 47 Brief of the Federal Reserve Bank of New York as Amicus Curiae in Support of Respondent-Appellant-Cross-Appellee, Amaprop Ltd. v. Indiabulls Fin. Servs. Ltd., 12-788-cv(L) (2d Cir. June 4, 2013) ..................................................... passim Brief of the Federal Reserve Bank of New York as Amicus Curiae in Support of Respondents, et al., Samsun Logix Corp. v. Bank of China, et al., Index No. 105262/2010 (N.Y. Sup. Ct. 2010) ............................................................. 3, 29, 30 Brief for United States as Amicus Curiae Supporting Petitioner, Citibank, N.A. v. Wells Fargo Asia Ltd., No. 88-1260, 1989 WL 1126987 (U.S. 1989) ................ 11 Charles Platto & William G. Horton, ENFORCEMENT OF FOREIGN JUDGMENTS WORLDWIDE (2d ed. Int’l Bar Assoc. 1993) ......................................................... 20 Clyde Mitchell, Separate Entity Rule - U.S. Branches of Non-U.S. Banks, N.Y.L.J. 3, col. 1 (Nov. 18, 1998) ....................................................................................... 30 Department of the Treasury and Board of Governors Subsidiary Requirement Study (Dec. 1992) ........................................................................................... 33, 34 Koehler v. Bank of Bermuda Ltd., Brief for Petitioner-Appellant Lee N. Koehler, 2009-0082, 2008 WL 6191439 (N.Y. Dec. 12, 2008) .......................................... 57 xi Koehler v. Bank of Bermuda Ltd., Brief for Respondent the Bank of Bermuda Limited, 2009-0082, 2009 WL 1615260 (N.Y. Feb. 4, 2009) ............................. 57 Koehler v. Bank of Bermuda Ltd., Appellant’s Reply to Amicus Curiae Brief of The Clearing House Association L.L.C., 2009-0082, 2009 WL 1615263, at *29- 30 (N.Y. Apr. 16, 2009) ........................................................................................ 57 Report of the Superintendent’s Advisory Committee on Transnational Banking Institutions (Mar. 1992) ...................................................................... 31, 32, 33, 35 1 STATEMENT OF INTEREST OF AMICI CURIAE The Institute of International Bankers (“IIB”) is the only national association devoted exclusively to representing, advancing and protecting the interests of the international banking community in the United States, with a membership comprised of internationally headquartered banks and financial institutions from over thirty-five countries that have operations throughout the U.S., particularly in New York. U.S. operations of IIB members have assets of approximately $5 trillion, are an important source of credit for U.S. borrowers, enhance the depth and liquidity of U.S. financial markets, and contribute more than $50 billion each year to the economies of major cities across the country. Established in 1853, The Clearing House Association L.L.C. (“The Clearing House”) is the nation’s oldest banking association and payments company. It is owned by the world’s largest commercial banks, which collectively employ 1.4 million people in the U.S. and hold more than half of all U.S. deposits. The Association is a nonpartisan advocacy organization representing - through regulatory comment letters, amicus briefs, and white papers - the interests of its member banks on a variety of systemically important banking issues. Its affiliate, The Clearing House Payments Company L.L.C., provides payment, clearing, and settlement services to its member banks and other financial institutions, clearing almost $2 trillion daily and representing nearly half of the automated-clearing- 2 house, funds-transfer, and check-image payments made in the United States. The New York Bankers Association (“NYBA”) is an association comprised of approximately 150 community, regional and money center commercial banks in New York with over 200,000 employees in the State. A number of NYBA’s member banks are internationally headquartered and many conduct business internationally as well as in New York. The European Banking Federation (“EBF”) is the leading professional organization of European banks. It provides a forum for European banks to discuss best practices and legislative proposals and to adopt common positions on matters affecting the European banking industry. EBF also actively promotes the positions of the European financial services industry, and the banking industry in particular, in international fora. The IIB, The Clearing House, NYBA, and EBF (the “amici”) appear as amici curiae regularly on matters that raise legal issues of significance for their member banks and in particular have supported the role of the United States in general and New York in particular as an international financial center. The amici have a substantial interest in this action because of the adverse precedent it could set for their member banks, and for all international banks with branches or offices in New York. As set forth in more detail below, a rule that authorizes post- judgment, global restraint (or turnover) of accounts maintained or assets held at 3 non-U.S. branches or offices of international banks with New York branches or offices would create serious problems for international banks doing business in New York, and would adversely affect New York’s position as a pre-eminent financial center. PRELIMINARY STATEMENT1 This Court has been asked to determine whether the separate entity rule remains viable in the context of an extraterritorial post-judgment restraining order and thus “precludes a judgment creditor from ordering a garnishee bank operating branches in New York to restrain a debtor’s assets held in foreign branches of the bank.” Tire Eng’g and Distrib. L.L.C. v. Bank of China Ltd., 740 F.3d 108, 110 (2d Cir. 2014). The separate entity rule provides that, even if a bank is subject to personal jurisdiction in New York, the branches and offices of the bank outside of New York will be treated as separate and juridically distinct entities for purposes of pre-judgment attachment and judgment enforcement. The rule recognizes the unique role and importance that international banking serves in New York and the 1 The following definitions are used herein: appellant-respondent Motorola Solutions Credit Company, LLC (“Motorola”); respondent-appellant Standard Chartered Bank (“SCB”); Brief of Appellant-Respondent Motorola Solutions Credit Company, LLC, dated April 21, 2014 (“Motorola Br.”); Brief for Respondent-Appellant Standard Chartered Bank, dated June 5, 2014 (“SCB Br.”); Reply Brief of Appellant-Respondent Motorola Solutions Credit Company, LLC, dated June 16, 2014 (“Motorola Reply”); Federal Reserve Bank of New York (“FRBNY”); FRBNY amicus brief filed in Samsun Logix Corp. v. Bank of China, et al., Index No. 105262/2010 (N.Y. Sup. Ct. 2010), Mot. No. 004 (“FRBNY Samsun Amicus”); FRBNY amicus brief filed in Amaprop Ltd. v. Indiabulls Fin. Servs. Ltd., 12-788-cv(L) (2d Cir. June 4, 2013) (“FRBNY Amaprop Amicus”). The amici have included with this brief an Addendum (“AMI- ADD”) that includes copies of sources cited by the amici that may be difficult to locate. 4 severe practical and legal problems posed for international banks if pre-judgment attachments, restraints, and other enforcement devices issued in New York judgment enforcement actions are found to extend to non-U.S. assets or accounts located abroad. In its briefs in this case, Motorola argues that any purpose served by the separate entity rule has long since ceased to exist; that the rule is a legal fiction created by a few lower courts that, if it exists at all, applies only in the pre- judgment attachment context; and that the rule was sub silentio overruled in the post-judgment context by the New York Legislature with the adoption of the C.P.L.R. in 1962 and subsequently impliedly repudiated by this Court’s decisions in Koehler v. Bank of Bermuda, 12 N.Y.3d 533 (2009), and Commonwealth of the N. Mariana Islands v. Canadian Imperial Bank of Commerce, 21 N.Y.3d 55 (2013). None of these arguments is correct. Contrary to Motorola’s contentions, the same important policy considerations that have long supported the separate entity rule remain highly relevant in today’s age of global banking. First, the importance of the separate entity rule is highlighted by the existence of laws in foreign jurisdictions where international banks have branches or offices, which govern the rights in, and disposition of, assets held or accounts maintained at such branches or offices, and which in many cases provide for 5 serious civil and criminal sanctions in the event of breach. Applying U.S. court orders to bank accounts or assets located abroad and governed by non-U.S. account agreements and laws would enmesh international banks regularly in a web of inconsistent and irreconcilable laws and orders, as the laws of each jurisdiction where an international bank has a branch would be implicated. The restraining notices that Motorola seeks to have given global effect would render any bank answerable in New York for any bank account or property entrusted to it anywhere in the world merely by virtue of a New York branch or office, even where the account or property in question has no U.S. connection and the local law governing the relationship between the bank and its customer affirmatively prohibits restraint or does not recognize the effectiveness of a foreign restraint to relieve the bank of local repayment liability to its customer based on the terms of a foreign order. The issuance of such orders by New York courts would be contrary to the well-established U.S. rule that the courts in the jurisdiction in which assets are actually located or accounts maintained should determine the rules regarding the treatment of assets or accounts, and would infringe on the sovereignty and primary jurisdiction of the nation in which those accounts or assets are actually located. Second, absent the separate entity rule, the burdens placed on banks with New York branches or offices would be significant - in terms of cost, time, 6 resources, and ability to satisfy and retain customers. In addition to the cost of global searches, banks would become embroiled in inevitable conflicts among competing legal systems and parties - a multiplication of litigation that is avoidable by requiring, as has historically been the case, creditors to bring enforcement proceedings against banks in the jurisdiction where assets are held or accounts maintained. Motorola’s suggestion that the burdens imposed on international banks by overturning the separate entity rule can be avoided by having banks operate in New York through subsidiaries ignores the reasons for branch banking and the significant benefits to New York and the United States that branch banking confers. A branch’s lending capacity is based on the international bank’s entire capital base. A U.S. subsidiary bank would have only its much smaller capital base as a limit on its lending capacity, and accordingly, the subsidiary bank’s ability to operate in New York would be greatly diminished. Adopting a rule that may discourage banks from operating in New York through branches would be detrimental to New York’s status as a preeminent global banking center and to New York banking customers, and it may encourage international banks to shift their U.S. dollar deposit and loan business to branches in other states or other countries. Moreover, the use by foreign banks of subsidiaries in New York to address the problem that would be created by abandonment of the separate entity 7 rule would be of no help to global banks organized or headquartered in New York which, in order to compete with other global banks, use branches in other jurisdictions. In addition to the many other policy considerations that support the separate entity rule, the rule in the transnational context is now rooted in federal constitutional doctrine. Under the Supreme Court’s recent decision in Daimler AG v. Bauman, 134 S. Ct. 746 (2014), a bank incorporated and headquartered outside of New York is not subject to general jurisdiction here merely by reason of doing business through a New York branch or office, and as a result, a restraining notice served on the New York branch of such a bank does not extend to the bank generally - i.e., to branches outside of New York. In light of Daimler, overturning the separate entity rule could have the anomalous result of disadvantaging domestic banks that are “at home” in New York under Daimler and also operate outside New York by subjecting those banks alone to the burden of global post- judgment asset restraints. Motorola’s effort to dismiss the separate entity rule as the product of a few lower court cases and limited to pre-judgment attachments is belied by the case law. The courts of this state have accepted and applied the separate entity rule for literally scores of years. And although this Court has never explicitly addressed the rule, the Appellate Divisions of the First and Second Departments have treated 8 the rule as sanctioned by this Court, and the First Department concluded little more than a decade ago that the rule was so firmly embedded in the New York common law that it should not be overturned or reduced in scope without an explicit pronouncement from this Court or the Legislature. See Nat’l Union Fire Ins. Co. v. Advanced Employment Concepts, Inc., 269 A.D. 2d 101, 101 (1st Dep’t 2000). In applying the separate entity rule, the New York State and federal courts have long recognized that the same considerations that support the rule in the pre- judgment context apply equally in the context of post-judgment restraints, and have routinely adhered to the separate entity rule in the post-judgment enforcement context. Indeed, the New York state cases decided after this Court’s decision in Koehler have uniformly found that the separate entity rule applies to Article 52 restraining notices and turnover orders.2 There is similarly no basis for finding that the Legislature overturned (or intended to overturn) the separate entity rule when it adopted the C.P.L.R. in 1962. Under this Court’s case law, where the Legislature is aware of an existing common law rule, new legislation does not repudiate the rule unless the legislation expressly so indicates. The Legislature clearly was aware of the separate entity rule in 1962, and Motorola cites no case that has adopted Motorola’s novel reading of the C.P.L.R.’s enactment. 2 The majority of, and most recent, federal cases have also found that the rule continues to apply in the post-judgment context after this court’s decision in Koehler. See, e.g., Tire Eng’g, 740 F.3d at 115 n.10 (citing New York state and federal courts continuing to apply separate entity rule post-Koehler); see also SCB Br. at 59-61, 70-71. 9 Finally, Motorola’s argument that this Court’s decisions in Koehler and Northern Mariana abrogated the separate entity rule is without merit. As Motorola concedes, this Court “never mentioned” the separate entity rule in those decisions. Motorola Br. at 32. Further, neither case involved the separate entity rule, as neither case involved an attempt to reach assets or accounts at the non-New York branches of a bank via service of process on a bank’s New York branch. Thus, neither case considered whether, let alone held that, merely by reason of the existence of a New York branch, a foreign bank must restrain, or turn over, assets held or accounts maintained outside of New York at the non-U.S. head office, or non-U.S. branches, of that bank in response to process issued in a New York judgment enforcement proceeding. For all of these reasons and the reasons set forth below, this Court should answer the certified question in the affirmative. ARGUMENT I. THERE ARE SIGNIFICANT POLICY CONSIDERATIONS THAT SUPPORT THE SEPARATE ENTITY RULE AND THOSE POLICY CONSIDERATIONS APPLY WITH EQUAL FORCE IN THE CONTEXT OF POST-JUDGMENT RESTRAINTS Important policy reasons underlie the separate entity rule.3 These policies 3 This Court is of course free to consider public policy in reaching its decisions, including decisions concerning the construction of New York statutes, as its recent decision in In re Thelen LLP, __ N.E.3d __, 2014 WL 2931526, at *7-8 (N.Y. July 1, 2014), confirms. In re Teachers Ins. & Annuity Ass’n of Am. v. City of N.Y., 82 N.Y.2d 35, 43 (1993) (Motorola Reply at 30), found that policy should not be used to create rules directly inconsistent with specific statutory 10 are not meant to “insulate[]” banks from foreign claims (Motorola Reply at 4) but rather serve the important goal of promoting New York as a financial center by encouraging banks to operate in this jurisdiction through branches. Indeed, banking is one of the few businesses that is conducted cross-border through branches. The separate entity doctrine has helped foster that development. A. The Separate Entity Rule Recognizes That Banks Operating Internationally Are Subject To Multiple And Frequently Conflicting Laws 1. The Separate Entity Rule Allows Banks To Avoid Having To Choose Among Competing Legal Regimes By limiting the reach of New York orders (including post-judgment restraints) affecting assets or accounts to those held or maintained at the New York branch or office, the separate entity rule serves the important policy goal of avoiding conflicts among competing legal regimes. See, e.g., Shaheen Sports, Inc. v. Asia Ins. Co., No. 98 Civ. 5951 (LAP), No. 11 Civ. 920 (LAP), 2012 WL 919664, at *8 (Mar. 14, 2012); Ayyash v. Koleilat, 38 Misc. 3d 916, 924 (N.Y. Sup. Ct. 2012), aff’d on other grounds, 115 A.D.3d 495 (1st Dep’t 2014); Global Tech., Inc. v. Royal Bank of Can., No. 150151/2011, 2012 WL 89823, at *5 (N.Y. Sup. Ct. Jan. 11, 2012) (noting that separate entity rule was “historically justified . . . on the recognition that any banking operation in a foreign country is necessarily subject to the foreign sovereign's own laws and regulations” (citation omitted)); see language. The case has no bearing here, where a long-standing rule of New York common law supplements - but is not contrary to - New York statutory law. 11 also Clinton Trust Co. v. Campania Azucarera Central Maybay S.A., 172 Misc. 148, 151 (N.Y. Sup. Ct.), aff’d, 258 A.D. 780 (1st Dep’t 1939); FRBNY Amaprop Amicus at 11. This respect for non-U.S. law was highlighted by the U.S. government in an amicus submission to the U.S. Supreme Court: In terms of international banking law, the separate entity doctrine thus gives recognition to the fact that any banking operation in a foreign country is necessarily subject to the foreign sovereign’s own laws and regulations . . . . Brief for the United States as Amicus Curiae Supporting Petitioner, Citibank, N.A. v. Wells Fargo Asia Ltd., No. 88-1260, 1989 WL 1126987, at *14 (U.S. 1989) (footnote and citation omitted). Contrary to Motorola’s assertion, recognizing the significance of foreign law does not mean that “any foreign law [] takes precedence over New York law” (Motorola Reply at 42), but rather, under the doctrine of comity, provides due respect to the law of the jurisdiction in which assets are actually located or accounts maintained in determining whether to issue an order with respect to those assets or accounts. Consistent with the doctrine of comity, it has long been U.S. policy to avoid applying U.S. laws in a way that interferes with the laws of other nations. See, e.g., Petersen v. Chem. Bank, 5 Tiffany 21, 32 N.Y. 21, 29 How. Pr. 240 (N.Y. 1865) (enunciating principle of comity); F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 164 (2004). A central tenet of comity is that “a state may not require a person to do an act in another state that is prohibited by the law of that 12 state or the law of the state of which he is a national.” Motorola Credit Corp. v. Uzan, 388 F.3d 39, 60 (2d Cir. 2004) (quoting RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES § 441 (1987)); see also Ings v. Ferguson, 282 F.2d 149, 152 (2d Cir. 1960)). Although it is beyond the scope of this brief to survey the laws of all other jurisdictions, there can be no dispute that efforts to restrain, or transfer to New York, foreign customer assets or funds on deposit in accounts located in every country where the bank has a branch or office would create conflicts with other jurisdictions and subject banks to criminal, civil or regulatory liability. See, e.g., Motorola Credit Corp. v. Uzan, 978 F. Supp. 2d 205, 213 (S.D.N.Y. 2013) (noting that SCB may be subject to censure, fines, or suspension or cancellation of its license for complying with U.S. court order directed to assets in the UAE); Samsun Logix Corp. v. Bank of China, No. 105262/10, 2011 WL 1844061, at *6 (N.Y. Sup. Ct. May 12, 2011) (noting that Chinese law prohibits banks from complying with an order issued by a court outside of China to disclose information about, freeze, or transfer funds from accounts in China, and that violation of such laws could expose the bank’s officers and employees to sanction and civil liability); Tiffany (NJ) LLC v. Qi Andrew, 276 F.R.D. 143 (S.D.N.Y. 2011) (similar); Shaheen, 2012 WL 919664, at *7 (noting that bank had presented colorable evidence that Pakistani law prohibited turnover of assets in Pakistan); Ayyash, 38 13 Misc. 3d at 924 (separate entity rule avoids conflicts with competing legal systems which have “serious civil and criminal sanctions” for the breach of local law), aff’d on other grounds 115 A.D.3d 495 (1st Dep’t 2014) (finding that “ordering compliance [with post-judgment subpoenas and restraints] raises the risk of undermining important interests of other nations by potentially conflicting with their privacy laws or regulations”); see also Trade Dev. Bank v. Cont’l Ins. Co., 469 F.2d 35, 41 (2d Cir. 1972) (bank would be subject to criminal and civil liability in Switzerland for violating Swiss bank secrecy laws); In re Union Bank of Switz., 158 Misc. 2d 222, 225 (N.Y. Sup. Ct. 1993) (same). It is hardly surprising that a foreign country would choose to regulate banks operating within its borders. Banks and bank branches operating in New York are, after all, subject to extensive New York and federal supervision and regulations.4 Motorola’s suggestion that, rather than continue to apply the separate entity rule, courts should apply a case by case analysis every time a plaintiff seeks an extraterritorial restraint affecting assets or accounts in another jurisdiction (see, 4 A New York State licensed branch is supervised and regulated by both the New York State Department of Financial Services (N.Y. Banking Law §§ 200-209) and the Board of Governors of the Federal Reserve System (12 U.S.C. §§ 3105-3111). A federally licensed branch is supervised and regulated by the Office of the Comptroller of the Currency (12 U.S.C. § 3102) and the Board of Governors of the Federal Reserve System (12 U.S.C. §§ 3105-3111). The U.S. operations of large foreign banking organizations are subject to additional, enhanced prudential standards pursuant to Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1423-1432), and the regulations promulgated thereunder by the Board of Governors of the Federal Reserve System (79 Fed. Reg. 17240 et seq. (March 27, 2014)), including liquidity stress testing and buffer requirements for their U.S. branches. See 12 C.F.R. § 252.157. 14 e.g., Motorola Br. at 25 n.14) ignores the significant burden such a system would place on, and uncertainty it would create for, international banks operating in New York. As discussed below (see pp. 25-30), international banks are frequently involved as bystanders in complex cross-border disputes among competing legal systems and parties regarding claims to assets. Without the separate entity rule, international banks would be forced to engage in costly litigation, which may include proving applicable non-U.S. law through expert submissions, each time they are faced with a judgment creditor’s effort to reach assets outside of New York. Courts would be inundated with plaintiffs seeking extraterritorial restraints (and turnover orders), and would be forced to engage in an extensive analysis in issuing decisions on the reach of such orders. See also Hoffmann, 542 U.S. at 164 (finding plaintiffs’ suggestion that courts consider comity on a “case by case” basis, rather than “exclude independent foreign injury cases across the board” was “too complex to prove workable,” including because requiring courts to compare foreign law to American law routinely would result in “lengthier proceedings, appeals, and more proceedings” (emphasis added)). The result would be one which Motorola seems to caution against - “conflicting, ad hoc judicial determinations.” Motorola Br. at 38. Thus, Motorola’s suggestion only highlights why this Court should confirm that the separate entity rule remains viable and prevents the type of relief Motorola seeks. 15 2. The Separate Entity Rule Is Consistent With And Supported By The Local Action Doctrine It has long been recognized that claims to property should be decided by, and under the rules of, the jurisdiction in which the asset is located. See, e.g., RESTATEMENT (SECOND) OF JUDGMENTS § 8 (1982); see also RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 195, comment d. (1971) (“Money lent by a bank or deposited in a bank is usually repayable at the bank itself or, when the bank has branches, at the branch with which the customer dealt. In the absence of an effective choice of law by the parties, the state of the applicable law in such instances will almost invariably be the state where the bank, or the particular branch thereof, is located.”); Cronan v. Schilling, 100 N.Y.S.2d 474, 476 (N.Y. Sup. Ct. 1950), aff’d, 282 A.D. 940 (1st Dep’t 1953) (under separate entity rule, “each branch of a bank is a separate entity, in no way concerned with accounts maintained by depositors in other branches or at the home office”); Parbulk II AS v. Heritage Maritime, SA, 35 Misc. 3d 235, 238 (N.Y. Sup. Ct. 2011) (“situs of an account is fixed at the branch where the account is carried”). This position was echoed by the FRBNY in a recent New York judgment enforcement case. See FRBNY Samsun Amicus Brief at 6 (citing the “generally recognized principle [that] claims against a single asset should be decided in a single forum, and that forum should be the court of the jurisdiction in which the asset is located”). This local action doctrine avoids the specter of conflicting orders from multiple 16 jurisdictions as to the rights in, or disposition of, a single asset - a potential that poses particularly acute problems for banks operating in multiple jurisdictions. The principle provides a strong justification for the separate entity rule, and is a consideration raised every time a court attempts to adjudicate with respect to assets located outside of its jurisdiction. The doctrine also reflects the fundamental role that the interests of local creditors and the public policy of the sovereign where the asset is located play in deciding how assets will be treated. New York (and other U.S.) courts have historically been willing to give effect to orders of foreign tribunals with respect to assets located here only if doing so would not prejudice the rights of local creditors or violate New York (or U.S.) public policy. See, e.g., In re Waite, 99 N.Y. 433, 448 (1885); see also Disconto Gesellschaft v. Umbreit, 208 U.S. 570, 579-580 (1908); Clarkson Co. v. Shaheen, 544 F.2d 624, 629 (2d Cir. 1976). Consistent with these principles, it is not logical or fair for U.S. courts to issue orders concerning assets in another jurisdiction, particularly where compliance in the foreign jurisdiction would require a third-party to violate the law and public policy of that jurisdiction. The separate entity rule avoids this problem by providing due respect for the sovereignty of other nations with primary jurisdiction over assets located within their territory. 17 3. Limiting The Reach Of A Post-Judgment Asset Restraint In A Manner Consistent With The Separate Entity Rule Is Consistent With The Presumption Against Extraterritorial Application Of New York Statutes In Global Reinsurance Corp. v. Equitas Ltd., 18 N.Y.3d 722, 735 (2012), decided two years after Koehler, this Court confirmed that “[t]he established presumption is . . . against the extraterritorial operation of New York law.” That presumption, which is in accord with the parallel federal law presumption against extraterritorial application of U.S. statutory law, is supported by the desirability of avoiding “clashes between our laws and those of other nations” reflected in principles of comity. Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659, 1664 (2013); see also Morrison v. Nat’l Australia Bank, Ltd., 130 S. Ct. 2869, 2877 (2010). As the Supreme Court explained in its earlier decision in Hoffmann, “this Court ordinarily construes ambiguous statutes to avoid unreasonable interference with other nations’ sovereign authority . . . . This rule of statutory construction cautions courts to assume that legislators take account of the legitimate sovereign interests of other nations when they write American laws. It thereby helps the potentially conflicting laws of different nations work together in harmony - a harmony particularly needed in today’s highly interdependent commercial world.” 542 U.S. at 156, 164-65. The concerns that underlie these established rules of construction militate against applying an Article 52 restraint to foreign branches of international banks, 18 where conflicts with foreign law are practically inevitable.5 The continued use of the separate entity rule furthers the goal of avoiding conflicts between New York law and the laws of other nations. Motorola’s reliance on the alleged existence of personal jurisdiction over SCB as a whole as the predicate for extending the reach of post-judgment restraints to non-U.S. branches of the bank (Motorola Br. at 4, 17-18; 27-28; Motorola Reply at 13-14) does not call for any different conclusion. The Supreme Court in Daimler, relying on the same concerns about the expansive reach of U.S. law and jurisdiction that support the general presumption against extraterritorial application of U.S. and New York law, held that the continuous conduct of business through a U.S. office cannot alone support the assertion of general jurisdiction over a foreign entity created and headquartered abroad. 134 S. Ct. at 761. Consequently, as discussed below, absent extraordinary circumstances not alleged to exist here, there is no constitutionally permissible basis for subjecting SCB (or other global banks) to the jurisdiction of a court sitting in New York as to assets held or 5 Section 5222 contains no language indicating that it was intended to apply extraterritorially. Although this Court in Koehler declined to “infer” a territorial limit on Article 52 (12 N.Y.2d at 539), this Court did not address the use of an Article 52 enforcement device against a foreign branch of an international bank subject to conflicting legal duties in foreign jurisdictions. Indeed there was no suggestion in Koehler that the laws of any other nation imposed any constraint on the turnover of the assets there at issue. See infra pp. 56-57. Particularly in light of this Court’s subsequent decision in Global Reinsurance, Koehler should not be read to support the unlimited extraterritorial application urged by Motorola. 19 accounts maintained at a branch located abroad merely by reason of the existence of New York offices or branches. 4. Overturning The Separate Entity Rule Would Subject Banks To The Risk Of Double Liability A post-judgment restraint is an enforcement mechanism that is normally a predicate for an application for a turnover order requiring delivery of the amount on deposit in an account or other assets to the judgment creditor. Motorola itself makes clear that it believes it would be entitled to a turnover order if the separate entity rule is found not to apply. Motorola Reply at 38. Moreover, an asset restraint that imposes restrictions on the foreign branch of a bank from taking action with respect to assets held or accounts maintained at the foreign branch - particularly where such restraint violates the laws of the local jurisdiction - has a practical effect not dissimilar from a turnover order and, like a turnover order, can subject the bank to the risk of multiple exposure. If a bank is prohibited by a New York restraint from transferring assets or paying deposits in another country but, according to the law of the jurisdiction where the assets or deposits are located, has to allow its customer to withdraw the assets, the bank could be liable for the assets twice.6 It can be liable here for 6 Indeed, a number of foreign jurisdictions will refuse to give effect to a judgment from another country if that judgment relates to the disposition of property located outside the territorial jurisdiction of the court issuing the judgment. See, e.g., FOREIGN JUDGMENT ACT 1991, § 7(3)(b) (Austl.) (“[T]he courts of the country of the original court are taken to have had jurisdiction . . . if the property in question was . . . situated in the country of that court”); A.I.R. 20 contempt if it allows a customer to withdraw funds abroad, as required by the jurisdiction where the account is located, and, if it honors the restraint and refuses to allow a withdrawal, it can be liable to the customer in the foreign jurisdiction for the full amount of the account balance or, at the very least, for the loss of use of the funds while the restraint is in effect. See, e.g., Shaheen, 2012 WL 919664, at *8 (recognizing this point); Samsun, 2011 WL 1844061, at *5 (same). As the FRBNY recently made clear to the Second Circuit in the context of another separate entity rule case, the separate entity rule protects non-party banks from double liability. See FRBNY Amaprop Amicus at 9-11 (noting that without the separate entity rule, “U.S. courts have no way to systematically discern whether creditors apart from Amaprop are seeking to enforce a judgment against the same asset through the Indian (or other) judicial system(s). The result is chaos, with multiple judgment creditors each asserting superior ownership to a single asset”). The FRBNY cautioned that a system which would create a “significant risk that [a garnishee bank] will become twice liable for [a debtor’s] judgment debt” in turn creates “a perverse incentive for foreign judgment debtors to default on their debt, thus transforming New York branches of foreign banks into de facto insurance 1963 S.C. 1 (India) (“A court of a foreign country has jurisdiction to deliver a judgment in rem which may be enforced or recognised in an Indian Court, provided that the subject matter of the action is property . . . within the foreign country”); Charles Platto & William G. Horton, ENFORCEMENT OF FOREIGN JUDGMENTS WORLDWIDE, 99 (2d ed. Int’l Bar Assoc. 1993) (Canadian court will enforce foreign judgment determining status of property if property was situated within the territorial jurisdiction of foreign court). 21 policies for judgment debtors.” Id. at 10. Repudiating the separate entity rule, therefore, creates the risk that non-parties having nothing to do with the dispute (e.g., banks), will ultimately bear the cost of the judgment - judgment creditors would be allowed to collect their judgments from non-party banks, while judgment debtors would have a right to be made whole (again, by the banks).7 This is just the type of problem New York law seeks to avoid by insulating third-party garnishees from double liability. C.P.L.R. §5209, which provides that once a garnishee turns over property of a judgment debtor under an execution or order, the garnishee is discharged from its obligations to the judgment debtor,8 reveals the strong New York policy that garnishee banks not be exposed to double liability. But, as the cases have found, there is no assurance that the discharge 7 The strong policies favoring the separate entity rule, which have been given repeated voice by the FRBNY in amicus briefs cited and discussed above, have also led to the adoption of the separate entity rule in federal regulations. Federal Reserve regulations specifically adopt the separate entity rule for purposes of check collection (12 C.F.R. §210.2(d) (“A branch or separate office of a bank is a separate bank to the extent provided in the Uniform Commercial Code”)) and wire transfers (12 C.F.R. § 210.25(b)). Similarly, for purposes of determining whether a bank is “located” in the United States, and hence subject to proprietary trading restrictions under the Volcker Rule, federal regulations implementing the Volcker Rule provide that: “For purposes of paragraph (e) of this section, a U.S. branch, agency, or subsidiary of a foreign banking entity is considered to be located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.” See 79 Fed. Reg. 5536, 5786 (Jan. 31, 2014) (§ 75.6(e)(5) of the final rules) (emphasis added). SEC regulations also treat local agencies or branches as separate and distinct from the other branches and offices of a foreign bank. See 17 C.F.R. § 230.902(k) (defining “U.S. person” to include “[a]ny agency or branch of a foreign entity located in the United States”). 8 “A person who, pursuant to an execution or [turnover] order, pays or delivers, to the judgment creditor . . . money or other personal property in which a judgment debtor has or will have an interest, or so pays a debt he owes the judgment debtor, is discharged from his obligation to the judgment debtor to the extent of the payment or delivery.” C.P.L.R. § 5209 (emphasis added). 22 contemplated by Section 5209 will be given effect abroad where assets may be located. Shaheen, 2012 WL 919664, at *8 (“Moreover, HBL argues that were it required to turn over Asia Insurance assets in New York, this would not discharge its obligations to Asia Insurance in Pakistan, because Pakistan's courts do not recognize judgments in U.S. courts. HBL’s concern for potential inconsistent judgments and double liability is therefore very real”); Samsun, 2011 WL 1844061, at *6 (finding that banks were subjected to risk of double liability where New York court restraint and turnover order would not be recognized in China). Granting Motorola a post-judgment restraint (and turnover) would create the very risk of double liability that New York law seeks to avoid. Simply put, this Court cannot provide any “assurance that [SCB] will not be held liable again in another jurisdiction.” W. Union Tel. Co. v. Pennsylvania, 368 U.S. 71, 75 (1961). The Supreme Court has long recognized that double liability raises concerns of a constitutional nature. Harris v. Balk, 198 U.S. 215, 226 (1905) (“It ought to be and it is the object of courts to prevent the payment of any debt twice over”). As Justice Kent wrote nearly a century before Harris, “[n]othing can be more clearly just, than that a person who has been compelled, by a competent jurisdiction, to pay a debt once, should not be compelled to pay it over again.” Embree v. Hanna, 5 Johns 101, 102 (1809). Applying that principle, the Supreme Court warned that, even where the court has in rem jurisdiction, “the holder of 23 such property is deprived of due process of law if he is compelled to relinquish it without assurance that he will not be held liable again in another jurisdiction or in a suit brought by a claimant who is not bound by the first judgment.” W. Union, 368 U.S. at 75 (citing Anderson Nat’l Bank v. Luckett, 321 U.S. 233, 242-43 (1944); Sec. Savs. Bank v. California, 263 U.S. 282, 286-90 (1923)). New York courts have found that, where a turnover order creates the potential for double liability, this would be “an unconscionable result.” Oppenheimer v. Dresdner Bank A.G., 50 A.D.2d 434, 441 (2d Dep’t 1975); see also JPMorgan Chase Bank, N.A. v. Motorola, Inc., 47 A.D.3d 293. 300-302, 306 (1st Dep’t 2007) (citation omitted) (rejecting turnover because of risk of double liability: “[T]he record evidence indicates that the Indian courts will not give the judgment appealed from the effect to which it is entitled under New York law”); Samsun, 2011 WL 1844061, at *5. The separate entity rule prevents the very risk of double liability which the C.P.L.R. is designed to avoid. Despite Motorola’s contention, there is no requirement (and there should not be one) that liability be “certain” for the policy against double liability to come into play. Motorola Reply at 36. The reality in the context of foreign banking is that there is a very significant risk of double liability for any bank operating in New York and in another jurisdiction that will not recognize the Section 5209 discharge. Although SCB or other banks would be “afforded the benefit” of 24 Section 5209 (Motorola Reply at 36) when turning over customer assets located in New York or even in another U.S. state, that “benefit” is meaningless in another jurisdiction that does not recognize a New York court order requiring the bank to pay over funds on deposit in an account maintained at a branch located in that jurisdiction to a judgment creditor. As the FRBNY cautioned, if the separate entity rule is ignored, and banks are faced with a “significant risk” of double liability, “[t]his will cause foreign banks to reassess their risk exposure and the associated cost of doing business in New York (if they choose to even maintain a New York presence). Ultimately, the cost of this risk will likely be borne by the consumer in the form of increased banking fees.” FRBNY Amaprop Amicus at 10. Finally, international banks such as SCB do not somehow accept the risk of double liability by doing business in New York. Motorola Reply at 39. As SCB points out in its brief, the New York Legislature has rejected that proposition.9 The 9 In response to the so-called Petrogradsky line of cases, which addressed the risks of double payment by banks where the banks are subject to conflicting claims of multiple parties claiming a direct ownership interest in an account, the Legislature enacted laws specifically designed to protect international banks from the threat of double liability, negating any suggestion that New York “as a matter of law . . . places on banks any risk” of double liability. Compare SCB Brief at 27-32 with Motorola Reply at 3. Moreover, in JPMorgan the First Department reviewed the Petrogradsky line of cases and distinguished these cases on the ground that they involved situations where a party asserted an ownership right to a bank account, and refused to follow them in the context of third-party garnishment proceedings: “Further, Chase, the party asking us to expose Motorola to the risk of double liability, seeks to garnish an asset to which Chase (unlike the plaintiffs in the Petrogradsky line of cases) asserts no claim in its own right, but only a derivative claim as judgment creditor of an absent third party.” JPMorgan, 47 A.D.3d at 311. Motorola, like the losing plaintiff in JPMorgan, seeks to use garnishment to obtain assets located outside of the jurisdiction, to which Motorola asserts no direct right. 25 separate entity rule protects international banks from exposure to worldwide liability arising from the application of New York pre-judgment attachments and post-judgment enforcement devices. A bank such as SCB would have no reason to think that by operating in New York through a branch it would be open to worldwide liability particularly where, as SCB highlights, the separate entity rule has been in place in New York (and elsewhere) for scores of years.10 See SCB Br. at 19-39; 82-88. B. International Banks Would Be Unduly Burdened If Required To Address Global Asset Restraints Issued In New York Proceedings Historically, the separate entity rule also recognized that requiring any branch other than the branch at which an account is located to handle an order relating to that account would place “an intolerable burden upon banking and commerce.” Cronan, 100 N.Y.S.2d at 476, aff’d, 282 A.D. 940. Far from being rendered “obsolete” by the advent of computers and the internet (Motorola Br. at 38; Motorola Reply at 31), this consideration remains an important one, and has been recognized as such in recent cases. For example, the FRBNY recently 10 As SCB outlines in great detail in its brief, the separate entity rule arose specifically because of New York’s prominence as an international financial center. See SCB Br. at 65. That some states are “silent” on the issue of the separate entity rule or have issued orders with respect to assets in other U.S. states (see Motorola Reply at 46, n.38) ignores New York’s prominent status as an international banking center. Motorola Reply at 45. States like New Jersey, Connecticut and Pennsylvania simply do not have the same level of international bank presence. 26 recognized in Samsun that the burden concern remains relevant in the context of world-wide post-judgment restraint and garnishment orders: It’s not uncommon for many banks to still rely on paper records. Even when records are electronic, many banks rely on different computer platforms. . . . It’s [searching for records] a huge undertaking, and [if required to respond to such orders] banks will also become routine players in costly and complicated international lawsuits . . . . Transcript of Oral Argument at 75-6, Samsun, Index No. 105262/2010 (Feb. 4, 2011). These concerns are equally present here. When served with a subpoena, restraint or turnover order directed to assets or deposits abroad, the New York offices of global banks often lack the practical access to information or accounts located at non-U.S. branches. See, e.g., Tiffany, 276 F.R.D. at 152 (noting that information sought “is located abroad and cannot be accessed by personnel” at the non-party Chinese banks); Samsun, 2011 WL 1844061, at *6 (banks filed affidavits showing “that the computer systems in the New York branches of the Banks do not provide access to customer account information at the head office or at branches outside of the United States”). Thus, the rationale Motorola asserts originally underpinned the separate entity rule - that banks at one branch had no effective way “to ascertain the status of a debtor’s account at another branch” - retains vitality. Motorola Br. at 35. Not only has this rationale not become irrelevant (Motorola Reply at 31), but the case Motorola claims began to erode this 27 premise (id. at 32, citing Digitrex, Inc. v. Johnson, 491 F. Supp. 66, 68 (S.D.N.Y. 1980)), has been expressly limited, including by cases cited by Motorola. In John Wiley & Sons, Inc. v. Kirtsaeng, No. 08 Civ. 7834, 2009 WL 3003242, at *4 (S.D.N.Y. Sept. 15, 2009) (Motorola Br. at 37, n.22), the court found that the “Digitrex exception” is only applicable where: “(1) the restraining notice is served on the bank’s main office; (2) the bank’s main office and branches [where the accounts in question are maintained] are within the same jurisdiction; and (3) the bank branches are connected to the main office by high-speed computers and are under the centralized control of the main office.” Id. (citations omitted); see also Nat’l Union, 269 A.D.2d at 101.11 Recognizing these limitations, New York courts have recently found that the practical inability of New York branch banks to address global asset restraints and turnover orders continues to be a compelling reason to employ the separate entity rule. See, e.g., Samsun, 2011 WL 1844061, at *4; see also Lok Prakashan Ltd. v. India Abroad Publ’s, Inc., No. 00 Civ. 5852, 2002 WL 1585820, at *1 (S.D.N.Y. July 16, 2002). 11 Zemo Leasing Corp. v. Bank of N.Y., 158 Misc. 2d 991, 991 (N.Y. Sup. Ct. 1993), and S&S Mach. Corp. v. Mfrs. Hanover Trust Co., 219 A.D.2d 249, 251-253 (1st Dep’t 1996) (Motorola Br. at 39; Motorola Reply at 32-33), do not assist Motorola. There is no suggestion in Zemo that the restraint involved was directed at accounts outside of New York. 158 Misc. 2d at 992-993. S&S Machinery found that a restraining notice and subpoena served on a bank’s main office in Manhattan operated to require discovery of information about and restraint of assets located at the bank’s corporate trust department, located just a few blocks away from the main office. 219 A.D.2d at 251-253. Again, the case did not in any way involve an extraterritorial asset restraint. 28 Even if a bank’s New York office or branch could access information abroad,12 and the bank were not prohibited under the law of the jurisdiction where the accounts are located from providing that information to its New York office or branch for disclosure in a New York court proceeding, such requests would still be unduly burdensome and costly not only in terms of money, but in terms of time, resources, and customer relationships. As the district court below noted, “it is clear that the policies implicated by abolition of the separate entity rule run much deeper than the ability to communicate across branches.” Motorola, 978 F. Supp. 2d at 213. First, as recognized by the FRBNY, extraterritorial restraints like that sought by Motorola would compel banks to search the entire worldwide organization to determine whether property belonging to the judgment debtor could be found at any branch anywhere in the world, and take the steps necessary to freeze (and possibly transfer to New York) that property. This will impose substantial costs and risks on banks merely because they have New York operations. This reality has recently been evidenced in the context of federal maritime enforcement procedures. See Cala Rosa Marine Co. v. Sucres Et Deneres Grp., 613 F. Supp. 2d 426, 431 n.37 (S.D.N.Y. 2009). As a result of the Second Circuit’s adoption of a 12 To the extent Motorola suggests that policies regarding burden are applicable only to discovery and not restraint (Motorola Reply at 34), that argument ignores the fact that in order to restrain (and eventually turnover) assets, banks would have to first search for them. 29 new and expansive interpretation of the federal maritime attachment rule, there was a surge in maritime attachment requests, which resulted in “New York banks . . . hir[ing] additional staff, and suffer[ing] considerable expenses, to process the attachments,” including because “each attachment requires banks to amend ‘their software screens.’” Id. The massive increase in the use of maritime enforcement procedures following the adoption of the new interpretation led the Second Circuit to reconsider and abandon this approach. See Shipping Corp. of India v. Jaldhi Overseas PTE Ltd., 585 F.3d 58, 61 (2d Cir. 2009). Second, banks with New York branches or offices would be forced, at their own expense, to become frequent participants in complex cross-border legal disputes, as the FRBNY has made clear in its two recent amicus submissions addressing the impact of Koehler. See FRBNY Samsun Amicus at 5 and FRBNY Amaprop Amicus at 11, discussed above at pp. 15, 20-21, 24-26. In addition to dedicating resources both here and abroad to defending suits, and filing briefs and affidavits, banks would be forced to insure against this litigation risk and recover the costs from customers - all of which would disrupt, and increase the cost of, banking services around the world. Third, as the FRBNY further cautioned, were a New York court to enter an order directed to assets or deposits held abroad at foreign banks, other jurisdictions and countries might follow New York’s example, and enter orders affecting U.S. 30 bank accounts. See FRBNY Samsun Amicus at 7. This web of reciprocal laws, by which courts around the world might begin entering orders affecting assets outside of their jurisdictions, would further expand the burden on international banks and, in the FRBNY’s words, “ultimately threaten[] the balance of international banking law.” Id.13 Particularly because New York courts have long been a reference point for other jurisdictions on banking issues,14 the expansive exercise of extraterritorial power advocated here might be followed by courts in other nations to the detriment of international banks and New York’s status as an international banking center. What is anomalous about all this is that garnishee banks historically protected by the separate entity rule are mere bystanders to myriad underlying legal disputes. There is no unfairness in imposing on judgment creditors the costs of proper enforcement in the jurisdiction where assets or deposits are located, and refusing to allow those costs to be shifted to banks whose only act was opening a New York branch or office. 13 Indeed, such concerns also have been echoed by commentators, who have observed that ordering foreign banks to deliver assets into the United States “might expose U.S. banks to similar rulings abroad, with severe effects, since it would tilt what has been a level playing field against foreign banks.” Clyde Mitchell, Separate Entity Rule - U.S. Branches of Non-U.S. Banks, N.Y.L.J. 3, col. 1 (Nov. 18, 1998). 14 See, e.g., Unicredito Italiano v. JPMorgan Chase Bank, No. 2-104, 2002 WL 1378226, at *4 (D. Del. June 26, 2002) (transferring case on ethics in banking profession to New York because “[w]ith deference to Delaware’s significant role in the banking industry, New York City remains the financial center of the United States, if not the world”); Int’l Multifoods Corp. v. Commercial Union Ins. Co., 98 F. Supp. 2d 498, 502 (S.D.N.Y. 2000) (“New York is a leading center of banking, commerce and insurance in the United States, and the law developed by its courts is generally recognized and respected in such a light”). 31 C. The Separate Entity Rule Encourages Banks To Operate In New York Through Branches, Which Is Important To The New York And U.S. Economies Motorola repeatedly suggests that SCB would be better off if it operated in New York through a subsidiary rather than a branch, suggesting that SCB chose to operate in New York “as a unitary bank” for its own selfish reasons. See, e.g., Motorola Reply at 40. What Motorola ignores however, is that it is the New York economy and New York bank customers that actually benefit from banks operating as “unitary” banks rather than through separately incorporated subsidiaries. Indeed, Motorola’s argument flies in the face of New York policy - including as articulated by the Legislature (see infra p. 34) - in favor of having banks operate in New York through branches, and highlights why the separate entity rule is so important to New York and its economy. There are significant economic reasons that favor use of branches rather than bank subsidiaries by non-U.S. and U.S. banks. A depositor or other creditor of a U.S. branch of a non-U.S. bank has the worldwide capital of the bank behind an obligation, not merely that of a local subsidiary. See Report of the Superintendent’s Advisory Committee on Transnational Banking Institutions (Mar. 1992) (“Superintendent’s Report”) at 9 (AMI-ADD-162). In addition, the maximum size of a loan to any one borrower of a U.S. branch of a non-U.S. bank is determined on the basis of the regulatory capital of the non-U.S. bank as a whole 32 (12 U.S.C. § 3102(b)(1); N.Y. Banking Law § 202-f) as opposed to the lending limits of a U.S. bank subsidiary, which are determined by the regulatory capital of the U.S. bank subsidiary alone. 12 U.S.C. § 84; N.Y. Banking Law § 103. Hence, a non-U.S. bank branch can make larger and more loans in the United States than it could through a subsidiary bank. For this reason, “[t]he ability of foreign banks to do business through branches and agencies is . . . important to New York and its economy.” See Superintendent’s Report at 9 (AMI-ADD-162) (“The Committee further believes that the greater access to international credit markets that the branch/agency form affords to businesses in the United States is beneficial to the American economy as a whole”). The Superintendent’s Report’s determination that the ability of foreign banks to do business in New York through branches is beneficial was echoed by the Secretary of the Treasury and Board of Governors of the Federal Reserve System in a study (conducted in consultation with the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Attorney General) to determine whether foreign banks should be required to conduct banking operations in the U.S. through subsidiaries rather than branches. The Treasury and Board of Governors concluded that such a requirement should not be imposed (and indeed indicated that they would “oppose” such a requirement), including because a branch of a foreign bank is able to operate more efficiently than a separate 33 subsidiary of a foreign bank, due to a number of factors, including, the “ability to deploy capital flexibly” and “the ability to compete based on access to the worldwide capital base of its parent.” See Department of the Treasury and Board of Governors Subsidiary Requirement Study (Dec. 1992) (“Subsidiary Study”) at 1, 4 (AMI-ADD-002, 005). The Treasury and Board of Governors further found that “branch operations of foreign banks provide numerous economic and financial advantages to consumers and financial institutions in the United States and abroad” (id. at 15) and concluded that requiring banks to operate through subsidiaries could reduce “the availability of credit in the United States market . . . perhaps substantially.” Id. at 2, 22-23 (AMI-ADD-003, 023-024); see also id. at 6 (AMI- ADD-007) (further noting that the “growth in foreign bank activities in the United States has added to the liquidity of the U.S. market while deepening the availability of credit to borrowers”).15 The same principles govern the decision of U.S. banks to open branches outside the U.S., as those branches take advantage of the worldwide capital of the banks. Superintendent’s Report at 10-11 (AMI-ADD-163). When the New York Legislature unanimously enacted legislation which shielded banks located in New 15 As noted above (see p. 13, n.4), the Board of Governors recently adopted a final rule pursuant to Section 165 of the Dodd-Frank Act, 12 U.S.C. § 5365, imposing enhanced prudential standards on foreign banking organizations operating in the United States. The final rule confirmed the ability of foreign banks to continue to conduct banking activities in the United States through branches, and to do so on the basis of the foreign bank’s total capital, though subject to new branch liquidity requirements. See 79 Fed. Reg. 17240 (Mar. 27, 2014). 34 York “from claims of depositors in their foreign branches,” the sponsor of the legislation made clear that the legislation was intended to “maintain[] the option of using the branch structure in foreign countries - this structure is more cost-efficient than a separate subsidiary and enables U.S. banks to remain competitive with foreign banks.” Bill Jacket, L. 1994, ch. 264, at 7, 8 (SCB-ADD-123) (emphasis added). The Treasury and Board of Governors in their 1992 study similarly noted the importance of the ability of U.S. banks to operate through branches abroad, and expressed the concern that, if the U.S. required foreign banks to operate through subsidiaries, “[f]oreign countries might [] retaliate against U.S. bank branches, perhaps by requiring that they establish a subsidiary.” Subsidiary Study at 2 (AMI-ADD-003). The separate entity rule facilitates and encourages use of the branch form. Abandonment or constriction of the rule would impose significant burdens on international banks operating in New York and could influence non-U.S. banks to conduct their New York banking operations through subsidiaries rather than branches or to conduct U.S. dollar business at locations outside New York or the United States.16 This would damage New York’s status as a preeminent 16 That international banking in New York has not “collapsed” since Koehler (discussed below), which Motorola contends repudiated the separate entity rule in the context of judgment enforcement proceedings, does not mean that foreign and domestic banks will continue to do business in New York no matter what the circumstances. Motorola Reply at 12, n.5. Despite initial concerns about Koehler’s impact, every New York state court and the majority of, and most recent, federal courts considering the issue concluded that Koehler did not abrogate the 35 international financial center by having “a significant adverse impact on the international banking business done in the United States and could result in the withdrawal of capital from U.S. markets.” Superintendent’s Report at 11.17 II. DAIMLER HIGHLIGHTS THE APPROPRIATENESS AND IMPORTANCE OF THE SEPARATE ENTITY RULE, PARTICULARLY FOR BANKS HEADQUARTERED OR INCORPORATED IN NEW YORK A. Under Daimler, International Banks Incorporated And Headquartered Outside Of New York Are Not Subject To General Jurisdiction Here separate entity rule. See, e.g., Tire Eng’g, 740 F.3d at 115 n.10 (citing New York state and federal courts continuing to apply separate entity rule post-Koehler); see also SCB Br. at 59-61, 70-71. A decision by this Court finding that the separate entity rule is not viable, however, may well have the effect of influencing banks operating in New York to reassess whether they want to continue to do business here as branches, where doing so will open them up to multiple and competing global enforcement orders. In addition, it would pose a strong barrier to entry into the New York banking market by foreign banks seeking to establish de novo branch operations in the United States, with the prospect that such banks would decide to establish branches in a state other than New York. 17 Abuhamda v. Abuhamda, 236 A.D.2d 290, 290 (1st Dep’t 1997), a case which involved a pre-judgment injunction, does not support Motorola’s argument that the separate entity rule is somehow not necessary for New York to be competitive. Motorola Reply at 45. Abuhamda, a one paragraph decision, involved a pre-judgment asset freeze - not a post-judgment restraint - and did not address the separate entity rule. 236 A.D.2d at 290. Any suggestion that Abuhamda reflects a general rule that a court may issue a pre-judgment global asset restraint that applies to assets in a bank account located at a foreign bank branch to secure a money judgment has been put to rest by this Court’s decision in Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 94 N.Y.2d 541, 548 (2000), which held that there is a “settled proscription against preliminary injunctions merely to preserve a fund for eventual execution of judgment in suits for money damages” (i.e., that a plaintiff seeking money cannot obtain a pre-judgment restraint in any circumstances, let alone one that extends extraterritorially). For the same reason, the dicta in Global Tech., 2012 WL 89823, at *5, citing Abuhamda, does not support a conclusion that New York courts would permit an extraterritorial pre-judgment asset restraint directed to a non-party bank. The court in Global Tech. applied the separate entity rule in the context of a post- judgment restraint. Id. at *3. 36 1. Daimler Sets Forth A General Rule That Entities Are Only Subject To Jurisdiction In The Fora Where They Are Incorporated Or Have Their Principal Place Of Business In its recent decision in Daimler AG v. Bauman, 134 S. Ct. 746 (2014), the Supreme Court fundamentally altered the contours of general jurisdiction in U.S. courts, articulating a narrow view of general jurisdiction for international entities. Under Daimler, there is no general jurisdiction in New York over banks which are not incorporated in and do not have their principal place of business in New York. In Daimler, the Court held that a corporation is not subject to general jurisdiction merely because it “‘engages in a substantial, continuous, and systematic course of business’” in the forum, including through an agent or affiliate. 134 S. Ct. at 761. A corporation is only subject to general jurisdiction where it is considered “at home” and there are “only a limited set of affiliations with a forum [that] will render a defendant amenable to all-purpose jurisdiction there.” Id. Absent exceptional circumstances, a company only is “at home” where the corporation is incorporated or has its principal place of business. Id. The Court also found that, for purposes of determining where a corporation is subject to general jurisdiction, a court should look at the corporation’s worldwide activities and contacts. Notably, in Daimler, where the Court assumed that the activities of Daimler’s subsidiary could be attributed to the parent (134 S. Ct. at 760), the Court found that the presence of multiple offices in California and 37 sales in California amounting to nearly 2.5% of Daimler’s global sales did not support general jurisdiction. The Supreme Court’s holding specifically rejected older authority that held that the courts of New York had general jurisdiction over foreign corporations that “engage[d] in a substantial, continuous, and systematic course of doing business” in New York, including by doing business in the state through a local office. Id. at 761, n.18 (these decisions “should not attract heavy reliance today”) (citing Barrow S.S. Co. v. Kane, 170 U.S. 100 (1898), and Tauza v. Susquehanna Coal Co., 220 N.Y. 259 (1917) (Cardozo, J.)). Both Barrow and Tauza found general jurisdiction based on maintenance of an office here, and both - and in particular Tauza - had long been cited as support for the well-accepted pre-Daimler rule that doing business through an office in New York subjects a corporation to general personal jurisdiction in New York. See, e.g., Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 57-58 (2d Cir. 1985) (citing Tauza); Landoil Resources Corp. v. Alexander & Alexander Services, Inc., 77 N.Y.2d 28, 33-34 (1990) (same). By specifically identifying and repudiating those cases, Daimler made clear that it was also repudiating that previously well-established rule. Daimler has fundamentally altered the contours of general jurisdiction in New York (and other states). See also Daimler, 134 S. Ct. at 770. (Sotomayor, J., concurring) (referencing the “new rule” announced by the majority, and noting that 38 the majority had rejected “the ‘continuous and systematic’ contacts inquiry that has been taught to generations of first-year law students”). The unmistakable import of Daimler is to overturn the long line of cases that had held that an international bank was subject to general jurisdiction here by reason of its New York branch. See, e.g., Dietrich v. Bauer, No. 95 Civ. 7051 (RWS), 2000 WL 1171132, *4 n.4 (S.D.N.Y. Aug. 16, 2000) (rejecting as “manifestly incorrect” an argument that a foreign bank with a New York branch was not “doing business” in New York). Those cases in turn rested on the even longer line of cases finding doing business jurisdiction over business corporations based on the conduct of business in New York, noted above. See, e.g., Hoffritz, 763 F.2d at 57-58 (citing, inter alia, Frummer v. Hilton Hotels Int’l, Inc., 227 N.E.2d 851 (N.Y. 1967)). As a result banks such as SCB, which are organized under the laws of and headquartered in other jurisdictions, and whose New York branches represent only one of hundreds, or in some cases, thousands of branches, the vast majority of which are located abroad, are not subject to general jurisdiction in New York. 2. The Comity Considerations Highlighted In Daimler Also Support Limiting The Jurisdictional Reach Of U.S. Courts The Court in Daimler also emphasized that the “risks to international comity posed” by expansive notions of personal jurisdiction were relevant in determining whether the exercise of jurisdiction met the “fair play and substantial justice” demands of due process. Daimler, 134 S. Ct. at 763. Daimler made clear that 39 these considerations of international comity require, especially in the transnational context, a restrained approach to personal jurisdiction. Daimler, 134 S. Ct. at 763. B. Daimler Is Directly Relevant To This Appeal And The Certified Question Contrary to Motorola’s contention, Daimler is directly relevant to the certified question here. Motorola Reply at 14. As the Second Circuit recognized in certifying this question (and as Motorola repeatedly emphasizes), this Court “explained in Koehler [that] ‘article 52 postjudgment enforcement involves a proceeding against a person - its purpose is to demand that a person convert property to money for payment to a creditor.’ . . . Accordingly, ‘personal jurisdiction is the linchpin of authority under 5225(b).’” Tire Eng’g, 740 F.3d at 110-111 (citing and quoting Koehler and N. Mariana and noting that separate entity rule applies “even if a bank is subject to personal jurisdiction due to the presence of a New York branch”); see also Motorola Br. at 17-18, 27-28; Motorola Reply at 45 (personal jurisdiction is the “‘linchpin’ in the context of post-judgment enforcement”); Motorola Reply at 13-14 (“[A] New York Court’s post-judgment enforcement powers are defined by its jurisdictional reach”). Daimler holds that, for due process purposes, entities which are neither incorporated nor headquartered in a New York forum are not, absent exceptional circumstances, subject to general jurisdiction in New York, i.e. even where such entities conduct banking business through an office here. Daimler thus establishes that such banks ordinarily cannot 40 be subject to extraterritorial asset restraint or turnover orders of the type Motorola seeks here - the same result achieved through application of the separate entity rule. 134 S. Ct. at 761. Daimler has, in effect, elevated the separate entity rule to a rule of constitutional dimension as to banks incorporated and headquartered abroad. Motorola acknowledges, repeatedly, that there must be personal jurisdiction over a bank in order for it to be subject to a post-judgment asset restraint issued by a New York court, and that Daimler addressed “the limits on personal jurisdiction imposed by the Due Process Clause of the U.S. Constitution.” Motorola Reply at 14. Nonetheless, Motorola argues that SCB is subject to personal jurisdiction by reason of SCB’s establishment of a branch and “conduct of business in New York.” Motorola Reply at 14, 15. That position cannot be squared with Daimler, which explicitly rejects the argument that an entity is subject to personal jurisdiction in every forum in which it “do[es] business.” 134 S. Ct. at 761, n.18.18 18 Motorola’s other efforts to distinguish Daimler also fail. Daimler is not “inapposite” because it involved a proceeding seeking to assert jurisdiction over a parent based on the presence of a subsidiary. Motorola Reply at 16. The court in Daimler assumed that the actions of the subsidiary could be imputed to the parent, but still found a lack of personal jurisdiction because the parent was neither headquartered nor incorporated in the forum. 134 S. Ct. at 760. Motorola’s argument that a bank such as SCB which did not raise a personal jurisdiction argument pre-Daimler has waived that argument is misplaced for the reasons stated by SCB, and, in any event, misses the point. Under Daimler, a restraint issued by a New York court cannot reach the non-New York branches of an international bank incorporated and headquartered outside New York simply on the basis of the presence of a branch in New York. This fundamentally alters the scope of Article 52 enforcement mechanisms as to international banks - a reality Motorola ignores. 41 To the extent that Motorola argues that New York’s Banking Law subjects every foreign bank with a branch here to general personal jurisdiction, its position is equally misplaced. Section 200(3) of the Banking Law provides that by establishing a branch here, a bank agrees to designate the Superintendent as an agent for service of process “in any action or proceeding against it on a cause of action arising out of a transaction with its New York agency or agencies or branch or branches.” N.Y. Banking Law § 200(3) (emphasis added). By its terms that section provides only a consent to service, not a consent to jurisdiction.19 But even if it were not so limited by its plain terms, the provision would not assist Motorola, since the consent contained therein extends only to causes of action involving the conduct of the New York agency or branch, not foreign agencies or branches.20 19 Service on a corporation does not by itself establish jurisdiction; the corporation must also be subject to jurisdiction under relevant state statutory law and constitutional principles. See Daimler, 134 S. Ct. at 753 (citing Fed. Rule Civ. Proc. 4(k)(1)(A)) (noting that “service of process is effective to establish personal jurisdiction over a defendant ‘who is subject to the jurisdiction of a court of general jurisdiction in the state where the district court is located’”); Licci v. Lebanese Canadian Bank, SAL, 673 F.3d 50, 59 (2d Cir. 2012); Gager v. White, 53 N.Y.2d 475, 489 (1981) (noting distinction between “jurisdictional defense” and defense of “defective service”). Indeed, Daimler’s holding would be meaningless if service on an office located within the forum created general jurisdiction, for in that case a corporation would always be subject to general jurisdiction in a forum where it had an office. Further, in each of the two cases addressing the doing business through an office basis for jurisdiction which the Court in Daimler found to be no longer entitled to precedential effect, service had been made on the local office. Barrow, 170 U.S. at 112; Tauza, 220 N.Y. at 269. 20 Ins. Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 705 (1982) (Motorola Reply at 15), is irrelevant. Although it contains the commonplace proposition that a party may consent to personal jurisdiction, it did not address the New York Banking Law, or consider the effect of a statutorily mandated consent to service of process. Cases arising under the Business Corporation Law (“BCL”) such as Doubet LLC v. Trustees of Columbia University in City of New York, 99 A.D.3d 433, 434-435 (1st Dep’t 2012) (Motorola Reply at 15), are similarly inapposite. Among other things, the BCL designation of the Secretary of State as the 42 The restraint issued by Motorola has nothing to do with any action of SCB’s New York branch. Far from supporting the assertion of general jurisdiction over SCB (or other international banks with New York branches) the limited language of Section 200(3) reflects the Legislature’s recognition that local branches of non-domestic banks are to be treated as distinct from the head office and other branches of such banks.21 In contrast to the language of Section 200(3), which limits consent to service to matters relating to the New York agency or branch of a foreign bank, the designation of the Secretary of State as agent for service of process for general business corporations under Section 304 of the BCL (enacted in 1961) is unlimited in scope. The Legislature’s decision to distinguish the scope of consent to service in the banking context from the business corporation setting is fundamentally at odds with Motorola’s argument, discussed below, that the Legislature sub silentio overturned the separate entity rule by adopting Article 52 of the C.P.L.R. in 1962. agent for service of process is unlimited in scope, in contrast to the limited language of Section 200(3) of the Banking Law. 21 The original version of Banking Law § 200(3) provided an unlimited consent for service of process in “any action or proceeding” brought by a resident of New York. See N.Y. Banking Law § 200(3) (1938). The scope of the consent to service was limited in 1951, when the Legislature amended that service of process provision to limit a bank’s consent to service of process to “cause[s] of action arising out of a transaction with its New York agency or agencies.” See N.Y. Banking Law § 200(3) (1951). Subsequently, in its 2006 amendment to the Banking Law, the Legislature clarified that this limitation operates to the foreign bank’s New York “branch or branches” as well. 43 The other statute referenced by Motorola - N.Y. Banking Law § 200-b - is inapposite, as that section on its face deals with subject matter jurisdiction. Id. at 200-b(2) (listing types of actions that may be maintained against foreign banking corporations - not instances where a foreign banking corporation agrees to be subject to personal jurisdiction). Not surprisingly, the cases addressing Section 200-b describe it as dealing with subject matter jurisdiction. See, e.g., Indosuez Int’l Finance B.V. v. Nat’l Reserve Bank, 98 N.Y.2d 238, 248 (2002) (noting that Section 200-b “grants subject matter jurisdiction over claims by foreign parties” (emphasis added)). The cases cited by Motorola (Motorola Reply at 15, n.12) are to the same effect. In Byblos Bank Europe, S.A. v. Syrketi, 12 Misc. 3d 792, 793 (N.Y. Sup. Ct. 2006), the issue before the court was whether subject matter jurisdiction was present under Business Corporation Law § 1314 and Banking Law § 200-b, and the court so found because the subject matter of the litigation was situated in New York. The subject matter of the restraint issued against SCB is, of course, property located in the UAE. The court in Milan Indus. v. Wilson, 2011 N.Y. Misc. LEXIS 6842 (N.Y. Sup. Ct. June 1, 2011), also addressed subject matter jurisdiction rather than personal jurisdiction.22 22 Indeed, in that case, the court found that it did not need a basis for personal jurisdiction over defendants for recognition and enforcement of a foreign judgment previously entered against defendants. Here of course, as Motorola concedes, personal jurisdiction is the “linchpin” of an enforcement proceeding against a non-party garnishee. Motorola Br. at 4, 16; Motorola Reply at 13. Motorola cites nothing that supports a conclusion that SCB has consented to all- purpose jurisdiction by New York courts. 44 Nor, of course, is there any basis to assert specific jurisdiction over a bank such as SCB in the circumstances here. Motorola Reply at 16.23 Both as a constitutional matter, and under Section 302 of the C.P.L.R., specific jurisdiction is jurisdiction that exists over causes of action that “arise[] out of or relate[] to the defendant’s [or in this case garnishee’s] contacts with the forum.” Daimler, 134 S. Ct. at 754; see also N.Y. C.P.L.R. § 302(a) (“As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator . . . .” (emphasis added)); Licci v. Lebanese Canadian Bank, SAL, 20 N.Y.3d 327, 340 (2012) (noting that “‘arise-from’ prong” of Section 302 “confer[s] jurisdiction only over those claims in some way arguably connected to the” contacts at issue). As the Supreme Court emphasized in its recent Walden v. Fiore decision, for specific jurisdiction, the cause of action must arise out of the defendant’s (in this case garnishee’s) contacts with the forum, not from contacts with other parties. 134 S. Ct. 1115, 1123 (2014) ( “Due process requires that a defendant be haled into court in a forum State based on his own affiliation with the State, not based on the ‘random, fortuitous, or attenuated’ contacts he makes by interacting with other 23 Motorola cites no authority for the assertion of specific jurisdiction over SCB. Motorola Reply at 16. For the reasons noted above, there is no basis whatsoever for Motorola’s suggestion that SCB could be subject to specific jurisdiction for purposes of this action, or that any other international bank in similar circumstances - where a plaintiff seeks to restrain assets located abroad merely by virtue of the presence of a New York branch - would be subject to specific personal jurisdiction as to such restraint. 45 persons affiliated with the State” (citation omitted)); see also Licci, 20 N.Y.3d at 340. Motorola’s suggestion that, where, as here, a creditor seeks to restrain assets located at the non-U.S. branches of a bank simply due to the presence of a U.S. branch, a bank in SCB’s position could be subject to specific jurisdiction (Motorola Reply at 16) is refuted by Walden. Here, the restraint does not arise from any contact between the bank or any of its branches and New York. To the contrary, the entire controversy between Motorola and SCB arises from the fact that an SCB branch in the UAE had a deposit relationship with a Jordanian bank that was identified as a proxy for the judgment debtors - i.e., SCB has accounts allegedly belonging to judgment debtors in the UAE. The relief that Motorola seeks - freezing accounts located outside of the U.S. - does not “arise from” any contact that the bank has with New York. Under Walden, this sort of fact pattern cannot support specific jurisdiction. C. The Separate Entity Rule Remains Important After Daimler To Provide A Level Playing Field For New York Banks By circumscribing the exercise of personal jurisdiction necessary for the enforcement of Article 52 enforcement devices over banks incorporated and headquartered outside of New York, Daimler is entirely consistent with the separate entity rule as applied to such international banks. But Daimler does not directly impact the scope of Article 52 as to garnishee banks incorporated or headquartered in New York. Thus, a finding that the separate entity rule is no 46 longer viable could have the anomalous result of making domestic banks alone subject to worldwide restraint and turnover orders issued out of New York courts. If effect is given to Daimler’s plain meaning, as it should be, then only those domestic banks would be regularly burdened with responding to such restraints and be placed in the difficult position of facing conflicting rules and orders with respect to accounts held abroad. That result would be perverse - if the separate entity rule were abandoned, New York courts would be able to issue extraterritorial restraints only against bank entities that are incorporated or make their headquarters in New York. Ironically, the very concern expressed by Motorola in its brief - that “foreign banks [could be given] a competitive advantage over New York banks” (Motorola Reply at 47) - will occur not if the separate entity rule is upheld, as Motorola suggests, but if it is disregarded, as Motorola urges. This reality poses a significant risk to New York’s role as a leading money market center. If Motorola’s position is adopted, U.S. domestic banks with international operations may choose not to incorporate or base their operations in New York. Although Motorola contends that there is “no meaningful risk” that this will be the case (id. at 45) Motorola cites nothing for this proposition. While New York has been “a leader in the banking industry” in the past (id. at 45), New York has also consistently applied the separate entity rule in the past, including, 47 specifically, to preserve New York’s “preeminence in the international financial community.” Bill Jacket, L. 1994, ch. 264, at 8 (SCB-ADD-124) (explaining reasoning behind bill “shield[ing] banks located in New York State from claims of depositors in their foreign branches”). To prevent the potential adverse impact on New York’s status as a financial center, this Court should answer the certified question in the affirmative. See, e.g., Brian Rosner and Natalie A. Napierala, ‘Daimler’ Mostly Resolves New York’s ‘Separate Entity’ Dispute, N.Y. Law Journal, March 18, 2014 (“Leveling the playing field between the New York ‘at home’ bank and its out-of-state competitors (domestic and foreign) is a policy reason for the New York Court of Appeals to reaffirm the separate entity rule by answering ‘yes’ to the Motorola certified question”). III. MOTOROLA’S EFFORTS TO DIMINISH THE LONG- STANDING RECOGNITION OF THE SEPARATE ENTITY RULE ARE MISPLACED The separate entity rule is a firmly entrenched rule of New York law, stretching back for decades and uniformly applied by New York courts (and recognized in New York statutory law). The rule was consistently applied by New York courts before the Koehler and Northern Mariana decisions, both in the pre- and post-judgment context, and continues to consistently be applied today. 48 A. The Separate Entity Rule Has Been Historically Recognized In The Pre-Judgment And Post-Judgment Context, And The Legislature Did Not Override The Rule When It Enacted The C.P.L.R. In 1962 Motorola’s attempt to avoid the separate entity rule by simply ignoring its existence fails. Motorola suggests that the separate entity rule never really “existe[d]” because the Legislature has not codified it or indicated any intent to treat banks differently than other garnishees and is at best a legal fiction adopted by only a few lower courts. Motorola Br. at 1. But, when the history of the rule in the courts and the C.P.L.R. is examined, it is clear that the separate entity rule is anything but illusory. In fact, New York courts have consistently applied the separate entity rule in both the pre-judgment and post-judgment context since its inception, as have federal courts, including at the appellate level. See, e.g., Nat’l Union, 269 A.D. 2d at 101 (pre-judgment attachment); Therm-X-Chemical & Oil Corp. v. Extebank, 84 A.D.2d 787, 787 (2d Dep’t 1981) (post-judgment restraint); Cronan, 100 N.Y.S.2d at 476, aff’d, 282 A.D. 940 (pre-judgment attachment); Intercont’l Credit Corp. v. Roth, 152 Misc. 2d 751, 752 (N.Y. Sup. Ct. 1990), rev’d on other grounds, 154 Misc. 2d 639 (N.Y. Sup. Ct. 1991) (post-judgment restraint); Walsh v. Bustos, 46 N.Y.S.2d 240 (N.Y. City Ct. 1943) (same); Clinton Trust, 172 Misc. at 150, aff’d, 258 A.D. 780 (pre-judgment attachment); Samsun, 2011 WL 1844061, at *5 and cases cited infra at p. 51-52 (post-judgment restraint and turnover); see also Det 49 Bergenske Dampskibsselskab v. Sabre Shipping Corp., 341 F.2d 50, 53 (2d Cir. 1965) (“A review of the New York cases indicates a consistent line of authority holding that accounts in a foreign branch bank are not subject to attachment or execution by the process of a New York court served in New York on a main office, branch, or agency of the bank” (emphasis added)); Shaheen, 2012 WL 919664, at *8 (post-judgment turnover order); Motorola Credit Corp. v. Uzan, 288 F. Supp. 2d 558, 560 (S.D.N.Y. 2003) (post-judgment restraint); Lok, 2002 WL 1585820, at *1 (post-judgment turnover order); Fid. Partners, Inc. v. Philippine Export & Foreign Loan Guarantee Corp., 921 F. Supp. 1113, 1119 (S.D.N.Y. 1996) (post-judgment attachment and execution). Although this Court has never explicitly addressed the issue, a decision applying the separate entity rule to overturn an attachment did reach, and was affirmed by, this Court in McCloskey v. Chase Manhattan Bank, 11 N.Y.2d 936 (1962). The officially reported summary of that decision shows that the Court affirmed a decision holding that accounts at German bank branches were not subject to attachment. The New York appellate courts have treated McCloskey as confirming the separate entity rule. See Nat’l Union, 269 A.D.2d at 101 (citing McCloskey for the proposition that the separate entity rule is a “long-standing general rule in New York”); Therm-X, 84 A.D.2d at 787 (citing McCloskey for proposition that “[t]he general rule in New York is that in order to reach a 50 particular bank account the judgment creditor must serve the office of the bank where the account is maintained”). In National Union, the First Department went on to hold that the separate entity rule is so firmly embedded in New York law that the rule should not be altered absent an explicit “pronouncement from the Court of Appeals or an act of the Legislature.” 269 A.D. 2d at 101. The Second Circuit has also cited McCloskey as support for its repeated recognition of the separate entity rule, both before and after Koehler, and as applying both in the pre-judgment and post-judgment contexts. See, e.g., Allied Mar., Inc. v. Descatrade SA, 620 F.3d 70, 74 (2d Cir. 2010) (citing McCloskey and other cases as support for application of separate entity rule); Det Bergenske, 341 F.2d at 53 (same).24 Throughout its history, the separate entity rule has been recognized as addressing the similar concerns raised in both the pre- and post-judgment context. That is reflected in cases decided both before and after the C.P.L.R. was adopted. For example, in Bluebird Undergarment Corp. v. Gomez, 139 Misc. 742, 743 24 The cases cited by Motorola which purport to “emphasize[] the critical distinction between prejudgment attachment and post-judgment enforcement proceedings” (Motorola Br. at 40) do nothing of the sort. Morgenthau v. Avian Res. Ltd., 49 A.D.3d 50 (1st Dep’t 2007), involved an attachment in a criminal case issued initially upon an affirmation that the money to be forfeited was in New York County. The court ultimately vacated the attachment holding that the court “lacked jurisdiction to issue [it] because the funds were at that time deposited in a bank outside of New York,” citing cases applying the separate entity rule. Id. at 54. The Appellate Division, in affirming the vacatur of the restraint, emphasized that “the property and garnishee in question were beyond the reach of the [] attachment order.” Id. at 58. Gryphon Domestic VI, LLC v. APP Int'l Fin. Co., involved a restraining notice directed to a debtor and held that the “defendant judgment debtors could be ordered to turn over out-of-state assets to a New York sheriff.” 41 A.D.3d 25, 37 (1st Dep’t 2007) (emphasis added). The case did not involve a third- party garnishee of any kind, let alone a bank, and therefore did not in any way implicate the separate entity rule. 51 (N.Y. City Ct. 1931), in which the court considered whether service of a warrant of attachment on a bank in New York could reach “money on deposit in the bank’s branch” in Puerto Rico, the court relied on an English case applying the separate entity rule in the post-judgment context (Richardson v. Richardson & The National Bank of India, Ltd., [1927] P. 228 (England) (SCB-ADD-011)), and recognized that the rule was, in general, “of far-reaching importance to the commercial and banking worlds.” Bluebird, 139 Misc. at 743; see also Walsh, 46 N.Y.S.2d 240 (applying separate entity rule in post-judgment context). Cases subsequent to the adoption of the C.P.L.R. also recognize the rule as applying with equal force in both the pre- and post-judgment context. See, e.g., Det Bergenske, 341 F.2d at 53. The only limitation on the separate entity rule that has been recognized is that set forth in Digitrex, which, as noted above, applies only when the main office of the bank is served in New York, the bank branches are in the same jurisdiction (i.e., are in New York) and the branches are connected by high-speed computers. Nat’l Union, 269 A.D.2d at 101. The separate entity rule has also been unanimously applied in the post- judgment context by the post-Koehler New York state court cases, which have uniformly found that the separate entity rule applies post-judgment and was not abrogated by Koehler. See Global Tech., 2012 WL 89823, at *13; Parbulk, 35 Misc. 3d at 238; Samsun, 2011 WL 1844061; see also SCB Br. at 61, n.31. The 52 majority of, and the more recent decisions from, the federal courts have also found that the separate entity rule continues to apply in the post-judgment context. See SCB Br. at 59, n.30 and 70, n.38. Motorola’s argument that the separate entity rule was “refute[d]” by the Legislature’s adoption of the C.P.L.R. is equally misguided. Motorola Reply at 19. The C.P.L.R. was adopted in 1962, after the separate entity rule was firmly rooted in New York case law (see, e.g., Cronan, 100 N.Y.S.2d at 476, aff’d, 282 A.D. 940) and had been applied in both pre- and post-judgment cases. Moreover, in the “nine times since 1968” that C.P.L.R. § 5222 has been amended (Motorola Br. at 24; Motorola Reply at 29 n.25), the Legislature has failed to express any disagreement with the separate entity rule, despite its widespread and continued application (in both state and federal courts). Such amendments have occurred as recently as 2009 - well after the separate entity rule was applied in post-judgment proceedings, as even Motorola acknowledges. See Motorola Br. at 39, n.24. Moreover, the same Legislature that enacted the C.P.L.R. in 1962 had codified the rule in the U.C.C. See N.Y. U.C.C. §§ 4-106 (“A branch or separate office of a bank is a separate bank for the purpose of computing the time within which . . . action may be taken or notices or orders shall be given under this Article and under Article 3. The receipt of any notice or order by or the knowledge of one branch or separate office of a bank is not actual or constructive notice to or 53 knowledge of any other branch or office of the same bank . . . .”) and 4-102 (“The liability of a bank for action or non-action with respect to any item handled by it for purposes of presentment, payment or collection is governed by the law of the place where the bank is located. In the case of action or non-action by or at a branch or separate office of a bank, its liability is governed by the law of the place where the branch or separate office is located”). The rule remains prominent in the U.C.C. today. See id.; see also N.Y. U.C.C. §§ 4-A-105(1)(b) (“A branch or separate office of a bank is a separate bank for purposes of this article”) and 4-A- 502(d) (“[c]reditor process with respect to a payment by the originator to the beneficiary pursuant to a funds transfer may be served only on the beneficiary’s bank with respect to the debt owed by that bank to the beneficiary. Any other bank served with the creditor process is not obligated to act with respect to the process”). Thus, under the U.C.C., creditor process is only effective if served on the branch of the beneficiary bank which ultimately received a transfer. See also Scanscot Shipping Services v. Metales Tracomex LTDA, 617 F.3d 679 (2d Cir. 2010); Allied Mar., 620 F.3d at 75.25 In arguing that in these circumstances the Legislature is deemed to have implicitly overridden an existing common law rule, Motorola turns the law on its 25 As noted above (p. 42), the Legislature had recognized the important distinctions between the offices of foreign banks with a New York office in the Banking Law service provisions long before the enactment of the C.P.L.R. 54 head. Motorola cites nothing for its argument that the absence of any statutory language specifically espousing the separate entity rule should be “dispositive” of the certified question before the Court. Motorola Reply at 8. The applicable rule in these circumstances is whether the Legislature has included express language in its enactment that evinces an intent to disavow the rule. Arbegast v. Board of Educ. of S. New Berlin Cent. School, 65 N.Y.2d 161, 169 (1985) (the Legislature is “presumed to be aware of the decisional and statute law in existence at the time of an enactment, and to have abrogated the common law only to the extent that the clear import of the language used in the statute requires” (citation omitted)); Engle v. Talarico, 33 N.Y.2d 237, 242 (1973) (“Where the practical construction of a statute is well known, the Legislature is charged with knowledge and its failure to interfere indicates acquiescence”). That the Legislature in its amendments over the years made no change to Section 5222, the C.P.L.R.’s asset restraint provision (or Sections 5225, 5227, or 5232, which provide judgment creditors their ultimate remedy through turnover orders and levies), to repudiate the separate entity rule confirms its continued vitality. Motorola’s repeated argument that the “plain language of Article 52 . . . refutes the existence of the separate entity rule’” (Motorola Reply at 17) ignores the fact that there is nothing in the “plain language” of that Article which repudiates, or even makes reference to, the rule, as Motorola 55 concedes. Id.26 Finally, Motorola’s suggestion that the separate entity rule should be ignored because it would lead to an “anomalous” result, whereby New York state and federal courts would be able to order post-judgment discovery from third-party banks about assets located abroad but could not restrain or require turnover of such assets (Motorola Br. at 32-33) is misguided. While the application of the separate entity rule to post-judgment discovery is beyond the scope of the certified question in this case, Motorola’s argument ignores the fact that, if a creditor did obtain information about assets located abroad but could not execute upon them in New York, it would still have an “effective remedy” (Motorola Br. at 33) in that it could go abroad to seek to execute on such assets.27 26 All of the cases cited by Motorola involve instances of courts interpreting unequivocal “language” and “words” in a statute; while here, of course, there is no language in C.P.L.R. 5222 referencing, let alone repudiating, the separate entity rule. See Motorola Br. at 26-27 and Motorola Reply at 17 (citing In re Amorosi, 9 N.Y.3d 367, 372 (2007); Pultz v. Economakis, 10 N.Y.3d 542, 548 (2008); People v. Finnegan, 85 N.Y.2d 53, 58 (1995); Doctors Council v. New York City Emps.’ Ret. Sys., 71 N.Y.2d 669, 674-675 (1988)). Motorola’s argument that the separate entity rule is a “legal fiction” because it is based on “policy choices” lacking a statutory basis apparently rests on the unwarranted premise that a common law rule that has been repeatedly and consistently applied by New York courts is not a real rule if it does not have a statutory basis. Motorola Reply at 20. New York courts are of course capable of creating common law rules and doctrines that apply as the law of New York. N.Y. CONST. art. I, § 14 (stating that the “common law” and “acts of the legislature” in force “shall be and continue the law of this state”); People v. Peque, 22 N.Y.3d 168, 194 (2013). 27 Motorola’s argument also ignores the fact that, in the context of international banks not headquartered or incorporated in New York, Daimler would seem to preclude the issuance of post-judgment extraterritorial discovery orders based on general jurisdiction precepts. See supra at pp. 36-40. 56 B. The Cases Motorola Cites Did Not Abrogate The Separate Entity Rule Although Motorola concedes that this Court “never mentioned” the separate entity rule in its 2009 decision in Koehler, 12 N.Y.3d 553, or its 2013 decision in Northern Mariana, 21 N.Y.3d 55 (Motorola Br. at 17-18, 27-33; Motorola Reply 8- 14), Motorola nonetheless argues that these cases implicitly abrogated the separate entity rule. That is not the case. Koehler did not involve the separate entity rule, let alone alter that rule. The bank in that case, Bank of Bermuda, had a New York subsidiary (not a branch). Although the bank had initially raised a personal jurisdiction objection, it ultimately stipulated that the bank itself (the head office that held the property at issue, not just the subsidiary) was subject to personal jurisdiction in New York. Koehler, 12 N.Y.3d at 533. Because Bank of Bermuda’s head office, which was holding the property at issue, was thereby actually present in New York, the case did not implicate the separate entity rule.28 Neither party - the judgment creditor, Koehler, nor the respondent, Bank of Bermuda, mentioned the separate entity rule 28 The district court decision in the federal action expressly concluded that “the separate entity rule has no role to play in this case, since the rule involves circumstances where a party attempts to obtain the assets of an entity’s foreign or auxiliary branch through service of its main branch. Here, the foreign branch itself was properly served.” Koehler v. Bank of Bermuda Ltd., No. M18-302, 2005 WL 551115, at *12 (S.D.N.Y. March 9, 2005). Giving effect to this Court’s opinion, the Second Circuit did not mention the separate entity rule, and emphasized that since Bank of Bermuda had consented to “personal jurisdiction” as of the commencement of the proceeding in 1993, the district court had authority to issue a turnover order as of that date. See Koehler v. Bank of Bermuda Ltd., 577 F.3d 497 (2d Cir. 2009). 57 in its initial brief to this Court. See Koehler v. Bank of Bermuda Ltd., Brief for Petitioner-Appellant Lee N. Koehler, No. 2009-0082, 2008 WL 6191439 (N.Y. Dec. 12, 2008); Koehler v. Bank of Bermuda Ltd., Brief for Respondent the Bank of Bermuda Limited, No. 2009-0082, 2009 WL 1615260 (N.Y. Feb. 4, 2009). Koehler referred to the rule only in his reply to an amicus brief, and then stated that the rule is “inapplicable where, as here, the judgment creditor seeks to obtain funds of the debtor held by the branch of the bank upon which service has been made.” Koehler v. Bank of Bermuda Ltd., Appellant’s Reply to Amicus Curiae Brief of The Clearing House Association L.L.C., No. 2009-0082, 2009 WL 1615263, at *29-30 (N.Y. Apr. 16, 2009) (emphasis added).29 Thus, this Court did not need to, and did not, address the separate entity rule, and no cases relating to the rule were cited or discussed by the Court. Under this Court’s case law, in these circumstances the Koehler decision should not be deemed to implicitly overrule the long-standing separate entity rule. See K2 Inv. Grp. v. Am. Guar. & Liab. Ins. Co., 22 N.Y.3d 578, 584, 586 (2014) (decisions which do not address a settled rule of law “should not be read as silently overruling” such rule); see also Tire Eng’g, 740 F.3d at 115 (“in light of the 29 The Clearing House in its amicus brief was simply expressing the legitimate concern that the Court not answer the certified question in Koehler in a way that altered the separate entity rule. In response, the parties argued to the Court that the rule was not at issue (as the district court had concluded), and in addressing the certified question, this Court did not reference or address the separate entity rule. 58 longstanding application of the separate entity rule in New York, . . . we doubt that the Court of Appeals intended to silently overrule the doctrine [in Koehler]”).30 As discussed above, the Court’s emphasis in Koehler on the in personam nature of judgment enforcement devices does not militate in favor of overruling the separate entity rule. Given the circumscribed scope of general jurisdiction under Daimler, there is no jurisdictional predicate for extending a restraint to foreign branches of an international bank based merely on the presence of a branch here. Northern Mariana also does not address the separate entity rule, does not address post-judgment restraints directed to non-party foreign bank branches, and does not support a conclusion that such restraints are appropriate. Thus, the Court’s conclusion that the use of the word “control” in Section 5224 (addressing post-judgment discovery) rendered that provision broader than Section 5225’s turnover provisions does not assist Motorola. If anything, Northern Mariana undermines Motorola’s position because the Court unanimously rejected an “attempt to broadly construe Koehler,” and held that under New York law a garnishee could not “be compelled to direct another entity, which is not subject to this state’s personal jurisdiction, to deliver assets 30 In light of the considerable uncertainty immediately following Koehler about how courts would treat the separate entity rule, it should be of no surprise that efforts were made to have the Legislature amend the C.P.L.R. to clarify the continuing viability of the separate entity rule. Motorola Br. at 24; Motorola Reply at 27-28. Such efforts are hardly an acknowledgement that the separate entity rule was modified by Koehler, or that the Legislature had not confirmed that rule through its silence. held in a foreign jurisdiction" to satisfy a judgment. 21 N.Y.3d at 64. As discussed above, under Daimler, international banks operating in New York through branches, which are not headquartered or incorporated in New York, are not subject to the personal jurisdiction of New York courts, and thus cannot be compelled to take action with respect to assets located outside of the jurisdiction. CONCLUSION For the foregoing reasons, the Institute of International Bankers, The Clearing House Association L.L.C., the European Banking Federation, and the New York Bankers Association respectfully urge the Court to answer the question certified by the Second Circuit in the affirmative. Dated: July 21, 2014 WHITE & CASE LLP By:.~....-...::~~~~LL. 59 Dwight A. Healy Ernest T. Patrikis Owen C. Pell Marika M. Lyons 1155 Avenue ofthe Americas New York, New York 10036 Telephone: (212) 819-8200 Facsimile: (212) 354-8113 Counsel for Institute of· International Bankers, The Clearing House Association L.L.C., European Banking Federation and New York Bankers Association ADDENDUM CONTENTS OF ADDENDUM PAGE Department of the Treasury and Board of Governors Subsidiary Requirement Study (Dec. 1992) .................................. AMI-ADD-001 Report of the Superintendent’s Advisory Committee on Transnational Banking Institutions (Mar. 1992) ........................... AMI-ADD-147 AMI-ADD-001 SUBSIDIARY REQUIREMENT DEPARTMENT OF THE TREASURY STUDY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AMI-ADD-002 SECTION 215 SUBSIDIARY REQUIREMENT STUDY EXECUTIVE SUMMARY Pursuant to section 215 of the Foreign Bank Supervision Enhancement Act ( 11 FBSEA 11 ), the Secretary of the Treasury and the Board of Governors of the Federal Reserve System, in consultation with the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Attorney General, have conducted a study of 11 Whether foreign banks should be required to conduct banking operations in the United States through subsidiaries rather than branches,n taking into account a number of factors specified by the legislation. The conclusions of the study are summarized briefly below. A subsidiary requirement applied to all foreign banking operations either across-the-board or for purposes of expanded powers would impose substantial economic and financial costs on the U.S. operations of foreign banks. In fact, a branch of a foreign bank is able to operate more efficiently than a separate subsidiary of a foreign bank, due to a number of factors: (1) the ability to deploy capital flexibly; (2) a lower cost of funding; (3) the ability to compete based on access to the worldwide capital base of its parent; (4) ability to engage in transactions with the home office without significant operational restrictions; and (5) lower transactions costs. AMI-ADD-003 2 As of June 1992, 82 percent of all u.s. assets held by foreign banks are maintained in branches and agencies. 1 If the United States were to require that foreign banks conduct their U.S. operations in subsidiaries, the availability of credit in the United States market could be reduced, perhaps substantially. For example, the participation of foreign banks in lending syndicates, trade finance, and transactions in foreign exchange, swaps and other products would be restricted by the increase in costs and by their inability to access their worldwide capital base. Foreign countries might also retaliate against U.S. bank branches, perhaps by requiring that they establish a subsidiary or by otherwise restricting their activities. One possible justification for an across-the-board subsidiary requirement is the belief that it safeguards financial stability. However, more appropriate and effective measures are available for purposes of protecting safety and soundness. These include the promotion of adequate supervisory standards worldwide and the right to prohibit access to the U.S. market by banks that are not adequately supervised. The FBSEA, as well as the minimum standards for consolidated supervision established by the Basle Committee on Banking Supervision, represent important steps in this direction. Importantly, both measures implicitly endorse foreign bank branches. 1 Foreign branches of U.S. banks also hold a majority (64 percent) of all foreign assets held by u.s. banks abroad. AMI-ADD-004 3 For purposes of protecting safety and soundness, measures other than a subsidiary requirement also may be applied to branches of foreign banks experiencing financial difficulties. These include asset maintenance requirements and restrictions on transactions between a branch and the foreign bank's other offices that "wall-off" or "ring-fence" the activities of the branch from those of the troubled foreign bank without imposing the unnecessary costs and inefficiencies associated with a broader subsidiary requirement. In the past, these measures have successfully addressed problems arising in relation to branches of foreign banks experiencing financial difficulty without penalizing the activities of branches of healthy foreign banks. Another possible justification for a subsidiary requirement was the belief that differences in capital and regulatory standards might place U.S. banks at a competitive disadvantage in their own market. In this regard, the guidelines established pursuant to section 214(b) of the FBSEA in the Report on Capital Equivalency provide assurances that foreign banks operating in the United States are subject to capital requirements equivalent to those imposed upon U.S. banking organizations such that U.S. banks are not placed at a competitive disadvantage in their own market with regard to capital standards. The joint annual updates on capital equivalency also provide the Federal Reserve Board and Treasury opportunity to ascertain that foreign banks are meeting capital and accounting standards equivalent to those required of U.S. banking organizations. AMI-ADD-005 .4 With regard to the other factors specified in section 215 of the FBSEA, which include considerations relating to deposit insurance, money laundering, tax, bankruptcy, and international trade, the agencies agree that none of these factors provides support for a subsidiary requirement. After carefully examining all of the factors contained in the legislation, the Treasury and the Board would oppose a subsidiary requirement that would be applied to all foreign bank operations either across-the-board or for purposes of expanded powers. The Treasury and the Federal Reserve Board consistently have opposed a subsidiary requirement that would be applied to all foreign banking operations in the United States. The inter-agency review of regulatory developments reveals several significant changes since the introduction of the 1991 Administration proposal. The agencies, therefore, agree that the various factors to be considered do not justify a "roll-up" of foreign bank branches should expanded powers be permitted to U.S. banks. Instead, subject to prudential considerations, the guiding policy for foreign bank operations should be the principle of investor choice. The right of a foreign bank to determine whether to establish a branch or a subsidiary is consistent with competitive equity, national treatment and equality of competitive opportunity. Foreign countries with banks that are provided national treatment and equality of competitive opportunity in the U.S. market should offer u.s. banks national treatment and competitive equity in their markets. AMI-ADD-006 5 In the Uruguay Round negotiations, NAFTA discussions, and bilateral negotiations, U.S. officials have impressed upon other countries the importance of providing equality of competitive opportunity to U.S. banks and they will continue to do so. The Treasury and the Board recognize that it is important to assure that U.S. negotiators have the necessary tools to advance U.S. interests abroad. However, the agencies agree that a subsidiary requirement applied to all foreign banking operations either across-the-board or for purposes of expanded powers is not desirable even in this context. AMI-ADD-007 '• 6 I. INTRODUCTION Operations of foreign banks have expanded in the U.S. market in recent years. Their share of U.S. banking assets has nearly doubled from 12 percent in December 1980 to 23 percent in June 1992. 2 The growth in foreign bank activities in the United States has added to the liquidity of the U.S. market while deepening the availability of credit to borrowers. For example, foreign bank operations have grown partially in response to the growth in foreign investment in and trade with the United States. Foreign banks have been especially active in wholesale activities, which include trade finance, commercial loan syndications, swaps and foreign exchange activities. In the light of the expanding operations of foreign banks in the United States and the difficulties experienced with criminal activity and unsound practices at a small number of foreign banks over the past several years, a need was identified for legislation that would fill gaps in the supervisory and regulatory framework governing foreign bank operations in this country. To this end, the Foreign Bank Supervision Enhancement Act (FBSEA) was passed by Congress and signed into law by the President, as Title II of the Federal Deposit Insurance Corporation Improvement Act of 1991. The FBSEA established uniform federal standards for entry and expansion of foreign banks 2 Appendix A contains tables and charts, as well as a brief narrative, describing the growth in foreign bank operations in the United States. AMI-ADD-008 7 in the United States, which broadly parallel the regulatory regime and standards applicable to U.S. banks. In light of the growth in U.S. operations of foreign banks and in order to assure that U.S. and foreign banks are treated on an equivalent basis in the U.S. market, the FBSEA also mandated that the Department of the Treasury (Treasury) and the Board of Governors of the Federal Reserve System (Board) should conduct two studies. The first of these studies, the Report on Capital Equivalency, which was required by section 214(b) of the FBSEA, was submitted to Congress by the Treasury and the Board in June 1992. This study, the Subsidiary Requirement Study, is required by section 215 of the FBSEA. Section 215 requires that the Secretary of the Treasury, jointly with the Board (hereafter collectively referred to as "the agencies") and in consultation with the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Attorney General conduct a study of "whether foreign banks should be required to conduct banking operations in the United States through subsidiaries rather than branches." In conducting the study, the legislation requires that the Secretary take into account the following factors: (1) differences in accounting and regulatory practices abroad and the difficulty of assuring that the foreign bank meets United States capital and management standards and is adequately supervised; (2) implications for the deposit insurance system; (3) competitive equity considerations; AMI-ADD-009 8 (4) national treatment of foreign financial institutions; (5) the need to prohibit money laundering and illegal payments; (6) safety and soundness considerations; (7) implications for international negotiations for liberalized trade in financial services; (8) the tax liability of foreign banks; (9) whether the establishment of subsidiaries by foreign banks to operate in the United States should be required only if United States banks are authorized to engage in securities activities and interstate banking and branching; and (10) differences in treatment of United States creditors under the bankruptcy and receivership laws. The legislation also requires that by December 19, 1992, the Secretary transmit to the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the House of Representatives a report on the results of the study. Any additional or dissenting views of participating agencies shall be included in the report. The full text of section 215 of the FBSEA is attached as Appendix B. II. ASSESSMENT OF THE FACTORS TO BE CONSIDERED working groups comprised of staff from the agencies were formed to consider the factors identified in section 215 of the FBSEA and papers addressing these factors were drafted.3 The 3 The factors relating to competitive equity, national treatment and new powers are addressed in one paper, as are the factors regarding accounting, regulatory and management practices and safety and soundness considerations. AMI-ADD-010 9 factor papers, which address the following subjects, are attached as Appendices C, D and E. APPENDIX C REGULATORY ACCOUNTING, REGULATORY AND IMPLICATIONS MANAGEMENT PRACTICES SAFETY AND SOUNDNESS DEPOSIT INSURANCE SYSTEM APPENDIX D NATIONAL COMPETITIVE EQUITY TREATMENT/. NATIONAL TREATMENT FINANCIAL SERVICES NEW POWERS IMPLICATIONS INTERNATIONAL NEGOTIATIONS APPENDIX E OTHER MONEY LAUNDERING AND ILLEGAL IMPORTANT PAYMENTS IMPLICATIONS TAX IMPLICATIONS BANKRUPTCY AND RECEIVERSHIP The findings and conclusions of the papers prepared by the inter- agency working groups are summarized below. A. Regulatory Implications This section summarizes the conclusions reached in the factor papers regarding the advantages and disadvantages of a subsidiary requirement when considered in the light of regulatory practices, safety and soundness considerations and implications regarding the deposit insurance fund. See Appendix C for the full text of the relevant factor papers. AMI-ADD-011 .10 1. Regulatory Practices and Safety and Soundness Considerations a. Regulatory Practices Regulatory practices in this context were considered to encompass considerations such as differences in accounting and regulatory practices abroad as well as assuring that the foreign bank meets United States capital and management standards and is adequately supervised. Regardless of whether an application has been filed for the establishment of a branch, agency or subsidiary, in evaluating applications, regulators consider, among other factors, capital, profitability, concentration of risk, liquidity and asset quality. Differing regulatory and accounting practices also are taken into account by federal banking supervisors and must be explained by the applicant. In this regard, all U.S. operations of foreign banks must maintain records and conduct operations in accordance with U.S. practices. Home country authorities are contacted routinely to obtain information that bears on the management, reputation and standing of a foreign bank filing an application to open a branch, agency or subsidiary. Although differences remain among supervisory practices, efforts to harmonize regulatory practices continue. The agencies do not believe differences in regulatory practices warrant a subsidiary requirement, especially given significant regulatory developments in the United States and abroad. The FBSEA requires that foreign banks be subject to comprehensive supervision on a consolidated basis to be permitted entry into the U.S. market through a branch, agency or subsidiary AMI-ADD-012 11 bank. The statute and the implementing regulations adopted by the Board should provide ample supervisory authority with respect to direct U.S. offices of foreign banks. In addition, under section 214(b} of the FBSEA, foreign banks with U.S. branches are expected to meet capital standards "equivalent" to those required of U.S. banks. The establishment of minimum standards for consolidated supervision of international banking groups and their cross-border establishments by the Basle Committee on Banking Supervision ("Basle Committee"} also represents an important step towards harmonization of regulatory standards. b. Safety and Soundness Considerations A subsidiary requirement for all foreign bank operations would require that the foreign bank conduct its U.S. operations in a separate legal entity. The actions of the subsidiary bank would not be attributed to the parent, which would be required neither to support the operations nor to meet the obligations of its subsidiary. The subsidiary's capital base would be segregated from that of its parent, and the ability of the subsidiary to transact business with its parent would be closely controlled. The subsidiary bank also would be subject to assessments for the deposit insurance fund. Finally, a subsidiary would be denied the benefits of being an integral part of a larger more diversified organization. A parent could choose (in extremis) to allow its subsidiary to fail, although this could affect adversely the parent bank's reputation and its ability to obtain funding. AMI-ADD-013 12 Conversely, a failure of the parent bank could cause difficulties for a subsidiary, including liquidity problems, to the extent that there is a market identification of the subsidiary with the parent bank. The strength of the parent, therefore, is a highly relevant consideration for supervisors in assessing the safety and soundness of a separately capitalized subsidiary. The safety and soundness of a branch of a foreign bank is closely linked with that of its parent. However, bank supervisory authorities in some countries have taken steps to make foreign bank branches behave more like subsidiaries. These restrictions can have the effect of insulating the financial condition of the branch or agency from that of the rest of the organization in much the same manner as the incorporation of a separate subsidiary. Such restrictions have been applied by U.S. supervisors to address particular prudential concerns in problem cases. However, general application of such restrictions would have the effect of denying the foreign bank the economic benefits that accrue to the branch form of operation. We do not believe that a subsidiary requirement is necessary to assure that foreign banks' direct banking operations in the United States are conducted in a safe and sound manner. Experience to date demonstrates that the u.s. banking operations of a foreign bank can function safely under either the branch or the subsidiary form of organization. The advantages or disadvantages of a branch or subsidiary primarily relate to operational differences and do not support a conclusion that one AMI-ADD-014 13 form is inherently more safe and sound than the other. Continuing convergence of supervisory standards, including the comprehensive supervision of banking organizations operating internationally, should enhance the ability of supervisors to monitor and enforce safety and soundness. 2. Deposit Insurance Considerations U.S. bank subsidiaries of foreign banks must obtain FDIC insurance on the same basis as other U.S. banks. Section 214(a) of the FBSEA (as amended) prohibits foreign banks from establishing new insured ("retail deposit-taking") branches in the United States. 4 If foreign banks wish to engage in retail deposit-taking activities, they must establish a subsidiary and obtain FDIC insurance. With the exception of a limited number of grandfathered branches, foreign bank branches and agencies do not accept insured deposits and, therefore, neither contribute to nor draw from the deposit insurance fund. Accordingly, the imposition of a subsidiary requirement would increase the assessment base, the contingent liabilities, and the potential exposure of the FDIC. The increased risk exposure of the FDIC could be heightened as a result of the enhanced ability of a foreign bank parent to withhold support from a separately incorporated subsidiary. A subsidiary requirement would prompt many foreign banks to undertake actions that would permit them to avoid paying 4 A total of 52 branches of "insured" foreign banks with $4.7 billion in non- IBF deposits were grandfathered from this provision. AMI-ADD-015 14 deposit insurance assessments. For example, these actions might include moving U.S. business offshore, booking deposits in an International Banking Facility (IBF), or converting deposits into other instruments that would not be subject to deposit insurance. These actions could temper the size of the increase in the assessment base. B. National Treatment/Financial Services Implication This section summarizes the national treatment and competitive equity implications of a subsidiary requirement, applied either across-the-board or in connection with the liberalization of banking powers. This section also examines the impact of a subsidiary requirement on international negotiations for liberalized trade in financial services. See Appendix D for the full text of the working group papers addressing these issues. 1. Competitive Equity and National Treatment Considerations Bank branches enjoy certain economic and financial benefits that are not available to subsidiaries, which include: (1) the ability to deploy capital flexibly; (2) a lower cost of funding; (3) the ability to compete based on access to the worldwide capital base of its parent; (4) freedom to engage in transactions with the parent without significant restriction; and (5) lower transactions costs. As of June 1992, branches and agencies of foreign banks together held slightly more than four- fifths (82 percent) of all assets held by foreign banks in the United States, while foreign branches of U.S. banks held 64 percent of all assets held abroad by U.S. banks. These figures AMI-ADD-016 15 demonstrate a general preference for the use of branches in comparison with subsidiaries. 5 In short, branch operations of foreign banks provide numerous economic and financial advantages to consumers and financial institutions in the United States and abroad. Imposition of an "across-the-board" {unqualified) subsidiary requirement would necessitate a major restructuring of foreign banks' operations in the United States, which would reduce the depth, efficiency and competitiveness of the U.S. banking market. It could prompt foreign countries to retaliate, making it more difficult for U.S. banks to branch abroad. These countries might introduce a subsidiary requirement or review whether to permit U.S. banks to engage in activities that are prohibited in the U.S. market. Finally, countries that might otherwise consider dropping their own subsidiary requirement {e.g., Canada or Mexico) might reconsider if the United States were to adopt such a requirement. An across-the-board subsidiary requirement would also be unnecessary under the minimum standards for consolidated supervision adopted by the Basle Committee, which has sought to strengthen supervision by stressing the primary responsibilities of the home country with respect to its foreign bank branches. Neither the Treasury nor the Board believes that such an unqualified subsidiary requirement is warranted. 5 See Appendix A for further detail regarding the extent and form of foreign banks' operations in the United States and of u.s. banks' operations abroad. AMI-ADD-017 .16 The agencies also examined whether a subsidiary requirement should be imposed for banking operations of foreign banks in the United States if U.S. banking organizations are permitted to engage through separately incorporated subsidiaries in securities activities or interstate banking and branching. Under this type of approach, only those foreign banks that wished to avail themselves of the expanded powers would be required to restructure their branch operations into subsidiary form. The Administration's 1991 financial modernization proposal, which ultimately was not adopted, was broadly along these lines. 6 Under this proposal, new powers would have been authorized to those U.S. financial services holding companies with "well-capitalized" banks. Foreign banks that wished to obtain expanded powers (which under the proposal included securities and insurance activities) would have been required to "roll-up" all existing branch and agency operations into one or more well-capitalized U.S. bank subsidiaries of a financial services holding company. Significant banking developments have transpired since the Administration introduced its 1991 proposal. Several developments have strengthened the ability of regulators to supervise the direct offices of foreign banks in the United ·States. The adoption of the FBSEA has strengthened the regulators' authority to assure that untoward actions do not 6 The Financial Institutions Safety and Consumers Act of 1991 (FISCCA) . AMI-ADD-018 17 jeopardize the safety and soundness of the financial system. 7 The establishment of the minimum standards for consolidated supervision by the Basle Committee on Banking Supervision also represents an important step towards harmonization of supervisory efforts with regard to foreign bank branches. In addition, the Report on Capital Equivalency, mandated by Congress in section 214(b) of the FBSEA, establishes guidelines that help assure that U.S. banks will not be placed at a competitive disadvantage in their own market. As a result, "roll-up" is no longer necessary on competitive equity grounds. The joint annual updates on capital equivalency also provide the Board and the Treasury opportunity to ascertain that foreign banks are meeting capital and accounting standards equivalent to those required of U.S. banks. The United States has generally followed the principle of national treatment with respect to financial services. National treatment is based on the principle of nondiscrimination between domestic and foreign firms, or treatment that is "no less favorable than that accorded in like circumstances to domestic enterprises." The United States endorsed a de facto national treatment standard and "equality of competitive opportunity" in 7 FBSEA requires that the Board in consultation with Treasury, establish criteria for banks from countries that do not provide comprehensive supervision on a consolidated basis. AMI-ADD-019 18 the International Banking Act of 1978. 8 This principle is embodied in the OECD Codes of Liberalization, the North American Free Trade Agreement (NAFTA), and current policies adopted in connection with the Uruguay Round of the GATT negotiations. Consistent with this principle, the United States believes that, subject to any relevant prudential considerations, the guiding policy for foreign bank operations should be the principle of investor choice. The right of a foreign bank to determine whether to establish a branch or a subsidiary is consistent with competitive equity, national treatment and equality of competitive opportunity. The U.S. Government has pursued this policy in a wide range of fora, including the Uruguay Round, NAFTA, and bilateral negotiations. Nevertheless, some countries have continued to restrict the right of U.S. banks to branch in their markets. Some have suggested that, following the adoption of reciprocal national treatment authority by many major U.S. trading partners, the U.S. Government also should be granted authority to apply a reciprocal national treatment standard. 9 With regard to 8 For a discussion of equality of competitive opportunity and the distinctions between de facto and de iure national treatment, see the 1979 Report to Congress on Foreign Government Treatment of U.S. Commercial Banking Organizations, pages 1-3 and 15-18. 9 A country that provides reciprocal national treatment grants national treatment to banks from another country contingent upon that country providing national treatment to its banks. By January, 1993, when the EC Second Banking Directive is due to be implemented by member states, at least 18 of the 24 OECD countries (including the 12 EC member states) will possess some type of reciprocity powers. AMI-ADD-020 19 establishment, this could mean that a subsidiary requirement could be imposed upon banks from countries that do not permit: (1) U.S. banks to branch; (2) U.S. bank branches the full benefits granted their own bank branches; and/or (3) national treatment and equality of competitive opportunity to U.S. banks and bank holding companies. This action could cause the affected country to provide national treatment and equality of competitive opportunity; alternatively, it could cause the country.to retaliate and restrict further access by U.S. banks. 2. Financial Services Negotiations A subsidiary requirement for all foreign banking operations in the United States could raise questions of interpretation with regard to Friendship, Commerce and Navigation (FCNS) Treaties and Bilateral Investment Treaties (BITs), the OECD Codes, and the U.S.-Canada Free Trade Agreement. However, under the NAFTA, a subsidiary requirement that applied to all other countries, while permissible, could impair the prospect for U.S. banks to achieve branching rights into Mexico and Canada at a future date. This could occur despite the arrangement for additional liberalization agreed in the NAFTA with respect to foreign bank branching. Under a proposed Uruguay Round Services Agreement, a subsidiary requirement under U.S. law could require reservations to market access commitments of the United States and would be inconsistent with U.S. objectives in the Round. It also would be likely to affect adversely on-going negotiations with developed AMI-ADD-021 20 countries to lock-in existing branching rights of U.S. banks abroad. With respect to markets that do not permit branching, a targeted subsidiary requirement could tend to discourage further . efforts to liberalize in these markets. It is also possible that the threat of a subsidiary requirement might serve as leverage for further liberalization. C. Other Important Implications This section addresses the implications of a subsidiary requirement when considered in the light of the need to prevent money laundering and illegal payments and considerations relating to tax and bankruptcy. See Appendix E for the full text of the papers addressing these issues. 1. Money Laundering Considerations All foreign banks doing business in the United States, regardless of whether they are operating a branch or a subsidiary, are subject to the Bank Secrecy Act (BSA). The BSA sets forth the currency reporting and recordkeeping requirements for banks and other financial institutions. It has evolved into the major anti-money laundering legislation aimed at the activities of banks. The ability of regulatory and law enforcement officials to assess and ensure compliance with the BSA and to detect and prosecute money laundering is not affected materially by whether a foreign bank chooses to conduct business as a branch or a subsidiary in the United States. 2. Tax Considerations The effect of a subsidiary requirement on the tax AMI-ADD-022 21 liability of a foreign bank would vary for banks from different countries, due to: (1) differences in home country tax laws; (2) the existence of U.S. income tax treaties with some, but not all, home countries; and (3) differences between the provisions of existing U.S. income tax treaties with different countries. Some preliminary conclusions can be drawn, however, as to whether particular tax-related consequences of a subsidiary requirement would tend to have a neutral or non-neutral effect on a foreign bank's tax liability and whether this effect would depend upon tax treaties or home country law. The conversion of a branch into a subsidiary would generally be a tax-free transaction for purposes of U.S. taxation, but the home country tax consequences of the conversion would vary. However, the subsidiary would not be permitted to carry over (following conversion) any net operating losses that had been accumulated by the former U.S. branch. With that one important exception, the tax treatment of a subsidiary is generally equivalent to that of a branch. However, differences between the taxation of a branch and a subsidiary may be affected significantly by U.S. income tax treaties. It is conceivable that a subsidiary requirement could induce a foreign bank to shift U.S. loans to foreign offices, as a result of limits that would apply to the subsidiary regarding amounts that may be lent to single borrowers. Interest paid by U.S. borrowers to foreign banking offices would be subject to gross basis. U.S. withholding tax. Although a number of U.S. AMI-ADD-023 .22 income tax treaties would eliminate this withholding tax, there are countries for which either no U.S. income tax treaty exists or the applicable treaty retains a positive withholding rate for interest. In these cases, the U.S. withholding tax on interest could eliminate a foreign bank's net profit on a U.S. loan made from the home office. This could result in a reduction in lending in the U.S. market by the affected foreign banks. 3. Bankruptcy Considerations Under U.S. law, a creditor of an insolvent U.S. branch of a foreign bank would be treated in much the same manner as a creditor of an insolvent domestic bank subsidiary of a foreign bank parent. Each would have access to assets of the branch or subsidiary under the jurisdiction of the U.S. liquidator. Potentially, a creditor of a branch would have access to the worldwide assets of the foreign bank. A creditor of a subsidiary would not have any legal claim to the assets of the parent bank, assuming that no legal or factual basis exists for piercing the corporate veil. A subsidiary requirement, therefore, would potentially limit the assets available to creditors in the event of liquidation. III. CONCLUSIONS A subsidiary requirement applied either across-the-board ·or for purposes of expanded powers ("roll-up") would impose substantial economic and financial costs on the U.S. operations of foreign banks. By not permitting foreign banks the option of conducting U.S. operations in branches, the availability of credit AMI-ADD-024 23 in the U.S. market could be reduced, perhaps substantially. For example, the participation of foreign banks in lending syndicates, trade finance, and swaps and other products would be greatly restricted by the increase in costs and their inability to access their worldwide capital base. Imposition of such a subsidiary requirement would likely prompt foreign countries to retaliate against U.S. bank branches, perhaps by requiring that they establish a subsidiary or by restricting their activities. Although some might argue that an unqualified subsidiary requirement would safeguard financial stability, more appropriate and effective measures are available for purposes of protecting safety and soundness. These include the promotion of adequate supervisory standards worldwide and the right to prohibit access to the U.S. market by banks that are not adequately supervised. The FBSEA, as well as the minimum standards for consolidated supervision established by the Basle Committee, represent important steps in this direction. Significantly, both measures implicitly endorse foreign bank branches. In addition, U.S. bank regulators may impose specific measures upon troubled banks, including asset maintenance requirements and restrictions on transactions between a branch and its parent, that "wall-off" or "ring-fence" the activities of a branch from those of its troubled parent without the unnecessary costs and inefficiencies associated with a subsidiary requirement. In the past, these measures have successfully addressed problems AMI-ADD-025 24 arising at branches of troubled foreign banks without penalizing the activities of branches of healthy foreign banks. The earlier case for roll-up was based upon the belief that differences in capital and regulatory standards might place U.S. banks at a competitive disadvantage in their own market. In this regard, the guidelines established in the Report on Capital Equivalency provide assurance that U.S. banks will not be placed at a competitive disadvantage in their own market. The joint annual updates on capital equivalency also provide the Board and the Treasury opportunity to ascertain that foreign banks are meeting capital and accounting standards equivalent to those required of U.S. banks. Based upon an examination of all ten factors included in the legislation, the agencies oppose a subsidiary requirement that would be applied either across-the-board or for purposes of expanded powers ("roll-up"). The Treasury and the Board consistently have opposed a subsidiary requirement that would be applied to all foreign banking operations in the United States. The interagency review of regulatory developments reveals several significant changes since the introduction of the 1991 Administration proposal. The agencies, therefore, agree that neither competitive equity nor prudential considerations justify a "roll-up" of foreign bank branches should expanded powers be permitted to U.S. banks. The United States believes that the guiding policy for foreign bank operations should be the principle of investor choice. The right of a foreign bank to determine whether to establish a AMI-ADD-026 25 branch or a subsidiary is consistent with competitive equity, national treatment and equality of competitive opportunity. Foreign countries with banks that are provided national treatment and equality of competitive opportunity in the U.S. market should offer U.S. banks national treatment and competitive equity in their market. In the Uruguay Round negotiations, NAFTA discussions, and bilateral negotiations, U.S. officials have impressed upon other countries the importance of providing equality of competitive opportunity to U.S. banks and they will continue to do so. The agencies recognize that it is important to assure that U.S. negotiators have the necessary tools to advance U.S. interests abroad. However, the agencies agree that a subsidiary requirement applied to all foreign banking operations either across-the-board or for purposes of expanded powers is not desirable even in this context. AMI-ADD-027 APPENDIX A AMI-ADD-028 APPENDIX A As shown in Chart 1, foreign banks have been expanding their activities at their u.s. offices, both in absolute amounts and as a share of banking activity in the United States. Between year-end 1980 and June 1992, assets of U.S. offices of foreign banks increased more than three-fold to $860 billion, and their share in the United States market nearly doubled from 12 percent to 23 percent. Chart 2 provides data on the types of offices at which foreign banks conduct their u.s. activities. At mid-year 1992, branches and agencies accounted for over four-fifths of the assets of all foreign banks. Commercial bank subsidiaries accounted for almost one-fourth of foreign bank activity at year- end 1980; by June 1992, commercial bank subsidiaries constituted less than one-fifth of the total U.S. office assets of foreign banks. Chart 3 provides data on the nationality of foreign banks conducting business in the United States. The Japanese banks have been heavily represented in U.S. markets, having by far the largest national share. The Japanese banks' share of total foreign bank activity in the United States peaked in December 1989 at 57 percent, and has declined steadily since then as Japanese banks have retrenched generally in international markets. Canadian, French and Italian bank shares of foreign bank assets have generally been in the 5-10 percent range during this period. British banks' share of foreign bank activity in AMI-ADD-029 2 U.S. markets has declined by more than one-half during this period largely because of the sale of two large California banks. The Swiss banks' share of foreign bank activity has also declined since 1980. The German banks' share has been between 2 and 3 percent throughout the period. Chart 4 provides data on the growth of foreign bank lending to businesses at their U.S. offices. This lending roughly paralleled the growth of their total assets, increasing more than three-fold during the period to stand at about $210 billion as of June 1992. The foreign banks' share of the market also doubled from 18 to 36 percent. The higher share in business lending by foreign banks reflects the concentration by branches and agencies of foreign banks in wholesale corporate lending rather than other types of lending. For purposes of comparison, Chart 5 provides historical data on the types of overseas offices of U.S. banks. Similar to foreign banks in the United States, U.S. banks prefer branches to subsidiaries. In recent years, foreign subsidiaries have increased to about one-third of the total assets held by foreign offices of U.S. banks. This share increase reflects several trends, including expansion of retail-based subsidiaries in several countries, the use of subsidiaries by some U.S. banking companies to conduct a broader range of non-banking financial activities overseas, and the reduction in branch activity in overseas interbank eurodollar markets. AMI-ADD-030 Chart 1 Decerrber 3, 1992 FOREIGN BANK ASSETS IN THE UNITED STATES 1/ $billions 3600 3300 3000 2700 2400 2100 1800 1500 1200 900 600 300 0 1992 Percent 100 r- 100 90 i- 90 so I- 80 70 I- 70 60 I- 60 50 I- 50 40 1- 40 30 I- 30 23 21 20 1- 16 20 12 10 1- 10 0 I I I 1980 1985 1990 1/ Data for 1992 as of June. 21 As share ct assets ol all banking offices in lhe United States AMI-ADD-031 C ha rt 2 Sh ar e of U .S . A ss et s H el d by F or ei gn B an ks : $2 01 B ill io n O th er 1. 6% .~! , B ra nc he s & A ge nc ie s 73 .4 % (1 ) D at a fo r 19 92 a s o f J un e So ur ce : F ed er al R es er ve 19 80 B y T yp e of O ff ic e $8 61 B ill io n Su bs id ia ri es 18 . J ~ .• ,.m 1:o n 11 i !: 1'W diH i ~:n ii• HII .I! 1, ! 1· , B ra nc he s & A ge nc ie s 81 .6 % 19 92 ( 1) AMI-ADD-032 C ha rt 3 Sh ar e of U .S . A ss et s H el d b y F or ei gn B an ks : B y H om e C ou nt ry 9% 3 % 2% 4% 23 % 20 % 19 80 19 85 7% 2% 3% 18 % 2 0 % 19 90 19 92 ( 1) ::::: ::::: ~ • ;:;:;: ;:;:;: ;: . . • f0 .'l ;:; :;: ;:; : C an ad a IQ 29 F ra nc e Ja pa n ~~~;~ ~~~~~ ~~~~ U m te d K in gd om . O th er ~ It al y S w it ze rl an d • G en na ny (I ) D at a fo r 19 92 a s of J un e C "' ,_ ,, , •• ~, ., .. n~ -- 1, .. ,. ., .. .. 1 n ~ ~ . - . ... ... ,.. . AMI-ADD-033 Char14 Decerriler 3, 1992 FOREIGN BANK BUSINESS LOANS AT U.S. OFFICES 1/ Amount $billions 500 500 0 Domestically owned banks 450 [0 U.S. offices of foreign banks 450 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 1980 1985 1990 1992 Foreign Bank Share 21 Percent 100 r- - 100 90 1- - 90 80 1- - 80 70 1- - 70 60 1- - 60 50 1- - 50 40 - 36 - 40 31 30 - - 30 23 20 - 18 - 20 10 - - 10 0 I I I 0 1980 1985 1990 1992 11 Data for 1992 as of June. 21 As share of business loans at all banking offices in the United StatP.:>. AMI-ADD-034 300 250 200 150 100 50 Chart 5 Decerrber 3, 1992 OVERSEAS OFFICE ASSETS OF U.S. BANKS: BY TYPE OF OFFICE Amount --- Branches Subsidiaries ........ -.. - ............ ............. -· $billions ,-----------------.-- --,• ... ----------"'"' -·· 0~------~------~------~------~------~------~------~----~ 100 90 so 70 60 50 40 30 20 10 0 1984 1985 1986 1987 1988 1989 1990 1991 Distribution by Type of Office Percent Branches ----------- ~~--- ... ---- ... --------· ---- ......... Subsidiaries ............. ______ ... --- ---................. _____ ... ........... - 1984 1985 1986 1987 1988 1989 1990 1991 400 350 300 250 200 150 100 50 0 100 90 80 70 60 50 40 30 20 10 0 AMI-ADD-035 APPENDIX B AMI-ADD-036 SECTION 215. STUDY AND REPORT ON SUBSIDIARY REQUIREMENTS FOR FOREIGN BANKS APPENDIX B (a) IN GENERAL. - The Secretary of the Treasury (hereafter referred to as the "Secretary"), jointly with the Board of Governors of the Federal Reserve System and in consultation with the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Attorney General, shall conduct a study of whether foreign banks should be required to conduct banking operations in the United States through subsidiaries rather than branches. In conducting the study, the Secretary shall take into account - (1) differences in accounting and regulatory practices abroad and the difficulty of assuring that the foreign bank meets United States capital and management standards and is adequately supervised; (2) implications for the deposit insurance system; (3) competitive equity considerations; (4) national treatment of foreign financial institutions; (5) the need to prohibit money laundering and illegal payments; (6) safety and soundness considerations; (7) implications for international negotiations for liberalized trade in financial services; (8) the tax liability of foreign banks; AMI-ADD-037 2 (9) whether the establishment of subsidiaries by foreign banks to operate in the United States should be required only if United States Banks are authorized to engage in securities activities and interstate banking and branching; and (10) differences in treatment of United States creditors under the bankruptcy and receivership laws. (b) REPORT REQUIRED. - Not later than 1 year after the date of enactment of this Act, the Secretary shall transmit to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the House of Representatives a report on the results of the study under subsection (a) . Any additional or dissenting views of participating agencies shall be included in the report. AMI-ADD-038 APPENDIX C REGULATORY IMPLICATIONS AMI-ADD-039 REGULATORY PRACTICES AND SAFETY AND SOUNDNESS CONSIDERATIONS (FACTORS 1 AND 6) AMI-ADD-040 APPENDIX C REGULATORY PRACTICES AND SAFETY AND SOUNDNESS CONSIDERATIONS (FACTORS 1 AND 6) I. SUBSIDIARY VS. BRANCH: REGULATORY PRACTICES Pursuant to federal banking laws 1 , the Board of Governors of the Federal Reserve System ("the Board") and the Off ice of the Comptroller of the Currency ( "the OCC") are required to evaluate, among other things, the financial and managerial resources of foreign banking organizations that apply to acquire a subsidiary bank or establish a branch or agency. Whether the application relates to the acquisition or establishment of a bank or the establishment of a branch or agency, the Board and the OCC evaluate applications by foreign banking organizations under the same set of general criteria relating to financial and managerial strength. The application process is designed to screen foreign banks in terms of their ability to participate in the U.S. banking market under applicable statutory and prudential standards. In evaluating the managerial resources of foreign banks applying to acquire a subsidiary bank or establish a branch or agency, the supervisory authorities in the home country are International Banking Act of l978, as amended; Bank Holding Company Act of l956, as amended. Prior to passage of the Foreign Bank Supervision Enhancement Act of l99l, which amended the International Banking Act of l978, the Federal Reserve had no formal role in the licensing of branches and agencies of foreign banks by either the Office of the Comptroller of the Currency or any state. AMI-ADD-041 2 routinely contacted in order to obtain information which bears on the management resources, reputation and standing of the foreign bank. In addition, a general review is conducted of the experience and expertise of the proposed U.S. management and background checks are made. In evaluating the financial condition of a foreign banking organization, sufficient information is required from the applicant in order to permit an assessment of the financial strength and operating performance of the foreign organization. Factors taken into account include capital, profitability, concentrations of risk, liquidity and asset quality. Differences in accounting and regulatory practices are also generally taken into account. In this regard, information submitted will consist of reports prepared in accordance with local practices together with an explanation and reconciliation of major differences between local accounting standards and U.S. generally accepted accounting procedures. The issue of capital equivalency was recently examined in a report to the House and Senate Banking Committees that was prepared jointly by the Board and Treasury. (See, Capital Equivalency Report, June 17, 1992.) The detailed findings of that report need not be reiterated here; broadly, however, the report concluded that the minimum capital standard established by the Basle Accord provides a common basis for evaluating the general equivalency of capital among banks from various countries. AMI-ADD-042 3 Although differences in regulatory practices among supervisors continue to exist, efforts are under way to reduce these differences, to the extent possible. Discussions are currently taking place among various supervisors relating to the convergence of regulatory practices. A recent example of the efforts undertaken by banking supervisors is the minimum standards for the supervision of international banking groups and their cross-border establishments proposed by the Basle Committee on Banking Supervision. In acting on applications by foreign banks, the Board or OCC, in any event, is required to ascertain that the foreign bank is subject to comprehensive supervision on a consolidated basis by the home country supervisor. This requirement applies whether the foreign bank is seeking to acquire or establish a banking subsidiary or establish a branch or agency in the United States. Once a foreign bank establishes a U.S. banking presence, that banking operation, whether an agency, branch or subsidiary bank, is supervised and regulated under U.S. rules. Such an operation, whether branch or subsidiary, is expected to maintain records and conduct operations in accordance with u.s. banking and regulatory practices. For example, regardless of the accounting practices of the foreign banking organization's home country, operations of foreign banks in the United States, whether conducted through a subsidiary bank or a branch or agency, are subject to u.s. AMI-ADD-043 4 regulatory accounting standards. Individual branches and agencies must also follow U.S. regulatory standards in the preparation of their quarterly reports provided to the federal banking regulators (Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks - FFIEC 002}. Similarly, branches and agencies are expected to have internal controls and operating procedures that meet U.S. standards. These procedures are subject to examination and, where necessary, U.S. banking authorities can and have used their supervisory powers to force remedial action. The basic standards applied to branches and the range of regulatory powers available to assure compliance with U.S. rules broadly compare to those applicable to subsidiary banks. II. SUBSIDIARY VS. BRANCH: SAFETY AND SOUNDNESS CONSIDERATIONS Safety and soundness can be defined essentially as the extent to which depositors and creditors can be assured that a bank is being operated in a manner that does not expose them to undue risk of loss. Safety and soundness also encompasses a consideration of the risk of loss to the federal deposit insurance fund in the event that the FDIC has to reimburse insured depositors. For a bank with a large volume of insured deposits, substantial risk is borne by the insurance fund. On the other hand, for an institution that accepts primarily uninsured deposits, to the extent that losses exceed capital, losses would be absorbed by depositors and other creditors. AMI-ADD-044 .5 In addition to the concern that banking institutions be operated in such a way as to prevent losses to depositors or to the insurance fund, there is also the potential that an institution could operate outside the bounds of the law, such as by engaging in money laundering or other illicit activities. Thus, safety and soundness further encompasses the principle that an institution operates in compliance with the law. Considerations related to legal compliance are discussed fully in the paper on Factor 5 regarding the need to prohibit money laundering and other illegal payments. Generally, this review found that there are no significant differences between the branch and subsidiary form of organizational structure with respect to compliance with the law. Both types of operation are examined and are subject to enforcement actions and penalties for violations of the law. There are a number of theoretical advantages and disadvantages, from a safety and soundness standpoint, associated with the two basic forms of organization for u.s. operations of foreign banks. These advantages and disadvantages are embodied in the legal and regulatory differences between branches and subsidiaries, which affect the way they operate. A discussion of the characteristics of each form of organization is provided below. For purposes of this discussion, it is assumed that AMI-ADD-045 6 branches of foreign banks do not accept retail deposits and, thus, do not have deposit insurance. 2 Comparison of Branches and Subsidiaries A subsidiary of an organization is a legal entity separate from its parent. Generally, the actions of a subsidiary are not attributed to its parent. As a result, the parent is not legally required to support the subsidiary's operations or to meet its obligations. There is, however, no legal distinction between a branch of an organization and the organization as a whole. Generally, obligations of a branch are obligations of the organization. In considering the implications for bank safety and soundness of the subsidiary form of organization, one view is that a subsidiary is more insulated, at least in terms of corporate form, from the rest of the parent organization than a branch and has its own capital base to absorb losses. The extent to which a subsidiary bank may engage in transactions with the parent bank is more closely controlled than are branch relations with the bank, thereby reducing potential concentrations of exposure to the parent and related entities. Also, a subsidiary bank's single borrower lending limit is based on the subsidiary 2 Insured branches of foreign banks in the United States currently represent a very small sub-set of the total U.S. branches and agencies of foreign banks. Due to recent legislative changes, while existing insured branches have been grandfathered, generally no new insured branches may be established. For this reason, this paper will focus upon uninsured branches of foreign banks. AMI-ADD-046 7 bank's own level of capitalization and is often quite small in relation to the total resources of the parent. However, subsidiary banks must obtain deposit insurance, which may have the effect of reducing market discipline. (See separate paper addressing considerations related to deposit insurance.) A subsidiary, by virtue of its separate corporate existence, however, is denied the benefit of being an integral part of a larger, more diversified banking institution. Although theoretically a local bank subsidiary of a foreign parent bank can operate profitably as a stand-alone entity without the benefit of direct access to its parent's funding, support and name, this access in reality is often critical to the subsidiary's survival of a downturn in its market. A parent institution could, under the law, allow a subsidiary to fail without providing additional support. In practice, it is likely that only in extremis would a banking institution with international operations allow a subsidiary to fail, in view of the potentially harmful effect this would have on the parent bank's market reputation and its ability to obtain funding in other markets. On the other hand, collapse of the parent bank can cause serious difficulties for a subsidiary, including liquidity problems, to the extent that there is market identification of the subsidiary with the parent bank. The strength of its parent, therefore, continues to be a highly relevant consideration for AMI-ADD-047 8 supervisors in assessing the safety and soundness of even a separately capitalized subsidiary bank. Under the branch form of organization, the U.S. office. functions not as an independent entity but rather as an integral part of the parent organization, which serves as a direct source of funding and support for the U.S. office. While not necessarily diversified themselves, branches also benefit from the overall diversification of the consolidated organization. Using this form of organization, a bank may enhance its overall profitability through the use of branches that carry out particular functions within the organization or serve specific markets. For example, since transactions with the parent are not restricted, those business functions that require significant volumes of intercompany transactions, such as dollar clearing and global trading functions, are often carried out through branches. The lack of restrictions on transactions with the foreign parent also facilitates the transfer of funds within the organization, both to provide support when needed and to take advantage of opportunities to maximize overall profits. Finally, a branch's lending limit is based on the consolidated capital of the foreign bank parent. A branch's safety and soundness, however, is directly linked to that of its parent. A branch cannot survive as an independent operating entity if its parent bank fails. In addition, deposits placed with a branch are ultimately deposits with the foreign parent and are subject in large part to the AMI-ADD-048 9 country risk of the parent bank. Branches normally fund their operations by accessing the wholesale markets and depositors operating in these markets are expected to recognize these risks . and make investment decisions accordingly, which imposes market discipline upon branches seeking such funding. While there are these general distinctions between branches and subsidiaries, bank supervisory authorities in some countries have taken steps to make foreign bank branch and subsidiary operations more alike. For example, German supervisory authorities have established "dotation" capital requirements for branches of foreign banks, under which branches are required to maintain a "capital" position. Credit extended and participations held by the branch are limited to a specified amount of this "capital." Some state supervisors in the United States have employed a different approach by imposing "asset maintenance" requirements upon certain individual banks that are experiencing financial weakness or are from countries whose currencies or economies are considered to be unstable. Under asset maintenance requirements, a branch or agency is required to maintain assets that exceed third-party liabilities by a certain stated percentage. Federal branches and agencies of foreign banks are required to maintain a "capital equivalency deposit" (CED) with a Federal Reserve member bank in the amount of five percent of the branch's (or agency's) third party liabilities. u.s. federal AMI-ADD-049 10 bank regulatory authorities also have the authority under existing law to restrict branch operations in appropriate cases in such a way as to provide additional protection to local depositors and creditors by, for example, introducing asset maintenance requirements. Another possible way to make a foreign bank's branch operations more similar to subsidiary operations is to place limits on transactions with the foreign parent, such as by subjecting the branch operations to limitations on transactions with affiliates similar to those contained in section 23A of the Federal Reserve Act. In the United States, however, such prudential requirements have not had the effect of requiring the branch to operate as a subsidiary in the conduct of its business operations. Asset maintenance requirements, restrictions such as those required under Section 23A of the Federal Reserve Act, and other supervisory actions can and have been used by U.S. regulators to impose restrictions in particular cases, when believed to be necessary to deal with specific problems for safety and soundness purposes. These restrictions have the effect of insulating the financial condition of the branch or agency from that of the rest of the organization in much the same manner as the incorporation of a separate subsidiary. However, while useful in dealing with specific problems, imposition of prudential requirements across the board in ways that would limit business operations would effectively AMI-ADD-050 .11 prevent branches from functioning as intended within the operating plans of the respective foreign banking organizations and would risk the relocation of their business outside the United States. Such an approach could also have further negative repercussions in that bank regulators abroad could subject U.S. banks' overseas operations to similar requirements. In any event, there have been very few instances where foreign banks with U.S. operations have failed or where the U.S. operations of a foreign bank have required rescue. Those instances that have occurred in recent years have resulted in no losses to either depositors or creditors of the U.S. operation, whether in a branch or subsidiary form. (For further discussion of these matters, see separate paper on bankruptcy.) Conclusion Our experience to date has shown that the u.s. operations of foreign banks can be operated safely under either the branch or the subsidiary form of organization. Instances of failure, with respect to either the parent or the U.S. operation, have been very few and, where they have occurred, have been resolved without loss to either insured or uninsured depositors or to the deposit insurance fund. This has been the result with respect to both the branch and subsidiary form of organization. The issues raised in the Report to the Senate Committee on Foreign Relations from Senators Kerry and Brown, dated September 30, 1992, regarding a subsidiary requirement were considered at length during the course of this study. Although AMI-ADD-051 12 there are theoretical advantages and disadvantages with respect to safety and soundness considerations under the two forms of organization, these distinctions are primarily associated with differences in the way the two forms of organization operate and do not support a conclusion that one form is inherently more safe and sound than the other. The ongoing convergence of supervisory standards, including those relating to the comprehensive supervision of banking organizations operating internationally, should enhance the ability of supervisors to monitor and enforce principles of safe and sound operation for all types of U.S. operations of foreign banks. AMI-ADD-052 IMPLICATIONS FOR THE DEPOSIT INSURANCE SYSTEM (FACTOR 2) AMI-ADD-053 APPENDIX C IMPLICATIONS FOR THE DEPOSIT INSURANCE SYSTEM I. SUMMARY AND CONCLUSIONS The direct, short-term implications for the U.S. deposit insurance system of requiring foreign banks to conduct banking operations in the United States through subsidiaries, and not branches, are: (1) the deposit insurance assessment base and, consequently, the assessment income of the Federal Deposit Insurance Corporation ("FDIC" l are likely to increase; (2) the amount of deposits covered by the FDIC and, therefore, the contingent liabilities of the FDIC are likely to increase; and (3) the risk exposure of the FDIC is likely to increase in response to changes in the structure of the U.S. banking system and the enhanced ability of a foreign bank parent to restrict or withhold support from a separate subsidiary. It is not possible to quantify the impact of these changes on the deposit insurance system because the subsidiary requirement could create an incentive for foreign banks to move their current operations outside of the United States. As a result of the requirement, foreign banks would be likely to restructure their balance sheets, probably by reducing their assets and liabilities in the United States, to lessen insurance costs (and other costs of operating a subsidiary) . The longer term implications of the subsidiary requirement depend on whether the requirement strengthens or weakens the structure and condition of the U.S. banking system as any changes in the AMI-ADD-054 2 banking system may affect the risk exposure of the deposit insurance fund. ll. ANALYSIS This analysis is divided into three sections: (A) Background, (B) Current Law, and (C) Implications of. Change. A. Background As of June 1992, foreign banks operated 382 branches in the United States. These branches held aggregate liabilities of $598 billion, or 18.7 percent of the total liabilities held by FDIC- insured commercial banks. As of the same date, 52 branches had FDIC insurance and held $10.1 billion in assets and $4.1 billion in· deposits (excluding international banking facility ("IBF") deposits) . 1 U.S. branches of foreign banks generally focus on wholesale banking activities more so than most U.S. banks. As a result, these branches rely more heavily on borrowed funds and on other funds that are not subject to FDIC insurance assessments than U.S. banks do generally. For example, as of June 1992, deposits accounted for 54% of liabilities of U.S. branches of foreign 1 In addition, 220 agencies of foreign banks held total liabilities of $101.2 billion on that date. The main difference between branches and agencies is that agencies may only accept "credit balances" received in connection with the customer's other business with the agency, ahd not deposits, from U.S. citizens or residents. AMI-ADD-055 3 banks, as compared with 83% of the liabilities of FDIC-insured U.S. commercial banks. 2 U.S. branches of foreign banks also make extensive use of international banking facilities (IBFs) 3 • IBFs were first authorized for use by all banks in 1981 to attract Eurocurrency business, which is a wholesale banking activity, by allowing banks to conduct a deposit and loan business with foreign residents free from reserve requirements and FDIC insurance assessments. Only time deposits that originate from foreign sources, other IBFs or sister offices, and generally that have a minimum transaction size of $100,000, may be placed in IBFs. As of June 1992, U.S. branches of foreign banks held more than half (56 percent) of their deposits in IBFs. B. Current Law The Federal Deposit Insurance Act ("FDI Act") requires the federal deposit insurance system, administered by the FDIC, to insure up to $100,000 of the deposits held by each depositor at an insured depository institution. 12 U.S.C. § 1821(a) (1). Insurance coverage of a U.S. bank extends both to retail and 2 This relatively low percentage of deposits to total liabilities may even understate the wholesale orientation of foreign bank branches. A large proportion of foreign branch deposits are in fact funds due to banks and, in response to a subsidiary requirement, could be converted to term federal funds or to borrowings to avoid FDIC assessments. 3 Both U.S. banks and U.S. offices of foreign banks are permitted to establish IBFs, which consist of asset and liability accounts segregated on the books of the bank that has established the IBF. An IBF is not a separate entity from the bank. AMI-ADD-056 4 wholesale deposits once an institution is insured; deposits held in an insured branch of a foreign bank receive insurance protection only if received from a u.s. citizen or resident unless the FDIC determines otherwise. 12 U.S.C. 1813(m) (2). Insured institutions must pay semi-annual assessments to the FDIC for deposit insurance. 4 Under the current insurance system, an institution's assessment equals one-half of the "assessment rate" multiplied by the institution's "average assessment base". The FDIC recently increased the assessment rate from $0.23 per $100 of deposits to an average of $0.254 per $100 of deposits. The assessment base for insured branches of foreign banks is essentially the same as for an insured U.S. bank, i.e., domestic deposits reduced for float. 5 The assessment base includes neither deposits held in IBFs nor deposits held by U.S. offices of Edge and agreement corporations, as these are not domestic deposits. An institution's average assessment base equals the average of an institution's assessment base on the two semi- annual dates that call reports (FFIEC 031) are submitted. U.S. branches of foreign banks were not eligible for federal deposit insurance until the enactment of the International Banking Act of 1978 ("IBA"). The IBA originally required any branch of a foreign bank that accepted deposits of less than 4 Section 7 of the FDI Act governs the current deposit insurance assessment system, and includes details on the computation procedures. 12 U.S.C. § 1817. 5 Domestic deposits are demand deposit liabilities and time and savings deposit liabilities held in domestic offices of banks in the United States, its territories, and its possessions. AMI-ADD-057 5 $100,000 that are domestic retail deposits as determined by the FDIC, or by the Office of the Comptroller of the Currency in the case of federal branches, to obtain deposit insurance. 12 U.S.C. § 3104(a), (b). The Foreign Bank Supervision Enhancement Act of 1991 ( "FBSEA") extended this restriction by requiring foreign banks to conduct domestic retail deposit taking activities requiring deposit insurance protection only through an insured bank subsidiary. 12 U.S.C. § 3104(c). As a result, foreign banks cannot generally establish new insured branches to conduct such activities. Existing insured branches are grandfathered. 6 C. Implications of Imposing a Subsidiary Requirement Requiring branches of foreign banks to roll-up their operations into subsidiaries will affect the assessment base, assessment income, liabilities, and risks of the deposit insurance system. Assuming U.S. branches of foreign banks converted to subsidiaries without changing their liability structure, the assessment base of the FDIC would increase by the amount of non-IBF deposits then held in all uninsured foreign bank branches. As of June 1992, these deposits amounted to $129.3 billion, or about 5.5 percent of the $2,353 billion in assessable deposits in all FDIC-insured commercial banks. At the new annual average assessment rate of $0.254 per $100 of 6 The FBSEA originally raised an issue as to whether a foreign bank must form an insured subsidiary to accept any type of deposit .that is less than $100,000, rather than just domestic retail deposits. Congress clarified in legislation enacted on October 28, 1992 that a subsidiary is only required for domestic retail deposit-taking activities. AMI-ADD-058 6 deposits, the assessment income of the FDIC would increase by $341 million, or 6.0 percent of the 1991 assessment income of $5.2 billion. 7 It is unlikely, however, that the assessable deposits or income of the FDIC would actually increase by these amounts. Increases in the assessment base and income of the FDIC would depend on the willingness of foreign banks (or their depositors if increased costs are passed on by the foreign banks) to pay the FDIC assessments. Foreign banks have several permissible options for restructuring their operations to avoid incurring the additional costs of deposit insurance premiums. Foreign banks could simply close their U.S. branches and move some or all of their U.S. operations offshore. Any business that foreign banks could not move offshore might shift to U.S. banks. 8 The foreign banks that form U.S. subsidiaries might restructure their funding requirements to types of liabilities, such as borrowings, that are not subject to FDIC premiums. The latter practice is often used by U.S. banks. Either of these restructuring measures would be relatively easy to implement because a large portion of the current deposits of foreign bank branches are from other banks or are foreign in origin. 7 The 1991 assessment income was based on an assessment rate of $0.23. 8 The U.S. business of branches of foreign banks that shifted to U.S. banks might, in turn, be transferred to the off- shore branches of these banks, thus remaining outside the FDIC's assessment base. AMI-ADD-059 7 The sensitivity of the funding decisions of banks with wholesale operations including U.S. branches of foreign banks -- to small changes in relative costs has been clearly demonstrated on numerous occasions. The most recent example occurred in late ~990 with the reduction in reserve requirements. Prior to this reduction, reserve requirements created an incentive for U.S. branches and agencies to obtain funds in the Eurodollar market at 0.05 to 0.~0 of a percent less than the cost of booking large time deposits in the United States. 9 When the reserve requirements were reduced, this small yield-spread vanished and large time deposits at U.S. branches and agencies of foreign banks more than doubled, from $60 billion to $~30 billion, in the first half of ~99~. The assessment of an insurance premium resulting from the subsidiary requirement would also add to the cost of booking deposits in the United States. This assessment, which would be similar to a reserve requirement of approximately 0.254 percent, would be roughly three times the size of the previous reserve requirement. The insurance premium would almost certainly cause U.S. branches of foreign banks to curtail or even to cease their acceptance of deposits in the United States. The subsidiary requirement would also affect the costs and risks of the deposit insurance system. A risk-based assessment 9 Reserve requirements specify the fraction of various categories of U.S. deposits banks must hold in vault cash or in non-interest bearing accounts with the Federal Reserve. Interest foregone on such reserves has been compared to a tax on banks. AMI-ADD-060 8 system would appear to be easier to implement for subsidiaries than for branches, at least in principle. The information available on a subsidiary would seem to be more meaningful for evaluating risk than that available on a branch, since a subsidiary is a separate legal entity, while a branch is an integral part of its parent. In practice, however, a subsidiary requirement would not simplify implementation of the risk-based assessment system in this manner. As discussed in the Safety and Soundness portion of this study, the financial strength and risks of the parent are relevant to the risks of a subsidiary, as well as a branch, and require evaluation in both circumstances. A subsidiary requirement could reduce the risk exposure of the deposit insurance system if it simplified supervision and, in the event of failure, liquidation. With respect to supervision, U.S. regulators may seem to have more control over a U.S. incorporated subsidiary bank (at least over those activities that are not moved offshore) than over a U.S. branch of a foreign bank. However, under the FBSEA, supervisors were granted similar statutory powers with regard to U.S. branches and agencies of foreign banks as U.S. banks. See also "Safety and Soundness," Factor 6. With respect to liquidation, while receivership might appear easier to administer for a subsidiary than for a branch of a foreign bank, there might equally be advantages to liquidating a branch rather than a subsidiary. Requiring a foreign bank to operate only through a subsidiary places a legal shield between AMI-ADD-061 9 the parent foreign bank and its U.S. operations. Although a foreign bank is already liable for the operations of its branches, a foreign bank's liability for its subsidiary is limited by law to the capital invested and to any guarantees of the subsidiary's liabilities. Thus, in a liquidation, a foreign bank could withdraw support more easily from a subsidiary. This potential may increase risks to the deposit insurance system. The FDIC has no experience in liquidating an insured branch of a foreign bank. Its only experience in closing an office of a foreign bank consists of the liquidation of an insured subsidiary of a foreign bank. In this case, in contravention of U.S. law, the U.S. subsidiary transferred assets to its parent. The FDIC eventually recovered the assets, but only after a protracted struggle. Only a few branches and agencies of foreign banks have been liquidated by other u.s. bank regulators since foreign banks began operating directly in the United States in 1945. In these few liquidations, all U.S. creditors, including depositors, were paid in full. AMI-ADD-062 APPENDIX D NATIONAL TREATMENT/ FINANCIAL SERVICES IMPLICATIONS AMI-ADD-063 NATIONAL TREAT:MENT/ COMPETITIVE EQUITY CONSIDERATIONS (FACTORS 3, 4 AND 9) AMI-ADD-064 APPENDIXD NATIONAL TREATMENT/COMPETITIVE EQUITY CONSIDERATIONS (FACTORS 3, 4 AND 9) L MEANING OF "NATIONAL TREATMENT" AND "COMPETITIVE EQUITY" "National treatment" is based on the principle of nondiscrimination between domestic and foreign firms. This policy has generally been followed by the United States with respect to many sectors and has been subscribed to through different mechanisms. The Friendship, Commerce and Navigation Treaties of the United States and the OECD National Treatment Instrument define national treatment as treatment under host- country laws, regulations and administrative practices "no less favorable than that accorded in like situations to domestic enterprises.• The expression "no less favorable" is meant to allow for the possibility that exact national treatment cannot always be achieved. Although not established by statute, national treatment has been the U.S. attitude toward foreign direct investment since World War II. The International Banking Act of 1978 (IBA) applied this policy to the treatment of foreign banks in the United States. Both in applying the concept of national treatment to foreign banks in the United States and in evaluating the treatment of U.S. banks abroad, the United States has attempted to ensure that national treatment means de facto not just de iure national treatment. Thus, the U.S. position has been that national treatment must be interpreted in a meaningful, common- AMI-ADD-065 2 sense way, as opposed to a rigid, mechanical application of host- country rules . Consistent with this approach, over the years the U.S. Government has used several additional terms to elaborate upon the concept of national treatment. These include "competitive equity,R •equality of competitive opportunity" and "same competitive opportunities." These terms have been helpful elaborations for financial policy-makers in consideration of the U.S. policy of national treatment, especially in light of an alternative interpretation that views identical treatment as consistent with national treatment, even though identical treatment might nonetheless impose real competitive disadvantages to foreign firms. 1 For this reason, in the Uruguay Round negotiations on trade in services, it has been acknowledged that national treatment may involve either identical or different treatment of foreign and domestic firms. The treatment would be considered "less favorable" if it modified the "conditions of competition" in favor of domestic over foreign firms. For purposes of this study, the implications of imposing a subsidiary requirement upon foreign banks will be considered in terms of the standard of de facto national · treatment, that is, treatment of foreign banks that could be For a discussion of equality of competitive opportunity and the distinctions between de facto and de jure national treatment, see the 1979 Report to Congress on Foreign Government Treatment of U.S. Commercial Banking Organizations, pages 1-3 and 15-18. AMI-ADD-066 3 identical to or different from the treatment of domestic banks but is no less favorable when all circumstances are taken into account. In this section, unless indicated otherwise, the term "national treatment" will be used to refer to both establishment and operations of foreign banks. 2 ll. RECIPROCAL NATIONAL TREATMENT The Treasury Department believes it is important to note that, in recent years, a number of countries have adopted legislation that incorporates a reciprocal national treatment standard. Pursuant to such legislation, foreign firms could be denied national treatment if the home market of the foreign firm does not offer national treatment to firms of the country concerned. In 1984, 11 OECD members had reciprocity powers available to them. By January 1993, at least 18 of the 24 OECD members will have some form of reciprocity powers available, including Japan, the United Kingdom, and Germany. The movement towards reciprocity or reciprocal national treatment in many other industrial countries and the slow progress in achieving national treatment and equality of competitive opportunity in some foreign markets have raised the question of whether the United States should change its 2 The term "national treatment" refers to the operations of financial institutions but, in specific cases, may not refer to the rights of establishment. For example, the OECD "National Treatment Instrument" does not refer to establishment, which is covered under the OECD Codes of Liberalization. AMI-ADD-067 4 fundamental policy of national treatment to one of reciprocal national treatment. For example, the United States could consider imposing a subsidiary requirement on banks from countries that do not permit the establishment of branches by u.s. banks. This would affect only a limited number of countries, including Canada, Mexico, Norway, South Africa, and several other Latin American and Asian countries. The threat that the United States might enforce such a sanction could be sufficient to cause the affected countries to permit entry by branches of U.S. banks. Alternatively, it might compel the country concerned -to- restrict further access by U .. S .. banks. The EC Second Banking Directive also established an EC- wide policy of reciprocal national treatment, which authorizes negotiations with countries that do not provide effective market access comparable to that granted by the Community to credit institutions from a third country. In addition, sanctions are allowed to be imposed upon countries that do not grant national treatment. The Second Banking Directive required member states that did not have reciprocity provisions to adopt them. EC officials indicated that they may eventually seek negotiations with the United States because of disparities in the structure of our respective financial systems and perceived unequal opportunities for EC firms in U.S. financial markets. AMI-ADD-068 5 ID. REVIEW OF THE TREATMENT ACCORDED FOREIGN BANKS IN THE U.S. MARKET AND U.S. BANKS ABROAD A. Foreign Banks in the U.S. Market As of June 30, 1992, 309 foreign banks from 62 countries had 733 U.S. offices with assets totalling $861 billion, which constitute approximately 23 percent of all banking assets in the U.S. market. More than four-fifths of these assets are held in branches of foreign banks. The IBA adopted the policy of national treatment, described as parity of treatment between foreign and domestic banks in like circumstances. The United States generally has adhered to such a policy. Exceptions are discussed in Chapter 1 of the 1990 National Treatment Study. Most notably, a minority of states still do not provide national treatment to foreign banks. 3 The 1990 Study acknowledges that denial of equality of competitive opportunity by states "undermines the International Banking Act's (IBA) policy of national treatment."4 The United States also has provided better than national treatment in specific cases to foreign banks. Although the IBA extended to branches and agencies of foreign banks restrictions similar to those applied to U.S. banks, the legislation also grandfathered existing U.S. activities of 3 Department of Treasury, 1990 National Treatment Study, pages 34-35. 4 Another exception is the Primary Dealers Act of 1988, which established a limited policy of reciprocal national treatment for the granting of primary dealer status to foreign firms operating in the U.S. government securities market. AMI-ADD-069 6 foreign banks.s Thus, seventeen foreign banks were permitted to retain ownership of their securities affiliates following passage of the IBA. B. U.S. Banks in Foreign Markets U.S. banks are active in a variety of international banking markets. In June 1992, 1,411 U.S. bank offices held $522.1 billion in foreign assets, of which 64 percent are held in foreign branches of U.S. banks. The 1990 National Treatment Study, which was submitted to Congress by the Department of Treasury, provides detailed information regarding the treatment accorded U.S. banks in twenty-one foreign banking markets, including some in which •significant• denials of national treatment to U.S. banks remain. Most industrialized countries at present permit establishment of branch operations by foreign banks. U.S. banks are also permitted by foreign authorities to engage and compete in various activities abroad, even though they are not permitted to engage in such activities in the United States. IV. ADVANTAGES AND DISADVANTAGES OF OPERATING THROUGH BRANCHES VERSUS SUBSIDIARIES IN THE UNITED STATES This section reviews the various advantages and disadvantages of operating in the United States through a branch as compared to a subsidiary from the perspective of a parent foreign bank. As discussed below, the branch or subsidiary form s See the 1990 National Treatment Report, pages 34-37 for additional explanation. AMI-ADD-070 7 of organization has implications for the amount and distribution of the capital of the bank, the management of its liquidity and funding, regulatory and administrative costs, and other factors, such as lending limits, that affect its competitive opportunities in certain markets. Some of the costs associated with organizational form are relatively fixed; others may vary with the size of the operation. The impact of lending limits and other constraints also depends upon the size of the U.S. operation relative to that of the parent foreign bank. This analysis indicates there can be significant cost savings derived from the branch form of organization. A branch, as compared to a subsidiary, of a foreign bank would also appear to have greater opportunities in highly credit-sensitive wholesale markets. It should be emphasized, however, that additional factors also enter into a bank's decision on whether to pursue the branch or subsidiary form of organization. These factors generally involve the foreign bank's overall strategy and business plan. For example, the subsidiary form is usually chosen if the emphasis is on retail banking, which usually requires a number of offices. In this case, the foreign bank might choose to acquire an existing U.S. bank. The branch form of organization is often chosen if the foreign bank's focus is on wholesale banking, as is typically the focus of foreign banks in the United States. The analysis set forth here would also apply to foreign banks should they be required to conduct banking operations in AMI-ADD-071 8 the United States through a subsidiary in order to engage in securities activities or interstate banking and branching. A. Capital 1. Amount and Distribution of Capital The branch versus subsidiary form of operation can affect the efficiency with which the capital of the banking organization is used. The branch form of operation enables the parent bank to deploy its capital flexibly to take advantage of changing profit opportunities in different markets. When competitive opportunities lead to an expansion of activities in the United States, say, the foreign parent can allocate additional capital internally to support this expansion. Should activities of the U.S. branch contract, the parent bank can reallocate this capital to support growth elsewhere in the parent bank organization. 6 Under a subsidiary structure, capital resources cannot easily be redeployed to respond to changing market opportunities. A subsidiary will need to maintain total capital (tier 1 plus tier 2) equal to at least 8 percent of the subsidiary's risk- 6 In the United States federal or, in some cases, state authorities require asset pledges, a form of minimum capital requirement, from U.S. branches of foreign banks. For federally licensed branches, the Comptroller of the Currency requires a capital equivalency deposit to be maintained in a Federal Reserve member bank in the amount of 5 percent of the branch's third party liabilities. State banking authorities may call for asset maintenance requirements, which are satisfied with eligible assets on the books of the branch. Asset maintenance requirements are discussed in the section on Safety and Soundness. AMI-ADD-072 9 weighted assets, at least half of which must be in the form of tier 1 capital. Tier 1 capital consists mainly of shareholder's equity and retained earnings. Tier 2 capital may consist of perpetual preferred stock, hybrid capital instruments, subordinated debt (limited to 50 percent of the U.S. subsidiary's tier 1 capital), and loan loss reserves (limited after 1992 to 1.25 percent of the subsidiary's risk-weighted assets) . 7 In practice, therefore, the tier 2 capital requirement generally involves the issuance of some capital instruments in addition to the parent's straight equity. If these are purchased by the parent; the effect on the parent's cash position is the same as a straight equity injection. The need for cash from the parent would be reduced to the extent the U.S. subsidiary could sell some of its subordinated debt in the market. A public sale of the subsidiary's debt, however, would usually be undertaken only with the guarantee of the foreign parent (which would reduce the parent organization's total borrowing capacity) in order to avoid paying a premium over the parent's cost of funds. In most cases, the parent would not wish to diminish its ownership interest in the U.S. subsidiary through the public sale of the subsidiary's equity or preferred stock. 7 Parent banks in countries that permit undisclosed reserves, revaluation reserves, and latent revaluation reserves to count as tier 2 capital could not transfer portions of these reserves to the United States to satisfy tier 2 capital requirements of U.S. subsidiaries. AMI-ADD-073 ~0 The required minimum capital for a subsidiary would also be expected to include an amount to accommodate future growth. The injection of new capital into a subsidiary involves satisfying legal and regulatory requirements in both the home and host country and often entails material tax and administrative costs. 2. Home Country Capital Requirements A subsidiary form of operation may result in a higher overall regulatory capital requirement for the foreign banking organization as a whole. The host country may require the subsidiary to hcild additional capital if the subsidiary; due to- its small size, is unable to build up a fully diversified portfolio of risk. The home supervisor could also decide to disallow from consolidated capital any portion of the U.S. subsidiary's capital that is not subordinated to the depositors and general creditors of the parent bank. A number of supe_rvisors, including U.S. supervisors, assess capital adequacy on an unconsolidated (solo), as well as a consolidated, basis; i.e., the capital in a U.S. subsidiary would not qualify as capital of the parent for certain supervisory purposes. A low level of capital as measured on an unconsolidated basis could trigger a supervisory response. B. Liquidity and Funding For the reasons given below, a subsidiary form of organization is likely to increase the cost of wholesale funding, reduce the availability of interbank credit lines, and decrease AMI-ADD-074 11 flexibility in the management of liquidity. However, the subsidiary structure may increase access to core retail deposits. 1. Wholesale Funding A bank's ability to sell large denomination CDs depends crucially on its credit standing, which depends, in turn, on its size and financial strength, including capital. Because a branch is an integral part of the parent, a branch's access to these markets is virtually the same as that of the parent bank. A subsidiary is a separate legal entity and has to operate in the market on its own strength, unless it is supported by a formal guarantee from the parent. In most cases, a subsidiary's credit standing is inferior to that of its parent, which diminishes its access to wholesale funding sources or increases the cost of such funds. 8 This differential for a subsidiary as compared with a branch is often accentuated during periods of market unrest or illiquidity. 2. Interbank Credit Lines Similarly, the cost of and access to interbank credit lines also depend crucially on the credit standing of a bank. For the reasons given above, a branch's access to interbank lines on the strength of its parent is usually greater than is available to a subsidiary of the bank. A subsidiary must generally pay more than the parent bank or its direct branches 8 A subsidiary would also have to pay insurance premiums on assessable deposits, which would erode its competitiveness in raising funds in the U.S. market for large denomination CDs. See separate paper on deposit insurance implications.} AMI-ADD-075 12 for interbank credit and the subsidiary's lines are not as large. A subsidiary's funding possibilities compared to those of a branch may also tend to narrow further during periods of market uncertainty or illiquidity. Liquidity support may also be provided to branches, subsidiaries, or the parent bank through possible access to central bank discount window credit in either the home or host country. 3. Funding Flexibility and Liquidity Management Under a branch form of operation, the parent bank can pursue a centralized approach to liquidity management. An important consideration for some parent banks is the extent .to· which its U.S. operations can be used to meet its overall dollar funding needs. A U.S. branch can either be heavily supported by funds from the parent bank (a "net due to" parent position) or, alternatively, the U.S. branch can be a funding source for the parent (a "net due from" parent position) . Under a subsidiary structure, funding must be conducted for the primary benefit of the subsidiary and not of the parent. A subsidiary will be expected to establish its own liquidity management guidelines and meet its own liquidity needs, both under normal and adverse conditions. This could increase funding costs and would reduce funding flexibility for the parent bank. Banking supervisors in the United States (as well as in most other countries) impose restrictions on the advancement of funds by a subsidiary to its parent or other affiliates (discussed below under C.3.). As a consequence, in operating AMI-ADD-076 13 through subsidiaries the parent bank loses flexibility in the management of liquidity, especially dollar liquidity, for the organization as a whole. 4. Retail Deposits With the passage of FDICIA, foreign banks desiring to raise retail deposits in the U.S. must do so as an insured subsidiary, although previously existing FDIC-insured branches are grandfathered. The importance of core retail deposits to the overall liquidity management and profile of a parent bank will vary, depending on such factors as the bank's strategy and position in other markets. C. Activities in the U.S. 1. Limits on Loans to a Single Borrower A subsidiary's legal lending limit would be based on its capital and surplus, rather than that of its parent foreign bank as would be the case for a branch. For a national bank, this lending limit is 15 percent of the bank's unimpaired capital and surplus for loans that are not fully secured, with another 10 percent permitted if secured by readily marketable collateral. State banks are also subject to legal lending limits based on capital, which vary by state but are generally similar to those that apply to national banks. The capital of subsidiaries is usually small compared to the capital of the parent, and the capital-related limit on loans to one borrower would likely prevent the U.S. subsidiaries of foreign banks from competing for large loans in the U.S. AMI-ADD-077 14 corporate sector. The subsidiaries could transfer loans to their parents but often at increased cost or with possible adverse tax consequences (see separate paper on tax implications). 2. Trading and Risk-Management Activities U.S. branches of foreign banks engage in foreign exchange, credit enhancement, and over-the-counter derivative products, such as swaps, forwards, and options, largely on the strength of their parent organizations. Of the "large" banking participants in the U.S. foreign exchange market, as indicated on the monthly consolidated foreign currency report of banks in the United States, 87 are·foreign banks; of which 85 conduct these operations through a branch or agency and only two through a U.S. subsidiary bank. 9 The counterparties in these transactions, which are generally other major international banks, are highly credit sensitive and know the branch's commitment is backed by its parent institution. A U.S. subsidiary would generally not be able to participate in these markets as extensively as a branch unless the foreign parent formally guaranteed its activities. Parent guarantees have cost consequences, however, such as raising the parent's required capital or reducing its overall borrowing power. 9 The FFIEC 035 foreign currency report is required from U.S. chartered banks, bank holding companies, Edge corporations, and U.S. branches and agencies that report more than $1 billion in commitments to purchase foreign exchange. There are 122 respondents to the 035 Report, of which 35. are U.S. owned banks and 87 are foreign owned or controlled. AMI-ADD-078 15 3. Restrictions on Transactions With Affiliates Since a U.S. subsidiary bank of a foreign bank is a separately chartered bank, transactions between the subsidiary and the parent bank must be carried out on an "arm's length" basis, which means that such transactions must be treated as if the parent and the subsidiary were not under common ownership. As a result, such transactions may have tax consequences and other costs that would not arise in the case of internal transactions between a parent and a branch. Section 23A of the Federal Reserve Act, which limits quantitatively the financial transactions between. -insured banks.~.-. and their affiliates and requires that such transactions be collateralized, would apply to the U.S. subsidiary of a foreign bank. For example, credit extensions, advances, purchases of assets, or investments in a single affiliate of an insured bank are limited to 10 percent of the bank's equity capital. Other transactions included in the limit are guarantees issued on behalf of an affiliate and the acceptance of an affiliate's securities as collateral for any loan. The total of such credit extensions, investments, and other transactions involving all affiliates is limited to 20 percent of equity capital. The 23A restrictions on extensions of credit to affiliates, including any intra-day and overnight extensions of credit (even if fully collateralized), would severely hamper a U.S. subsidiary bank of a foreign bank in serving as a funding center for its parent or in providing clearing services for the AMI-ADD-079 16 parent and other affiliates. Such activities are currently important functions of U.S. branches of foreign banks. In some cases, exceptions to the 23(a) restrictions have been made to accommodate extensions of credit incidental to clearing services, as in the case of domestic Section 20 subsidiaries . 10 The cost of collateralizing such credit extensions, however, would erode the competitiveness of a U.S. subsidiary bank of a foreign bank in this area of activity. D. Regulatory and Legal Costs The establishment of a subsidiary usually entails greater costs than that generally·associated with the establishment of a branch because a subsidi~ry requires a separate board of directors and management structure, its own system of credit administration and internal controls, and additional legal documentation. 1. Board of Directors and Management Structure A U.S. branch needs an approved branch manager and other staff as appropriate. A U.S. subsidiary, however, is required to be "self-contained," that is a complete stand-alone entity, and generally must have a complete management staff. There is no separate board of directors for a branch, but a number of requirements apply to directors of national banks. Similar requirements generally apply to state chartered banks. 10 See paragraph 21 (b) of the 28 firewall conditions (Board Order dated January 18, 1989). AMI-ADD-080 17 National bank directors normally need to be U.S. citizens, though the Comptroller of the Currency may waive this requirement for not more than a minority of the total number of directors in the case of foreign bank subsidiaries. At least two-thirds of the directors are also subject to other residency requirements. These requirements increase the costs of a.subsidiary, whereas for a branch the foreign bank's head office may undertake many functions on its behalf, including planning and logistical support. 2. Credit Administration and Internal Controls A U.S. branch needs to ·maintain adequate credit files,--~ have adequate internal controls (which may be largely provided by head office) , and maintain its records in English. In addition to the requirements for a branch, a U.S. subsidiary will often have its own, separate credit administration and support and control systems, which will also add to its costs. 3. Legal Documentation For U.S. branches, legal documentation is limited to that necessary to gain approval for establishment of the branch in the United States. Minimal legal documentation is required for most transactions between the branch and its parent (or other affiliates). A subsidiary, however, is separately incorporated and must obtain a national or state banking charter. In addition, the subsidiary is likely to be subject to ongoing legal documentation requirements with regard to transactions with its AMI-ADD-081 . 18 affiliates, which would not arise in the case of transactions between a branch and the parent or other branches of the parent. V. INTERNATIONAL IMPUCATIONS OF A SUBSIDIARY REQUIREMENT This subsection examines the international implications of a U.S. requirement that foreign banks roll-up their banking operations in the United States into separate subsidiaries, if such requirements were applied: (1) across-the-board to all foreign banking operations in the United States; or (2) only to those foreign banks that wished to avail themselves of new banking powers in the event that new powers are granted to U.S. banks. A. Subsidiary Requirement Imposed upon all Foreign Banking Operations Introduction of a subsidiary requirement by the United States for all foreign banking operations would necessitate a major restructuring of such operations in view of the preference exhibited to date by foreign banks for the branch form of organization for their U.S. operations. As discussed above, U.S. branches of foreign banks account for more than four-fifths of all U.S. assets held by foreign banks. Adoption of a subsidiary requirement for all commercial bank activities would reduce the efficiency and competitiveness of international banking markets and thereby decrease the welfare of consumers. Beyond achieving equality of competitive opportunity for foreign and domestic banks, a fundamental purpose of a policy of national treatment is to provide consumers of financial services in a host country with access to as deep, AMI-ADD-082 19 varied, competitive and efficient a banking market as possible. In other words, a policy of national treatment for foreign banking institutions helps to assure that a host country market is one in which individuals, businesses, and also public sector entities can satisfy their financial needs on the best possible terms. Introduction of an unqualified subsidiary requirement by foreign countries could also have a substantial adverse impact on U.S. banks, which rely heavily on the branch form of organization for their activities abroad. As discussed above, foreign branches of U.S. banks account for two-thirds of all foreign assets held by U.S. banks. Indeed, branches are by far the preferred form of organization for the conduct of U.S. banking operations abroad. A subsidiary requirement could jeopardize U.S. banks' existing foreign branches by establishing a model to be followed by foreign governments in their own markets, and similarly frustrate future efforts by U.S. banks to establish operations abroad in new markets that could be important to the banks' longer-term competitive position. This possibility is particularly acute in those countries that have a reciprocal national treatment standard. (For further discussion of these issues, see separate paper on Factor 7 -- Implications for International Negotiations for Liberalized Trade in Financial Services.) In addition, at present, U.S. banks are permitted by foreign authorities to engage and compete in various activities AMI-ADD-083 20 abroad, even though they are not permitted to engage in such activities in the United States. Foreign authorities could also choose to reconsider such favorable treatment in the light of the imposition of a subsidiary requirement. Such a wide-ranging subsidiary requirement would also undermine longstanding U.S. efforts to encourage countries such as Canada to drop their own subsidiary requirements. In addition, it might encourage other countries to introduce such requirements. At present, most industrialized countries do not have requirements prohibiting the establishment of branch operations by foreign banks. The motivation for an across-the-board subsidiary requirement would also be inconsistent with the framework adopted by the Basle Committee of Banking Supervisors, which recognizes that banks operate internationally through branches and which consequently has sought to strengthen the supervision exercised over branches of foreign banks by stressing the primary role and responsibilities of the home country (i.e., the country of incorporation of the foreign bank) supervisor, as well as host country responsibilities. Neither Treasury nor the Federal Reserve Board believe that such an unqualified subsidiary requirement is warranted. B. Subsidiary Requirement Imposed in Connection with New Powers The question has also been raised as to whether a subsidiary requirement should be imposed with regard to the AMI-ADD-084 21 banking operations of foreign banks in the United States if u.s. banking organizations are granted new powers to engage through separately incorporated subsidiaries in securities activities or interstate banking and branching. 11 Under this type of approach, only those foreign banks that wished to avail themselves of the expanded powers would be required to restructure their branch operations into subsidiary form. The Administration's 1991 financial modernization proposal, 12 which ultimately was not enacted, was broadly along these lines. Under this proposal, new powers would have been authorized to those U.S. financial services holding companies. with "well-capitalized" banks. Foreign banks that wished to obtain expanded powers (which under the 1991 proposal included securities and insurance activities) were required to "roll-up" all existing branch and agency operations into one or more well- capitalized U.S. bank subsidiaries of a financial services holding company. Supporters of this proposal believed that the "roll-up" requirement assured that domestic banks would not be placed at a competitive disadvantage in their own market. They maintained that the proposal would have assured that the same capital, accounting, regulatory and supervisory requirements (as well as 11 Neither the Treasury nor the Board believe a subsidiary requirement should be imposed in connection with expanded powers with regard to interstate activities. 12 The Financial Institutions Safety and Consumer Act of 1991 (FISCCA) . AMI-ADD-085 22 domestic firewalls) would be imposed on foreign and domestic banking organizations that wished to engage in expanded powers. No foreign bank would have been required to "roll-up"; each foreign bank could make a decision based on its own corporate strategy and preference. Foreign banks that did not desire expanded powers in the United States could continue to conduct their banking operations in branches. Opponents of the 1991 roll-up proposal believed that existing regulatory authority was sufficient to assure that foreign banks seeking to establish operations in the United States would have to ·meet the same general standards of financial,,,. strength, including capital, experience and reputation as required for domestic institutions.· The mandatory roll-up of branches of foreign banks seeking expanded powers was considered to be an unnecessary requirement, which would have had undesirable consequences. First, the proposed roll-up requirement would have jeopardized the continued willingness of foreign banks to maintain a U.S. banking presence, thereby potentially removing an important source of credit for U.S. borrowers. Second, the roll-up of branches of foreign banks in this country could have led to similar requirements for U.S. banks abroad. This was not considered to be in the long-term interest of U.S. bank competitiveness, in view of the reliance placed by U.S. banks upon the branch form of organization in their operations abroad. AMI-ADD-086 23 It is agreed that, under a limited subsidiary requirement, foreign banks that did not wish to take advantage of the expanded powers could have continued to operate in the United States through branches. However, those foreign banks that did wish to engage in the expanded activities would have been denied the advantages associated with branch operations, including access to their worldwide capital, which are discussed in section IV. above. Since the 1991 financial reform proposals were introduced, adoption of the Foreign Bank Supervision Enhancement Act ("FBSEA") has strengthened the regulators' authority to. assure that untoward actions do not jeopardize the safety and soundness of the financial system. In addition, application of the guidelines established in the Report on Capital Equivalency, which reinforced existing regulatory practice, helps assure that U.S. banks will not be placed at a competitive disadvantage in their own market. The findings of the joint annual updates on capital equivalency required by Section 214(b) of FBSEA also provide an opportunity for continuous review of this objective. Finally, FBSEA requires that the Board in consultation with Treasury, establish criteria for banks from countries that do not provide comprehensive supervision on a consolidated basis. The EC's Second Banking Directive (the "Directive"), which must be implemented by member states by no later than January 1993, has been put forward as one example of treatment of U.S. banks abroad that might serve as a precedent for imposing a AMI-ADD-087 24 subsidiary requirement on the U.S. banking operations of foreign banks in connection with the availability of new powers. The Directive allows banks incorporated in the Community, including bank subsidiaries of foreign banks, to establish branches or provide services throughout the Community, based upon the authorization and supervision by its home, rather than the host, country. It has been suggested that the Directive parallels a U.S. subsidiary requirement imposed in connection with the grant of new powers because it requires establishment of a subsidiary to take advantage of the single banking license. Some have complained that the program of liberalization under the Directive does not apply to EC branches of U.S. banks. A brief description of the Directive and the operation and effect of its provisions is provided below. Under the Directive, a host Member State in general will no longer have a role in the licensing or day-to-day supervision of branches of banks from other Member States and will not be able to limit the number of branches that may be established or to impose endowment capital requirements. The Directive also establishes a list of permissible activities that, if authorized by a bank's home country, may be offered anywhere in the EC even if the host country does not permit its banks to carry on such activities. The EC's reliance upon home-country rules and home- country administration of those rules in the creation of a single AMI-ADD-088 25 market is predicated on harmonization among Member States of •essential" national rules pertaining, inter alia, to banking and financial services. In two major respects, this harmonization exercise goes far beyond what the major industrial countries have accomplished through any forum for cooperation, including the Basle Committee on Banking Supervision and the OECD. First, the harmonizing measures with regard to financial services, which are directed to the creation of a single market, are much broader than the general minimum standards agreed in Basle and encompass other areas besides supervisory standards, e.g., matters relating to corporate law, bank ownership of nonfinancial institutions, initial capital requirements, provisions relating to major shareholders and changes in share ownership, bank and branch accounts, and, in future, deposit insurance and perhaps reorganization and liquidation. Second, the EC harmonizing measures are not just voluntary agreements; instead, they are legally binding as part of the body of Community law, which is supreme over national laws and constitutions. The Second Banking Directive does not directly address the treatment of branches of banks from the United States and other non-EC countries. Because such branches are not incorporated in an EC Member State, are not subject to the EC's harmonization of essential rules, and do not have an EC Member State as a sponsoring home-country authority, foreign banks operating in a Member State only through branches are not AMI-ADD-089 26 eligible under the Directive to establish branches or provide services throughout the Community. That is, to receive the full benefits associated with the EC passport, a foreign bank will need to have an EC subsidiary. The Directive does not prohibit foreign banks from establishing or maintaining both subsidiaries and direct branches. However, foreign bank branches will continue to be subject to approval by the individual EC Member States in accordance with the First Banking Directive. There are, therefore, similarities and differences between a proposal to impose a subsidiary requirement upon foreign banks' operations in the United States in connection with the grant of new powers and the treatment accorded foreign banks under the Directive. One similarity is that, albeit in very different circumstances and for different reasons, under each program, foreign banks would be required to establish local subsidiaries to avail themselves of different types of market liberalization {namely, the removal of national boundaries in relation to the provision of banking and financial services in the EC13 and the expansion of permissible activities in United States) . Local subsidiaries, of course, do not have access to the worldwide capital of their parents. The primary difference between the two programs is that, unlike the Administration's 1991 proposal, the EC Second 13 In contrast, the Administration's 1991 proposal would not have required establishment of a subsidiary to branch on an interstate basis. AMI-ADD-090 27 Banking Directive does not require that third country banks terminate their EC branch activities in order either to benefit from the passport and liberalization that is provided in the Directive or to establish nonbanking subsidiaries. 14 14 As noted above, each Member State may set its own policies with regard to branches of foreign banks. As discussed further above and in the separate paper regarding Factor 6 - Safety and Soundness, to the extent that individual Member States (such as Germany) impose dotation capital requirements (which require capital to be held in the host country) or other restrictions upon the operations of branches of foreign banks, the benefits of branch operations are significantly reduced. AMI-ADD-091 INTERNATIONAL NEGOTIATIONS FOR LIBERALIZED TRADE (FACTOR 7) AMI-ADD-092 APPENDIXD INTERNATIONAL NEGOTIATIONS FOR LffiERALIZED TRADE (FACTOR 7) The effect of a subsidiary requirement on international agreements, international negotiations and U.S. bank access to foreign markets is an important factor in analyzing such a requirement. This section specifically addresses the implications a subsidiary requirement would have from two perspectives: 1) international agreements governing financial services issues, including those currently under negotiation or awaiting approval; and 2) bilateral financial market discussions. Since World War II, the United States has pursued a strategy aimed at achieving open international markets. The view that open markets promote the welfare of all countries has been the driving force behind multilateral and bilateral negotiations to achieve freer trade in goods or services and a more liberal international investment environment. Over the last fifteen years, negotiations on financial services issues have become an important part of U.S. international economic policy. Treasury Department and other U.S. officials have sought to open financial markets in treaty negotiations, bilateral and multilateral trade agreements, and a variety of other fora. The goals of the United States in its financial services negotiations have been national treatment and market access for U.S. financial firms. More specifically, the United AMI-ADD-093 2 States has pursued a policy of national treatment that includes equality of competitive opportunity, the objective of which has been to ensure that other countries' laws and practices do not disadvantage U.S. financial institutions in their ability to compete. In return, the United States has adopted a general policy of national treatment towards foreign financial institutions. These goals, where achieved, allow U.S. firms to bring their comparative advantage in financial services to foreign markets, thus providing profits and jobs for the U.S. financial services industry and adding to the country's wealth. This section first examines the legal rules that have been agreed or are being negotiated to govern international banking. The existing legal agreements analyzed are: 1) Friendship Commerce and Navigation Treaties and Bilateral Investment Treaties; 2) the Code of Liberalization of Capital Movements and the Code of Liberalization of Movements of Current and Invisible Transactions negotiated under the auspices of the Organization for Economic Co-operation and Development; and 3) the Canada -- United States Free Trade Agreement. Proposed future international agreements such as the North American Free Trade Agreement and the Uruguay Round Agreement on Financial Services are also examined, as are bilateral financial policy discussions between the United States and other countries. AMI-ADD-094 3 A. International Agreements Governing Financial Services 1. Treaties The United States has negotiated a network of more than fifty bilateral Friendship, Commerce and Navigation Treaties (FCNs) and Bilateral Investment Treaties (BITs) with various trading partners, including France, Germany, Italy, Japan and Korea. These treaties generally impose three obligations in the banking sector: (1) a country may not impose new limitations on national treatment of existing operations of foreign banks, with national treatment defined as treatment in a particular state that is no less favorable than that provided in that state to banks located in another state; (2) foreign banks must be granted "the right to maintain branches and agencies to perform functions necessary for essentially international operations in which they are permit ted to engage" 1 ; and (3) most-favored-nation (MFN) treatment must be accorded in all respects (e.g., Japanese banks are entitled to no less favorable treatment by U.S. authorities than German banks). The first of these obligations permits violations of national treatment as long as existing firms are not affected. This obligation would not appear to be violated by a subsidiary requirement imposed on foreign banks because the FCNs and BITs adopt a special definition of national treatment that measures treatment of foreign firms in a particular state with U.S. firms established in other states. Because branching across state lines is generally prohibited in the United States under the McFadden Act, 12 U.S.C. § 36, and the Federal Reserve Act, This obligation is contained only in FeN-treaties. AMI-ADD-095 4 12 U.S.C. § 321, national treatment defined in this way would not include the right of a foreign bank to branch under these treaties. Based on this rule, it would appear that a subsidiary requirement imposed on existing or future operations of a foreign bank branch or agency would not be inconsistent with the prohibition against new departures from national treatment. A subsidiary requirement for all foreign banks in the United States would, however, raise an issue with respect to the second basic banking obligation in the FCNs (this obligation is not present in BITs) . This obligation requires that foreign banks be permitted to maintain·branches and agencies if a signatory to an FCN permits foreign banks to engage in international banking business in its territory. The term "international banking business" refers to activities such as foreign exchange services, lending services and other banking services incidental to international business, such as that permitted to Edge corporations under the Federal Reserve Act, and limited branches under the International Banking Act. A subsidiary requirement for all foreign banking operations in the United States would appear to be inconsistent with this requirement. Finally, a subsidiary requirement imposed under a reciprocity statute would be inconsistent with the MFN obligation of the FCNs and BITs. MFN treatment requires the banks of a signatory to an FCN or BIT to be treated no less favorably than any other country's banks. If use of a reciprocity test resulted AMI-ADD-096 5 in the banks of a signatory to an FCN or BIT being forced to •roll-up," that country would have a claim under its treaty with the United States. A violation of a treaty would permit the country harmed to proceed in an agreed international forum (e.g., the International Court of Justice) against the offending country or take other actions permissible under international law. Such actions could include retaliation against the firms of the country that took the action inconsistent with the treaty. 2. OECD Codes of Liberalization The Organization for Economic Co-operation and Development (OECD) is an organization of 24 industrialized countries that includes many of the major trading partners of the United States. The members of the OECD have entered into two agreements governing financial services and other business sectors: the Code of Liberalization of Capital Movements (the Capital Code) and the Code of Liberalization of Current Invisible Operations (the Invisible Code) . The Capital Code governs direct and portfolio investment in financial services. The Invisible Code deals with, among other things, treatment of established bank branches. Under the Capital Code, each country is required to permit "investment for the purpose of establishing lasting economic relations . by means of . . . creation or extension of a wholly-owned enterprise, subsidiary or branch . . " Countries cannot apply conditions "that raise special barriers or AMI-ADD-097 6 limitations with respect to non-resident (as compared to resident) investors, and that have the intent or the effect of preventing or significantly impeding inward direct investment by non-residents." OECD Capital Code, art. 2 (a) & item I.A. The OECD Members' interpretation of the Capital Code indicates that restrictions on the right to invest in branch form would be inconsistent with the Code. The interpretation has developed in the periodic examinations conducted by the OECD of individual members' markets, and on interpretation by the Secretariat of the OECD. Any definitive legal analysis based on the plain language of the Code would require an analysis of many of the factors identified in the national treatment/competitive equity section of this study to determine whether special barriers are raised to foreign investment through a subsidiary requirement. A subsidiary requirement would also appear to be inconsistent with the Invisible Code, which requires "equivalent" treatment of bank branches. Section 214 of the Federal Deposit Insurance Corporation Improvement Act of 1991 requires all new insured deposit-taking activities of foreign banks to occur through subsidiaries, and not also direct branches as was previously the case. The United States lodged a reservation to the Invisible Code to account for this restriction. Normally reservations are limited to existing non-conforming measures, but the Invisible Code was in the process of amendment at the time FDICIA was passed and the United States was permitted to take a AMI-ADD-098 7 reservation. The time for lodging new reservations is now closed; therefore, further restrictions on foreign bank branches may be inconsistent with the Invisible Code. The formal sanction procedure for violations of the Codes would be referral to the OECD Council -- the political level decision-making body of the OECD -- for consideration of appropriate action. The OECD Council works by consensus; consequently, it is unlikely sanctions would be authorized. Indeed, various OECD members have taken action in the past that is inconsistent with the OECD Codes with no sanctions or retaliation having been sought. For example, when the EC adopted its Second Banking Directive, the reciprocity test contained in Article VII of the Directive was inconsistent with the commitment of OECD members not to adopt any new reciprocity statutes in their financial laws. Nevertheless, a subsidiary requirement that is inconsistent with Code obligations would undermine the integrity of the agreements and damage possibilities for further liberalization under the Codes. 3. The Canadian Free Trade Agreement and the North American Free Trade Agreement In 1989, the Canada -- United States Free Trade Agreement (the CFTA} entered into force. The CFTA contained a number of specific commitments on treatment of Canadian bank subsidiaries in the United States, but only one regarding Canadian bank branches. No other protection was afforded AMI-ADD-099 8 Canadian bank branches in the FTA because Canada refused to provide U.S. banks the right to branch into Canada at all. The one obligation applicable to foreign bank branches Article 1702(2) -- concerned certain interstate branches of Canadian banks permitted to operate under section 5 of the International Banking Act of 1978 (IBA) . Before the IBA was ·passed, foreign banks were permitted to establish full-service branches in more than one state as long as individual states permitted such branches. In other words, interstate branching restrictions did not apply to direct branches of foreign banks. After 1978, the interstate branching prohibitions were applied to all foreign banks. In order to protect acquired rights, however, the established branches of foreign banks were "grandfathered." The CFTA guaranteed these grandfather rights for. Canadian banks permanently under Article 1702(2). Thus, a subsidiary requirement imposed on the interstate branch offices of Canadian banks which existed at the time of the CFTA could violate the grandfathering provisions of that agreement. It should be noted that legal sanctions are not specifically authorized under the CFTA for a breach of the financial services obligations. However, the recently negotiated Financial Services Chapter of the North American Free Trade Agreement will incorporate the specific grandfathering provision of the CFTA. When this Agreement enters into force, it will provide a dispute settlement mechanism for breaches of the grandfathering commitment. AMI-ADD-100 9 In June 1991, the United States began formal negotiations with Canada and Mexico on a North American Free Trade Agreement (NAFTA) . The NAFTA provided an opportunity to expand upon the legal commitments made in the CFTA. A major negotiating objective of the United States in the NAFTA negotiations was obtaining the right to branch into Canada and Mexico. This objective was not achieved partly due to the Canadian and Mexican perception of a lack of equivalent market access in the U.S. financial services market. As a result, the NAFTA provides each country the right to require incorporation of financial institutions under its laws, that is, the right to require operation through a subsidiary. At present, Canada prohibits direct branches of foreign banks into its territory and is permitted to continue to do so under the terms of the NAFTA. Mexico presently permits Citibank to operate in branch form, but has not authorized any other foreign bank to enter Mexico in this form. Mexico has indicated it will permit U.S. banks to enter only in subsidiary form under the liberalization negotiated under the NAFTA. The Parties to the NAFTA have also agreed, however, that when the United States permits interstate bank branching in its market, the NAFTA Parties will negotiate with a view toward permitting NAFTA-wide branching by NAFTA banks. The imposition of a subsidiary requirement in the United States prior to such negotiations would have a negative impact on such future AMI-ADD-101 10 negotiations and almost certainly result in Mexico and Canada refusing to allow direct branching in the future. 4. Uruguay Round ("UR") Services Agreement A requirement that all foreign banks conduct banking operations in the United States through subsidiaries could require reservations to the market access commitments of the United States under the Services Agreement and would be inconsistent with U.S. objectives in the Uruguay Round. a. U.S. Objectives in the Round A major objective of the United States in the UR has been to obtain commitments that insure U.S. banks can establish and operate effectively in foreign countries. As part of this effort, U.S. officials have sought guarantees that U.S. banks will have the option of entering and operating either as branches or subsidiaries. This objective has already been hampered by recent U.S. legislation requiring that new insured deposit-taking operations take place through subsidiaries. Enactment of a subsidiary requirement with wider effect would further erode, if not eliminate entirely, the ability of U.S. negotiators to support U.S. banks in their desire to operate as branches abroad. United States negotiators would not be able to argue credibly that other countries should commit to allow entry in branch form if the United States did not. The use or threat of a subsidiary requirement might be argued to enhance U.S. leverage in financial services talks by being •traded off" to obtain commitments to remove similar AMI-ADD-102 11 measures in other countries. Such a strategy, however, would risk causing the major trading partners of the United States to propose subsidiary requirements or take other adverse actions against U.S. banks abroad in the context of the negotiation. In this regard, the members of the European Community and most other developed countries already permit foreign banks to operate as branches in their territory. As of October 1992, they were prepared to legally guarantee continuation of this practice in the UR. As noted above, the United States has been seeking in the UR negotiations the elimination of existing prohibitions on branch banking. The extent to which this effort will be successful is unclear. On a more fundamental plane, it is also unclear whether the Round negotiations will produce sufficient liberalization in the financial services area to enable a U.S. commitment to legally guarantee continuation of the present liberal treatment of financial institutions from countries which refuse to liberalize. The United States has indicated, that if adequate commitments by other countries in the financial services sector were not forthcoming, the United States would be unable to agree to most-favored-nation (MFN) treatment in this sector. Such an MFN exemption would enable the U.S. to exercise selective leverage to achieve liberalization in future bilateral or multilateral negotiations. Such leverage could include a AMI-ADD-103 12 subsidiary requirement where U.S. banks do not receive reciprocal treatment. b. Provisions of the Agreement Article XVI ("Market Access") of the Services Agreement provides that any Party undertaking commitments in service sectors shall not maintain restrictions on the specific types of legal entities or joint ventures through which a service supplier provides a service, unless such restrictions are reserved. Where no restrictions are inscribed in a Party's schedule of commitments, a Party would be obligated to permit a foreign bank, which otherwise met its prudential requirements, to create or maintain a commercial presence as a branch. Countries can choose to undertake commitments in financial services with reference to the "Understanding on Commitments in Financial Services" (the "Understanding"). This document is composed of a series of commitments that form an integral part of the draft Services Agreement, although the relationship to Article XVI remains to be determined. (In many areas, the Understanding provides greater or more detailed obligations.) With respect to the "commercial presence" aspect of its market access provisions, the Understanding provides that each Party shall grant financial service providers the right to establish or expand a commercial presence, including branches. In its most recent proposed offer, the United States scheduled its commitments to market access with respect to the AMI-ADD-104 13 Understanding's market access provisions rather than those of Article XVI. Under either Article XVI or the Understanding, the U.S. would have certain obligations, subject to reservations, to permit other Parties to operate through branches. Measures may be reserved under both Article XVI and the Understanding, although the latter permits reservations only of existing non- conforming measures. As a practical matter, reservations taken by a country entail a cost, in the form of other countries either taking reservations or refusing to remove restrictions which the U.S. has sought. B. Bilateral Financial Market Negotiations Bilateral financial services negotiations have been conducted by the United States for several years with Japan, Korea and Taiwan. The issue of subsidiaries versus branches has not arisen in these negotiations, since in all cases U.S. banks are able to establish in their preferred form as branches. However, other kinds of restrictions on U.S. banks do exist in these markets, including the inability to establish as subsidiaries in two countries and restrictions on the type and scope of operations in all three. The impact on these negotiations of imposition by the U.S. of a subsidiary requirement on the banks of these countries is an open question. It could be that the possibility of doing so on a selective basis would serve as a lever in obtaining concessions on behalf of U.S. banks. Since currently the banks AMI-ADD-105 14 of these countries enjoy greater access in most respects in the United States than U.S. banks enjoy in the respective countries, the potential imposition of a U.S. subsidiary requirement might provide an element of leverage in the negotiations. However, it is likely that the imposition of an across-the-board subsidiary requirement for all foreign banks would be met with greater reluctance to liberalize or even with retaliatory restrictions. C. Summary A subsidiary requirement imposed on all foreign banks would raise legal issues under the OECD Codes for all branches, and the CFTA with respect to operations of the Canadian IBA- grandfathered interstate branches that existed in 1987. In addition, a subsidiary requirement would appear to be inconsistent with the OECD Codes and the FCNS where imposed on all operations of foreign banks in the United States. Under the NAFTA a subsidiary requirement would be permissible but would significantly reduce the possibility that U.S. banks could achieve branching rights into Mexico and Canada at a future date despite the further arrangement for future liberalization in the NAFTA with respect to branching. Under the Uruguay Round a subsidiary requirement could necessitate reservations by the United States and would likely adversely affect negotiations with developed countries to guarantee branching rights of U.S. banks abroad that already exist. A subsidiary requirement would only be useful as a AMI-ADD-106 15 selective measure to deal with countries that did not make sufficient commitments in the Round. In other bilateral negotiations, the effect of a subsidiary requirement appears to be an open question. While such a requirement could tend to discourage further efforts to liberalize in these markets, it is also possible that the selective imposition of a subsidiary requirement might serve as leverage for further liberalization. AMI-ADD-107 APPENDIX E OTHER IMPORTANT IMPLICATIONS AMI-ADD-108 THE NEED TO PROHIBIT MONEY LAUNDERING AND ILLEGAL PAYMENTS (FACTOR 5) AMI-ADD-109 APPENDIX E THE NEED TO PROlllBIT MONEY LAUNDERING AND ILLEGAL PAYMENTS (FACTOR 5) I. SUMMARY AND CONCLUSIONS All foreign banks doing business in the United States, regardless of form, are subject to the Bank Secrecy Act ("BSA"). 1 The ability of regulatory and law enforcement officials to assess and ensure compliance with the BSA and to detect and prosecute money laundering is not affected materially by the form in which a foreign bank has chosen to do business in the United States. IT. ANALYSIS Money laundering is defined as "the process whereby one conceals the existence, illegal source, or illegal application of income, and then disguises that income to make it appear legitimate. "2 Activities that would generate such income include drug trafficking, the criminal attempt to avoid paying taxes or a combination of both. Money laundering may be accomplished The two titles of Pub. L. 91-508, 84 Stat. 1114 (Oct. 26, 1970), are commonly known as the Bank Secrecy Act. Title I, the Currency and Foreign Transactions Reporting Act, as amended, has been codified at 31 U.S.C. §§5311-26. Title II is codified at 12 U.S.C. §§1829b and 1951-59. The BSA sets forth the currency reporting and recordkeeping requirements for banks and other financial institutions. It has evolved into the major anti-money laundering legislation aimed at the activities of banks. 2 President's Commission on Organized Crime, Interim Report to the President and the Attorney General, The Cash Connection: Organized Crime, Financial Institutions. and Money Laundering 7 (1984) . AMI-ADD-110 2 through financial institutions using transactions that are no different from transactions normally associated with legitimate commercial or personal financial activities. Whether money laundering occurs through the U.S. branch of a foreign bank or through a subsidiary bank incorporated in the United States, the techniques are the same. These techniques can be very simple, such as exchanging cash for a cashier's check, or very complex, such as schemes involving one or more shell corporations, accounts in offshore banking centers and multiple wire transfers. The BSA was enacted in 1970 and subsequently amended in an attempt to prevent financial institutions from being used in the money laundering process. The BSA requires all domestic financial institutions, including U.S. offices of foreign banks, 3 to maintain records of transactions and accounts of their customers and to report to the government certain types of transactions that are of particular interest to regulatory and law enforcement agencies. The BSA covers four major areas of financial activity requiring reporting or recordkeeping: • maintenance of records concerning customers and transactions, including retention of signature cards and checks, and maintenance of ledgers and transaction records; 3 12 u.s.c. §§1829b, 1953; 31 u.s.c. §§5313, 5316, 5318 (a) (2). AMI-ADD-111 3 • reporting of all currency transactions involving cash in amounts exceeding $10,000 (or deliberately structured in smaller dollar amounts to evade the $10,000 threshold) (on a form known as a 11 CTR 11 ); • reporting by any person who transports or causes another to transport monetary instruments (defined as cash or bearer negotiable instruments) exceeding $10,000 or who receives such instruments in the same amount in the United States from abroad (on a form known as a 11 CMIR 11 l ; and • annual reporting by a person over whom the United States has jurisdiction of any interests in foreign accounts valued in excess of $10,000 (on a form known as an 11 FBAR 11 ). The BSA currently does not require reporting with respect to funds transfers and there are no plans to impose such requirements. 4 BSA enforcement resides in the first instance with the Secretary of the Treasury. The Secretary has delegated authority 4 A funds transfer involves the movement of debits or credits from one financial institution to another. Funds transfers may be made between domestic banks, including u.s. branches of foreign banks, by means of clearing houses established by banks within one locale, by Fedwire (the funds transfer system operated by the Federal Reserve System), or by transfers among correspondent banks by Fedwire or other means such as internal bank communications systems. International funds transfers generally are communicated through SWIFT (Society of Worldwide Interbank Financial Telecommunication, a Belgian based association of banks that provides the communication network for a large number of international funds transfers) and are settled in the United States through CHIPS (Clearing House Interbank Payments System, the funds settlement system operated by the New York Clearing House) and the Federal Reserve System or by book entries. AMI-ADD-112 4 to monitor BSA compliance by banks to the federal banking agencies. Both civil and criminal penalties may be imposed for violations of the BSA. In addition, each of the federal banking agencies may take administrative action against banks under its supervision for failure to put into place adequate policies and procedures designed to insure BSA compliance. The issues raised in the Report to the Senate Committee on Foreign Relations from Senators Kerry and Brown, dated September 30, 1992, regarding a subsidiary requirement were considered at length during the course of this study. Each of the three federal banking agencies responsible for supervision .of foreign bank offices in the United States ensures that the domestic operations of such offices for which it is responsible (state licensed branches and agencies of foreign banks5 in the case of the Federal Reserve, federally licensed branches and agencies of foreign banks in the case of the OCC, and insured branches (whether state or federally licensed) in the case of the FDIC) are examined for BSA compliance. This BSA compliance review is equivalent in relevant respects to the compliance review performed in the case of domestic institutions. Where the initial review reveals irregularities, additional verification procedures are employed. 6 5 The large majority of foreign bank branches (80%) and agencies (99%) are state licensed. 6 In recent years there has been a great deal of harmonization in international standards related to money laundering. Examples include recommendations made by the (continued ... ) AMI-ADD-113 5 Heretofore, because it was not the licensing agency for the foreign bank offices it regulates, the Federal Reserve could not revoke the authority of state licensed offices to operate in the event it became aware of violations of the BSA or other federal laws. The Federal Reserve now has that authority where it can demonstrate that there is "reasonable cause" to believe that a foreign bank has committed a violation of law, including a violation of the BSA or the substantive criminal money laundering statute. 7 The Federal Reserve received this new authority at its request in the Federal Deposit Insurance Corporation Improvements Act ( "FDICIA") . 8 This authority has been implemented in recent revisions to Regulation K. 9 FDICIA also gives the Board the authority to recommend to the OCC that it terminate the license of a federal branch or agency for violations of law. The OCC has independent authority to terminate the license of a foreign bank office it supervises for violations of law. The federal bank regulatory agencies may impose the same range of penalties administratively (e.g., termination of the license, cease and desist orders and civil money penalties) 6 ( ••• continued) Financial Action Task Force headquartered at the OECD, the model regulations published by the Organization of American States and the EC directive on money laundering. This harmonization means that foreign banks operating in the U.S. market are likely to be subject to money laundering restrictions in their home markets. 7 Money Laundering Control Act of 1986, as amended, 18 u.s.c. §§1956-1957. 8 P.L. No. 102-242 (Dec. 19, 1991.) 9 12 C.F.R. §211.26 (1992). AMI-ADD-114 6 for violations of law and regulations on a branch of a foreign bank and its personnel that these agencies may impose on a financial institution incorporated in the United States and its personnel. The agencies also may file civil and/or criminal referrals when they have uncovered significant violations. The civil and criminal penalties that may be imposed by federal courts for violations of specific money laundering statutes (which include both fines and imprisonment) apply equally to branches of foreign banks, on the one hand, and banks incorporated in the United States, on the other. AMI-ADD-115 TAX LIABILITY OF FOREIGN BANKS (FACTOR 8) AMI-ADD-116 APPENDIX E TAX LIABILITY OF FOREIGN BANKS (FACTOR 8) I. SUMMARY AND CONCLUSIONS A. Taxation of U.S. Branches and Subsidiaries In general, a U.S. ·subsidiary of a foreign corporation is taxed in the same manner (i.e., on a net basis with respect to all income, wherever earned) and at the same rate as any other U.S. corporation. Interest and dividends paid by the subsidiary to the foreign parent are subject to gross basis tax at a 30 percent rate (or lower treaty rate) . A U.S. branch of a foreign corporation, however, is subject to U.S. tax only with respect to income that is "effectively connected" with a U.S. trade or business conducted by the branch. Effectively connected income of a U.S. branch is subject to tax on a net basis under rules that generally parallel those applicable to U.S. corporations. The applicable tax rate is the regular U.S. corporate rate. The "dividend equivalent amount" is subject to a branch profits tax, and interest allocable to effectively connected income is treated as paid by a U.S. corporation and, therefore, is subject to gross basis tax at a 30 percent rate (or lower treaty rate) . These taxes are intended to substitute for the withholding taxes imposed on dividends and interest paid by a U.S. subsidiary to its foreign parent. AMI-ADD-117 2 Income derived by a foreign corporation from U.S. sources that is not effectively connected with a U.S. trade or business is generally subject to U.S. withholding tax imposed on the gross amount of such income. The statutory withholding rate is 30 percent, but this rate is often reduced under U.S. income tax treaties. Income derived by a foreign corporation from foreign sources that is not effectively connected with a U.S. trade or business is not subject to U.S. tax. B. Effects of a Subsidiary Requirement The effect of a subsidiary requirement on the tax liability of a foreign bank would vary for banks from different countries, due to (~) differences in home country tax laws, (2) the existence of U.S. income tax treaties with some, but not all, home countries and (3) differences between the provisions of existing U.S. income tax treaties with different countries. As an initial matter, therefore, it is not possible to draw a general conclusion as to the overall effect of a subsidiary requirement on the tax liability of foreign banks as a group. Some preliminary conclusions can be drawn, however, as to whether particular tax-related consequences of a subsidiary requirement would tend to have a neutral or non-neutral effect on a foreign bank's tax liability and whether this effect would depend upon tax treaties or home country law. l. Conversion from Branch to Subsidiary Form The conversion of a U.S. branch of a foreign bank to a U.S. subsidiary would generally be a tax-free transaction under AMI-ADD-118 3 the Internal Revenue Code (the "Code"), but the home country tax consequences of the conversion would vary among countries. In addition, the Code would not permit a new U.S. subsidiary to utilize net operating losses (if any) accumulated by a former U.S. branch. 2. Post-Conversion Operations The Code generally seeks to equalize the tax treatment of U.S. branches and U.S. subsidiaries of foreign corporations in order not to create incentives for foreign businesses to choose one form of U.S. operation over the other. This theme of branch- subsidiary equivalence is evident in the rules governing determination of the U.S. taxable income of branches and subsidiaries of foreign corporations, the information reporting requirements that apply to each, and the treatment of home office lending to U.S. operations. A subsidiary requirement would tend to have a neutral effect in these areas. In some cases, however, application of the Code provisions governing branch and subsidiary operations is affected significantly by U.S. income tax treaties. For example, the effect of a subsidiary requirement on the taxation of repatriated profits would depend on the existence of an applicable U.S. income tax treaty and on whether the provisions of that treaty currently permit imposition of the branch profits tax. Similarly, the effect of a subsidiary requirement on the tax cost of lending to U.S. customers would vary, depending upon the existence of an applicable U.S. income tax treaty and AMI-ADD-119 4 the withholding rate provided in that treaty with respect to interest payments. It is conceivable that the capital requirements that would apply to a new U.S. subsidiary would cause a foreign bank to prefer to make large U.S. loans from its horne office, rather than from the subsidiary. Interest paid on horne office loans would be subject, however, to gross basis U.S. withholding tax. Although many U.S. income tax treaties would eliminate this withholding tax, there are significant cases in which either no u.s. income tax treaty exists or the applicable treaty retains a positive withholding rate for interest. In these cases, the U.S. withholding tax on interest could eliminate a foreign bank's net profit on a U.S. loan made from the horne office. The combined effect, therefore, of increased capital requirements for loans made by a U.S. subsidiary and withholding tax on interest paid on horne office loans (where applicable) could be a reduction in lending to U.S. customers by foreign banks based in affected countries. II. ANALYSIS A. Tax Consequences of Conversion from Branch to Subsidiary 1. Conversion Transaction Under Code section 351, a foreign bank's transfer of U.S. branch assets to a new U.S. subsidiary in exchange for stock of the new subsidiary would generally be a tax-free AMI-ADD-120 5 nonrecognition transaction. 1 A foreign bank's home country, however, could impose a tax on built-in gain inherent in appreciated assets of a U.S. branch when those assets were transferred to a U.S. corporation. 2 In this case, the foreign bank could incur a home country tax liability upon conversion of its U.S. branch to a U.S. subsidiary, notwithstanding the tax- free nature of the transaction under U.S. law. 3 2. Post-Conversion Use of Branch Net Operating Losses A U.S. branch of a foreign corporation is permitted to use U.S. net operating losses generated in one taxable year to reduce its U.S. taxable income in a prior or subsequent year. Under Code section 172, net operating losses may be carried back three years or forward fifteen years. This carryover rule If the foreign bank receives property other than stock of the new subsidiary (e.g., debt securities), gain recognition will be required. In addition, the tax consequences of the conversion transaction could differ if the u.s. branch assets are held through a special purpose foreign subsidiary of the foreign bank and that foreign subsidiary is converted into a U.S. corporation by means of a reorganization described in Code section 368(a) (1). 2 Code section 367(a) imposes such a tax on the transfer of certain types of appreciated assets from a u.s. corporation to a foreign corporation. 3 The incorporation of a U.S. branch would not trigger the branch profits tax (discussed below) if, under Treas. Reg. §1.884- 2T(d), the U.S. branch elected to transfer its accumulated earnings and profits to the new U.S. subsidiary. In addition, the foreign parent corporation would have to agree to recognize gain (subject to certain limitations) upon a subsequent transfer of the stock of the new U.S. subsidiary. The transferred earnings and profits would then be taxed upon subsequent distribution (as a dividend) to the foreign parent corporation. If an election to transfer the accumulated earnings and profits were not made, the accumulated earnings and profits would be subject to taxation upon termination of the branch. AMI-ADD-121 6 reduces the disparity between the taxation of businesses that have stable income and the taxation of businesses that experience income fluctuations. Code section 172 generally requires, however, that net operating losses be used by the same legal entity that incurred the losses.• Thus a foreign bank required to convert its u.s. branch to a U.S. subsidiary would generally lose the ability to carry its branch net operating losses forward into future years. The effect of this rule on any particular foreign bank would depend upon whether its U.S. branch had accumulated net ,operating losses prior to conversion and, if so, the extent of those losses. B. Subsidiary Operations: Areas Where Tax Treaties Have Minimal Effect As noted above, the Code generally seeks to achieve equivalent tax treatment of the operations of U.S. branches and U.S. subsidiaries of foreign corporations in order to avoid the creation of incentives for operation in one form or the other. The effect of a conversion of a u.s. branch to a U.S. subsidiary would thus tend to have a relatively neutral effect on a foreign bank's U.S. operations in situations where the application of relevant Code provisions is not significantly affected by U.S. tax treaties. 4 Although Code section 381 permits transfer of net operating losses to a different legal entity in some circumstances, these exceptions would not generally apply to a conversion of a u.S. branch to a U.S. subsidiary. AMI-ADD-122 7 1. Determination of Taxable Income Assuming that there is no significant change in the u.s. business of a foreign bank when it converts from branch to subsidiary form, there should not be a significant change in the amount of its U.S. taxable income. a. U.S. Branch Under Code section 882, the U.S. branch of a foreign corporation is subject to net basis taxation with respect to income that is "effectively connected" with its U.S. trade or business ("ECI"). ECI is taxed at the same rate that applies to a u.s. corporation and may be subject to the alternative minimum tax imposed by Code section 55. A foreign corporation may not include a U.S. branch in a consolidated federal income tax return filed for any U.S. subsidiaries. Interest income from a banking, financing or similar business activity is treated as ECI if the loans on which the interest is received are attributable to the U.S. branch. Under Treas. Reg. §1.864-4(c) (5) (iii), a loan is treated as attributable to a U.S. branch if that branch "actively and materially participated in soliciting, negotiating, or performing other activities required to arrange the acquisition of" the loan. 5 Similar rules apply with respect to income from 5 The fact that a foreign bank books a loan made to a U.S. customer in a foreign office (e.g., an office located in a low-tax jurisdiction) is not determinative as to whether interest income associated with that loan is taxable in the U.S. as ECI of a U.S. branch. If personnel employed in a U.S. branch of a foreign bank (continued ... ) AMI-ADD-123 8 securities held in connection with a banking, financing or similar business. Income from services is generally considered ECI if the services were performed in the U.S. Transactions between a U.S. branch and its home office (or other non-U.S. branches of the same foreign corporation) are generally disregarded for purposes of determining ECI. In computing taxable ECI, foreign corporations are allowed the same deductions allowed to U.S. corporations, to the extent that those deductions are connected with ECI. The most significant deduction allowable to a U.S. branch of a foreign bank is the interest deduction, determined under Treas. Reg. §1.882-5. The underlying objective of Treas. Reg. §1.882-5 is to determine the approximate amount of interest expense that would have been deductible by a U.S. branch if the branch were a subsidiary. The regulation permits a U.S. branch to deduct interest expense associated with its "U.S.-connected liabilities." To compute the amount of U.S.-connected liabilities, the regulation assumes that the liability-to-asset ratio of the U.S. branch is the same as that of the foreign bank as a whole. This ratio is multiplied by the value of the assets held by the U.S. branch to determine the amount of U.S.-connected liabilities. If the amount of U.S.-connected liabilities does not exceed the amount of liabilities actually booked in the U.S. 5 ( ••• continued) actively and materially participated in activities associated with the making of a loan booked outside the U.S., interest income derived from the loan will be treated as taxable ECI of the U.S. branch. AMI-ADD-124 9 branch, the interest deduction is computed by multiplying the amount of U.S.-connected liabilities by the average interest rate paid by the u.s. branch for the year. If the amount of u.s.- connected liabilities does exceed the amount of liabilities actually booked in the U.S. branch, the foreign bank's home office is treated as having borrowed the excess amount on behalf of the U.S. branch and reloaned it to the u.s. branch. The interest deduction of the u.s. branch in this case is the sum of (1) the amount of booked liabilities multiplied by the average branch interest rate for the year and (2) the amount of the excess U.S.-connected liabilities multiplied by a worldwide dollar interest rate. b. U.S. Subsidiary A u.s. subsidiary of a foreign corporation is taxed in the same manner as a U.S.-owned corporation. Thus a U.S. subsidiary of a foreign bank would be subject to net basis taxation on its worldwide income at a maximum rate of 34 percent and could be subject to the alternative minimum tax. A U.S. subsidiary owned by a U.S. holding company would be eligible to file a consolidated federal income tax return with the holding company. Income reported by a U.S. subsidiary with respect to transactions with its foreign parent corporation or any other related person may be subject to adjustment under Code section 482 where necessary to clearly reflect the income of the U.S. subsidiary. Code section 482 and the regulations thereunder AMI-ADD-125 10 generally apply an arms' length standard for review of related person transactions. Assuming that the business of a new U.S. subsidiary were essentially the same as the business conducted by a former U.S. branch, the worldwide income of the subsidiary should roughly correspond to the ECI of the former U.S. branch. In addition, the amount of the interest deduction allowed to a new U.S. subsidiary should be roughly comparable to the amount of the interest deduction allowed to the former u.s. branch. As noted above, the general objective of Treas. Reg. §1.882-5 is to compute an interest deduction for a U.S. branch that is comparable to the interest deduction which would have been allowed if the branch were a U.S. subsidiary. 2. Information Reporting and Record Maintenance The u.s. tax information reporting and record maintenance requirements that apply to U.S. branches and U.S. subsidiaries of foreign corporations are designed to be comparable. Differences that do exist are generally limited to those necessitated by the difference in the form of the entity. Thus a foreign bank should not experience a substantial change in its information reporting and record maintenance requirements upon conversion of a U.S. branch to a subsidiary. a. U.S. Subsidiary: Code section 6038A Under Code section 6038A and the Treasury regulations thereunder, a foreign-controlled U.S. corporation engaged in a U.S. business must file an information return (on IRS Form 5472) AMI-ADD-126 11 describing "reportable transactions "6 with related persons (including a parent corporation, brother-sister corporations, and U.S. or foreign subsidiaries) and must maintain certain records relevant to these transactions in the United States. Substantial monetary penalties apply in the event of a failure to satisfy these requirements. A foreign-controlled U.S. corporation to which Code section 6038A applies is a u.s. corporation that is 25 percent foreign-owned, i.e., 25 percent or more of the total voting power or value of its stock is owned by at least one foreign person at any time during the taxable year. A separate IRS Form 5472 must be filed by the foreign-controlled U.S. corporation with respect to each related party with which the foreign-controlled U.S. corporation had a reportable transaction. The aggregate dollar amount for all reportable transactions must be provided on each Form 5472, as well as the separate dollar amount for each category of reportable transactions. A foreign-controlled U.S. corporation must maintain records (or cause another person to maintain records) sufficient to establish the correctness of the corporation's federal income 6 Reportable transactions include sales and purchases of inventory; sales and purchases of other tangible personal property; sales, purchases, and amounts paid and received as consideration for the use of intangible property; other rents and royalties received; consideration paid and received for technical, managerial, engineering, construction, scientific or similar services; commissions paid and received; amounts loaned and borrowed (other than trade receivables paid or collected in full in the ordinary course of business).; interest paid or received; and premiums paid and received for insurance or reinsurance. AMI-ADD-127 12 tax return and the correct treatment of all reportable transactions with related persons. Records must be maintained in the United States, unless a special election is made under which the foreign-controlled U.S. corporation agrees to produce foreign-held records for the IRS. Under a "safe harbor" rule, reporting corporations that maintain records in certain specified categories are deemed to satisfy the record maintenance requirement. Any foreign person related to a foreign-controlled U.S. corporation must authorize the foreign-controlled U.S. corporation to act as its agent for purposes of IRS examination of its books and records and for the service and enforcement of a summons relating to any reportable transaction with the foreign- controlled U.S. corporation. 7 b. U.S. Branch: Code section 6038C Code section 6038C requires that a foreign corporation engaged in a U.S. trade or business file an information return (on IRS Form 5472) that identifies all foreign shareholders owning 25 percent or more of their stock and describes reportable transactions between the foreign corporation and related persons (including its significant foreign shareholders). Substantial monetary penalties apply in the event of a failure to file the requisite information return or to maintain adequate supportive records. 7 Foreign-controlled U.S. corporations with less than $10,000,000 in gross receipts are exmept from this requirement, as well as the record maintenance requirements discussed above. AMI-ADD-128 13 Although Treasury regulations have not yet been issued under section 6038C, that section incorporates by cross-reference the information reporting and record maintenance requirements of Code section 6038A (applicable to foreign-controlled u.s. corporations). It is thus expected that the transactions identified as "reportable" in forthcoming Treasury regulations under section 6038C .will be comparable to those identified in the existing Treasury regulations under section 6038A, and that the record maintenance requirements imposed by the section 6038C regulations will be similar to those of the section 6038A regulations. In addition, the House Ways and Means Committee Report on the Revenue Reconciliation Act of 1990 indicates that a foreign corporation may be required to provide information and maintain records relevant to the allocation and apportionment of deductible expenses (including deductible interest expense) to effectively connected U.S. branch income and the allocation of income and deduction amounts between the U.S. and foreign countries. See House Ways and Means Comm. Rpt. on H.R. 5835 at p. 72-3. 3. Home Office Lending to U.S. Operations Under Code section 884(f), interest deemed paid by a U.S. branch to a foreign home office is subject to an excess interest tax designed to correspond to the withholding tax that applies to interest payments by a U.S. corporation to a foreign lender. Interest expense that is deductible under Treas. Reg. §1.882-5 (discussed above) is treated as "excess interest" to the AMI-ADD-129 14 extent that it exceeds the interest expense actually paid by the u.s. branch. The amount of "excess interest" effectively equals the amount of interest expense associated with the excess of U.S.-connected liabilities over booked liabilities (as determined under Treas. Reg. §1.882-5). As noted above, this excess amount of liabilities is treated as having been incurred by the foreign corporation's home office on behalf of the U.S. branch and re- loaned to the branch. The rate of the excess interest tax is 30 percent, the same as the statutory withholding rate for interest payments. For corporations which are "qualified residents" of a treaty country, the excess interest tax is imposed at the reduced treaty rate provided for interest withholding. The conversion of a u.S. branch to a U.S. subsidiary should thus tend to have a relatively neutral effect on inter-office lending practices of a foreign bank. C. Subsidiary Operations: Areas Where Tax Treaties Have Significant Effect Although the Code generally seeks to achieve equivalent tax treatment of the operations of U.S. branches and U.S. subsidiaries of foreign corporations, some Code provisions governing operation in branch or subsidiary form are significantly affected by applicable U.S. income tax treaties. In these areas, a foreign bank's conversion of its U.S. operations from branch to subsidiary form may have a non-neutral effect. AMI-ADD-130 15 1. Repatriation of Profits A number of U.S. income tax treaties prevent imposition of the branch profits tax (designed to correspond to the dividend withholding tax). For foreign banks from these countries, the withholding tax applicable to dividends paid by a new U.S. subsidiary would represent an additional cost of repatriating U.S. profits. a. U.S. Branch: Branch Profits Tax No U.S. withholding tax is imposed on profits repatriated from a U.S. branch to the home office of a foreign corporation. Instead, Code section 884 imposes a "branch profits tax" on an amount of profits deemed to have been remitted by a U.S. branch (the "dividend equivalent amount"). The dividend equivalent amount for a taxable year is generally equal to the amount of branch profits for the year, reduced by increases in U.S. investment and increased by reductions in U.S. investment during the year. The branch profits tax is intended to correspond to the shareholder-level withholding tax imposed on dividends paid by a U.S. subsidiary to a foreign parent. The tax is a second-level tax imposed in addition to the regular tax imposed on U.S. branch ECI. The statutory rate of the branch profits tax is 30 percent (the same as the dividend withholding tax rate). For corporations which are "qualified residents" of a treaty country, the branch profits tax is imposed at the reduced treaty rate provided for withholding on dividends paid to a 100 AMI-ADD-131 16 percent shareholder. The branch profits tax is considered discriminatory, however, under a number of significant U.S. tax treaties and is not imposed on U.S. branches of corporations resident in the affected countries. 8 b. U.S. Subsidiary: Dividend Withholding Tax Under Code section 881, dividends paid by a U.S. subsidiary to a foreign parent corporation are subject to U.S. withholding tax at a statutory rate of 30 percent. This rate is reduced by U.S. income tax treaties often to 5 percent for dividends paid to a direct investor (i.e., a corporate investor owning at least 10 percent of the stock of the dividend-paying corporation) . As noted above, the branch profits tax is designed to correspond to the dividend withholding tax. Thus, in many cases, a foreign bank switching from the branch profits tax to dividend withholding (upon conversion of its U.S. operations to subsidiary form) should not face a substantial change in U.S. tax liability on repatriated profits. For a foreign bank resident in a country whose income tax treaty with the U.S. does not permit imposition of the branch profits tax, however, dividend withholding would 8 U.S. income tax treaties that do not permit imposition of the branch profits tax are those with Aruba, Austria, Belgium, China, Cyprus, Denmark, Egypt, Finland, Greece, Hungary, Iceland, Ireland, Italy, Jamaica, Japan, Korea, Luxembourg, Malta, Morocco, Netherlands, Norway, Pakistan, Philippines, Sweden, Switzerland, United Kingdom. Countries whose income tax treaties with the U.S. do permit imposition of the branch profits tax include Australia, Barbados, Canada, France, Germany, India, New Zealand, Poland, Romania, Spain, Trinidad & Tobago, and the countries of the former U.S.S.R. AMI-ADD-132 17 increase the U.S. tax cost of repatriating profits to the home office. However, it should also be noted that dividend withholding would eliminate a competitive advantage which banks from those countries currently enjoy over banks from countries whose treaties permit imposition of the branch profits tax or from countries with no U.S. tax treaty. 2. Interest Paid by U.S. Customers It is possible that the capital requirements applicable to a u.s. subsidiary of a foreign bank would cause a foreign bank to restrict the lending activities of the U.S. subsidiary (after enactment of a subsidiary requirement) . In this situation, the potential application of withholding tax to interest paid by U.S. customers to the foreign bank's home office could (where not eliminated by treaty) preclude a compensating increase in U.S. lending activity by the home office. The result could be an overall restriction in lending to U.S. customers by foreign banks in affected countries. a. Interest Paid to U.S. Branch or U.S. Subsidiary Interest paid by a U.S. customer to a U.S. branch of a foreign bank is not subject to U.S. withholding tax if the interest income represents ECI of the branch (which is subject to net basis U.S. income taxation). Interest that is not ECI is subject to U.S. withholding tax at a statutory rate of 30 percent or a reduced treaty rate. 9 Interest paid by a U.S. customer to 9 As a practical matter, virtually all interest paid by U.S. customers to U.S. branches of foreign banks is ECI. AMI-ADD-133 1B a U.S. subsidiary of a foreign bank is treated in the same manner as interest paid to any other U.S. person, i.e., it is exempt from U.S. withholding tax. b. Interest Paid by U.S. Customer to Home Office A foreign bank that made large U.S. loans through a new U.S. subsidiary would be required to maintain substantial capital in the u.s. subsidiary. A foreign bank might thus prefer to make large loans to U.S. customers from its home office, e.g., by participating in a syndication arranged by a U.S. bank. Interest paid by a U.S. customer to the home office of a foreign bank is subject, however, to U.S. withholding tax at a statutory rate of 30 percent. 10 Interest withholding is eliminated under many U.S. tax treaties, but remains at a positive rate under some significant treaties, e.g., Canada (15 percent), Japan (10 percent) and Switzerland (5 percent) . In addition, many foreign banks with U.S. operations are based in countries which do not have income tax treaties with the U.S., e.g., Hong Kong, the Middle East and Latin America. Even at a reduced treaty rate, a gross basis U.S. withholding tax on interest paid by a U.S. customer to a foreign 10 Statutory exceptions from U.S. withholding tax include: (a) interest on bank deposits, under Code sections 881(d) and 871(i); (b) portfolio interest, which specifically does not include interest received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business, under Code section 8B1(c); and (c) interest on certain short-term discount obligations with a maturity of 183 days or less, under Code section 871 (g) (1) (B). None of these exceptions would be useful to a foreign bank making loans to u.s. customers in the ordinary course of its business. AMI-ADD-134 19 bank's home office could eliminate the small profit margin typical of the lending business. In contrast, interest paid to a U.S. branch is subject to net basis U.S. tax that is usually less than 2 percent of the gross amount of interest received. In addition, a net basis U.S. tax is usually fully creditable against net basis home country tax, whereas a gross basis U.S. withholding tax would usually exceed the net basis home country tax, resulting in excess foreign tax credits. Although the potential for elimination of profit on U.S. loans could encourage foreign banks to make U.S. loans through a new U.S. subsidiary, it seems more likely that the combined effect of the U.S. capital requirements applicable to a U.S. subsidiary and the withholding tax implications of home office lending would be a reduction in lending to U.S. customers by foreign banks not eligible for a treaty exemption from withholding tax. The imposition of u.s. withholding tax on interest paid to the home offices of banks located in these countries would presumably give these countries a new incentive to agree to a treaty exemption for bank loan interest. The U.S. Model Income Tax Treaty provides an exemption from withholding for interest income. Some countries have historically been unwilling, however, to agree to an exemption for bank loan interest in order to protect their domestic banking industries, i.e., because a withholding exemption would permit U.S. banks to compete with domestic banks for the business of domestic customers. To the extent that treaties could be renegotiated to provide an AMI-ADD-135 20 exemption for bank loan interest, the potential effect of the withholding tax would be mitigated. If this does not occur, however, the potential for reduced lending to U.S. customers may be the most significant tax-related consequence of a subsidiary requirement for foreign banks. AMI-ADD-136 DIFFERENCES IN TREATMENT OF UNITED STATES CREDITORS UNDERBANKRUPTCYAND RECEIVERSHIP LAWS (FACTOR 10) AMI-ADD-137 APPENDIX E DIFFERENCES IN TREATMENT OF UNITED STATES CREDITORS UNDER BANKRUPTCY AND RECEIVERSillP LAWS (FACTOR 10) I. SUMMARY AND CONCLUSIONS Under U.S. law and procedure, a creditor of an insolvent U.S. branch of a foreign bank would be treated in much the same way as a creditor of an insolvent domestic bank subsidiary of a foreign bank parent. Each creditor would have a U.S. forum either a state or federal liquidation proceeding in which to pursue its claim. Each would have access, by virtue of that proceeding, to assets of the branch or subsidiary under the jurisdiction of the U.S. liquidator. In addition, however, the branch creditor potentially would have access, in a foreign forum or forums, to the worldwide assets of the foreign bank. The subsidiary creditor would not have any legal claim to such additional assets, assuming no legal or factual basis exists for piercing the corporate veil. IT. ANALYSIS A. Background Tremendous diversity exists in the ways in which countries deal with insolvent banks. U.S. bank insolvencies are outside the scope of general bankruptcy legislation and instead are treated under state and federal banking laws administered by bank regulatory authorities, while bank insolvencies in many other countries are handled pursuant to general insolvency laws. AMI-ADD-138 2 Some countries, including the United States, liquidate foreign bank branches as separate entities; others either attempt to liquidate the entire foreign bank or simply collect assets and transfer them to the home country liquidator for disposition in the liquidation proceeding pending there. This diversity has hindered the development of common approaches to multinational insolvencies even among countries actively promoting cooperation on other economic issues. 1 It is unlikely that multinational bank insolvency will be the subject of multilateral treaty or agreement in the near term. One internationally recognized principle of bankruptcy . law is that similarly situated creditors should share equally in the assets of the debtor's estate. In practice, however, local law and policy frequently dictate that equal treatment means all creditors of a local debtor, whether such creditors are themselves local or not, should be treated in accordance with local law. Thus, the principle of equal treatment accommodates two competing theories of bankruptcy administration: universality -- where deference generally is given to the legal proceedings in the country in which the insolvent entity is organized and the worldwide creditors and assets of a debtor are treated in accordance with the laws of that country and territoriality -- where no such deference is given and any See R. Gitlin & E. Flaschen, "The International Void in the Law of Multinational Bankruptcies," 42 Bus. Law. 307, 311-13 (1987) (discussing history of EC's efforts to negotiate a bankruptcy convention) . AMI-ADD-139 3 country may administer its own bankruptcy proceedings without regard for foreign proceedings or judgments. B. Applicable Federal and State Law State and federal bank insolvency rules, as well as the federal bankruptcy code, generally reflect a territorial approach. 2 The same basic rules currently apply to insolvencies of U.S. branches of foreign banks and to insolvencies of banks organized under the laws of the United States that are owned or controlled by foreign banks or foreign bank holding companies. This parity of treatment is accomplished in the case of branches by treating an insolvent branch as an entity separate and apart from the rest of the foreign bank for purposes of actual liquidation. 3 1. Branch Liquidation for Insolvency Under federal law, the Office of the Comptroller of the Currency ("OCC") is authorized to appoint a receiver to liquidate a federal branch of a foreign bank. In the case of an insured branch, the receiver would be the Federal Deposit Insurance 2 Section 304 of the federal bankruptcy code, 11 U.S.C. §304, which reflects a more universalist approach, is discussed infra at page 9. 3 See e.g., 12 u.s.c. §3102(j) (2) (provision of the International Banking Act governing claims that may be made in liquidations of federal branches); N.Y. Banking Law §606-4 (McKinney 1971) (permits N.Y. Superintendent to take possession of all property of a foreign bank in the state in connection with liquidation of a foreign bank office licensed by the state). AMI-ADD-140 4 Corporation ("FDIC") . 4 The OCC may appoint a receiver for certain violations of law; where a conservator has been appointed for the foreign bank in the bank's home country; when the bank does not pay a judgment obtained by a creditor against it, arising out of a transaction with its branch; or if the OCC determines that the foreign bank is insolvent.' The receiver has a broad mandate; he or she may take possession of all of the foreign bank's agencies and branches (including state-licensed offices), and any additional property or asset of the foreign bank located in the United States.• The applicable law creates a preference for claims of third party depositors and other creditors against a foreign bank arising out of transactions with any branch or agency of the foreign bank in the United States. The receiver is prohibited from paying any claims that would not represent an enforceable legal obligation against the branch if it were a separate legal entity (e.g., a subsidiary). 7 These preferences and prohibitions define the assets of the branch broadly -- to include all of the foreign bank's U.S. assets and not simply the assets of the branch itself -- and the claims against the branch narrowly, thereby benefiting local creditors. 4 At present, most branches of foreign banks are not FDIC insured. 5 12 U.S.C. §3102(j). The OCC also may appoint a receiver if it determines that an insured branch is critically undercapitalized. 12 U.S.C. §1831o(h) (3). 6 7 12 u.s.c. §3102 (j) (1). 12 u.s.c. §3102 (j) (2). AMI-ADD-141 5 After all valid claims are paid, the receiver is authorized to turn over any excess assets of the branch to the head office of the foreign bank or to a duly appointed local liquidator of such foreign bank. State-licensed branches of foreign banks are subject, in the first instance, to the liquidation laws of the licensing state. In practice, a state-licensed insured branch would be liquidated by the FDIC. State-licensed branches that are not insured would be wholly subject to state bank liquidation law. The states with a substantial foreign bank presence follow a separate entity approach which is comparable to that followed by the OCC as liquidator of federal branches.• This approach has the advantage of affording U.S. creditors of a branch a U.S. forum, as they would have if the branch had been a subsidiary, but not denying them access, albeit perhaps in other forums, to the bank's worldwide capital and assets. Creditors of a subsidiary, unlike creditors of a branch, generally have no rights to the assets of the corporate parent. Access to worldwide assets was recognized as a crucial factor favoring the branch form in the report of the Superintendent's Advisory Committee on Transnational Banking Institutions recently published by the New York State Banking Department. Of course, 8 See e.g., Cal. Fin. Code §§1781, 1785 (West) (foreign bank office to be liquidated in accordance with law applicable to state bank); Fla. Stat. Ch. 663.02 (same); Ill. Rev. Stat. Ch. 17, paras. 2701, 2719, 2725 (1991) (same); N.Y. Banking Law §606- 4 (McKinney 1971) (same). AMI-ADD-142 6 access to worldwide capital and assets has important implications for the other factors addressed in this study. 2. Subsidiary Liquidation for Insolvency A U.S. bank subsidiary of a foreign bank would be liquidated in the same manner as a U.S. bank subsidiary of a U.S. bank holding company. If the U.S. subsidiary were a national bank, the national bank liquidation procedures would apply. If the U.S. subsidiary were a state chartered bank, the liquidation procedures of the chartering state would apply. Generally speaking, the chartering entity would close the institution and the FDIC would act as receiver. The assets available to the receiver would be those of the subsidiary and would not include assets of the parent, assuming no legal or factual basis exists for piercing the corporate veil. Unlike the case of a branch or agency, where the insolvency of the foreign bank itself would necessarily trigger a liquidation of the branch, the insolvency of a foreign bank parent of a U.S. subsidiary would not necessarily require the liquidation of the U.S. subsidiary.• In general, however, when a 9 Canadian Commercial Bank ("CCB"), a mid-sized Canadian bank based in Edmonton, Alberta, failed in 1985. CCB was liquidated pursuant to Canadian law by Price Waterhouse, Ltd., a court appointed liquidator. At the time of the failure, CCB had both an indirect state chartered bank subsidiary, Commercial Center Bank ("Commercial Center") in Santa Ana, California, and a state-licensed Los Angeles agency. The agency was closed in September 1985 and liquidated as a separate entity by the California authorities. All permitted claims were paid in full and the excess assets were transferred to the Canada Deposit Insurance Corporation ("CDIC"), the entity that held the assets (continued ... ) AMI-ADD-143 7 parent fails an otherwise sound subsidiary also suffers because of the effects on market confidence. 10 C. Case Studies Recent experience with liquidations of U.S. branches of foreign banks is consistent with these conclusions. 11 There have been very few involuntary liquidations of U.S. branches of foreign banks since 1945. All have involved uninsured state- licensed branches; neither the OCC nor the FDIC has been required to liquidate a branch under its supervision for reasons of 9 ( ••• continued) of CCB in liquidation. Commercial Center was not closed at the time of the CCB liquidation. The CDIC has continued to support the bank by funding it and putting in place a management team. In the absence of such foreign government support -- which could not be expected to occur in all cases -- U.S. regulators might have been required to liquidate Commercial Center, which could have resulted in losses to either the insurance fund or depositors. 10 See g_,_g., Treasury and Civil Service Comm., Fourth Report Banking Supervision and BCCI: International and National Regulation, Bank of England Response (July 1992) Annex 2 (I) (a) (11) . The problems experienced by the First American banks in the aftermath of the closing of BCCI are consistent with this general trend. 11 In an effort to obtain comparative data on this issue, the Justice Department surveyed banking requirements in a selected sample of jurisdictions. These jurisdictions were chosen because they were representative of the types of jurisdictions in the U.S. foreign bank community (United Kingdom, Italy, Japan, India, Qatar and Argentina). None of the jurisdictions surveyed require that foreign banks conducting regular banking operations in their territory do so through domestically incorporated subsidiaries. Where banks have the option, as they do in the United States, of conducting operations directly through branches or indirectly through subsidiaries, they generally choose the branch form of organization. Thus, there is an absence of comparative data to support a judgment that the use of one form of bank organization is superior to the other in protecting domestic depositors in the event of insolvency. AMI-ADD-144 8 insolvency. In these liquidations, the insolvency of the branch was part of the insolvency of the entire institution and contemporaneous liquidation proceedings were underway in the home country. In each case, all valid claims were paid in full. •• In the late 1960s, the New York State Superintendent of Banks liquidated the New York branch of Intra Bank, S.A., a Lebanese bank. The estate was large enough to pay all validated claims. The surplus went to the U.S. government in compromise of a claim of the Commodity Credit Corporation that initially had been rejected by the Superintendent. 12 •• In early 1980, the New York Superintendent liquidated the New York branch of Banco de Intercambio Regional, S.A., an Argentine bank. The estate was large enough to pay all claims of branch creditors. The surplus was turned over to the Argentine liquidator. 13 •• In the ongoing liquidations of the New York and California depository agencies of the Bank of Commerce and Credit International, S.A. ("BCCI"), each of the New York and California Superintendents expects there to be a surplus after the payment of valid claims. The liquidations of BCCI's New York and California agencies, though not directly relevant to this study because they involved agencies as opposed to branches, are nonetheless instructive as contemporary examples of a complex, multinational bank failure involving simultaneous liquidations of the foreign bank itself in the home country and multiple liquidations of subsidiaries and unincorporated offices around the world. The state liquidations were complicated by the early filing in U.S. bankruptcy court of petitions, under section 304 of the federal 12 In Re Willie, 61 Misc. 2d 992, 30 N.Y.S.2d 520, 543 (Sup. Ct. 1968). 13 In Re Seibert, 135 Misc. 2d 1093, 517 N.Y.S.2d 358 (Sup. Ct. 1987). AMI-ADD-145 9 bankruptcy code, by the foreign liquidators of BCCI and the pendency of a criminal case which resulted in the forfeiture by BCCI of certain U.S. assets. The major section 304 proceeding was filed by BCCI liquidators appointed by the courts of Luxembourg, where BCCI was organized, the United Kingdom, where BCCI was headquartered, and Grand Cayman, where BCCI Overseas, a sister company, was organized. The petition and accompanying motion sought a temporary restraining order which, if granted, could have prevented the Superintendents in New York and California from proceeding with the liquidations of the BCCI agencies in those states. Section 304 permits a foreign representative of a foreign debtor to petition to enjoin the commencement or continuation of any proceedings against the debtor with respect to property involved in a foreign proceeding and to order the turnover of the U.S. assets of the debtor for administration by the foreign representative. 14 U.S. bank regulators took the position in court that section 304 should not be used to enjoin or otherwise interfere with a bank insolvency proceeding. 15 The judge did not enjoin the continuation of either the California or the New York liquidation nor did he reach the merits of the regulators' argument that section 304 should not apply to state or federal bank liquidation proceedings. Instead, California and 14 ~~ u.s.c. §304. ts In Re Smouha, Case No. 91-B-13569 (JLG), U.S. Bankr. Ct., S.D.N.Y. AMI-ADD-146 ~0 New York negotiated a settlement with the foreign liquidators which permitted the liquidations to go forward unimpeded. The foreign liquidators agreed not to make any claims against BCCI assets until after the state liquidations were concluded. The BCCI liquidations are not yet complete. Nonetheless, a few important conclusions can be drawn from them. First, in spite of the complications created by the section 304 proceeding, the state-appointed liquidators in both New York and California have been able to conduct their liquidations in accordance with the rules and principles outlined above. Second, the liquidators have at least as many assets under their jurisdiction that they would have had if the agencies had been separately incorporated subsidiary banks of BCCI. Finally, the outcome of the BCCI liquidations in all likelihood will be consistent with prior cases; that is, the liquidator will be left with excess assets after all valid claims of the agencies' creditors are paid. AMI-ADD-147 '· I I R E P O R T O F T H E "S U P E R IN T E N D E N T 'S A D V IS O R Y C O M M I' IT E E O N T R A N S N A T IO N A L B A N K IN G I N S T IT U T IO N S -- M A R IO M . C U O M O G O V E R N O R D E R R IC K D . C E P H A S S U P E R IN T E N D E N T O F B A N K S JO H N G . H E I M A N ~ C H A ff iM A N M A R C H , 1 99 2 AMI-ADD-148 R E P O R T O F T H E S U P E R IN T E N D E N T 'S A D V IS O R Y C O M M IT T E E O N T R A N S N A T IO N A L B A N K IN G I N S T IT U T IO N S M A R C H 19 92 [; . .. , .. . ~ . AMI-ADD-149 l T H E S U P E R IN T E N D E N T 'S A D V IS O R Y C O M M IT T E E O N T R A N S N A T IO N A L B A N K IN G I N S T IT U T IO N S C ha ir m an Jo h n G . H ei m an n C ha ir m an , G lo ba l F in an ci al I n st itu tio n s M er ril l Ly nc h S te p h e n M . B re ch e r P ar tn er K P M G P ea t M a rw ic k H id e o K ita ha ra D ir e ct o r & G en er al M a n a g e r D a i- lc h i K a n g yo B an k, L td . H a n . R o b e rt M . M o rg e n th a u - D is tr ic t A tt o rn e y, N e w Y o rk C o u n ty C . H a rr is o n S m ith S e n io r V ic e P re si de nt - A g e n t B a n co m e r, S .A . Jo a n E . S p e ro E xe cu tiv e V ic e P re si d e n t C o rp o ra te A ffa irs a n d C o m m u n ic a ti o n s A m e ri ca n E xp re ss C o m p a n y G e o rg e J . V o jta V ic e C h a ir m a n B a n ke rs T ru st C o m p a n y H . R o d g in C o h e n P ar tn er S ul liv an & C ro m w e ll P hi lip A . la co va ra M a n a g in g D ir e ct o r & G en er al C ou ns el M o rg a n S ta nl ey & C o. I n co rp o ra te d -M ic h a e l E . P a tt e rs o n E xe cu tiv e V ic e P re si de nt & G en er al C o u n se l J. P . M o rg a n & C o. , In c. W in fr ie d H . S pa eh S e n io r G en er al M an ag er , C hi ef E xe cu tiv e O ff ic e r U S A D re sd n e r B a n k Jo h n T ug w el l C ha ir m an o f th e B o a rd a n d C h ie f E xe cu tiv e O ff ic e r N at io na l W e st m in st e r B a n co rp I nc . P ro fe ss o r ln g o W a lte r S te rn S ch o o l o f B us in es s N e w Y o rk U n iv e rs ity E x- O ff ic io D e rr ic k D . C ep ha s S u p e ri n te n d e n t o f B an ks AMI-ADD-150 -. ~ ~ I ~~- S TA FF O F TH E TH E S U P E R IN T E N D E N T 'S A D V IS O R Y C O M M IT T E E O N T R A N S N A T IO N A L B A N K IN G I N S T IT U T IO N S C hi ef o f S ta ff M ar tin E . Lo w y R os en m an & C ol in N an cy A . A m ee n W hi te & C as e D on al d B ill in gs K P M G P ea t M ar w ic k R on al d F. D ai tz W ei l G ot sh al l & M an ge s A lb er t V . D e Le on N at io na l W es tm in st er B an co rp I nc . K ev in F . B ar na rd W hi te & C as e Ja sb ir C ho pr a N at io na l W es tm in st er B an co rp I nc . N ic ho la s D az zo J. P . M or ga n· & C o· ;, In c. La w re nc e D . F ru ch tm an E at on & V an W in kl e A rt hu r G el m an D on al d G er sh un y F irs t A ss is ta nt C ou ns el M er ril l Ly nc h In te rn at io na l S ta te o f N ew Y or k B an ki ng D ep ar tm en t La w re nc e J. H oh lt G ib so n, D un n & C ru tc he r Ja m es M . K in dl er E xe cu tiv e A ss is ta nt D is tr ic t A tto rn ey , N ew Y o rk C ou nt y M ic ha el J . Le ss er A ss is ta nt D ep ut y S up er in te nd en t o f B an ks F or ei gn C om m er ci al B an ks D iv is io n ·S ta te o f N ew Y o rk B an ki ng D ep ar tm en t Je ro m e K en ne y M er ril l Ly nc h & C o. E dw in C . La ur en so n P au l, W ei ss , R ifk in d, W ha rt on & G ar ris on V in ce nt L ov e E rn st & Y ou ng ii AMI-ADD-151 R ob er t H . M cC o rm ic k Jo hn M is ne r D ep ut y S up er in te nd en t of B an ks A ss is ta nt D e p u ty F or ei gn C om m er ci al B an ks D iv is io n F or ei gn C om m er ci al B an ks D iv is io n S ta te o f N e w Y o rk B an ki ng D ep ar tm en t S ta te o f N e w Y or k B a n ki n g D ep ar tm en t D eb or ah S . P ru tz m an P au l, W ei ss , R ifk in d, W ha rt on & G ar ri so n P au l A . S ea de r G en er al C ou ns el 's O ffi ce A m er ic an E xp re ss C o m p a n y D on al d J. T ou rn ey S ul liv an & C ro m w el l D ua ne D . W al l W hi te & C as e M ic ha el S ch us sl er A ss is ta nt C ou ns el S ta te o f N e w Y o rk B an ki ng D ep ar tm en t E liz ab et h T ib ba ls D ep ut y S up er in te nd en t o f B an ks an d C ou ns el S ta te o f N e w Y o rk B an ki ng D ep ar tm en t P et er V og el sa ng M or ga n S ta nl ey & C o. I n co rp o ra te d P au l N . W at te rs on , Jr . S ch u lte ·R o th -& Z ab el A dm in is tr at or M ar ya nn S ch em br i R os en m an & C ol in iii AMI-ADD-152 :!i. '"' <. .,: _. T A B L E O F C O N T E N T S C h a ir m a n 's L e tt e r to S u p e ri n te n d e n t o f B a n ks . . . . . . . . . . . . . . . . vi S E C T IO N I - IN T R O D U C T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . P ro ce ss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 B ra n ch e s, A g e n ci e s a n d S u b si d ia ri e s . . . . . . . . . . . . . . . . . . . . . . . . 8 In te rn a tio n a l C o o p e ra ti o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 C o o p e ra ti o n A m o n g U .S . R e g u la to rs . . . . . . . . . . . . . . . . . . . . . . . 15 S E C T IO N I I- C R IT E R IA F O R E N T R Y .. .. .. .. .. .. . . . . . . . . . . 18 E va lu a tin g H o m e C o u n tr y S u p e iv is io n . . . . . . . . . . . . . . . . . . . . . . 21 F in a n ci a l S tr e n g th o f th e B a n k . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6 M a n a g e m e n t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 7 O w n e rs h ip . . . . . . . . . . . . . . · . . . . . . . · . ·: . . . . . . . . . . . . . . . . . . . 28 B a n k S e cr e cy . . . . . . . · . . : . . . . : ·: ·. -. . . . . . . . . . . . . . . . . . . . . . . 29 O th e r C ri te ri a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 0 C o u n tr y R is k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 R e p re se n ta tiv e O ff ic e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 R e g u la to ry F le xi b ili ty . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . 3 4 P h a se -I n F o r E xi st in g O ff ic e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 S E C T IO N I ll - FO R M S O F O R G A N IZ A TI O N A V A IL A B LE . . . . . . . 3 6 B ra n ch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6 A g e n cy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 R e p re se n ta tiv e O ff ic e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2 N e w Y o rk A rt ic le X II In ve st m e n t C o m p a n ie s . . . . . . . . . . . . . . . . . . 46 S E C T IO N I V - R E G U L A T IO N O F O W N E R S . . . . . . . . . . . . . . . . . 50 S E C T IO N V - O FF S H O R E B R A N C H E S A N D R E LA TE D I S S U E S .. 52 N e w D o cu m e n ta ry T e st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4 R e co rd -K e e p in g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 N o R et ai l D e p o si ts . . . . . . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . . 5 7 E xa m fn a ti o n o f O ff sh o re A ct iv iti e s . . . . . .' . . . . . . . . . . . . . . . . . . . 57 S ta tu to ry R e q u ir e m e n ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 iv AMI-ADD-153 '.. _ . . . ~ .. . t • .. . ... " .' : . , • • ~ •• J ' ... ..;_ . S E C T IO N V I- E X A M IN A T IO N I S S U E S . . . . . . . . . . . . . . . . . . . . . 59 P ro fe ss io na l S ta ff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 R ep or tin g R eq ui re m en ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 O th er S up er vi si on I ss ue s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 S E C T IO N V II - S U P E R V IS IO N O F B R A N C H E S /A G E N C IE S T O P R O T E C T N E W Y O R K C R E D IT O R S . . . . . . . . . . . . . . . . 63 A ss et D iv e rs ifi ca tio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 D ue F ro m H om e O ffi ce . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . 65 S et -O ff an d N et tin g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 · · · A ss et M ai nt en an ce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 S E C T IO N V II I ·L IC E N S E T E R M IN A T IO N . . . . . . . . . . . . . . . . . . . 70 S E C T IO N I X - L IQ U ID A T IO N I S S U E S "'~ ·~ :· :· . : : .· : .. . ·. .. .. .. .. . 73 P rio rit y S ta tu s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 D ef in iti on o f N e w Y o rk C re di to rs . . . . . . . . . . . . . . . . . . . . . . . . . . 75 N e w Y or k A ss et s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 P ow er s o f t he S up er in te nd en t . . . . . . . . . . . . . ." . . . . . . . . . . . . . . 78 D 'O en ch D uh m e R ul e . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 E xe cu to ry C o nt ra ct s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . · 79 Q ua lif ie d F in an ci al C on tr ac ts . . . . . . . . . . . . . . . . . . . . . . . 80 Le tte rs o f C re di t an d C om m itm en ts . . . . . . . . . . . . . . . . . . 83 F ed e ra ljS ta te Is su es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 P ro ce du ra l Is su es U n d e r N ew Y o rk L aw . . . . . . . . . . . . . . . . . . . . 85 S in gl e Ju d g e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 C o m p ro m is e o f C la im s . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 R es po ns es t o C la im s . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 A ut om at ic S ta y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 A pp ro va l o f C o n tr a ct s . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 S E C T IO N X • B A N K IN G D E P A R T M E N T F U N D IN G . . . . . . . . . . . . 87 N O T E S · .. . · . : . · . . :·: . : . :: . . : · ; . :· . . .". . . . . . . . . . . . . . . . . . . . . 89 S U M M A R Y O F R E C O M M E N D A T IO N S . . . . . . . . . . . . . . . . . . . . 1 0 1 A P P E N D IX I . . .. . . . . . . . . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . A -1 v AMI-ADD-154 ..... ... .s , _ _ S U P E R IN "T :E N D E N T 'S A D V IS O R Y C O M M IT T E E O N T R A N S N A T IO N A L B A N K IN G I N S T IT U T IO N S Jo h n G . H e im a n n C h a ir m a n T he H on or ab le D e rr ic k D . C ep ha s· ·- ··· ·- - ··· · · S up er in te nd en t of B an ks S ta te o f N ew Y or k B an ki ng D ep ar tm en t T w o R ec to r S tr ee t N ew Y or k, N Y 10 00 6 D ea r S up er in te nd en t C ep ha s: M ar ch 2 0, 1 99 2 O n be ha lf o f th e A dv is or y C om m itt ee o n T ra ns na tio na l B an ki ng In st itu tio ns , I am p le as ed t o s ub m it th e re po rt o f th e C om m itt ee . T he C om m itt ee w as e st ab lis he d an d its m em be rs a pp oi nt ed b y G ov er no r M ar io M . C uo m o on S ep te m be r 10 , 19 91 . S in ce it s fir st m ee tin g on S ep te m be r 16 , 19 91 , th e C om m itt ee h as s ol ic ite d pu bl ic p ar tic ip at io n in i ts d el ib er at io ns , ha s he ld s ix m ee tin gs , ha s re ce iv ed , in r es po ns e to it s in vi ta tio n, co m m en ts fr om in te re st ed m em be rs o f th e pu bl ic , an d on N ov em be r 18 , 19 91 h el d a pu bl ic h ea rin g. T he C om m itt ee is i nd eb te d to th e la rg e nu m be r o f in di vi du al s an d or ga ni za tio ns t ha t ha ve o ffe re d th ei r vi ew s . vi AMI-ADD-155 T he H on or ab le D er ric k .D . C ep ha s. M ar ch 2 0, 1 99 2 P ag e 2 T he G ov er no r's p re ss r el ea se a nn ou nc in g th e ap po in tm en t o f t he C om m itt ee s ta te s: "B ec au se N ew Y or k is t he w o rl d 's b an ki ng c ap ita l, it is es se nt ia l fo r us t o p ro te ct t he i nt eg ri ty a nd f in an ci al s ta bi lit y o f fo re ig n ba nk s do in g bu si ne ss h er e. T he c om m itt ee w ill a na ly ze th e ris ks in vo lv ed in tr an sn at io na l b an ki ng a nd r ec om m en d sp ec ifi c ac tio ns w e ne ed t o t ig ht en s up er vi si on o f th es e ba nk s. " Y ou -s um m ar iz ed t h ~ C or lir ui tt ee 's ta sk "a s- fo lto w s: p- "N ew Y or k S ta te a nd t he B an ki ng D ep ar tm en t ha ve t hu s fa r m an ag ed to a vo id u nd ue r eg ul at or y di ffi cu lti es a t s ta te -li ce ns ed fo re ig n ba nk s. B ut th e in cr ea si ng u se o f c o m p le x tr an sa ct io ns a nd ho m e co u n tr y se cr ec y la w s b y fo re ig n ba nk in g in st itu tio ns d o in g bu si ne ss in N e w Y or k an d m a n y ot he r j ur is di ct io ns a t o nc e m ak es th e ta sk o f ef fe ct iv e re gu la tio n m or e di ffi cu lt. O u r re sp on si bi lit y is to m in im iz e th e at te nd an t re gu la to ry r is ks a s m u ch a s po ss ib le w hi le s til l en co ur ag in g fo re ig n ba nk in g in st itu tio ns t o f lo ur is h in N ew Y or k. " T he o ve rr id in g th em e o f t he C om m itt ee 's r ec om m en da tio ns is th at N e w Y or k S ta te b en ef its fr om t he w ho le sa le b an ki ng b us in es s th a t is d o n e b y fo re ig n ba nk s in N ew Y or k. T he b us in es s o f f or ei gn b an ks in N ew Y o rk ha s g ro w n f ro m a r el at iv el y sm al l su m t w e n ty y ea rs a go t o a ss et s o f ov er $6 00 b ill io n to d a y an d tr ill io ns o f d ol la rs in d a ily tr an sa ct io ns . T hi s le ve l o f bu si ne ss h as a n ex tr em el y po si tiv e im p a ct o n N ew Y or k' s e co n o m y an d o n t he p os iti on o f t he U ni te d S ta te s in i nt er na tio na l fin an ce . A t th e sa m e tim e, ho w ev er , o n g o in g ch an ge s in t h e -f in a n ci a l ";: se rv ic es in du st ry , dr iv en b y e co n o m ic f or ce s, cu st o m e r ex pe ct at io ns , co m pe tit io n an d te ch no lo gi ca l d ev el op m en ts , pr es en t a c ha lle ng e to b a n k su pe rv is or s to k ee p pa ce . vi i AMI-ADD-156 .. ~; - 't ·I ~ ; ,· t ~.~ . T he H o n o ra b le D er ric k D . C ep ha s. M ar ch 2 0, 1 99 2 P ag e 3 In re ce nt ye ar s ag re ed -u po n tr an sn at io na l ba nk in g ru le s ha ve be gu n to t a ke s ha pe t h ro u g h t he B an k fo r In te rn at io na l S et tle m en ts a t B as fe , S w itz er la nd a nd o th er m ul til at er al o rg an iz at io ns . G en er al ly a cc ep te d in te rn at io na l ca pi ta l st an da rd s n o w g ov er n th e c ap ita l re qu ire m en ts o f ba nk s fr om al l m a jo r co un tr ie s, an d su pe rv is or s ar e m ov in g to w ar d ag re em en ts o n ot he r is su es i nv ol vi ng b an k sa fe ty a nd s ou nd ne ss . T he B C C I fa ilu re , w h ic h to o k pl ac e in th e m id st o f t hi s pr oc es s, h as sp ur re d it fo rw ar d an d ha s pr om pt ed r eg ul at or y ch an ge s a t v ar io us le ve ls o f go ve rn m en t. T he se c h a n g e s· in cl u d e ·1 h tr fo re ig n · B an k S up er vi si on E nh an ce m en t A ct , w hi ch w as e na ct ed b y C on gr es s in N o ve m b e r 19 91 a s pa rt o f t he F ed er al D ep os it In su ra nc e C or po ra tio n Im p ro ve m e n t A ct . T ha t A ct em ph as iz es in te rn at io na l co op er at io n as a co rn er st on e o f U .S . re gu la tio n an d su pe rv is io n o f fo re ig n ba nk s d o in g b us in es s he re . T he S up er in te nd en t's A dv is or y C om m itt ee w as c re at ed t o e ns ur e th at N e w Y o rk 's r eg ul at io n an d su pe rv is io n o f tr an sn at io na l ba nk s w ou ld co n tin u e t o m ee t th e h ig he st s ta nd ar ds . T he N e w Y or k S ta te B an ki ng D ep ar tm en t ha s su pe rv is ed f or ei gn b an ks d o in g b us in es s in t h e U ni te d S ta te s fo r lo n g e r th an a ny o th er s ta te o r fe de ra l re gu la to ry a g e n cy a nd lic en se s m o re f or ei gn b an ks t ha n an y o th e r U .S . au th or ity . In f ac t, N e w Y o rk l ic en se s m or e fo re ig n ba nk s th an a ny o th er a ut ho ri ty i n t h e w or ld , e xc e p t th e B an k o f E ng la nd . T he B an ki ng D ep ar tm en t's r ol e th er ef or e is cr iti ca l to t he s ou nd f un ct io ni ng o f th e in te rn at io na l w ho le sa le b an ki ng sy st em . O u r re co m m en da tio ns a re d es ig ne d to r ei nf or ce t h e s af et y an d so un dn es s o f th at sy st em , to r ed ed ic at e N e w Y o rk 's co m m itm e n t to p ro m o tin g c o o p e ra tio n o f ba nk s w ith la w e nf or ce m en t au th or iti es , an d, a t th e sa m e tim e, to p er m it th e fr ee in te rn at io na l flo w o f ca pi ta l. If t he C om m itt ee h as o ne p ri nc ip al c on cl us io n, it is th a t b ec au se c ap ita l m ar ke ts ar e in te gr at ed w or ld w id e, ba nk s ca n a n d w ill a vo id d o in g b us in es s in · lo ca tio n s w h ic h h av e hi gh c os ts a nd u nn ec es sa ry o ve rr eg ul at io n. vi ii AMI-ADD-157 - • • ~ • .h . ~ ·- · t • .. ,. . ,, . , <• • . , • •· - V • - ·· '" • •" ·• •• _. ,. ,. ., ._ , ,. ~. ,. " ~ "" ~: • .. .. .... - ,.. .., _ .,., , .. t . '": ·. r ., ,; .. . ?-! $, T he H on or ab le D e~ ri ck .D . C ep ha s M ar ch 2 0, 1 99 2 P a g e 4 S om e o f th e re gu la tio n w hi ch t h e b an ki ng b us in es s w ill a vo id i s n o t, o f co ur se , w ith in t he c on tr ol o f st at e au th or iti es . F o r ex am pl e, ap pl ic at io n o f t he B an k H ol di ng C om pa ny A ct to f or ei gn b an ks t ha t ha ve of fic es in t h e U ni te d S ta te s m a y fo rc e se ve !C ll of t h e m w h ic h ha ve in te gr at ed t he ir o pe ra tio ns w lth se cu rit le s. o r In su ra nc e fir m s to c ur ta il o r te rm in at e th ei r U .S . ba nk in g op er at io ns . T hi s w ou ld n o t be b en ef ic ia l to th e u .s. e co no m y. S pe ak in g fo r" al l C om m itt ee m em be rs , it ha s be en a n h o n o r an d pl ea su re to s er ve t lie S ta te o f N e w Y o rk W e ha ve fo un d th e b an ki ng la w s an d th e B an ki ng D ep ar tm en t's p ol ic ie s o n t ra ns na tio na l ba nk s to b e i n g en e ra lly g o o d o rd e r. W e ho pe t ha t o u r re co m m en da tio ns w ill h el p th e D ep ar tm en t t o m ee t th e ne ed s o f t he f ut ur e. S in ce re ly , ~ < 0 ~ . . # Jo hn G . H ei m an n ix AMI-ADD-158 I . I N T R O D U C T IO N D ur in g th e pa st th re e de ca de s, th e w or ld 's ba nk in g sy st em ha s be co m e in cr ea si ng ly gl ob al iz ed . D ue to te ch no lo gi ca l ad va nc es a nd g ro w in g ne ed s to s er ve c us to m er s w ith m ul ti na ti on al o pe ra ti on s, b an ks h av e es ta bl is he d fa ci lit ie s in m an y co un tr ie s. A s ba nk s ha ve e xp an de d, n at io ns h av e li be ra li ze d th ei r la w s to p er m it f re er e nt ry o f fo re ig n ba nk s, i n re co gn it io n of th e re al d om es tic e co no m ic b en ef it s of f or ei gn ba nk p ar ti ci pa ti on . ·· -·· ·· " ··· · · · T hi s tr en d co nt in ue s. T he in te rn at io na l ba nk in g en vi ro nm en t in t he 1 99 0' s is h ig hl y co m pe tit iv e, b ri ng in g m an y be ne fi ts to th e us er s of t he sy st em in th e fo rm of m or e so ph is ti ca te d se rv ic es , m or e co m pe tit iv e se rv ic es , an d, in ge ne ra l, m or e co m pe tit iv e pr ic in g of th os e se rv ic es , ul ti m at el y re su lti ng i n lo w er c os ts a nd a s tr on ge r ec on om y. T o ta ke a dv an ta ge o f m aj or m ar ke ts a nd t o op er at e in al l tim e zo ne s, m aj or i nt er na ti on al b an ks h av e ex pa nd ed i nt o th e th re e fi na nc ia l ce nt er s w hi ch d om in at e th e w or ld 's f in an ci al sy st em : N ew Y or k, L on do n an d T ok yo . T hi s tr i- po la r sy st em is t he l in ch pi n of t od ay 's f in an ci al s ys te m r ep re se nt in g, a s it do es , th e th re e m ai n ce nt er s of in te rn at io na l fi na nc ia l ac tiv ity . In s pi te of t he i nt er na ti on al iz at io n of b an ki ng ,· ba nk re gu la ti on r em ai ns i n la rg e pa rt a p ro ce ss · c on du ct ed u nd er na ti on al an d st at e la w s. T he N ew Y or k· S ta te B an ki ng D ep ar tm en t (t he "B an ki ng D ep ar tm en t" ) is th e m os t ex pe ri en ce d A m er ic an re gu la to r of fo re ig n ba nk s. F or ei gn AMI-ADD-159 b an k s ha ve b ee n d oi ng b us in es s in t he S ta te o f N ew Y or k fo r ov er 1 00 y ea rs , an d fo r m an y ye ar s th e B an ki ng D ep ar tm en t w as t he s ol e su pe rv is or o f fo re ig n ba nk s do in g bu si ne ss i n t he U ni te d S ta te s. G ra du al ly , ot he r st at es o pe ne d th ei r do or s to fo re ig n ba nk s, an d in 19 78 th e In te rn at io na l B an ki ng A ct (" IB A ") 1 au th or iz ed th e O ff ic e o f th e C om pt ro ll er of th e C ur re nc y (t h e "O C C ") t o gr an t li ce ns es f or " fe de ra l br an ch es ". T h e IB A a ls o fi rs t gr an te d th e F ed er al R es er ve B oa rd ( "F R B ") ju ri sd ic ti on t o ex am in e an d su pe rv is e fo re ig n br an ch es a nd ag en ci es .2 T h e F or ei gn B an k S up er vi si on E nh an ce m en t A ct o f 19 91 ( th e "E nh an ce m en t A ct ") , en ac te d as p ar t o ft h e F ed er al D ep os it In su ra nc e C or po ra ti on Im pr ov em en t A ct o f 19 91 (" F D IC IA ") ,3 e xp an de d th e F R B 's p ow er s to · i nc lu de ·· ap pr ov in g an d t er m in at in g li ce n se so ff o re ig n b ar tk s do in g bu si ne ss i n t he U n it ed S ta te s. T od ay 4 9 o u t o f th e la rg es t 50 b an ks i n th e w or ld a re h ea d q u ar te re d o ut si de t he U ni te d S ta te s, a nd a ll o f th em h av e of fi ce s in N ew Y or k. N ew Y or k li ce ns es an d su pe rv is es br an ch es an d ag en ci es o f ov er 2 00 f or ei gn b an ks fr om 45 co un tr ie s w hi ch h av e ov er $ 40 0 bi ll io n o f as se ts i n N ew Y or k. In a dd it io n, t h er e ar e ov er 1 70 r ep re se nt at iv e of fi ce s o f f or ei gn ba nk s in N ew Y or k, an d th e B an ki ng D ep ar tm en t is th e ch ar te ri ng a ut ho ri ty o f 46 c om m er ci al b an ks c ha rt er ed u n d er A rt ic le I II o f th e B an ki ng L aw a nd 1 2 A rt ic le X II c om pa ni es w hi ch a re o w ne d o r co nt ro ll ed b y fo re ig n ba nk s. 4 In a ll, b an ks fr om 6 4 fo re ig n co un tr ie s ar e pr es en t in N ew Y or k. T he se fo re ig n b an k b ra nc he s, a ge nc ie s an d su bs id ia ri es a cc ou nt f or ov er h al f o f th e U .S . as se ts o f fo re ig n ba nk s do in g bu si ne ss i n - .. th e U n it ed -S ta te s, -- an d- ov er ··t w o- th ir ds ·o f- br an ch a n d a ge nc y as se ts . In a dd it io n, d om es ti c N ew Y or ks ta te -c ha rt er ed ·h an ks ~ •· ho ld o ve r 5 0 % o f th e as se ts o f al l fo re ig n of fi ce s o f U .S . ba nk s. A s a co ns eq ue nc e, t h e N ew Y or k S up er in te nd en t o f B an ks re m ai ns t h e pr in ci pa l U .S . li ce ns in g au th or it y fo r tr an sn at io na l 2 ,. f. ,., ·' ba nk s, a lt ho ug h th e F R B 's e xp an de d ju ri sd ic ti on o ve r al l f or ei gn ba nk s in t he U ni te d S ta te s un de r th e E nh an ce m en t A ct w il l gi ve i t su bs ta nt ia ll y in cr ea se d au th or it y ov er t he l ic en si ng a nd su pe rv is io n of f or ei gn b an ks . B an ki ng co nt in ue s to gr ow in i ts im po rt an ce t o th e ec on om y o f N ew Y or k C ity a nd N ew Y or k S ta te , an d fo re ig n ba nk s co nt in ue t o in cr ea se t he ir s ig ni fi ca nc e to t he w ho le sa le ba nk in g m ar ke ts o f th e U ni te d S ta te s ge ne ra ll y an d o f N ew Y or k in p ar ti cu la r. F or ei gn b an ks n ow e m pl oy o ve r 10 0, 00 0 pe op le i n t he U ni te d S ta te s, o ve r ha lf o f th em i n t he C it y of N ew Y or k, a nd n at io na ll y fo re ig n ba nk s le as e o r ow n ov er 3 5 m il li on s qu ar e fe et o f sp ac e. 5 T h e bt is in es s 'th at f or ei gn b an ks do iri th e U ni te d S ta te s is pr in ci pa ll y a w ho le sa le b an ki ng bu si ne ss , le nd in g to A m er ic an an d fo re ig n bu si ne ss es , su pp or ti ng i m po rt a n d e xp or t tr an sa ct io ns , an d pa rt ic ip at in g in th e in te rb an k m ar ke t fo r de po si ts a nd a v ar ie ty o f de ri va ti ve pr od uc ts d es ig ne d to he dg e in te re st r at e, cu rr en cy o r ot he r fi na nc ia l ri sk s. O nl y 20 fo re ig n ba nk s ac ce pt si gn if ic an t am ou nt s o f re ta il d ep os it s in N ew Y or k th ro ug h br an ch es , al l of w hi ch a re i ns ur ed b y th e F D IC . T h e as se ts o f th es e F D IC - in su re d br an ch es a cc ou nt f or l es s th an 2 % o f th e fo re ig n ba nk br an ch a n d a ge nc y as se ts i n N ew Y or k. In t he f ut ur e, t h e E nh an ce m en t A ct w ill r eq ui re t h at f or ei gn b an ks e n te r th e re ta il d ep os it b us in es s on ly th ro ug h su bs id ia ri es a n d n o t t hr ou gh br an ch es . T h e w ho le sa le b us in es s th at p re do m in at es t he f or ei gn ba nk s' b us in es s in N ew Y or k fl ou ri sh es b ec au se t he d ol la r i s th e- w or ld 's p ri nc ip al m ed iu m ·o f ex ch an ge a nd b ec au se N ew Y o rk · is t he l ar ge st c en te r o f do ll ar a ct iv ity . T hi s w ho le sa le b us fu es s ha s b ee n c on du ct ed s af el y an d e ff ic ie nt ly u n d er N ew Y or k su pe rv is io n. F o r N ew Y or k to m ai nt ai n it s po si ti on a s a fi na nc ia l ca pi ta l, i t is e ss en ti al f or N ew Y or k to m ai nt ai n la w s 3 AMI-ADD-160 th at p er m it l eg it im at e bu si ne ss to b e do ne as fr ee ly as is pr ud en tl y po ss ib le . T h e ba nk r eg ul at or y an d su pe rv is or y la w s, ru le s an d po li ci es t ha t go ve rn f or ei gn b an ks d oi ng b us in es s in N ew Y or k ar e an i m po rt an t pa rt o f th e pa no pl y of l aw s an d re gu la ti on s th at de te rm in e w he th er N ew Y or k is fu nd am en ta ll y an at tr ac ti ve p la ce t o do f in an ci al bu si ne ss .6 It i s th es e ba nk re gu la to ry a nd s up er vi so ry la w s, r ul es a nd p ol ic ie s on w hi ch th is A dv is or y C om m it te e R ep or t f oc us es . T he C om m it te e' s ta sk w as to re vi ew ba nk re gu la to ry an d su pe rv is or y m at te rs , no t co ns um er p ro te ct io n, t ax o r ot he r le ga l m at te rs t ha t m ay b ea r on f or ei gn b an ks d oi ng · b us in es s in N ew ·Y or k' . ' - · ·· T h e C om m it te e' s ba si c go al i s to f os te r a sy st em o f re gu la ti on a nd s up er vi si on w hi ch l ea ve s fo re ig n ba nk s fr ee t o co m pe te a nd d o bu si ne ss i n N ew Y or k on a l ev el p la yi ng f ie ld w it h U .S . in st it ut io ns , w hi le a t th e sa m e ti m e pr ot ec ti ng t ho se w ho d o bu si ne ss w it h th e fo re ig n ba nk s th at d o bu si ne ss h er e. T he C om m it te e ad he re s to t he p ri nc ip le o f na ti on al t re at m en t un de r w hi ch b an ks f ro m o th er c ou nt ri es a re t o b e tr ea te d, a s m uc h as p os si bl e, t he s am e as b an ks c ha rt er ed a nd o w ne d in th e U ni te d S ta te s. P ro ce ss T h e C om m it te e w as a pp oi nt ed b y G ov er no r M ar io M . C uo m o in S ep te m be r 19 91 , an d m et a s a w ho le C om m it te e ap pr ox im at el y m on th ly t hr ou gh F eb ru ar y 19 92 . M uc h of t he w or k o f th e C om m it te e ha s- be en a ce om pl is he d th ro ug h· fo ur · su bc om m it te es , as f ol lo w s: • · · · · ". . ·· - · · .. · - -· · 4 ..; :.- :,~ - C ri te ri a F o r E nt rv M ic ha el E . P at te rs on , C ha ir C . H ar ri so n S m it h Jo an E . S pe ro In go W al te r F or m s o f O rg an iz at io n G eo rg e J. V oj ta , C ha ir H . R od gi n C oh en H id eo K it ah ar a E xa m in at io n an d S up er vi si on Jo hn T ug w el l, C ha ir S te ph en M . B re ch er H on . R ob er t M . M or ge nt ha u E xi t an d L iq ui da ti on P hi li p A . L ac ov ar a, C ha ir W in fr ie d H . S pa eh E ac h su bc om m it te e ha s ha d th e as si st an ce o f se ve ra l v ol un te er st af f· · m em be rs ; ·w ho · ha ve · at te nd ed m ee ti ng s o f th e su bc om m it te es a nd t he C om m it te e, h av e w ri tt en r es ea rc h 'a nd po si ti on p ap er s on v ar io us sp ec if ic is su es , ha ve do ne f ie ld re se ar ch a nd i nt er vi ew s, a nd h av e co nt ri bu te d im po rt an tl y to th e C om m it te e' s w or k. R ep re se nt at iv es of th e B an ki ng 5 AMI-ADD-161 D ep ar tm en t an d th e C om m it te e' s C hi ef of S ta ff ha ve pa rt ic ip at ed i n su bs ta nt ia ll y al l su bc om m it te e an d C om m it te e m ee tin gs . T he C om m it te e co nd uc te d a fo rm al p ub lic h ea ri ng at w hi ch t es ti m on y w as h ea rd f ro m i nt er es te d pa rt ie s, i nc lu di ng th e In st it ut e of In te rn at io na l B an ke rs a nd th e Pu bl ic E m pl oy ee s F ed er at io n, th e la bo r un io n w hi ch re pr es en ts th e B an ki ng D ep ar tm en t's e xa m in er s. L es s fo rm al c on ta ct s ha ve b ee n m ad e w ith r ep re se nt at iv es o f th e F ed er al R es er ve B an k of N ew Y or k (" FR B N Y ") , th e O ff ic e of th e C om pt ro ll er o f t he C ur re nc y, a nd th e F ed er al D ep os it I ns ur an ce C or po ra ti on . M an y of t he i ss ue s th at t he C om m it te e ha s co ns id er ed ha ve c ut a cr os s su bc om m it te e li ne s: Q ue -s tio ns r eg ar di ng e nt ry st an da rd s, fo r· ex am pl e; ·· ·a ls o· m a:y - ha ve · im pl ic at io ns fo r co nt in ue d lic en su re , li qu id at io n ru le s re fl ec t ba ck on ex am in at io n an d su pe rv is io n is su es , an d is su es o f ex am in at io n - an d su pe rv is io n m ay b es t b e de al t w ith i n th e lic en si ng p ro ce ss or b y re st ri ct in g th e bu si ne ss i n w hi ch a f or m o f or ga ni za ti on ca n en ga ge . S om e of t he c ha ng es r ec om m en de d by t he C om m it te e w ill r eq ui re p ha si ng i n an d ne go ti at io n or d is cu ss io n am on g re gu la to rs . T hi s m ay b e pa rt ic ul ar ly t ru e of a re as w he re t he C om m it te e su gg es ts i nc re as ed c oo pe ra ti on a m on g re gu la to rs o r th at sp ec if ic re gu la to ry st an da rd s be de em ed m in im um st an da rd s or th at e nt ry s ta nd ar ds s ho ul d be e nf or ce d as o ng oi ng st an da rd s af te r lic en si ng . T he se a re a re as w he re t he B an ki ng D ep ar tm en t w ill h av e to e xe rc is e ju dg m en t in g oi ng f or w ar d if it a do pt s th e C om m it te e' s re co m m en da ti on s. T he C om m it te e be li ev es i n -g en eF al -t ha t·· re gu la to ry f le xi bi lit y- is - ne ed ed ·· in t he in te rn at io na l ar en a; -· · ·- ·· · ·- ·- -- -· · · · · · ·- ··· In a dd it io n to b ei ng h os t to o ff ic es o f m aj or b an ks f ro m ot he r co un tr ie s, N ew Y or k is h om e to U .S .- ba se d tr an sn at io na l 6 ~ ~ ~ - ba nk s, a nd th e C om m it te e ha s co ns id er ed th ei r in te re st s as w el l. T he C om m it te e re co gn iz es th at w ha t U .S . ba nk s m ay be pe rm it te d to d o ab ro ad i s lik el y to b e re la te d, i n th e lo ng r un , to w ha t fo re ig n ba nk s ca n do i n th e U .S . T hu s, w hi le t he C om m it te e ha s ge ne ra ll y no t fa vo re d re ci pr oc it y st an da rd s, i t ha s be en c og ni za nt t ha t U .S . tr ea tm en t of f or ei gn b an ks w ill in fl ue nc e ho w U .S . ba nk s ar e tr ea te d by o th er c ou nt ri es . T he C om m it te e al so r ec og ni ze s th at t ax a nd r eg ul at or y is su es o ft en a re in te rt w in ed . T hu s, a lt ho ug h th e C om m it te e ha s no t ge ne ra ll y co m m en te d on t ax i ss ue s, i n ge ne ra l it s up po rt s th e co nc ep t th at t ax a dm in is tr at io n sh ou ld b e co ns is te nt w ith th e ec on om ic g oa ls o f re gu la tio n. T hi s R ep or t co nt ai ns m an y re co m m en da ti on s, s om e of w hi ch su gg es t on ly m in or v ar ia ti on s fr om cu rr en t pr ac ti ce , ot he rs o f w hi ch t he C om m it te e re ga rd s as i m po rt an t in iti at iv es . T he m os t im po rt an t fi nd in g of th e C om m it te e is th at m ai nt ai ni ng t he -b ra nc h/ ag en cy f or m i s ne ce ss ar y in o rd er t o m ai nt ai n th e le ve l of in te rn at io na l bu si ne ss d on e in N ew Y or k. T he C om m it te e fi rm ly be lie ve s th at i f fo re ig n ba nk s w er e re qu ir ed t o do b us in es s in s ub si di ar y fo rm , th e le ve l of b us in es s w ou ld d ec li ne s ig ni fi ca nt ly , w hi ch c ou ld h av e a ne ga ti ve i m pa ct on t he p os it io n of t he do ll ar an d of t he U ni te d S ta te s in in te rn at io na l co m m er ce . In th e C om m it te e' s vi ew , th e su bs id ia ry fo rm is n ot re qu ir ed b y co ns id er at io ns o f e it he r s af et y an d so un dn es s or c om pe ti ti ve e qu ity . i· - ·· 7 AMI-ADD-162 A dd it io na l si gn if ic an t re co m m en da ti on s in cl ud e: • C on ti nu at io n of t he N ew Y or k S ta te B an ki ng D ep ar tm en t's i m po rt an t ro le a s a re gu la to r an d su pe rv is or o f tr an sn at io na l ba nk s. • St ep s to p ro m ot e co op er at io n am on g su pe rv is or s bo th d om es tic al ly a nd i nt er na ti on al ly . • Po lic ie s th at p re ve nt f or ei gn b an k se cr ec y la w s fr om de fe at in g U ni te d S ta te s cr im in al in ve st ig at io ns . • C la ri fy in g th e· te st fo rw he ni ia bi li ti es o f a f or ei gn ba nk w ill b e de em ed l ia bi lit ie s of it s N ew Y or k br an ch / a ge nc y in l iq ui da tio n. • Pr ov id in g th e B an ki ng D ep ar tm en t w ith an in de pe nd en t b ud ge t s o th at it c an h ir e an d re ta in ap pr op ri at el y ex pe ri en ce d pe rs on ne l an d su pe rv is e ba nk s pr op er ly i n a co m pl ex f in an ci al w or ld . B ra nc he s. A ge nc ie s an d S ub si di ar ie s O ne o f th e fa ct or s th at m ak es N ew Y or k at tr ac ti ve t o fo re ig n ba nk s th at de si re to do w ho le sa le bu si ne ss is th e av ai la bi lit y of th e br an ch a nd a ge nc y fo rm s of d oi ng b us in es s. W he n a ba nk ( w he th er U .S . or fo re ig n) e st ab li sh es a s ub si di ar y ba nk i n a fo re ig n lo ca tio n- ·it - ge ne ra ll y ·m us t al lo ca te ·s pe ci fi c ca pi ta l to t ha t su bs id ia ry a nd m ay · b e le ga lly r es tr ic te d in , i ts · -· ,. - - · · de al in gs w ith t ha t su bs id ia ry . B y co nt ra st , a br an ch o r ag en cy is a n in te gr al p ar t of th e ba nk it se lf ; ge ne ra lly a b ra nc h/ ag en cy th er ef or e re qu ir es n o se pa ra te c ap it al o f its o w n an d is f re e to 8 de al w ith th e ho m e of fi ce an d ot he r br an ch es o f th e ba nk w it ho ut r es tr ic ti on . A s ub si di ar y is b y- le ga l d ef in it io n an e nt it y th at c an s ur vi ve o r fa il in de pe nd en t of it s ow ne rs . A b ra nc h or ag en cy , by c on tra st ,_ r at he r th an b ei ng t re at ed a s if i t w er e a se pa ra te e nt ity , ha s th e en ti re w or ld w id e ca pi ta l of t he b an k be hi nd it s tr an sa ct io ns a nd it s le nd in g li m it ( th e re gu la to ry li m it on t he s iz e of l oa ns t ha t it m ay e xt en d to o ne b or ro w er ) is ba se d on t he ba nk 's w or ld w id e ca pi ta l, ra th er t ha n on t he ca pi ta l al lo ca te d to i t, as w ou ld b e th e ca se f or a s ub si di ar y. B ec au se o f th is d is tin ct io n, a b ra nc h or a ge nc y ca n do a l ar ge r an d m or e va ri ed b us in es s th an a s ub si di ar y, a nd i ts a bi lit y to en ga ge i n in te rn at io na l co m m er ce o n be ha lf o f th e ba nk i s gr ea te r th an a s ub si di ar y' s w ou ld b e. In de ed ; as a co ns eq ue nc e of b ra nc h/ ag en cy f le xi bi lit y, m os -t fo re ig n ba nk s th at m ai nt ai n su bs id ia ri es in N ew Y or k to co nd uc t do m es ti c A m er ic an bu si ne ss al so m ai nt ai n a br an ch or ag en cy w hi ch en ga ge s pr im ar il y in i nt er na ti on al a nd i nt er ba nk t ra ns ac ti on s. T he a bi lit y of f or ei gn b an ks to do b us in es s th ro ug h- br an ch es a nd a ge nc ie s is , fo r th es e re as on s, i m po rt an t t o th em , an d, be ca us e of t he p re po nd er an t w ho le sa le na tu re of t he bu si ne ss d on e by N ew Y or k br an ch es a nd a ge nc ie s, i m po rt an t to N ew Y or k an d its e co no m y. T he C om m it te e fu rt he r be li ev es th at t he g re at er a cc es s to i nt er na ti on al c re di t m ar ke ts t ha t th e br an ch /a ge nc y fo rm a ff or ds t o bu si ne ss es i n th e U ni te d S ta te s is b en ef ic ia l to t he A m er ic an e co no m y as a w ho le . In de ed , th e C om m it te e be lie ve s th at w ith dr aw al o f si gn if ic an t am ou nt s of le nd ab le f un ds b y fo re ig n ba nk s (w hi ch a cc ou nt f or o ve r 25 % of co m m er ci al a nd in du st ri al lo an s m ad e by ba nk s· -i n th e U ni te d S ta te s) w ou ld h av e· a ne ga ti ve i m pa ct o n th e ec on om y of t he U ni te d S ta te s. · T he b ra nc h/ ag en cy fo rm h as b ee n qu es ti on ed , h ow ev er , on t he g ro un d th at i t is m or e di ff ic ul t fo r a U ni te d S ta te s 9 AMI-ADD-163 re gu la to r to pr ot ec t pe rs on s an d en ti ti es th at de al t w ith a U ni te d S ta te s br an ch /a ge nc y of a f or ei gn b an k th at f ai ls t ha n it w ou ld b e to p ro te ct t ho se w ho h ad d ea lt w ith a s ub si di ar y. A s ub si di ar y, it i s sa id , ha s its ow n ca pi ta l, its ow n cl ea rl y de m ar ca te d as se ts a nd l ia bi lit ie s, i s re st ri ct ed i n its d ea lin gs w ith i ts p ar en t ba nk , an d st an ds o r fa lls o n its o w n fi na nc ia l co nd iti on . A b ra nc h o r ag en cy , by c on tr as t, do es n ot h av e its ow n le ga l ca pi ta l, is r el at iv el y fr ee t o de al w ith i ts h om e of fi ce an d ot he r br an ch o ff ic es , an d w ill f ai l if t he b an k as a w ho le fa ils . T he se d if fe re nc es l ea d so m e to a dv oc at e re qu ir in g al l fo re ig n ba nk b us in es s in t he U ni te d St at es ·to · b e· d on e th ro ug h su bs id ia ri es ( or r ep re se nt at iv e of fi ce s· w hi ch t he m se lv es d o no t m ak e lo an s or a cc ep t de po si ts ). 7 T he C om m it te e do es n ot be li ev e su ch a r es tr ic ti ve p os it io n is w ar ra nt ed o r pr od uc ti ve . T he re h av e be en v er y fe w f ai lu re s of fo re ig n ba nk s w ith o ff ic es in t he U ni te d St at es , an d un le ss t he h om e of fi ce r ef us es t o or ca nn ot h on or b ra nc h· o bl ig at io ns , a br an ch /a ge nc y ca nn ot f ai l on it s ow n; i t on ly f ai ls w he n th e ba nk a s a w ho le f ai ls . In N ew Y or k on ly a f ew b ra nc he s/ ag en ci es o f fo re ig n ba nk s ha ve b ee n li qu id at ed in th e ov er 1 00 y ea rs t ha t th ey h av e do ne b us in es s, a nd o nl y th re e of th em s in ce 1 94 5. 8 In t he f ir st tw o po st -1 94 5l iq ui da ti on s, a ll N ew Y or k cr ed it or s w er e pa id in fu ll an d a su rp lu s w as p ro vi de d to t he h om e co un tr y li qu id at or . In t he t hi rd l iq ui da ti on , B C C I, w hi ch i s pr oc ee di ng n ow , th e S up er in te nd en t be li ev es t ha t th e re su lt w il l be t he s am e. 9 . . .. . -I t is d is tin ct ly - pr ef er ab le -- to -h av e a ba nk 's w or ld w id e ca pi ta l an d th e w or ld w id e di ve rs if ic at io n uf -i ts ~· cr ss et s· s ta nd :: ;: be hi nd i ts U .S . ob li ga ti on s th an t o ha ve , in t he c as e of a su bs id ia ry fo rm o f o rg an iz at io n, a s m al le r am ou nt o f d es ig na te d ca pi ta l an d le ss di ve rs if ie d as se ts b eh in d th em . W ha te ve r 10 . -~ ~' .. ~- be ne fi ts o ne m ay s ee i n th e su bs id ia ry f or m a re o ut w ei gh ed b y th e be ne fi ts o f th e br an ch f or m . U .S . br an ch es a nd a ge nc ie s of fo re ig n ba nk s ha ve no t pr ov ed to be da ng er ou s to th ei r cr ed it or s an d co un te _r pa rti es . A s po in te d ou t ab ov e, r eq ui ri ng b us in es s to b e do ne th ro ug h su bs id ia ri es w ou ld h av e a si gn if ic an t a dv er se im pa ct o n th e in te rn at io na l ba nk in g bu si ne ss d on e in t he U ni te d S ta te s an d co ul d re su lt in th e w ith dr aw al o f c ap it al f ro m U .S . m ar ke ts . In a dd it io n, r es tr ic ti ng th e us e of th e br an ch f or m i n th e U ni te d S ta te s co ul d ha ve an a dv er se i m pa ct o n U .S . ba nk s w hi ch co nd uc t bu si ne ss i n m an y fo re ig n co un tr ie s th ro ug h th e br an ch fo rm , be ca us e ot he r co un tr ie s m ig hl b e in fl ue nc ed t o ad op t si m il ar r ul es . U .S . ba nk s op er at in g· a br oa d va lu e th e br an ch fo rm n o le ss t ha n fo re ig n ba nk s op er at in g in th e U ni te d S ta te s. (I nt er na ti on al a gr ee m en ts , s uc h as t ho se w hi ch m ay r es ul t f ro m th e U ru gu ay R ou nd o f t he G A T T , al so m ay h av e an im pa ct o n ho w t he U ni te d St at es r eg ul at es f or ei gn b an ks a nd o n ho w ot he r co un tr ie s re gu la te U .S . ba nk s. ) B y D ec em be r 19 , 19 92 , F D IC IA r eq ui re s th e S ec re ta ry of th e T re as ur y an d th e F ed er al R es er ve B oa rd , " in c on su lt at io n w ith " th e C om pt ro ll er o f th e C ur re nc y, th e F D IC a nd th e A tt or ne y G en er al o f th e U ni te d St at es , to c on du ct a " st ud y of w he th er f or ei gn b an ks s ho ul d be r eq ui re d to c on du ct b an ki ng op er at io ns in th e U ni te d S ta te s th ro ug h su bs id ia ri es r at he r th an br an ch es ." 10 T he C om m it te e ho pe s th at i n pr ep ar in g th ei r re po rt t he S ec re ta ry o f th e T re as ur y an d th e F ed er al R es er ve B oa rd w ill c on si de r an d ta ke i nt o ac co un t th is C om m it te e' s · · co nc lu si on s~ · · · ··· · T he C om m it te e be lie ve s th at c on ti nu in g to p er m it a nd en co ur ag e th e br an ch /a ge nc y fo rm of do in g bu si ne ss is co ns is te nt w ith c ur re nt p ra ct ic e in t he E ur op ea n C om m un ity 11 AMI-ADD-164 (" E C ") , w hi ch , in it s S ec on d B an ki ng D ir ec ti ve , ha s op te d fo r a sy st em u nd er w hi ch b ra nc hi ng t hr ou gh ou t th e E C c ou nt ri es , w ith a pp ro va l on ly f ro m t he h om e co un tr y re gu la to r, i s th e ru le .U T he E C c ou nt ri es h av e ag re ed t o tr us t ea ch o th er 's re gu la to ry a ut ho ri ti es t o pr ot ec t de po si to rs t hr ou gh ou t th e E C in t er m s of u lt im at e ba nk h ea lt h. A U .S . ba nk t ha t do es bu si ne ss i n th e E C h as a ch oi ce of o bt ai ni ng ap pr ov al to op er at e th ro ug h br an ch es o r es ta bl is hi ng a s ub si di ar y in a n E C co un tr y w hi ch w ill q ua lif y to b e tr ea te d as a n E C -b as ed b an k w hi ch c an o pe ra te t hr ou gh ou t th e C om m un ity . In te rn at io na l C oo pe ra ti on T he B C C I af fa ir -i s - a· re m in de r· th at t he re a re p ot en ti al da ng er s fr om t ra ns na ti on al b an ki ng o rg an iz at io ns , ev en th ou gh it a pp ea rs t ha t N ew Y or k cr ed it or s w ill b e fu lly p ro te ct ed i n th at c as e. A nd t he B C C I af fa ir h as f oc us ed g re at er a tt en ti on o n co op er at io n am on g su pe rv is or s. A s ea rl y as 1 98 3, h ow ev er , th e C om m it te e on B an ki ng R eg ul at io n an d Su pe rv is or y P ra ct ic es of th e B an k fo r In te rn at io na l S et tl em en ts (" B IS ") r ec og ni ze d in it s re po rt k no w n as t he " B as le C on co rd at ", w hi ch e st ab li sh ed p ri nc ip le s fo r th e su pe rv is io n of fo re ig n of fi ce s of ba nk s, th at ef fe ct iv e co op er at io n be tw ee n ho st a nd h om e co un tr y re gu la to rs i s "a ce nt ra l pr er eq ui si te f or t he s up er vi si on o f ba nk s' i nt er na ti on al op er at io ns ." In g iv in g ef fe ct t o th es e pr in ci pl es , th e C on co rd at re co m m en de d bo th t ha t ho st c ou nt ry r eg ul at or s en su re t ha t ho m e co un tr y re gu la to rs a re i nf or m ed o f an y se ri ou s pr ob le m s . w hi ch a ri se i n a b an k' s· -f or ei gr ro ff ic es a nd ; co nc om it an tl y, t ha t ho m e co un tr y re gu la to rs i nf or m h os t co un tr y~ re gu la to rs w he n ··· pr ob le m s ar is e in a b an k th at a re l ik el y to a ff ec t its f or ei gn of fi ce s. T he C on co rd at h as b ee n en do rs ed b y ap pr ox im at el y 75 12 su pe rv is or y au th or it ie s in ad di ti on to th os e in th e G -1 0 co un tr ie s. 12 It i s im po rt an t th at t he se pr in ci pl es of i nt er na ti on al co op er at io n be im pl em en te d, s in ce t he y ar e th e fo un da ti on o n w hi ch i nt er na ti on al b an k su pe rv is io n sh ou ld b e bu il t. H ow ev er , in or de r fo r th er e tr ul y to be in te rn at io na l co op er at io n, re gu la to rs n ee d to o ve rc om e th ei r re lu ct an ce t o co ns ul t w ith ea ch ot he r co nc er ni ng po te nt ia l pr ob le m s. (F D IC IA en co ur ag es e xc ha ng es o f in fo rm at io n be tw ee n ho m e co un tr y an d ho st co un tr y su pe rv is or s, an d, in or de r to pr om ot e ex ch an ge s of in fo rm at io n, a re co m m en da ti on co nc er ni ng en ha nc ed c on fi de nt ia li ty is c on ta in ed i n th is R ep or t. ) · In t hi s co nn ec ti on , in A pr il 1 99 0, t he B IS C om m it te e pu bl is he d a S up pl em en t to i ts C on co rd at o f 19 83 t o pr om ot e ad eq ua te in fo rm at io n flo w s be tw ee n ba nk su pe rv is or y au th or it ie s. T he S up pl em en t re co m m en de d th at ( i) w he n an ap pl ic at io n by a b an k to e st ab li sh a n ew f or ei gn p re se nc e is m ad e, t he a ut ho ri za ti on p ro ce du re e m pl oy ed b y ho m e an d ho st co un tr y re gu la to rs sh ou ld b e us ed to cr ea te th e ba si s fo r co ll ab or at io n be tw ee n th em i n th e fu tu re ; (i i) t he i nf or m at io n ne ed s of h om e co un tr y re gu la to rs s ho ul d be m et b y re qu ir in g ba nk s to d ev el op a s ys te m o f re po rt in g, c ap ab le o f v er if ic at io n, fr om f or ei gn o ff ic e to h ea d of fi ce o r pa re nt b an k; (i ii) t he in fo rm at io n ne ed s of h os t co un tr y re gu la to rs s ho ul d be m et b y ho m e co un tr y re gu la to rs f ir st a pp ri si ng t he f or m er o f t he e xt en t to w hi ch f or ei gn o ff ic es w ill b e m on it or ed a t ho m e an d th en ke ep in g th e ho st c ou nt ry r eg ul at or s in fo rm ed o f m at te rs a br oa d 'th at m ay a ff ec t th e fo re ig n of fi ce s; · ( iv ) na ti on al s ec re cy l aw s sh ou ld b e am en de d to e na bl e na ti on al s up er vi so rs to e xc ha ng e in fo rm at io n w ith th ei r fe llo w s up er vi so rs a br oa d o n c er ta in st ri ct c on di ti on s; a nd ( v) a ll fo re ig n of fi ce s sh ou ld b e su bj ec t to ex te rn al a ud it . T he C om m it te e is in a gr ee m en t w ith th es e 13 AMI-ADD-165 pr in ci pl es a nd i n th is R ep or t se ek s to a ss is t in i m pl em en ti ng th e m Y D es pi te th e C on co rd at a nd it s S up pl em en t, th e ex ch an ge of i nf or m at io n be tw ee n m an y co un tr ie s' re gu la to rs is no t co ns is te nt o r hi gh ly s tr uc tu re d. In m os t ca se s th e ex ch an ge o f in fo rm at io n ta ke s pl ac e en ti re ly t hr ou gh b il at er al r eg ul at or y- co nt ac ts . It c an b e di ff ic ul t fo r a su pe rv is or w hi ch h os ts b an ks fr om m an y na ti on s to m ai nt ai n su it ab le b il at er al c on ta ct s w ith al l of th em . B an ks f ro m 6 4 co un tr ie s, f or e xa m pl e, c ur re nt ly d o bu si ne ss i n N ew Y or k, an d it i s ex pe ct ed t ha t ba nk s fr om ad di ti on al c ou nt ri es , i nc lu di ng fo rm er c om m un is t b lo c co un tr ie s, w ill s ee k to d o so i n- th e ne ar f ut ur e; ··· · -· · - ·· · T he C om m it te e co ns id er ed w he th er t o re co m m en d th at an i nt er na ti on al " co ng re ss of r eg ul at or s" s ho ul d be c re at ed , un de r th e ae gi s of t he B IS or ot he rw is e, to fa ci li ta te th e in te rc ha ng e of i nf or m at io n so th at h om e co un tr y an d ho st co un tr y re gu la to rs c ou ld a ss is t ea ch o th er in a m or e sy st em at ic w ay th an ca n be do ne th ro ug h th e ex is tin g sy st em of m ul ti la te ra l an d bi la te ra l co nt ac ts . T he C om m it te e st op pe d sh or t of re co m m en di ng th at sy st em at ic in te rc ha ng e be in st it ut io na li ze d th ro ug h an e xi st in g or n ew i nt er na ti on al b od y at t hi s ti m e. T he c ur re nt s ys te m ca n be a ug m en te d w ith im pr ov ed bi la te ra l co nt ac ts , m or e in te rn at io na l fo ra fo r di sc us si on o f re gu la to ry a nd s up er vi so ry i ss ue s, a nd i nc re as ed co op er at io n. C er ta in ly t he p ro ce ss c an b eg in b y ho st c ou nt ry su pe rv is or s as si st in g ho m e co un tr y su pe rv is or s by m ak in g in fo rm at io n o n b ra nc h ex am in at io ns o r re vi ew s av ai la bl e m or e .. re ad il y th an -a t pr es en t. · T o- -t he -· ex te nt -p ra ct ic ab ie ;· du pl ic at e su pe rv is io n of b ra nc he s sh ou ld b e ·a vo id ed b y h o m e ~ a nd •h os t- ' co un tr y su pe rv is or s ex ch an gi ng i nf or m at io n. 14 B ec au se i t is t he o nl y m aj or s up er vi so r of in te rn at io na l ba nk s th at i s no t an a rm o f a so ve re ig n na ti on , th e B an ki ng D ep ar tm en t ha s a sp ec ia l di ff ic ul ty i n pl ay in g its a pp ro pr ia te ro le i n in te rn at io na l ex ch an ge s of in fo rm at io n. T hi s fa ct or h as no t, ho w ev er , pr ev en te d cl os e co op er at io n be tw ee n th e N ew Y or k B an ki ng D ep ar tm en t an d ba nk r eg ul at or y ag en ci es i n ot he r co un tr ie s in th e pa st , a nd i t s ho ul d no t p re ve nt N ew Y or k fr om e xp an di ng i ts b il at er al r el at io ns hi ps . A s in te rn at io na l bo di es e vo lv e to d ea l w it h in fo rm at io n in te rc ha ng e am on g ba nk su pe rv is or s, N ew Y or k' s ba nk in g su pe rv is or s sh ou ld b e in cl ud ed i n th e pr oc es s, e it he r di re ct ly o r as r ep re se nt at iv es o f s ta te s w hi ch su pe rV is e br an ch es o f f or ei gn ba nk s, s in ce i t is a ni on g th e m aj or s up er vi so rs o f in te rn at io na l ba nk s. A lt ho ug h th e F ed er al R es er ve Sy st em 's ju ri sd ic ti on ov er la ps w ith N ew Y or k' s, N ew Y or k' s ju ri sd ic ti on is s ep ar at e, an d it is N ew Y or k la w , no t fe de ra l la w , w hi ch g ov er ns m an y br an ch an d ag en cy at tr ib ut es , in cl ud in g, ul tim at el y, th ei r li qu id at io n. T o en ha nc e its a bi lit y to d ea l w ith i nt er na ti on al is su es , th e B an ki ng D ep ar tm en t sh ou ld p ro m ot e in te rn at io na l co op er at io n by h os tin g se m in ar s an d by o ff er in g in te rn sh ip pr og ra m s fo r fo re ig n re gu la to rs . B an ki ng D ep ar tm en t pe rs on ne l sh ou ld v is it re gu la rl y w ith h om e co un tr y re gu la to rs an d re gu la to rs w ho se c ou nt ri es h os t N ew Y or k in st it ut io ns t o es ta bl is h or ex pa nd re la tio ns hi ps . Pl ay in g an ap pr op ri at e in te rn at io na l ro le , th e C om m it te e re co gn iz es , w ill i m po se c os ts on t he B an ki ng D ep ar tm en t fo r w hi ch i t w ill n ee d ad di ti on al fu nd in g, a s w ill b e re co m m en de d be lo w . C oo p er at io n A m on g- U .S . R eg ul at or s · T o ga in s up er vi so ry e ff ic ie nc y an d to r ed uc e th e bu rd en of r eg ul at io n w he re p os si bl e, im pr ov ed co op er at io n am on g U ni te d S ta te s su pe rv is or s al so i s de si ra bl e. T o th e ex te nt 15 AMI-ADD-166 po ss ib le , b as ic s ta nd ar ds a pp li ed b y th e st at es w hi ch li ce ns e th e la rg es t n um be rs o f f or ei gn b ra nc he s/ ag en ci es a nd b y th e O C C , w hi ch l ic en se s fe de ra l br an ch es /a ge nc ie s, s ho ul d be u ni fo rm . B an ks c om in g to t he U .S . sh ou ld n ot b e ab le t o sh op f or t he m os t le ni en t re gu la to r. T he C om m it te e be lie ve s th at t he O C C is p re pa re d to c oo pe ra te w ith t he S up er in te nd en t i n fa sh io ni ng ap pr op ri at e ru le s so a s to a vo id a ny s uc h po ss ib ili ty . T he r ol es o f th e st at es t en d to b e so m ew ha t di ff ic ul t to co or di na te i n th e in te rn at io na l ba nk in g fi el d. T he s ta te s ar e us ef ul s up er vi so rs i n th at th ei r un de rs ta nd in g of lo ca l e co no m ic in te re st s na tu ra ll y be co m es p ar t o f t he ir s up er vi so ry p ro ce ss . A re gu la to r w ith ju ri sd ic ti on th ro ug ho ut t he U ni te d St at es ·c a: fi ho t be a s se ns it iv e to t he se i ss ue s. T he B an ki ng D ep ar tm en t, f or ex am pl e, h as v er y us ef ul ly p ro vi de d an a pp ro ac ha bl e of fi ci al li nk t o th e fo re ig n ba nk in g co m m un ity . A s a w ho le , ho w ev er , m os t st at e ba nk s up er vi so rs h av e no t ha d re as on t o de vo te si m il ar r es ou rc es t o fo re ig n ba nk s. F ew er t ha n a do ze n st at es ha ve an y m at er ia l nu m be r of f or ei gn b an ks l ic en se d to d o bu si ne ss ; as a c on se qu en ce , i t is d if fi cu lt fo r th e C on fe re nc e of S ta te B an k Su pe rv is or s (" C SB S" ) to p la y its p ro pe r li ai so n ro le . T he C om m it te e w ou ld e nc ou ra ge m or e ac tiv e co or di na ti on b y an i nt er es te d su bs et o f th e C SB S, w hi ch a lr ea dy h as b eg un th ro ug h an i nf or m at io n- sh ar in g ag re em en t am on g C al if or ni a, F lo ri da , G eo rg ia , lll in oi s, M ic hi ga n, N ew Y or k, an d W as hi ng to n. I f t he s ta te s ar e to p la y a si gn if ic an t ro le in s et ti ng na ti on al an d in te rn at io na l po lic y in th e re gu la ti on an d su pe rv is io n of b an ks , it i s lik el y th at th ey m us t do so by se le ct in g re pr es en ta ti ve s. N ew Y or k is c le ar ly t he in te rn at io na l le ad er a m on g- th e st at es b ut ·i t i s- -m or e lik el y to h av e si gn if ic an t in fl ue nc e an d ga in ac ce ss · · to , i m po rt an t "C om m itt ee s as : : a ~· · · .. :, .. ·· re pr es en ta ti ve o f th e st at es in ge ne ra l. 14 In ad di ti on , co op er at io n am on g th e st at es m ig ht pe rm it co or di na te d ex am in at io ns o f fo re ig n ba nk s w hi ch ha ve m ul ti pl e U .S . 16 . _ __ .. .. & _ br an ch es , w hi ch w ou ld c re at e a m or e co m pl et e pi ct ur e of U .S . op er at io ns . In fu tu re y ea rs , t he k ey c oo pe ra ti on in t he s up er vi si on o f fo re ig n ba nk s w ill b e be tw ee n st at e re gu la to rs a nd t he F ed er al R es er ve Sy st em . T he C om m it te e no te s th at th e B an ki ng D ep ar tm en t an d th e F R B N Y ha ve co nd uc te d jo in t ex am in at io ns o f f or ei gn b ra nc he s/ ag en ci es f or t he p as t se ve ra l ye ar s an d th e C om m it te e en co ur ag es t hi s co op er at io n to g ro w so t ha t th e F ed er al R es er ve 's n ew r es po ns ib il it ie s un de r th e E nh an ce m en t A ct d o no t un ne ce ss ar ily b ur de n fo re ig n ba nk s do in g bu si ne ss i n N ew Y or k. 15 Jo in t an nu al e xa m in at io ns a re pl an ne d by th e tw o· a ge nc ie s, an d th e C or iu ir itt ee e nd or se s fo rm al iz ed j oi nt e xa m in at io n. 17 AMI-ADD-167 II C R IT E R IA F O R E N T R Y T h e N ew Y or k B an ki ng L aw (t he "B an ki ng L aw ") pr ov id es a ut ho ri ty fo r th e S up er in te nd en t o f B an ks , o n ap pr ov al o f th e N ew Y or k S ta te B an ki ng B oa rd ( th e "B an ki ng B oa rd ") , to g ra nt l ic en se s to f or ei gn b an ks t o op er at e br an ch es a nd ag en ci es i n t he S ta te o f N ew Y or k. 16 S ec ti on s 20 0 an d 20 1 o f th e B an ki ng L aw p ro vi de t ec hn ic al r eq ui re m en ts f or f or ei gn ba nk s to c om pl y w it h, i nc lu di ng t he p ro po se d of fi ce b ei ng i n co m pl ia nc e w it h th e la w s ·o f it s· h om e -c ou nt ry , fu rn is hi ng fi na nc ia l in fo rm at io n re qu ir ed by th e · S up er in te nd en t, an d su bm it ti ng t o le ga l pr oc es s in N ew Y or k. T he S up er in te nd en t ha s de ve lo pe d ad di ti on al r el ev an t cr it er ia u nd er w hi ch l ic en se s m ay b e gr an te d. T h e E nh an ce m en t A ct is m or e sp ec if ic t ha n th e B an ki ng L aw i n es ta bl is hi ng t he c ri te ri a th at th e F ed er al R es er ve B oa rd is t o ap pl y in e xe rc is in g it s au th or it y to a pp ro ve l ic en se s fo r br an ch es an d ag en ci es : "T he B oa rd m ay no t ap pr ov e an ap pl ic at io n ... u nl es s it d et er m in es t ha t - "( A ) th e fo re ig n ba nk . .. is s ub je ct t o co m pr eh en si ve su pe rv is io n o r re gu la ti on o n a c on so li da te d ba si s by t he ap pr op ri at e au th or it ie s in it s ho m e co un tr y; a nd (B ) th e fo re ig n b an k h as fu rn is he d th e. B o ar d t he ... -. i nf or m at io n- -- it - ne ed s- · - to · -- ad eq ua te ly .. -a ss es s ·t he ap pl ic at io n. "1 7 · T h e st at ut e go es o n t o sp ec if y w ha t th e B oa rd " m ay t ak e in to ac co un t" : 18 "( A ) w he th er t he a pp ro pr ia te a ut ho ri ti es i n t he h om e co un tr y o f th e fo re ig n ba nk ha ve co ns en te d to th e pr op os ed es ta bl is hm en t o f a br an ch , ag en cy o r co m m er ci al le nd in g co m pa ny in th e U ni te d S ta te s by t he fo re ig n ba nk ; (B ) th e fi na nc ia l an d m an ag er ia l re so ur ce s o f th e fo re ig n ba nk , in cl ud in g th e ba nk 's ex pe ri en ce an d ca pa ci ty t o en ga ge i n in te rn at io na l ba nk in g; (C ) w he th er t he f or ei gn b an k ha s pr ov id ed t he B oa rd w it h ad eq ua te as su ra nc es th at th e ba nk w ill m ak e · av ai la bl e to th e B oa rd ·s· uc h "i nf oh ri at io n on th e op er at io ns o r ac ti vi ti es o f th e fo re ig n ba nk a nd a ny af fi li at e o f th e ba nk t ha t th e B oa rd d ee m s ne ce ss ar y to de te rm in e an d en fo rc e co m pl ia nc e w it h th is A ct , th e B an k H ol di ng C om pa ny A ct o f 19 56 , an d o th er ap pl ic ab le F ed er al la w ; an d (D ) w he th er t he f or ei gn b an k an d th e U ni te d S ta te s af fi li at es o f th e ba nk a re i n co m pl ia nc e w it h ap pl ic ab le U ni te d S ta te s la w ." 18 T h e cr it er ia th at th e B an ki ng D ep ar tm en t h as d ev el op ed ar e si m il ar t o th e cr it er ia c on ta in ed i n th e fe de ra l st at ut e b u t th ey a re s om ew ha t m or e ex te ns iv e. T h e B an ki ng D ep ar tm en t' s cr it er ia , w hi ch h av e b ee n u ti li ze d fo r se ve ra l ye ar s, i nc lu de : 1. 2. P er m is si on f or o pe ni ng o f a br an ch o r ag en cy · f ro m ·a ·b an k' s ho m e· co un tr y re gl il at or . C on si de ra ti on o f th e si ze a nd s ig ni fi ca nc e o f th e ba nk i n r el at io n to ot he r ba nk s in t he ho m e 19 AMI-ADD-168 3. co un tr y an d w or ld w id e. (G en er al ly a t le as t $1 bi lli on o f w or ld w id e as se ts f or t he b an k. ) C on si de ra ti on of th e fi na nc ia l co nd it io n an d po li ti ca l st ab il ity o f an a pp lic an t's c ou nt ry . T he po lic y ge ne ra lly r eq ui re s as se t m ai nt en an ce f or in st itu tio ns f ro m c ou nt ri es w ith w ea k or ·tr ou bl ed · e co no m ie s. 4. C on si de ra ti on o f th e na tu re o f ho m e co un tr y su pe rv is io n. 5. · ·R eq ui re m en t th at g en er al ly b an k n n ai nr ai n ri sk - w ei gh te d ta pi t~ l · c on si st en t· w it h in te rn at io na l st an da rd s (B IS ). 6. R ef er en ce c he ck s fr om o th er b an ks i n N ew Y or k an d fr om b an ks a nd r eg ul at or s in o th er c ou nt ri es in w hi ch t he b an k ha s a pr es en ce . 7. R eq ui re m en t of an in ve st ig at io n of th e in di vi du al s or g ro up s th at c on tr ol t he b an k. 8. R eq ui re m en t o f a cr ed ib le b us in es s pl an a nd pr of it ab il it y pr oj ec tio ns . A pp lic an ts g en er al ly a re re qu ir ed t o b e pr of it ab le i n 4 to 5 y ea rs . T he fo re ig n ba nk m us t h av e a su cc es sf ul tr ac k re co rd in it s ho m e co un tr y, u su al ly f iv e ye ar s at le as t. . . . .. 9. - ·R ev ie w o f th e· q ua lif ic at io ns · o f · th e" p ro po se d se ni or m an ag er s o f th e N ew Y or k .. o ff ic e; · · ·· -·· ·' T he C om m it te e be lie ve s th at t he k ey c ri te ri a ar e th os e re la te d to ( 1) h om e co un tr y ec on om ic a nd p ol it ic al s ta bi lit y, ( 2) 20 ~ - - ..... th e qu al ity o f ho m e co un tr y su pe rv is io n, ( 3) f in an ci al s tr en gt h o f th e b an k, a s in di ca te d in p ar t by i ts c ap it al p os it io n, ( 4) t he qu al ity a nd c ha ra ct er o f th e ba nk 's m an ag em en t, an d (5 ) th e ch ar ac te r o f th e ba nk 's o w ne rs hi p. E v al u at in ' H om e C ou nt cy S up er vi si on T he c ha ra ct er a nd q ua lit y of h om e co un tr y su pe rv is io n, a fa ct or w hi ch t he f ed er al s ta tu te s po tli gh ts , m ay p re se nt t he m os t d if fi cu lt se t o f s ta nd ar ds to a pp ly . T he se s ta nd ar ds in vo lv e no t on ly th e ex te nt of su pe rv is io n (" co ns ol id at ed " an d "c om pr eh en si ve " in th e la ng ua ge o f t he fe de ra l s ta tu te ), b ut a ls o ho w w el l t ha t s up er vi si on is p er fo rn ie d an d th e de gt ee t o w hi ch th e su pe rv is or is w ill iii g to pr ov id e in fo im at io n to ot he r su pe rv is or s th at n ee d to k no w a bo ut th e he al th a nd s ta nd in g o f th e ba nk o n an on -g oi ng ba si s. M in im um s ta nd ar ds ar e re qu ir ed b ec au se o ne o f th e ke y fa ili ng s in t he s up er vi si on o f B C C I ap pe ar s to ha ve be en th e la ck o f a re sp on si bl e co ns ol id at ed h or ne c ou nt ry s up er vi so r. "C on so lid at ed " su pe iV is io n re fe rs t o su pe iV is io n cu tt in g ac ro ss b ra nc h an d en ti ty li ne s so t ha t th e su pe rv is or h as a v ie w no t on ly o f th e ba nk in g op er at io ns un de r it s im m ed ia te ju ri sd ic ti on , bu t al so o f op er at io ns th at m ay b e pe rf or m ed th ro ug h br an ch es a br oa d o r su bs id ia ri es a t ho m e o r ab ro ad . G iv en t he c om pl ex ity o f m an y co rp or at e st ru ct ur es , th e no ti on o f c on so li da te d su pe rv is io n ra is es q ue st io ns a bo ut h ow f ar u p, ho w f ar t o th e si de , an d ho w f ar d ow n th e co rp or at e o r co nt ro l tr ee th e su pe rv is io n m us t go in · or de r to ·q ua lif y ·· as · " co ns ol id at ed ": - · · ·· ,. ··· ·· '· ,. ·· · · - · · · T he F ed er al R es er ve B oa rd , p os si bl y in c oo pe ra ti on w ith th e B IS o r o th er in te rn at io na l o rg an iz at io ns , w ill h av e to d ec id e th e m ea ni ng o f "c on so lid at ed " fo r fe de ra l la w p ur po se s. T he 21 AMI-ADD-169 C o ~ t t e e be li ev es t ha t ev en tu al ly a de fm it io n sh ou ld be ad op te d in te rn at io na ll y, w hi ch a ll ba nk su pe rv is or y ag en ci es w ill th en a cc ep t as a m in im um s ta nd ar d. T h e C om m it te e re co m m en ds a s ta nd ar d of c on so li da ti on w hi ch i nc lu de s su pe rv is io n of t he b an k, a ll o f its b ra nc he s, w he re ve r lo ca te d, an d al l of its in ve st m en ts , in cl ud in g su bs id ia ri es , w he re ve r lo ca te d. A lth ou gh th is s ta nd ar d do es n ot ge ne ra ll y re qu i r e su pe rv is io n o f co m pa ni es w hi ch c on tr ol t he ba nk o r co m pa ni es u nd er c om m on c on tr ol w ith t he b an k bu t no t in t he b an k' s ch ai n of c on tr ol , in c as es w he re a h ol di ng co m pa ny i s th e on ly c on tr ol li ng e le m en t in a b an ki ng g ro up , · h ol di ng c om pa ny su pe rv is io n by a ho m e co un tr y su pe rv is or m ay be r eq ui re d to a ss ur e co ns ol id at ed ·s up er vi si on o f al l ba nk in g en ti ti es i n th e gr ou p. T hi s re co m m en de d de fi ni tio n of "c on so lid at ed " pr es up po se s th at , w he n a ho ld in g co m pa ny is n ot s up er vi se d, th e ho m e co un tr y su pe rv is or re gu la te s tr an sa ct io ns b et w ee n th e ba nk a nd c on tr ol li ng p er so ns o r en ti ti es a nd e nt it ie s un de r co m m on c on tr ol 19 H is to ri ca lly , t ra ns ac tio ns w it h af fi lia te s an d re la te d pa rt ie s ha ve be en t he ca us e of m an y m aj or b an k fa ilu re s; a s a co ns eq ue nc e, i t is t em pt in g to s ug ge st t ha t in or de r to h av e co ns ol id at ed s up er vi si on , no a ff il ia te ca n go un su pe rv is ed . In p ra ct ic e, h ow ev er , fe w s up er vi so rs w ou ld ha ve th e au th or it y to ef fe ct su ch br oa d su pe rv is io n, an d su pe rv is in g tr an sa ct io ns w ith a ff ili at es c an p ro vi de s at is fa ct or y pr ot ec ti on . E ve n in th e U ni te d St at es , w he re th e m os t co ns ol id at ed s up er vi si on is p ra ct ic ed a nd h ol di ng c om pa ni es a re .. . s up er vi se d, c or po ra ti on s w hi eh ·m ay -b e- co m m on ly ·c on tr ol le d w ith a b an k th ro ug h in di vi du al o w ne rs hq r·a re - n o rs ub je ct to a ny · fo rm o f s up er vi si on , a lt ho ug h tr an sa ct io ns w ith t he m a re su bj ec t to r es tr ic ti on s. 22 • • " '"? " . ~ D ef in in g "c om pr eh ep si ve " su pe rv is io n is m or e di ff ic ul t st ill , an d ag ai n th e F ed er al R es er ve B oa rd w ill h av e to fo rm u la te a w or ki ng d ef in iti on i n or de r to e xe rc is e its p ow er s un de r th e E nh an ce m en t A ct . T he d if fi cu lty h er e st em s fr om th e ex tr em el y w id e ra ng e of s up er vi so ry to ol s us ed b y di ff er en t re sp ec te d su pe rv is or s. T he U ni te d S ta te s pr ac ti ce , w he th er a t th e st at e or f ed er al l ev el , is t o ba se b an k su pe rv is io n on a pe ri od ic on -s ite ex am in at io n of th e ba nk . O rd er s an d di re ct iv es , w he th er fo rm al or in fo rm al , ar e ba se d on th e fi nd in gs m ad e in s uc h ex am in at io ns . N ew Y or k ap pl ie s th is m et ho d of s up er vi si on t o br an ch es a nd a ge nc ie s of f or ei gn ba nk s as w el l, an d th e F ed er al R es er ve w ill b e re qu ir ed t o do th e sa m e un de r th e E nh ·an ce m en t A ct : M an y ot he r co un tr ie s, ho w ev er , do n ot c on du ct r eg ul ar ' o n~ si te e xa m in at io ns . In st ea d of o n- si te e xa m in at io n, s om e fo re ig n re gu la to rs r el y on o ut si de au di tin g fi rm s, w hi ch i n m an y ca se s ar e re qu ir ed t o ad dr es s th ei r au di t re po rt s di re ct ly to t he b an k su pe rv is or y au th or it y as w el l a s to th e bo ar d of d ir ec to rs o r ot he r go ve rn in g bo dy o f t he ba nk . T he C om m it te e do es no t be li ev e th at i t w ou ld be re al is tic o r pr od uc ti ve f or U ni te d S ta te s re gu la to rs t o re qu ir e ho m e co un tr y re gu la to rs t o co nd uc t on -s ite e xa m in at io ns i n or de r to q ua lif y un de r th e w co m pr eh en si ve " st an da rd . T he la ck o f su ch ex am in at io ns do es no t ne ce ss ar ily in di ca te th at a su pe rv is or 's p ro ce ss es a re n ot s uf fi ci en tly c om pr eh en si ve . F or ex am pl e, th e B an k of E ng la nd re lie s on s up er vi so ry st af f ev al ua ti on s of s en io r m an ag em en t o f th e ba nk an d th ei r ch ar ac te r an d co m m an d o f op er at io ns · to su pp le m en t · in de pe nd en t au di to rs ' on -s ite "f irt di tig s: · ·A nd s om e E ur op ea n ce nt ra l ba nk s w hi ch m ay n o t en ga ge i n o n- si te e xa m in at io n' ha ve a t ra di ti on o f n ot p er m it ti ng a m aj or b an k to f ai ~ th er eb y in ci de n ta lly p ro te ct in g th os e w ho b ad d ea lt w ith t he f or ei gn (i nc lu di ng U ni te d S ta te s) b ra nc he s o f t ho se b an ks , r eg ar dl es s of 23 AMI-ADD-170 w he th er t he h om e co un tr y de po si t in su ra nc e sy st em r eq ui re d th at r es ul t. 20 G iv en t he w or ld -w id e di ve rs ity o f m ea ns o f su pe rv is io n, th e C om m it te e re co m m en ds th at th e B an ki ng D ep ar tm en t sh ou ld b e sa ti sf ie d th at a h om e co un tr y su pe rv is or 's p ro ce ss es an d pr oc ed ur es a re d es ig ne d re as on ab ly t o as su re th at t he su pe rv is or k no w th e ba nk 's fi na nc ia l c on di tio n, i nc lu di ng c ap it al po si ti on an d as se t qu al ity , an d th e ba nk 's m an ag em en t ca pa bi lit y, o n a cu rr en t ba si s. T he C om m it te e ur ge s th at , ov er tim e, pr oc es se s an d pr oc ed ur es th at ar e in te rn at io na ll y ac ce pt ab le b e de ve lo pe d an d w id el y ad op te d. E xc ha ng e of id ea s on t hi s su bj ec t ap pe ar s to b e ta ki ng p la ce a nd i s on e of th e po si tiv e re su lt s of th e B C C I de ba cl e: In ad di ti on to th e fo rm al re qu ir em en ts th at ho m e co un tr y su pe rv is io n be c on so li da te d an d co m pr eh en si ve , th e C om m it te e re co gn iz es t ha t di ff er en t su pe rv is or s in f ac t w ill fu nc ti on a t di ff er en t le ve ls a nd t he re fo re t ha t th e qu al ity o r co m pe te nc e of h om e co un tr y su pe rv is io n w ill v ar y. Id ea lly , th e qu al ity o f ho m e co un tr y su pe rv is io n sh ou ld b e ev al ua te d by a n in te rn at io na l gr ou p of s up er vi so rs , w ho w ou ld b e in a p os it io n to en co ur ag e st ep s to st re ng th en s up er vi si on w he n it w as de fi ci en t. L ac ki ng su ch an in te rn at io na l bo dy , th e S up er in te nd en t s ho ul d, in c oo pe ra ti on w ith th e F ed er al R es er ve Sy st em , se ek t o ev al ua te s up er vi si on i n co un tr ie s w ho se b an ks se ek a dm is si on t o N ew Y or k fo r th e fi rs t tim e. B ec au se gr an ti ng a b ra nc h or a ge nc y lic en se p la ce s re li an ce o n th e qu al ity o f ho m e co un tr y su pe rv is io n to p ro te ct th os e w ho d ea l w it h th e- N ew ·- Y or k ·o ff ic e; ·- m in im um ·- ·s ta nd ar ds ·· m us t· b e en fo rc ed . · :. . ' - • ~ · · · : Fi na lly , it w ou ld b e us ef ul f or th e S up er in te nd en t · to ap pl y a m in im um s ta nd ar d of c oo pe ra ti on f ro m th e ho m e 24 co un tr y su pe rv is or .. T he s up er vi so r m ay d o an e xc el le nt jo b bu t a ba nk un de r its su pe rv is io n m ay ne ve rt he le ss w ea ke n fi na nc ia lly , an d it is i m po rt an t t ha t h os t c ou nt ry s up er vi so rs w ho ha ve l ic en se d br an ch es or a ge nc ie s kn ow w he n th e ba nk 's fi na nc es or st an di ng ha ve de cl in ed . Y et th e hi st or y of co op er at io n of t hi s so rt i s sp ot ty . S om e fo re ig n su pe rv is or s pr ov id e fa ir ly e ar ly w ar ni ng s of f in an ci al w ea kn es se s, a s th e S up pl em en t to t he B as le C on co rd at c on te m pl at es ; ot he rs d o no t. A f or m al i nt er na ti on al in te rc ha ng e sy st em w ou ld b e us ef ul to pr ov id e gr ea te r un if or m ity ; bu t at t he p re se nt t im e th e S up er in te nd en t s ho ul d se ek a ss ur an ce s of c oo pe ra ti on fr om t he ho m e co un tr y su pe rv is or a s a co nd it io n of e nt ry . F D IC IA pe rm it s th e F ed er al R es er ve B oa rd ' t o do t hi s as w el l, an d th e C om m it te e be lie ve s th at N ew Y or k, t he F ed er al R es er ve a nd th e O C C c ou ld u se fu lly a rr iv e at c om m on r eq ui re m en ts . T o en co ur ag e co op er at io n, t he C om m it te e re co m m en ds th at N ew Y or k en ac t a st at ut e w hi ch pe rm it s th e S up er in te nd en t to a cc or d th e sa m e st an da rd o f co nf id en tia lit y to i nf or m at io n re ce iv ed f ro m f or ei gn b an k su pe rv is or s th at i s ac co rd ed to ex am in at io n re po rt s an d re la te d m at er ia ls ge ne ra te d by t he B an ki ng D ep ar tm en t. 21 T he C om m it te e no te s th at th e in te rn at io na l ba nk in g co m m un ity u su al ly p er ce iv es a b an k' s w ea kn es s as e ar ly a s its su pe rv is or d oe s, a nd t ha t m on it or in g th e le ve ls o f a ba nk 's ac ce ss t o cr ed it li ne s or d ep os its o f o th er b an ks m ay p ro vi de a n ea rl y w ar ni ng of po te nt ia l pr ob le m s. T he C om m it te e re co m m en ds th at th e B an ki ng D ep ar tm en t c on ti nu e an d ex pa nd it s us es of b an ki ng · S ou rc es as a ·m ea ns of m on it or in g th e fi na nc ia l st re ng th o f f or ei gn b an ks w ith l ic en se d of fi ce s in N ew Y or k. A p er io di c su rv ey o f a cc es s to w ho le sa le m ar ke ts m ay b e us ef ul . 25 AMI-ADD-171 F in an ci al S tr en gt h of th e B an k In th e pa st i t ha s be en d if fi cu lt fo r U .S . ba nk r eg ul at or y au th or it ie s to e va lu at e th e fi na nc ia l st re ng th o f so m e of t he ba nk s th at h av e ap pl ie d fo r lic en se s to e st ab li sh o ff ic es i n th e U ni te d S ta te s. D if fe re nt a cc ou nt in g co nv en tio ns , sy st em s of "h id de n re se rv es ", b an k se cr ec y la w s, a nd a v ie w i n m an y pa rt s of t he w or ld t ha t ba nk in g sh ou ld n ot b e· a w ho lly t ra ns pa re nt bu si ne ss m ad e it d if fi cu lt to e va lu at e th e fi na nc ia l st re ng th o f m an y fo re ig n ba nk s. A lt ho ug h di ff er en ce s in ac co un ti ng co nv en ti on s an d sy st em s of " hi dd en r es er ve s" r em ai n in s om e ca se s, t he B IS c ap it al s ta nd ar ds a nd t he n ee d to i nt er pr et th os e st an da rd s un if or m ly h av e m ad e -- m ea st ir en ie ii t o f fl lia nc ia l st re ng th m or e pr ac ti ca bl e. In a dd it io n, b an k se cr ec y la w s ha ve be en m od if ie d in m an y co un tr ie s in r ec en t ye ar s, a n ~ ev en ts su ch as th e fa il ur e of B C C I ha ve de m on st ra te d th at ba nk su pe rv is or s w ho pe rm it se cr ec y or di sc re ti on to ir ih ib it in ve st ig at io n ca n en co ur ag e ill eg al c on du ct , m on ey l au nd er in g, fr au d an d ab us e. W hi le B IS ca pi ta l st an da rd s m ay ne ve r am ou nt t o a br ig ht -l in e te st o f fi na nc ia l st re ng th , th ey a re a si gn if ic an t st ep f or w ar d an d, i f gr ea te r ac co un ti ng u ni fo rm it y (i nc lu di ng ev al ua ti on o f re se rv es fo r ba d de bt s) ca n be en co ur ag ed b y th e sa m e m ea ns , th ey s ho ul d le ad t o a re li ab le te st . T h e E ii ha nc em en t A ct r eq ui re s th at t he F ed er al R es er ve B oa rd a nd t he S ec re ta ry o f th e T re as ur y su bm it a r ep or t to C on gr es s o n a dj us tm en ts n ec es sa ry to m ak e fo re ig n ba nk c ap it al eq ui va le nt t o U .S . ba nk c ap it al u nd er B IS st an da rd s; 22 th is st ud y m ay p er m it b et te r eq ui va le nc y m ea su re s in th e fu tu re . A t th e pr es en t ti m e, t he C om m it te e be li ev es t ha t un ad ju st ed B IS • ca pi ta l s ta nd ar ds a re th e be st s ta nd ar ds -a va ila bl e- an d sh ou ld b e - ap pl ie d as a n e nt ry s ta nd ar d- on an br ar tc h/ ag e: ri cy "a pp lic at io ns ·, -z - pr ov id ed th at th e B an ki ng D ep ar tm en t be li ev es th at th e ac co un ti ng s ta nd ar ds u ti li ze d ar e re as on ab ly d es ig ne d to r ef le ct ec on om ic re al it y. I f t he B an ki ng D ep ar tm en t c an no t r ea so na bl y 26 de te rm in e a ba nk 's ca pi t~ l, th e C om m it te e be li ev es th at br an ch /a ge nc y ap pr ov al s sh ou ld b e w it hh el d. U si ng t he B IS _ ca pi ta l st an da rd s on e nt ry i m pl ie s th at th ey s ho ul d be u se d as a s ta nd ar d of g oo d st an di ng o n an o n- go in g ba si s. T he re fo re m ec ha ni sm s sh ou ld b e es ta bl is he d on en tr y to a ss ur e th at t he B an ki ng D ep ar tm en t w ill h av e pr om pt pe ri od ic no ti fi ca ti on of B IS ca pi ta l le ve ls o f ba nk s do in g bu si ne ss in N ew Y or k. If a ba ri k fa lls be lo w B IS ca pi ta l st an da rd s, th e S up er in te nd en t sh ou ld se ek to es ta bl is h a co or di na te d re m ed ia l p ro gr am w ith t he h om e co un tr y re gu la to r. C on ti nu ed o r dr as ti c fa il ur e to m ee t s ta nd ar ds c ou ld , ho w ev er , ca us e th e S up er in te nd en t to - -r es tr ic t ac tiv iti es , te rm in at e a ba nk 's l ic en se o r ta ke o ve r th e br an ch o r ag en cy .2 3 S om e ba nk s th at a re o w ne d by s ov er ei gn s ta te s su gg es t th at t he y sh ou ld n ot b e re qu ir ed t o m ee t B IS c ap it al s ta nd ar ds be ca us e in e ss en ce t he s ta te s ta nd s be hi nd t he b an k. T he C om m it te e do es n ot b el ie ve a n ex ce pt io n sh ou ld b e cr ea te d· fo r th is c at eg or y o f ba nk s. Fi rs t, in m an y ca se s th e li ab il it y of th e so ve re ig n co un tr y fo r th e de bt s of th e ba nk is n ot m uc h cl ea re r th an t he t ra di ti on o f th e ce nt ra l ba nk s in m an y co un tr ie s o f pr op pi ng u p ba nk s w hi ch b ec om e w ea k. 24 S ec on d, t o op er at e w it ho ut c ap it al r ed uc es t he d is ci pl in e im po se d on a b an k an d is , in t he C om m it te e' s vi ew , ir ih er en tl y un so un d. T hi rd , a le ve l pl ay in g fi el d an d a pe rc ep ti on t ha t th e pl ay in g fi el d is l ev el a re im po rt an t pr in ci pl es t ha t an e xc ep ti on t o th e B IS s ta nd ar ds w ou ld b re ac h. T he C om m it te e' s po si ti on is c on si st en t w ith t he po si ti on t ak en b y th e B IS o n th is i ss ue . .-. M an ag em en t T he q ua li ty a nd c ha ra ct er o f m an ag em en t ar e ke y to a ba nk 's l on g- te rm f in an ci al h ea lt h. A h os t co un tr y re gu la to r, 27 AMI-ADD-172 ho w ev er , in t he f ir st i ns ta nc e, g en er al ly r el ie s on t he h om e co un tr y re gu la to r fo r in fo rm at io n an d m on it or in g of m an ag em en t. In th e ab se nc e of sp ec if ic c on ce rn s, it is s uf fi ci en t fo r th e B an ki ng D ep ar tm en t to ev al ua te re po rt s on h om e co un tr y m an ag em en t an d to o bt ai n ba ck gr ou nd c he ck s on a nd m ee t w ith p ro po se d m an ag er s of t he N ew Y or k of fi ce a nd ev al ua te th em as re pr es en ta ti ve s of th e ho m e co un tr y m an ag em en t. O w ne rs hi o A lt ho ug h th e C om m it te e co nc lu de d th at c on so li da te d su pe rv is io n di d no t ne ce ss ar ily in cl ud e dn go iil g su pe rv is io n of ow ne rs , th e C om m it te e be lie ve s- th at e va lu at in g co nt ro lli ng ow ne rs is e xt re m el y im po rt an t. It is t he c on tr ol lin g ow ne rs w ho se t th e ul ti m at e to ne f or t he b an k, a nd w he n fr au du le nt o r ill eg al t ra ns ac ti on s ha ve b ee n a pa rt o f th e fa br ic o f a ba nk 's op er at io ns , th ey u su al ly c an b e tr ac ed t o th e pu rp os es o f th os e ow ne rs . A cc or di ng ly , be fo re gr an ti ng lic en se s th e S up er in te nd en t sh ou ld b e sa tis fi ed t ha t th e tr ue o w ne rs o f th e ba nk a re k no w n an d th at , ba se d on i nf or m at io n fr om r el ia bl e so ur ce s, t he y ar e en ga ge d in l eg it im at e bu si ne ss a nd h av e no co nn ec ti on s to c ri m in al e le m en ts . A cc es s to t he g lo ba l b an ki ng sy st em fr eq ue nt ly is n ec es sa ry fo r cr im in al e le m en ts to t ra ns la te th e fr ui ts o f cr im e in to a pp ar en tl y le gi ti m at e w ea lth , an d th e ba nk in g au th or it ie s sh ou ld co nt in ue th ei r st ro ng ef fo rt s to pr ev en t cr im in al e le m en ts f ro m g ai ni ng a cc es s to t he b an ki ng sy st em . A s w ill b e de sc ri be d· be lo w ;·t he C om m it te e re co m m en ds th at t he r ev ie w o f ow ne rs hi p at t im e of e nt ry b e re in fo rc ed ·b y · au th or it y ov er c ha ng es i n co nt ro l. 28 B an k S ec re cv H is to ri ca lly , ba nk in g se cr ec y in t he U ni te d S ta te s ha s di ff er ed i n pr ac ti ce f ro m a n um be r of E ur op ea n co un tr ie s, a nd pa rt ic ul ar ly f ro m a n um be r of ta x ha ve n ju ri sd ic ti on s. U nd er A m er ic an pr ac ti ce , ba nk in fo rm at io n co nc er ni ng cu st om er ac co un ts an d tr an sa ct io ns is av ai la bl e to la w en fo rc em en t au th or it ie s th ro ug h th ei r su bp oe na p ow er . A nd t he f ed er al B an k Se cr ec y A ct i s in f ac t a ba nk n on -s ec re cy a ct i n th at i t sp ec if ie s th e ci rc um st an ce s un de r w hi ch b an ks m us t r et ai n da ta an d m ak e in fo rm at io n av ai la bl e. 25 P ro se cu to rs i n U ni te d S ta te s ju ri sd ic ti on s be li ev e th at a fo re ig n ba nk s ho ul d no t be a bl e to d o bu si ne ss i n th e U ni te d S ta te s th ro ug h a br an ch o r ag en cy y et c la im t ha t its h om e co un tr y la w s do n ot p er m it it to d iv ul ge i nf or m at io n re ga rd in g cu st om er s w ho a re s us pe ct ed o r ac cu se d of h av in g co m m it te d cr im es i n th e U ni te d S ta te s. In f ac t pr og re ss h as b ee n m ad e in pr ov id in g U ni te d S ta te s pr os ec ut or s w ith ac ce ss to su ch in fo rm at io n. S ev er al bi la te ra l tr ea ti es gi ve U ni te d S ta te s pr os ec ut or s ac ce ss to ac co un t in fo rm at io n re ga rd in g U .S . ci tiz en s or r es id en ts w ho a re s us pe ct ed o f cr im es , an d so m e co un tr ie s, n ot ab ly S w itz er la nd , h av e en ac te d la w s w hi ch e na bl e ba nk s to c oo pe ra te , su ch a s by r eq ui ri ng t ha t ba nk s kn ow t he ir cu st om er s. In s om e se cr ec y ju ri sd ic ti on s, h ow ev er , ac qu ir in g in fo rm at io n ab ou t tr an sa ct io ns an d ac co un ts af fe ct in g th e U ni te d S ta te s is st ill a pr ob le m f or U .S . la w en fo rc em en t of fi ci al s. T he C om m it te e co ns id er s it a pp ro pr ia te f or t he B an ki ng D ep ar tm en t to u se r eg ul at or y pr es su re s to i nf lu en ce f or ei gn ba nk er s an d re gu la to rs t o ef fe ct d es ir ab le c ha ng es i n se cr ec y la w s an d to m ak e in fo rm at io n av ai la bl e to N ew Y or k la w 29 AMI-ADD-173 en fo rc em en t au th or it ie s on a r ea so na bl e ba si s. T h e B an ki ng D ep ar tm en t sh ou ld s ee k to p ro m ot e no t on ly t he e xi st en ce o f ad eq ua te t re at ie s an d la w s, b ut a ls o co op er at iv e at ti tu de s an d pr ac ti ce s o f fo re ig n re gu la to rs a nd b an ks i n th is a re a. T h e C om m it te e ha s so ug ht a n ap pr op ri at e be nc hm ar k fo r N ew Y or k to e st ab li sh a s a st an da rd t o ex pe ct b an k se cr ec y co un tr ie s to m ee t if t he ir b an ks w an t ac ce ss t o th e N ew Y or k m ar ke t. T h e C om m it te e fi nd s th at th e U .S .- Sw is s tr ea ty a nd t he la w s o f S w it ze rl an d ar e an ap pr op ri at e be nc hm ar k, si nc e th ro ug h th is s ys te m o f la w s U .S . la w e nf or ce m en t au th or it ie s ca n ga in a cc es s to a cc ou nt i nf or m at io n. B ec au se t he y ha ve t o go th ro ug h ·- th e U .S .- D ep ar tm en t o f Ju st ic e; th e Sw is s au th or it ie s, a nd i n s om e ca se s th e U .S . S ta te D ep ar tm en t an d th e Sw is s co ur ts , m an y U .S . pr os ec ut or s fi nd t he se p ro ce du re s cu m be rs om e. T h e U .S .- Sw is s tr ea ty al so do es n o t co ve r cr im in al t ax c as es n ot i nv ol vi ng f ra ud , w hi ch s ho ul d no t b e ex cl ud ed . N on et he le ss , in a ge ne ra l w ay th e U .S .- Sw is s ar ra ng em en ts pr ov id e a ba si c st an da rd w hi ch co ul d b e un iv er sa ll y en fo rc ed . T hi s st an da rd a ls o co ul d b e ad op te d by th e F ed er al R es er ve B oa rd u nd er t he E nh an ce m en t A ct , w hi ch ex pl ic it ly p er m it s th e B oa rd t o co ns id er f ut ur e av ai la bi li ty o f in fo rm at io n as a n e nt ry r eq ui re m en t. 26 O th er C ri te ri a A ll th e S up er in te nd en t's cr it er ia li st ed ab ov e fo r ap pr ov in g br an ch a nd a ge nc y li ce ns es s ee m a pp ro pr ia te t o th e C om m it te e. I n ad di ti on , t he C om m it te e r- ec om m en ds t ha t s om e - fo rm al - -m at te rs th at · ha ve ·· be en -- ta ke n as - as su m pt io ns b e fo rm al iz ed . T h e S up er in te nd en t · sh ou ld ; fo r ex at hp k, 'r eq u it e · th at b an ks s ee ki ng b ra nc h/ ag en cy a ut ho ri ty a ff ir m t ha t th e ba nk 's w or ld w id e ca pi ta l st an ds be hi nd N ew Y or k of fi ce li ab il it ie s. T h e B an k o f E ng la nd h as a s im il ar p ra ct ic e. T h e 30 ·r ;- · af fi rm at io n th at t h e ba nk 's w or ld w id e ca pi ta l s ta nd s be hi nd t he li ab il it ie s o f th e N ew Y or k of fi ce w ou ld a ff ir m a f un da m en ta l pr em is e o n w hi ch 0r an ch es /a ge nc ie s ar e w el co m ed to do bu si ne ss . In p ra ct ic e, t he a ff ir m at io n w ou ld u lt im at el y ha ve t o be e nf or ce d in th e ba nk 's h om e co un tr y, w he re it s en fo rc ea bi li ty m ay b e su bj ec t to l oc al c on si de ra ti on s o f pu bl ic p ol ic y, b u t ex ce pt i n ex tr em e si tu at io ns , su ch a s w he re U .S ~- ba se d as se ts ar e em ba rg oe d or f ro ze n, a n a ff ir m at io n sh ou ld b e en fo rc ea bl e. C ou nt cy R is k T h e in st ab il it y o f th e fi na nc ia l o r po li ti ca l sy st em o f a ba nk -'s h om e co un tr y ca n po se r is ks t o t he b an k' s so lv en cy o r ab il it y to f un ct io n. H is to ri ca ll y, S up er in te nd en ts o f B an ks h av e ad m it te d w el l- ca pi ta li ze d, w el l- m an ag ed b an ks f ro m c ou nt ri es w it h un ce rt ai n fi na nc ia l sy st em s su bj ec t t o a fo rm o f re gu la to ry re st ra in t kn ow n as " as se t m ai nt en an ce "P T h e C om m it te e ha s co ns id er ed w he th er t hi s po li cy i s pr ud en t o r w he th er b an ks fr om su ch co un tr ie s sh ou ld b e de ni ed ad m is si on as br an ch es /a ge nc ie s. T h e C om m it te e ha s co nc lu de d th at t he B an ki ng D ep ar tm en t's c ur re nt p ol ic y is a pp ro pr ia te , es pe ci al ly in l ig ht o f fo re ig n ba nk s' e xc el le nt r ec or d in N ew Y or k. F ir st , th e ba nk s th at f al l in to t hi s ca te go ry a re i n N ew Y or k la rg el y to f ac il it at e tr ad e be tw ee n th ei r ow n co un tr ie s an d th e U ni te d S ta te s. If a t al l po ss ib le , th is tr ad e sh ou ld b e en co ur ag ed . S ec on d, k ee pi ng s uc h ba nk s ou t o f N ew Y or k w ou ld e nc ou ra ge t ra de to f lo w i n ot he r di re ct io ns , s o th at a s th e su bj ec t co un tr ie s ac hi ev e gr ea te r st ab il it y an d pl ay -a la rg er r ol e in i nt er na ti on al t ra de ; th ei r' em ph as is · w ill b e el se w he re , to t he de tr im en t o f N ew Y or k an d th e U ni te d- St at es ~- T hi rd , al th ou gh · so m e m ay t hi nk e nt ry b y su ch b an ks in th e b an k s ub si di ar y fo rm m ay b e sa fe r, t he C om m it te e be li ev es t ha t th e as se rt ed g re at er sa fe ty o f th e su bs id ia ry f or m h as n ot b ee n d em on st ra te d an d 31 AMI-ADD-174 th at i n. p ra ct ic e re qu ir in g th e su bs id ia ry f or m w ou ld e xc lu de · m an y su ch b an ks o r w ou ld s o re du ce t he a m ou nt o f bu si ne ss th at t he y w ou ld do in N ew Y or k th at i t w ou ld am ou nt t o ex cl us io n. F ou rt h, w ith t he im pr ov em en ts in a ss et m ai nt en an ce th at w ill b e di sc us se d be lo w , th e C om m it te e be li ev es t ha t th e B an ki ng D ep ar tm en t ca n as su re a r ea so na bl e de gr ee o f sa fe ty . T he C om m it te e do es n ot b el ie ve t ha t N ew Y or k sh ou ld ad m it b an ks t ha t ar e th em se lv es w ea k fi na nc ia lly o r th at h av e w ea k m an ag em en t, e ve n su bj ec t t o st ri ng en t a ss et m ai nt en an ce . A nd i f a co un tr y' s fi na nc ia l w ea kn es s (e .g ., th e w ea kn es s of it s cu rr en cy ) is s o ex tr em e th at it s ba nk s ar e in he re nt ly w ea k, t he B an ki ng D ep ar tm en t s ho ul d se ek to p er su ad e th os e ba nk s to d o bu si ne ss th ro ug h re pr es en ta tiV e of fi ce s un til . gr ea te r ho m e co un tr y fi na nc ia l st ab ili ty h as b ee n ac hi ev ed . C ou nt ry r is k sh ou ld c on ti nu e to b e an o n- go in g co nc er n of th e B an ki ng D ep ar tm en t, an d it sh ou ld im po se as se t · m ai nt en an ce or ot he r pr ot ec ti ve m ea su re s on ba nk s fr om co un tr ie s w ho se f in an ci al o r po li ti ca l s ys te m s m ay , f ro m t im e to tim e, a pp ea r un st ab le o r ill iq ui d. A s a re pr es en ta ti ve o f th e C SB S, N ew Y or k is a n on -v ot in g m em be r of t he I nt er ag en cy C ou nt ry E xp os ur e R ev ie w C om m it te e (" IC E R C ") , a nd th er ef or e ha s ac ce ss to t he c ou nt ry ri sk d at a ut il iz ed b y th e fe de ra l ag en ci es . R ep re se nt at iv e O ff ic es A r ep re se nt at iv e of fi ce i s th e lo w es t- ri sk .t yp e of o ff ic e .. fo r a fo re ig n- ba nk t o· o pe n~ · It s po w er s - ar e· e xt re m el y li m it ed ; it h as n o po w er t o ta ke d ep os it s o r cr ed it b al an ce s: o r : ev en : t o . . ;~ m ak e lo an s fo r its o w n ac co un t. A r ep re se nt at iv e of fi ce i s pr oh ib it ed f ro m e ng ag in g di re ct ly i n th e bu si ne ss o f ba nk in g. In e ss en ce i t is a l ia is on b et w ee n th e ba nk a nd t he b us in es s 32 'C .. . co m m un ity w he re . th e re pr es en ta ti ve of fi ce is es ta bl is he d. R ep re se nt at iv e of fi ce s of te n ha ve b ee n us ed a s a fi rs t st ep to w ar d a fu tu re b ra nc h or a ge nc y. N ew Y or k la w do es no t cu rr en tl y re qu ir e th at re pr es en ta ti ve o ff ic es o f ba nk s w ith $ 50 0 m ill io n or m or e of as se ts b e lic en se d, ex am in ed o r su pe rv is ed b y th e B an ki ng D ep ar tm en t; 28 b ut t he B an ki ng D ep ar tm en t pr op os ed a b ill t o th e N ew Y or k S ta te L eg is la tu re i n 19 91 t ha t w ou ld r eq ui re lic en si ng , ex am in at io n an d su pe rv is io n, a nd i t is e xp ec te d th at su ch a bi ll w ill be en ac te d in 19 92 .2 9 M ea nw hi le , th e E nh an ce m en t A ct h as p ro vi de d th at " N o fo re ig n ba nk m ay es ta bl is h a re pr es en ta ti ve ·o ff ic e w it ho ut t he p ri or a pp ro va l of th e [F ed er al R es er ve ] B oa rd " an d th at " In ac tin g on an y ap pl ic at io ns u nd er t hi s pa ra gr ap h to e st ab li sh a r ep re se nt at iv e of fi ce , th e B oa rd s ha ll ta ke in to a cc ou nt t he s ta nd ar ds [ th at t he ba nk b e 's ub je ct to c om pr eh en si ve s up er vi si on o r re gu la ti on o n a co ns ol id at ed b as is b y th e ap pr op ri at e au th or it ie s in it s ho m e co un tr y' ] an d m ay i m po se a ny a dd it io na l re qu ir em en ts t ha t th e B oa rd d et er m in es t o be n ec es sa ry t o ca rr y ou t th e pu rp os es o f th is A ct . " 30 T he C om m it te e is of th e vi ew th at en tr y as a re pr es en ta ti ve o ff ic e, w hi le a pp ro pr ia te ly s ub je ct t o ap pr ov al an d su pe rv is io n, s ho ul d be e as ie r t ha n en tr y as a b ra nc h/ ag en cy or t hr ou gh a s ub si di ar y ba nk o r ot he r co m pa ny c on du ct in g a ba nk in g bu si ne ss . T he C om m it te e be lie ve s th at s ou nd , w el l- m an ag ed ba nk s fr om co un tr ie s th at m ay no t ha ve ba nk su pe rv is io n th at m ee ts a ll in te rn at io na ll y ac ce pt ed · s ta nd ar ds sh ou ld b e pe rm it te d th e" ty pe · o f l im it ed · a cc es s to t he m ar ke t th ro ug h re pr es en ta ti ve o ff ic es . ·T he C om m it te e ho pe s· in t hi s ·· ·· re ga rd th at th e F ed er al R es er ve B oa rd w ill co ns tr ue its m an da te f le xi bl y an d no t re ad t he r eq ui re m en t th at i t ta ke st an da rd s "i nt o ac co un t" a s a re qu ir em en t th at t ho se s ta nd ar ds 33 AMI-ADD-175 m us t b e m et i n al l ca se s. R ep re se nt at iv e of fi ce s ar e a us ef ul w ay f or b an ks w it h li tt le i nt er na ti on al e xp er ie nc e to g ai n th at ex pe ri en ce a nd t he re by in th e lo ng r un to e nh an ce t ra de a nd t o br in g th ei r ho m e co un tr ie s in to co nf or m it y w it h gl ob al st an da rd s. T h e m os t i m po rt an t c ri te ri a fo r re pr es en ta ti ve o ff ic e en tr y, t he C om m it te e be li ev es , ar e th at t he b an k ha ve a s ou nd pl an a s to t he b us in es s th at i t ho pe s to g en er at e th ro ug h th e re pr es en ta ti ve o ff ic e, t ha t th e pl an n ot i nv ol ve t he s ol ic it at io n o f r et ai l de po si ts o r ef fe ct iv el y ru nn in g an o ff sh or e br an ch , a nd th at t he b an k ha ve a r ep ut at io n fo r in te gr it y in o th er p la ce s w he re i t do es b us in es s. T h e C om m it te e re co m m en ds t ha t th e · S up er in te nd en t ap pl y th es e cr it er ia . R ee ul at m y F le xi bi li ty - T h e C om m it te e do es n ot r ec om m en d th at c ri te ri a fo r en tr y b e en ac te d by s ta tu te . T he S up er in te nd en t, w it h B an ki ng B oa rd a pp ro va l w he re r eq ui re d, s ho ul d ha ve d is cr et io n to a dm it ba nk s o r re je ct a pp li ca ti on s an d to f or m ul at e st an da rd s. T h e st an da rd s sh ou ld , h ow ev er , b e kn ow n to t he b an ki ng c om m un it y ge ne ra ll y, a nd t he re fo re t he y sh ou ld b e pr om ul ga te d fo rm al ly . It w ou ld b e us ef ul f or S ec ti on s 20 0 an d 20 1 of th e B an ki ng L aw to b e si m pl if ie d to ex pl ic itl y gr an t su ch po w er to th e S up er in te nd en t. P ha se -I n F o r E xi st in g O ff ic es T h e fo re go in g re co m m en da ti on s re ga rd in g st an da rd s fo r en tr y co nt ai n so m e cr it er ia w hi ch t he S up er in te nd en t h as - n ot ap pl ie d to . e nt ra nt s- -i n- th e ·p as t-; · ·-T o th e ··e xt en t po ss ib le ~ th e C om m it te e re co m m en ds · t ha nh e· su pe ri nt en de nr se ek t< r- ap pl y '"'- th es e st an da rd s to b an ks a lr ea dy d oi ng b us in es s in N ew Y or k. C le ar ly t hi s pr oc es s w ill t ak e a nu m be r of y ea rs , an d ba nk s sh ou ld b e af fo rd ed t im e to c om e in to c on fo rm it y. H ow ev er , 34 ev en tu al ly , al l fo re ig n b a ~ i n N ew Y or k sh ou ld b e ad he ri ng to t he s am e ru le s an d st an da rd s. 35 AMI-ADD-176 II I F O R M S O F O R G A N IZ A T IO N A V A IL A B L E N ew Y or k cu rr en tl y of fe rs f or ei gn b an ks a c ho ic e am on g fiv e di ff er en t fo rm s of o rg an iz at io n fo r N ew Y or k ba nk in g op er at io ns : a br an ch , an a ge nc y, a re pr es en ta ti ve of fi ce , a su bs id ia ry b an k o r tr us t c om pa ny , a nd a n A rt ic le X II in ve st m en t co m pa ny . E ac h o f th es e fo rm s of o rg an iz at io n ha s di ff er en t po w er s an d is s ub je ct t o di ff er en t re gu la ti on a nd s up er vi si on .3 1 S ub si di ar y ba nk s an d A rt ic le X II i nv es tm en t co m pa ni es ow ne d by f or ei gn b an ks a re t re at ed n o di ff er en tl y fr om s im il ar en ti ti es o w ne d by U .S .- ba se d co m pa ni es , th us a dh er in g st ri ct ly to th e pr in ci pl e of n at io na l t re at m en t. T he C om m it te e do es n ot re co m m en d an y ch an ge i n th is r eg ar d. T he C om m it te e do es , ho w ev er , re co m m en d m in or c ha ng es i n th e A rt ic le X II f or m o f or ga ni za ti on w hi ch w ou ld ap pl y re ga rd le ss of w he th er its ow ne rs hi p w as do m es ti c or f or ei gn . T he C om m it te e al so re co m m en ds c ha ng es i n th e ag en cy f or m , w hi ch c ou ld r es ul t in its b ei ng n o di ff er en t fr om t he b ra nc h fo rm , an d su pp or ts t he le gi sl at io n re ga rd in g re pr es en ta ti ve o ff ic es w hi ch w as p ro po se d by t he B an ki ng D ep ar tm en t in 1 99 1, w ith s om e am en dm en ts . B ra nc h A N ew Y or k br an ch i s an o ff ic e of a f or ei gn b an k th at . ..i s li ce ns ed b y- th e- S up er in te nd en t t o C {) nd uc t·a b an ki ng b us in es s in N ew Y or k. T he B an ki ng D ep ar tm en t- ha s; f or -m an y- ye ar s; ·.· :• in te rp re te d th e N ew Y or k B an ki ng L aw t o au th or iz e br an ch es o f f or ei gn b an ks t o ex er ci se t he s am e po w er s as s ta te -c ha rt er ed co m m er ci al b an ks , ex ce pt a s ex pr es sl y li m it ed b y th e B an ki ng 36 L aw o r th ei r ow n ch ar te rs . o r ho m e co un tr y la w s. B ra nc he s m ay , fo r ex am pl e, a cc ep t de po si ts , m ak e lo an s, i ss ue l et te rs o f cr ed it , de al in fo re ig n ex ch an ge , m ak e ac ce pt an ce s an d, if au th or iz ed , ex er ci se f id uc ia ry ( tr us t) p ow er s. A b ra nc h m ay co nd uc t a re ta il ba nk in g bu si ne ss in N ew Y or k, m ak in g co ns um er l oa ns a nd a cc ep ti ng c on su m er d ep os it s. S in ce 1 97 8, ho w ev er , a br an ch h as n ot b ee n pe rm it te d to a cc ep t co ns um er de po si ts o n m or e th an a d e m in im is b as is u nl es s it h ad F D IC in su ra nc e. 32 T he N ew Y or k br an ch es o f on ly 2 0 fo re ig n ba nk s ar e F D IC -i ns ur ed , si nc e th e va st m aj or it y o f fo re ig n ba nk s' br an ch es l im it t he ir b us in es s to f or ei gn a nd w ho le sa le b an ki ng . T he C om m it te e co nc ur s th at a f or ei gn b an k do in g bu si ne ss a s · a br an ch / a ge nc y in N ew · Y o rk s ho ul d co nt in ue ·t o ha ve t he sa m e po w er s as a N ew Y or k ba nk , so f ar ·a s N ew Y or k la w i s co nc er ne d. F D IC IA h as li m it ed th e po w er s of st at e- ch ar te re d ba nk s, re ga rd le ss of th ei r ow ne rs hi p, an d of st at e- li ce ns ed br an ch es /a ge nc ie s of f or ei gn b an ks . F D IC IA r eq ui re s, w ith so m e li m it ed e xc ep tio ns , th at , w he n ac ti ng a s pr in ci pa l, st at e- ch ar te re d ba nk s ex er ci se o nl y th e po w er s of a n at io na l ba nk . It lim its th e ac tiv iti es o f a st at e- li ce ns ed br an ch to th os e pe rm it te d a fe de ra l br an ch ( w hi ch a re b as ed o n th e po w er s o f a na ti on al b an k) , un le ss ( 1) t he F ed er al R es er ve B oa rd h as ap pr ov ed t he a ct iv ity , an d (2 ) in t he c as e of a n in su re d br an ch , th e F D IC h as g iv en i ts a pp ro va l. 33 S ta te -l ic en se d fo re ig n ba nk br an ch es /a ge nc ie s th er ef or e ar e su bj ec t to bo th st at e an d fe de ra l re st ri ct io ns , w ith at te nd an t po te nt ia l fo r co nf us io n, pa rt ic ul ar ly on m at te rs fo r w hi ch bo th th e O C C an d· t he B an ki ng · D ep ar tm en t --h av e· pr ev io us ly es ta bl is he d di ff er en t re gu la to ry r eg im en s. T he C om m it te e be li ev es t ha t in g en er al th is o ve rl ap s ho ul d no t ca us e un du e co nf us io n, s o lo ng a s th e B an ki ng D ep ar tm en t an d th e O C C w or k to ge th er t o ac hi ev e a un if or m f ed er al -s ta te a pp ro ac h. It m ay b e th at t hi s w ill b e a 37 AMI-ADD-177 si m pl e pr oc es s, b ec au se t he C om m it te e is a dv is ed t ha t th e on ly w ho le sa le b an ki ng p ow er p re se nt ly e xe rc is ed by N ew Y or k br an ch es a nd n ot b y fe de ra l br an ch es i s th e po w er t o tr ad e in pl at in um as w el l as in go ld an d si lv er . T he C om m it te e re co m m en ds t ha t if o th er i ss ue s ar is e, p er ha ps t he B an ki ng D ep ar tm en t an d th e O C C s ho ul d su rv ey b an ks w it h br an ch es in N ew Y or k to f in d ou t w ha t p ow er s is su es t he y pe rc ei ve . T he B an ki ng D ep ar tm en t an d th e O C C c ou ld th en d ec id e th os e is su es a nd , to t he e xt en t th at t he y po se d di ff ic ul t qu es ti on s, co ul d as k fo r ad di ti on al i nf or m at io n fr om af fe ct ed pa rt ie s be fo re u nd er ta ki ng a s ec on d ro un d of d ec is io n- m ak in g. O ne i m po rt an t co nf li ct be tw ee n· t he N ew Y o rk a nd fe de ra l ap pr oa ch es h as b ee n th e li m it at io n on lo an s m ad e to a si ng le b or ro w er b y a br an ch . U nd er th e B an ki ng L aw , a b ra nc h of a f or ei gn b an k ge ne ra ll y m ay l en d to a s in gl e bo rr ow er u p to 15 % o f th e en ti re b an k' s ca pi ta l an d su rp lu s if t he l oa n is un se cu re d, a nd m ay e xt en d an a dd it io na l am ou nt e qu al to 1 0% o f it s ca pi ta l an d su rp lu s if t he l oa n is s ec ur ed . T he se l en di ng · li m it r es tr ic ti on s ar e ca lc ul at ed a s a pe rc en ta ge o f th e pa id -i n ca pi ta l st oc k, s ur pl us a nd u nd iv id ed p ro fi ts o f th e no n- U .S . ba nk .3 4 A n a ge nc y ha s no l en di ng l im it. H ow ev er , as a r es ul t of th e E nh an ce m en t A ct , a st at e br an ch o r ag en cy a ls o w ill b e su bj ec t to t he l en di ng l im it f or a f ed er al b ra nc h or a ge nc y, w hi ch a pp li es t he s am e pe rc en ta ge l im it at io ns a s N ew Y or k ap pl ie s to b ra nc he s bu t ba se d on a d if fe re nt a gg re ga ti on o f in te re st s in l oa ns ?5 Sp ec if ic al ly , th e fe de ra l le nd in g lim it, w hi ch is t he s am e as t ha t ap pl ie d to n at io na l ba nk s, c ou nt s th e lo an s m ad e to t he s am e bo rr ow er a nd c er ta in r el at ed b or ro w er s . by al l o f th e ba nk 's - fe de ra l -b ra nc he s· · a nd - ag en ci es in t he ag gr eg at e. B y co nt ra st , a· N ew Y o rk b ra nc h· o f -a f or ei gn · b an k · ha s no t b ee n r eq ui re d to a gg re ga te i ts l oa ns t o a bo rr ow er w it h lo an s m ad e to t he s am e bo rr ow er b y an y ot he r U .S .- ba se d br an ch es /a ge nc ie s o f th e sa m e ba nk . 38 'j T he C om m it te e ag re es w it h th e fe de ra l vi ew t ha t lo an s m ad e by a ll u ni nc or po ra te d U .S . of fi ce s of fo re ig n ba nk s sh ou ld b e ag gr eg at ed f or l oa n- to -o ne -b or ro w er -r ul e pu rp os es . T h e E nh an ce m en t A ct c re at es a n u nc er ta in ty a s to t he ab il it y of fo re ig n ba nk s to ac ce pt de po si ts th ro ug h U .S . br an ch es . P ri or t o th e E nh an ce m en t A ct , it w as c le ar t ha t a br an ch c ou ld n ot a cc ep t re ta il d ep os it s of l es s th an $ 10 0, 00 0 un le ss t he b ra nc h w as F D IC -i ns ur ed . "R et ai l" w as d ef in ed f or th is p ur po se i n a m an ne r th at w as s uf fi ci en tl y fl ex ib le t o pe rm it no rm al o pe ra ti on s of m os t f or ei gn b an k br an ch es . T he F D IC 's · an d th e O C C 's r eg ul at io ns de fi ne d "d om es ti c re ta il d ep os it ac tiv ity " (t ha t is , th e ac tiv ity r eq ui ri ng d ep os it in su ra nc e) as "t he ac ce pt an ce b y a S ta te b ra nc h of a ny i il it ia l de po si t of le ss t ha n $1 00 ,0 00 ". T he se r eg ul at io ns a ls o ex em pt ed o th er s pe ci fi ed ty pe s o f de po si ts ( bu si ne ss , go ve rn m en t, fo re ig n so ur ce a nd d e m in im is d ep os it s) f ro m t he d ep os it in su ra nc e re qu ir em en ts e ve n if th ei r in it ia l am ou nt w as le ss th an $1 00 ,0 00 . A s a co ns eq ue nc e, b ra nc he s of f or ei gn b an ks t ha t w er e no t F D IC - in su re d st il l co ul d en ga ge i n fo re ig n an d w ho le sa le b an ki ng , as w el l as a d e m in im is a m ou nt o f re ta il b us in es s. 36 T h e E nh an ce m en t A ct h as c au se d co ns id er ab le c on fu si on be ca us e it p ro vi de s th at a b ra nc h of a f or ei gn b an k ca nn ot m ai nt ai n de po si t ac co un ts w it h ba la nc es o f le ss t ha n $1 00 ,0 00 un le ss t he b ra nc h w as F D IC -i ns ur ed o n th e da te o f th e bi ll 's en ac tm en t (D ec em be r 19 , 19 91 )? 7 T he C om m it te e do es n ot be li ev e th at C on gr es s re as on ab ly co ul d ha ve m ea nt th is pr ov is io n to b e ta ke n li te ra ll y. 38 E ve n w ho le sa le de po si ts ro ut in el y fa ll be lo w $1 00 ,0 00 · bu t ·n ev er th el es s re ta in th ei r w ho le sa le ch ar ac te r. T h e C ol T lii lit te e do es no t op po se ' th e ap pa re nt s pi ri t of t he E nh an ce m en t A ct p ro vi si on -- th at r et ai l de po si ts o f U .S . re si de nt s sh ou ld b e in su re d an d th e F D IC sh ou ld n ot i ns ur e ad di ti on al b ra nc he s o f fo re ig n ba nk s -- bu t 39 AMI-ADD-178 be lie ve s th at d ep os its u nd er $ 10 0, 00 0 th at w ou ld b e ex em pt un de r th e F D IC a nd O C C r eg ul at io ns w er e no t in te nd ed t o be co ve re d by t hi s po lic y. T he F ed er al R es er ve B oa rd a nd t he O C C h av e an no un ce d th at b ra nc he s of f or ei gn ba nk s m ay co nt in ue to a cc ep t d ep os its u nd er th e re gu la ti on s in e ff ec t p ri or to D ec em be r 20 , 19 91 , un ti l re gu la tio ns cl ar if yi ng th e ne w re qu ir em en ts o f th e E nh an ce m en t A ct a re a do pt ed .3 9 T he C om m it te e en co ur ag es a dm in is tr at iv e in te rp re ta ti on of th is p ro vi si on t o gi ve e ff ec t to i ts a pp ar en t in te nt t o af fe ct on ly re ta il de po si ts , as th ey ha ve be en de fi ne d. In th e al te rn at iv e, th e C om m it te e su pp or ts a te ch ni ca l co rr ec ti on s am en dm en t to th e E nh an ce m en t A cr t o m ak e cl ea r th e ap pa re nt C on gr es si on al i nt en t· ·o f r eq ui ri ng d ep os it i ns ur an ce on ly f or " re ta il" d ep os its , gi vi ng t he O C C a nd F D IC f re ed om t o pr es er ve t he e xi st in g ex em pt io ns . A tt ac he d to t hi s R ep or t as A pp en di x I ar e le tt er s on th is su bj ec t su bm it te d by th e C om m it te e' s C ha ir m an an d th e S up er in te nd en t w ith th e C om m it te e' s ap pr ov al . A ge nc y T he o ri gi na l d is ti nc ti on b et w ee n th e po w er s of b ra nc he s an d ag en ci es h as e ro de d co ns id er ab ly d ur in g th e pa st te n ye ar s. H is to ri ca lly , a fo re ig n ba nk b ra nc h in N ew Y or k co ul d ac ce pt de po si ts , w hi le a n ag en cy c ou ld n ot . T hi s di st in ct io n be ca m e le ss i m po rt an t in t he e ar ly 1 98 0' s w he n th e B an ki ng B oa rd au th or iz ed N ew Y or k ag en ci es to is su e la rg e- de no m in at io n C D s or o th er o bl ig at io ns .4 0 A 1 98 4. a m en dm en t to t he . B an ki ng .. . L aw a llo w ed a ge nc ie s to a cc ep t·d ep os it s- fr om fo re ig n re si de nt s an d ci tiz en s. 41 In a dd it io n, a N ew ·Y or k· ag en cy m ay m ai nt ai n· :: · · • cr ed it ba la nc es fo r its cu st om er s in ci de nt al to its ba nk in g bu si ne ss . A b ra nc h co nt in ue s to b e th e on ly m et ho d fo r a fo re ig n ba nk t o ac ce pt d ep os it s di re ct ly f ro m r et ai l cu st om er s 40 :· -J o ·· • .: · I L in N ew Y or k, b ut th is d is tin ct io n is no l on ge r m ea ni ng fu l, si nc e th e E nh an ce m en t A ct p ro hi bi ts r et ai l d ep os it -t ak in g at b ra nc he s or a ge nc ie s of f or ei gn b an ks u nl es s th ey a re a lr ea dy F D IC - in su re d. N ot w it hs ta nd in g th is co nv er ge nc e in t he p ow er s of a br an ch a nd a ge nc y, a n ag en cy h as n ot b ee n su bj ec t to s om e of th e "s af et y an d so un dn es s" r eq ui re m en ts i m po se d on b ra nc he s. M os t no ta bl y, t he l en di ng l im it on l oa ns t o on e bo rr ow er a nd a 5% a ss et p le dg e re qu ir em en t w er e im po se d on b ra nc he s, b ut no t on a ge nc ie s. 42 · T he C om m it te e be lie ve s th at a ge hd es s ho ul d be s ub je ct to t he se t w o "s af et y an d so un dn es s" r eq ui re m en ts . B ec au se t he E nh an ce m en t A ct i m po se s th e O C C l en di ng l im it r es tr ic ti on s on N ew Y or k ag en ci es a s w el l as b ra nc he s, N ew Y or k al so sh ou ld a pp ly t he s am e lo an s- to -o ne -b or ro w er r ul es t o th e tw o fo rm s of o rg an iz at io n. T he 5 % a ss et p le dg e re qu ir em en t al so sh ou ld b e ap pl ie d to a ge nc ie s so t ha t, in t he e ve nt o f ha vi ng t o ta ke p os se ss io n, t he S up er in te nd en t w ou ld h av e a re li ab le f un d fr om w hi ch t o pa y th e ea rl y ex pe ns es o f th e li qu id at io n. (T he 5% p le dg e re qu ir em en t h as n ot h er et of or e be en a pp li ed t o ID F de po si ts . In s om e ca se s, t hi s ha s re su lt ed i n br an ch es w ith l ar ge am ou nt s of IB F de po si ts ha vi ng vi rt ua lly no pl ed ge re qu ir em en t. T he C om m it te e re co m m en ds t ha t, in o rd er t o as su re a m in im um p le dg e am ou nt , th e pl ed ge r eq ui re m en t be m od if ie d to t he g re at er o f (i ) 5% o f d ep os its n ot in cl ud in g ID F de po si ts , (i i) 1 % o f de po si ts i nc lu di ng I D F de po si ts , or ( iii ) $1 m ill io n. )4 3 If th es e ch an ge s ar e ef fe ci :e ·d , th e re m ai ni ng d is tin ct io ns be tw ee n br an ch es a nd a ge nc ie s un de r N ew Y or k la w w ill h av e be en e li m in at ed . A cc or di ng ly , un le ss a ft er s ur ve yi ng e xi st in g ag en ci es (w hi ch th e C om m it te e re co m m en ds th e B an ki ng 41 AMI-ADD-179 D ep ar tm en t do ) th er e w er e a co ge nt r ea so n to re ta in t he ag en cy fo nn , th e C om m it te e w ou ld no t se e a pu rp os e in co nt in ui ng t o m ai nt ai n th e tw o na m es . A ge nc ie s w ou ld t he n au to m at ic al ly b ec om e br an ch es w it ho ut f ur th er a pp li ca ti on . It m ay b e, h ow ev er , th at h om e co un tr y la w s or la w s of U .S . "h om e st at es " un de r th e IB A w ill g iv e ag en ci es c on ti nu ed u til ity ; or i t m ay b e th at t he a ge nc y fo rm c ou ld b e us ef ul i n fa sh io ni ng a so lu ti on t o th e pr ob le m s un de r th e IB A f ac ed b y ba nk s do in g bu si ne ss in N ew Y or k th at h av e ac qu ir ed or m er ge d w it h co rp or at io ns , s uc h as i ns ur an ce c om pa ni es , t ha t do n ot c on fo rm to th e re qu ir em en ts o f S ec ti on 4( c) of t he B an k H ol di ng C om pa ny A ct . R ep re se nt at iv e O ff ic es · R ep re se nt at iv e of fi ce s, u nl ik e ot he r fo rm s of N ew Y or k pr es en ce f or f or ei gn b an ks , do n ot i nc ur b an ki ng l ia bi li ti es i n N ew Y or k. T he re fo re , un le ss th ey v io la te th e re st ri ct io ns pl ac ed o n th e ty pe s o f bu si ne ss t ha t th ey a re p er m it te d to d o, th ey d o no t re qu ir e th e sa m e ty pe o f s up er vi si on a s ot he r fo rm s o f or ga ni za ti on w hi ch f or ei gn b an ks u se t o do b us in es s in N ew Y or k. B as ic al ly , a re pr es en ta ti ve o ff ic e do es b us in es s on ly o n be ha lf o f it s ho m e of fi ce o r ot he r au th or iz ed br an ch es . H is to ri ca ll y, t hi s ha s b ee n in te rp re te d to m ea n no t on ly t ha t th e re pr es en ta ti ve o ff ic e (1 ) no t ta ke d ep os it s or m ak e ad va nc es an d (2 ) no t i nc ur li ab il it ie s fo r de po si ts o r m on ey b or ro w ed b ut al so (3 ) th at i ts p er so nn el n ot a pp ro ve a ny l oa ns .4 4 . . T he se . . co nc ep ts r el at in g -to - lo an s- be co m e ·s om ew ha t te nu ou s· i n an el ec tr on ic w or ld . T h e pl ac e w he re a .l oa rr is "a pp ro ve d u r w he re ·,· · -· , .. · do cu m en ts a re e xc ha ng ed is n ot o f p ar ti cu la r im po rt an ce . N on - ba nk in g co m pa ni es f re el y m ak e lo an s in N ew Y or k an d bo th ba nk in g an d no n- ba nk in g co m pa ni es f ro m o ut si de N ew Y or k 42 ' •• ,, :.& . · ·~ • .• L fr ee ly s ol ic it c re di tc ar d an d m or tg ag e bu si ne ss i n N ew Y or k. T he e ss en ti al r es tr ic ti on s w hi ch r ep re se nt at iv e of fi ce s sh ou ld ha ve , th er ef or e, a re r es tr ic ti on s on t ak in g de po si ts o r in cu rr in g ba nk in g li ab il it ie s. .I f a ba nk w ith a r ep re se nt at iv e of fi ce i n N ew Y or k fa ils , it sh ou ld b e cl ea r to a ll w ho d ea lt w ith i t th at th ey m us t lo ok o ut si de N ew Y or k to c ol le ct f un ds d ue f ro m ba nk in g tr an sa ct io ns . U nf or tu na te ly , s om e re pr es en ta ti ve o ff ic es h av e vi ol at ed th e te rm s of N ew Y or k' s au th or iz at io n to do . b us in es s as a re pr es en ta ti ve o ff ic e by a cc ep ti ng d ep os it s fr om r et ai l c us to m er s fo r tr an sm is si on t o th e he ad o ff ic e in a m an ne r no t pe rm it te d by · th e B an ki ng D ep ar tm en t. · · In " 19 90 ,· fo r- ex am pl e, T h e N at io na l M or tg ag e B an k of G re ec e w as i nd ic te d by a f ed er al gr an d ju ry si tti ng in N ew Y or k on 30 co un ts of m on ey la un de ri ng a nd t he r el at ed f ai lu re t o fi le c ur re nc y tr an sa ct io n re po rt s on a pp ro xi m at el y $7 00 m il li on o f de po si ts t ra ns m it te d to it s ho m e of fi ce . P ri or t o th e in di ct m en t, th e N at io na l M or tg ag e B an k ag re ed t o a $2 m il li on s et tl em en t w it h th e F ed er al R es er ve B oa rd a ri si ng o ut o f th e sa m e fa ct s. 45 T he C om m it te e re co m m en ds th at N ew Y or k la w s re ga rd in g re pr es en ta ti ve o ff ic es b e am en de d to p ro vi de t ha t: • A ll re pr es en ta ti ve o ff ic es m us t b e li ce ns ed b y th e B an ki ng D ep ar tm en t (a t pr es en t on ly o ff ic es o f ba nk s w it h le ss t ha n $5 00 m il li on o f as se ts a re re qu ir ed t o b e li ce ns ed ). 46 ··· • · ·T he · B an ki ng · D ep ar tm eh t 'h as au th or it y to ex am in e an d su pe rv is e al l re pr es en ta ti ve o ff ic es . • R ep re se nt at iv e of fi ce s m ay e ng ag e in lo an -r el at ed ac tiv iti es t ha t ar e w ho le sa le i n na tu re a s de fi ne d 43 AMI-ADD-180 by t he S up er in te nd en t, pr ov id ed th at th ey t ak e no de po si ts or c as h fo r an y pu rp os e, ad va nc e no ca sh , an d is su e no le tt er s of c re di t or ot he r ob lig at io ns . • A re pr es en ta ti ve of fi ce is pr oh ib it ed fr om so lic iti ng re ta il de po si ts . V io la ti on of th is pr ov is io n sh ou ld b e a cr im in al o ff en se . (R et ai l de po si ts f or t hi s pu rp os e co ul d be d ef in ed as in it ia l de po si ts o f le ss t ha n $1 00 ,0 00 o r de po si ts in e xc es s of $ 10 0, 00 0 by a n in di vi du al w it ho ut a re la te d bu si ne ss t ra ns ac tio n. ) T he se r ec om m en da ti on s ar e ba si ca lly c on si st en t w ith t he b ill in tr od uc ed b y th e B an ki ng D ep ar tm en t i n 19 91 , e xc ep t t ha t t he C om m it te e w ou ld pl ac e le ss er re st ri ct io ns on th e le nd in g ac tiv iti es o f re pr es en ta ti ve o ff ic es . T he C om m it te e re co gn iz es th at e xp an di ng t he t yp e of in vo lv em en t in t he l en di ng p ro ce ss th at r ep re se nt at iv e of fi ce s ca n en ga ge i n w ou ld b e a m at er ia l ch an ge . T he C om m it te e do es no t be lie ve , ho w ev er , th at pe rm it ti ng r ep re se nt at iv e of fi ce s to p la y a m or e fo rt hr ig ht r ol e in t he le nd in g pr oc es s w ill p os e si gn if ic an t d an ge rs to t he p ub lic so l on g as t he d ep os it -t ak in g an d ot he r lia bi lit y- si de r ul es a re st ri ct ly e nf or ce d. T he C om m it te e co ns id er ed w he th er , in o rd er to p ro te ct th e pu bl ic , it w as n ec es sa ry t o pr oh ib it a r ep re se nt at iv e of fi ce fr om be in g lo ca te d on th e gr ou nd fl oo r of a bu ild in g or ad ja ce nt t o a li ce ns ed m on ey t ra ns m it te r. T hi s co ul d be a pr op hy la ct ic m ea su re -t o re du ce t he a bi lit y· o f a· re pr es en ta ti ve of fi ce t o im pr op er ly s ol ic it de po si ts f ro m r et ai l cu st om er s· w ho ·. ·· m ay no t un de rs ta nd t ha t th e re pr es en ta ti ve o ff ic e is no t a ba nk in g of fi ce s up er vi se d by t he B an ki ng D ep ar tm en t. T he C om m it te e de ci de d th at lo ca tin g a re pr es en ta ti ve o ff ic e on th e 44 ~~c gr ou nd f lo or or i n cl os e pr ox im ity t o a m on ey tr an sm it te r sh ou ld be pe rm it te d on ly w ith th e pr io r ap pr ov al of th e S up er in te nd en t an d re co m m en ds t ha t th is r ul e be e m bo di ed ei th er in th e le gi sl at io n or in re gu la ti on s of t he B an ki ng B oa rd .4 7 T he B an ki ng D ep ar tm en t h is to ri ca lly h as n ot r eq ui re d a fo re ig n ·b an k to e st ab lis h a re pr es en ta ti ve o ff ic e in N ew Y or k be fo re it m ay se ek a lic en se fo r a br an ch /a ge nc y. O ne ad va nt ag e to t hi s "s ta gi ng " ap pr oa ch w ou ld b e th at t he B an ki ng D ep ar tm en t co ul d in cr ea se i ts k no w le dg e of t he f or ei gn b an k an d th e fo re ig n ba nk c ou ld i nc re as e its k no w le dg e of th e N ew Y or k m ar ke t an d ba nk in g re gu la tio ns ;· be fo re th e fo re ig n ba nk ex pa nd s its o pe ra ti on s th ro ug h th e es ta bl is hm en t o f a b ra nc h or ag en cy . A lt ho ug h th e C om m it te e en co ur ag es th e st ag in g ap pr oa ch , th e C om m it te e be lie ve s th at th e la ck o f a pr io r re pr es en ta ti ve o ff ic e is no t su ff ic ie nt ju st if ic at io n fo r de ny in g a br an ch o r ag en cy li ce ns e to a f or ei gn b an k w hi ch , in th e op in io n of th e S up er in te nd en t, sa tis fi es t he r eq ui re m en ts t o es ta bl is h a br an ch o r ag en cy i n N ew Y or k. In l ic en si ng f or ei gn b an ks t o ha ve r ep re se nt at iv e of fi ce s in N ew Y or k, t he C om m it te e be lie ve s th at t he S up er in te nd en t sh ou ld e m ph as iz e th e ne ed s fo r a re as on ab le b us in es s pu rp os e an d pl an a nd a r ev ie w o f th e re pu ta ti on o f th e ba nk f or s ou nd m an ag em en t a nd in te gr ity . T he C om m it te e be li ev es t ha t i t m ay be ap pr op ri at e to pe rm it sm al le r ba nk s an d ba nk s fr om co un tr ie s w ith re la tiv el y w ea k ba nk in g sy st em s to ha ve a pr es en ce i n th e re pr es en ta ti ve o ff ic e fo rm . · In s uc h ca se s, ho w ev er ;·· t he ·- B an ki ng ·· D ep ar tm en t sh ou ld , · t hr ou gh th e ex am in at io n an d su pe rv is io n pr od ~s s, c or if ir m t ha t ap pr op ri at e di sc lo su re s ar e be in g m ad e to p ot en ti al c us to m er s an d th at t he ru le a ga in st s ol ic iti ng r et ai l de po si ts i s no t be in g vi ol at ed . 45 AMI-ADD-181 N ew Y or k A rt ic le X II I nv es tm en t C om pa ni es A rt ic le X II o f th e N ew Y or k B an ki ng L aw p ro vi de s fo r th e es ta bl is hm en t of " In ve st m en t C om pa ni es ", a n am e w hi ch de ri ve s fr om t h e pr in ci pa l fu nc ti on e ng ag ed i n by t he e ar ly an ce st or s o f to da y' s A rt ic le X II c om pa ni es . T hi s n am e ca n b e co nf us in g in li gh t o f t he e no rm ou s de ve lo pm en t o f m ut ua l f un ds w hi ch a re f ed er al ly r eg ul at ed a s "i nv es tm en t co rn pa ni es ". 48 D ur in g th e ap pr ox im at el y 10 0 ye ar s th at A rt ic le X II . co m pa ni es ha ve b ee n ch ar te re d, fo ur ba si c ty pe s ha ve de ve lo pe d: (1 ) th os e en ga ge d, p ri or t o th e D ep re ss io n, i n th e sa le o f pa rt ic ip at io ns i n m or tg ag e in ve st m en ts -( so c al le d "b on d an d m or tg ag e co m pa ni es ") ; (2 ) th O se e ng ag ed i n w ho le sa le a nd re ta il sa le s fi na nc in g an d fa ct or in g; (3 ) th os e en ga ge d in w ho le sa le , pr im ar il y in te rn at io na ll y- or ie nt ed b an ki ng ; an d ( 4) th os e th at s er ve a s ho ld in g co m pa ni es f or m er ch an t ba nk s. T h e ca te go ry o f "b an ki ng i nv es tm en t co m pa ni es " w as t he f oc us o f th e C om m it te e' s re vi ew . (B on d an d m or tg ag e- ty pe A rt ic le X II co m pa ni es n o lo ng er ex is t; th e C om m it te e ha s no re co m m en da ti on s re ga rd in g sa le s fi na nc in g o r ho ld in g co m pa ny A rt ic le X II c om pa ni es , ex ce pt t o no te t ha t th ey h av e se rv ed a us ef ul p ur po se a n d t od ay s ev er al o f th e fi na nc e co m pa ni es a re am on g th e so un de st i n t he n at io n. 49 T h e fo rm i s qu it e fl ex ib le an d m ay i n f ut ur e b e be ne fi ci al t o ot he r fi na nc ia l bu si ne ss es .) B an ki ng A rt ic le X II c om pa ni es e xe rc is e m an y tr ad it io na l ba nk in g po w er s an d ar e re co gn iz ed i n t h e w ho le sa le b an ki ng m ar ke tp la ce a s ba nk s, b ut t he y ca nn ot a cc ep t de po si ts i n N ew . . · Y or k. sp - T he -. C om m it te e be li ev es -- th at i t- is .. t he a cc ep ta nc e o f. de po si ts r at h er t h an t he a bi li ty m ·t en d -t h at r eq ui re s- · t h e fu ll : ·· su pe rv is io n pr ov id ed b y th e ba nk in g la w s. A s no te d ab ov e, m an y no n- ba nk in g co m pa ni es a re e ng ag ed i n a lm os t ev er y fa ce t o f le nd in g w it ho ut c om in g u n d er b an k re gu la to ry s tr ic tu re s. 51 46 i '- T h e A rt ic le X II c om pa ny c ha rt er p ro vi de s a re gu la te d ba nk in g fo rm at w hi ch , be ca us e it d oe s no t ha ve g en er al d ep os it -t ak in g po w er s, c an b e re gu ~a te d so m ew ha t di ff er en tl y fr om o rd in ar y ba nk in g co rp or at io ns . T h e re as on s so m e fo re ig n ba nk s ha ve c ho se n to o rg an iz e an A rt ic le X II c om pa ny i n t he U ni te d S ta te s ha ve b ee n b as ed . o n h or ne c ou nt ry r es tr ic ti on s on b ra nc hi ng a br oa d, t h e fl ex ib il it y of t h e A rt ic le X II f or m , o r ta x co ns id er at io ns . In a dd it io n, a br an ch o r ag en cy d oe s n o t su it a co ns or ti um o rg an iz at io na l st ru ct ur e. F o r th es e ba nk s ne ed in g an i nc or po ra te d ve hi cl e, t h e A rt ic le I II c om m er ci al b an k su bs id ia ry m ay b e cu m be rs om e an d · t he p ow er t o ta ke d ep os it s m ay n o t be · it np ot ta ht ~ th e re la ti ve fr ee do m o f th e A rt ic le X II c or np ar ii es m ay b e at tr ac ti ve t o th em . B ec au se A rt ic le X II c om pa ni es a cc ep t n o d ep os it s in N ew Y or k, t he y ha ve n o re se rv e re qu ir em en ts , no r ig id p er cu st om er l en di ng l im it s, a n d n o de po si t in su ra nc e. T he y ar e re qu ir ed t o m ai nt ai n th ei r ow n ca pi ta l an d t he y ar e ex am in ed li ke b an ks , be ca us e th ey s ta nd o r fa ll o n t he ir o w n. T o d at e, ho w ev er , no A rt ic le X II c om pa ny h as f ai le d. A n A rt ic le X II co m pa ny is ex pr es sl y pe rm it te d to m ai nt ai n cr ed it b al an ce s "i nc id en ta l to , o r ar is in g o u t of , th e ex er ci se o f it s la w fu l po w er s" .5 2 A lt ho ug h an A rt ic le X II in ve st m en t co m pa ny m ay ex er ci se a ll n or m al b an k l en di ng p ow er s, i t m ay n o t u n d er cu rr en t la w e xe rc is e ge ne ra l fi du ci ar y po w er s n o r b ec o m e a m em b er o f th e F ed er al R es er ve S ys te m . T hu s A rt ic le X II co m pa ni es d o n o t h av e a· le nd er o f la st r es or t:5 3 · W hi le , as n ot ed a bo ve , A rt ic le X II c om pa ni es a re n o t b y st at ut e su bj ec t to s om e o f th e re st ri ct io ns a pp li ca bl e to b an ks , bo th a s a m at te r o f su pe rv is or y po li cy a n d o n a c as e- by -c as e 47 AMI-ADD-182 ba si s, th e B an ki ng D ep ar tm en t ha s, i n ce rt ai n re sp ec ts , ap pl ie d to A rt ic le X II c om pa ni es s im ila r re st ri ct io ns a s ar e ap pl ic ab le to b ra nc he s, a ge nc ie s an d co m m er ci al b an ks . T he C om m it te e be lie ve s th at t hi s is a pp ro pr ia te . C ur re nt B an ki ng D ep ar tm en t po lic y pe rm it s th e in co rp or at io n of A rt ic le X II c om pa ni es b y fo re ig n ba nk s th at w an t an in co rp or at ed p re se nc e in t he U ni te d St at es b ut d o no t w an t th e po w er t o ta ke d ep os its i n N ew Y or k. T he C om m it te e su pp or ts t he c on ti nu ed a va ila bi lit y of th is f or m o f o rg an iz at io n, be lie vi ng th at le nd in g fr om o ut si de th e de po si t i ns ur an ce s ys te m w ill b e be ne fi ci al t o th e U .S . ec on om y. T he C om m it te e se es n o un us ua l da ng er s fr om b an ki ng - ty pe A rt ic le X II c om pa ni es , pr ov id ed t ha t (1 ) th ei r ow ne rs hi p is c le ar a nd t he ir o w ne rs a re r es po ns ib le a nd l eg it im at e, ( 2) tr an sa ct io ns w ith ow ne rs an d af fi lia te s ar e re gu la te d in a m an ne r th at p re ve nt s ab us e, ( 3) t he y ar e ex am in ed l ik e ba nk s an d re qu ir ed t o m ai nt ai n a re as on ab le l ev el o f ca pi ta l, ( 4 ) lo an -t o- on e- bo rr ow er an d di ve rs if ic at io n st an da rd s ar e m ai nt ai ne d, a nd ( 5) t he p ow er t o cr ea te c re di t ba la nc es i s no t al lo w ed t o be u se d to t ak e de po si ts i n N ew Y or k. B an ki ng A rt ic le X II c om pa ni es a re n ot w ith in t he f ed er al s af et y ne t -- an d as s uc h th ey p ro vi de a n ex ce lle nt f re e m ar ke t so ur ce o f cr ed it - - bu t th e B an ki ng D ep ar tm en t sh ou ld s up er vi se t he m lik e ba nk s, s in ce f or m an y le ga l an d bu si ne ss p ur po se s th ey ha ve t he a tt ri bu te s of b an ks . B ec au se th e re gu la to ry fr am ew or k of A rt ic le . X IL co m pa ni es h as e vo lv ed -w ith a v ie w t o th e ec on om ic p ur po se s th ey s er ve , th ey ca n he lp to · at tr ac t in te rn at io na l·· f in an ci al ' r bu si ne ss t o N ew Y or k. 48 T he C om m it te e re co m m en ds th at th e B an ki ng D ep ar tm en t co nt in ue t o ha ve a ut ho ri ty w ith r es pe ct t o A rt ic le X II c om pa ni es t o re je ct a ny d e no vo c ha rt er ( or a ny c ha ng e of co nt ro l) w he re , in t he v ie w o f th e B an ki ng D ep ar tm en t, t he re is a ny p os si bi lit y th at t he p ro po se d ow ne rs hi p st ru ct ur e co ul d ob sc ur e th e ul ti m at e ow ne rs hi p or c om pl ic at e th e en fo rc em en t of th e B an ki ng D ep ar tm en t's su pe rv is or y pr oc es s. T he C om m it te e is o f th e vi ew t ha t th e B an ki ng D ep ar tm en t sh ou ld ob je ct to a c ha ng e in t he o rg an iz at io na l s tr uc tu re o f an e xi st in g A rt ic le X II i f th e B an ki ng D ep ar tm en t co nc lu de s th at t he ch an ge co ul d le ad to po te nt ia l ow ne rs hi p or en fo rc em en t pr ob le m s. 54 O rg an iz at io na l st ru ct ur es i nv ol vi ng i nt er m ed ia te no n- op er at in g co m pa ni es s tr uc tn re d as -s uc h fo r ta x pl an ni ng o r ot he r re as on s ty pi ca lly s ho ul d no t ra is e th e sa m e su pe rv is or y co nc er ns . T he C om m it te e al so r ec om m en ds t ha t th e na m e A rt ic le X II " in ve st m en t co m pa ny " be c ha ng ed b ot h to a vo id c on fu si on w ith i nv es tm en t co m pa ni es r eg is te re d un de r th e In ve st m en t C om pa ny A ct o f 19 40 a s w el l as t o m or e cl os el y de sc ri be t he ir ac tiv iti es . T he C om m it te e ha s co ns id er ed th e fo llo w in g po ss ib il it ie s: "F in an ci al C or po ra tio ns ", " F in an ce C om pa ni es ", "C om m er ci al L en di ng C om pa ni es ", o r "A rt ic le X II C om pa ni es ". T he C om m it te e fu rt he r re co m m en ds t ha t A rt ic le X II co m pa ni es b e gi ve n th e au th or ity , b as ed o n sp ec if ic a pp ro va l b y th e B an ki ng B oa rd , t o ex er ci se n on -d ep os it or y fi du ci ar y po w er s on t he s am e ba si s as A rt ic le I II b an ks . T hi s w ou ld n ot v io la te th e th eo re ti ca l ba se s on w hi ch A rt ic le X II co m pa ni es ·· ar e ch ar te re d: ·: · ·. · · · · ··· 49 AMI-ADD-183 IV R E G U L A T IO N O F O W N E R S Ju st as ev al ua ti on o f ow ne rs hi p is im po rt an t in t he de ci si on w he th er o r no t to g ra nt a l ic en se , re vi ew o fc ha ng es i n ow ne rs hi p o f l ic en se d en ti ti es is n ec es sa ry to a ss ur e th at th ey d o no t be co m e co nt ro ll ed b y cr im in al o r ir re sp on si bl e el em en ts . F or ei gn ba nk s w hi ch m ai nt ai n br an ch es , ag en ci es o r re pr es en ta ti ve o ff ic es i n N ew Y or k ar e no t cu rr en tl y re qu ir ed to ob ta in ap pr ov al fo r ch an ge s in co nt ro l, as su bs id ia ri es ch ar te re d u n d er t he B an ki ng l :;a w a re · re qu ir ed t o d o. 55 · ·Y et it i s of te n a ch an ge i n ow ne rs hi p w hi ch c re at es t he g re at es t da ng er s to a ba nk in g in st it ut io n' s he al th . T h e C om m it te e th er ef or e re co m m en ds t ha t, a lt ho ug h it m ay p la ce s om e bu rd en o n f or ei gn b an ks do in g bu si ne ss in N ew Y or k, ba nk s w it h of fi ce s li ce ns ed b y th e B an ki ng D ep ar tm en t sh ou ld b e re qu ir ed to o bt ai n th e S up er in te nd en t's a pp ro va l fo r ch an ge s in c on tr ol un le ss a n a cc ep ta bl e al te rn at e pr oc es s ha s b ee n i m pl em en te d. T o m in im iz e th e bu rd en o n ba nk s w hi ch un de rg o ch an ge s in c on tr ol , th e C om m it te e re co m m en ds t h at b an ks b e pe rm it te d to c ho os e w he th er to s ee k ch an ge in c on tr ol a pp ro va l be fo re o r af te r th e ch an ge i n co nt ro l ha s oc cu rr ed . If th e b an k se ek s pr io r ap pr ov al f or a c ha ng e o f co nt ro l, i t w ill h av e th e op ti on o f n o t un de rt ak in g th e ch an ge in co nt ro l if th e ap pl ic at io n is d en ie d. I f a pp ro va l i s so ug ht a nd d en ie d af te r th e ch an ge h as o cc ur re d, t he S up er in te nd en t w ou ld b e gi ve n po w er ·- to r ev ok e th e ba nk 's -l ic en se to · do bu si ne ss in 'N ew Y or k. C ha ng e in c on tr ol a pp ro va l sh ou ld b e re qu ir ed f or : m er ge rs o r st oc k tr an sa ct io ns w hi ch r es ul t in a 2 5% o r gr ea te r ch an ge i n ef fe ct iv e ow ne rs hi p to a s in gl e pe rs on , en te rp ri se o r gr ou p. 50 ' L T h er e sh ou ld b e tw o· a cc ep ta bl e al te rn at iv e pr oc es se s un de r w hi ch a ch an ge in c on tr ol ap pl ic at io n w ou ld no t b e re qu ir ed . F ir st , ap pr ov al s ho ul d no t b e re qu ir ed i n th e ca se o f a m er ge r w he re t he s ur vi vo r al re ad y is l ic en se d to d o a ba nk in g bu si ne ss i n N ew Y ar k. S ec on d, a c ha ng e in c on tr ol a pp li ca ti on sh ou ld n ot b e re qu ir ed i n th e ca se o f a tr an sa ct io n w hi ch h as b ee n a pp ro ve d by t he b an k' s ho m e co un tr y su pe rv is o( u nd er pr oc ed ur es t ha t ar e ac ce pt ab le t o th e S up er in te nd en t. T hi s ch an ge i n co nt ro l ap pr ov al au th or it y sh ou ld b e ad op te d by s ta tu te . T h e st at ut e sh ou ld n ot , ho w ev er , at te m pt to c om pl et el y de fi ne w ha t co ns ti tu te s a ch an ge o f co nt ro l fo r a fo re ig n ba nk w it h an u ni nc or po ra te d of fi ce i n N ew Y or k. T h e st at ut e sh ou ld es ta bl is h a 2 5 % o f vo ti ng sh ar es ch an ge in co nt ro l te st b ut s ho ul d le av e fu rt he r de fi ni ti on t o th e B an ki ng B oa rd . T h e C om m it te e' s vi ew i s th at t he t es t, a s m uc h as po ss ib le , sh ou ld a vo id t he t yp e o f co m pl ex q ue st io ns w hi ch re su lt f ro m f ed er al c ha ng e o f co nt ro l ru le s. N ew Y or k ch an ge o f co nt ro l ru le s al so d o no t cu rr en tl y m ak e cl ea r th at a ny p ar ty t ha t m ak es a pp li ca ti on t o co nt ro l a N ew Y or k ba nk in g or ga ni za ti on i s re qu ir ed t o su bm it t o th e ju ri sd ic ti on o f th e S ta te o f N ew Y or k fo r pu rp os es o f en fo rc in g la w s re la te d to t he o w ne rs hi p o f th e ba nk . T hi s ap pa re nt le gi sl at iv e ov er si gh t co ul d b e re m ed ie d by t he S up er in te nd en t re qu ir in g su ch su bm is si on t o ju ri sd ic ti on a s a co nd it io n o f ap pr ov al . T h e C om m it te e be li ev es , ho w ev er , th at l eg is la ti on w ou ld b e cl ea re r an d m or e ap pr op ri at e an d th er ef or e re co m m en ds s uc h le gi sl at io n. 5 1 AMI-ADD-184 v O F F S H O R E B R A N C H E S A N D R E L A T E D I S S U E S A n um be r of fo re ig n ba nk s th at h av e br an ch es /a ge nc ie s in N ew Y or k al so h av e br an ch es l ic en se d in o ne o r m or e C ar ib be an lo ca ti on s, s uc h as t he C ay m an I sl an ds o r N as sa u, t he B ah am as . In p ra ct ic e th es e of fs ho re b ra nc he s fr eq ue nt ly a re ru n fr om N ew Y or k, b y th e sa m e em pl oy ee s w ho r un t he N ew Y or k of fi ce . It i s no t un us ua l fo r th e as se ts o f an o ff sh or e br an ch w hi ch i s ru n in t hi s m an ne r to e xc ee d th os e o f th e N ew Y or k- li ce ns ed o ff ic e. A lt ho ug h m an y o f th e ta x · a nd r es er ve re qu ir em en t ru le s th at h is to ri ca ll y ha ve c au se d bu si ne ss t o be bo ok ed t o th e of fs ho re b ra nc h ar e no l on ge r in f or ce , an d N ew Y or k ba nk s an d br an ch es o f f or ei gn b an ks l oc at ed in N ew Y or k no w ha ve th e ab il it y to es ta bl is h "I nt er na ti on al B an ki ng F ac il it ie s" t ha t pr ov id e so m e o f th e ta x an d re se rv e ad va nt ag es o f of fs ho re b ra nc he s, t he o ff sh or e of fi ce s co nt in ue t o bo ok a su bs ta nt ia l pe rc en ta ge o f th e bu si ne ss a ct ua ll y tr an sa ct ed i n N ew Y or k. 56 N on e o f th es e of fs ho re o ff ic es h av e fa il ed o r be en fo un d to h av e co m m it te d se ri ou s il le ga l co nd uc t, b u t th ei r su pe rv is io n ne ve rt he le ss n ee ds t o be e va lu at ed . E va lu at in g th e la w s an d re gu la ti on s th at a ff ec t th es e of fs ho re b ra nc he s th at a re r un f ro m N ew Y or k al so r eq ui re s co ns id er at io n o f re la te d is su es t ha t re su lt f ro m t he o rd in ar y op er at io n o f m od er n tr an sn at io na l ba nk in g. T w o se ts o f is su es w ho se i m pl ic at io ns n ee d to b e de al t w it h ar e: ( 1 ) N ew Y or k pe rs on ne l o ft en ·o ve rs ee a ll U. S; ~' N or th A m er ic an o r W es te rn H em is ph er e op er at io ns o f a f or ei gn b an k. T ha t o ve rs ig ht in vo lv es d ec is io n- m ak in g an d re vi ew b ut o ft en it do es no t in vo lv e ex ec ut in g tr an sa ct io ns o n b eh al f o f ot he r 52 of fi ce s. T he C om m it te e do es n ot b el ie ve t ha t th e ev al ua ti on o f th is o ve rs ig ht i s pa rt o f th e B an ki ng D ep ar tm en t's f un ct io n in su pe rv is in g th e N ew Y or k br an ch . U nd er th e th eo ry of co ns ol id at ed s up er vi si on , a U .S ., N or th A m er ic an o r W es te rn H em is ph er e he ad qu ar te rs i s su pe rv is ed b y th e ho m e co un tr y su pe rv is or th ro ug h its ov er al l re vi ew of op er at io ns . T he B an ki ng D ep ar tm en t t he re fo re s ho ul d co op er at e w it h th e ho m e co un tr y su pe rv is or b y pr ov id in g as si st an ce w he re r eq ue st ed t o do s o, a nd m ay r ev ie w h ea dq ua rt er s op er at io ns c on du ct ed i n N ew Y or k if a pp ro pr ia te a s pa rt o f th is c oo pe ra ti on . (2 ) N ew Y or k pe rs on ne l ty pi ca lly p la y an i m po rt an t ro le i n ha nd li ng a m aj or b an k' s· fo re ig n ex ch an ge a nd i nt er es t ra te p os it io ns . T he " bo ok ", w hi ch ty pi ca lly f or i nt er na l p ur po se s w ill b e ac co un te d fo r at t he h om e of fi ce , of te n co ns is ts o f a se t of tr ad in g po si ti on s th at a re a dj us te d th ro ug ho ut t he d ay , w it h tr ad in g au th or it y be in g pa ss ed f ro m T ok yo t o L on do n to N ew Y or k so t ha t tr ad in g ca n co nt in ue i n ea ch m aj or m ar ke t an d so th at th e ba nk 's po si ti on ca n be co ns ta nt ly m on it or ed an d re ba la nc ed . F or ei gn e xc ha ng e tr an sa ct io ns e xe cu te d by N ew Y or k pe rs on ne l t yp ic al ly a re d on e fo r th e ac co un t o f N ew Y or k, w ith a n of fs et ti ng t ra ns ac ti on b ei ng d on e w it h th e ho m e of fi ce . In t he i nt er es t ra te m ar ke t, t ra de s fr eq ue nt ly a re d on e fo r th e ac co un t o f a no n- N ew Y or k of fi ce e ve n w he n th e N ew Y or k pe rs on ne l ar e ru nn in g th e bo ok . It is n ec es sa ry t o m ak e cl ea r w hi ch tr ad in g ac ti vi ti es ar e N ew Y or k of fi ce ac ti vi ti es fo r li qu id at io n pu rp os es . T he B an ki ng D ep ar tm en t m ay f in d it ap pr op ri at e to e xa m in e th es e ac ti vi ti es s in ce t he y do i nv ol ve ex ec ut io n o f tr an sa ct io ns b y N ew Y or k pe rs on ne l re ga rd le ss · o f w he re t he y ar e bo ok ed .57 · ··~ ·-- · ·- . 53 AMI-ADD-185N ew D oc um en ta rv T es t T h e C om m it te e do es no t be li ev e th at th er e is an y in he re nt w ro ng i n of fs ho re b us in es s be in g co nd uc te d in N ew Y or k, pr ov id ed it i s ad eq ua te ly s up er vi se d by th e B an ki ng D ep ar tm en t. S up er vi si on o f no n- N ew Y or k of fi ce s by N ew Y or k pe rs on ne l ra is es no si gn if ic an t is su es w he n th at su pe rv is io n do es n ot i nv ol ve t ra ns ac ti ng b us in es s o n b eh al f of th e no n- N ew Y or k of fi ce . W he n bu si ne ss i s ex ec ut ed b y N ew Y or k pe rs on ne l, h ow ev er , i t a pp ea rs t ha t s te ps n ee d to b e ta ke n to as su re th at co un te rp ar ti es kn ow at w hi ch of fi ce th e tr an sa ct io n is be in g bo ok ed a nd t o m ai nt ai n re co rd s of t he tr an sa ct io n in N ew Y or k. A nd w he n N ew Y or k pe rs on ne l ar e tr an sa ct in g bu si ne ss o n be ha lf o f a br an ch w hi ch i s su bj ec t to se cr ec y la w s, l aw e nf or ce m en t is su es m ay a ri se a s w el l. T he ex is ti ng la w s do no t de al cl ea rl y w it h th es e si tu at io ns . A s a co ns eq ue nc e, i t i s po ss ib le t ha t th os e w ho d ea l w it h N ew Y or k pe rs on ne l co ul d be m is le d. T he le ga l pr ob le m st em s fr om th e B an ki ng L aw 's de fi ni ti on o f w ha t tr an sa ct io ns a re c on si de re d li ab il it ie s of th e N ew Y or k of fi ce fo r pu rp os es of l iq ui da ti ng a N ew Y or k br an ch /a ge nc y. T h at d ef in it io n pr ov id es t ha t an y "t ra ns ac ti on ha d w ith " th e N ew Y or k of fi ce m ay b e a cl ai m a ga in st t he N ew Y or k of fi ce a ss et s. 58 A nd f or s om e ti m e it h as b ee n u nc le ar - - al th ou gh i t ha s ne ve r b ee n t es te d in a l iq ui da ti on - - w ha t th e st at us o f tr an sa ct io ns b oo ke d to a n o ff sh or e br an ch b y N ew Y or k pe rs on ne l w ou ld b e. T he d ra ft er s of th e st at ut e pr ob ab ly as su m ed t ha t th e- N ew · Y or k bo ok s w ou ld r ef le ct t ra ns ac ti on s ha d w it h th e N ew Y or k of fi ce . ·T h is s o rt ·o fa ss u m p ti o n m ay - ha ve b ee n a pp ro pr ia te in a p re -e le ct ro ni c ag e, b ut t he s ta tu to ry la ng ua ge n ow f al ls s ho rt o f th e pr ec is io n ne ed ed w he n tr il li on s 54 i . . -~ l [ __ of d ol la rs of t ra ns ac ti on s ar e co nd uc te d an nu al ly th ro ug h el ec tr on ic a dv ic es . T he k ey t o el im in at in g th e co nf us io n ca us ed b y of fs ho re - bo ok ed b us in es s be in g do ne i n N ew Y or k is a c le ar er t es t fo r w he n a de po si t o r ot he r li ab il it y tr an sa ct io n is d ee m ed t o ha ve be en fo r th e ac co un t of th e N ew Y or k br an ch v er su s w he n it is de em ed t o ha ve b ee n bo ok ed o ff sh or e. In m an y ca se s th er e is no i nh er en t di ff er en ce i n ho w t he t ra ns ac ti on is c on du ct ed ; th e em pl oy ee m er el y pu ts i t on th e bo ok s o f o n e of fi ce r at he r th an o n t he b oo ks of a no th er . C ur re nt ly t he re i s no r ul e th at di ct at es h ow t he d is ti nc ti on s ho ul d be m ad e fo r li qu id at io n pu rp os es , al th ou gh i t ap pe ar s th at a lm os t' al l ba nk s pr oV id e an ad vi ce t o th e co un te rp ar ty · w hi ch d es ig na te s at w hi ch o ff ic e th e tr an sa ct io n ha s be en b oo ke d an d th er ef or e w ho se r is k w as be in g ta ke n. B as ic al ly , in a N ew Y or k of fi ce l iq ui da ti on , li ab il it ie s on th e bo ok s of th e N ew Y or k of fi ce s ho ul d be c la im s ag ai ns t N ew Y or k as se ts , w hi le l ia bi li ti es b oo ke d at o th er o ff ic es s ho ul d no t be a ll ow ed a s cl ai m s ag ai ns t N ew Y or k as se ts . C on fu si on c ou ld ar is e, ho w ev er , w he n a cu st om er 's o r co un te rp ar ty 's co nf ir m at io n re fl ec te d th at t he t ra ns ac ti on w as f or t he a cc ou nt of t he N ew Y or k of fi ce , w he re as t he b an k ha d bo ok ed t he tr an sa ct io n in an ot he r of fi ce , or w he re th e ad vi ce w as am bi gu ou s. T he i nv ol ve m en t of N ew Y or k pe rs on ne l in t he tr an sa ct io n al so m ig ht b e re le va nt u nd er t he c ur re nt l aw , bu t th e C om m it te e be li ev es t ha t it s ho ul d no t be d et er m in at iv e. ·· -- "T he C om m it te e re co m m en ds t ha t it is t he a dv ic e to t he cu st om er o r co un te rp ar ty - -w he th er \w it te n o r el ec tr or ii c ~- th at ul ti m at el y sh ou ld go ve rn w he re th e tr an sa ct io n is de em ed bo ok ed an d th er ef or e w ho se li ab il it y it i s in t he e ve nt o f li qu id at io n. T ha t N ew Y or k pe rs on ne l e xe cu te d th e tr an sa ct io n 55 AMI-ADD-186s ho ul d no t b e de te rm in at iv e. T he p la ce o f b oo ki ng , as r ef le ct ed in t he a dv ic e, no t th e pl ac e de si gn at ed f or p ay m en t, w ou ld go ve rn t he q ue st io n o f w he th er a N ew Y ar k of fi ce l ia bi li ty h ad be en cr ea te d fo r pu rp os es of t he l iq ui da ti on . (T he pl ac e de si gn at ed f or p ay m en t m ay h av e m ea ni ng f or o th er l eg al o r bu si ne ss p ur po se s, b ut in t he li qu id at io n of th e N ew Y ar k of fi ce it w ou ld no t b ea r on w he th er t he l ia bi li ty c re at ed a cl ai m ag ai ns t N ew Y or k as se ts . T hi s ru le w ou ld e li m in at e m uc h of th e ex is ti ng p ot en ti al f or a m bi gu ity .} T he C om m it te e w ou ld fu rt he r st re ng th en t he " do cu m en ta ry " ev id en ce b y ad op ti ng a li qu id at io n ru le u nd er w hi ch t he e vi de nc e, i f g en ui ne , w ou ld b e co nc lu si ve . T he se r ul es a re e xp la in ed i n m or e de ta il i n th e "L iq ui da ti on I ss ue s" s ec ti on b el ow . ·· T h e do cu m en ta ti on r ul es w ill r eq ui re f ur th er d ef in it io n in t he c as e o f fo re ig n ex ch an ge , in te re st r at e an d co m m od it ie s tr an sa ct io ns . T he pl ac e o f bo ok in g sh ou ld go ve rn th es e tr an sa ct io ns as w el l as st ra ig ht li ab il it y tr an sa ct io ns , bu t fa sh io ni ng d oc um en ta ti on th at m ak es th e pl ac e o f b oo ki ng c le ar to co un te rp ar ti es an d ta ke s ac co un t o f pe rm it te d ne tt in g ar ra ng em en ts m ay be m or e co m pl ex . T he C om m it te e re co m m en ds t ha t t he la w e m po w er th e B an ki ng B oa rd to d ef in e th e re qu ir ed do cu m en ta ti on an d th at th e S up er in te nd en t fo rm ul at e pr op os ed r eg ul at io ns s o th at t he v ar io us c on ce rn ed co ns ti tu en ci es c an m ak e th ei r ne ed s an d co nc er ns k no w n. 59 R ec or d- K ee pi na : A do cu m en t- ba se d te st fo r N ew Y or k tr an sa ct io ns . . ne ce ss ar il y im pl ie s th at ·d oc um en ts · ev id en ci ng t he t ra ns ac ti on b e m ai nt ai ne d in N ew Y ar k i f th e tr an sa ct io n w as e ff ec te d by N ew Y ar k p er so nn el . T hi s w ou ld b e go od b an ki ng p ra ct ic e ev en w er e th er e no le ga l r ea so n to m ai nt ai n th e re co rd s in N ew Y or k. T h e C om m it te e th er ef or e re co m m en ds th at th e 56 S up er in te nd en t re qu ir e th at r ec or ds o f al l ba nk in g tr an sa ct io ns w hi ch N ew Y or k em pl oy ee s ef fe ct s ho ul d be m ai nt ai ne d in N ew Y ar k e ve n if th e tr an sa ct io n is bo ok ed t o an ot he r of fi ce . T he se re co rd s sh ou ld s ho w w he th er o r no t th e tr an sa ct io n cr ea te d a N ew Y or k li ab il it y an d su ch o th er i nf or m at io n as t he B an ki ng . D ep ar tm en t de si gn at es a s ne ce ss ar y fo r pr op er s up er vi si on . T h e C om m it te e do es n ot c on te m pl at e th at t he B an ki ng D ep ar tm en t's re co rd -k ee pi ng re qu ir em en ts w ou ld ap pl y to tr an sa ct io ns w he re N ew Y or k pe rs on ne l pe rf or m ed o nl y tr ue su pe rv is or y, i nt ro du ct or y or r el at io ns hi p se rv ic es . ·A ll r ec or ds m ai nt ai ne d in N ew Y or k w ou ld b e su bj ec t to su bp oe na by la w en fo rc em en t au th or it ie s, as th ey ar e at pr es en t. 60 N o R et ai l D ep os it s In ke ep in g w it h th e ru le s re co m m en de d fo r re pr es en ta ti ve o ff ic es , th e C om m it te e re co m m en ds t ha t it b e cl ar if ie d th at r et ai l de po si ts o f U .S . pe rs on s, a s de fi ne d by t he S up er in te nd en t, ca nn ot be ac ce pt ed in N ew Y or k fo r th e ac co un t o f of fs ho re b ra nc he s. E xa m in at io n of O ff sh or e A ct iv it ie s A ll ba nk in g ac ti vi ti es co nd uc te d in N ew Y ar k bu t bo ok ed of fs ho re sh ou ld be su bj ec t to ex am in at io n by th e B an ki ng D ep ar tm en t in it s di sc re ti on b ot h to o bs er ve w he th er do cu m en ta ry r eq ui re m en ts · · ar e be in g co m pl ie d w it h an d fo r su pe rv is or y pu rp os es . · 57 AMI-ADD-187S ta tu to ry R eq ui re m en ts T he C om m it te e re co m m en ds a s ta tu te m ak in g cl ea r th e S up er in te nd en t's p ow er t o ex am in e of fs ho re b us in es s do ne i n N ew Y or k an d th e S up er in te nd en t's p ow er t o re qu ir e th at re co rd s re ga rd in g su ch tr an sa ct io ns b e m ai nt ai ne d in N ew Y or k. It a pp ea rs t ha t th e S up er in te nd en t m ay h av e su ch p ow er u nd er ex is tin g la w , bu t st at ut or y cl ar if ic at io n w ou ld be us ef ul to pr ev en t a ny e nt it y fr om im pe di ng th e S up er in te nd en t's e xe rc is e of a ut ho ri ty .61 · .... ,. . ~ ~ ·. ~ . ._ •. ~ .... 58 VI E X A M IN A T IO N I SS U E S A f or ei gn b an k br an ch /a ge nc y in N ew Y or k of te n is su bj ec te d to e xa m in at io n by i ts h om e co un tr y au di ti ng f ir m , a ho m e co un tr y in te rn al a ud it g ro up , i ts o w n in te rn al a ud it or , t he B an ki ng D ep ar tm en t or t he O C C , th e F R B N Y ( an d th e F D IC if i ns ur ed ), a nd p er ha ps a s ep ar at e ou ts id e au di to r fo r U .S . op er at io ns . In a dd it io n, i t m ay h av e re po rt in g re qu ir em en ts t o or b e ex am in ed b y its h om e co un tr y re gu la to r. L og ic al ly , th er e ar e to o m an y au di to rs /e xa m in er s: E ac h ha s its s pe ci fi c fu nc ti on an d re as on f or b ei ng , b ut th e pr oc es s ob vi ou sl y ca n be w as te fu l. T he C om m it te e th er ef or e re co m m en ds th at i n ge ne ra l th e B an ki ng D ep ar tm en t sh ou ld e va lu at e th e w or k pe rf or m ed b y ot he rs an d se ek no t to du pl ic at e th at w or k w he re it is un ne ce ss ar y. C on ti nu ed c oo rd in at io n of e xa m in at io ns , as t he C om m it te e un de rs ta nd s is p la nn ed b y th e B an ki ng D ep ar tm en t an d th e F R B N Y , w ill b e of p ar ti cu la r im po rt an ce n ow t ha t th e E nh an ce m en t A ct r eq ui re s an nu al o n- si te e xa m in at io ns .6 2 T he co st o f e xa m in at io ns c an b ec om e a si gn if ic an t c om pe ti ti ve is su e. P ro fe ss io na l S ta ff T he l ev el o f kn ow le dg e an d ex pe rt is e of e xa m in at io n st af f is ex tr em el y im po rt an t to co nd uc ti ng ex am in at io ns ef fi ci en tly . E xa m in er s w ho a re u nf am il ia r w ith i nt er na ti on al w ho le sa le b an ki ng o pe ra ti on s in ev ita bl y pe rf or m le ss u se fu l·a nd · · e ff ec tiv e ex am in at io ns ; a s w el l as i m po si ng a n un fa ir b ur de n on · m an ag em en t. T he C om m it te e re co m m en ds t ha t th e . . B ar ik in g D ep ar tm en t tr ai n an d m ai nt ai n a sp ec ia li ze d ex am in at io n st af f to ex am in e fo re ig n ba nk br an ch es /a ge nc ie s. In lig ht of co m pe ti ti on fo r ex pe ri en ce d pe rs on ne l, at tr ac ti ng a nd r et ai ni ng 59 AMI-ADD-188 su ch st af f w ill re qu ir e hi gh er sa la ri es th an th e B an ki ng D ep ar tm en t cu rr en tl y is ab le to pa y. T he C om m it te e re co m m en ds t ha t th e L eg is la tu re a nd E xe cu tiv e B ra nc h en ab le th e B an ki ng D ep ar tm en t t o pa y th es e hi gh er s al ar ie s. T he c os t ul ti m at el y w ill be bo rn e by th e ex am in ed ba nk s. T he al te rn at iv e is l es s pr ot ec ti on a nd f ur th er e ro si on o f th e du al ba nk in g sy st em , w hi ch al re ad y is th re at en ed by th e fe de ra li za ti on o f ba nk p ow er s an d th e F D IC 's n ew p ow er s fo r ea rl y in te rv en ti on a nd c lo su re o f t ro ub le d st at e- ch ar te re d ba nk s. R ep or ti ng R eq ui re m en ts F or ei gn b ra nc he s an d ag en ci es , l ik e do m es tic b an ks , ar e su bj ec t to n um er ou s re po rt in g re qu ir em en ts . T he C om m it te e di d no t fi nd t ha t an y sp ec if ic r ep or ts s ho ul d be e li m in at ed b ut re co m m en ds g en er al ly th at , to t he e xt en t p os si bl e, w he re b an ks ha ve b ot h st at e an d fe de ra l r ep or ti ng o r ap pl ic at io n ob lig at io ns , th e B an ki ng D ep ar tm en t sh ou ld c on ti nu e to a cc ep t re po rt s or ap pl ic at io ns o n th e fe de ra l fo rm . T hi s is a si m pl e m at te r of ad m in is tr at iv e ef fi ci en cy . A nd i f th e B an ki ng D ep ar tm en t re qu ir es a dd it io na l in fo rm at io n no t ca lle d fo r by t he f ed er al fo rm , it s ho ul d be , as i t no rm al ly is n ow , a cl ea r ad di ti on to t he fo rm . O th er S up er vi si on I ss ue s T he C om m it te e so ug ht t o id en tif y pa rt ic ul ar a re as o f ba nk in g, o th er t ha n tr ad it io na l as se t qu al ity o r in te re st r at e or cu rr en cy r is k is su es , w hi ch c ou ld p os e th re at s to t he h ea lt h of a ba nk o r th e ba nk in g sy st em .·· T w o ·o f th es e ar ea s w ar ra nt co m m en t. T he g re at es t c ha ng e in w ho le sa le b an ki ng in re ce nt y ea rs ha s be en th e gr ow th of of f- ba la nc e- sh ee t an d de ri va ti ve 60 tr an sa ct io ns . M aj or f or ei gn a nd U .S . ba nk s en ga ge a ct iv el y in th es e m ar ke ts bo th in N ew Y or k an d el se w he re . T he se tr an sa ct io ns , m an y of w hi ch a re d es ig ne d to h ed ge o r sp ec ul at e in c ur re nc y an d in te re st r at e m ar ke ts , of te n re su lt i n ex tr em el y la rg e no ti on al p os it io ns w hi ch in vo lv e co un te r- pa rt y ri sk s as w el l as i nt er es t ra te o r cu rr en cy r is k. T he C om m it te e co nc lu de s th at of f- ba la nc e- sh ee t tr an sa ct io ns o f th is n at ur e re su lt i n si gn if ic an t da ng er s m ai nl y w he n in te rn al c on tr ol s do n ot p ro pe rl y ev al ua te a nd r es tr ic t t he ri sk s w hi ch t ra de rs c an a ss um e or p er m it t o co nt in ue . T he re ha ve b ee n a nu m be r of c as es o f ba nk s an d in ve st m en t ba nk s w he re u na ut ho ri ze d tr ad in g or lo os e su pe rv is io n ha ve r es ul te d in s ig ni fi ca nt l os se s. T o pr ev en t th es e si ti. ui tio ns f ro m a ri si ng , th e C om m it te e re co m m en ds th at th e B an ki ng D ep ar tm en t co nt in ue to re qu ir e ea ch fo re ig n ba nk br an ch /a ge nc y to m ai nt ai n ap pr op ri at e in te rn al c on tr ol s fo r of f- ba la nc e- sh ee t tr an sa ct io ns ; in ad di ti on , th e B an ki ng D ep ar tm en t sh ou ld co ns id er -w he th er th e ba nk 's o ut si de a ud it or s sh ou ld b e re qu ir ed to o pi ne o n th e ad eq ua cy o f th es e co nt ro ls . T he C om m it te e no te s th at s im il ar o pi ni on s w ill b e re qu ir ed f or F D IC -i ns ur ed ba nk s un de r F D IC IA .6 3 In t he c as e of N ew Y or k br an ch es /a ge nc ie s of f or ei gn ba nk s, s up er vi so ry i ss ue s m ay a ri se w he n, i n or de r to g ai n a hi gh er r at in g fo r ob li ga ti on s of o th er p ar ts o f an i nt er na ti on al ba nk in g sy st em o r to qu al if y fo r ex em pt io n fr om s ec ur it ie s re gi st ra ti on r eq ui re m en ts , N ew Y or k br an ch es g ua ra nt ee t he ob li ga ti on s of o th er br an ch es or su bs id ia ri es o f th e sa m e -b an k. ~ -T he se ·- gu ar an te es ,· ·so lo rr g ·as th ey ar e ge nu in e gu ar an te es , a re li ab il it ie s of th e N ew Y or k br an ch w hi ch q u: lli fy · fo r th e N ew Y or k as se t pr io ri ty i n li qu id at io n. 61 AMI-ADD-189 . A s ec on d ph en om en on th at is n ot a pp ar en t fr om a b an k or b ra nc h' s ba la nc e sh ee t, bu t ca n ca us e sy st em ic p ro bl em s, ar is es w he n a ba nk o r br an ch f re qu en tl y ha s a pa ym en t v ol um e th at i s ab no rm al ly l ar ge c om pa re d w ith i ts b al an ce s he et s iz e. F or th e m os t pa rt , th is is su e is pr ot ec te d ag ai ns t by th e pa ym en ts s ys te m i ts el f, w hi ch , if i t op er at es c or re ct ly , w ill n ot ex te nd e xc es si ve i nt ra -d ay c re di t.6 5 F ro m a b an k su pe rv is or y pe rs pe ct iv e, t he C om m it te e be lie ve s th at th is a ls o is b as ic al ly a co nt ro ls i ss ue , an d re co m m en ds t ha t w he re p ay m en t vo lu m es ar e hi gh in re la ti on to ba la nc e sh ee t si ze , th e B an ki ng D ep ar tm en t s ho ul d as su re it se lf th at a pp ro pr ia te c on tr ol s ar e in pl ac e so t ha t th e ba nk d oe s no t ov er ex po se i ts el f on a n in tr a- da y ba si s. · - · 62 V II S U P E R V IS IO N O F B R A N C H E S /A G E N C IE S T O P R O T E C T N E W Y O R K C R E D IT O R S O ne of th e ke y go al s of r eg ul at in g an d su pe rv is in g br an ch es /a ge nc ie s of f or ei gn b an ks i s to p ro te ct N ew Y or k cr ed it or s of t ho se of fi ce s in t he e ve nt t ha t th e ba nk f ai ls . A lt ho ug h th is g oa l of r eg ul at io n an d su pe rv is io n of o ff ic es o f fo re ig n ba nk s is t he s am e as a m aj or g oa l of r eg ul at io n an d su pe rv is io n of do m es ti c ba nk s, U ni te d S ta te s re gu la to ry au th or it ie s ha ve li tt le in fl ue nc e o r ·c on tr ol o ve r w he th er a fo re ig n ba nk m ay f ai l. U ni te d S ta te s re gu la to rs m us t re ly o n ho m e co un tr y re gu la to rs t o pr ev en t or r em ed y th e fa il ur e of fo re ig n ba nk s th at d o bu si ne ss h er e, a nd , in th e ev en t o f f ai lu re , th e U ni te d S ta te s ro le i s ba si ca lly l im it ed t o pr ot ec ti ng t ho se w ho d ea lt w ith t he U .S . of fi ce . P ro te ct in g th os e w ho de al w ith N ew Y or k of fi ce s of fo re ig n ba nk s in th e ev en t o f fa il ur e be gi ns w ith so un d li qu id at io n la w s, as to w hi ch th e C om m it te e m ak es re co m m en da ti on s be lo w . In or de r to ut il iz e th os e la w s, ho w ev er , t he s up er vi so r ha s to p ur su e po li ci es w hi ch r ea so na bl y as su re t ha t th e as se ts o f th e N ew Y or k of fi ce w ill b e at l ea st eq ua l t o th e li ab il it ie s o f t he N ew Y or k of fi ce u nd er th os e ru le s. Y et t o en fo rc e po li ci es o n he al th y ba nk s w hi ch r el ie d pr im ar il y on N ew Y or k as se ts r at he r th an o n th e fi na nc ia l st re ng th o f t he ba nk a s a w ho le w ou ld b e cu m be rs om e an d w ou ld t en d to ne ga te · th e be ne fi ts · o f· th e· br an ch /a ge nc y fo tr n. A s a ·c on se qu en ce , th e ·C om m it te e· b el ie ve s th at th e 'B an ki ii g D ep ar tm en t sh ou ld i m pl em en t po lic ie s to m ai nt ai n N ew Y or k as se ts o nl y w he n ei th er th e ba nk o r its h om e co un tr y' s ec on om y sh ow s si gn s of w ea kn es s th at ev en tu al ly m ay po te nt ia ll y 63 AMI-ADD-190t hr ea te n th e ba nk 's s ol ve nc y or li qu id ity . W he n th es e si gn s ar e pr es en t, t he C om m it te e be li ev es t ha t th e B an ki ng D ep ar tm en t sh ou ld im pl em en t a pr og ra m to (1 ) pr om ot e as se t di ve rs if ic at io n an d th e ho ld in g o f N ew Y or k- ba se d as se ts , (2 ) re st ri ct a m ou nt s du e fr om h om e (a nd o th er b ra nc h) o ff ic e, ( 3) pr ot ec t ag ai ns t se t- of f o r ne tt in g ag ai ns t de po si ts r ef le ct ed a s as se ts o n th e br an ch /a ge nc y' s bo ok s, a nd ( 4) i m po se a n a ss et m ai nt en an ce p ro gr am . T he se s te ps w ill n ot g ua ra nt ee t ha t al l cr ed it or s of t he N ew Y or k br an ch /a ge nc y o f a fa il ed f or ei gn ba nk w ill b e pa id i n fu ll, b ut t he y sh ou ld p ro vi de r ea so na bl e pr ot ec ti on , g iv en th e fa ct t ha t un in su re d br an ch es /a ge nc ie s w ill ha ve n o su bs ta nt ia l re ta il d ep os it s. M or eo ve r, t he se s te ps a re fl ex ib le e no ug h th at t he B an ki ng D ep ar tm en t ca n ·u se t he in se le ct iv el y an d to v ar yi ng d eg re es · to ad dr es s th e va ri et y o f pr ob le m s or p ot en ti al p ro bl em s th at m ay a ri se . E xc ep t w he n a ba nk is s ub je ct t o an a ss et m ai nt en an ce pr og ra m , th e C om m it te e do es n ot b el ie ve t ha t a b ra n ch / a ge nc y sh ou ld b e re qu ir ed t o· m ai nt ai n its ow n lo an l os s re se rv es . A de qu at e re se rv es sh ou ld b e m ai nt ai ne d by t he b an k as a w ho le , a nd th e B an ki ng D ep ar tm en t s ho ul d se ek to s at is fy it se lf th at r es er ve s ar e su ff ic ie nt . A l ac k of a ss ur an ce a s to a de qu ac y o f re se rv es o n th e ba nk 's bo ok s m ay le ad th e B an ki ng D ep ar tm en t to i m po se s om e of t he m ea su re s ou tl in ed i n th e pr ec ed in g pa ra gr ap h, w hi ch m ay i nc lu de e st ab li sh m en t of l oa n lo ss r es er ve s o n t he b oo ks o f th e b ra n ch / a ge nc y. A ss et D iv er si fi ca ti on . A ss et d iv er si fi ca ti on , { )n e of th e ·b as ic -p ri nc ip le s of b an k m an ag em en t, w hi ch is em ph as iz ed in · th e su pe rv is io n- ~· :o f · · do m es ti c ba nk s, h as n ot b ee n e m ph as iz ed i n th e su pe rv is io n of fo re ig n ba n k of fi ce s be ca us e th os e of fi ce s ar e no t ex pe ct ed t o st an d o n t he ir o w n. H ow ev er , w he re a N ew Y or k of fi ce h as a 64 co nc en tr at io n o f as se ts i n. th e ob li ga ti on s o f bu si ne ss es a nd go ve rn m en t en ti ti es f ro m a f in an ci al ly w ea k ho m e co un tr y, t he B an ki ng D ep ar tm en t s ho ul d be c on ce rn ed a bo ut t ha t co nd it io n an d sh ou ld t ak e st ep s to r ed re ss i t. E ve n a ba la nc e sh ee t th at ha s as se ts o f ob li go rs f ro m s ev er al w ea k co un tr ie s is p re fe ra bl e to o ne t ha t ha s as se ts f ro m a s in gl e su ch c ou nt ry , s in ce i t i s le ss li ke ly t ha t se ve ra l na ti on s w ill e xp er ie nc e ec on om ic c ri si s at on ce t ha n th at a s in gl e on e w ill d o so . T he C om m it te e w ou ld le av e th e ex te nt o f di ve rs if ic at io n re qu ir ed t o pr ac ti ca li ty a nd th e B an ki ng D ep ar tm en t's c as e- by -c as e ju dg m en t. A s pa rt o f th is d iv er si fi ca ti on , th e B an ki ng D ep ar tm en t sh ou ld e nc ou ra ge t he h ol di ng · o f N ew Y or k ar td o th er U ni te d S ta te s as se ts , as w el l as · a h ig h le ve l of in ve st m en t gr ad e li qu id as se ts . In th e ev en t o f a li qu id at io n, i t us ua ll y is m or e di ff ic ul t to c ol le ct l oa ns d ue f ro m f or ei gn o bl ig or s th an l oa ns d ue f ro m U ni te d S ta te s ob li go rs . In a dd it io n, h ar d as se ts a nd l iq ui d as se ts i n th e U .S . of te n pr ov id e gr ea te r va lu e in a l iq ui da ti on th an d o fo re ig n as se ts .6 6 D ue F ro m H om e O ff ic e F ed er al b ra nc he s ar e li m it ed i n th e pe rc en ta ge o f th ei r as se ts t ha t ca n co ns is t o f ac co un ts d ue f ro m h ea d of fi ce o r, i n so m e ca se s, o th er b ra nc h of fi ce s of t he s am e ba nk . A t th e pr es en t ti m e th is p er ce nt ag e is 5 0% . T he B an ki ng D ep ar tm en t re st ri ct ed t hi s pe rc en ta ge b ef or e 19 83 b ut s in ce t he n ha s no t do ne s o. 67 · · - · · · T h e C om m it te e re co lil il1 en ds t ha t ·w he n a ba nk o r its ho m e co un tr y ec on om y ex hi bi ts s ig ns o f w ea kn es s, · t he B an ki ng D ep ar tm en t sh ou ld l im it t he p er ce nt ag e o f as se ts o f th e N ew Y or k of fi ce t ha t m ay c on si st o f ac co un ts d ue f ro m t he b an k' s ho m e an d ot he r br an ch o ff ic es . B y im po si ng t hi s li m it at io n in 65 AMI-ADD-191 th e ev en t o f s ig ns o f w ea kn es s, t he B an ki ng D ep ar tm en t w ill b e en ha n- ci ng it s ab il it y to p ro vi de a dd it io na l p ro te ct io n if th e ba nk or co un tr y w ea ke ns fu rt he r. T h e C om m it te e be li ev es th e B an ki ng D ep ar tm en t sh ou ld co nt in ue to ha ve th e ri gh t to im po se s uc h a li m it at io n fl ex ib ly b as ed o n th e ne ed s o f a gi ve n si tu at io n. Se t- O ff a nd N et ti ng O n e o f th e m aj or t he or et ic al c on ce rn s ab ou t pr ot ec ti ng cr ed it or s o f N ew Y or k br an ch es /a ge nc ie s is t he p re va le nc e o f se t- of f an d ne tt in g sc he m es i n w ho le sa le m ar ke ts . C le ar in g ag en ci es a nd i nt er ba nk · m ar ke ts - h av e ·a do pt ed -v a:r hm s fo rm s o f ne tt in g ag re em en ts u nd er w hi ch t he a ss et s o f a N ew Y or k of fi ce co ul d b e ne tt ed a ga in st a l ia bi li ty o f th e ho m e of fi ce o r an ot he r br an ch o f th e sa m e ba nk o r th e sa m e cl ea ri ng g ro up . T hi s m ec ha ni sm c ou ld r es ul t in " du e fr om " ac co un ts o n t he b oo ks o f a N ew Y or k br an ch b ei ng i ll us or y (u nc ol le ct ib le ) as se ts i n th e ev en t o f a li qu id at io n. A s a co ns eq ue nc e, t he a rg um en t ru ns , th e le ss s op hi st ic at ed c re di to rs o f th e N ew Y or k br an ch m ig ht no t b e pa id i n f ul l, w hi le th e so ph is ti ca te d w ho le sa le b an k cr ed it or s m ig ht b e m ad e w ho le t hr ou gh t he n et ti ng p ro ce ss . T h e qu es ti on a ri se s, t he re fo re , w he th er N ew Y or k' s se t- of f an d n et ti ng r ul es s ho ul d pr ot ec t th e un se cu re d cr ed it or s o f a N ew Y a rk o ff ic e fr om t he a bi li ty o f ba nk s to s et o ff N ew Y or k of fi ce d ep os it s ag ai ns t l ia bi li ti es o f n on -N ew Y ar k o ff ic es . F o r se ve ra l re as on s, s uc h a se t- of f pr oh ib it io n do es n ot a pp ea r to b e se ns ib le o r a vi ab le a lt er na ti ve . F ir st , it w ou ld p ut N ew Y or k- ou t o f st ep w it h in te rn at io na l- tr en ds .- - It a pp ea rs t h at i n m os t co un tr ie s th e la w s pe rm it · ne tt in g· ·a rr an ge m en ts ;- -e ve n ... w he re b an ks d o n ot o rd in ar il y ha ve a r ig ht o f se t- of f. S ec on d, as a m at te r o f p ol ic y, i t a pp ea rs t ha t ne tt in g ar ra ng em en ts s er ve th e pa ym en ts s ys te m w el l. W it ho ut n et ti ng a rr an ge m en ts , i nt ra - 66 da y m an ag em en t of ri sk . is le ss ef fi ci en t, w hi ch le ad s to po te nt ia l sy st em ic r is k an d im pe de s in te rn at io na l co m m er ce . A nd t hi rd , in F D IC IA C on gr es s ha s pa rt ia ll y pr ee m pt ed t he fi el d by e xp lic itl y va li da ti ng m an y ne tt in g ar ra ng em en ts a m on g fi na nc ia l in st it ut io ns .6 8 It w ou ld b e op en to N ew Y or k to v al id at e on ly e xp li ci tl y ag re ed n et ti ng a rr an ge m en ts , bu t th is a pp ro ac h w ou ld i gn or e N ew Y or k' s lo ng h is to ry o f re co gn iz in g a ba nk er 's r ig ht o f of fs et .6 9 T he n ee d to p ro te ct N ew Y or k cr ed it or s do es n o t ap pe ar so co m pe ll in g to th e C om m it te e th at it sh ou ld re co m m en d re vi si ng th is bo dy of la w , w hi ch w ou ld ha ve ra m if ic at io ns be yo nd th e re gu la ti on · 'a nd su pe rv is io n o f tr an sn at io na l ba nk s. T he C om m it te e be li ev es t ha t by r eq ui ri ng w ea k ba nk s an d ba nk s on a ss et m ai nt en an ce t o en te r in to a gr ee m en ts w it h N ew Y or k de po si to ri es w hi ch e xp lic itl y ag re e no t to n et a ga in st N ew Y or k of fi ce a ss et s, t he B an ki ng D ep ar tm en t ca n pr ot ec t cr ed it or s o f b an ks t ha t a re k no w n to h av e w ea kn es se s. In a ss et m ai nt en an ce c as es , on ly d ep os it s in d ep os it or ie s w it h su ch n on - ne tt in g ag re em en ts w ou ld b e co ns id er ed e li gi bl e de po si ts f or as se t m ai nt en an ce pu rp os es . (T hi s in fa ct w as B an ki ng D ep ar tm en t po lic y be fo re 19 83 , bu t w as te rm in at ed w he n ge ne ra l as se t m ai nt en an ce w as r ep ea le d .f 0 T h e ri sk t ha t is r un b y pe rm it ti ng n et ti ng a nd s et -o ff i n th e ca se o f ap pa re nt ly s tr on g ba nk s is t ha t an a pp ar en tl y st ro ng ba nk w ill f ai l as a r es ul t o f a ca ta st ro ph ic e ve nt . In p ra ct ic e, th is v er y ra re ly o cc ur s, ·a nd t he · b en ef it s o f a w ho le sa le b an ki ng sy st em t ha t fu nc ti on s sm oo th ly ' o ut W ei gh , in · t he C om in lt te e' s' · ju dg m en t, t he r el at iv el y re m ot e ri sk o f lo ss a s a co ns eq ue nc e. T h e lo ss , w e w ou ld p oi nt o ut in a dd it io n, w ou ld n ot b e a lo ss t o 67 AMI-ADD-192 re ta il d ep os it or s si nc e un in su re d br an ch es / ag en ci es w ill h av e no s ub st an ti al r et ai l de po si ts . A ss et M ai nt en an ce A ss et m ai nt en an ce h as l on g be en a m on g th e B an ki ng D ep ar tm en t's n or m al m ec ha ni sm s fo r pr ot ec ti ng N ew Y or k cr ed it or s. U nt il 1 98 3 al l N ew Y or k br an ch es /a ge nc ie s w er e su bj ec t t o as se t m ai nt en an ce ru le s, b ut a ss et m ai nt en an ce fo r al l bu t a fe w b an ks w as l if te d in t ha t ye ar i n or de r to e qu al iz e tr ea tm en t w ith fe de ra l br an ch es au th or iz ed u nd er th e IB A w hi ch , un de r th e O C C 's ru le s, w er e no t su bj ec t to as se t m ai nt en an ce . 7 1 T od ay ; t h e B an ki ng D ep ar tm en t ap pl ie s as se t m ai nt en an ce t o ab ou t 25 b an ks "f ro m c ou nt ri es w ho se c ur re nc y or ec on om y ar e un st ab le an d to a fe w ba nk s th at ar e ex pe ri en ci ng f in an ci al w ea kn es s. T he se b an ks a cc ou nt f or l es s th an 1 % o f t he to ta l as se ts o f f or ei gn b an k of fi ce s in N ew Y or k. U nd er as se t m ai nt en an ce , th e B an ki ng D ep ar tm en t ad op ts a q ua si -s ep ar at e- en ti ty a pp ro ac h to s up er vi si ng a f or ei gn ba nk 's b ra nc h/ ag en cy . It ta ke s th e lia bi lit ie s at f ac e va lu e an d re qu ir es t he b ra nc h/ ag en cy to m ai nt ai n as se ts i n N ew Y or k at le as t eq ua l to a p er ce nt ag e of th os e lia bi lit ie s, w hi ch u su al ly is se t be tw ee n 10 5% a nd 1 25 % . In a dd it io n, i n co m pu tin g th e as se ts of t he b ra nc h/ ag en cy , th e B an ki ng D ep ar tm en t m ay as si gn d is co un ts t o as se ts f ro m w ea k co un tr ie s or a ss et s of do ub tf ul co lle ct ab ili ty , so m et im es re qu ir in g th at as se ts be co un te d at a s li tt le a s 20 % o f fa ce v al ue .7 2 F or b an ks o n as se t m ai nt en an ce i n N ew Y or k, t he B an ki ng D ep ar tm en t al so g iv .e s no a ss et c re di t f or a cc ou nt s du e fr om th e· b an k' s ho m e ·o ff ic e or ot he r br an ch o r af fi li at e of fi ce s. ·· A ss et m ai nt en an ce h as t he p ot en ti al t o pr ot ec t N ew Y or k br an ch /a ge nc y cr ed it or s if th e as se ts a re p ro pe rl y va lu ed 68 on t he b al an ce s he et . In m an y ca se s, h ow ev er , th e C om m it te e re co gn iz es t ha t th is m ay n ot b e th e ca se . F or e xa m pl e, i f m os t of t he c re di ts a re h om e- co un tr y ba se d, h om e co un tr y po li ti ca l or e co no m ic u ph ea va l m ay r en de r th em u nc ol le ct ib le . F or th is re as on , th e C om m it te e re co m m en ds t he d iv er si fi ca ti on g oa ls di sc us se d ab ov e an d lo an l os s re se rv es w he re a pp ro pr ia te . In s om e ca se s, i t m ay b e te m pt in g fo r ba nk s in d if fi cu lty to e ng ag e in t ra ns ac ti on s w hi ch a re b en ef ic ia l to h om e co un tr y of fi ce s bu t no t to U S . of fi ce s. T he B an ki ng D ep ar tm en t th er ef or e sh ou ld r eq ui re t ha t al l br an ch es /a ge nc ie s su bj ec t to as se t m ai nt en an ce c on du ct a ll tr an sa ct io ns w ith a ff ili at es a t at m 's l en gt h fo r eq ui va le nt v al ue o r w ith B an ki ng D ep ar tm en t · a pp ro va l. V io la tio ns o f th is r ul e sh ou ld · b e pe rs on al v io la tio ns by m an ag er s w ho k no w in gl y pa rt ic ip at e in th e vi ol at io ns a s w el l as co rp or at e vi ol at io ns . T he se r ul es ap pl y to af fi lia te s of in co rp or at ed s ub si di ar ie s, a nd w he n, u nd er a ss et m ai nt en an ce , a br an ch /a ge nc y is t re at ed a s a qu as i- in co rp or at ed e nt ity , it is ap pr op ri at e to i m po se s uc h ru le s on th at e nt ity . In a dd it io n, t he B an ki ng D ep ar tm en t s ho ul d be a le rt to p re ve nt o th er m ea ns o f ci rc um ve nt in g as se t m ai nt en an ce r eq ui re m en ts . T he C om m it te e is a w ar e th at s om et im es w he n a w ea k ba nk i s fi rs t m ad e su bj ec t to as se t m ai nt en an ce , it i s no t po ss ib le f or t he B an ki ng D ep ar tm en t t o ob ta in s uf fi ci en t as se ts in N ew Y or k. T he B an ki ng D ep ar tm en t's p re se nt p ol ic y of se ek in g as se ts r at he r th an p re ci pi to us ly t er m in at in g lic en se s w he n di ff ic ul tie s ar is e ap pe ar s ap pr op ri at e. T he B an ki ng D ep ar tm en t ca n, of c ou rs e, p ic k up e ar ly s ig ns o f a ba nk 's · w ea kn es s by w at ch in g its ·l iq ui di ty a nd · i ts a cc es s to · w ho le sa le m ar ke ts . O ft en a b an k' s w ho le sa le ' l in es · o f' ci ed it a re r ed uc ed w el l be fo re its pr ob le m s ar e re ve al ed as ba la nc e sh ee t w ea kn es s. 69 AMI-ADD-193 V II I L IC E N S E T E R M IN A T IO N T he B an ki ng D ep ar tm en t ha s a nu m be r of fl ex ib le t oo ls th at i t ca n us e to a tt em pt t o re m ed y pr ob le m s th at i t pe rc ei ve s at N ew Y or k- li ce ns ed o ff ic es o f fo re ig n ba nk s. T he se r an ge fr om i nf or m al p re ss ur e, t hr ou gh c ea se a nd d es is t or de rs , to t he ul ti m at e sa nc ti on s of li ce ns e re vo ca ti on an d ta ki ng po ss es si on .7 3 T h e C om m it te e do es n ot b el ie ve t ha t ad di ti on al to ol s ar e re qu ir ed bu t do es be li ev e th at t he s ta nd ar ds fo r li ce ns e re vo ca ti on s ho ul d be -r ed ef in ed a il d th at su pe rv is io n of a ba nk w ho se l ic e: riS e ha s· b ee n -r ev ok ed s ho ul d be c la ri fi ed . U nd er th e E nh an ce m en t A ct , t he F ed er al R es er ve B oa rd ha s be en g iv en p ow er t o te rm in at e th e li ce ns e o f a st at e- li ce ns ed o ff ic e o f a fo re ig n ba nk i f ei th er ( 1) t he f or ei gn b an k is n ot " su bj ec t to c om pr eh en si ve s up er vi si on o r re gu la ti on o n a co ns ol id at ed b as is b y th e ap pr op ri at e au th or it ie s in i ts h om e co un tr y" o r (2 ) "t he re i s re as on ab le c au se t o be lie ve " th at t he fo re ig n b an k h as " co m m it te d a vi ol at io n of la w o r en ga ge d in a n un sa fe o r un so un d ba nk in g pr ac ti ce i n th e U ni te d S ta te s" a s a re su lt o f w hi ch c on ti nu ed o pe ra ti on i n th e U .S . "w ou ld n ot b e co ns is te nt w it h th e pu bl ic i nt er es t" .7 4 T he l aw d ir ec ts t ha t an y fo re ig n ba nk t ha t is r eq ui re d to t er m in at e ac ti vi ti es i n th e U .S . sh al l co m pl y w it h "a pp li ca bl e F ed er al an d S ta te l aw '' w ith re sp ec t to p ro ce du re s fo r cl os ur e o r di ss ol ut io n. 75 .T he B an ki ng L aw · s ta nd ar ds · f o r -l ic en se r ev oc at io n ar e th e sa m e as t he B an ki ng L aw ·s ta nd ar ds -f or ta ki ng p os se ss io n o f :.: ·· a br an ch /a ge nc y o f a fo re ig n ba nk .7 6 T he y in cl ud e vi ol at io ns o f la w , co nd uc ti ng bu si ne ss in a n un au th or iz ed or un sa fe m an ne r, b ei ng i n an u ns ou nd o r un sa fe c on di ti on t o tr an sa ct 70 bu si ne ss , ha vi ng n eg le ct ed o r re fu se d to c om pl y w it h an o rd er of th e S up er in te nd en t, o r ha vi ng r ef us ed t o pr ov id e in fo rm at io n as r eq ui re d. T he se g w un ds t hu s in cl ud e, i n so m ew ha t d if fe re nt la ng ua ge , th e gr ou nd s fo r li ce ns e re vo ca ti on g ra nt ed t o th e F ed er al R es er ve B oa rd , ex ce pt fo r th e ho m e co un tr y su pe rv is io n st an da rd . T he C om m it te e do es n ot r ec om m en d th at a ny s ta tu to ry g ro un ds b e ad de d bu t, b el ie vi ng i n ge ne ra l th at if e nt ry st an da rd s ar e no lo ng er m et by a ba nk th e S up er in te nd en t sh ou ld h av e po w er t o te rm in at e its l ic en se , th e C om m it te e re co m m en ds t ha t th e st at ut e pe rm it t he B an ki ng B oa rd b y re gu la ti on t o de si gn at e so m e en tr y st an da rd s w hi ch , if n o lo ng er m et , w ou ld b e gr ou nd s fo r li ce ns e re vo ca ti on . In ad di ti on , th e· C om m it te e re co m m en ds th at ne w sa fe gu ar ds b e en ac te d to r eq ui re t ha t a he ar in g b e he ld b ef or e li ce ns e re vo ca ti on . Su ch a he ar in g sh ou ld no t st ay ot he r en fo rc em en t m ea su re s, b ut d ue p ro ce ss s ta nd ar ds s ho ul d be ob se rv ed b ef or e re vo ki ng a l ic en se t o do b us in es s. M or e ur ge nt t ha n ch an gi ng t he s ta nd ar ds f or l ic en se re vo ca ti on i s th e ne ce ss it y to p ro vi de a c le ar m ec ha ni sm f or w in di ng u p th e af fa ir s o f a N ew Y or k br an ch /a ge nc y w ho se li ce ns e ha s be en t er m in at ed e it he r by t he F ed er al R es er ve B oa rd o r th e S up er in te nd en t. A s no te d ab ov e, t he f ed er al l aw on ly d ir ec ts t he t er m in at ed l ic en se e to c om pl y w ith f ed er al a nd st at e la w s bu t d oe s no t p ro vi de a m ec ha ni sm f or w in di ng u p th e bu si ne ss . C ur re nt N ew Y or k la w i s al so d ef ic ie nt i n th at i t pr ov id es f or n o su pe rv is io n of a l iq ui da ti on f ol lo w in g a li ce ns e re vo ca ti on . T he C om m it te e th er ef or e re co m m en ds t ha t th e B an ki ng L aw e m po w er t h e S up er in te nd en t to s up er vi se t he w it hd ra w al o f a ba nk w ho se l ic en se t o do b us in es s h as b ee n te rm in at ed . Su ch s up er vi si on s ho ul d in cl ud e th e co nt in ui ng ri gh t to i ss ue o rd er s, e xa m in e an d re qu ir e an d re ce iv e su ch re po rt s as th e S up er in te nd en t de em s ne ce ss ar y. T h e 71 AMI-ADD-194 S up er in te nd en t al so s ho ul d ha ve t he c on ti nu in g ri gh t to t ak e po ss es si on u nd er t he e xi st in g st at ut or y gr ou nd s. 77 72 IX .L IQ U ID A T IO N I S S U E S A s re fl ec te d in s ev er al a re as o f th is R ep or t, m an y o f t he su pe rv is or y is su es th at ar is e w it h re sp ec t to br an ch es an d ag en ci es l oo k to t he l iq ui da ti on r ul es t o pr ot ec t cr ed it or s o f th e N ew Y or k br an ch /a ge nc y. T hi s pr ot ec ti on d ep en ds u po n fo ur pr in ci pa l is su es : • T he d ef in it io n o f li ab il it ie s fo r w hi ch t he N ew · Y or k of fi ce i s re sp on si bl e. • T he d ef in it io n o f as se ts w hi ch th e N ew Y or k of fi ce c an u ti li ze t o sa ti sf y th os e li ab il it ie s. • T he r el at iv e pr io ri ty o f N ew Y or k of fi ce c re di to rs w it h re sp ec t to t ho se a ss et s. • T he p ro ce du ra l ab il it y o f th e S up er in te nd en t to ef fe ct a n o rd er ly l iq ui da ti on o f th e as se ts a nd pa ym en t o f th e li ab il it ie s. P ri or it y S ta tu s H is to ri ca ll y, N ew Y or k ha s gi ve n pr io ri ty st at us to cr ed it or s o f th e N ew Y or k of fi ce . 7 8 T h e C om m it te e be li ev es th at t hi s pr io ri ty f or c re di to rs o f a N ew Y or k br an ch /a ge nc y is ap pr op ri at e be ca us e ·it p ro V id es l h e b es t m ea ns " fo r N ew Y or k re gu la to rs t o pr ot ec t th os e w ho d ea l w it h th e N ew Y o rk o ff ic e. 73 AMI-ADD-195 A ft er N ew Y or k cl ai m an ts h av e be en p ai d, N ew Y or k la w d ir ec ts t he S up er in te nd en t to d el iv er e xc es s as se ts t o th e ho m e co un tr y li qu id at or a s pa rt o f t he o ve ra ll li qu id at io n of th e ba nk .79 T he a lt er na ti ve f or m ul at io n is th at t he a ss et s co ul d be ut il iz ed t o pr ov id e fi rs t fo r th e pr ot ec ti on o f cr ed it or s of o th er br an ch es /a ge nc ie s in o th er U .S . ju ri sd ic tio ns . U nd er t he I B A a f or ei gn ba nk w hi ch ha s a fe de ra l br an ch i s de em ed t o ha ve a ll of i ts U .S . br an ch es /a ge nc ie s li qu id at ed a s on e. 80 T ha t la w w ou ld t ak e pr ec ed en ce o ve r th e N ew Y or k la w i f th er e w er e bo th a f ed er al b ra nc h an d a N ew Y or k br an ch , bu t it al so s ug ge st s a U .S . po lic y th at c re di to rs o f U .S . of fi ce s sh ou ld b e gi ve n pr io ri ty a s u si ne ss 9 on e . . b y fo re ig n ba nk s in th e U ni te d S ta te s. ar e . .d er iv e. d. .fr .a m .i nf or m at io n fu rn is he d by t he I ns ti tu te f or I nt er na ti on al B an ke rs . 6. ~ ln go W al te r an d A nt ho ny S au nd er s, N at io na l an d G lo ba l C om pe ti ti ve ne ss o f N ew Y or k as a F in an ci al C en te r, N ew Y or k U ni ve rs ity , S al om on C en te r . O cc as io na l P ap er s in B us in es s an d F in an ce 1 99 1- 11 . 7. T hi s po si ti on is r ef le ct ed i n F D IC IA § 2 15 . 8. In tr a B an k, S .A ; B an co d e In te rc am bi o R eg io na l, S. A .; B an k o f C re di t an d C om m er ce I nt er na ti on al S .A 9. B C C I m ai nt ai ne d a N ew Y or k ag en cy . T he B an ki ng D ep ar tm en t ef fe ct iv el y or de re d th at ag en cy t o ce as e op er at io ns i n M ar ch 1 99 1 an d w as o ve rs ee in g an o rd er ly e xi t w he n B C C I · · ·.f ai le d o n- Ju ly -5 , · 19 91 : .. 10 . F D IC IA § 2 15 . 88 I 89 AMI-ADD-203 11 . Se co nd C ou nc il D ir ec tiv e of 1 5 D ec em be r 19 89 on t he C oo rd in at io n of L aw s, R eg ul at io ns a nd A dm in is tr at iv e Pr ov is io ns R el at in g to t he T ak in g U p an d P ur su it o f th e B us in es s of C re di t In st it ut io ns a nd A m en di ng D ir ec tiv e 77 /7 80 /E E C , 32 O .J . E U R . C O M M . (N o. L 38 6) ( 19 89 ) (C ou nc il of E ur op e) . 12 . B an k fo r In te rn at io na l Se ttl em en ts , C om m it te e on B an ki ng R eg ul at io ns a nd S up er vi so ry Pr ac tic es , Pr in ci pl es f or t he S up er vi si on o f B an ks ' F or ei gn E st ab li sh m en ts ( B as le , M ay 19 83 ). 13 . B an k fo r In te rn at io na l Se ttl em en ts , B as le C om m it te e on B an ki ng S up er vi si on , S U P P L E M E N T T O T H E C O N C O R D A T ( T he E ns ur in g of A de qu at e In fo rm at io n Fl ow s B et w ee n B an ki ng S up er vi so ry A ut ho ri ti es ), pu bl is he d as a tt ac he d to I nf or m at io n Fl ow s B et w ee n B an ki ng S up er vi so ry A ut ho ri ti es (B as le , A pr il 1 99 0) . 14 . T he B an ki ng D ep ar tm en t is an o bs er ve r on t he In te ra ge nc y C ou nt ry E xp os ur e R ev ie w C om m it te e (" IC E R C ') as a r ep re se nt at iv e of th e st at es . 15 . S ee F D IC IA § 2 03 . 16 . Se e B an ki ng L aw § 2 6. T he B an ki ng B oa rd i s a go ve ni m ei it al b od y ap po in te d by t he G ov er no r. It co ns is ts o f ba nk er r ep re se nt at iv es , pu bl ic m en ib er s an d th e S up er in te nd en t, w ho i s its c ha ir pe rs on . T he B an ki ng B oa rd h as f or m al a ut ho ri ty t o ad op t re gu la ti on s an d to a pp ro ve c ha rt er s an d m an y ty pe s of 90 lic en se s. T he S up er in te nd en t al so i s th e C hi ef E xe cu tiv e of th e B an ki ng D ep ar tm en t, w hi ch a ct s th ro ug h th e S up er in te nd en t an d hi s or h er a pp oi nt ed de pu tie s. 17 . F D IC IA § 2 02 (a ), a m en di ng I B A § 7 (d )( 2) , 12 U .S .C . § 31 05 (d )( 3) . 18 . F D IC IA § 2 02 (a ), a m en di ng I B A § 7( d) (3 ), 1 2 U .S .C . § 31 05 (d )( 3) . 19 . F ed er al R es er ve A ct § § 23 A a nd 2 3B , 12 U .S .C . § 37 1c e t ~ - fo r. ex am pl es . o f. re gu la ti on o f tr an sa ct io ns w ith a ff ili at es , . 20 . T he l as t si gn if ic an t E ur op ea n ba nk s to f ai l w er e H er st at t an d A m br os ia no . T he se w er e si gn if ic an t ba nk s, b ut w er e no t am on g th ei r co un tr ie s' l ar ge st . 21 . B an ki ng L aw § 3 6( 10 ). Se e F D IC IA § 2 06 , am en di ng IB A b y ad di ng a n ew § 1 5, 1 2 U .S .C . § 31 05 (j ). 22 . F D IC IA § 2 14 (b ), b y cr ea ti ng a n ew I B A § 7 (j ) of th e IB A , 12 U .S .C . § 31 05 0) . 23 . T he g ro un ds u nd er w hi ch t he S up er in te nd en t m ay t ak e po ss es si on o f a ba nk in g in st it ut io n do n ot s pe ci fi ca lly in cl ud e a fa il ur e to m ai nt ai n ad eq ua te c ap ita l. H is to ri ca lly , ho w ev er , th e po w er t o ta ke p os se ss io n w he n a ba nk i s in a n un sa fe a nd u ns ou nd c on di ti on ha s be en i nt er pr et ed t o i nc lu de a c ap it al l ev el w hi ch i s un sa fe . In so lv en cy h as n ot b ee n re qu ir ed . N o ba nk . ha s co nt es te d th is e xe rc is e of th e S up er in te nd en t's po w er . 91 AMI-ADD-204 92 93 AMI-ADD-205 49 . . F or e xa m pl e, t he se n on -b an ki ng A rt ic le X II c om pa ni es in cl ud e T he C .I. T . G ro up /E qu ip m en t Fi na nc in g, I nc .; G en er al E le ct ri c C ap it al C or po ra ti on ; G en er al M ot or s A cc ep ta nc e C or po ra ti on . 50 . 51 . 52 . 53 . 54 . 55 . 56 . 57 . 58 . 59 . S ee B an ki ng L aw § § 50 8, 5 09 . F or e xa m pl e, m an y fi na nc e co m pa ni es a nd l ea si ng co m pa ni es a re i m po rt an t le nd er s in t he c om m er ci al an d co ns um er c re di t m ar ke ts , pr ov id in g th e sa m e ty pe s of lo an s an d ex te ns io ns o f cr ed it a s ba nk s do . . S ee g en er al ly B an ki ng L aw , § 50 8 . .. T he F ed er al R es er ve w as g en er al ly k no w n as t he "l en de r of t he l as t re so rt " fo r ba nk s w hi ch a re m em be rs o f th e F ed er al R es er ve S ys te m . F D IC IA h as li m it ed t he F ed er al R es er ve 's u se o f th e di sc ou nt w in do w ( se e ge ne ra ll y FD IC IA , § 14 2 (a )- (c )) . T he B an ki ng D ep ar tm en t m ay i m pl ic itl y ha ve s uc h au th or it y pu rs ua nt t o se ve ra l pr ov is io ns i n th e B an ki ng L aw . Se e, ~ . B an ki ng L aw § 5 19 . S ee B an ki ng L aw §§ 1 42 , 14 3- b. F ed er al R es er ve R eg ul at io n D , 12 C .P .R . § 20 4. 8( d) (1 99 0) . B an ki ng L aw § 2 00 . ... . - ~ ~ . - . -. . B an ki ng L aw § § 60 5( 11 )( C ); 6 06 (4 )( a) ,.- .. ; . . S e e , ~ . B an ki ng L aw ,§ 1 4( 1) . T he B an ki ng B oa rd al re ad y ha s br oa d au th or it y to a do pt r ul es a nd 94 L 60 . 61 . 62 . 63 . 64 . 65 . re gu la tio ns i t de em s. a dv is ab le , al th ou gh t he l aw , as cu rr en tly d ra ft ed , do es n ot s pe ci fi ca lly r ef er t o "d oc um en ta ti un r ul es " as c on te m pl at ed b y th e C om m itt ee . S e e , ~ . N .Y . C P L R § § 31 02 , 21 11 a nd R .3 12 0; N .Y . C P L § § 61 0. 10 , 61 0. 20 . B an ki ng L aw § 3 6( 4) g iv es t he S up er in te nd en t br oa d au th or it y to e xa m in e ev er y br an ch o r ag en cy l oc at ed i n th e S ta te o f N ew Y or k. In a dd iti on , B an ki ng L aw § 36 (6 ) gr an ts t he S up er in te nd en t th e au th or it y to ex am in e "c or po ra tio ns a ff ili at ed " w ith a b an ki ng .. co rp or at io n, w hi ch a rg ua bl y- w ou ld i nc lu de o ff sh or e en tit ie s. F D IC IA § 2 03 (a )( 1) , by a m en di ng I B A § 7 (c ) to a dd a ne w p ar ag ra ph ( 1) (C ). F D IC IA § 1 12 . Se e, ~ . S ta nd ar d & P oo r's C re di tW ee k w hi ch de m on st ra te s th e fr eq ue nc y w ith w hi ch f or ei gn b an ks gu ar an te e th e ob lig at io ns o f th ei r ba nk a nd n on -b an k af fi lia te s. Se e, ~ . F ed er al R es er ve B oa rd 's I nt er im P ol ic y S ta te m en t on R ed uc in g R is ks o n L ar ge -D ol la r Sy st em s, 3 F .R .R .S . 9- 10 00 . 66 . · · · I n· th e li qu id at io n ·o f t he N ew Y ot 'k ' h ta :rt ch o f In tr a B an k, t he m aj or a ss et t ha t'i -e su lte d- fri a f ul l re co ve ry fo r N ew Y or k cl ai m an ts w as a n of fi ce b ui ld in g on Fi ft h A ve nu e. 95 AMI-ADD-206 67 . S ee L et te r of S up er in te nd en t of B an ks , A ug us t 2, 1 98 3 · ( di sc us si ng t he r ev is io n of t he B an ki ng B oa rd 's R eg ul at io n P ar t 52 r eq ui ri ng a ss et m ai nt en an ce w ith th e ac co m pa ny in g re vi se d P ar t 52 a tt ac he d) . 68 . F D IC IA , §§ 4 01 -0 7. 69 . Se e, e .g ., M ar in e M id la nd B an k - N ew Y or k v. G ra yb ar E le ct ri c C o. , 41 N .Y .2 d 70 3, 3 63 N .E .2 d 11 39 , 39 5 N .Y .S .2 d 40 3 (1 97 7) ; S an dl er v . U ni te d In du st ri al B an k, 2 3 A D .2 d 5 67 , 25 6 N .Y .S .2 d 44 2 (1 96 5) ; K re ss v. C en tr al T ru st C o. , 24 6 A D . 76 , 28 3 N .Y .S . 46 7 (1 93 5) , af fd , 27 2 N .Y . 62 9, S N .E .2 d 3 65 ( 19 36 ); ·· M ile s v. B an k of C om m er ce ,- 76 M is c, .2 d 62 3, 3 51 N .Y .S .2 d 51 3 (1 97 3) ; Je ff er so n C ou nt y N at . B an k v. D us ck as , 16 6 M is c. 7 20 , 2 N .Y .S .2 d 33 6 (1 93 8) . 70 . S ee L et te rs o f S up er in te nd en t of B an ks , N ov em be r 3, 19 83 , an d F eb ru ar y 17 , 19 84 ( dr op pi ng t he re qu ir em en t th at d em an d de po si ts w ith b an ki ng in st it ut io ns i n th e U ni te d S ta te s b e co ve re d by a w ai ve r of s et -o ff a nd a cc ou nt d es ig na ti on a gr ee m en ts in o rd er t o co ns ti tu te " el ig ib le a ss et s" ). 71 . 12 C .P .R . P ar t 28 . 72 . S ee B an ki ng L aw § 2 02 -b (2 ). 73 . S ee B an ki ng L aw § § 39 , 40 , 60 6. 74 . F D IC IA § 2 02 (a ); ·a m en di ng I B A §· 7, 1 2 U .S .C . § 31 05 by a dd in g a ne w p ar ag ra ph ( e) (1 ). - ··· 75 . F D IC IA § 2 02 (a ), a m en di ng I B A § 7 , 12 U .S .C . § 31 05 by a dd in g a ne w p ar ag ra ph ( e) (4 ). 96 76 . B an ki ng L aw § 4 0. 77 . B an ki ng L aw § 6 06 . 78 . B an ki ng L aw § 6 06 , Su bd . 4( a) . 79 . B an ki ng L aw § 6 06 , Su bd . 4( b) . 80 . 12 U .S .C . § 31 02 (j ). 81 . C al if or ni a F in an ci al C o d e§ 1 78 5( d) . 82 . B an ki ng L aw § 6 06 , Su bd . 4( a) . 83 . T he l aw h as a lw ay s co nt ai ne d ce rt ai n in co ns is te nc ie s w ith r eg ar d to t he s ta tu s of b ra nc he s. F or e xa m pl e, fo r pu rp os es o f de te rm in in g th e ti m e an d lo ca ti on f or gi vi ng n ot ic es i n th e ch ec k co ll ec ti on p ro ce ss , br an ch es ar e tr e~ te d as s ep ar at e ba nk s (s ee U C C § 4 -1 06 ), bu t a ba nk 's u lt im at e so lv en cy is d et er m in ed o n a co ns ol id at ed b as is . Si m ila rl y, s er vi ce o f pr oc es s an d ce rt ai n ot he r le ga l ac ti on s ag ai ns t N ew Y or k br an ch es ar e ge ne ra ll y th ou gh t no t to r ea ch t he b an k' s no n- U .S . br an ch es . T hu s, n o di ff ic ul ty s ho ul d ar is e fr om pr ov id in g th at a b an k de po si t m ay c on st it ut e a lia bi lit y of th e N ew Y or k br an ch e ve n th ou gh i t w as p ay ab le el se w he re , or v ic e ve rs a. 84 . B an ki ng L aw § 6 06 , Su bd . 4( c) . 85 . , S ee g en er al ly 1 2- U .S .C . § 18 21 ; B an ki ng L aw § § 6 06 -· 63 3. 97 AMI-ADD-20786 . . 1 2 U .S .C . § 18 23 (e ); s ee g en er al ly D 'O en ch . D uh m e an d C o. v . F D IC , 31 5 U .S . 44 7 (1 94 2) , an d L an gl ey v . F D IC , 48 4 U .S . 86 ( 19 87 ). 87 . F o r a re ce nt d is cu ss io n of t he a dv an ta ge s an d di sa dv an ta ge s of t he D 'O en ch d oc tr in e, s ee S ti ll m an , "E nf or ci ng A gr ee m en ts w ith F ai le d D ep os it or y In st it ut io ns : A B at tl e w ith t he F D IC /R T C S up er po w er s, " 47 B us in es s L aw ye r 99 , 10 0- 11 3 (1 99 1) . 88 . 12 U .S .C . § 18 21 ( e ) . .. 89 . S ee 1 2 U .S .C . § 18 21 (e )( 8) . 90 . 12 u .s. c. § 3 10 20 ). 91 . In r e P et it io n of B ri an S m ou ha , Ja cq ue s D el va ux a nd C on st a, nt F ra ns se ns , C or nr ni ss ai re s of B C C I H ol di ng s (L ux em bo ur g) , S. A ., C as e N o. 9 1- B -1 35 69 , Jo in tl y A dm in is te re d, U .S . B an kr up tc y C ou rt , S ou th er n D is tr ic t of N ew Y or k. 92 . U ni te d S ta te s of A m er ic a v. B C C I H ol di ng s (L ux em bo ur g) , S. A ., B an k of C re di t an d C om m er ce In te rn at io na l S. A ., B an k of C re di t an d C om m er ce In te rn at io na l (O ve rs ea s) L im ite d, I nt er na ti on al C re di t an d In ve st m en t C om pa ny . ( O ve rs ea s) L im it ed , · C ri m in al · N o. -9 1- 06 55 ; U ni te d S ta te s D is tr ic t C ou rt f or th e D is tr ic t of C ol um bi a; O rd er . o f F or fe it ur e en te re d Ja nu ar y 22 , 19 92 b y Jo yc e H en s G re en , U ni te d S ta te s D is tr ic t Ju dg e. 98 I I_ 93 . B an ki ng L aw § 6 18 .. 94 . B an ki ng L aw § 6 23 . 95 . F or t he F ed er al p ro vi si on , se e 11 U .S .C . § 36 2. 96 . T he N ew Y or k C om pt ro ll er s o in te rp re ts S ta te F in an ce L aw § 1 12 . 99 AMI-ADD-208 10 0 S U M M A R Y O F R E C O M M E N D A T IO N S G E N ::: R A L R E C O M M E N D A T IO N S Th e U .S . ·re gu la to ry s ys te m s ho ul d pe rm it fo re ig n ba nk s en ga ge d in w ho le sa le b an ki ng to c on tin ue t o d o b us in es s in t he b ra n ch ja g e n cy fo rm r at he r th an r eq ui rin g th at th ey es ta bl is h su bs id ia rie s. H om e an d ho st c ou nt ry s up er vi so rs o f t ra ns na tio na l b an ks sh ou ld e xc ha ng e in fo rm at io n m or e sy st em at ic al ly in o rd er to b et te r co or di na te t he ir su pe rv is io n. Th e N ew Y or k S ta te B an ki ng D ep ar tm en t sh ou ld c on tin ue to p la y an i m po rt an t ro le a s a re gu la to r an d su pe rv is or o f tr an sn at io na l ba nk s. · . S ta te s w hi ch lic en se si gn ifi ca nt nu m be rs of of fic es o f fo re ig n ba nk s, th e O ffi ce of th e C om pt ro lle r of th e C ur re nc y, an d th e F ed er al R es er ve ·S ys te m sh ou ld co or di na te t he ir ef fo rt s to a ch ie ve e ffi ci en cy a s w el l as so un d re gu la tio n. Th e C on fe re nc e o f S ta te B an k S up er vi so rs sh ou ld co or di na te th e ac tiv iti es o f th e st at es w hi ch ha ve si gn ifi ca nt n um be rs o f of fic es o f fo re ig n ba nk s. C R IT E R IA F O R E N T R Y Th e cr ite ria f or e nt ry t ha t N ew Y or k cu rr en tly u se s ar e ba si ca lly ap pr op ria te . In ad di tio n, th e S up er in te nd en t sh ou ld re qu ire co ns ol id at ed an d co m pr eh en si ve su pe rv is io n b y a re sp on si bl e ho m e co un tr y re gu la to r w ho . sh ou ld G om m it. to c oo pe ra te w ith N ew Y o rk a ut ho rit ie s . .. . "C on so lid at ed " su pe rv is io n sh ou ld i nc lu de s up er vi si on o f al l br an ch es , w he re ve r lo ca te d, o f al l ba nk i nv es tm en ts , in cl ud in g su bs id ia rie s, w he re ve r lo ca te d, bu t no t ne ce ss ar ily s up er vi si on o f c om pa ni es w hi ch c on tr ol b an ks 10 1 AMI-ADD-209 o r ar e u n d e r co m m on c on tr ol w ith t he m . H om e co un tr y su pe rv is io n o f a ho ld in g co m pa ny s ho ul d be r eq ui re d if it is ne ce ss ar y to pr ov id e co ns ol id at ed su pe rv is io n o f a ba nk in g g ro u p o r if tr an sa ct io ns b et w ee n a su pe rv is ed ba nk an d its ho ld in g co m pa ny or af fil ia te s ar e no t re gu la te d. "C om pr eh en si ve " su pe rv is io n sh ou ld r eq ui re th at th e ho m e co un tr y su pe rv is or h av e pr oc es se s an d pr oc ed ur es t ha t ar e de si gn ed re as on ab ly t o as su re t ha t th e su pe rv is or kn o w t he ba nk 's fin an ci al co nd iti on , in cl ud in g ca pi ta l po si tio n an d as se t qu al ity , an d th e ba nk 's m an ag em en t ca pa bi lit y on a c ur re nt b as is . -N ew Y or k sh ou ld en ac t a st at ut e- to · a cc o td < •o th er re gu la to rs ' co nf id en tia l do cu m en ts -t he -- sa m e de gr ee o f co nf id en tia lit y as d oc um en ts g en er at ed b y th e B an ki ng D ep ar tm en t. T he B an ki ng D ep ar tm en t sh ou ld m ak e its re po rt s on _ fo re ig n ba nk o ffi ce s av ai la bl e to h om e co un tr y su pe rv is or s on a c on fid en tia l ba si s. E nc ou ra ge h om e co un tr y re gu la to rs to p ro vi de in fo rm at io n to t he B an ki ng D ep ar tm en t on a c on fid en tia l ba si s. T he B an ki ng D ep ar tm en t sh ou ld s up pl em en t in fo rm at io n fr o m ho m e co un tr y su pe rv is or s b y co nt in ui ng an d ex pa nd in g its us e of ba nk in g so ur ce s as a m ea ns o f m on ito ri ng t he f in an ci al st re ng th o f fo re ig n ba nk s w ith lic en se d of fic es in N ew Y or k. T he B an ki ng D ep ar tm en t sh ou ld r eq ui re a ll fo re ig n ba nk s w ith b ra nc he s o r ag en ci es in N ew Y or k to a dh er e to S IS ca pi ta l st an da rd s. - - · C on tin ue t o i nv es tig at e ba nk s' c on tr ol lin g ow ne rs a s an im po rt an t pa rt o f t he a pp lic at io n pr oc es s. 10 2 L R eq ui re f or ei gn b an ks e st ab lis hi ng o ffi ce s in N ew Y or k to be a bl e to m ak e in fo rm at io n av ai la bl e to la w e nf or ce m en t au th or iti es in N ew Y or k at l ea st a s fr ee ly a s S w is s ba nk s. R eq ui re b an ks th at e st ab lis h br an ch es o r a ge nc ie s in N ew Y or k to a ffi rm t ha t th ei r w or ld w id e ca pi ta l st an ds b eh in d th e lia bi lit ie s o f th e N ew Y or k of fic e. C on tin ue to a dm it w el l-m an ag ed , w el l-c ap ita liz ed b an ks to d o b us in es s in N ew Y or k ev en i f th e ir h om e co un tr ie s ha ve f in an ci al i ns ta bi lit y if th e S up er in te nd en t is s at is fie d th at r es tr ic tio ns p la ce d on t he m w ill p ro te ct t ho se w h o de al w ith t he m . A pp ly l es s st rin ge nt st an da r'd s to re pr es en ta tiv e of fic e ap pl ic at io ns th an to · br an ch an d a g e n cy a pp lic at io ns , pr ov id ed t ha t th e ap pl yi ng b an k ha s a so un d bu si ne ss pl an t ha t do es n ot i nc lu de s ol ic iti ng r et ai l de po si ts a nd a re pu ta tio n fo r in te gr ity . H om e co un tr y su pe rv is io n o f re pr es en ta tiv e of fic es n ee d no t m ee t al l en tr y cr ite ria f o r br an ch es a nd a ge nc ie s. N o t a ll en tr y cr ite ria s ho ul d be e st ab lis he d by s ta tu te . T he B an ki ng B oa rd sh ou ld be en ab le d to pr om ul ga te re gu la tio ns r eg ar di ng c rit er ia . O ve r an un sp ec ifi ed pe rio d o f tim e, ex is tin g of fic es gr ad ua lly s ho ul d be b ro ug ht i nt o co m pl ia nc e w ith n ew en tr y st an da rd s. F O R M S O F O R G A N IZ A T IO N A V A IL A B L E B ra nc h po w er s pr es en tly e xe rc is ed a re a pp ro pr ia te a nd ar e n o t s ig ni fic an tly c ha ng ed b y F D IC IA . B ra nc he s sh ou ld co nt in ue t o b e a bl e le i h ol d no n~ ·i -e ta il d ep os it ac co un ts th at fa ll be lo w $ 1 oo ,oo o: · R eq ui re a ge nc ie s to a dh er e to t he s am e lo an s- to -o ne - b o rr o w e r ru le s an d 5% as se t pl ed ge as br an ch es ; if 10 3 AMI-ADD-210 ag en ci es t h e n h av e n o d iff e re n t fu nc tio ns f ro m b ra nc he s, · th e y sh o u ld b e p ha se d o u t a n d c o n ve rt e d i n to b ra nc he s w ith o u t a n e w a p p lic a tio n . In o rd e r to a ss ur e th a t al l br an ch es o r a g e n ci e s ha ve a m in im u m as se t p le d g e a m o u n t, m o d if y th e pl ed ge re qu ir em en t to t h e g re a te r o f (i) 5 % of d e p o si ts n o t in cl u d in g I B F d ep os its , Q i) 1% o f d e p o si ts i n cl u d in g I B F d e p o si ts , o r (ii i) $1 m ill io n. S u b je ct a ll re pr es en ta tiv e · o ff ic e s to li ce n su re , e xa m in at io n a n d s up er vi si on . P er m it re pr es en ta tiv e of fic es to e n g a g e i n l o a n -r el at ed ac tiv iti es t h a t a re w ho le sa le ·i n na tu re ·a s d e fin e d b y t h e · · .. · S up er in te nd en t, p re vi d e cH h a t- th e y· -ta l< e· -n o- -d e p o si ts o r ca sh f o r a n y pu rp os e, a d va n ce n o c as h , is su e n o le tt er s o f c re d it o r o th e r o b lig a tio n s, a nd s o lic it n o re ta il de po si ts . P ro hi bi t re pr es en ta ti v~ o ff ic e s fr o m so lic iti n g re ta il d e p o si ts , a n d m ak e vi ol at io n o f th is p ro h ib iti o n a c ri m in al of fe ns e. P ro hi bi t re pr es en ta tiv e of fic es fr om o cc u p yi n g g ro u n d fl o o r sp a ce o r sp a ce n e a r a m o n e y tr an sm itt er , e xc e p t w ith t h e a pp ro va l o f t h e S u p e ri n te n d e n t T h e S u p e ri n te n d e n t sh o u ld c o n tin u e t o l ic en se b a n ki n g - ty p e A rt ic le X II in ve st m en t co m pa ni es . T h e B a n ki n g D e p a rt m e n t sh o u ld s up er vi se b a n ki n g -t yp e A rt ic le X II co m p a n ie s lik e b a n ks a n d s h o u ld c o n tin u e t o m ai nt ai n ca pi ta l st an da rd s, t o r eg ul at e tr a n sa ct io n s w ith af fD ia te s in a m a n n e r th at p re ve nt s a b u se a n d t o a p p ly · d iv e rs ifi ca tio n a n d lo a n s- to -o n e -b o rr o w e r st a n d a rd s. A rt ic le X II co m p a n ie s sh o u ld b e p e rm itt e d t o h av e n o n - d e p o si to ry f id u ci a ry p o w e rs . 10 4 L C ha ng e th e .n am e o f . A rt ic le X II co m p a n ie s fr o m "i nv es tm en t co m p a n ie s' ' to a n a m e t ha t w o u ld b e l es s co n fu si n g . R E G U L A T IO N O F O W N E R S F o re ig n b a n ks w ith u n in co rp o ra te d o ffi ce s in N e w Y o rk sh o u ld b e r eq ui re d to o b ta in a pp ro va l fo r 25 % -o r- gr ea te r ch an ge s in c on tr ol . P er m it th em t o m ak e a p p lic a tio n f o r ch a n g e in c o n tr o l ap pr ov al e ith e r be fo re o r a ft e r th e ch an ge . C h a n g e in c o n tr o l a pp ro va l s h o u ld n ot b e re qu ir ed If e ith e r (i) t h e s er vi ci ng b a n k a lr e a d y is li ce ns ed t o d o b us in es s in · N e w Y or k, o r (ii ) th e t ra n sa ct io n h as b e e n ·a p p ro ve d b y · th e b a n k' s h o m e ·c o u n tr y su pe rv is dr ·u n d e r' p ro ce d u re s th at a re a cc e p ta b le t o t h e S up er in te nd en t. R eq ui re p a rt ie s a p p ly in g fo r ch a n g e In c o n tr o l a pp ro va l t o su bm it to t h e j u ri sd ic tio n o f th e S ta te f o r p u rp o se s o f e n fo rc in g la w s re la te d to t h e o w ne rs hi p o f th e b an k. O F F S H O R E B R A N C H E S C la ri fy t he d e fin iti o n o f a N e w Y or k b ra n ch l ia b ili ty b y m e a n s o f a sp e ci fic d o cu m e n ta ry te st , a s o u tli n e d i n th e liq u id a ti o n s e ct io n b el ow . U n d e r th is t es t, th e b ra n ch de si gn at ed t o c a rr y th e tr an sa ct io n on It s b o o ks s h o u ld b e th e d et er m in at iv e fa ct or . R e co rd s sh o u ld b e r eq ui re d to b e k ep t i n N e w Y o rk fo r a ll tr a n sa ct io n s ef fe ct ed b y N e w Y o rk p er so nn el . N o r et ai l d e p o si ts o f U .S . p e rs o n s (a s d e fin e d b y tt' !e . S up er in ie nd en t) s h o u id 'b e. tak e n . o r. so lic ite d fo r o ff sh o re b ra n ch e s in N e w Y o rk .· · · ···· .. · · · N e w Y o rk ac tiv iti es o f o ff sh o re br an ch es sh o u ld b e su b je ct t o N e w Y o rk e xa m in a tio n a nd s up er vi si on . 10 5 AMI-ADD-211 E X A M IN A T IO N I S S U E S T he B an ki ng D ep ar tm en t sh ou ld s ee k to u se a nd e va lu at e th e w or k of ot he rs w he re ap pr op ria te an d sh ou ld co or di na te i ts e xa m in at io ns w ith f ed er al a ut ho rit ie s. T he B an ki ng D ep ar tm en t sh ou ld h av e a pr of es si on al s ta ff th at s pe ci al iz es in e xa m in in g fo re ig n ba nk s. T he B an ki ng D ep ar tm en t s ho ul d co nt in ue to a cc ep t f ili ng s on f ed er al f or m s, w he re p os si bl e, t o a vo id d up lic at io n. Th e B an ki ng D ep ar tm en t sh ou ld c on tin ue t o re qu ire e ac h fo re ig n ba nk t o m ai nt ai n ap pr op ria te i nt er na l co nt ro ls f or of f- ba la nc e- sh ee t tr an sa ct io ns -· a nd ·s ho ul d co n si d e r re qu iri ng o ut si de a ud ito rs ··t o· o pi ne · - on ··t he ··a de qu ac y o f su ch c on tr ol s. T he B an ki ng D ep ar tm en t sh ou ld as su re its el f th at ap pr op ria te i nt er na l co nt ro ls a re in pl ac e at a ny o ffi ce w hi ch h as a la rg e pa ym en ts v ol um e in r el at io n to it s as se t si ze . S U P E R V IS IO N O F B R A N C H E S /A G E N C IE S T O P R O T E C T N E W Y O R K C R E D IT O R S W he n fo re ig n ba nk s do in g bu si ne ss i n N ew Y or k sh ow si gn s o f fin an ci al w ea kn es s o r ot he r in st ab ili ty o r th ei r ho m e co un tr y sh ow s su ch s ig ns , th e B an ki ng D ep ar tm en t sh ou ld im pl em en t a pr og ra m th at pr om ot es as se t di ve rs ifi ca tio n, re st ric ts du e- fr om -h om e- of fic e ac co un ts , pr ot ec ts a ga in st ne tti ng ag re em en ts , an d im po se s an as se t m ai nt en an ce r eg im e. O ff- ba la nc e- sh ee t ob lig at io ns sh ou ld be ta ke n in to ac co un t in ad m in is te rin g as se t - m ai nt en an ce . · ·· B ra nc he s an d ag en ci es s ho ul d no t b e re qu ire d to m ai nt ai n th ei r ow n lo an l os s re se rv es u nl es s th ey a re s ub je ct t o as se t m ai nt en an ce o r th e B an ki ng D ep ar tm en t is no t 10 6 'I I I L sa tis fie d th at t he b an k as a w ho le m ai nt ai ns a de qu at e re se rv es . Th e la w s ho ul d pe rm it ne tti ng a gr ee m en ts a nd n o ch an ge in N ew Y or k la w o n se t-o ff is p ro po se d, e xc ep t th at w ea k ba nk s o r ba nk s fr om w ea k co un tr ie s sh ou ld b e re qu ire d to m ai nt ai n ac co un ts th at ar e no t su bj ec t to ne tti ng ag re em en ts . P ro hi bi t ba nk s su bj ec t to as se t m ai nt en an ce fr om en ga gi ng in d et rim en ta l n on -a rm s- le ng th tr an sa ct io ns w ith ho m e of fic e or a ffi lia te s. LI C E N S E T E R M IN A T IO N E xp an d th e gr ou nd s fo r lic en se t er m in at io n to i nC lu de su ch en tr y st an da rd s as th e B an ki ng B oa rd m ay de si gn at e. A h ea rin g sh ou ld b e re qu ire d be fo re li ce ns e te rm in at io n. T he S up er in te nd en t sh ou ld b e em po w er ed t o s up er vi se an d co nt in ue to e xa m in e th e w ith dr aw al o f a ny te rm in at ed lic en se e. LI Q U ID A T IO N I S S U E S N ew Y or k cr ed ito rs s ho ul d co nt in ue t o h av e a pr ef er en ce w ith r es pe ct t o N ew Y or k as se ts . A m en d N ew Y or k la w t o p ro vi de t ha t th e S up er in te nd en t sh al l pa y ex ce ss a ss et s fir st t o l iq ui da to rs i n ot he r U .S . ju ris di ct io ns w hi ch h av e re ci pr oc al a rr an ge m en ts , se co nd to l iq ui da to rs i n ot he r U .S . ju ris di ct io ns , in e ac h ca se i n p' ro po rt io ri· to ar iy s ho rt ta ii t ha t th ey ' e xp e- rie nc e, a nd t he n an y re m ai nd er t o h om e cO un try l iq ui da to rS . - Th e "!B A sh ou ld be a m en de d to c ha ng e th e ex is tin g ru le t ha t if th er e is a f ed er al b ra nc h of a f ai le d ba nk , th en a ll U .S . of fic es a re t o b e liq ui da te d un de r th e fe de ra l ru le s. 10 7 AMI-ADD-212 T he d ef in iti on o f N e w Y or k cr ed ito rs s ho ul d be a m en de d · to e st ab lis h a cl ea r te st f or l iq ui da tio ns u nd er w hi ch t he pl ac e a tr an sa ct io n is b oo ke d is p re su m ed t o b e co rr ec t. T he l aw s ho ul d re qu ire w rit te n o r el ec tr on ic a dv ic es in a ll lia bi lit y tr an sa ct io ns , an d th is a dv ic e sh ou ld b e re qu ire d to de si gn at e th e of fic e fo r w ho se a cc o u n t th e tr an sa ct io n is pe rf or m ed . T he a dv ic e, i f ge nu in e, n ot c le ar ly a m is ta ke , an d n o t p ro m p tly o bj ec te d to , w ou ld b e co nc lu si ve . F or ei gn ex ch an ge , in te re st ra te , an d co m m o d iti e s tr an sa ct io ns s ho ul d be g ov er ne d b y si m ila r ru le s de fin ed b y th e B an ki ng B oa rd . D am ag e o f a to rt io u s o r fr au du le nt n at ur e ca us ed b y N e w Y o rk p er so nn el s ho ul d be a N e w Y or k lia b ili ty in N eW Y o rk ' of fic e liq ui da tio ns .·· · N o c h a n g e is re qu ire d in th e de fin iti on o f N ew Y or k as se ts . T he S up er in te nd en t, as li q u id a to r un de r th e B an ki ng L aw , sh ou ld h av e th e be ne fit o f a ru le s im ila r in s ub st an ce t o th e fe de ra l ru le s u n d e r th e D 'O en ch D uh m e ca se . T he S up er in te nd en t s ho ul d ha ve e xp lic it p o w e r t o d is af fir m e xe cu to ry c o n tr a ct s fo r re al es ta te , go od s, se rv ic es o r e m p lo ym e n t w ith n o c la im f o r fu tu re o bl ig at io ns a cc ru in g af te r th e d a te o f di sa ffi rm an ce . Q ua lif ie d e xe cu to ry f in an ci al c on tr ac ts ( "Q F C 's ") , w hi ch in cl ud e fu tu re s, fo rw ar d, sw ap an d si m ila r co nt ra ct s, sh ou ld b e de em ed te rm in at ed a t th e tim e th e S up er in te nd en t t ak es p os se ss io n an d da m ag es s ho ul d be as se ss ed t o e ith er s id e ba se d on m ar ke t pr of it o r lo ss a t th a t ti m e .· T he l ia bi lit y si de o f a Q F C s ho ul d go ve rn w he th er t he tr an sa ct io n is d e e m e d a N e w Y or k tr an sa ct io n fo r liq u id a tio n p ur po se s. 10 8 T he B an kr up tc y A ct s ho ul d be c la rif ie d to m ak e cl ea r th at N e w Y or k la w g ov er ns th e liq ui da tio n o f a ss et s de fin ed a s as se ts o f a N ew Y or k br an ch u nd er N e w Y or k la w . T he l aw s ho ul d be m ad e cl ea r th at t he S up er in te nd en t is en tit le d to t he a pp oi nt m en t o f a si ng le j u d g e t o h an dl e a liq ui da tio n. T he S up er in te nd en t's p o w e r t o c o m p ro m is e c la im s sh ou ld b e i nc re as ed f ro m $ 25 0 to $ 25 ,0 00 . T he S up er in te nd en t s ho ul d be a llo w ed 6 0 da ys ra th er th an 30 d a ys t o r ul e on c la im s. T he re s ho ul d be a n au to m at ic s ta y o f pe nd in g lit ig at io n ag ai ns t a br an ch o r ag en cy a fte r th e S up er in te nd en t ha s ta ke n po ss es si on . C on tr ac ts w ith se rv ic e pr ov id er s en te re d in to b y th e S up er in te nd en t as l iq ui da to r sh ou ld n o t re qu ire a pp ro va l o f th e S ta te C om pt ro lle r. B A N K IN G D E P A R T M E N T F U N D IN G T he B an ki ng D ep ar tm en t sh ou ld ha ve in de pe nd en t bu dg et ar y au th or ity s o th at it c an p ay s al ar ie s ne ce ss ar y to a tt ra ct a nd r et ai n th e pe rs on ne l ne ce ss ar y to s up er vi se fo re ig n ba nk s an d so th at it c an i n cu r t he n ec es sa ry c os ts at te nd an t to p la yi ng a n im po rt an t ro le i n th e su pe rv is io n o f tr an sn at io na l ba nk s. 10 9 AMI-ADD-213 i I I I .:7~1 .-: :~, -- '"; ... ' ~. ( sC ; """ I A PP E N D IX I ~M er ri ll Ly nc h · Ja nu ac y 2 7 , 19 92 'lh e H o n o ra b le A la n G re e n sp a n O la ii: m an B oa rd o f G ov er ri or s o f th e F e d e ra l R es er v e sy st em 2 o th & O Jn st i. t: u ti o n A ve nu e, . N .W . W a .s h ir g ta n , D .C . 20 55 1 · D ea r O la in ra n G re en sp an : 1- t- 1: ..!_ ·- \ C ha irm an G lo ba l F in an ci al ln st itu tio m ~ ? F in an ci al C en te r N on nT ow er N ey t Y or k. N ew Y or k I 0 28 1- 13 32 .) [2 4 49 8 72 7 ·,.- ._ _. -: ~ .. i. _ j - I '1' -·\ . . ..... ·"'f -.. : ,, ,· , '.. ... _ <' '- •. ~ / ": -- -- .- ' \ - / ' . \ / __ __ ,.,.. la s t fa ll t h e S U p e ri :n te n :le ir t: o f th e S ta te o f N ew Y or k B a n lc ir q ~ e st a b li sh e d a s p ec ia l cc m n it te e , th e S U p e ri n te rr le n t' s M v is o cy C cm n it te e on T ra n sn at io n al B :1 nl d. rq I n st it u ti o n s (t h e " C am ni .tt ee ") , to s tu :l y t h e is su e o f fo re ig n b an k s u p e rv is io n i n N ew Y or k. I h av e th e b :l no r to s e rv e as O la in D an o f th e c a m d tt e e . A l t h ~ th e s tu :l y i s n o t y e t CX ~I pl et e, a n i n p Jr ta n t m at te r re g a n ti n g t h e su p e rv is io n o f fo re ig n b an ks h a s b e e n ~ t t o t h e C cl !m it te e 's a tt e n ti o n w h ic h t h e c a m n itt e e b e li e v e s re q u ir es i m n ed ia te a c ti o n . A cn lr d in :J ly , a t it s l a s t m ee t.i n: J th e C cm n itt e e d ec id ed t h a t I sh o o ld w ri te y oo t o a d v is e yo o o f th e C a m li tt e e 's t h ~ t s an :i c o n ce rn s. S e: :t io n 2 14 ( a) o f th e F e d e ra l [) ep :: si t In su ra n ce C o rp o ra ti o n I n p ro ve m e n t A c t o f 19 91 (" F D IC IA ") am en d s S e: :t io n 6 o f th e I n te m a ti o n a l B a n ld n g A c t o f 19 78 (t h e " Il lA ") , w h ic h r e la te s to t h e i n su ra n ce o f d ep o si ts a t U n it e d s ta te s b ra n ch es o f fo re ig n b a n k s. 'I h e re w as n o i n :l ic at io n i n t h e C o r" g re ss io n al d eb at es o r th e O :m n it te e r e p o rt s th a t S e ct io n 2 14 ( a) w as d es ig n ed t o : i.l lp le m en t a m aj o r c: ha n; e in t h e i n su ra n ce s t. ru c b lr e f o r u. s. b ra n ch es o f· f o re ig n b an k s. Ir xl ee d, th e c le a r m es sa ge i n t h e f lo o r d eb at es an :l. o th e r st at em en ts b y C o rg re ss io n al l e a d e rs i s t h a t n o s u ch m aj o r c: ha n; e w as i nt er x: le d. N o n et h el es s, b e ca u se o f am b ig u it y i n t h e s ta tu to ry l ar q u ag e, oo ca si on ed . in la rg e p a rt b y t h e d el et io n o f a si n :J le w o rd w it ho .r t: a rr: 1 aw ar en t C o r" g re ss io n al e n :: lo rs eo sl t, th e q u e st io n h a s b e e n r a is e d lo h e th e r S ec ti o n 2 1 4 (a ) h a s .i n ;f a c t il rp le m en te d ·a m jo r re v is ia 1 o f th e · in su ra n: le s ch em e fo r fo re ig n b an k s. S ta te d w it h g re a te r sp e c if ic it y , i t i s u n: ii sp .r t: ed t h a t S e: :t io n 2 14 ( a) p ro v id es t h a t fo re ig n b an k s m y n o t h e re a ft e r e st a b li S h in su re d. b ra n :h e s to a cx :e pt i n su re d d ep :: ls it s. 'lh e q u e st io n i s w h et h er S e: :t io n 2 1 4 (a ) w en t Jl ll ch f u rt h e r an :i p ro h ib it e d u .s . b ra n :h e s o f fo re ig n b an k s fr a n a cx :e pt in :J o r m a in t: a i.n in ] ce rt ai n n o n -r et ai l d ep o si t ac o: JU nt s A -1 AMI-ADD-214 ;j f i· I :'~ o?i /_' i; 'l h e li :l nO ra bl e A la n G re en ap an P ag e 'n io Ja ru ar y 27 1 19 92 th a t th e se b ra n :: h e s ha ve b ee n p ei :m itt ed t o a a: :e p t e v e r si n = e en ac t: l! el t o f th e I 81 1. . W e un de rs ta n: :l t h a t th is q u e st ia l is p re s e n tl y t h e s u b je ct o f re vi ew b y t h e f ed er al b ar .ld ..n ; ag en ci es a n: i w il l re q u ir e i ll pl em en t.i n; J re g u l. at ic n s o r .i n te J: p re ta ti cn s. W e d o n at i n te n d i n t h is l e tt e r to a n a ly ze t h e l e g a l is su es i n v o lv ed . R at h er , w e w a n t to e lQ ;l re sS o o r cx ::n ::: er n C N e r th e p o li cy i ll p li ca ti cn s o f a fe d er al r eg u l. at o ry i n t: ex p re ta ti o n o f S ec ti .o o 21 4 (a ) th a t l« :W .d b tp o se ad ti ti O I' la l. , su b st an ti al b n :d e n s on t h e ~ t i C l ' l S o f fo re ig n b an k s in t h e ab se n ce o f ev id en ce t h a t th is w as i nt en cl ed b y O :X g re ss . 'n le r e s u lt s o f o o r sW :l y to d at e ca n fi l: m . t h a t fo re ig n b an k s h a ve b e e n h ig h ly v al u ab le t o . t h e b an ld n: J p lb li c a n: i th e o v e ra ll E !C C! X III i.c c c n ii ti o o o f th e s ta te o f N ew Y oz :X . F o re ig n b an k b ra n d le s h a ve p ro vj rl ed a n :i n p :l rt an t sc u rc e o f b o th c re d it a n: i eo pl oy m en t, a s w e ll a s b e ir q u se rs o f 1 'l t. li im 'a lS a n :i ll ae y s er vi ce s. M :l re g en er al ly , th e f o re ig n b an k ~ t i c n s ha ve c on t: ri l: .u te d si g n if ic a n tl y t o . t h e s ta tu s o f N ew Y oO c., a n i th e re b y· th e n at io n a s a w ho le , a s th e f in ar ci al . an :i e ca nc m ic c en te r o f th e w o rl d . 'l h e v a st m aj o ri ty o f fo re ig n b a n ks h av e· a t: te lp te d t o a b id e sc r: u p llo u sl y b y u .s . la w s an :i r e; u la ti o n s. ~ l y , w e b el ie v e th a t th e b an k I '9 3U la to ry a g ex :i es s h o u ld b e l o a th to i n te rp re t cm bi gu ou s le q is l. at io n a s im po si ng s u b st a n ti a l ne w l .l m it at io ns o n f o re ig n b a n k ~ t i o n s in t h e u n it e d s ta te s, a b se n t a d e n a 'ls tr a b le n ee d . S U dl a r e; u la to ry p :1 5i ti on i s p a rt ic u la rl y C C II p! lli n; J in t h is c as e, b ec au se t h e e x tr in si c e v id en ce i n d ic at es t h a t ~ d id o o t in te n d s u ch a re s u lt a n i th e re h a s b e e n n o o p p o rt u n it y f o r ~ d eb at e o r o o n si d er at io n o f th e c on se qu en ce s. 'l h e ab se oo e o f an y su ch Q n jr e ss io n a l in te n t is n at s u x p ri si n g . W e a re u na w ar e o f a n y e x p re ss e d v ie w t h a t th e p re se n t in su ra n :: e st ru ct u re f o r fo re ig n b an k s h a s b e e n a b ls e d , c re a te s s a fe ty a n i sc u rd n e ss c an ce m s, h a s re s u lt e d i n l o ss es f o r d ep o si to rs o r h a s re s u lt e d i n a c x: .u pe ti ti ve i lW al an :: :e . * A d if fe re n t re g u la to ry p :1 5i ti on l «: W .d i n ev it ab ly t h re a te n t h e i J ip :l rt a n t c: on tr il :l ut io n th a t fo re ig n b an k s h av e m ad e an :i a re l ik e ly t o c o n ti n le t o m ak e to t h is c a .m tr y 's e cr ::n :m f· If f o re ig n b an k s pe xt :e iv e th em se lv es a s u n fa ir ly t re a te d , th e y w il l s h if t th e ir i n te rn a ti o n a l b .J si n es s to o th e r in te rn a ti o n a l fi n an ce c en te rs . If f o re ig n b a n ks c a n n o t cx :u p rt :e a 1 e ve n te rm s, J il il ir f w il l d Jo o se o o t to C C !I pe te . u .s . b an k s l« :W .d b e s u b je ct t o b o th f oz :m al . a n i in fc n :m l re ta li a ti o n a b ro ad , an :i t h e U n it e d s ta te s W Q 1l d fi n i it i n: :: re as in gl y d if fi c u lt t o d ef en d f re e t ra d e p o li c ie s. * A lt hc :u 3h f o re ig n b a n ks w it h u .s . b ra n d le s ar e g e n e ra ll y t re at ed . si m il a rl y t o u .s . b an k s, in a n u m b e r o f ar ea s th e x :e g u la to ry sc he m e d if fe rs . '! h e I 81 l. re p re se n te d a n a t: te !J il t to s tr ik e a ~ o f cc m p et it iv e eq u al it y . 'I h a t b a la n ce ~ d b e u nd on e if a n y m aj or p ro v is ia l o f th e I B A w er e si g n if ic a n tl y r ev is ed . A -2 AMI-ADD-215 l: 'll le H c: rx m m le A la n G r: e e n sp a n P ag e T h re e Ja n m :y 2 7 , 1. 99 2 I t t h e f e d e ra l ba nl ti ix ] ag en ci es w er e nc u to a cS c¢ a r e st ri c ti v e in te rP re ta ti al o f S ec t. ic n 21 4( a) ,· th e h a m w ru l.d b e i n aY o ca b le _ , i t su c h i n te rp re ta ti o o w e re l a te r d la llg e d o r ~ b y O :r lg n !s s. In t h e in te ri m , o p er at i. al s o f am a o .: n m ts a t th e u .s . b ra n ch e s o f fa t' li li p t b a n ks w o u ld n ee d t o b e s i< jn if ic a n tl y a lt e l: e d . O f ev en 1 11 0r e iq x lr ta n c e , th e w il .l ..i .r gn es s o f th e l :l an lc iJ q aq en :: :i es t o a d e p t a re st ri c ti v e p o si ti c n w ou ld se n :l a p o w er fU l m es sa ge t o f O re ig n h a M s a s t o a n o v e ra ll ~ i n re g u la to ry ~ t h a t