REPRESENTATIVE OFFICE

Opening a representative office is often the first step banks take to establish their US presence. It allows the least number of activities and is the easiest to establish from a regulatory perspective. Representative offices can solicit business, promote the bank’s products and services, and act as a liaison to their headquarters with customers in the United States. However, representative offices have no authority to make business decisions or enter into contracts (e.g., accept deposits, make loans or disburse proceeds). The application process to open a representative office is straightforward and the Federal Reserve Bank and New York State Banking Department’s (NYSBD) reviews are limited in scope. The Comprehensive Consolidated Supervision (CCS) status of the bank’s home country supervisor is a consideration, but not a decisive factor. Applications to open a representative office in the US are approved on a faster timetable than applications to open a branch or a subsidiary office.

BRANCH OFFICE

A branch office can have either a state or a federal license. It can engage in a full range of banking activities with one important exception – the branch cannot accept retail deposits or obtain FDIC insurance. Because branches cannot acquire FDIC insurance, they are subject to less rigorous regulatory requirements than subsidiaries or foreign acquired banks. Specifically, there are no separate capital requirements and no limitations on transactions between the branch and the main office. Branch offices are subject to the International Banking Act and the Bank Holding Company Act. The applicant bank needs to demonstrate that its capital, earning, compliance and operational records, and the business plan for the proposed branch are consistent with the approval of the application. Branch applications are subject to CCS – approval cannot be granted without the CCS status of the home country supervisor. However, there are exceptions – if the home regulator is actively working toward obtaining CCS status, an exception for a branch application may be granted.

NON-CONTROLLING INTEREST

This option does not subject a foreign bank to the Bank Holding Company Act or the International Banking Act. However, such an entrance is limited to a passive investment. Restrictions to ensure non-controlling status include limited ownership stakes, representation, and voting rights of members of the board of directors. Under the Bank Holding Company Act, a company controls another company if it Directly or indirectly owns 25% or more of any of the target company’s voting securities, Controls, in any manner, the election of a majority of the directors of such company, or if it Directly or indirectly exercises controlling influence over the management or policies of the target bank. The Federal Reserve is currently reviewing its controlling interest test and plans to provide additional clarity on how to determine whether an investment by a foreign bank in a US entity is non-controlling.

CASE STUDY

China Mingsheng Bank’s investment in United Commercial Bank of California (UCB)  The initial investment phases limit China Mingsheng to 9.9% of UCB’s shares and one director.  There are, however, provisions in the investment agreement that, with UCB’s approval, China Mingsheng can increase its ownership of UCB to 20% and nominate a second director to sit on UCB's board.  Nevertheless, if China Mingsheng exercises this option, it is likely that the Federal Reserve will consider it a violation of China Mingsheng’s non-controlling status and force China Mingsheng to submit a full Bank Holding Company Act application.

ACQUISITION OF A US BANK

This option requires Federal Reserve approval under the Bank Holding Company Act. Many of the same criteria that apply to a branch office application apply to an application to establish or acquire a subsidiary, although the latter calls for even closer scrutiny from regulators, whose examinations will be conducted more vigorously. For establishments of subsidiaries, a key issue is whether the Federal Reserve will grant an applicant an exemption if its home country supervisor has not yet been granted CCS status or if it will insist that CCS be passed for the bank’s home country supervisor. To date, the Federal Reserve has not granted approval of a local bank acquisition by a foreign bank applicant that required a CCS exemption. Another issue is whether the Federal Reserve will grant the same exemption to a state holding company (parent of a foreign bank that applied to acquire a US bank) as it would give to a foreign bank applying to establish a branch. The answer may depend on the size of the bank being acquired and is expected to be of the same standard as those granted to branch applicants long as the target bank is not a very large US bank. If the target bank has significant issues, the acquiring bank must present a buying plan that would remedy those deficiencies. Acquiring banks are strongly advised that they consult the Federal Reserve on the potential target bank’s standing before holding discussions with that bank.

REGULATORY SUPERVISION

The Federal Reserve will first establish a Strength of Support Assessment (SOSA) rating. A SOSA rating is an assessment of a foreign bank's ability to support its US operations. A SOSA 1 rating is the strongest and is granted to banks with the strongest financial condition. A SOSA 3 rating typically means that the Federal Reserve has several concerns and will likely impose restrictions on the newly licensed bank. Regulators will establish a supervisory strategy based on the bank’s SOSA rating. As part of that strategy, newly approved banks will be subject to on-site examinations and off-site monitoring. The focus of this strategy is to ensure that the bank has sufficient risk management, operation control, compliance, and asset quality (ROCA). In order to ensure that the newly applied bank meets US standards, regulators will conduct assessments of the bank’s practices and funding sources as well as the practices of the bank’s parent company home country supervisor and financial system. Such examinations will be made through a review of public records and interviews with individual representatives of the foreign bank and/or the bank’s home country supervisor.

OCC AND NYS BANKING SUPERVISION

The Office of the Comptroller of the Currency (OCC) issues federal licenses to banks while NYSBD issues New York State licenses. Both organizations have extensive experience and knowledge of the businesses under their supervision. Banks with OCC licenses are supervised by the OCC while those with State licenses are jointly supervised by the Federal Reserve and New York State. Interagency supervision reduces over-regulation as NYSBD and the Federal Reserve frequently conduct joint examinations in which one examination report is drafted and regulators share examination results.

NEW YORK STATE BRANCH LICENSE APPLICATION

The New York State Banking Department takes an average of 6–12 months to approve a branch license application. The cost of application is $7,500. Opening a branch requires banking board approval. The approval process may be stalled if the applicant lacks a lease or board resolution. The home country supervisor will need to issue a statement, informing the NYSBD that they do not object to the establishment of the foreign branch and verifying that the bank is licensed and is in good standing. For more information on preparing a license application with the NYSBD, please visit www.banking.state.ny.us.

US BANKING SUPERVISION

The Federal Reserve’s mission is to foster financial stability and deter or manage financial crises in the US. The International Banking Act of 1978 (IBA) established the policy of national treatment of international banks, granting foreign banks the same powers and subjecting them to the same regulatory requirements as domestic banks. IBA authorized OCC to grant licenses to federal bank branches and agencies of foreign banks. IBA also allowed international banks to accept local deposits as long as they had obtained FDIC insurance and gave the Federal Reserve power to supervise foreign banks in the US. The Foreign Bank Supervision Enhancement Act of 1991 (FBSEA) was passed in the wake of the collapse of The Bank of Credit and Commerce International (BCCI). FBSEA established federal standards for entry, expansion, and supervision of foreign banks in the US, and substantially expanded the Federal Reserve’s supervisory responsibility and authority over the US operations of foreign banks. FBSEA requires that the Federal Reserve approve the establishment of all U.S. banking offices of foreign banks and determine whether a foreign bank is subject to comprehensive, consolidated supervision (CCS) by its home country supervisor. Home country supervisors need to attain CCS status with the Federal Reserve before a foreign bank can establish operations in the US. This requirement was first introduced by the FBSEA. FBSEA took away foreign banks’ privilege to obtain FDIC insurance in the US. Foreign banks already with retail branches in the US were exempt from this new regulation via a grandfather clause, but foreign bank applicants after December 19, 1991 have since been subject to the new limitations. The Gramm-Leach-Bliley Act of 1999 established the concept of financial holding companies, allowing banks, including foreign banks, to conduct financial activities including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment. In return, holding companies are required to remain well-capitalized, efficiently managed, and have a satisfactory record under the Community Reinvestment Act (CRA).

AVAILABLE RESOURCES

There are several organizations within the New York City and New York State infrastructures whose mission it is to assist foreign companies conducting business in the City: NYCEDC, the NYC Department of Small Business Services, the Empire State Development Corporation, and the Office of the Mayor’s Commission for the UN Consular Corps and Protocol can help foreign businesses navigate the City and the State. Services provided by these agencies include: Location assistance Staff training Networking assistance Incentives education and guidance Several sources provide regularly updated information about operating in New York and assessments of the City’s economic trends: Economic Snapshot, published monthly by NYCEDC, provides an overview of the City’s economy, including employment trends, consumer spending, and real estate costs. To access Economic Snapshot, please visit NYCEDC Economic Snapshot. New York City’s 311 information hotline offers round-the-clock live operator service in 170 languages that can address issues ranging from your company’s workforce development to fixing a pothole in front of your building. For more information on 311, please visit www.nyc.gov/311. The Office of the Mayor’s Commission for the UN Consular Corps and Protocol will publish an updated list of foreign companies with New York offices soon. This list will grant companies easier access to their peers and to their respective chambers of commerce. For more information, please visit www.nyc.gov/html/unccp. Contract Reporter is a database published by Empire State Development Corporation that lists all State-procured contracts at or above $15,000. To access Contract Reporter, please visit www.nylovesbiz.com.

FOR MORE INFORMATION

For more information, please contact NYCEDC at 212.312.3600 or send an email to info@nycedc.com.