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Meeting With Institute of International Bankers on Part 347 Revisions
On Tuesday, October 12, 2004 representatives of the FDIC met with the Institute of International Bankers (IIB). FDIC staff attending the meeting was: Chief of Staff Jodey Arrington, EGRPRA Project Manager Claude Rollin, Doug Jones, Marilyn Anderson, Rodney Ray (FDIC Legal), Miguel Brown, John Di Clemente, and Galo Cevallos (FDIC DSC). The IIB was represented by Executive Director Larry Uhlick and outside counsel Scott Anenberg. In addition, David Hertz (Bank Hapoalim), Ajit Lal (State Bank of India), Amjad Ali Shaikh (National Bank of Pakistan), and Bailin Zheng (Bank of China) were in attendence.
The IIB requested the meeting in a letter to Chairman Powell and Vice-Chairman
Reich (a copy of which is attached). The purpose of the meeting was to
discuss various issues raised in the IIB's September 17, 2004 comment letter
concerning the FDIC's proposed revisions to Part 347.
Concerning interstate moves of insured foreign branches, the proposed rule addresses intrastate moves but not interstate moves and the IIB felt that there was a need for clarity on the latter issue. It was recognized, however, that whether the foreign branch at issue had a federal or state license may be a consideration and FDIC staff indicated that the issue was being reviewed.
The IIB believed the FDIC's proposal to calculate asset maintenance on a daily basis is expensive because the new calculation method would involve computer system changes. It also observed that assets and liabilities can fluctuate daily and it was easier to target to a fixed liability number. It suggested that the FDIC consider leaving the existing calculation method in place but carve out areas where daily calculations are appropriate.
Regarding deposit insurance for U.S. branches of foreign banks, the JIB
urged the FDIC to take a fresh look at the need for the subsidiary requirement
and whether institutions that are subject to consolidated supervision should
be able to have insured branches. It also observed that this issue should
be thought of in the context of regulatory burden relief because it was
less expensive to operate through branches than subsidiaries. In addition,
the IIB felt that strong arguments could be made for insuring wholesale
branches and that the FDIC should not foreclose consideration of that question.
FDIC staff observed that the wholesale branch discussion in the preamble
of the proposed rule was more of a viewpoint on the question, based on
observations made in prior rulemakings. Rather than foreclose the question,
it was intended to lay out the issues that need to be addressed.
The FDIC's proposed revision of the examination and information commitment from foreign banks was also discussed. The JIB felt that the suggestion of examinations outside the United States was a significant step beyond what FDIC and other regulators have done and that it would present a problem with some home countries. FDIC staff felt that the examination requirement was fairly narrowly defined and that it may be possible for the FDIC to make arrangements with the home country to address this issue. It was also observed by FDIC staff that the Board of Directors could consider these issues, under the proposed rule, as part of its consideration of whether deposit insurance should be granted or denied.
August 25, 2004
Dear Chairman Powell and Vice Chairman Reich:
We are writing in the context of our earlier communications with FDIC staff concerning various proposals to reduce the regulatory burden and facilitate the continued operation of FDIC-insured U.S. branches of international banks, and, more generally, to improve the dialogue between the FDIC and the international banking community. In particular, our December 22, 2003 submission (a copy of which is enclosed) set forth the legal and policy justifications for four specific proposals: adoption of a risk-based asset pledge requirement, facilitating the relocation of grandfathered FDIC-insured branches, permitting transferability of grandfathered branches, and permitting "wholesale" branches of international banks to obtain "optional" FDIC insurance. Those proposals have been reflected, in part, in various aspects of the FDIC's recently proposed amendments to its international banking regulations (Part 347). 69 Fed. Reg. 43060 (July 19, 2004).
We are concerned, however, that the proposed amendments reflect an unnecessarily restrictive approach to the issues raised in our December 22 submission. Specifically, although the proposed amendments would facilitate the relocation of "grandfathered" branches, they:
In addition, rather than proposing additional ways to reduce the regulatory
burdens on the 12 remaining FDIC-insured branches, the proposal actually
returns to some of the FDIC's previously abandoned positions which actually
would have the effect of increasing the burdens on those branches.
Although we plan to submit a more formal comment letter on the proposal,
we would appreciate the opportunity to meet with you next month to discuss
our concerns. We will be contacting your offices shortly to try to arrange
such a meeting.
cc: Scott A. Anenberg, Esq. (Shaw Pittman LLP)
INSTITUTE OF INTERNATIONAL BANKERS
Mr. Michael J. Zamorski
Re: Regulatory Relief for FDIC-Insured Branches of International Banks
As we discussed, banking has become truly international in nature, and the over 200 international banks operating in the United States have a substantial positive impact on the U.S. economy through job creation, operating and capital expenditures, taxes and other contributions (see Tab 1 of the background materials being provided under separate cover). For example:
Viewed in this context, it is especially appropriate that the FDIC maintain
and expand its dialogue with the international banking community, and we
are committed to doing our part to help in that effort.
As requested at our recent meeting, we have enclosed an outline summarizing those proposals as well as the FDIC's legal authority to implement them. As the FDIC reviews these proposals, we ask that you also take into account the following broader policy issues.
First, the statutory prohibition on the establishment of additional FDIC-insured branches of international banks -- which we believe has resulted in unnecessarily restrictive FDIC policies with respect to the remaining grandfathered FDIC-insured branches -- was adopted in 1991 without serious debate in an atmosphere dominated by the BCCI scandal.1 Much has changed since then, especially in the application, examination, and supervision standards applied to international banks both globally and in the United States. For example, the work of the Basel Committee on Banking Supervision, including its "Core Principles for Effective Banking Supervision," has contributed greatly to the improvement and harmonization of supervisory practices around the world. The degree of cooperation and information-sharing between U.S. and home country regulators also has increased substantially since 1991.
In the United States,
an international bank seeking to establish an office must, since 1991,
from the Federal Reserve as well as the
licensing authority, and must be found to be subject to comprehensive supervision
or regulation on a consolidated basis by its home country supervisor. In
addition, U.S. regulators now prepare and have access to a "strength
of support assessment" ("SOSA") for each international bank
with U.S. operations. That assessment takes into account factors including
the financial condition of the institution, the system of home country
supervision, the record of home country support, and the level of transfer
Second, taking a restrictive approach with respect to the operations of FDIC insured branches and prohibiting the establishment of additional insured branches are inconsistent with the now widely endorsed concept of "investor choice," which permits banking organizations to choose the most efficient organizational form for their operations. In fact, a December 21, 1992 joint study by the Federal Reserve and the Department of the Treasury -- which was mandated by the same 1991 law that prohibited the establishment of new FDIC-insured branches -- expressly opposed imposition of a requirement that foreign banks conduct U.S. operations only in subsidiary form (see Tab 2 of the supplementary materials provided under separate cover). The study concluded that operating in branch rather than subsidiary form is more efficient, allowing capital to be deployed more flexibly, a lower cost of funding, the ability to compete based on the institution's worldwide capital, freedom from operational restrictions on transactions with home office, and lower transactional costs. Notably, the study also specifically concluded that "considerations relating to deposit insurance" do not provide support for a subsidiary requirement.
Third, most foreign banks that operate FDIC-insured branches target specific ethnic or cultural markets. Providing more operational flexibility for, and permitting creation of additional, existing FDIC-insured branches would further facilitate access to banking services by those ethnic communities. Helping the underbanked members of ethnic communities enter the financial mainstream has been a major goal of Chairman Powell.
To summarize, each of the proposals in the enclosed outline falls clearly
within the FDIC's existing legal authority, is consistent with the FDIC's
existing EGRPRA initiative, is supported by strong policy considerations,
and represents an opportunity for the FDIC to demonstrate its recognition
of the positive contributions made by the U.S. operations of international
Lawrence R. Uhlick
INSTITUTE OF INTERNATIONAL BANKERS
December 22, 2003
I. FDIC regulations (12 C.F.R. § 347.210) require FDIC-insured branches of international banks to pledge assets for the benefit of the FDIC in an amount equal to 5 percent of their third party liabilities.
1. Eliminate the 5 percent requirement in favor of a risk-based approach that takes into account the specific circumstances of each branch.
C. Legal Authority
1. The FDIC has complete statutory discretion in setting the amount of the pledge. 12 U.S.C. § 1815(c)(2) provides that:
“[A foreign] bank shall maintain on deposit ... assets ... in such amounts ... as shall be determined from time to time in accordance with such regulations as the Board of Directors may prescribe.”
2. The FDIC has explicit authority to vary the amount of the pledge based on an individual branch's risk profile. 12 U.S.C. § 1815(c)(2) provides. that:
“Such regulations may impose differing requirements on the basis of any factors which in the judgment of the Board of Directors are reasonably related to the purpose set forth in paragraph (4).”
3. The purpose of the asset pledge is to protect the insurance fund against the "risks entailed in insuring the domestic deposits of a foreign bank whose activities, assets, and personnel are in large part outside the jurisdiction of the United States." 12 U.S.C. § 1815(c)(4). The development and global acceptance of Basel risk-based capital standards, recent advances in risk-based bank supervision, increased focus on enhancing the responsibilities of home country supervisors in the consolidated supervision of internationally active banks, and substantially increased coordination between home and host country supervisors have substantially mitigated the risks against which the asset pledge was intended to protect. Moreover, assets held by an insured branch pursuant to FDIC's asset maintenance requirement (12 C.F.R.. § 347.211) and subject to FDIC examination and supervision provide effective protection of depositors and the FDIC's insurance guaranty.
4. The FDIC is specifically obligated to try to avoid placing international banks at a competitive disadvantage vis-à-vis U.S. banks in setting the pledge. Asset pledge requirements do not apply to U.S. banks, and the asset pledge requirement imposed by the FDIC on insured branches adversely affects the earnings and liquidity of those branches by requiring them to maintain and pledge specific amounts of generally lower-yielding assets.
D. Other Considerations
l. Connecticut, Illinois, and New York have all recently taken similar actions, and the OCC has proposed legislation that would remove the existing statutory barrier to taking similar action.
2. Other countries that are major international banking centers (for example, France, Germany, Japan, Switzerland, the United Kingdom) do not impose asset pledge requirements on local branches of U.S. (or other non-domestic) banks.
II. Relocation of Grandfathered Insured Branches
1. FDIC regulations (12 C.F.R. § 303.41(b)) governing state nonmember insured banks provide that moving a branch outside its "immediate neighborhood" is considered the closure of an existing branch and the establishment of a new branch. Applying a similar rule to grand fathered insured branches of international banks would effectively preclude relocations because of the statutory prohibition (12 U.S.C. § 3104(d)(1)) against establishing new FDIC-insured retail branches.
1. Clarify that an international bank may, subject to FDIC approval, move an -insured branch without terminating its grandfathered status under section 3104(d)(2) and regardless of how the licensing authority classifies the relocation.
C. Legal Authority
1. 12 U.S.C. § 1828(d)(1) provides, in relevant part, that:
“... [N]o State nonmember insured bank (except a District bank) shall move its main office or any such branch from one location to another without [the prior written consent of the Corporation]. No foreign bank may move any insured branch from one location to another without such consent ....”
2. Plain meaning
3. FDIC regulations
a. Subpart C of part 303 implements the first sentence of section 1828(d)(1), which governs the establishment and relocation of domestic branches of state nonmember insured banks. For purposes of subpart C, section 303.41(b) defines "branch relocation" to mean:
“... a move within the same immediate neighborhood of the existing branch that does not substantially affect the nature of the business of the branch or the customers of the branch. Moving a branch to a location outside its immediate neighborhood is considered the closing of an existing branch and the establishment of a new branch. Closing of a branch is covered in the FDIC Statement of Policy Concerning Branch Closing Notices and Policies.”
b. However, Subpart C, including its definition of branch relocation, is explicitly made inapplicable to insured branches of international banks. Section 303.40(c) provides that:
“Applications regarding insured branches of foreign banks and foreign branches of domestic banks are processed in accordance with subpart J (International Banking) of this part.”
c. Section 303.184, contained in subpart J, implements the second sentence of section 1828(d)(1), which governs the relocation of an insured branch of an international bank. Section 303.184 does not contain any geographic limitation on the ability of an insured branch to move outside its immediate neighborhood.
Indeed, section 303.184(c) expressly contemplates that an insured branch may move from one community to another:
“The applicant shall publish a notice of its proposal to move from one location to another, as described in § 303.7(b), in a newspaper of general circulation in the community in which the insured branch is located prior to its being moved and in the community to which it is to be moved.”
d. Not only is subpart C's definition of "branch relocation" made inapplicable by the express terms of the regulation, its underlying purpose also appears inapplicable to insured branches of international banks. Section 303.41(b) was presumably intended to implement section 42 of the FDI Act (12 U.S.C. § 183lr-1), which provides procedures for branch closures. Significantly, the FDIC Statement of Policy Concerning Branch Closing Notices and Policies states that:
“Insured branches of foreign banks are not considered “branches” for
purposes of section 42 because they are subject to separate liquidation
1. May a grandfathered insured branch be sold or otherwise transferred to another international bank without losing its status as an FDIC-insured branch?
1. Clarify that the grandfather rights of 12 U.S.C. § 3104(d)(2) survive the sale or transfer of an insured branch from one international bank to another international bank.
C. Legal Authority2
“Domestic retail deposit accounts with balances of less than $100,000 that require deposit insurance protection may be accepted or maintained in a branch of a foreign bank only if such branch was an insured branch on December 19, 1991.”
2. Plain meaning
The statutory language conditions the availability of the grandfather exception on a single factor: that the branch was insured on December 19, 1991. It would be inconsistent with the plain meaning of the statutory language to read into section 3104(d)(2) a second factor: that the branch was not transferred after December 19, 1991.
a. This same analysis
led a court to the same conclusion in a very similar case involving grandfathered
gas station "retail outlets."
3. Congressional intent
Unlike the insured branch grandfather provision contained in
a. 'The FDIC itself used this analysis, among others, in determining that the grandfather rights in another provision of FDICIA would survive a change of control. See FDIC Advisory Opinion 94-36 (July 13, 1994).
D. Other Considerations
1. Permitting transfers of grandfathered insured branches would provide an option for other international banks that would like to establish FDIC-insured branches but are constrained from doing so by the 1991 prohibition.
2. Permitting transfers also would ensure that the depositors of an insured branch would not lose the protections of deposit insurance solely as a result of the transfer of the branch to another international bank.
IV. Optional Deposit Insurance for Wholesale Branches
1. Despite legal authority to do so, the FDIC has been unwilling to date to consider applications by "wholesale" branches of international banks (i.e., those branches that are not engaged in domestic retail deposit activities that require FDIC insurance) to obtain FDIC insurance.
1. The FDIC should no longer discourage international banks from applying for "optional" FDIC insurance and should exercise its existing authority to approve those applications when the statutory factors for approval have been met.
C. Legal Authority
1. 12 U.S.C. § 1815(b) provides:
“Subject to the provisions of this chapter and to such terms and conditions as the Board of Directors may impose, any branch of a foreign bank, upon application by the bank to the Corporation, and examination by the Corporation of the branch, and approval by the Board of Directors, may become an insured branch.”
2. Plain meaning
The statutory authority of a branch to apply for and obtain deposit insurance is not conditioned on that branch conducting deposit-taking activities for which deposit insurance is required. Section 1815(b) permits "any branch" to become an insured branch - including wholesale branches.
3. Former section 346.8 of the FDIC's regulations explicitly authorized wholesale branches to apply for optional insurance:
“A foreign bank may apply to the FDIC, for deposit insurance for any State branch that is not otherwise required to be insured under § 346.4 or, for any Federal branch that is not otherwise required to be insured under the rules and regulations of the Comptroller of the Currency.”
4. Although section 346.8 was repealed in 1998, the preambles to both the relevant proposed and final regulations expressly recognized that repeal of section 346.8 did not affect the statutory authorization for international banks to apply for optional FDIC insurance for their wholesale branches.
a. Preamble to proposed rule:
“Although the statutory mandate of FBSEA now requires a foreign
bank that proposes to engage in domestic retail deposit activity to organize
an insured bank subsidiary, noninsured branches are still authorized to
operate in the U.S. because they are not engaged in domestic retail deposit
activity .... Section 5(b) of the FDI Act is still, in theory, applicable
to these U.S. branches of foreign banks. 12 U.S.C. 1815(b). Because of
this statutory underpinning, rescinding the regulation does not really
affect a foreign bank’s discretion to apply to the FDIC for insurance.
Former § 346.8 added nothing substantive to the statutory authorization
and, therefore, is redundant and unnecessary.”
b. Preamble to final rule:
“On their face,
at least, FBSEA's amendments to section 6 of the IBA seem only to reach
banks conducting domestic retail deposit
activity, and Congress has not repealed section 5(b) of the FDI Act, authorizing
deposit insurance applications from foreign branches. Therefore, it may
arguably be possible for a foreign branch which does not engage in domestic
retail deposit activity to seek deposit insurance from the FDIC.... Moreover,
the elimination of 346.8 does not affect a foreign bank's ability to argue
that it may make an application under section 5(b) of the FDI Act. The
Board would have to determine whether to actually accept and approve such
an application, based upon its review of the facts and circumstances, in
addition to the pertinent legal and policy considerations.”
D. Other Considerations
1. The FDIC also indicated in the preamble to the proposed and final regulations repealing section 346.8 that:
“As a practical
matter, however, the FDIC does not foresee many circumstances in which
be appropriate for the FDIC Board of Directors
to approve such an application.”
2. This reluctance to entertain applications for optional insurance was attributable primarily to the FDIC's view that enactment of the 1991 prohibition on the establishment of new FDIC-insured branches evidenced a broader Congressional intent to prohibit FDIC insurance for all branches of international banks.
a. However, as noted above, Congress expressly prohibited international banks from obtaining FDIC insurance only for branches "engaged in domestic retail deposit activities." Congress did not remove the statutory provisions authorizing international banks to apply for FDIC insurance for wholesale branches.
b. Moreover, from a policy standpoint, the FDIC's unnecessarily restrictive approach ignores the significant changes that have occurred since 1991, including changes in the regulatory and supervisory policies and practices with regard to international banks, broader acceptance of the principle of "investor choice," and rejection of a broader policy to force international banks to operate in the United States only through subsidiaries.
3. Wholesale depositors, particularly international customers from Latin America, often seek the benefits of FDIC insurance - even though the full amount of their deposits may not be insured. An international bank's ability to offer these benefits through its U.S. branches would provide a benefit to customers and increase an international bank's funding options.
a. Optional FDIC insurance for wholesale international bank branches is likely to be attractive primarily to international banks already operating FDIC-insured branches or subsidiaries in the United States and to a relatively small number of other international banks, particularly those seeking to serve particular ethnic markets. As a result, adopting a more liberal policy toward optional FDIC insurance for wholesale branches likely would have a minimal effect on the deposit insurance fund.
4. Permitting wholesale branches to obtain FDIC insurance is consistent
with the business model that has been followed by some major U.S. banks
(e.g., Bankers Trust, J.P. Morgan) that have retained FDIC insurance while
focusing on the wholesale markets.
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