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

New York Regulation of Foreign Branch OfficesForeign AgenciesForeign Rep Offices Marjorie E. Gross Deputy Superintendent and Counsel New York State Banking Department July 16, 2007

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

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

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

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

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

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

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

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

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

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

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

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

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

Branch or Agency Displaying the License • License must be conspicuously displayed in the office

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

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

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

Pledge of Assets by Branch or Agency • Liabilities arising from qualified financial contracts are excluded from total liabilities if secured by collateral. See BL 618-a(2)(d) & (e).

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

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

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

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

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

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

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

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

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

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

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

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

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

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