Overview of Foreign Banking Organization Supervision Program

1. Overview of Foreign Banking Organization Supervision Program Lisa DeFerrari Manager, International Supervision Federal Reserve Board July 2007

2. Overview of Presentation • Historical background and key legislation • Comprehensive consolidated supervision • Core elements of the FBO Supervision Program • Communication with home country supervisors

3. Background • International Banking Act, 1978 • “National treatment” of foreign banks in the U.S. • Foreign Bank Supervision Enhancement Act of 1991 (FBSEA) – Impact of BCCI • FBO Supervision Program – 1995 • Basel Committee: Concordat (1975), Minimum Standards (1992), Supervision of Cross-Border Banking (1996)

4. FBSEA - 1991 • Expanded Federal Reserve oversight role • FR approval required for branch/agency establishment • Gives FR power to terminate • Requires annual examination of branch/agency • Comprehensive consolidated supervision

5. Comprehensive Consolidated Supervision (CCS) • Board must determine the following: • “whether the foreign bank is supervised or regulated in such a manner that its home country supervisor receives sufficient information on the worldwide operations of the foreign bank (including the relationship of the bank to any affiliate) to assess the foreign bank’s overall financial condition and compliance with law and regulation”

6. Comprehensive Consolidated Supervision (CCS) • As part of the applications process when a foreign bank wishes to establish or expand operations in the U.S., the Board evaluates extent to which the foreign supervisor • Ensures bank has adequate procedures for monitoring and controlling worldwide activities • Obtains info on the condition of bank and its subsidiaries and offices outside home country (examinations, audit reports, etc.) • Obtains info on dealings between bank and its affiliates, both domestic and foreign • Receives from the bank financial reports that are fully consolidated, or the equivalent • Evaluates prudential standards, such as capital adequacy, on a worldwide basis

7. FBO Supervision Program (Post-FBSEA) • Interagency program (federal and state) • All foreign banks with banking presence in U.S. • Coordinated oversight of U.S. operations (including branches, agencies, BHCs, commercial banks, nonbank subsidiaries, representative offices, etc.) • Comprised of three major components: • Analysis of Home Country Financial System • FBO strength-of-support assessment (SOSA) • Risk-focused supervision of the U.S. operations of FBOs

8. Analysis of Home Country Financial System • Purpose: Prepared for each country with FBO representation in U.S. -- along with Accounting Practices Review -- to provide reference and background information about an FBO’s home country environment and financial reporting practices.

9. Analysis of Home Country Financial System • Operating Environment • Current economic situation and outlook • Political environment/impact on economy • Systemic banking issues • Bank Supervision • Key banking laws • On/off-site supervision practices • Extent to which supervisors have sufficient information to evaluate banks on a consolidated basis • Treatment of problem/failed institutions

10. Strength-of-Support Assessment “SOSA” • A ranking based on an assessment of support available for U.S. operations of the FBO • Financial condition of FBO • Managerial oversight of U.S. operations • System of bank supervision in home country • Home country record of support for banking system • Operating environment, including any transfer risk concerns • Ranked on a scale of 1 to 3, with 1 highest/best. • If ranked “2” or “3”, may be subject to specific supervisory procedures to ensure that FBOs can honor their U.S. obligations at all times. • Ranking updated as often as necessary to be current. • A key driver of the FBO’s U.S. supervisory strategy.

11. SOSA Supervisory Implications • “1” ranking • Any supervisory follow-up would be based on deficiencies at U.S. operations • “2”/”3” ranking • Monitor U.S. operations for areas of concern • Assure that contingent funding and liquidity are in place • Due from/due to position monitoring • May require a “net due to” position, asset maintenance, etc.

12. Determine the Overall Condition of the FBO’s U.S. Operations • “ROCA” – Risk Management, Operations, Compliance, and Asset Quality • Applies to individual branches and agencies • Annually, a combined ROCA rating is developed for all U.S. branches and agencies of an FBO • Also annually, a Rating for Combined U.S. Operations is developed • Takes into account all U.S. supervisory ratings including any bank (CAMELS) or bank holding co. (RFI) ratings

13. “Responsible Reserve Bank” in FBO Supervision • Supervision of each FBO is coordinated by a “Responsible Reserve Bank” • Coordinates development of and execution of supervisory strategy • Prepares annual Summary of Condition of U.S. operations • Coordinates supervisory relationship with U.S. regional and head office management of FBO

14. Communicate the Results of the FBO Supervision Process • Annually, the Federal Reserve communicates in writing the results of the FBO supervision process to the: • Head Office Management of the FBO • Resident U.S. management of the FBO • Home Country Supervisor of the FBO What is communicated?A “Summary of Condition of U.S. Operations” is developed that contains the FBO’s • Rating for Combined U.S. operations • Combined ROCA rating • Any corrective actions taken or to be taken • The SOSA ranking

15. Communications and Coordination with Home Country Supervisors • Ways in which information is shared • Ad hoc meetings/conversations • Bilateral meetings/discussions • Participation in examinations • Annual summary of condition letter including SOSA ranking • Sharing of examination reports • Information sharing arrangements • In place with bank supervisors in 15 countries and the European Commission • Not necessary for sharing but serve to expedite the process

16. Additional Information on FBO Supervision Program SR Letter 00-14 “Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations” http://www.federalreserve.gov/boarddocs/SRLETTERS/2000/SR0014.HTM