J. Virgil Mattingly, Jr., General Counsel, Board of Governors of the Federal Reserve System.

Statement by J. Virgil Mattingly, Jr., General Counsel, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer and Regulatory Affairs of the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, May 23, 1991.

I am pleased to appear today before this subcommittee to describe the Federal Reserve's experience with the Bank of Credit and Commerce International (BCCI) and to express the Federal Reserve's support for S.1019, the Foreign Bank Supervision Enhancement Act. As its name implies, this legislation is intended to strengthen the supervision and regulation of foreign banks operating in the United States.

Summary

Foreign bank operations in this country are large--accounting for about 21 percent of U.S. banking assets--and growing. Experience with fraud and other criminal activity at a small number of foreign banks over the past several years has convinced the Board that greater and better coordinated attention needs to be paid by state and federal regulators to the U.S. offices of these institutions. Although the problems do not at this time appear to be widespread in relation to the overall presence of foreign banks in the United States, recent experience in other areas of the financial services industry demonstrates that regulators cannot prudently ignore any early-warning signs of trouble.

For this reason, and in light of the Board's continuing strong interest in ensuring that sound prudential and supervisory policies are in place for all banking institutions in the United States, the Board has proposed legislation to fill gaps in the supervisory and regulatory framework governing foreign bank operations in this country. The proposals are intended to help ensure that the banking policies established by the Congress are implemented in a fair and uniform manner with respect to all entities conducting a banking business in the United States and that the sizable foreign bank community in this country adheres to legal requirements and operates in a safe and sound manner.

To this end, S.1019 would establish uniform federal standards for entry and expansion of foreign banks in the United States, including, importantly, a requirement of consolidated home country supervision and the application of the same financial, managerial, and operational standards that govern U.S. banks. The proposal would also grant regulators the power to terminate the activities of a foreign bank that is engaging in illegal, unsafe, or unsound practices and provide regulators with the information-gathering tools necessary to carry out their supervisory responsibilities. The proposal would clarify the Board's examination authority over foreign banks by providing that it may coordinate examinations of all U.S. offices of a foreign bank.

This legislation draws on the Board's overall experience in regulating foreign banks operating in this country, as well as its review of the loan practices of the Atlanta agency of Banca Nazionale del Lavoro and the U.S. activities of the BCCI, including its acquisition of First American Bankshares, a U.S. bank holding company, and its conviction for money laundering.

With regard to the BCCI case, the Board was concerned about the relationship of the BCCI to First American from the beginning. In the application by a group of Middle Eastern investors to acquire First American and at a hearing called by the Board on the matter in 1981, the Board received numerous assurances that the BCCI would not fund the acquisition and would have no relationship with First American other than serving as investment adviser to the investing shareholders.

In the years immediately after the acquisition, the Board had no indication that the BCCI had financed the acquisition of First American or that other assurances given to the Board had not been honored. Shortly after the BCCI was indicted for money laundering in 1988, the Federal Reserve began a special inquiry into any linkage between the BCCI and First American. During 1989 and 1990, the Board also consulted with law enforcement agencies and foreign and domestic bank supervisors regarding this issue. In late 1990, the Board learned from several sources that the BCCI had outstanding loans secured by shares of First American's parent holding company, Credit and Commerce American Holdings, N.V. (CCAH). In January 1991, the Board authorized a formal investigation with full discovery powers, made criminal referrals, and issued cease and desist orders upon consent, requiring the BCCI to divest shares of CCAH that it controls and to terminate its activities in the United States. The Board's investigation is intensive and ongoing and includes requests for documents, depositions, and witness interviews, both domestically and abroad. To avoid jeopardizing the ongoing criminal and civil investigations into the matter, my statement does not discuss the specific findings or evidence that have been developed to date.

I will now discuss in greater detail the BCCI case and what it indicates about the need for, and practical limits of, improved supervision and regulation of foreign banks in this country. I will then describe the Board's legislative recommendations.

The BCCI Case

Background

Financial General Bankshares--the predecessor to First American Bankshares--was one of a handful of bank holding companies that were grandfathered under the Bank Holding Company Act of 1956 to retain ownership of banks in more than one state acquired before the statute was enacted. In 1956, Financial General owned banks in Virginia, Maryland, Georgia, Tennessee, New York, and the District of Columbia.

On April 29, 1977, an investor group led by J. William Middendorf II acquired control of Financial General. Within a few months, dissatisfaction with his leadership developed among some of the investors, who went in search of a buyer for their shares. They discussed a purchase of Financial General's shares with the chief executive officer of the BCCI, Agha Hasan Abedi.

In late 1977 and early 1978, four clients of the BCCI, acting on the recommendation of Mr. Abedi, began to purchase shares of Financial General, eventually acquiring approximately 20 percent of its voting shares. The investors, none of whom purchased more than 5 percent of the shares, were two prominent citizens of Saudi Arabia and Kuwait and two sons of the ruler of Abu Dhabi. In various official filings, the BCCI stated that it acted only as an investment adviser to these persons in connection with their purchases of Financial General shares and did not itself own, control, or vote any of the shares.

When the purchases were made public, the Securities and Exchange Commission filed a complaint alleging that each of the four Middle Eastern investors, the BCCI, Mr. Abedi, and certain U.S. shareholders of Financial General had acquired, as a group, control of more than 5 percent of Financial General's shares in violation of the Williams Act. In March 1978, the investors, without admitting fault, entered into a consent decree with the Securities and Exchange Commission (SEC). The investors agreed either to divest their shares or to proceed with a tender offer for all of Financial General's shares.

Three of the original four investors decided to proceed with the tender offer. They were joined by eleven additional individual and corporate investors from the Middle East who were also advised by BCCI. The investors formed CCAH, a Netherlands Antilles corporation, to make the tender offer.(1)

CCAH's Application to Acquire Financial General

CCAH could not proceed to acquire Financial General's shares without Board approval under the Bank Holding Company Act. On October 19, 1978, CCAH filed an application seeking such approval. The application was opposed by Financial General, including its Maryland subsidiary bank. On February 16, 1979, the Board dismissed the application, concluding that the acquisition would be unlawful under a Maryland law that forbade any hostile acquisition of a Maryland bank.

The applicants challenged the Board's decision, but before the matter was adjudicated the investors and Financial General's management negotiated an agreement for the acquisition of Financial General by CCAH. In November 1980, CCAH again sought Board approval to acquire Financial General.

In reviewing such an application, the Board is required to consider the competitive effects of the proposal, the financial and managerial resources and future prospects of the companies concerned, and the convenience and needs of the relevant communities. The statutory factors do not distinguish between foreign and domestic acquirers, and thus these factors were applied to the CCAH application as they would be to a domestic holding company application. Under the Bank Holding Company Act, the Board's findings on these statutory factors must be supported by substantial evidence.

The application specified that the Middle Eastern investors were to be passive and would take no part in the management or operation of Financial General. The management of Financial General was to be vested in a board of directors that would include former Senator Stuart Symington, former Secretary of Defense Clark M. Clifford, and retired Lieutenant General Elwood R. Quesada. Investors controlling more than 50 percent of CCAH's shares transferred the power to vote their shares to Senator Symington for a period of five years. An experienced banker was to be selected as president and chief executive officer of Financial General, and this person was identified before the Board acted on the application.

In accordance with its procedures, the Board requested detailed information from the investors regarding their financial resources and affiliations. The Board received financial statements, including in the case of the largest shareholders the source of funds to be used to make the acquisition and letters from their banks confirming their financial statements. The materials showed that the investors were persons of considerable means and that the purchases were to be made from their own personal resources.

The Board also conducted background checks on the shareholders, soliciting information from various federal government agencies and a foreign bank supervisor. The Board also obtained information from the SEC regarding the original acquisition and two CCAH shareholders.

As a result of the SEC case, the Board focused great attention on the relationship between CCAH and the BCCI, specifically whether the BCCI had a stake in the planned acquisition, either directly or indirectly. The Board's concern was sufficiently serious that it took the unusual step of convening a hearing on this question and others raised by the application, requesting that the principal shareholders of CCAH appear and testify at the hearing.

In response to the Board's questions, CCAH and its principal shareholders stated that the BCCI would not be involved in the acquisition other than as an investment adviser to the CCAH investors and, in particular, would not fund the acquisition. At the hearing and in written submissions, CCAH shareholders and their counsel (Mr. Clifford and his partner, Robert A. Altman, of the firm of Clifford & Warnke) made the following statements:

* The application filed by CCAH stated: BCCI owns no shares of FGB, CCAH or CCAI, either directly or indirectly, nor will it if the application is approved. Neither is it a lender, nor will it be, with respect to the acquisition by any of the investors of either FGB, CCAI or CCAH shares. * In a letter submitted to the Board in response to questions about the relationship between BCCI and CCAH, counsel for CCAH stated: "With regard to the stockholders of CCAH, all holdings constitute personal investments. None are held as an unidentified agent for another individual or organization." * Sheikh Kamal Adham, the largest shareholder of CCAH, stated at the Board's hearing, "There is ... no understanding or arrangement regarding any future relationship or proposed transactions between Financial General and BCCI." He further stated, "[I]t appears that there is doubt that there is somebody or BCCI is behind all of this deal. I would like to assure you that each one on his own rights will not accept in any way to be a cover for somebody else." * CCAH counsel, when asked at the hearing about the relationship among CCAH and CCAI and BCCI, stated, "[T]here is no connection between those entities and BCCI in terms of ownership or other relationship." * Asked about the function of BCCI in the proposal, CCAH counsel stated, "None. There is no function of any kind on the part of BCCI." He added, "I know of no present relationship. I know of no planned future relationship that exists . . . ."

The same representations were made to the other regulators involved in the application. The Comptroller of the Currency was advised by counsel that "none of the investors are borrowing to finance their respective equity contributions" and that "BCCI will have no involvement with the management and other affairs of Financial General nor will the BCCI be involved in the financing arrangements, if any are required, regarding this proposal." Based on these representations, the Office of the Comptroller (OCC) informed the Board that its concerns about the application had been addressed. The Bank Commissioner of Maryland approved the acquisition of the Maryland bank on June 26, 1981.

In a "Closing Statement" filed with the Board, the Virginia Commissioner of Financial Institutions recommended disapproval based on concerns about whether foreign ownership of U.S. banks was in the public interest and whether the investors would make management changes and reduce services to local communities in contravention of their commitments to the Board. His statement expressed particular concern with the acquisition by foreign organizations of U.S. banking organizations, particularly one as large as Financial General. As noted, however, the Bank Holding Company Act does not distinguish between foreign and domestic companies seeking control of U.S. banks, and the concerns about possible changes in management and services after the acquisition were not substantiated. The BCCI was not mentioned in the Commissioner's closing statement; the concern expressed was that the Middle Eastern shareholders would actively represent their own business interests in the management of CCAH, not that they were acting as nominees or borrowing to support their purchases.

On August 25, 1981, after having considered the hearing record, reports from staff, and the views of the federal and state agencies, the Board approved CCAH's acquisition of Financial General. Consummation of the acquisition was delayed, however, pending approval of the New York State Banking Department of the acquisition of Financial General's New York banks. The Department initially disapproved the application, principally because of concerns about a lack of reciprocity for American banks in Arab countries. On March 2, 1982, the Department granted its approval after CCAH's commitment to divest one of the New York banks. In a subsequent letter, the Department stated that "the information we received indicated that the investors were prestigious and reputable people."

The acquisition was consummated on April 19, 1982. Financial General was renamed First American in August 1982.(2) Mr. Clifford became chairman of the board of First American, and Mr. Symington became chairman of the board of CCAH. Mr. Clifford's law partner, Mr. Altman, was named president of First American Corporation and secretary and a managing director of CCAH.

The 1982-90 Period

In the years immediately after the acquisition, there was no evidence to suggest that CCAH and First American were functioning other than in accordance with the statements made to the Board and the other regulators. The investors adhered to their commitment to inject $12 million in new capital into First American, and no dividends were paid to the investors in keeping with another commitment. On several occasions, the investors made additional capital injections to support First American's activities. Both federal and state examinations of First American and its subsidiary banks and of the U.S. offices of BCCI detected no irregularities in their dealings with each other, which were reported as limited.

In early 1989, after the BCCI's indictment for money laundering, the Federal Reserve Bank of Richmond conducted a special inquiry into the relationship between CCAH and the BCCI. The inquiry was initiated in connection with a pending application by CCAH to retain control of a Florida bank. Each of the First American subsidiary banks was asked to report on any transactions with the BCCI, and CCAH management was questioned on any relationship with the BCCI.

In its report to the Board on February 8, 1989, the Reserve Bank found no evidence of irregular or significant contacts between the First American banks and the BCCI or of failure by CCAH to adhere to its commitments. As for ownership of CCAH, senior management of CCAH and First American stated that the relationship between CCAH and the BCCI was no different in nature than at the time of the original application, and that the BCCI did not exercise a controlling influence over CCAH. The Reserve Bank noted that the common ownership of CCAH and the BCCI had increased, but the Bank Holding Company Act does not prohibit common ownership of banks or nonbanks by individuals, as it does in the case of companies. Thus, this common ownership, while significant, did not itself provide grounds for Board action.

During 1989 and 1990, concerns about a possible relationship between the BCCI and CCAH remained, and Federal Reserve staff continued inquiries into the matter. In this timeframe, Federal Reserve personnel made a number of inquiries of law enforcement authorities and foreign bank supervisors seeking information. In late 1989, the Board received informal advice from a foreign banking supervisor that the BCCI had loans outstanding to certain CCAH shareholders, but it was unclear whether the loans were for the purchase of CCAH stock or for other business activities of the shareholders and whether the loans were secured by CCAH stock. Board staff wrote to counsel for CCAH on December 13, 1989, asking for information on any loans by the BCCI or its affiliates to the original or subsequent investors in CCAH, either directly or indirectly and regardless of the purpose of the loan.

In response, the Board was advised by letter from the acting chief executive of the BCCI that the BCCI had not financed in any respect the acquisition of Financial General; that none of the CCAH shareholders had personal loans from the BCCI in 1981 or 1982; and that no CCAH stock was held as collateral against subsequent unrelated business loans by the BCCI to some of these shareholders. Counsel for CCAH at the same time advised that no pledge or security interest had ever been recorded on CCAH's share register by any lender. Kamal Adham, the principal shareholder of CCAH, also confirmed that his CCAH acquisition was primarily from personal funds and was not financed by the BCCI.

To verify the accuracy of the statements made by the BCCI in its 1990 letter, Board staff members requested the assistance of the foreign bank supervisor that had originally provided information to the Board. The supervisor responded that it had encountered difficulties in obtaining the necessary information but would continue its investigation.

In sum, during the 1989-90 period, Federal Reserve staff members consulted with law enforcement officials, including the New York County District Attorney's Office, other investigative federal agencies, and foreign bank supervisors to obtain information about allegations that the BCCI had acquired control of CCAH. The Board received no substantive evidence of such a relationship until late in 1990.

The Present Investigation

In November 1990, the New York County District Attorney's Office informed Federal Reserve staff members that a confidential source had stated that a report prepared in October 1990 by the BCCI's outside auditors indicated that the BCCI had made substantial loans to CCAH shareholders secured by CCAH shares. Board staff members immediately requested access to this report from the U.S. General Manager of the BCCI. After a delay occasioned by the initial refusal of the auditor to permit the report to be examined by the Federal Reserve, the BCCI agreed to make the report available for review by a senior member of the Board's examination staff in the BCCI's main office in London. The review was conducted on December 10, 1990. The auditor's report and a conversation on that date with the new chief executive officer of the BCCI indicated that the BCCI had substantial loans outstanding, secured by CCAH stock. This was the first substantive evidence received by the Board confirming a financial relationship between the BCCI and CCAH.

Shortly after Board staff members gained access to the report, attorneys from a U.S. law firm representing the BCCI and its Abu Dhabi shareholders contacted my office to request a meeting. At a meeting on December 21, 1990, counsel explained that in the spring of 1990, the Abu Dhabi government had invested a very large sum in BCCI stock to correct certain capital deficiencies. As a result, the ownership interest of the Abu Dhabi royal family and government in the BCCI increased from approximately 30 percent to approximately 77 percent. Counsel went on to confirm that a substantial amount of the stock of CCAH had been pledged to the BCCI as collateral for hundreds of millions of dollars in loans to certain shareholders of CCAH and to provide other information relevant to the BCCI's control over the pledged CCAH shares. Counsel stated that the new controlling shareholders of the BCCI had retained his firm to help conduct a special inquiry into this and other matters at BCCI, and wished to cooperate with the Board in addressing the CCAH matter.

Based on the information described above, on January 4, 1991, the Board initiated a formal investigation, including authorization for the use of full discovery powers, into the circumstances of the BCCI's acquisition of control of CCAH and whether false or misleading statements had been made to the Board during the application process in 1981 and subsequently. On January 17, 1991, in response to my request for further information concerning the loan arrangements, counsel for the BCCI described certain documentary materials in the BCCI's files relevant to the question of nominee arrangements by the BCCI with certain CCAH shareholders. I should note that not all of the CCAH shareholders had borrowed from the BCCI, and some that had borrowed have since denied that the CCAH shares were held for the BCCI.

Although the investigation is not complete and there remain many unanswered questions, the Board determined in January 1991 that it had sufficient evidence to take certain action. On January 22, 1991, the Board sent a proposed cease and desist order to counsel for the BCCI and made criminal referrals to the Department of Justice. The cease and desist order, which was consented to by the BCCI on March 4 without admitting or denying any wrongdoing, requires that the BCCI divest its interest in CCAH and submit to the Board for its approval a plan to do so promptly. That order, and a similar one against CCAH, also prohibits transactions between the BCCI and CCAH and its subsidiary banks (other than capital injections into the banks) unless the transactions are in the ordinary course of business; any such transactions must be approved by the Federal Reserve Bank of Richmond, which is monitoring compliance with the orders. All such business transactions between the BCCI and CCAH are required to be eliminated shortly. Finally, the order requires that the BCCI submit a plan to cease all banking operations in the United States.

Also in January 1991, the Board briefed the appropriate state and federal banking supervisors concerning its preliminary findings regarding the BCCI's control of CCAH, and requested examinations of all First American banks, with particular attention to detection of any relationship with BCCI.

As I have indicated, the Board's investigation into this matter is continuing, as we try to determine fully the circumstances surrounding the BCCI's acquisition of control of CCAH, and to obtain the evidence necessary to document what violations of law have occurred and the persons involved. The investigative team has issued numerous subpoenas, interviewed and deposed witnesses, and reviewed thousands of pages of documents in this country and abroad. That process is the most extensive in my experience with the Federal Reserve.

In carrying out this investigation and during previous efforts to determine any control linkage between CCAH and the BCCI, the Board has faced serious obstacles. I would emphasize how complex investigations of this nature are under the best of circumstances, but when the evidence is located all over the world and deliberately concealed, the difficulties are very greatly magnified. The shareholder register and other CCAH records in the United States and the Netherlands Antilles that were subject to Board examination or review indicated that the individuals and companies listed in CCAH's filings with the Board were, in fact, the owners of the shares of CCAH. There was no record of a security or other interest by the BCCI in the CCAH shares. The documents that evidence the arrangements between CCAH shareholders and the BCCI were maintained outside the United States. Moreover, documents reviewed during the investigation suggest that the BCCI deliberately structured various transactions so as to conceal from the Board the relationship between the BCCI and CCAH. Although the new owners of the BCCI have cooperated in the investigation, bank secrecy laws and pending litigation in foreign jurisdictions have made it difficult to obtain the documents necessary to determine and prove the full extent of the violations. In this connection, the Board has requested and received assistance in the investigation from foreign bank supervisors and continues to coordinate actively with federal and state law enforcement authorities.

Finally, during the course of the investigation, the Board also obtained information indicating that the BCCI acquired control of shares of the Independence Bank, headquartered in Encino, California, and the National Bank of Georgia, which became a subsidiary of First American in 1987 without receiving the necessary approval under the Bank Holding Company Act. The Board has issued a cease and desist order, consented to by the BCCI without admitting or denying any wrongdoing, that requires that the BCCI divest any shares of Independence Bank that it controls. The BCCI was required to divest National Bank of Georgia as a subsidiary of First American in the March cease and desist order.

I will now turn to an explanation of the Board's legislative recommendations and the reasons for these recommendations.

The Foreign Bank Supervision Enhancement Act of 1991

As a result of the BCCI matter and several other recent foreign bank supervisory problems, the Board has conducted a review to determine whether the existing statutory framework governing foreign bank operations in this country is adequate. That review, together with the Board's ongoing interest in assuring that a sound prudential and supervisory structure governs banking operations in this country, convinced the Board that improvements in the framework, including standards for entry and the exercise of examination powers, in particular, were needed. As a result, the Board has recommended the legislation being considered here today. The legislation is not intended to impose sweeping new requirements or to alter radically the supervisory framework governing foreign bank operations in the United States. Rather, its purpose is to build upon, and complement, the existing supervisory structure to fill those regulatory gaps that experience has demonstrated exist.

The most pressing gap was addressed last year when the Board recommended, and the Congress adopted in the Crime Control Act of 1990, amendments to cover branches and agencies of foreign banks under various provisions of the criminal code governing bank fraud and other bank-related crimes. The present proposal takes the next step and seeks to strengthen the supervisory structure for foreign banks in the United States.

The International Banking Act (IBA) of 1978 for the first time subjected foreign banks with U.S. branches and agencies to federal regulation, chiefly requiring them to maintain reserves and generally limiting their activities and geographic expansion in the United States to those available to U.S. banking organizations. Because the IBA was based on a policy of national treatment, it attempted also to adapt the dual banking system to the unique characteristics of foreign bank branches and agencies. The IBA was largely successful in this effort but left foreign banks free of certain of the federal requirements imposed on U.S. banks. For example, in the IBA the Congress did not require prior federal review of foreign bank entry as had been recommended by the Board.

The Board's recommendations to correct these supervisory gaps have a common purpose: to ensure that foreign bank operations in this country are regulated, supervised, and examined in the same manner as U.S. banks. The recommended new procedures for the geographic expansion by, or examination of, foreign banks are already applied to banks in the United States, whether they have state or national charters. The Board's proposals establish the same framework for state-licensed offices of foreign banks as applies to any state-chartered bank, whether it is a member or nonmember bank.

Foreign banks have an important presence in, and hold a substantial portion of, the banking assets of this country. As of December 31, 1990, the U.S. branches and agencies of foreign banks in the United States alone had aggregate assets of $626 billion, or 18 percent of total banking assets in this country. When the assets of their subsidiary banks are included, this share rises to 21 percent. Well over 90 percent of foreign bank branch and agency assets are held in 489 state-licensed offices. In light of their size and importance to the nation's banking system, the participation of foreign banks in the U.S. economy, in the Board's view, is rightly a matter of national banking policy. This policy, if it is to be both fair and effective, must be applied on an equitable basis not only as between domestic banks and foreign banks but also among foreign banks themselves. The Board's proposal is intended to establish uniform standards for entry and participation in the U.S. market by foreign banks, whether through state or federal license, and to provide a basis for improved coordination and cooperation among state and federal supervisors in overseeing the various offices of foreign banks in this country.

At this point, the Board wishes to emphasize that its recommendations will not solve every supervisory problem relating to foreign banks. Fraud is extremely hard for any regulatory authority to detect, especially when bank employees actively conspire to prevent official scrutiny or when all relevant information relating to the fraudulent activity is maintained outside the United States. The Board's proposals are designed to minimize the potential for illegal activities by creating a bar to entry by questionable organizations and, in the event that illegal or improper activities are suspected, to provide as many regulatory and supervisory tools as possible to investigate and enforce compliance.

Financial and Managerial Strength

As a starting point in its proposals, the Board recommends that the law establish clear and definite standards that would apply to any foreign institution seeking entry into the United States. Under the current system, a state may allow entry by a foreign bank based on its own criteria, which could differ substantially from the criteria applied by another state. In the interests of uniformity and in providing national treatment to all foreign banks, there should be a common set of standards that all applicants must meet to be participants in the U.S. banking market. These standards must be designed to continue to permit strong international banks to do business in the United States but to weed out weakly capitalized, poorly managed, or inadequately supervised institutions.

The proposal would not in any way replace or substitute for state regulatory approval of foreign bank branches and agencies. A state must still license a branch or agency of a foreign bank and must apply its own standards to the establishment and ongoing operation of the office, including standards that may be more stringent or rigorous than those proposed here. The Board's proposal establishes a minimum standard that all foreign banks operating in the United States must meet because of the significance and impact of these institutions on the nation's banking system. These offices are now an integral part of our economy and have access to the payment system. In light of their size, any problems or difficulties in this sector could have significant effects on the rest of the U.S. banking industry. For these reasons, the Board believes that foreign banks should meet the same standards of financial responsibility as are applied to U.S. banks, including the standards that would be applied to a U.S. bank operating internationally.

Home Country Supervision

The Board also believes that it is critical that any foreign bank entrant be subject to comprehensive supervision on a consolidated basis by a home country regulator. When an institution operates internationally in separate jurisdictions with differing laws and regulations, consolidated review and supervision are the only means of determining its financial condition and the extent and lawfulness of its operations. The BCCI case provides an example of an institution that was not subject to consolidated review by any one regulator, which enhanced the BCCI's ability to carry out its operations without normal regulatory scrutiny. This standard of comprehensive and consolidated supervision was not a generally accepted principle of international bank supervision at the time the IBA was adopted, as it is today, and became so only after experience demonstrated the pitfalls of fragmented review of an international bank's operations. The Board recommends incorporation of this standard into the laws governing foreign banks operating in the United States.

Access to Information

The Board also recommends that the standards include a requirement that the foreign bank agree to supply information on its activities and operations that a regulatory agency finds to be necessary to determine whether the bank is in compliance with U.S. banking requirements. Recent experience of the Board in the BCCI investigation has demonstrated the critical importance of agency access to this type of information. Without this type of agreement, it is difficult for the agency to detect and enforce compliance with the banking laws. The agency is in the position of having to use its enforcement authority to attempt to gain access to information that the bank may be trying deliberately to shield by holding it offshore.

The provision is not intended to grant authority to the agencies for "fishing expeditions," to allow the exercise of extraterritorial jurisdiction over the non-U.S. operations of the foreign bank, or to provide access to the records of customers unrelated to the bank's compliance with U.S. banking law. Rather, the provision seeks to confirm that a foreign bank that chooses to participate in the U.S. market, with all attendant privileges and responsibilities, will also make available to banking regulators information that is directly relevant to determining and enforcing the bank's compliance with U.S. banking requirements.

Requirement for Prior Approval

As a means of implementing these standards, the Board recommends that there be a federal approval process that applies these standards to the proposed entry by a foreign bank through any form of banking office, whether a state or federally licensed office or a commercial lending company. The IBA gave the Board certain responsibilities for the supervision of foreign banks in the United States, but no federal agency has a voice in deciding whether individual institutions seeking to enter U.S. markets through state branches, agencies, or commercial lending companies meet the standards generally applicable to banking organizations in this country. The Board believes that it is important that the agency charged with responsibility for the overall supervision of foreign banks in this country have a role in deciding whether the foreign bank may establish or maintain a U.S. banking presence. This practice applies in other areas of federal bank regulation, and, given the size and importance of foreign bank offices in the U.S. banking market, the practice should be applied to these institutions as well.

Supervision of Representative Offices

Foreign banks also participate in the U.S. market through representative offices. These are offices at which a foreign bank may promote the services offered by the foreign bank but may not engage directly in a banking business with customers. Representative offices may not make credit or other business decisions but must refer such decisions to the home office. Because their activities are intended to be limited, there is a lesser degree of regulation of these offices. There have, however, been instances in which foreign banks have used representative offices to conduct banking activities without licenses. To prevent such instances in the future, the Board believes that it would be appropriate to require federal review of the establishment by foreign banks of representative offices in the United States and to make these offices subject to examination.

Termination of Foreign Bank Offices

Besides the establishment of standards for entry and federal approval authority, the Board has recommended that authority be provided to terminate the activities of a state branch, agency, representative office, or commercial lending company of a foreign bank for violations of law or the conduct of unsafe or unsound practices when the continuation of the activities would not be consistent with the public interest or the applicable statutory standards.

Coordinated Examinations

Our experience has demonstrated the need to strengthen and coordinate federal and state examinations of the various branches and agencies of a foreign bank. Many foreign banks operate extensive interstate networks of branches and agencies licensed under the authority of the various states or the OCC. As a result, the timing of the examinations of the various offices and the elements of the various examination processes may differ widely. The IBA, although it gives the Board the residual responsibility for supervising all of a foreign bank's U.S. operations, also requires that the Board use the reports of examination of other regulators to the extent possible. The Board believes that the IBA should be amended to remove this requirement and to authorize the Board to call for coordinated or simultaneous examinations. Because such coordinated examinations would require the close cooperation of a number of different regulators, the Board believes that it is preferable that there be clear congressional authorization for such coordination, including authority to call for simultaneous examinations when appropriate.

This last point bears emphasis. It is axiomatic that the branch offices of a bank should be regulated and examined as part of a single entity. Thus, for example, the branches of a U.S. bank are not examined as separate units. The Board strongly believes that all offices of a foreign bank must also be treated and examined as parts of a single entity.

The proposal is not intended to interfere with state efforts to examine and supervise state-licensed branches and agencies. In implementing a coordinated examination program, the Board anticipates that examinations of state branches and agencies would be conducted in a manner similar to those of state member banks. The Federal Reserve has a long record in coordinating examinations of state member banks with the states. The Board applies a flexible approach designed to use resources efficiently while obtaining the necessary information from the examination. Depending on the state, the Board may conduct its own examination of the bank, participate in a joint examination with the state, or alternate examinations with the state every other year. Examination of branches and agencies may require greater coordination with the states and the OCC because of the interstate aspect of the foreign bank's operations and the number of different regulators that are involved, but it is to be hoped that the end result will provide a more comprehensive picture of a foreign bank's U.S. operations than is currently available. The Board hopes to enhance its existing communications and cooperation with federal and state bank regulators in conjunction with the program of coordinated examinations.

Cooperation with Foreign Supervisors

In terms of supervising banks that operate internationally, a crucial aspect is cooperation and coordination with the home country regulators of such banks. Consequently, the Board recommends that the IBA be amended to clarify that the federal banking agencies are authorized to share supervisory information with their foreign counterparts, subject to adequate assurances of confidentiality, when such sharing is appropriate in carrying out the agency's supervisory responsibilities.

Other Proposals

There are several other areas in which the Board has recommended either enhancing current requirements in the law or extending to foreign banks in the United States the same legal requirements that apply to U.S. banking organizations. These areas include requiring reports by foreign banks with U.S. operations of loans secured by 25 percent or more of the voting shares of an insured depository institution; requiring that a foreign bank with a branch, agency, or commercial lending company in the United States obtain prior approval before acquiring more than 5 percent of the shares of a U.S. bank or bank holding company; designating the banking agencies as the enforcement agencies for foreign bank branches and agencies with respect to consumer lending statutes; clarifying the managerial standards applicable to bank acquisitions in the Bank Holding Company Act; and confirming the authority to impose civil money penalties for violation of the IBA or its implementing regulations.

I might also note that, as part of the Treasury's proposed legislation on banking reform, state-chartered banks would be limited in their activities to those of a national bank, absent agency approval. If that portion of the banking reform legislation were to be enacted, consideration should be given to applying a similar limitation to the activities of state branches and agencies of foreign banks.

Conclusion

In sum, the Board's proposals are designed to be consistent with the policy established in the IBA of national treatment for foreign banks and to provide the federal regulators with the same authority over the U.S. operations of foreign banks as they have with respect to domestic banks. The proposals do not establish a new scheme of bank regulation; they apply to foreign banks the same structure of regulation as applies to domestic banks. The dual banking system is served in the same way as with domestic banks, and the proposed legislation recognizes that states have an important role in determining whether to invite foreign banks into their states under a scheme of state regulation. The Board's proposal also recognizes, however, that the presence of an international bank in the U.S. market has implications that go beyond the boundaries of any one state and that the national policies established by the Congress with respect to banking must also be served.

(1)There were two other companies in the ownership chain: Credit and Commer ce American Investment, B.V. (CCAI), a Netherlands company and a wholly owned subsidiary of CCAH; and FGB Holding Corporation, a District of Columbia corporation that was a wholly owned subsidiary of CCAI. FGB Holding was subsequently renamed First American Corporation and was the entity that acquired Financial General Bankshares. (2)During the course of the takeover, prior Financial General management ha d renamed most of the subsidiary banks First American Bank.