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 banks 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 FBOs 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 FBOs 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 FBOs 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
  FBOs
• 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