Subsidiary Banks

A subsidiary U.S. bank is a separately capitalized legal entity chartered in the United States, the shares of which are owned or controlled by the parent foreign bank. The subsidiary may be either a national bank—Federally chartered under the National Bank Act by the OCC or a state bank, chartered under state banking law by the state bank regulator in the state in which the bank is located. National bank subsidiaries can be located in any State and the District of Columbia. Thirty states and the District of  Columbia provide specifically for foreign bank ownership of state-chartered banks. Bank subsidiaries of foreign banks  in the United States have the same banking powers and are subject to the same legal or regulatory restrictions and limitations and reporting or other requirements as other domestic banks. They may engage in the same banking activities as other domestic banks, perform trust functions, accept all types of deposits and obtain deposit insurance from FDIC.

A board of directors composed primarily of U.S. citizens and residents must govern the U.S. subsidiary bank of a foreign bank. In the case of a national bank subsidiary of a foreign bank, less than a majority of the board of directors may be foreign citizens. Although a majority of a national bank’s board of directors must reside in the area in which the bank is located, the OCC may waive this requirement. State law citizenship and residency requirements for bank directors may vary.

Because a subsidiary bank is a separate legal entity, it must have its own capital structure, separate from that of the parent bank. The subsidiary’s own capital accounts will be used to determine compliance with various regulatory requirements dependent on capital, such as minimum capital adequacy requirements, and the limitations on the loans it may make to a single borrower or group of related borrowers. In practice, the subsidiary bank may comply with those lending limits by selling or participating portions of any large credit to the parent bank or to other banks.

A subsidiary bank may be established either by obtaining a new charter or by acquiring the shares of an existing bank. In every case involving the establishment or acquisition of a U.S. subsidiary bank (defined as a 25 percent or greater investment in a class of a bank’s voting shares) the foreign bank parent must seek the approval of the Fed under the BHC Act. The parent bank, and any other upstream parent companies of the proposed U.S. subsidiary bank, will become a bank holding company within the meaning of the BHC Act, a statute that limits the non banking activities of the parent bank or other parent institutions in the chain of ownership in the United States. Like U.S. bank holding companies, a parent foreign bank can elect to become a financial holding company to engage in a broader range of financial activities in the United States.

Edge Act and Agreement Corporations

A U.S. or foreign bank may organize or acquire a separate subsidiary to engage in international banking activities specified in the Edge Act and its implementing Fed regulations. This subsidiary may be an Edge Act corporation, chartered under Federal law by the Fed, or an Agreement corporation, that is chartered under State law and formally agrees with the Fed to limit its activities to those permitted to an Edge Act corporation.

The IBA amended U.S. law to permit foreign banks and their affiliates to establish Edge Act corporations, subject to prior approval by the Fed. The powers and limitations of an Edge Act corporation are similar to those of a wholesale bank, with the additional restriction that its transactions and activities must have a foreign or international connection. A small number of foreign banks have established Edge Act corporations.

Commercial lending company

It is a specialized non-depository lending institution authorized under state law. Currently, these types of corporations are located only in New York.

A foreign bank may acquire a commercial lending company after receiving approval of both the Superintendent of the New York State Banking Department  and the Fed. The state and Federal standards for approval are similar to those for branch and agency approvals. These institutions, called Article XII Investment Companies in New York, may engage in borrowing and lending activities and many other banking powers and may maintain credit balances, but may not accept deposits. For many years, NY Banking Department policy, in general, has been that foreign banks are allowed to establish Article XII investment companies only if there are no other practicable means of entering the New York market.

International Banking Facilities

An international banking facility or IBF is a set of accounts segregated on the books and records of a depository institution. The IBF may include only international time deposits and international loans, as well as the income and expense accounts relating to those international loans and deposits. U.S. banks, Edge Act and Agreement corporations and U.S. branches and agencies of foreign banks may establish IBFs. The institution establishing the IBF may accept deposits in the IBF only from foreign residents, other IBFs and other offices of the institution establishing the IBF. Both the deposits and extensions of credit may be used only to support customers operations outside the United  States. An IBF is the banking equivalent of a free trade zone. An institution booking deposits in an IBF may maintain them free  of U.S. reserve requirements and deposit insurance premiums. An IBF thus has a lower cost of funds than an insured bank providing identical services. An IBF is intended to provide U.S. banks with competitive funding opportunities in international markets without having to establish a shell branch. However, foreign bank branches and agencies, in fact, account   for a majority of IBF operations in the United States since IBFs can serve as useful vehicles to conduct dollar operations in third countries. The establishment of an IBF does not authorize activities that are otherwise prohibited for the establishing institution. For example, the IBF of an agency cannot accept U.S. deposits if its establishing agency may not accepted US deposit.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.