Foreign Bank Operations in New York

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1 Foreign Bank Operations in New York Overview of Basic State Laws and Regulations Rosanne Notaro Deputy Counsel July 2010

2 Overview I. Foreign Banks Entry into New York II. Legal Tools of Supervision III. Selected Transactions/Activities Requiring Notice or Approval IV. Closing/Liquidation of Foreign Bank Offices in New York 2

3 Types of Foreign Bank Operations Permitted in New York A. Direct Offices Representative Offices Agencies Branches B. Bank and Non-Bank Subsidiaries State or federally-chartered insured banks or uninsured trust companies NYBL Article XII Investment Companies (commercial lending companies) Other nonbanking companies (subject to Federal Reserve and/or functional regulator supervision) 3

4 Representative Offices Conduct marketing (including solicitation of loans in principal amounts of $250,000 or more); liaison activities. (Supervisory Policy FB 2) Transactional activity generally prohibited (Exception: representative office personnel may execute loan documents for loans in principal amounts of $250,000 or more pursuant to specific written authorization with respect to each loan). Application Approval by Superintendent of Banks. (Federal Reserve approval also required). 4

5 Branches & Agencies Except for deposit-taking powers, virtually identical banking powers. Generally, same powers as permitted NYS chartered commercial banks. Also, generally same powers as federally-licensed foreign bank branches and national banks. 5

6 Branches & Agencies International Banking Act ( IBA ) 12 U.S.C. 3105(h) State Branch/Agency Powers A State branch or State agency may not engage in any type of activity that is not permissible for a Federal branch. unless o the Federal Reserve Board has determined that such activity is consistent with safe and sound banking practice; or o in the case of an insured branch, the FDIC has determined that the activity would pose no significant risk to the deposit insurance fund. 6

7 Branches & Agencies IBA 12 U.S.C. 3102(b) Federal Branch Powers Except as otherwise specifically provided operations of a foreign bank at a Federal branch or agency shall be conducted with the same rights and privileges as a national bank at the same location. and shall be subject to all the same duties, restrictions, penalties, liabilities, conditions and limitations that would apply to a national bank doing business at the same location 7

8 Lending Limits IBA (b) - Limitations based on capital stock and surplus of a national bank shall be deemed to refer, as applied to a Federal branch or agency, to the dollar equivalent of the capital stock and surplus of the foreign bank. NYBL 202-f: Similar rule under NY law (e.g. bank worldwide capital and surplus). IBA (h)(2) Single Borrower Lending Limit A State branch or State agency shall be subject to the same limitations with respect to loans made to a single borrower as are applicable to a Federal branch or Federal agency under section 3102(b)... 8

9 Trust Powers NYBL 201-b: Permits NY-licensed foreign bank branches and agencies to exercise same trust powers, subject to same conditions, as New York state trust companies. Supervisory Procedure FB 103 Superintendent Approval required. IBA 12 U.S.C. 3102(d) Federal agencies may not exercise trust powers. 9

10 New York Wild Card Power Statute NYBL 12-a: Authorizes NY-licensed branches and agencies to engage in powers permitted to federally-licensed branches and agencies, with approval of the Banking Board. Foreign bank may make application, or Superintendent may recommend permitting power (or privilege) to one or more state branches and/or agencies. 10

11 NY Licensed Foreign Branches Deposit-Taking Powers Branches are permitted to accept deposits to extent permitted by FDIC without becoming FDIC-insured under FDIC rules (12 U.S.C. 3104(b)*; 12 CFR , , ). Must disclose non-insured status: Branch may accept initial deposits in an amount of $250,000 or greater; Branch may enter into agreement with the FRB to accept only those deposits permissible for Edge Act Corporations (12 U.S.C. 611 et. seq.; 12 C.F.R. 211). Branch may accept initial deposits in an amount less than $250,000 only if derived solely from the following: * Note: 12 U.S.C. 3104(b) and 12 C.F.R. Part 347 reference the standard maximum deposit insurance amount or SMDIA. The SMDIA has been increased, at least temporarily until December 31, 2013, from $100,000 to $250,000 as a result of the Emergency Economic Stabilization Act and Helping Families Save Their Homes Act of The increase would be made permanent upon the expected passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 11

12 NY Licensed Foreign Branches Deposit-Taking Powers 1. Individuals who are not citizens or residents of the United States at the time of the initial deposit; 2. Individuals who are residents but not U.S. citizens and are employed by a foreign bank, foreign business, foreign government, or recognized international organization; 3. Persons to whom the branch or foreign bank (including any affiliate) has extended credit or provided other nondeposit banking services within the past 12 months or has a written agreement to provide such services within the next 12 months; 12

13 NY Licensed Foreign Branches Deposit-Taking Powers 4. Foreign businesses, large Unites States businesses, and persons from whom an Edge or agreement corporation may accept deposits under 12 C.F.R (a)(1); 5. Any governmental unit, including the U.S. 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 transmission of funds or the transmission of such funds by electronic means; 13

14 NY Licensed Foreign Branches Deposit-Taking Powers 7. Any other depositor, but only if the branch s average deposits under the authority set forth in 12 C.F.R (a)(7) 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. 14

15 NY Licensed Agencies Deposit-Taking Powers May not take most deposits (NYBL 202-a), but may: Maintain credit balances arising out of the exercise of its lawful powers; Issue large denomination obligations of $100,000 or more to a corporation, partnership, trust unincorporated association or similar association, with notice to the Banking Department (3 N.Y.C.R.R. Part 81); Accept deposits from persons (including entities) that are neither U.S. citizens nor residents, even in amounts below $100,000, with written disclosure of non-insured status (3 N.Y.C.R.R. Part 323) IBA 12 U.S.C. 3102(b) Federal agencies may not accept deposits. (Accordingly, NY Agencies seeking to exercise authority to take deposits other than credit balances may be viewed as branches by the Federal Reserve). 15

16 Supervision Tools Asset Pledge NYBL 202-b(1) A FBO maintaining a branch or agency must keep a deposit of liquid assets in an approved New York depository. Pledge used by the Superintendent in the event of involuntary liquidation (to pay liquidation expenses and claimants) and, on occasion, retained by the Superintendent to ensure cover of contingent liabilities upon voluntary liquidation. Asset Pledge List (attached). 16

17 Supervision Tools Asset Pledge Pledge against third-party liabilities (3 N.Y.C.R.R. Part 322) Qualified Financial Contracts excluded from calculation (NYBL 618-a(2)(d)) 1% of average total liabilities from previous month $2 million minimum pledge Well-rated foreign banking corporations (lesser percentages after first $1 billion of liabilities; cap on pledge of $100,000,000) Form for calculation ( 17

18 Supervision Tools Asset Maintenance NYBL 202-b(2) Requirement to keep assets in New York constituting stated percentage of third party liabilities (example: 105%). (See N.Y.C.R.R. Parts 52 and 322). Superintendent may impose an asset maintenance requirement when he/she deems it necessary for the protection of the public interest and/or interests of depositors and creditors. Examples o Weaknesses in financial condition of the bank; o Circumstances in home country that may adversely affect the NY office 18

19 Maintenance of Books and Records NYBL 200-c: All foreign banks must maintain or make available at branch, agency or representative offices books, accounts and records reflecting: i. all transactions effected by or on behalf of the branch, agency or representative office; ii. all actions taken by its NY employees to effect transactions for the foreign banking corporation outside NY Superintendent s Regulation Requirement to maintain records detailing liabilities; pledged assets. Documentation in English, sufficient to enable examination (e.g. especially important documents such as key documents in credit files; transaction summaries; general ledgers; written policies and procedures; audit reports, etc.). (see NYSBD Guidance Letter dated July 1, 1992) 19

20 Certain Actions/Transactions Requiring Approval or or Notice 1. Change of Location NYBL 28, 203 (Superintendent s approval). (NYBL 221-e: notice requirement for representative offices). 2. Change of Name NYBL 203, Supervisory Procedure FB 104 (Superintendent s approval). 3. Change of Manager, Deputy Manager, Representative, or Individual Designated to Receive Service of Process Supervisory Procedure FB 105 (Superintendent s approval). 4. Branch/Agency Conversions NYBL 202-g, Supervisory Procedure FB (Superintendent s Approval). * Applications and Instructions on Department s website. 20

21 Certain Actions/Transactions Requiring Approval or Notice 5. Establishment of Operating Subsidiaries Industry Letter Dated June 4, 2001 o o o o Recognizes the ability of NY branches and agencies to form operating subsidiaries. Sets forth notice procedures for establishing/investing in operating subsidiaries comparable to domestic procedures. Subs generally will be viewed as consolidated with the branch or agency for regulatory purposes (e.g. asset pledge calculation). FRB notice or approval may be required. 21

22 Certain Actions/Transactions Requiring Approval or Notice 6. Acquisition of Control or Merger o o NYBL 201-c; 221-i: Require notice to the Superintendent within 14 days after the foreign banking corporation maintaining a New York branch, agency or representative office becomes aware of control of the foreign banking corporation or merges with another corporation. ( Control = 25% of the voting stock or ability to control or influence). 22

23 Certain Actions/Transactions Requiring Approval or Notice Industry Letter Dated June 10, 1998 o Provides guidance concerning whether new licensing application will be required. o New FBCs and legal entities not previously licensed to maintain an office in New York must receive a license prior to operating in NY (or continuing as legal successor of an existing licensed FBC). 23

24 Certain Actions/Transactions Requiring Approval or Notice 7. Approval or Review of Certain New Products/ Activities Industry Letter Dated January 10, 2007 o o o o Guidance describing situations where prior approval of Department may be required to engage in certain new business lines/products (e.g. trading of complex instruments such as commodity/equity-linked derivatives). Transactions raising legal permissibility (e.g. bank powers) or safety-and-soundness issues. Informal inquiries encouraged (e.g. communication with Department examiners, legal staff) Formal submissions to explain new activities may be necessary, including in situations when NY office is acting as agent on behalf of other FBO offices. 24

25 Closing/Liquidation of Foreign Bank Offices A. Representative Offices Notice of intention to Close. Surrender license. B. Branches/Agencies 1. Voluntary Closing/Wind Down a. NYS-Supreme Court-supervised liquidation (NYBL 605(11)(a)(b)) Rarely used 25

26 Closing/Liquidation of Foreign Bank Offices b. Banking Department-supervised liquidation (NYBL 605(11)(c)) Identify liabilities (including contingent liabilities) Run-off of liabilities Notice to Department of intention to wind down Periodic reporting to Department (e.g. monthly balance sheets) Zero-out balance sheet Surrender license Asset pledge balance returned (portion of asset pledge might be retained to cover certain remaining liabilities (e.g. lease) or contingent liabilities (e.g. litigation exposure). 26

27 Closing/Liquidation of Foreign Bank Offices 2. Involuntary Liquidation/Possession by the Superintendent NYBL 606, et. seq. Grounds include: violation of law; conducting business in unsafe and unsound manner; refusal to comply with order issued by Superintendent; doubt concerning ability or willingness of branch/agency to pay claims of creditors; bankruptcy or liquidation in home country. (NYBL 606). Upon possession, title to all FBC s assets in New York vests in Superintendent. (NYBL 606,615). Liquidation of NY offices conducted by Superintendent. Claims process conducted for NY office creditors (NYBL 620). NYS Supreme Court-supervised process. Excess funds/assets turned over (1) as necessary to cover claims/expenses of liquidation of other U.S. offices of the FBC; (2) to FBC principal office or home country liquidator. 27

28 Contact Information Rosanne Notaro Deputy Counsel New York State Banking Department One State Street New York, NY Tel: (212) Fax: (212)