Foreign Bank Operations in New York

Foreign Bank Operations in New York

Overview of Basic State Laws and Regulations

Rosanne NotaroDeputy Counsel

July 2008

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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

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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)

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Representative Offices

Conduct marketing; liaison activities.

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).

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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.

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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.

Branches & Agencies

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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…”

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Lending Limits

IBA - §3102(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 - §3105(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)...”

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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.

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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.

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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 CFR §§

347.213, 347.214, 347.215). Must disclose non-insured status:

Branch may accept initial deposits in an amount of $100,000 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

$100,000 only if derived solely from the following:

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1. Individuals who are not citizens or residents of the United

States at the time of the initial deposit;

2. Individuals who are residents by 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;

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4. Foreign businesses, large Unites States businesses, and persons from whom an Edge or agreement corporation may accept deposits under 12 C.F.R. §211.6(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;

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7. Any other depositor, but only if the branch’s average deposits under this paragraph 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.

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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);

May accept deposits from non-U.S. citizen or resident, 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).

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Supervision Tools – Asset Pledge

NYBL 202-b(1) - Branches and agencies 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).

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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

(http://www.banking.state.ny.us/il070212a.pdf)

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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

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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 322.5 – 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.).

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Certain Actions/Transactions Requiring Approval 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)

* Applications and Instructions on Department’s website.

Certain Actions/Transactions Requiring Approval or NoticeCertain Actions/Transactions Requiring Approval or Notice

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4. Establishment of Operating Subsidiaries

Industry Letter Dated June 4, 2001

o Recognizes the ability of NY branches and agencies to form operating subsidiaries.

o Sets forth notice procedures for establishing/investing in operating subsidiaries– comparable to domestic procedures.

o Subs generally will be viewed as consolidated with the branch or agency for regulatory purposes (e.g. asset pledge calculation).

o FRB notice or approval may be required.


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5. Acquisition of Control or Merger

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.

o (“Control” = 25% of the voting stock or ability to

control or influence).


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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).


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6. Approval or Review of Certain New Products/ Activities

Industry Letter Dated January 10, 2007

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).

o Transactions raising legal permissibility (e.g. bank powers) or

safety-and-soundness issues.

o Informal inquiries encouraged (e.g. communication with

Department examiners, legal staff)

o Formal submissions to explain new activities may be

necessary.

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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

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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).

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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.

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Contact Information

Rosanne Notaro

Deputy Counsel

New York State Banking Department

One State Street

New York, NY 10004

Tel: (212) 709-1663

Fax: (212) 709-1655

Email: [email protected]

Documents

Foreign Bank Operations in New York